SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON, D.C.  20549

                                       FORM 10-K


          (Mark One)

          [X]          ANNUAL REPORT PURSUANT  TO SECTION 13 OR 15(d) OF  THE
          SECURITIES
                                 EXCHANGE ACT OF 1934
                      For the fiscal year ended December 31, 1998

                                          OR

          [  ]         TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d)  OF
          THE SECURITIES
                                 EXCHANGE ACT OF 1934
                 For the transition period from _________ to _________

                  Commission File Numbers: 333-32385-05 and 333-32385

                                HEDSTROM HOLDINGS, INC.
                                 HEDSTROM CORPORATION
                (Exact name of registrant as specified in its charter)

                         Delaware                      51-0329830
                         Delaware                      51-0329829            
           (State or other jurisdiction of          (I.R.S. Employer
           incorporation or organization)          Identification No.)

                585 Slawin Court, Mount Prospect, Illinois  60056-2183
            (Address of principal executive offices, including zip code)

                                    (847) 803-9200                           
                 (Registrant's telephone number, including area code)

           Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to Section 12(g) of the Act: None


          Indicate by check mark whether the registrant (1) has filed all
          reports required to be filed by Section 13 or 15(d) of the
          Securities Exchange Act of 1934 during the preceding 12 months (or
          for such shorter period that the registrant was required to file
          such reports) and (2) has been subject to such filing requirements
          for the past 90 days.  Yes X   No__                                 

          Indicate by check mark if disclosure of delinquent filers pursuant
          to Item 405 of Regulation S-K is not contained herein, and will not
          be contained, to the best of registrant's knowledge, in definitive
          proxy or information statements incorporated by reference in Part
          III of this Form 10-K or any amendment to this Form 10-K.  [  ]
<PAGE>
          The aggregate market value of voting stock held by non-affiliates
          of the registrant as of March 30, 1999 was $6,124,747.

          On March 30, 1999, there were outstanding: (i) 36,142,883 shares of
          Common Stock, par value $.01 per share, of Hedstrom Holdings, Inc.,
          (ii) 31,520,000 shares of Non-Voting Common Stock, par value $.01
          per share, of Hedstrom Holdings, Inc. and (iii) 10 shares of Common
          Stock, par value $.01 per share, of Hedstrom Corporation.



                                HEDSTROM HOLDINGS, INC.

                                 HEDSTROM CORPORATION

                            1998 ANNUAL REPORT ON FORM 10-K

                                   TABLE OF CONTENTS


                                                                             

          Item 1.      Business  

          Item 2.      Properties

          Item 3.      Legal Proceedings

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

                                          PART II                            

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

          Item 6.      Selected Financial Data                                
          Item 7.      Management's Discussion and Analysis of Financial   
                       Condition and Results of Operations     

          Item 8.      Financial Statements and Supplementary Data
                                                                           
          Item 9.      Changes in and Disagreements with Accountants on    
                       Accounting and Financial Disclosure

                                          PART III

          Item 10.     Directors and Executive Officers of the Registrant  
                                                                           

          Item 11.     Executive Compensation.     
                                                                           

          Item 12.     Security Ownership of Certain Beneficial Owners and 
                       Management     

          Item 13.     Certain Relationships and Related Transactions     
<PAGE>                                                                        
                                          PART IV                           
          Item 14.     Exhibits, Financial Statement Schedules, and        
                       Reports on Form 8-K               

          Item 1.  Business

            This Form 10-K and future filings by the Company on Form 10-Q and
          Form 8-K and future oral and written statements by the Company and
          its management may include, certain forward-looking statements,
          including (without limitation) statements with respect to
          anticipated future operating and financial performance. Year 2000
          compliance and other similar forecasts and statements of
          expectation. Words such as "expects", "anticipates", "intends",
          "plans", " believes", "seeks", "estimates", and "should", and
          variations of these words and similar expressions, are intended to
          identify these forward looking statements. Forward-looking
          statements by the Company and its management are based on
          estimates, projections, beliefs and assumptions of management and
          are not guarantees of future performance. The Company disclaims any
          obligation to update or revise any forward-looking statement based
          on the occurrence of future events, the receipt of new information,
          or otherwise. Actual future performance, outcomes and results may
          differ materially from those expressed in forward-looking
          statements made by the Company and its management.

          General

           Hedstrom Holdings, Inc. ("Holdings") is a holding company whose
          primary operating subsidiary is Hedstrom Corporation ("Hedstrom") or
          the "Company"). The principal shareholders of Holdings are Hicks,
          Muse, Tate & Furst Equity Fund II, L.P. ("HM Fund II"), an
          affiliate of Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse"),
          certain affiliates of Hicks Muse and certain members of Holding's
          senior management. Hicks Muse is a private investment firm based in
          Dallas, New York, St. Louis and Mexico City that specializes in
          acquisitions, recapitalizations and other principal investing
          activities.

            In October 1995, HM Fund II, together with certain other
          investors (the "HM Group"), acquired an 82% common equity interest
          in Holdings in a transaction that was accounted for as a
          recapitalization (the "1995 Recapitalization"). The total
          enterprise value of Hedstrom at the time of the 1995
          Recapitalization, including the assumption and refinancing of
          certain indebtedness, was approximately $75 million. The HM Group
          paid approximately $27 million for its common equity interest,
          which, together with Holdings senior management's 18% retained
          common equity ownership, implied a total equity value of Holdings
          at that time of approximately $33 million. In June of 1997,
          Hedstrom acquired ERO, Inc. ("ERO") and its subsidiaries,
          manufacturers and marketers of children's leisure products (the
          "Acquisition"). In connection with the Acquisition, HM Fund II
          purchased 31,520,000 shares of Holding's non-voting common stock
          for an aggregate purchase price of $39,400,000.  On July 24, 1998
          the Company acquired Backyard Products Limited, a leading
          manufacturer and supplier of wood gym sets and accessories.
<PAGE>
            Hedstrom is a leading North American manufacturer and marketer of
          well-established children's leisure and activity products. The
          Company's diversified product lines are in such "evergreen" product
          categories as outdoor gym sets, wood gym kits and slides, spring
          horses, trampolines, playballs, arts and crafts kits, game tables,
          and indoor sleeping bags, play tents and wall decorations. The
          Company considers such product categories to be "evergreen" because
          each is characterized by proven longevity, demonstrated market
          demand and consistent sales over time. The Company's products are
          sold primarily through national retailers, mass merchants, home
          improvement centers, sporting goods stores, drug store chains and
          supermarkets.

             For the twelve month period ended December 31, 1998, the
          Company's net sales, cash flow from operations and EBITDA were
          $301.7, $7.4 and $36.7 million, respectively.  The Company's
          outdoor gym set product line accounted for approximately 20% of the
          Company's net sales for the fiscal year ended December 31, 1998. No
          other product line accounted for more than 10% of the Company's net
          sales in fiscal year 1998.

          Hedstrom's operations are conducted through five principal
          operating divisions (or segments).

              The Bedford Division in Bedford, Pennsylvania manufactures and
              markets in the United States and Canada outdoor gym sets, wood
              gym kits and slides, spring horses, trampolines and gym
              accessories.

              The Ashland Division in Ashland, Ohio manufactures and markets
              in the United States a wide variety of children's playballs and
              ball pit products.

              The Montreal Division in Montreal, Canada is a fully integrated
              manufacturer of children's products, including arts and crafts
              kits, game tables and certain other children's bulk play
              products such as play kitchens and battery-operated ride-on
              vehicles.  It also manufactures and markets a broad line of
              school supplies featuring popular licensed characters,
              including back packs, book bags, lunch kits and stationery
              products such as portfolios, binders, study kits, pencils and
              theme books marketed under the Impact brand name.

              The ERO Division in Hazlehurst, Georgia produces the
              Slumber Shoppe line of products, including indoor sleeping bags
              and play tents featuring popular licensed characters, a water
              sports line of products including flotation jackets, masks,
              fins, goggles and snorkels sold to the children's market
              utilizing ERO's license portfolio and to the children's and
              adults' markets under the Coral brand name. It also markets
              licensed room decorations for young children, consisting
              principally of stick-on and peel-off wall decorations under the
              Priss Prints brand name.

              The International Division in Bracknell, United Kingdom and
              Milton, Ontario Canada produces and distributes gym sets
              and other products manufactured by all of Holdings' domestic
              divisions.
<PAGE>
            Hedstrom utilizes excess capacity at both the Bedford Division
          and the Ashland Division to manufacture components for a variety of
          OEMs of industrial and consumer products.

          Customers

            Four of the Company's customers (Wal-Mart, Toys R Us, K-Mart and
          Target) account for over 50% of the Company's sales.  As a result,
          the Company's operations can be significantly impacted by these
          customers. Although Hedstrom has well-established relationships
          with these customers, it does not have long term contracts with any
          of them.  A decrease in business from any of these customers could
          have a material adverse effect on the Company's results of
          operations and financial condition.  During 1998, well-publicized
          changes in the inventory policies and purchasing practices of Toys
          R Us, the Company's second largest customer in 1998, and, to a
          lesser extent, those of the Company's other customers adversely
          affected the 1998 sales levels of the Company and of the industry
          generally.  As a consequence, the Company's operating income in
          fiscal 1998 was significantly less than anticipated.  Although
          management does not anticipate similar events in fiscal 1999, there
          can be no assurance that competitive pressures in the retail sector
          will not result in continued pressure on the Company's sales and
          operating income.

            As a result of the aforementioned competitive pressures, there
          recently have been a number of consolidations and business failures
          in the retail sector.  As a result, there may be a further
          concentration of the Company's customer base, as well as an adverse
          change in the Company's credit exposure.  Although management has
          no reason to believe that there are any significant credit risks
          associated with any of  its key customers, a credit failure by a
          key customer or a significant number of smaller customers would
          have a material adverse effect on Hedstrom's results of operations.

          Acquisitions

          See Note 3 to the consolidated financial statements for a discussion
          of the Company's acquisitions.

          Products

          Bedford Division

            Outdoor Gym Sets. The Bedford Division produces a broad selection
          of painted metal gym sets and composite metal and plastic gym sets.
          Each of the Company's outdoor gym sets consists of a heavy-duty
          metal frame which supports several hanging, swinging rides such as
          contoured swing seats, glide rides and trapezes. In addition, the
          Company's outdoor gym sets often incorporate a plastic slide and
          climbing tower. The Company sells its outdoor gym sets as complete,
          ready-to-assemble kits. The Company's outdoor gym set line consists
          of 12 styles available in a variety of colors that sell at retail
          prices between $99.99 and $299.99. In 1997, the Company began to
          emphasize wood complete gym sets, which consist of all components
<PAGE>
          necessary to construct a wood gym set. This product line was
          enhanced through the acquisition of Backyard Products Ltd. in 1998.
          As the leading manufacturer of ready-to-assemble wood gym sets, the
          Company markets and sells this product line under the Backyard
          Escapes brand. These products consist of all components necessary
          to build wood gym sets including pre-cut, pre-drilled, treated
          lumber, swings, plastic slides and accessories. These products
          generally sell for retail prices between $299.99 and $799.99.


            Wood Gyms and Slides. The Bedford Division produces wood gym kits
          which it markets primarily through home improvement centers and
          building supply stores. Wood gym kits consist of components
          necessary to construct a wood gym set, such as nuts, bolts and
          framing brackets, and are typically sold together with accessories
          such as swings, climbing towers and plastic slides. The Company
          does not sell the lumber, nails or the tools required to construct
          the wood gym kits. The retailers that carry the Company's wood gym
          kits benefit from the sale of such items, particularly the lumber.
          The Company currently offers wood gym kits with designs and layouts
          ranging from simple swing set designs to more elaborate designs in
          the shape of pirate ships and trains. The Company's wood gym kits
          generally sell for retail prices between $69.99 and $324.99, and
          the Company's slides generally sell for retail prices between
          $79.99 and $129.99.

            Spring Horses. The Bedford Division designs and manufactures 14
          different styles of spring horses for use by children ages 9 months
          to six years old. The Company manufactures the body of the horse,
          paints it to a specific style and packages it with a metal frame
          manufactured by the Company.

            Trampolines. The Bedford Division designs, manufactures and
          imports three different styles of trampolines primarily for use by
          children. This relatively new product line was enhanced during 1997
          by the acquisition of Bollinger Industries, Inc.'s trampoline
          business.

            Gym Accessories, OEM and Other. The Bedford Division designs,
          manufactures, sources and sells a broad line of accessories that
          complement its outdoor gym sets and wood gym kits. Accessories
          include swing seats, climbing ropes, ladders and nets. Many of the
          Company's outdoor gym sets may be customized with various
          accessories sold both in connection with the initial purchase of an
          outdoor gym set and as upgrades or replacement parts for the
          Company's large base of installed units. The Company is currently
          offering over 65 individual accessory items. In addition, the
          Company has undertaken efforts to identify new products that the
          Bedford Division can manufacture during the May through November
          period when its manufacturing capacity historically has been
          underutilized. During the second half of 1997, the Company began
          producing one such product, "Turbo Hoops," which is a home version
          of the popular basketball game found in taverns and other
          commercial establishments. In addition, the Company is seeking
          opportunities to utilize seasonal excess capacity at the Bedford
          Division to manufacture products for OEMs. Sales to OEM customers
<PAGE>
          will better enable it to cost-effectively maintain a core of full-
          time, highly skilled workers and a high level of plant utilization
          year-round, resulting in a consistent source of revenue and
          profitability for the Bedford Division.

            For fiscal years 1998, 1997 and 1996, the Bedford Division
          accounted for 36.1%, 33.1% and 65.7%, respectively, of the
          Company's net sales.

          Ashland Division

            The Ashland Division produces a wide variety of children's
          playballs ranging in size from 4" to 36" in diameter, including
          both premium playballs and non-premium playballs.

            Premium Playballs. The Company's premium playballs generally
          include stylized printing on all or one-half of the ball's surface
          or contain fun novelty items inside the ball. The premium playballs
          that are decorated with stylized printing feature either popular
          characters from the Company's extensive license portfolio or the
          Company's proprietary playball patterns. The Company's proprietary
          playball patterns include holograms, sparkles and other geometric
          patterns. In addition to playballs with stylized printing, the
          Company produces a line of "goofballs" that contain items inside
          the ball such as plastic spiders, worms and beads. The Company's
          premium playballs generally sell at retail prices between $1.99 and
          $8.99.

            Non-Premium Playballs. The Company's non-premium playballs
          include decorated playballs with stripes or other simple patterns,
          undecorated playballs and athletic-style playballs such as
          footballs, basketballs, baseballs, volleyballs and soccer balls.
          Non-premium playballs are available in a wide range of colors and
          sizes. This product line experienced significant growth over the
          last two years from the introduction of an 18" diameter playball, a
          new size in the playball category. The Company's non-premium
          playballs generally sell at retail prices between $1.99 and $24.99.

            Ball Pits. In fiscal 1995, the Company developed and introduced
          home and backyard versions of the popular ball pits used by
          children in commercial locations such as McDonald's. The Company
          sells its ball pit product as a complete, ready-to-assemble set
          including an inflatable tent-like enclosure and 250 to 400 ball pit
          balls. The Company sources the enclosures from several overseas
          manufacturers and packages the enclosures with ball pit balls
          manufactured at the Ashland Division. Management believes that one
          of the Company's competitive advantages in this product category is
          its ability to manufacture high-quality ball pit balls using a
          patented process for which the Company has an exclusive licensing
          agreement. Hedstrom currently offers four ball pit models.
<PAGE>
            OEM and Other. The Ashland Division complements its core playball
          and ball pit businesses and smoothes seasonal production
          requirements by manufacturing a variety of custom-fabricated
          plastic products for toy, sporting goods, hospital supply,
          decorating and lighting companies. Sales to OEM customers enable
          the Ashland Division to cost-effectively maintain a core of full-
          time, highly skilled workers and result in a high level of plant
          utilization year-round while providing a consistent source of
          revenue and profitability.

            For fiscal years 1998, 1997 and 1996, the Ashland Division
          accounted for 12.9%, 14.3% and 34.3%, respectively, of the
          Company's net sales.

          Montreal Division

            The Montreal Division manufactures and markets over 700
          children's leisure and activity products, including arts and crafts
          kits, game tables, battery operated ride-ons and a line of back-to-
          school/stationery products marketed under the Impact brand name.
          The Montreal Division's arts and crafts kits and Impact back-to-
          school stationery products, over 700 products combined, are being
          repostioned under one new brand, Express Ways!, to take advantage
          of the synergy between the two categories within the trade and the
          consumer and provide a stronger competitive advantage.  The
          Montreal Division's game tables and battery operated ride-ons are
          being repositioned under the Hedstrom brand name to take advantage
          of that brand's established identity of leadership in bulk toys.

            Arts and crafts products include a broad variety of children's
          activity kits, chests and boxes that include stickers, stamps,
          candles, paints, clay, beads, sand art and magic sets.  Back-to-
          school and stationery products utilize characters popular with
          children such as Star Wars characters, Pooh and Barbie.

            Game tables combine a wide variety of popular table games such as
          pool, table tennis, knock hockey, foosball and basketball, into a
          single game table.  For example, the 5-in-1 game table includes
          pool, table tennis, knock hockey, shuffleboard and curling. The 10-
          in-1 game table includes each of those games plus foosball, arcade
          and floor basketball, English pub darts and racquetball.

            Battery-operated ride-ons utilize 6-volt or 12-volt battery power
          to motorize child-size versions of adult vehicles.  Designed for 3
          to 7 year old children, these vehicles reach speeds of 2.5 to 4.5
          miles per hour.

            The Montreal Division was acquired in June of 1997 in connection
          with the ERO Acquisition. For fiscal years 1998 and 1997, the
          Montreal Division accounted for 20.3% and 25.3% of the Company's
          net sales, respectively.

          ERO Division

            ERO's product offerings consist of its Slumber Shoppe line of
          products, its water sports line of products and its Priss Prints
          line of products.
<PAGE>
            The Slumber Shoppe line of products includes indoor sleeping
          bags, carrying cases, play tents and selected children's furniture,
          all of which feature popular licensed characters and are marketed
          for children between the ages of two and ten. The core product
          within this line is the slumber bag, a lightweight indoor sleeping
          bag used for slumber parties, sleepovers and children's nap times.
          Play tents (also called slumber tents and play houses) are designed
          to be used indoors and give children a private area that can be
          used as a clubhouse, fort or special play area. ERO also sells foam
          and bean bag chairs featuring licensed characters.

            The water sports line of products includes a full range of
          personal flotation devices (such as flotation vests) and swim and
          pool products (including masks, fins, snorkels and goggles). These
          products are directed at the children's market using the Company's
          license portfolio, and at the children's and adults' markets under
          the Coral brand name.

            Priss Prints sells self-adhesive wall decorations for children's
          rooms that can be removed without any damage to the wall or paint.
          Such wall decorations use licensed characters and proprietary
          designs. For 1998, such licensed characters included Looney Tunes,
          Barbie(TM), Pooh, Mickey for Kids and other popular characters.  New
          product offerings include licensed character borders, night-lights,
          switchplates, hooks and drawer knobs.

            The ERO Division was acquired in June of 1997 in connection with
          the ERO acquisition. For fiscal years 1998 and 1997, the ERO
          Division accounted for 24.3% and 23.6% of the Company's net sales,
          respectively.

          International Division

            The International Division, located in the United Kingdom and
          Canada, produces and distributes gym sets and other products
          manufactured by all of Holdings' Domestic Divisions. For the fiscal
          years 1998 and 1997, the International Division accounted for 6.4%
          and 3.6% of the Company's net sales, respectively. Sales by the
          International Division were insignificant prior to 1997 and were
          included within the Ashland and Bedford Divisions' net sales.

          Sales and Marketing

            The Company's sales force for the Bedford, Ashland and ERO
          Divisions is comprised of a Senior Vice President, four sales
          managers of national accounts, one sales manager of home centers
          and one international sales manager who deal directly with
          customers and outside vendor representatives. These outside vendor
          representatives include approximately 22 manufacturers
          representative organizations with over 100 sales representatives
          that service Hedstrom's mass merchant and home center customers.
          The Company's sales force for the Montreal Division is comprised of
          several in-house sales managers and three outside vendor
          representatives.
<PAGE>
            Hedstrom's marketing activities include customer service, product
          development and advertising and promotions. The Company utilizes
          six customer service representatives to serve retail customers by
          tracking and confirming orders and answering general inquiries.
          Hedstrom's consumer relations department is staffed with trained
          professionals who, through an "800" number, assist end-users in
          assembling products and purchasing spare parts. Hedstrom's product
          development staff consists of engineering and design professionals.
          The product development process involves extensive product
          engineering, model making and sample testing.

            An important element in the Company's marketing strategy is the
          ability to differentiate its products from those of its competitors
          and stimulate sales by using popular licensed characters and well-
          known brand names on its products. Accordingly, the Company
          emphasizes the acquisition and maintenance of a broad portfolio of
          licensed characters. Rather than pursuing a few licensed characters
          with speculative appeal, the Company maintains multiple licenses in
          several categories, including both classic (e.g., Mickey's Stuff
          for Kids, Barbie(TM), Pooh and 101 Dalmatians) and contemporary
          characters. The Company's license agreements typically have a term
          of two years and require payments by the Company of approximately
          12-16% of licensed product revenues. The renewal terms of certain
          license agreements are based upon the attainment of specified sales
          levels, whereas others are based on informal understandings or
          arrangements. License agreements typically are subject to
          termination by the licensor upon failure of the licensee to meet
          various performance standards. Under the terms of certain of its
          license agreements, the Company is required to pay minimum
          guaranteed fees to the licensors over the life of the agreement or
          on a prepaid basis. The guaranteed license fees payable by the
          Company have been insignificant due to the Company's having
          exceeded its minimum royalty requirements. Approximately 25% of the
          Company's net sales for the fiscal year ended December 31, 1998
          were derived from sales of licensed products.  Approximately 89% of
          such net sales were attributable to licenses covering ten licensed
          characters and approximately 54% of such net sales were derived
          from licenses with Disney Enterprises, Inc. and its affiliates.
          Approximately 29% of the Company's Pro Forma Net Sales for the
          fiscal year ended December 31, 1997 were derived from sales of
          licensed products. Approximately 91% of such net sales would have
          been attributable to licenses covering ten licensed characters and
          approximately 65% of such net sales would have been derived from
          licenses with Disney Enterprises, Inc. and its affiliates.

            The ERO Division derives a significant portion of its revenues
          from sales of products featuring licensed characters.  Although the
          ERO Division intends to renew key existing licenses and obtain new
          licenses, there can be no assurance that it will be able to do so.
          The failure to renew key existing licenses or obtain new licenses
          would have a material adverse effect on the Company's results of
          operations.

          International

            The Company's sales to customers located outside the United
          States totaled $45.7 million, $30.8 million and $12.6 million, for
          the fiscal years ended December 31, 1998, December 31, 1997 and for
          the fiscal year ended July 31, 1996, respectively.
<PAGE>
          Competition

            The Company generally operates in a highly-competitive
          environment. Competition in the markets for the Company's products
          is based primarily on cost, characters licensed (for licensed
          character products), product design and quality, reputation,
          customer service, new product innovation and creative marketing and
          distribution approaches. Competitive factors
          in the market for character licenses include royalty levels,
          breadth of product lines, timely royalty reporting and payment,
          artistic applications and compliance with licensors' guidelines.

            Bedford Division. Management believes that the Company's sales of
          outdoor gym sets for the fiscal year ended December 31, 1998,
          represented approximately 98% of the total sales in the U.S. market
          for outdoor painted metal gym sets and composite metal and plastic
          gym sets. The Company's principal competitor in this product line
          is RDM, Inc., formerly known as Roadmaster Corporation, which was
          purchased out of bankruptcy in late 1997. Certain custom gym set
          manufacturers also compete in this market. Management believes that
          the Company holds the second largest share of the total U.S. wood
          gym kit market behind Playcor Corporation (formerly known as Swing-
          N-Slide Corporation).

            Ashland Division. Based on the Company's sales of playballs for
          the fiscal year ended December 31, 1998, management estimates that
          the Company accounted for approximately 85% of total sales in the
          U.S. market for children's playballs. The Company's largest
          competitor in this product line is National Latex Corporation.

            Montreal Division. In the arts and crafts and back-to-
          school/stationery product categories, the Company competes with
          Hallmark Corporation's Binney & Smith unit (under the Crayola
          brand name), Rose Art, Lisa Frank, NSI, Creativity for Kids, Stuart
          Hall and Mead Corporation. In the game table category, the Company
          competes with Toy Biz, Sportscraft and Monneret. Competition in the
          battery-operated ride-on category includes Fisher Price ( a
          subsidiary of Mattel) and Peg Perego.

            ERO Division. The Company's main competitors with respect to its
          Slumber Shoppe product line are Bibb and Coleman, which produces
          non-licensed slumber bags, and Fisher Price which produces non-
          licensed slumber tents. Management believes that the Company has a
          market share of greater than 75% with respect to licensed sleeping
          bags and slumber tents. With respect to its water sports product
          line, the Company's competitors include Sterns, Kent and Aqua
          Leisure. The Company competes primarily against Borden, Infantino,
          Dolly and 3M in the overall room decor industry. Management
          believes that the Company is a market leader in this business.

            International Division. Management believes that the Company is
          the leading marketer for outdoor childrens toys within the United
          Kingdom with its major competitors being Kettler in Germany and
          AMCA in France. Additionally, management believes that the Company
          is the leading provider of gym sets in Canada. The Company's main
          competitors in Canada are Flexible Flyer, Jump King and Grand Toys.

          Manufacturing and Supply; Raw Materials
<PAGE>
          Bedford Division

            Production Process. The Bedford Division's main production,
          warehousing and distribution facilities are located in Bedford,
          Pennsylvania. The manufacturing process for the Company's outdoor
          gym sets and accessories consists of eight integrated operations:
          steel tube-forming, metal stamping, secondary fabrication,
          painting, plastic forming, plastic coating, assembly and packaging.
          Steel tubes are used primarily for the main structural supports of
          the Company's gym sets. The Bedford Division can produce up to
          8,000 gym sets per day depending on the type of outdoor gym sets
          then in production. Backyard Products production, warehousing and
          distribution facilities are located in a 120,000 square foot
          facility in Collingwood, Ontario. The manufacturing process for the
          company's outdoor gym sets consists of five integrated operations;
          wood milling, wood processing, wood staining, assembly and
          packaging. Backyard Products can produce up to 1,000 wooden gym
          sets a day depending on the type of gym set in production.

            Capacity. Management believes that the Bedford Division presently
          has adequate capacity to meet anticipated future production
          requirements at times of peak demand. The division also has the
          capability to outsource or increase capacity in all of its
          processes in the future should backlog develop.

            Quality Assurance. The Bedford Division maintains an extensive
          quality assurance program that includes the development of plans
          for effective control of manufacturing processes, supplier surveys
          to assure manufacturing capability and a formal product release
          system to assure that product goals are achieved. Quality assurance
          personnel verify that manufacturing employees are correctly
          performing quality inspections by, among other things, auditing
          incoming raw materials, manufacturing processes and finished
          products. All manufacturing employees are trained and provided with
          the tools necessary to determine whether manufactured parts meet
          specifications. Employees assemble one unit from each production
          lot to verify conformance to safety standards.

            Raw Materials. The primary raw materials used by the Bedford
          Division include sheet and band steel, wood and plastic resin. Most
          of the division's steel raw materials (which represented
          approximately one-third of the Bedford Division's total raw
          materials purchased in 1998) are currently sourced from a single
          supplier. The Company typically enters into a one-year
          supply contract with this supplier each August. These contracts
          protect the Company from price increases while allowing for
          downward adjustments if market prices should fall. Management
          believes that alternative sources of supply are readily available
          for substantially all of the raw materials used by the Bedford
          Division, including steel.

            Components Purchases. Management periodically evaluates the
          economics of producing internally rather than purchasing certain
          plastic components used in the production and assembly of its
          outdoor gym sets. The Company currently is using excess capacity in
          its Montreal Division plant to produce certain plastic slides and
          swings for the Bedford Division.
<PAGE>
          Ashland Division

            Facilities. The Ashland Division's production facilities are
          located in two facilities in Ashland, Ohio. The main plant houses
          most of the division's production capacity. It includes a warehouse
          and distribution center. A second leased facility is used primarily
          to serve the division's OEM customer base and, to a lesser degree,
          as a source of increased playball capacity. The second plant also
          houses the division's administrative offices and showrooms. The
          Ashland Division also has three satellite facilities strategically
          located in Carrollton, Texas, Reno, Nevada and Dothan, Alabama.
          These facilities are used primarily to manufacture undecorated
          playballs for regional customers and to inflate premium and non-
          premium playballs that are shipped from Ashland.

            Production Process. The Ashland Division manufactures its
          products utilizing two manufacturing processes: (i) rotational
          molding for polyvinyl playballs and polyethylene plastic OEM
          products and (ii) blow molding for plastic ball pit balls. All
          playballs are inflated at Ashland during production to ensure that
          they meet the Company's quality standards, then deflated for
          storage or shipping. The Company believes its satellite playball
          plants provide it with a competitive advantage by minimizing the
          distance that inflated balls must be shipped, and thereby reducing
          shipping costs.

            Capacity. Management believes that the Ashland Division has
          adequate capacity to meet anticipated future production
          requirements at times of peak demand and has ample space within its
          existing facilities to expand capacity.


            Ball Pit License. The Company has entered into a year-to-year
          licensing agreement with Euro-Matic, Ltd. ("Euro-Matic"), a United
          Kingdom-based company that holds the patent for the ball pit balls
          that the Company produces. Using machinery and molds supplied by
          Euro-Matic, the Company manufactures ball pit balls for sale by
          Euro-Matic to the "institutional market," including McDonald's,
          Discovery Zone, hospitals, schools, and similar institutions and
          businesses. The Company receives a fixed fee for each ball
          manufactured. In addition, Euro-Matic provides the Company with
          molds that the Company uses with its own machinery to produce ball
          pit balls that the Company packages with its ball bit products for
          sale to the retail market.

            Quality Assurance. The Ashland Division maintains a rigorous
          quality control process. The division has three quality assurance
          personnel who are trained in methods of statistical process control
          and continuous improvement.

            Raw Materials. The Ashland Division manufactures its products
          from commodity raw materials such as plastic resins, pigments and
          other chemicals that generally are available from numerous sources.
          The Company has not entered into any supply contracts with any of
          the Ashland Division's vendors. Management believes that alternate
          sources of supply are readily available for all of the raw
          materials used by the Ashland Division.
<PAGE>
          Montreal Division

            The Montreal Division's production facilities are located in
          Montreal, Quebec. The Division also owns a facility in Plattsburgh,
          New York which is used to distribute products in the United States.
          The Montreal Division manufactures all of its plastic components
          and crayons, mixes its own paint and prints all labels, cartons,
          coloring books, stickers and instruction sheets. All of the
          Montreal Division's products are manufactured with non-toxic
          materials to comply with industry standards for children's products
          and applicable environmental laws.

          ERO Division

            The ERO Division produces or assembles slumber bags, personal
          flotation devices, juvenile furniture and children's wall
          decoration products at the ERO Division's Hazlehurst, Georgia
          facility. To reduce lead times and inventory levels with respect to
          these product lines, the ERO Division utilizes just-in-time
          manufacturing and sourcing systems. The ERO Division purchases its
          play tents, slumber mates, swim, aqua fitness, back-to-school and
          wall decoration products from manufacturers located in the United
          States, Taiwan, Hong Kong and the People's Republic of China. The
          ERO Division's pricing and supply of imported products has not been
          affected by the recent economic problems in Asia.

            The ERO Division's largest suppliers for its domestic operations
          provide printed fabric for the slumber bags, liners for the slumber
          bags, vinyl prints for room decorations, polyester fiber to fill
          the slumber bags and zippers and buckles. The ERO Division  works
          closely with its suppliers in order to consolidate the purchasing
          function and to foster teamwork between the ERO Division and its
          suppliers. For each of the aforementioned products, the ERO
          Division maintains alternative sources of supply.

          International Division

            The Company leases and operates a production facility in
          Holyhead, United Kingdom. The facility is used to manufacture
          various gym set lines. The International Division produces gym sets
          in a similar fashion as those at the Bedford Division with its
          primary raw materials being sheet and band steel. Products other
          than metal gym sets are primarily sourced from the Company's other
          divisions.

          Backlog

            The Company monitors the inventory level of each of its key
          customers, which allows the Company to anticipate customer orders
          and fill such orders within days. As a result of such monitoring
          and the Company's just-in-time manufacturing of several of its
          principal products, the Company does not generate significant
          backlog.
<PAGE>
          Seasonality

            Historically, the Company's sales have been highly seasonal, with
          its peak selling season occurring during the first two calendar
          quarters of the year. However, management believes the ERO
          acquisition has helped the Company to better balance its sales
          throughout the year because the ERO and Montreal Division's peak
          selling season occurs during the third and fourth calendar quarters
          of the year. Net sales for the Company for each calendar quarter
          during the fiscal year ended December 31, 1998 were 26.0%, 27.6%,
          21.3% and 25.1%, respectively, of total net sales for the twelve
          month period. Pro Forma Net Sales for the Company for each calendar
          quarter during the fiscal year ended December 31, 1997 were 22.7%,
          25.6%, 20.9% and 30.8%, respectively, of total Pro Forma Net Sales
          for such twelve-month period.

          Environmental

            Certain of the Company's operations, including the use of
          solvents, paints and other materials that contain chemicals that
          are considered hazardous under various environmental laws, are
          subject to federal, state, local and foreign environmental laws and
          regulations which govern, among other things, the discharge of
          pollutants into the air and water, and the handling and disposal of
          solid and hazardous wastes. Permits are required for certain of the
          Company's operations, and these permits are subject to
          modification, renewal and revocation by issuing authorities.
          Governmental authorities have the power to enforce compliance with
          applicable laws and regulations, and violations may result in
          fines, injunctions, including the cessation of operations, or both.
          Management believes that the Company's operations currently comply
          in all material respects with applicable environmental laws and
          regulations.

            Under the Clean Air Act Amendments of 1990 (the "CAA"), the
          Environmental Protection Agency has been directed, among other
          things, to develop standards and permit procedures with respect to
          certain air pollutants. Because many of the implementing
          regulations have not yet been promulgated, the Company cannot make
          a final assessment of the impact of the CAA. Based upon its
          preliminary review of the CAA, however, management currently
          believes that compliance with the CAA and other environmental laws
          and regulations will not have a material adverse effect on the
          Company.

          Government Regulations

            The Company is subject to the provisions of, among other laws,
          the Federal Hazardous Substances Act and the Federal Consumer
          Product Safety Act. These laws empower the Consumer Product Safety
          Commission (the "CPSC") to protect consumers from hazardous
          products and other articles. The CPSC has the authority to exclude
          from the market products which are found to be unsafe or hazardous
          and can require a manufacturer to recall such products under
          certain circumstances. Similar laws exist in some states and cities
          in the United States and in Canada and Europe. While the Company
<PAGE>
          believes that it is, and will continue to be, in compliance in all
          material respects with applicable laws, rules and regulations,
          there can be no assurance that the Company's products will not be
          found to violate such laws, rules and regulations, or that more
          restrictive laws, rules or regulations will not be adopted in the
          future which could make compliance more difficult or expensive or
          otherwise have a material adverse effect on the Company's business,
          financial condition and results of operations.

          Employees

            As of December 31, 1998, the Company employed 2,234 people.
          Approximately 10% of the Company's employees are unionized, all of
          whom are employed in the Ashland Division. These employees are
          represented by the Rubber Workers Union, which is affiliated with
          the United States Steel Workers Union. Members of the Rubber
          Workers Union in Ashland, Ohio ceased production at the Ashland
          Division Plant on October 3, 1998.  The work stoppage at the
          Ashland facility was resolved on October 10, 1998 when a tentative
          agreement was reached. The new collective bargaining agreement was
          ratified by the rank and file on October 12, 1998 and will expire
          on October 2, 2001. The work stoppage did not have a material
          effect on the Company's operations or its ability to service its
          customers on a timely basis. The Company believes that it has a
          good relationship with its employees.

          Item 2.  Properties                                     

            Management believes that the Company's facilities are in good
          condition and that it has sufficient capacity to meet its current
          and projected manufacturing and distribution needs. The Company's
          principal executive offices are located at 585 Slawin Court, Mount
          Prospect, Illinois 60056.

            The following table summarizes certain information regarding the
          Company's principal operating facilities all of which are owned by
          the Company or one of its subsidiaries.
<PAGE>
                                     Approximate
                                       Square                                  
               Location               Footage        Description of Use        
               -------------------   ------------    ---------------------

               Saint Laurent, Quebec   800,000       Montreal Division sales,
                                                     administration,
                                                     manufacturing and
                                                     distribution

               Bedford, Pennsylvania   472,000       Bedford Division
                                                     manufacturing, warehouse
                                                     and administration

               Ashland, Ohio           273,000       Ashland Division
                                                     manufacturing, warehouse
                                                     and administration

               Hazlehurst, Georgia     230,000       ERO Division manufacturing
                                                     and distribution

               Plattsburgh, New York    80,000       Montreal Division
                                                     manufacturing and
                                                     distribution

             Leased Facilities

             The Company also leases various facilities in the U.S., Canada
          and United Kingdom. Such facilities range in size from
          120,000 square feet in Collingwood, Ontario to 1,400 square feet
          in the United Kingdom.

          Item 3.  Legal Proceedings                                           

            The Company is from time to time involved in lawsuits arising in
          the ordinary course of business. The Company maintains product
          liability insurance and management does not believe that the
          outcome of any such lawsuits, individually or in the aggregate,
          will have a material adverse effect on the Company's financial
          condition. Although historically the Company has not been required
          to pay any material liability claims, there can be no assurance
          that the Company will not incur claims which are in excess or
          outside of its insurance coverage.

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

            There were no matters submitted during the fourth quarter of the
          year ended December 31, 1998.

                                        PART II                                

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

            There is no established public trading market for the Company's
          common stock. As of March 30, 1999, there were 61 record holders of
          Holdings common stock and 1 record holder of Holdings' non-voting
          common stock.
<PAGE>
            The terms of the Company's indebtedness  impose significant
          restrictions on the Company's ability to make dividend payments
          (see further discussion of such in Item 7, "Management's Discussion
          and Analysis of Financial Condition and Results of Operations", and
          Note 6 to the Company's consolidated financial statements in Item
          8). The Company has not paid cash dividends historically, and does
          not intend to do so in the foreseeable future.
<PAGE>
          Item 6.  Selected Financial Data

            The  following  information   should  be  read   in  conjunction
          with "Management's Discussion and Analysis of Financial Condition
          and  Results of Operations" and the consolidated financial
          statements of Holdings  and the notes thereto contained elsewhere
          herein. Holdings historically had a fiscal year ending July  31
          but changed its  fiscal year to December  31, effective in 1997.
<PAGE>
<TABLE>
                                       Fiscal Year  Fiscal Year     Five Months
                                          Ended        Ended           Ended
                                       December 31, December 31,   December 31,           Fiscal Year Ended July 31,
 (Dollars in thousands, except per         1998       1997       1996        1995         1996      1995       1994
 share amounts)                        ------------  ----------  ----        ----         ----      ----       ----
                                                                        (unaudited)
 <S>                                      <C>        <C>        <C>         <C>        <C>        <C>         <C>
 Income Statement Data:
   Net sales .........................    $301,696   $256,146   $23,994     $31,792    $133,194   $133,862    $108,655
   Cost of sales .....................     210,607    172,390    21,973      26,000     105,068    107,312      87,170
                                          --------   --------   -------     -------     -------    -------     -------
   Gross profit ......................      91,089     83,756     2,021       5,792      28,126     26,550      21,485
   Selling, general and administrative
    Expenses .........................      66,917     47,052     7,546       7,067      24,603     19,207      18,181
                                          --------   --------   -------     -------     -------    -------     -------
   Operating income (loss)............      24,172     36,704    (5,525)     (1,275)      3,523      7,343       3,304
   Recapitalization expenses(a)                  _          _         _       9,600       9,600          _           _
   Interest expense ..................      31,335     19,131     2,115       1,773       5,896      4,573       2,982
                                          --------   --------   -------     -------     -------    -------     -------
   Income (loss) before income taxes..      (7,163)    17,573    (7,640)    (12,648)    (11,973)     2,770         322
   Income tax expense (benefit).......        (436)     7,997    (2,869)     (4,074)     (3,857)     1,440         103
                                          --------   --------   -------     -------     -------    -------     -------
   Income (loss) from continuing
    Operations .......................      (6,727)     9,576    (4,771)     (8,574)     (8,116)     1,330         219
   Loss from discontinued
    operations(b) ....................           _          _         _           _          _        (585)     (3,180)
                                          --------   --------   -------     -------     -------    -------     -------
   Net income (loss) .................    $ (6,727)  $  9,576   $(4,771)    $(8,574)    $(8,116)  $    745    $ (2,961)
                                          ========   ========   =======     =======     =======    =======     =======

   Diluted earnings per share (c)           ($0.10)     $0.18
   Diluted weighted average shares
    Outstanding(c) ....................     67,663     52,416
 Other Financial Data:
   Net cash provided by (used in):
     Operating activities                   $7,414    $(9,779)   $2,978    $(19,209)   $(17,744)     $ 396      $1,344
     Investing activities                  (34,713)  (146,387)   (1,309)     (1,342)     (6,490)    (2,574)     (2,988)
     Financing activities                   20,789    165,622    (9,134)     19,842      31,135      2,899       1,060
   EBITDA(d) ..........................     36,717     45,772    (3,549)       (393)      9,420     10,088       5,529
   Depreciation and amortization(e)         12,545      9,068     1,976         882       3,347      2,745       2,225
   Capital expenditures ...............     11,292      6,395     1,376       1,342       6,738      2,574       2,988
 Balance Sheet Data (end of period):
   Total assets .......................   $395,767   $387,539   $72,075     $70,459     $85,024    $69,809     $60,005
   Total debt (including current
     maturities) ......................    313,489    289,404    60,471      57,750      69,706     32,710      29,811
   Stockholders' equity (deficit)           38,599     47,164    (3,097)      2,055       1,674     15,392      14,647
</TABLE>
<PAGE>

          __________
          (a) In connection with the 1995 Recapitalization, Holdings incurred
            approximately $9.6 million in costs, all of which were expensed.

          (b) During fiscal 1995, Holdings discontinued the operations of its
            Hedstrom  Holdings  II  subsidiary.  Hedstrom  Holdings  II   was
            involved in  the manufacturing  of traffic  control devices.  The
            sole customer of Hedstrom  Holdings II was  a related party  with
            which Holdings no longer has an ongoing relationship.

          (c) Due to the ERO acquisition, net income (loss) per share for the
            five months ended December 31, 1996 and 1995 and for
            the three fiscal years ended July 31, 1996 has no
            significant relevance to current amounts.

          (d) EBITDA  represents  operating  income  plus  depreciation   and
            amortization and,  for the  twelve months  ended July  31,  1996,
            certain other  one-time  charges aggregating  $2.55  million,  as
            follows:  (i)  $0.8   million  related  to   a  one-time   design
            adjustment to one  of Hedstrom's outdoor  gym set accessories  to
            address  certain  alleged  defects,  (ii)  a  non-cash  inventory
            write-down  of  $0.75  million  related  to  the  mix  shift   in
            Hedstrom's  outdoor gym  set  product  line,  and  (iii)  a  $1.0
            million  non-cash write-off  of  advertising  barter  credits  by
            Hedstrom in  connection  with  its decision  to  discontinue  its
            trial advertising campaign.  Management believes  EBITDA for  the
            twelve months ended  July 31, 1996,  as adjusted  for these  one-
            time  charges,   provides  a   more  meaningful   comparison   of
            historical results. EBITDA as determined  by Holdings may not  be
            comparable to the EBITDA measure as reported by other  companies.
            EBITDA is not intended to represent cash flow from operations  as
            defined by GAAP and should  not be considered as an indicator  of
            operating performance or an alternative to cash flow or operating
            income (as measured by GAAP) or as  a measure of  liquidity. In
            addition, this  measure does not represent funds available  for
            discretionary use. It  is included herein to  provide additional
            information with  respect to the  ability of  Holdings  to meet
            its future  debt  service, capital expenditures and working
            capital requirements.

          (e) Depreciation and  amortization  included  herein  excludes  the
            amortization of  deferred financing  costs  that is  included  in
            interest expense.


          Item 7.  Management's Discussion and Analysis of Financial           
                   Condition and Results of Operations                         
<PAGE>
            The following  discussion  generally relates  to  the  historical
          consolidated results  of  operations  and  financial  condition  of
          Holdings and Hedstrom.  The comparison between  years is  naturally
          affected by the significant impact of the Acquisition of ERO,  Inc.
          The following discussion and analysis should be read in conjunction
          with the  consolidated financial  statements of  Holdings, and  the
          notes thereto,  included elsewhere  herein.  For purposes  of  this
          discussion, references  to "Hedstrom",  where appropriate,  include
          Holdings and Hedstrom and its subsidiaries (including, with respect
          to periods after the consummation of  the ERO acquisition, ERO  and
          its subsidiaries).

          General

            Hedstrom is a leading United States manufacturer and marketer of
          well-established children's leisure and activity products. Hedstrom
          has five principal divisions. The Bedford Division principally
          manufacturers and markets in the United States and Canada painted
          metal and composite metal and plastic outdoor gym sets, wood gym
          kits and sets and slides, spring horses, trampolines and gym
          accessories. The Ashland Division manufactures and markets in the
          United States a wide variety of children's playballs and ball pit
          products. The Montreal Division manufactures children's products
          including arts and craft kits, game tables, battery operated cars
          and back-to-school products. The ERO Division manufactures and
          distributes slumber products, water sports products and room decor
          items. The International Division manufactures and distributes
          painted metal gym sets and sells other products manufactured by
          Hedstrom's other divisions.

          Forward Looking Statements

            This Form 10-K and future filings by the Company on Form 10-Q and
          Form 8-K and future oral and written statements by the Company and
          its management may include, certain forward-looking statements,
          including (without limitation) statements with respect to
          anticipated future operating and financial performance, Year 2000
          compliance and other similar forecasts and statements of
          expectation. Words such as "expects", "anticipates", "intends",
          "plans", "believes", "seeks", "estimates", and "should", and
          variations of These words and similar expressions, are intended 
          to identify these forward looking statements. Forward-looking
          statements by the Company and its management are based on
          estimates, projections, beliefs and assumptions of management and
          are not guarantees of future performance. The Company disclaims any
          obligation to update or revise any forward-looking statement based
          on the occurrence of future events, the receipt of new information,
          or otherwise. Actual future performance, outcomes and results may
          differ materially from those expressed in forward-looking
          statements made by the Company and its management.
<PAGE>
          Fiscal Year Change

            Hedstrom historically  had  a  fiscal year  ending  July  31  but
          changed its  fiscal year-end  to December  31, effective  in  1997.
          Management  implemented  this  change  primarily  to  improve   the
          accuracy of Hedstrom's annual budgeting process. Hedstrom's  retail
          customers generally  do  not  determine  outdoor  gym  set  product
          placements for the  upcoming peak Spring  selling season until  the
          preceding Fall. In the past, Hedstrom prepared its budgets  without
          the benefit of knowing what its outdoor gym set placements would be
          for the upcoming fiscal year.

            As a result of the change in Hedstrom's fiscal year, Hedstrom has
          presented financial statements for the five-month period ended
          December 31, 1996 and for the comparable period in 1995. Management
          does not believe that a comparison of such periods is meaningful
          because, given the concentration of Hedstrom's net sales in the
          first and second calendar quarters, overall changes in production
          levels in the comparably less active period from August to December
          can have a significant impact on stated profitability for such
          period due to the absorption of fixed manufacturing costs. This is
          especially true when comparing the above-mentioned five-month
          period in 1996 versus the same five-month period in 1995. In late
          1996, management took several steps to increase the daily
          production capacity of outdoor gym sets in an effort to increase
          its capacity during peak production periods, thereby reducing
          inventory levels and related material and warehouse expense. As a
          result of these efforts, Hedstrom is now able to manufacture gym
          sets on a just-in-time basis in response to specific customer
          orders. The move to just-in-time manufacturing in late calendar
          1996 precluded the need to begin manufacturing gym sets in 1996 for
          sale in 1997 and thus, unlike in late 1995, Hedstrom expensed the
          fixed overhead incurred at its idle outdoor gym set operations. As
          a result of the switch to just-in-time manufacturing, Hedstrom's
          operating results were significantly better in the second calendar
          quarter of 1997 versus the second calendar quarter of 1996 because,
          among other things, it produced outdoor gym sets in the second
          calendar quarter of 1997, whereas in the same period of 1996,
          Hedstrom met consumer demand for outdoor gym sets out of inventory.
            
          Net Sales

            Hedstrom  computes  net  sales  by  deducting  sales  allowances,
          including allowances for returns,  volume discounts and  promotions
          (including cooperative advertising),  from its  gross sales.  Where
          information concerning net  sales by  product line  is provided  in
          this filing, Hedstrom has estimated net sales by attributing  sales
          allowances to each  product line  in proportion  to the  individual
          product line's percentage of gross sales.

            In 1996, Hedstrom  revised certain of  its promotional  policies,
          effectively increasing  the sales  thresholds at  which  Hedstrom's
          customers  earn  certain  promotional  discounts,  which  increased
          Hedstrom's profitability in 1997.
<PAGE>
          Results of Operations

            The following table  sets forth net  sales and  gross profit  for
          each  of  Hedstrom's  five  operating  divisions  for  the  periods
          indicated:
                                                      Twelve Months
                                                   Ended December 31,          
                                                 ----------------------
                                                 1998     1997      1996       
                (In millions)                    ----     ----      ---- 
                                                                 (unaudited)

                Net sales:
                  Bedford Division ...........  $109.0    $ 84.8   $ 82.4
                  Ashland Division ...........    38.9      36.8     43.0
                  Montreal Division ..........    61.2      64.8        _
                  ERO Division ...............    73.4      60.5        _
                  International Division .....    19.2       9.2        -      
                                                ------    ------   ------    
                          Total net sales ....  $301.7    $256.1   $125.4    
                                                ======    ======   ======     
                Gross profit:
                  Bedford Division ...........  $ 22.3    $ 21.2   $ 13.1
                  Ashland Division ...........    10.6       9.5     11.2
                  Montreal Division ..........    21.0      24.0        _
                  ERO Division ...............    33.5      27.1        _
                  International Division .....     3.7       2.0        -   
                                                ------    ------   ------
                          Total gross profit..  $ 91.1    $ 83.8   $ 24.3    
                                                ======    ======   ======    

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

            Net Sales.  Hedstrom's total net sales increased to $301.7
          million in the fiscal year ended December 31, 1998 from $256.1
          million in fiscal 1997, an increase of $45.6 million.  Such
          increase was attributable to higher sales at the Bedford,
          International, and Ashland Divisions, and also the inclusion of the
          ERO and Montreal Divisions for the full year 1998 versus only the
          last seven months of fiscal 1997.  Net sales of the Bedford
          Division increased by $24.2 million for fiscal 1998 versus fiscal
          1997.  The increase was attributable primarily to increased sales
          of trampolines as a result of the acquisition of Bollinger
          Industries Inc.'s trampoline business, higher sales of metal gym
          sets as a result of increased market penetration, and  increased
          wood gym sales as a result of the acquisition of Backyard Products
          Limited  (see Note 3 of the Notes to Consolidated Financial
          Statements). These increases were partially offset by lower sales
          of spring horses during the year due to inventory reduction efforts
          by Toys R Us.  Additionally, increased sales of preschool products
          were offset by lower sales of OEM products.  The net sales of the
          International Division for fiscal 1998 increased by $10.0 million
          as compared to fiscal 1997.  The increase can be attributed to the
<PAGE>
          acquisition of certain assets of Bestoy, a U.K. manufacturer,
          during the first quarter of 1998. The inclusion of the ERO and the
          Montreal Divisions for the full fiscal year 1998 versus only seven
          months of fiscal 1997 resulted in increased sales of $9.3 million.
          Net sales of the Ashland Division increased by $2.1 million versus
          the prior year mainly as a result of greater demand for children's
          ball pits, the effects of which were partially offset by lower
          sales of OEM products.   On a pro-forma basis, net sales of the ERO
          Division decreased approximately 15% mainly as a result of
          inventory reduction efforts by Toys R Us.  On a pro-forma basis,
          net sales of the Montreal Division decreased approximately 21% due
          to limited new product offerings related to arts and crafts and
          game tables and lower sales of Impact products attributable to the
          Company's elimination of non profitable products during 1998.

            Gross Profit.  As a result of the increase in Hedstrom's total
          net sales, total gross profit increased to $91.1 million in fiscal
          1998 from $83.8 million in fiscal 1997.  As a percentage of net
          sales, gross profit decreased to 30.2% in fiscal 1998 from 32.7% in
          fiscal 1997.  The decrease in total gross profit percentage in
          fiscal 1998 was due to lower gross margin percentages at the
          Bedford, and Montreal Divisions, which were partially offset by a
          higher gross margin percentage at the ERO Division. The gross
          profit percentage of the Montreal Division decreased to 34.3% for
          fiscal 1998 from 37.0% for fiscal 1997. The decrease in the
          Montreal Division's gross profit margin was mainly a result of
          unfavorable production variances during the first five months of
          the year, as a result of the seasonal nature of the business, which
          were not included in the fiscal 1997 results due to the timing of
          the acquisition by Hedstrom.  Additionally, margins were negatively
          impacted by an unfavorable product sales mix and low margin "close-
          out" sales of  Impact products. The Bedford Division's gross profit
          percentage decreased from 25.0% in fiscal 1997 to 20.5% in fiscal
          1998.  The decline in the Bedford Division's gross profit
          percentage for fiscal 1998 was due mainly to an unfavorable product
          mix. Sales of trampolines, which carry a lower gross profit
          percentage, increased as a percentage of total Bedford
          Division sales, while sales of metal gym sets, which generally
          carry a higher overall gross margin, decreased as a percentage
          of total Bedford Division sales.  Additionally, gym set
          margins were negatively impacted by a shift in sales to mass
          merchants which resulted in lower average selling prices.  The ERO
          Division's gross profit percentage increased to 45.6% for fiscal
          1998 versus 44.8% for fiscal 1997.  The increase in the ERO
          Division was due primarily to favorable manufacturing variances, as
          well as a more favorable product sales mix and more favorable
          material costs.  The Ashland and International Divisions gross
          margins fluctuated slightly from the prior year as a result of
          changes in product sales mix. On a pro-forma basis, the gross
          profit percentage of the ERO Division increased in fiscal 1998 as
          compared to fiscal 1997 due to more favorable product sales mix and
          more favorable material costs.  On a pro-forma basis, the gross
          profit percentage of the Montreal  Division remained relatively
          unchanged as favorable material costs were offset by unfavorable
          production variances related to volume.
<PAGE>
            Selling, General and Administrative Expense.  Total selling,
          general and administrative expenses increased to $66.9 million in
          fiscal 1998 from $47.1 million in fiscal 1997.  Expressed as a
          percentage of net sales, selling, general and administrative
          expenses increased to 22.2% in fiscal 1998 from 18.4% in fiscal
          1997.  The increase was due principally to the inclusion of the ERO
          and Montreal Divisions for the full year, which experience
          relatively high selling, general and administrative expenses, and
          the inclusion of amortization of acquisition-related intangible
          assets and royalty expenses. In addition, provision for bad debts
          was increased to cover accounts receivable risk related to Caldor
          and Service Merchandise. The Company also wrote off approximately
          $0.7 million of barter credits during fiscal 1998.

            Interest Expense.  For fiscal 1998, interest expense increased by
          $12.2 million to $31.3 million.  The increase in interest expense
          was a result of higher average debt levels associated with the
          acquisition-related debt and higher working capital requirements.

            Income Tax Expense.  Holdings' effective income tax rate in 1998
          was 6.1% as compared with an effective income tax rate of 45.5% in
          1997.  The decrease was attributable to the large amount of non-
          deductible goodwill generated by the ERO acquisition, unbenefitted
          foreign losses and certain foreign income which will be taxed.

          Fiscal Year Ended December 31, 1997 Compared to Twelve Months Ended
          December 31, 1996

            A comparison of Hedstrom's results  of operations for the  fiscal
          year ended  December 31,  1997  with the  same  period in  1996  is
          necessarily affected by the impact of  the consummation of the  ERO
          Acquisition in June 1997. Due to  the inclusion of seven months  of
          operations of the  ERO and Montreal  Divisions in  the fiscal year
          ended  December  31,  1997,  management  does  not  believe that
          comparisons with the same period in 1996 is meaningful.

            Net Sales. Hedstrom's total net sales increased to $256.1 million
          in the  fiscal year ended December 31, 1997 from $125.4 million  in
          1996, an increase of $130.7 million. Such increase was attributable
          to the inclusion of the ERO and Montreal Divisions and an increase
          in sales at the Bedford Division, offset by a decline in sales at
          the Ashland Division. Net sales of the Bedford Division increased
          primarily  as  a  result  of (i) the  restructuring  of  several
          promotional allowances, (ii) increased sales of trampolines due  to
          the business  acquired from  Bollinger Industries,  Inc., (iii)  an
          increase in OEM sales, (iv) new  product introductions and (v)  the
          acquisition  of  M.A.  Henry  Limited  in  August  of  1997.  These
          increases were  partially offset  by a  decrease resulting  from  a
          shift in product mix to lower-priced outdoor gym sets. Net sales of
          the Ashland Division decreased primarily as a result of a  decrease
          in sales  of  certain  undecorated  playballs  which  decrease  was
          partially offset by the increase in market share of ball pits. On a
          pro-forma basis,  the  net  sales of  the  ERO  Division  increased
          approximately 12%  in 1997  as compared  to 1996  due to  increased
          account penetration in the Slumber Shoppe and Priss Prints  product
          lines. On a pro-forma basis, the net sales of the Montreal Division
          decreased by approximately 4% in 1997 primarily due to a decline in
          the overall arts and crafts market which decrease was offset by the
          introduction of its battery-operated car.
<PAGE>
            Gross Profit. As a result of the increase in Hedstrom's total net
          sales, total gross profit increased to $83.8 million in 1997 from
          $24.3 million in 1996. As a percentage of net sales, gross profit
          increased to 32.7% in 1997 from 19.4% in 1996 due in part to the
          inclusion of the results of the ERO and Montreal Divisions, whose
          combined gross profit margin of 40.8% is higher than the other
          divisions of Hedstrom. The Bedford Division's gross profit margin
          in 1997 increased to 24.4% from 15.9% in 1996, primarily as a
          result of the benefits of (i) a 1996 Cost Reduction Plan, and (ii)
          improvements in promotional programs, which benefits were partially
          offset by a decrease in net sales attributable to sales of lower-
          priced and lower-margin outdoor gym sets. Gross profit margin in
          the Ashland Division increased to 26.4% in 1997 from 26.0% in 1996
          primarily as a result of an increase in selling prices and the
          favorable effects of the 1996 Cost Reduction Plan, the effects of
          which were partially offset by a reduction in production volume. On
          a pro-forma basis, the gross profit percentage of the ERO Division
          increased in 1997 as compared to 1996 due to increased production
          volume and lower material costs. On a pro-forma basis, the gross
          profit percentage of the Montreal Division decreased in 1997 due
          primarily to (i) decreased production volume, (ii) the start-up
          costs of producing a new product, battery-operated cars and  (iii)
          a shift in sales mix from higher-margin arts and crafts products to
          lower-margin battery-operated cars.

            Selling, General  and Administrative  Expenses. Selling,  general
          and administrative expenses increased to $47.1 million in 1997 from
          $25.1 million  in 1996.  As a  percentage  of net  sales,  selling,
          general and administrative expenses decreased to 18.4% in 1997 from
          20.0% in  1996, due  principally to  a reduction  in warehouse  and
          shipping costs resulting from Hedstrom's implementation of just-in-
          time manufacturing of outdoor gym  sets and the discontinuation  of
          certain print advertising  programs. This  reduction was  partially
          offset  by  the  inclusion  of  the  ERO  and  Montreal   Divisions
          relatively high selling, general and administrative expenses, which
          include the amortization  of acquisition-related intangible  assets
          and royalty expense.

            Interest Expense. Interest expense increased  as a result of  the
          incurrence of acquisition-related indebtedness and higher  interest
          rates.

            Income Tax Expense. Holdings' effective  income tax rate in  1997
          was 45.5% as compared with an effective income tax rate of 38.1% in
          1996. The  increase was  attributable to  the acquisition  of  ERO,
          which generated a  large amount  of non-deductible  goodwill and  a
          higher amount of income derived from  foreign sources which have  a
          higher effective tax rate than the U.S. sources.

            Liquidity and Capital Resources of the Company
<PAGE>
          Working Capital and Cash Flows

            Net cash provided by operating activities was $7.4 million for
          the fiscal year ended December 31, 1998.  The cash provided by
          operations reflects the seasonal nature of the Company's sales. The
          ERO and Montreal Division's sales and accounts receivable build
          during the second half of the year and are liquidated in the first
          half of the following year. The Bedford, Ashland and International
          Divisions build sales and accounts receivable during the first half
          of the year and liquidate during the second half of the year.

            Net cash used for investing activities was $34.7 million during
          the fiscal year ended December 31, 1998, including $16.8 million
          used for the acquisition of Backyard Products Limited (as discussed
          in Note 3 of the Notes to Consolidated Financial Statements), $11.3
          million used for the acquisition of property, plant and equipment,
          $3.0 million of contingency payments relating to the ERO
          acquisition (as discussed in Note 3 of the Notes to Consolidated
          Financial Statements) and $3.6 million used to purchase certain
          assets from Bestoy, a U.K. manufacturer.

            Net cash provided by financing activities was $20.8 million,
          representing net proceeds from an additional $30.0 million of
          Tranche B Term Loans used to fund the acquisition of Backyard
          Products Limited and paydown a portion of the Company's outstanding
          balance of the Company's Revolving Credit Facility. The Company
          also made $8.0 million of principal payments on the Company's other
          term loans.

          Liquidity

            Interest payments on the  Senior Subordinated Notes and  interest
          and principal payments under the Senior Credit Facilities represent
          significant  cash  requirements   for  the   Company.  The   Senior
          Subordinated Notes  require semiannual  interest payments  of  $5.5
          million.  Borrowings  under  the  Senior  Credit  Facilities   bear
          interest at floating rates and require interest payments on varying
          dates depending  on  the  interest  rate  option  selected  by  the
          Company.

              Outstanding borrowings under the Senior Credit Facilities
          consisted of $130.7 million under the Term Loan Facilities,
          comprised of $66.5 million of Tranche A Term Loans maturing in 2003
          and $64.2 million of Tranche B Term Loans maturing in 2005. The
          Senior Credit Facilities also include a $70 million Revolving
          Credit Facility.  As of December 31, 1998, a balance of $34.9
          million was outstanding under the Revolving Credit Facility.

            The Term  Loan Facilities  will require  principal repayments  in
          1999 according to the following schedule:

            Date                 Tranche A Term Loans    Tranche B Term Loans
            --------------       --------------------    --------------------
            March 31, 1999           $4,000,000                $125,000
            June 30, 1999             1,000,000                 125,000
            September 30, 1999        4,000,000                 125,000
            December 31, 1999         1,000,000                 125,000
<PAGE>
            The  Revolving  Credit  Facility   terminates  and  all   amounts
          outstanding thereunder mature on the maturity date of the Tranche A
          Term Loan Facility in 2003.

            At present,  the  Discount Notes  do  not require  cash  interest
          payments. Rather, principal will accrete to an aggregate  principal
          amount of $44,612,000  on June 1,  2002. Commencing  on such  date,
          Holdings will be required to  make semiannual interest payments  of
          $2,676,720.

            The  Company's  remaining  liquidity  demands  are  for   capital
          expenditures and  for  working  capital needs.  The  Senior  Credit
          Facilities impose an annual limit of $10.0 million on the Company's
          capital expenditures and investments (subject in any given year  to
          a roll-over of  up to $4.0  million of  unused capital  expenditure
          capacity from  the previous  year).  The Senior  Credit  Facilities
          impose significant restrictions  on the Company's  ability to  make
          dividend payments.

            The Company's primary  sources of liquidity  are cash flows  from
          operations and borrowings under  the Revolving Credit Facility.  As
          of December 31, 1998, approximately $22.6 million was available  to
          the Company (subject to borrowing base limitations) for  borrowings
          under the Revolving Credit Facility. Management believes that  cash
          generated from  operations,  together  with  borrowings  under  the
          Revolving Credit Facility, will be sufficient to meet the Company's
          working capital and capital expenditures needs for the  foreseeable
          future.

            The  Company has established avaluation  allowance  which fully
          reserves  deferred  tax  assets associated with  the Company's
          operations in  the United  Kingdom, which are  not  assured of
          realization.  However,  the  Company believes it is more  likely
          than not to  realize the remaining  net deferred tax asset and
          accordingly no valuation allowance has  been provided. This
          conclusion is based on, (i) projections  (which  include
          the  ERO and  Montreal Divisions) of sufficient taxable U.S.
          income to fully realize  the net operating loss carryforwards by
          the end of calendar year  1999, (ii) the tax loss carryforwards
          included  in the net deferred  tax asset were generated  in very
          recent  periods and do  not begin  to expire until the  years
          2011-2018, (iii)  the significant excess  of book basis over tax
          basis relative  to the net assets of ERO,  Inc. and  (iv)  the
          carryback  of  $5,545,000  in  net  operating   loss carryforwards
          which will result in a 1999 tax refund of $6,745,000. Management
          continually  evaluates  the  realizability  of  the  net
          deferred tax assets and the need for a valuation allowance on  such
          assets.
<PAGE>
          Montreal Division
                                          
            In 1997, subsequent to its acquisition by the Company, the
          Montreal Division experienced a decline in sales of its arts and
          crafts product line, a new product line experienced initial quality
          problems and the former owners of the Montreal Division announced
          they were leaving the Company. These events triggered an assessment
          of recoverability of the book value of the non-current assets,
          including goodwill, of the Montreal Division. Results of the
          assessment indicated there was no impairment of value under
          Statement of Financial Accounting Standards No. 121 ("SFAS 121") as
          of December 31, 1997. Management has put in place a new management
          team, instituted certain cost reduction programs and is actively
          developing new versions of current products. Management believes
          these factors will improve the future cash flow and profitability
          of the Montreal Division.

          Adoption of Recently Issued Accounting Pronouncements

            The Financial Accounting Standards Board has issued SFAS No. 133,
          "Accounting for Derivative and Similar Financial Instruments For
          Hedging Activities".  This pronouncement revises the accounting for
          derivative financial instruments.  It requires entities to
          recognize all derivatives as either assets or liabilities in the
          balance sheet and measure those instruments at fair value.  The
          adoption of this statement is required for fiscal years beginning
          after June 15, 1999.  The Company has entered into interest rate
          swap agreements to hedge exposure to variable interest rate debt.
          The Company will recognize these derivatives at fair value in its
          financial statements if these agreements are outstanding as of
          January 1, 2000. The adoption of this pronouncement is not expected
          to have a significant impact on the Company's financial position or
          results of operations.

            The Financial Accounting Standards Board has issued SFAS No. 134
          "Accounting For Mortgage-Backed Securities".  SFAS No. 134 will
          have no effect on the financial condition or results of operations
          of the Company.

          Year 2000 Date Conversion

            The Company relies on a significant number of computer programs
          and computer technologies (collectively, "IT") and non-IT Systems
          for its key operations, including product design, finance and
          various administrative functions.  In July of 1997 the Company
          began an impact assessment of the Year 2000 on its business systems
          and ability to provide product, information, and services to its
          business partners before, during and after the Year 2000.  As a
          result of this assessment the Company adopted a two phase plan to
          attain Year 2000 compliance.

            Phase I of the Company's Year 2000 compliance plan addresses its
          mainframe business systems which need to be converted to  handle
          Year 2000 dates.  Phase II addresses computer hardware, stand-alone
          systems, and embedded systems which may need to be upgraded by the
          end of 1999.
<PAGE>
            Conversion of Phase I data bases and programs was completed in
          July 1998.  The systems testing phase is now in progress and is
          anticipated to be completed in the first quarter of 1999.  The
          Company plans to install the converted business systems in April
          1999.

            Assessment of all computer hardware, stand-alone systems,
          communications hardware and software which may require replacement
          or upgrade by January 2000 is now in progress. The Company has
          identified all systems which it believes are not Year 2000
          compliant. Remediation of these systems will take place throughout
          1999.

            In addition, the Company is evaluating the Year 2000 readiness of
          its key vendors to ensure that its ability to produce and deliver
          products is not materially impacted.  As this evaluation is
          completed, the Company will decide what further actions, if any,
          are appropriate.

            The Company anticipates that its Year 2000 compliance costs will
          approximate $1.0 million.  The Company believes that it has funds
          available through its existing credit facilities to address the
          Year 2000 costs.  These costs will include software, hardware and
          consulting expenses which are being expensed as incurred. The
          Company believes its current worse case scenario would be the
          inability of suppliers to deliver key raw materials. The Company is
          currently devising contingency plans which could among other things
          include carrying excess stock of key raw materials such as steel at
          December 31, 1999. While the Company is confident that the Year
          2000 issues are manageable and will be dealt with in a timely
          fashion, this conclusion is forward looking and involves
          uncertainty and risks.  The ultimate result may be impacted by a
          variety of factors such as, but not limited to,  the ability to
          successfully remediate existing IT systems, the failure to identify
          problems associated with non-IT systems and problems associated
          with supplier or customer information systems any of which could
          have a material adverse effect on the Company's ability to
          successfully address Year 2000 issues.

          Item 8.  Financial Statements and Supplementary Data                

                       REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

          To the Board of Directors of
          Hedstrom Holdings, Inc.:

            We have audited the  accompanying consolidated balance sheets  of
          Hedstrom Holdings, Inc. (a Delaware corporation) and subsidiary  as
          of December 31, 1998 and 1997, and the related consolidated
          statements of income, stockholders' equity, and cash flows for the
          two  years ended December 31, 1998, the five  months ended December
          31,  1996, and the fiscal year ended July 31, 1996. These financial
          statements and the schedule referred to below are  the responsibility
          of  the   Company's   management.   Our responsibility  is  to
          express  an  opinion  on  these   financial statements and schedule
          based on our audits.
<PAGE>
            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  financial  statements  referred  to  above
          present fairly, in all material respects, the financial position of
          Hedstrom Holdings, Inc. and subsidiary as of December 31, 1998  and
          1997, and the results of their operations and their cash flows  for
          the two  years  ended December  31,  1998, the  five  months  ended
          December 31,  1996, and  the fiscal  year ended  July 31,  1996  in
          conformity with generally accepted accounting principles.

            Our audits were made for the purpose of forming an opinion on the
          basic financial statements taken as a whole. The schedule appearing
          on page 52 of this Form 10-K is presented for the purpose of
          complying with the Securities and Exchange Commission's rules and
          is not a part of the basic financial statements. This schedule has
          been subjected to the auditing procedures applied in our audits of
          the basic financial statements and, in our opinion, fairly states
          in all material respects the financial data required to be set
          forth therein in relation to the basic  financial statements
          taken as a whole.


                                               ARTHUR ANDERSEN LLP


          Dallas, Texas
          February 5, 1999

<PAGE>
<TABLE>
                   HEDSTROM HOLDINGS, INC. AND SUBSIDIARY

                         CONSOLIDATED BALANCE SHEETS
                      (In thousands, except share data)

                                                December 31, December 31,
                                                   1998         1997
                                                  -------     -------
  <S>                                            <C>         <C>
               ASSETS
  CURRENT ASSETS:
    Cash and cash equivalents ..........         $  4,334    $ 10,844
    Trade accounts receivable, net of
       allowance for bad debts of
       $5,280 and $2,297 ...............           69,522      82,702
    Taxes receivable ...................            6,745           -
    Inventories ........................           53,722      47,464
    Deferred income taxes ..............            6,016       4,379
    Prepaid expenses and other current
       assets ..........................            4,130       4,801
                                                 --------    --------
            Total current assets .......          144,469     150,190
                                                 --------    --------
  PROPERTY, PLANT, AND EQUIPMENT, at cost,
     net of accumulated depreciation ......        48,102      42,823
  GOODWILL, net of accumulated amortization
     of $7,341 and $2,384 .................       186,826     170,941
  OTHER ASSETS:
    Deferred financing fees, net of
       accumulated amortization of $4,755 and
       $1,576 ...............................      14,295      17,474
    Deferred charges and other, net of
       accumulated amortization of  $2,372
       and $1,629 .......................             500       1,387
    Deferred income taxes ..............            1,575       4,724
                                                 --------    --------
            Total other assets .........           16,370      23,585
                                                 --------    --------
            Total assets ...............         $395,767    $387,539
                                                 ========    ========
</TABLE>
<PAGE>
<TABLE>
                   HEDSTROM HOLDINGS, INC. AND SUBSIDIARY

                         CONSOLIDATED BALANCE SHEETS
                      (In thousands, except share data)

                                                December 31, December 31,
                                                   1998         1997
                                                  -------     -------

     LIABILITIES AND STOCKHOLDERS' EQUITY
  <S>
  CURRENT LIABILITIES:                            <C>         <C>
    Revolving line of credit ...........          $34,920     $35,500
    Current portion of long-term debt ..           11,905       9,222
    Accounts payable ...................           20,709      23,381
    Accrued expenses -
      Compensation .....................            2,958       4,066
      Commissions and royalties ........            5,044       5,365
      Acquisition costs ................              230       6,354
      Customer allowances ..............            7,234       7,193
      Other ............................            7,504       4,612
                                                 --------    --------
            Total current liabilities ..           90,504      95,693
                                                 --------    --------
  LONG-TERM DEBT
    Senior Subordinated Notes ..........          110,000     110,000
    Senior Discount Notes ..............           26,584      23,288
    Term loans .........................          123,736     104,375
    Notes payable to related parties ...            2,500       2,500
    Capital leases .....................            1,690       1,605
    Other ..............................            2,154       2,914
                                                 --------    --------
            Total long-term debt .......          266,664     244,682
                                                 --------    --------
  STOCKHOLDERS' EQUITY:
    Preferred stock, $.01 par value,
     10,000,000 shares authorized, no shares
     issued or outstanding ................             -          -
    Common stock, $.01 par value,
     50,000,000 shares authorized, 36,142,883
     shares issued and outstanding, 
     respectively ......................              361        361
    Non-voting common stock, $.01 par
     value, 40,000,000 shares authorized,
     31,520,000 shares issued and outstanding         315        315
    Additional paid-in capital .........           51,553     51,553
    Accumulated other comprehensive loss .         (2,616)      (778)
    Accumulated deficit ................          (11,014)    (4,287)
                                                 --------   --------
       Total stockholders' equity                  38,599     47,164
                                                 --------   --------
   Total liabilities and stockholders' equity    $395,767   $387,539
                                                 ========   ========

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

</TABLE>
<PAGE>
<TABLE>
                    HEDSTROM HOLDINGS, INC. AND SUBSIDIARY

                        CONSOLIDATED INCOME STATEMENTS
                   (In thousands, except per share amounts)

                                             For the     For the    For the Five   For the
                                           Fiscal Year  Fiscal Year    Months    Fiscal Year
                                              Ended       Ended        Ended        Ended
                                           December 31, December 31, December 31,  July 31,
                                               1998       1997          1996         1996
                                              -------    -------      -------      -------
  <S>                                        <C>        <C>          <C>
  NET SALES .......................          $301,696   $256,146     $ 23,994     $133,194
  COST OF SALES ...................           210,607    172,390       21,973      105,068
                                             --------   --------     --------     --------
      Gross profit ................            91,089     83,756        2,021       28,126
  SELLING, GENERAL, AND ADMINISTRATIVE
    EXPENSES                                   66,917     47,052        7,546       24,603
                                             --------   --------     --------     --------
      Operating income (loss) .....            24,172     36,704       (5,525)       3,523
  RECAPITALIZATION EXPENSES .......                 -          -            -        9,600  
  INTEREST EXPENSE ................            31,335     19,131        2,115        5,896
                                             --------   --------     --------     --------
  INCOME (LOSS) BEFORE INCOME TAXES            (7,163)    17,573       (7,640)     (11,973)
  INCOME TAX EXPENSE (BENEFIT) ....              (436)     7,997       (2,869)      (3,857)
                                             --------   --------     --------      -------
  NET INCOME (LOSS) ...............          $ (6,727)  $  9,576     $ (4,771)     $(8,116)
                                             ========   ========     ========      =======
  BASIC NET INCOME PER COMMON SHARE:
    Net income ....................          $  (0.10)  $   0.18
    Weighted average shares outstanding        67,663     52,153

  DILUTED NET INCOME PER COMMON SHARE AND
  COMMON SHARE EQUIVALENTS:
    Net income ....................          $  (0.10)  $   0.18
    Weighted average shares and common share
    equivalents outstanding .......            67,663     52,416


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

</TABLE>
<PAGE>
<TABLE>
                         HEDSTROM HOLDINGS, INC. AND SUBSIDIARY

                         CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (In thousands)
                                                            For the     For the      For the      For the
                                                            Fiscal      Fiscal        Five        Fiscal
                                                             Year        Year         Months       Year
                                                             Ended       Ended        Ended        Ended
                                                          December 31, December 31, December 31,  July 31,
                                                              1998        1997         1996         1996
                                                           --------     -------      -------      -------
 <S>                                                        <C>         <C>        <C>          <C>
 CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss) .......                                $ (6,727)   $  9,576   $ (4,771)    $ (8,116)
   Adjustments to reconcile net income (loss) to net
    cash provided by (used for) operating activities-
     Depreciation of property, plant and  equipment            7,588       5,802      1,626        2,903
     Amortization of goodwill and deferred charges             4,957       3,266        350          511
     Amortization of deferred financing fees and
       original issue discount                                 6,475       3,246          -            -
     Deferred income tax  provision (benefit)                 (4,033)      7,027     (2,862)      (3,808)
     Gain on the disposition of property, plant, and
       equipment .................                                (1)         (1)       (60)        (182)
     Provision for losses on accounts  receivable, net
       of recoveries ............                              3,183       1,246         64           37
     Changes in assets and liabilities
       Accounts receivable .                                   9,966     (46,754)     9,734         (892)
       Taxes receivable ....                                  (6,745)          -          -            -
       Inventories .........                                  (4,243)      4,874     (2,042)        (139)
       Prepaid expenses ....                                     761         298      (119)            6
       Accounts payable ....                                  (3,630)      1,709      1,851       (7,906)
       Accrued expenses ....                                    (137)        (68)      (793)        (158)
                                                            --------    --------   --------     --------
          Net cash provided by (used for) operating
            activities ................                        7,414      (9,779)     2,978      (17,744)
                                                            --------    --------   --------     --------
 CASH FLOWS FROM INVESTING ACTIVITIES:
   Acquisition of ERO, Inc.                                   (3,037)   (122,600)         -            -
   Acquisition of Backyard Products, Ltd.                    (16,805)          -          -            -
   Acquisition of certain assets of Bollinger
     Industries, Inc. ..........                                   -     (14,928)         -            -
   Acquisitions of property, plant, and equipment            (11,292)     (6,395)    (1,376)      (6,738)
   Proceeds from the sale of property, plant, and
     equipment .................                                   -           8         67          248
   Other acquisitions ......                                  (3,579)     (2,472)         -            -
                                                            --------    --------   --------     --------
          Net cash used for investing activities             (34,713)   (146,387)    (1,309)      (6,490)
                                                            --------    --------   --------     --------
<PAGE>

 CASH FLOWS FROM FINANCING ACTIVITIES:
   Net proceeds from the issuance of Senior
     Subordinated Notes ....                                       -     110,000          -            -
   Net proceeds from the issuance of new Term Loans           30,000     110,000          -            -
   Net proceeds from  the issuance of Senior Discount
    Notes ..................                                       -      21,618          -            -
   Borrowings on new Revolving Credit Facility, net             (580)     35,500          -            -
   Repayments on new term loans                               (7,956)     (1,125)         -            -
   Borrowings (repayments) of old term loans, net                  -     (92,767)         -       35,000
   Debt financing and other transaction costs                      -     (21,000)         -            -
   Borrowings (repayments) on old revolving lines of              
    credit, net ...............                                    -     (42,400)    (9,050)      (2,360)
   Net proceeds from issuance of voting common stock               -       3,401          -       27,242
   Net proceeds from issuance of non-voting common stock           -      40,000          -        -
   Redemption of common stock from existing stockholders           -           -          -      (29,772)
   Redemption of preferred stock from
     existing stockholders .                                       -           -          -       (3,072)
   Notes payable to related parties                                -           -          -        2,500
   Capital lease (payments) borrowings and other                (675)      2,395        (84)       1,597
                                                            --------    --------   --------     --------
    Net cash provided by (used for) financing activities      20,789     165,622     (9,134)      31,135
                                                            --------    --------   --------     --------
 NET INCREASE (DECREASE)  IN CASH AND CASH
   EQUIVALENTS .............                                  (6,510)      9,456     (7,465)       6,901
 CASH AND CASH EQUIVALENTS:
   Purchased cash ..........                                       -         855          -            -
   Beginning of year/period                                   10,844         533      7,998        1,097
                                                            --------    --------   --------     --------
   End of year/period ......                                $  4,334    $ 10,844   $    533     $  7,998
                                                            ========    ========   ========     ========
 SUPPLEMENTAL DISCLOSURES OF CASH FLOW
   INFORMATION:
   Income taxes paid .......                                  $3,733    $  4,431  $     45      $    503
   Interest paid ...........                                 $24,897    $ 13,922  $  1,534      $  5,036
 SUPPLEMENTAL DISCLOSURE OF ASSETS ACQUIRED:
   See Note 3


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

</TABLE>
<PAGE>
<TABLE>
                                                HEDSTROM HOLDINGS, INC. AND SUBSIDIARY

                                            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                                   (In thousands, except share data)

                                                                                     Accumulated
                               Preferred Stock        Common Stock         Additional    Other
                                                                            Paid-In   Comprehensive Accumulated
                                  Shares    Par Value    Shares   Par Value  Capital     Loss        Deficit     Total
                                 ---------    ------   ----------    ----    ------   ------------  -----------  ------      
 <S>                             <C>         <C>       <C>          <C>     <C>       <C>         <C>         <C>
 BALANCE AT JULY 31, 1995        3,005,555   $ 3,006   33,231,090   $ 332   $12,964   $     -     $  (910)    $ 15,392
   Paid-in-kind dividends on
     preferred stock                66,277        66            -                 -         -         (66)           -
   Redemption of common stock
     from existing stockholders          -         -  (27,531,941)   (275)  (29,497)        -           -      (29,772)
   Redemption of preferred
     stock from existing
     stockholders               (3,071,832)   (3,072)           -       -         -         -           -       (3,072)
   Sale of common stock to
     new stockholders ..                 -         -   27,242,350     272    26,970         -           -       27,242
   Net loss ........                     -         -            -       -         -         -      (8,116)      (8,116)
                                                                                                              --------
   Comprehensive Loss                    -         -            -       -         -         -           -       (8,116)
                                 ---------   -------   ----------   -----   -------   -------     -------     --------
 BALANCE AT JULY 31, 1996                -         -   32,941,499     329    10,437         -      (9,092)       1,674

   Net loss ........                     -         -            -       -         -         -      (4,771)      (4,771)
                                                                                                              --------
   Comprehensive Loss                    -         -            -       -         -         -           -       (4,771)
                                 ---------   -------   ----------   -----   -------   -------     -------     --------
 BALANCE AT DECEMBER 31, 1996            -         -   32,941,499     329    10,437         -     (13,863)      (3,097)

   Issuance of voting common
     stock                               -         -    3,201,384      32     3,369         -           -        3,401
   Issuance of non-voting
     common  stock ...........           -         -   31,520,000     315    39,685         -           -       40,000
   Acquisition transaction costs         -         -            -       -    (1,938)        -           -       (1,938)
   Foreign currency
     translation adjustment              -         -            -       -         -      (778)          -         (778)
   Net income ......                     -         -            -       -         -         -       9,576        9,576
                                                                                                              --------
  Comprehensive Income                   -         -            -       -         -         -           -        8,798
                                 ---------   -------   ----------   -----   -------   -------     -------     --------
 BALANCE AT DECEMBER 31, 1997            -         -   67,662,883     676    51,553      (778)     (4,287)      47,164
 Foreign Currency translation
     Adjustment ....                     -         -            -       -         -    (1,838)          -       (1,838)
   Net Loss ........                     -         -            -       -         -         -      (6,727)      (6,727)
                                                                                                              --------
   Comprehensive Loss                    -         -            -       -         -         -           -       (8,565)
                                 ---------   -------   ----------   -----    ------   -------    --------     --------
 BALANCE AT DECEMBER 31, 1998            -   $     -   67,662,883   $ 676  $ 51,553   $(2,616)   $(11,014)    $ 38,599
                                 =========   =======   ==========   =====  ========   =======    ========     ========


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

<PAGE>

                        HEDSTROM HOLDINGS, INC. AND SUBSIDIARY

                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


          1. NATURE OF OPERATIONS:

            Hedstrom Holdings, Inc. ("Holdings") is a holding Company with no
          operations, other than its  100% ownership of Hedstrom  Corporation
          ("Hedstrom",  and  together  with  Holdings,  the  "Company").  The
          Company  is  a  manufacturer   and  marketer  of   well-established
          children's leisure and  activity products.  The Company's  products
          fall within five principal  divisions: Bedford, Ashland,  Montreal,
          ERO  and   International.   Through  its   facility   in   Bedford,
          Pennsylvania, the Bedford Division manufactures and distributes gym
          set products  consisting of  metal gym  sets, composite  metal  and
          plastic gym sets,  wood gym sets,  wood gym  kits, plastic  outdoor
          slides and gym  set accessories. Through  its facility in  Ashland,
          Ohio, the Ashland  Division manufactures  playball products,  which
          consist of premium playballs made of plastic or vinyl and decorated
          with popular licensed characters  or designs, nonpremium  playballs
          that generally have minimal decoration, athletic balls targeted  at
          young children,  and ball  pit products.  Through its  facility  in
          Montreal, Canada,  the  Montreal Division  manufactures  children's
          products including  arts  and  crafts kits,  game  tables,  battery
          operated ride-on vehicles  and back-to-school items.   Through  its
          facility in Hazlehurst, Georgia, the ERO Division manufactures  and
          distributes  slumber  products,  water  sports  products  and  room
          decorations for  children.  Through  its  facility  in  the  United
          Kingdom and Canada, the International  Division produces  and
          distributes  gym sets and other products manufactured by its
          Domestic Divisions. The Company sells its  products through major
          national toy  retailers, mass merchants, supermarkets, drug  store
          chains, and home  centers primarily in the United States, Canada,
          and the United Kingdom. The Company employed 2,234 people  at
          December 31,  1998, 10% of  which are  represented  by  the  Rubber
          Workers  Union.  The  collective bargaining agreement  with  the
          Rubber Workers  Union  expires  on October 2, 2001.

            Four of the Company's customers (Wal-Mart, Toys R Us, K-Mart and
          Target) account for over 50% of the Company's sales.  As a result,
          the Company's operations can be significantly impacted by these
          customers. Although Hedstrom has well-established relationships
          with these customers, it does not have long term contracts with any
          of them.  A decrease in business from any of these customers could
          have a material adverse effect on the Company's results of
          operations and financial condition.  During 1998, well-publicized
          changes in the inventory policies and purchasing practices of Toys
          R Us, the Company's second largest customer in 1998, and, to a
          lesser extent, those of the Company's other customers adversely
          affected the 1998 sales levels of the Company and of the industry
          generally.  As a consequence, the Company's operating income in
          fiscal 1998 was significantly less than anticipated.  Although
          management does not anticipate similar events in fiscal 1999, there
          can be no assurance that competitive pressures in the retail sector
          will not result in continued pressure on the Company's sales and
          operating income.
<PAGE>
            As a result of the aforementioned competitive pressures, there
          recently have been a number of consolidations and business failures
          in the retail sector.  As a result, there may be a further
          concentration of the Company's customer base, as well as an adverse
          change in the Company's credit exposure.  Although management has
          no reason to believe that there are any significant credit risks
          associated with any of  its key customers, a credit failure by a
          key customer or a significant number of smaller customers would
          have a material adverse effect on Hedstrom's results of operations.

            The ERO Division derives a significant portion of its revenues
          from sales of products featuring licensed characters.  Although the
          ERO Division intends to renew key existing licenses and obtain new
          licenses, there can be no assurance that it will be able to do so.
          The failure to renew key existing licenses or obtain new licenses
          would have a material adverse effect on the Company's results of
          operations.
          
          2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

          Principles of Consolidation

            The accompanying  consolidated financial  statements include  the
          accounts  of  Hedstrom   Holdings,  Inc.  and   its  wholly   owned
          subsidiary, Hedstrom Corporation. Effective June 12, 1997, Hedstrom
          acquired ERO, Inc. ("ERO"), which became a wholly owned  subsidiary
          of Hedstrom (see Note  3). The accompanying consolidated  financial
          statements reflect  the  operations  of ERO  since  June  1,  1997.
          Management does not believe that the 1997 over 1996 comparisons are
          meaningful, given  the 1997  acquisition of  ERO. All  intercompany
          balances and transactions have been eliminated in consolidation.

          Fiscal Year

            Prior to August 1, 1996, the Company's fiscal year ended on  July
          31. Effective January 1, 1997, the Company changed its fiscal  year
          to  a  calendar   year  ending  on   December  31.  The   following
          consolidated financial statements include  the twelve month  period
          from January 1, 1996 to December 31, 1996 for comparative  purposes
          only.

                              Consolidated Income Statement
                         For the twelve months ended December 31, 1996
                                          (Unaudited)
                                       (In thousands)

                        NET SALES ..............................   $125,396
                        COST OF SALES ..........................    101,041   
                                                                   --------
                                  Gross profit .................     24,355
                        SELLING, GENERAL, AND ADMINISTRATIVE
                        EXPENSES ................................    25,082  
                                                                    -------
                                  Operating loss ................      (727)
                                                                    -------
                        INTEREST EXPENSE ........................     6,238  
                        INCOME TAX BENEFIT ......................    (2,652)
                                                                   --------
                        NET LOSS ................................  $ (4,313)
<PAGE>                                                             ========

                            Consolidated Statement of Cash Flows
                          For the twelve months ended December 31, 1996
                                          (Unaudited)
                                        (In thousands)

                         CASH FLOWS FROM OPERATING
                         ACTIVITIES:
                         Net loss ...............................    $(4,313) 
                                                        
                         Adjustments to reconcile net
                         loss to net cash provided
                           by operating activities
                           Depreciation and amoritization .......      4,401
                           Changes in assets and liabilities:
                              Accounts receivable ...............      3,804
                              Inventories .......................      4,088
                              Accounts payable ..................         (5)
                              Accrued expenses ..................      1,434
                              Other .............................     (4,966) 
                                                                      ------
                          Net cash provided by operating
                          activities ............................      4,443
                                                                      ------
                         CASH FLOWS FROM INVESTING ACTIVITIES
                           Acquisitions of property,                          
                           plant and equipment ..................     (6,457) 
                                                                      ------
                           Net cash used for investing
                           activities ...........................     (6,457) 
                                                                      ------
                           Net cash provided by financing
                           activities ...........................      2,159
                                                                      ------
                         NET INCREASE IN CASH AND CASH
                         CASH EQUIVALENTS .......................        145
                         CASH AND CASH EQUIVALENTS:
                           Beginning of period ..................        388  
                                                                     -------
                           End of period ........................    $   533  
                                                                     =======
          Cash and Cash Equivalents

            Cash and  cash equivalents  include short-term  investments  with
          original maturities of three months or less. These investments  are
          stated at cost which approximates market.

          Inventories

            Inventories are stated at  the lower of cost  or market. Cost  is
          determined using the first-in, first-out (FIFO) method. The cost of
          manufactured products  includes  materials, direct  labor,  and  an
          allocation of  plant  overheads.  The cost  of  purchased  products
          includes inbound freight and duty.
<PAGE>
          Property, Plant, and Equipment

            Property, plant, and equipment acquired  in the normal course  of
          business  are  stated  at  cost.  Property,  plant,  and  equipment
          acquired in  connection  with the  acquisitions  of ERO  and  other
          companies are  stated at  fair  market value  as  of that  date  as
          determined   by   independent   appraisals,   where    appropriate.
          Depreciation is computed  using the straight-line  method over  the
          estimated useful lives  of the assets.  Additions and  improvements
          are capitalized, while expenditures for maintenance and repairs are
          charged  to  operations  as  incurred.  The  cost  and  accumulated
          depreciation of  property  sold or  retired  are removed  from  the
          respective accounts and the resultant gains or losses, if any,  are
          included in current operations.

            The estimated useful lives of property, plant, and equipment  are
          as follows:

                       Buildings and improvements .......  5-40 years
                       Machinery and equipment ..........  3-12 years
                       Computer hardware and software ...  3-5  years
                       Furniture and fixtures ...........  5-10 years

            Depreciation is allocated to cost of sales and selling,  general,
          and administrative  expense based  upon  the related  asset's  use.
          Depreciation of  approximately $6,696,000,  $5,184,000,  $1,576,000
          and $2,797,000 is included  in cost of sales  for the fiscal  years
          ended December 31,  1998, December 31,  1997, for  the five  months
          ended December 31,  1996, and for  the fiscal year  ended July  31,
          1996, respectively. Depreciation of approximately $892,000, $618,000,
          $50,000 and $106,000  is  included  in  selling,  general,  and
          administrative expense for the fiscal years ended December 31, 1998,
          December  31, 1997, for  the five months  ended December 31,  1996,
          and for the fiscal year ended July 31, 1996, respectively.

            Long-lived assets and certain identifiable intangibles, including
          goodwill, to  be  held and  used  by  the Company are  reviewed  for
          impairment whenever  changes  in circumstances  indicate  that  the
          carrying amount of an  asset may not be  recoverable. In the  event
          that facts and circumstances indicate  that the cost of  long-lived
          assets  may  be  impaired,  an  evaluation  of  recoverability   is
          performed. If  an  evaluation  is required,  the  estimated  future
          undiscounted cash flows associated with the asset would be compared
          to the asset's carrying amount to determine if a write-down to fair
          value is required.

          Goodwill

           Goodwill, representing the excess of the cost over the net
          tangible and identifiable intangible assets of acquired businesses,
          is stated at cost and is amortized on a straight-line basis over
          forty years.  Amortization of goodwill of $4,214,000 and $2,384,000
          is included in selling, and administrative expense for the fiscal
          years ended December 31, 1998 and December 31, 1997, respectively.
          The Company had no Goodwill during fiscal year 1996 or on December
          31, 1996. Goodwill is reviewed for impairment in accordance with
          the policy, as discussed above.
<PAGE>
          Deferred Financing Fees

           Deferred financing fees, representing costs incurred in connection
          with obtaining borrowings under long-term debt agreements, are
          stated at cost and are amortized over the life of the related debt.
          Amortization of deferred financing fees of $3,179,000 and
          $1,576,000 is included in interest expense for the fiscal years
          ended December 31, 1998 and December 31, 1997, respectively.

          Deferred Charges and Other, Net

            Deferred charges and other on the accompanying balance sheets  is
          comprised of the following (in thousands):

                                                     December 31, December 31,
                                                        1998         1997      
                                                     -----------  -----------

              Deferred expenses ....................  $ 2,872      $  2,546
              Barter credits .......................        -           470   
                                                      -------      --------
                                                        2,872         3,016
              Less-Accumulated amortization ........   (2,372)       (1,629)
                                                      -------      --------
                                                      $   500      $  1,387
                                                      =======      ========
            Deferred expenses primarily relate to costs the Company incurs to
          obtain shelf space, and replace competitors products, at certain of
          its retail customers.  In connection with  these transactions,  the
          Company obtains  a  commitment  from  the  retailer  that  it  will
          exclusively stock the Company's products for a period not less than
          three years. As a  result, these costs  are deferred and  amortized
          over a  36-month  period  on a  straight-line  basis.  Amortization
          expense is included in selling, general, and administrative expense
          on the accompanying income  statements and was $743,000,  $882,000,
          $350,000 and $358,000 for the fiscal years ended December 31, 1998,
          December 31, 1997, for the five months ended December 31, 1996  and
          for the fiscal year ended July 31, 1996, respectively.

            Prior to the recapitalization discussed  in Note 12, the  Company
          had capitalized certain financing  costs and organizational  costs.
          These costs  were  immediately  expensed  in  connection  with  the
          recapitalization and are included  in recapitalization expenses  on
          the accompanying  July 31,  1996,  income statement.  The  deferred
          financing costs  were  being  amortized  over  the  period  of  the
          underlying debt on a  straight-line basis and organizational  costs
          were  being  amortized  over  a  60-month  period.  Prior  to   the
          recapitalization, amortization  of  deferred  financing  costs  was
          $67,000 in the fiscal year ended  July 31, 1996 and is included  in
          interest   expense   on   the   accompanying   income   statements.
          Amortization of organizational costs prior to the  recapitalization
          was $85,000 in the fiscal year ended July 31, 1996 and is  included
          in selling, general, and administrative expense on the accompanying
          income statements.
<PAGE>
            During the fiscal year ended July 31, 1995, the Company exchanged
          certain finished goods inventory with a cost basis of approximately
          $320,000 for barter  credits. Although the  barter credits had  a
          stated value of approximately $3,200,000, they were recorded at  an
          amount equal to  the cost basis  of the  inventory exchanged,  such
          that no  profit  was  recognized on  the  transaction.  The  barter
          credits can be used principally for the purchase of print and media
          advertising; however, cash must be used  in addition to the  barter
          credits to secure  the advertising.  During the  fiscal year  ended
          December 31, 1997, the five months ended December 31, 1996 and  the
          fiscal year ended July 31, 1996, the Company utilized approximately
          $49,000, $262,000  and $262,000,  respectively,   of  these  barter
          credits. As  a  result of  the  Company's decision  to  reduce  its
          advertising   expenditures   during   calendar   1997,   management
          determined that all of its barter credits may not be fully utilized
          prior to their  expiration in August  1998. Therefore, the  Company
          wrote-off an additional $1,000,000 of the barter credits during the
          fiscal year ended  July 31, 1996.  During 1998 management  assessed
          the realizable value of the remaining barter credits and determined
          that it was unlikely that any significant value would be  realized.
          As a result,  the Company  wrote-off the  remaining barter  credits
          totaling $747,000.

          Revenue Recognition

            The Company recognizes revenue when title to the goods transfers.
          For the majority of the Company's sales, this occurs at the time of
          shipment.

          Income Taxes

            Deferred  income  taxes  are  determined  under  the  asset   and
          liability  method  in  accordance   with  Statement  of   Financial
          Accounting  Standards  No.  109  "Accounting  for  Income   Taxes".
          Deferred income taxes arise from temporary differences between  the
          income tax  basis  of assets  and  liabilities and  their  reported
          amounts in the financial statements.

          Net Income (Loss) Per Common Share

            Basic earnings per share is computed by dividing net income
          (loss) by the weighted average number of shares of common stock
          outstanding during the period.  Diluted earnings per share is
          computed by dividing the net income (loss) by the weighted average
          number of shares of common stock and other dilutive securities.
          Excluded from the computation of diluted earnings per share are
          options to purchase 2.4 million and 1.8 million shares of common
          stock in 1998 and 1997 respectively. These options were outstanding
          during these respective years, but were excluded because the option
          exercise price was greater than the average market price of the
          common shares. Due to the ERO acquisition, described in Note 3,
          net income (loss) per share for the five months ended December 31,
          1996 and for the fiscal year ended July 31, 1996  have no
          significant relevance to current amounts.
<PAGE>
          Fair Value of Financial Instruments

            The carrying amount reported  in the consolidated balance  sheets
          for  cash  and  cash  equivalents,  accounts  receivable,  accounts
          payable, and accrued  expenses approximates fair  value because  of
          the  immediate   or   short-term  maturity   of   these   financial
          instruments.  The  carrying  amount  reported  for  long-term  debt
          approximates fair market value  because the underlying  instruments
          are at rates similar  to current rates offered  to the Company  for
          debt with the same remaining maturities.

          Foreign Currency Translation

            The financial position and results of operations of the Company's
          foreign subsidiaries  are measured  using each  subsidiary's  local
          currency as the functional currency. Assets and liabilities of  the
          foreign subsidiaries are translated to U.S. dollars using  exchange
          rates in effect at  balance sheet dates.  Income and expense  items
          are translated at monthly average rates of exchange. The  resultant
          translation  gains  or  losses  are  included  as  a  component  of
          accumulated other comprehensive  loss in  stockholders' equity  and
          designated  as   a   foreign   currency   translation   adjustment.
          Transaction gains or losses were not significant in any year.

          Stock-Based Compensation

            Statement of Financial Accounting Standards No. 123,  "Accounting
          for Stock-Based Compensation" (SFAS 123), encourages, but does  not
          require companies  to  record  compensation  cost  for  stock-based
          employee compensation plans at fair  value. The Company has  chosen
          to continue  to  account  for stock-based  compensation  using  the
          intrinsic value method  prescribed in  Accounting Principles  Board
          Opinion No. 25,  "Accounting for  Stock Issued  to Employees,"  and
          related interpretations. Accordingly,  compensation cost for  stock
          options is measured  as the excess,  if any, of  the quoted  market
          price of the  Company's stock  at the date  of the  grant over  the
          amount the employee must pay to acquire the stock. See Note 9.

          Reclassifications

            Certain 1997 and 1996 amounts have been reclassified to conform
          with their current year presentation.
  
          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 for the reporting period.
          Actual results could differ from those estimates.
<PAGE>
          Recent Accounting Pronouncements

            Holdings has  adopted  SFAS  No.  130,  "Reporting  Comprehensive
          Income," effective  January  1,  1998.  SFAS  No.  130  establishes
          standards for reporting and display of comprehensive income and its
          components in a full  set of general-purpose financial  statements.
          Comprehensive income is defined as the total of net income and  all
          other non-owner changes  in equity.  The accompanying  Consolidated
          Statement of  Stockholders' Equity  has been  restated to  disclose
          comprehensive income for each year presented.

            Holdings has adopted SFAS No. 131, "Disclosure about Segments  of
          An Enterprise and Related Information." This pronouncement  changes
          the requirements under which public businesses must report  segment
          information. The  objective  of  the pronouncement  is  to  provide
          information  about  a   company's  different   types  of   business
          activities  and  different  economic  environments.  SFAS  No.  131
          requires companies  to  select  segments based  on  their  internal
          reporting system. Restatement of prior year segment disclosure  was
          required upon adoption of SFAS No. 131. See Note 13.

            Holdings has adopted SFAS No. 132, "Employees' Disclosures about
          Pension and Other Postretirement Benefits", as of January 1, 1998.
          This pronouncement revises employers' disclosures about pension and
          other postretirement benefit plans. It does not change the
          measurement or recognition of those plans, however, it does require
          additional information on changes in the benefit obligations and
          fair values of plan assets in order to facilitate financial
          analysis. The Company has revised its disclosures accordingly. See
          Note 8.

            The Financial Accounting Standards Board has issued SFAS No. 133,
          "Accounting for Derivative and Similar Financial Instruments For
          Hedging Activities".  This pronouncement revises the accounting for
          derivative financial instruments.  It requires entities to
          recognize all derivatives as either assets or liabilities in the
          balance sheet and measure those instruments at fair value.  The
          adoption of this statement is required for fiscal years beginning
          after June 15, 1999.  The Company has entered into interest rate
          swap agreements to hedge exposure to variable interest rate debt.
          The Company will recognize these derivatives at fair value in its
          financial statements if these agreements are outstanding as of
          January 1, 2000. The adoption of this pronouncement is not expected
          to have a significant impact on the Company's financial position or
          results of operations.

            The Financial Accounting Standards Board has issued SFAS No. 134
          "Accounting For Mortgage-Backed Securities".  SFAS No. 134 will
          have no effect on the disclosures, financial condition or results
          of operations of the Company.
<PAGE>
          3. ACQUISITIONS:

            On April 10, 1997,  Hedstrom and HC  Acquisition Corp., a  wholly
          owned subsidiary of Hedstrom, entered into an Agreement and Plan of
          Merger (the "Merger Agreement") with ERO to acquire ERO for a total
          enterprise value  of approximately  $200 million.  Pursuant to  the
          Merger Agreement, HC Acquisition Corp.  commenced and, on June  12,
          1997, consummated a tender offer for all of the outstanding  shares
          of the common stock of ERO at a purchase price of $11.25 per  share
          (the "Tender  Offer").  Holdings  also  assumed  a  purchase  price
          contingency related  to ERO,  Inc.'s  acquisition of  the  Montreal
          Division in October of 1995. The contingency included an additional
          $3.7 million  of  purchase  price contingent  upon  achievement  of
          certain conditions. As those conditions were met as of December 31,
          1997, Holdings  accrued a  liability  for the  contingency  against
          goodwill. This was reflected in accrued expenses-acquisition  costs
          in the consolidated balance  sheet. The payment  was made in  March
          1998. Upon consummation  of the  Tender Offer,  (i) HC  Acquisition
          Corp. was  merged  with  and  into  ERO  (the  "Merger")  with  ERO
          surviving the Merger as a wholly owned subsidiary of Hedstrom, (ii)
          certain  of  ERO's  outstanding  indebtedness  was  refinanced   by
          Hedstrom (the "ERO Refinancing") and (ii) Hedstrom refinanced  (the
          "Hedstrom Refinancing") its existing revolving credit facility  and
          term  loan  facility  (the  Merger,  the  Tender  Offer,  the   ERO
          Refinancing and the Hedstrom Refinancing, are collectively referred
          to herein as the "Acquisition").

            Holdings and Hedstrom  required approximately  $301.1 million  in
          cash to  consummate the  Acquisition, including  approximately  (i)
          $122.6 million paid  in connection with  the Tender  Offer and  the
          Merger,  (ii)  $82.6  million  paid  in  connection  with  the  ERO
          Refinancing, (iii)  $74.9  million  paid  in  connection  with  the
          Hedstrom Refinancing and (iv) $21.0 million incurred in respect  of
          fees and expenses. The funds required to consummate the Acquisition
          were provided by (i) $75.0 million  of term loans under a new  six-
          year senior secured term  loan facility (the  "Tranche A Term  Loan
          Facility"), (ii) $35.0 million of term loans under a new eight-year
          senior secured term loan facility (on  July 24, 1998 the Tranche  B
          Term  Loan  was  increased  to  $65.0  million  to  allow  for  the
          acquisition of Backyard  Products Limited,  see further  discussion
          below) (the "Tranche B Term Loan  Facility" and, together with  the
          Tranche A Term  Loan Facility, the  "Term Loan Facilities"),  (iii)
          $16.1 million  of  borrowings  under a  new  $70.0  million  senior
          secured revolving credit facility (the "Revolving Credit  Facility"
          and, together with  the Term  Loan Facilities,  the "Senior  Credit
          Facilities"), (iv)  $110.0  million  of  gross  proceeds  from  the
          offering by Hedstrom of 10% Senior Subordinated Notes Due 2007 (the
          "Senior Subordinated Notes"), (v)  $25.0 million of gross  proceeds
          from the offering  by Holdings of  44,612 units  consisting of  12%
          Senior Discount Notes Due 2009 (the "Discount Notes") and 2,705,896
          shares of  Common Stock,  $.01 par  value  per share,  of  Holdings
          ("Holdings Common Stock") and (vi) $40.0 million of gross  proceeds
          from the  private  placement  of 31,520,000  shares  of  Non-Voting
          Common Stock, $.01 par value per share, of Holdings ("Holdings Non-
          Voting Common Stock") and 480,000 shares of Holdings Common  Stock.
          The Revolving  Credit Facility  is also  used   to finance  certain
          seasonal working capital requirements.
<PAGE>
            The acquisition of ERO has been accounted for under the  purchase
          method of accounting, and accordingly, the purchase price has  been
          allocated to the assets acquired and the liabilities assumed  based
          upon fair value at the date  of the acquisition of ERO. The  excess
          of the purchase  price over  the fair  values of  the tangible  net
          assets acquired was approximately $159.8 million, has been recorded
          as goodwill and is being amortized on a straight-line basis over 40
          years. In the event that facts and circumstances indicate that  the
          goodwill may be impaired, an evaluation of recoverability would  be
          performed. If  an  evaluation  is required,  the  estimated  future
          undiscounted cash flows associated with the asset would be compared
          to the  assets carrying  amount to  determine if  an adjustment  is
          required.


          The fair value of assets acquired and liabilities assumed,
          reflecting the final allocation, was as follows (in thousands):

                        Current assets ..............  $  53,500       
                        Net property,plant and
                         equipment...................     20,000
                        Other assets ................      9,400
                        Goodwill ....................    159,800
                        Liabilities assumed .........   (120,100)    
                                                       ---------
                            Cash paid for ERO........  $ 122,600
                                                       =========

          In 1997, subsequent to the acquisition of ERO, the Montreal
          Division experienced a decline in sales of its arts and crafts
          product line, a new product line experienced initial quality
          problems and the former owners of Montreal announced they were
          leaving the Company. These events triggered an assessment of
          recoverability of the book value of the non-current assets,
          including goodwill, of this Division. Results of the assessment
          indicated there was no impairment of value under Statement of
          Financial Accounting Standards No. 121 ("SFAS 121") as of December
          31, 1997. Management has put in place a new management team,
          instituted certain cost reduction programs, established a quality
          control function and is actively developing new versions of current
          products. Management believes these factors will improve the future
          cash flow and profitability of this Division.

            On July 24, 1998 the Company acquired 100% of the outstanding
          shares of Backyard Products Limited, approximately $13.9 million,
          a leading Canadian manufacturer and supplier of wood gym sets and
          accessories. The purchase price of approximately $16.8 million was
          financed through an amendment to the Company's existing Senior
          Credit Facilities, which increased the Tranche B Term Loan by $30
          million. The $30 million proceeds from the amendment were used to
          fund the acquisition as well as to pay down borrowings under the
          Revolving Credit Facility. The acquisition was accounted for as a
          purchase; accordingly, the purchase price was allocated to the
          underlying assets and liabilities based on their respective estimated
          fair values at the date of the acquisition. The estimated value of
          assets acquired was $3.4 million and the liabilities assumed was
          $2.7 million.  The excess of the purchase price over the value of
          the net assets acquired of, $16.1 million was recorded as goodwill
          and will be amortized over 40 years.
<PAGE>
          4. INVENTORIES:

           Inventories are comprised of the following (in thousands):

                                                    December 31,   December 31,
                                                       1998           1997    
                                                    ------------   -----------

                Raw materials .....................   $21,421       $16,502
                Work-in-process ...................     9,013         5,690
                Finished goods ....................    23,288        25,272
                                                      -------       -------
                                                      $53,722       $47,464
                                                      =======       =======




          5. PROPERTY, PLANT, AND EQUIPMENT:

           Property, plant, and equipment is comprised of the following (in
          thousands):

                                                  December 31,   December 31,
                                                     1998           1997
                                                  ------------    -----------

                 Buildings and improvements.......   $17,183         $16,567
                 Machinery and equipment ..........   47,392          40,131
                 Computer software and hardware ...    3,095           1,469
                 Furniture and fixtures ...........    2,076           1,277
                                                     -------          ------
                                                      69,746          59,444
                 Less -  Accumulated depreciation .. (25,453)        (20,430)
                                                     -------         ------- 
                                                      44,293          39,014
                 Land .............................    3,809           3,809
                                                     -------         -------
                                                     $48,102         $42,823
                                                     =======         =======
          6. DEBT

           Debt consists of the following (in thousands):

                                                    December 31, December 31,
                                                        1998         1997
                                                    -----------  -----------
                 Senior Subordinated Notes .......... $110,000      $110,000
                 Term Loans .........................  134,158       112,375
                 Senior Discount Notes ..............   26,584        23,288
                 Revolving Credit Facility ..........   34,920        35,500
                 Other ..............................    7,827         8,241
                                                      --------      --------
                                                      $313,489      $289,404
                                                      ========      ========
<PAGE>
          Term Loans and Revolving Credit Facility

               As discussed in Note 3, in connection with the ERO acquisition,
          Hedstrom obtained the Senior  Credit Facilities. The Senior  Credit
          Facilities consist of (a) a six-year Tranche A Senior Secured  Term
          Loan Facility providing for term loans  to Hedstrom in a  principal
          amount of $75 million; (b) an  eight-year Tranche B Senior  Secured
          Term Loan  Facility  providing for  term  loans to  Hedstrom  in  a
          principal amount of  $35 million (on  July 24, 1998  the Tranche  B
          Term  Loan  was  increased  to  $65.0  million  to  allow  for  the
          acquisition of Backyard  Products Limited, see  Note 3 for  further
          discussion); and  (c) a  Senior Secured  Revolving Credit  Facility
          providing for  revolving  loans to  Hedstrom  and the  issuance  of
          letters of  credit for  the account  of  Hedstrom in  an  aggregate
          principal and stated amount at any time not to exceed $70  million.
          Borrowings under the  Revolving Credit Facility  will be  available
          based upon a borrowing base not to exceed 85% of eligible  accounts
          receivable and 50% of eligible inventory.

            The obligations of  Hedstrom under the  Senior Credit  Facilities
          are unconditionally, fully and irrevocably guaranteed (jointly  and
          severally) by Holdings  and each of  Hedstrom's direct or  indirect
          domestic subsidiaries (collectively, the "Senior Credit  Facilities
          Guarantors"). In  addition, the  Senior Credit  Facilities will  be
          secured by first priority or  equivalent security interests in  (i)
          all the capital stock of, or other equity interests in, each direct
          or indirect domestic subsidiary of Hedstrom and 65% of the  capital
          stock of,  or  other  equity  interests  in,  each  direct  foreign
          subsidiary of Hedstrom,  or any  of its  domestic subsidiaries  and
          (ii)  all  tangible  and  intangible  assets  (including,   without
          limitation, intellectual  property  and  owned  real  property)  of
          Hedstrom and the Senior Credit Facilities Guarantors.

            On December 30, 1998, the Company amended the Senior Credit
          Facility.  The amendment allows for less restrictive financial
          covenants.In addition, the amendment allows, at Hedstrom's option,
          the interest rates per annum applicable to the Senior Credit
          Facilities to be either (i) the Eurocurrency Rate (as defined) plus
          3.0% in the case of the Tranche A Term Loan Facility and the
          Revolving Credit Facility or 3.5% in the case of the Tranche B
          Term Loan Facility or (ii) the Alternate Base Rate (as defined)
          plus 2.0% in the case of the Tranche A Term Loan Facility and the
          Revolving Credit Facility or 2.5% in the case of the Tranche B
          Term Loan Facility.  The Alternate Base Rate is the highest of (a)
          Credit Suisse First Boston's Prime Rate (as defined) or (b) the
          federal funds effective rate from time to time plus 0.5%.  The
          applicable margin in respect of the Tranche A Term Loan Facility
          and the Revolving Credit Facility will be adjusted from time to
          time by amounts to be agreed upon based on the achievement of
          certain performance targets to be determined.
<PAGE>
            The Senior Credit Facilities contain a number of covenants that,
          among other things, restrict the ability of Hedstrom to dispose
          of assets, incur additional indebtedness, repay other indebtedness
          or amend other debt instruments, pay dividends, create liens on
          assets, make investments or acquisitions, engage in mergers or
          consolidations, make capital expenditures, or engage in certain
          transactions with affiliates. In addition, under the Senior
          Credit Facilities, Hedstrom is required to comply with specified
          minimum interest coverage and maximum leverage ratios. At December
          31, 1998, the Company was in compliance with all of the amended
          restrictive covenants contained in the Senior Credit Facility.

          Senior Discount Notes

            In connection with the  ERO acquisition, Holdings received  $25.0
          million of gross proceeds from the  issuance by Holdings of  44,612
          units, consisting of  the Discount  Notes and  2,705,896 shares  of
          Holdings common stock. Of the $25.0 million in gross proceeds, $3.4
          million ($1.25 per share) was allocated to the common stock,  based
          upon management's estimate of fair market value, and $21.6  million
          was allocated to Discount Notes.

            The Discount Notes are unsecured obligations of Holdings and have
          an aggregate principal amount at maturity  (June 1, 2009) of  $44.6
          million, representing a yield to maturity of 12%. No cash  interest
          will  accrue  on  the  Discount  Notes  prior  to  June  1,   2002.
          Thereafter, cash interest will be payable on June 1 and December  1
          of each  year, commencing  December 1,  2002. Amortization  of  the
          original issue  discount, which  is included  in interest  expense,
          totaled $3,296,000  and $1,670,000  during the  fiscal years  ended
          December 31, 1998 and December 31, 1997, respectively.

            Except as  set  forth  below, the  Discount  Notes  will  not  be
          redeemable at the option of Holdings prior to June 1, 2002. On  and
          after  such  date,  the  Discount  Notes  will  be  redeemable,  at
          Holdings' option, in whole or in part, at the following  redemption
          prices (expressed in percentages of principal amount at  maturity),
          plus accrued and unpaid interest to the redemption date:

            if redeemed during the  12-month period commencing  on June 1  of
          the years set forth below:

                                                            Redemption
                   Period                                    Price(%) 
                   ------------                             ----------
                   2002 ................................... 106.000
                   2003 ................................... 104.000
                   2004 ................................... 102.000
                   2005 and thereafter .................... 100.000
<PAGE>
            In addition, at any time and from  time to time prior to June  1,
          2000, Holdings  may  redeem in  the  aggregate  up to  40%  of  the
          accreted value of the  Discount Notes with the  proceeds of one  or
          more equity offerings  by Holdings  so long  as there  is a  public
          market at  the  time of  such  redemption, at  a  redemption  price
          (expressed as  a percentage  of accreted  value on  the  redemption
          date) of 112%,  plus accrued and  unpaid interest, if  any, to  the
          redemption date;  provided however,  that  at least  $26.8  million
          aggregate principal  amount  at  maturity  of  the  Discount  Notes
          remains outstanding after each such redemption.

            At any time on or prior to  June 1, 2002, the Discount Notes  may
          also be redeemed  as a  whole at the  option of  Holdings upon  the
          occurrence of  a change  of control  (as defined)  at a  redemption
          price equal  to  100%  of  the  accreted  value  thereof  plus  the
          applicable premium as of, and accrued and unpaid interest, if  any,
          to the date of redemption.

            The Discount  Notes Indenture  contains certain  covenants  that,
          among  other  things,  limit  (i)  the  incurrence  of   additional
          indebtedness  by  Holdings  and  its  restricted  subsidiaries  (as
          defined), (ii)  the  payment  of  dividends  and  other  restricted
          payments  by  Holdings  and  its  restricted  subsidiaries,   (iii)
          restrictions on  distributions from  restricted subsidiaries,  (iv)
          asset sales,  (v)  transactions  with  affiliates,  (vi)  sales  or
          issuances of restricted subsidiary capital stock and (vii)  mergers
          and consolidations.

          Senior Subordinated Notes

            The $110.0 million Senior Subordinated Notes bear interest at 10%
          per annum,  payable  on  June  1  and  December  1  of  each  year,
          commencing December 1, 1997.  The Senior Subordinated Notes  mature
          on June 1, 2007. Except as set forth below, the Senior Subordinated
          Notes are not redeemable at the option of Hedstrom prior to June 1,
          2002. On and  after such date,  the Senior  Subordinated Notes  are
          redeemable, at  Hedstrom's option,  in whole  or  in part,  at  the
          following redemption prices (expressed in percentages of  principal
          amount), plus accrued and unpaid interest to the redemption date:

            if redeemed during the  12-month period commencing  on June 1  of
          the years set forth below:

                                                        Redemption
                   Period                                 Price(%)
                   ---------                            ----------
                   2002 ..................................105.000
                   2003 ..................................103.333
                   2004 ..................................101.667
                   2005 and thereafter ...................100.000
<PAGE>
            In addition, at any time and from  time to time prior to June  1,
          2000, Hedstrom  may redeem  in the  aggregate up  to $44.0  million
          principal amount of Senior Subordinated Notes with the proceeds  of
          one or more equity offerings so long as there is a public market at
          the time of such redemption (provided  that if the equity  offering
          is an offering  by Holdings,  a portion  of the  net cash  proceeds
          thereof equal  to the  amount required  to redeem  any such  Senior
          Subordinated  Notes  is  contributed  to  the  equity  capital   of
          Hedstrom), at  a redemption  price (expressed  as a  percentage  of
          principal amount) of  110%, plus  accrued and  unpaid interest,  if
          any, to the redemption date; provided, however, that at least $66.0
          million aggregate principal amount of the Senior Subordinated Notes
          remains outstanding after each such redemption.

            The Senior Subordinated Notes  are unsecured senior  subordinated
          obligations  of  Hedstrom   and  are   unconditionally  and   fully
          guaranteed (jointly and  severally) on a  senior basis by  Holdings
          and on a senior subordinated basis  by each domestic subsidiary  of
          Hedstrom. The  Senior Subordinated  Notes are  subordinated to  all
          senior indebtedness (as defined) of Hedstrom and rank pari passu in
          right of  payment with  all  senior subordinated  indebtedness  (as
          defined) of Hedstrom.

            The  Senior   Subordinated  Notes   Indenture  contains   certain
          covenants that, among  other things,  limit (i)  the incurrence  of
          additional indebtedness by Hedstrom and its restricted subsidiaries
          (as defined), (ii)  the payment of  dividends and other  restricted
          payments  by  Hedstrom  and  its  restricted  subsidiaries,   (iii)
          restrictions on  distributions from  restricted subsidiaries,  (iv)
          asset sales,  (v)  transactions  with  affiliates,  (vi)  sales  or
          issuances of restricted subsidiary capital stock and (vii)  mergers
          and consolidations.

          Other Debt

            Other debt consists of  a $2.5 million  Holdings note payable  to
          the previous owners of Holdings as well as various other mortgages,
          capital leases and equipment loans.  The $2.5 million note  payable
          bears interest at 10%  per annum and is  payable at the earlier  of
          April 30,  2002, or  when the  Company has  met certain  cash  flow
          levels. The  mortgages and  equipment loans  have varying  interest
          rates and maturities.

          Interest Rate Swaps

            As of December 31, 1998, the Company had interest rate swap
          agreements in place with two of its lenders under which the Company
          exchanged a variable interest rate for a fixed interest rate.  The
          Company anticipates that the counter parties to the swap agreements
          will fully perform their obligations. During the fiscal year ended
          December 31, 1998, the effect of the swap agreements were
          immaterial. Terms of the swap agreements are as follows at December
          31, 1998:

          Notional Amounts      Fixed Interest Rate     Expiration Date
          ----------------      -------------------     ---------------
          $30 million           8.05%                   October 28, 1999
          $12 million           8.555%                  December 29, 2000
<PAGE>
          Maturities

            Aggregate maturities of long-term debt over the next five years
          are as follows (in thousands): 1999 - $11,905; 2000 - $14,655; 2001
          - $17,156; 2002; - $22,156; and 2003 - $33,552.


          7. INCOME TAXES:

          The sources of pretax income (loss) for the fiscal years ended
          December 31, 1998 and December 31, 1997 were as follows (in
          thousands):

                                                                              
                          1998          1997                
                          ----          ----
          Domestic ...  $(14,174)     $ 9,877
          Foreign ....     7,011        7,696
                        --------      -------
                        $ (7,163)     $17,573                        
                        ========      =======

            The Company has not provided for U.S. federal and foreign income
          withholding taxes on its foreign subsidiaries' undistributed
          earnings as of December 31, 1998 and December 31, 1997, because
          such earnings are considered to be indefinitely reinvested.
          Repatriation of these earnings would not materially increase the
          Company's tax liability. If these earnings were distributed in the
          form of dividends or otherwise, foreign tax credits could be used
          to offset the U.S. income taxes due on income earned from foreign
          sources.

          Pretax income from foreign sources in periods prior to 1997 were
          not significant.

            The components of the provisions (benefits) for income taxes  are
          as follows (in thousands):
<TABLE>

                              For the Fiscal     For the Fiscal    For the Five   For the Fiscal
                               Year Ended         Year Ended       Months Ended    Year Ended
                               December 31,        December 31,    December 31,     July 31,
                                  1998                1997             1996           1996
                             ---------------    --------------     ------------  -------------
            <S>
            Current               <C>                <C>              <C>            <C>
              State .........     $     -            $   339        $     33       $     43
              U.S. federal...           -             (2,745)            (40)           (92)
              Foreign .......       3,597              3,376               -              - 
                                  -------            -------        ---------      ---------
                                    3,597                970              (7)           (49)
                                  -------            -------        ---------      ---------                   
            Deferred:

              State .........        (773)               412               -              -         
              U.S. federal...      (3,511)             6,133          (2,862)        (3,808)
              Foreign ......          251                482               -              - 
                                  -------            -------        ---------      ---------
                                   (4,033)             7,027          (2,862)        (3,808)
                                  -------            -------        ---------      ---------         
                                  $  (436)           $ 7,997        $ (2,869)      $ (3,857)
                                  =======            =======        =========      =========
</TABLE>
<PAGE>

            The provisions  (benefits) for  income  taxes differ  from  those
          computed using  the statutory  U.S. federal  income tax  rate as  a
          result of the following (in thousands)
<TABLE>
                                        For the Fiscal     For the Fiscal    For the Five      For the Fiscal
                                          Year Ended         Year Ended      Months Ended       Year Ended
                                         December 31,        December 31,     December 31,        July 31,
                                             1998                1997             1996             1996
      <S>                               ---------------     --------------   -------------    --------------
      Current:                           Amount   Rate     Amount   Rate     Amount   Rate    Amount    Rate
                                         ------   ----     ------   ----     ------   ----    ------    ----
                                        <C>       <C>      <C>       <C>     <C>      <C>     <C>       <C>
       Expected provision (benefit)...  $(2,435)  (34)%    $5,975    34%     $(2,598)  (34)%  $(4,071)  (34)%
       State income taxes, net
        of federal benefit............     (511)   (7)        495     3         (219)   (3)      (183)   (1)
       Foreign corporate tax in
        excess of 34%.................      459     6         826     5           47     -        151     1
       Foreign loss nottax benefited .      980    14           -     -            -     -          -     -
       Nondeductible Goodwill ........      994    14         727     4            -     -          -     -
       Recapitalization costs ........        -     -           -     -            -     -        479     4 
       Other..........................       77     1         (26)    -          (99)   (1)      (233)   (2)
                                        -------   ----     ------   ----     -------   -----  -------   -----
       Actual Provision(benefit)        $  (436)   (6)%    $7,997    46%     $(2,869)  (38)%  $(3,857)  (32)%
                                        =======   ====     ======   ====     =======   =====  =======   =====
 </TABLE>
            The net deferred tax  assets are comprised  of the following 
              (in thousands):
<TABLE>
                                                                 December 31,   December 31,
                                                                    1998            1997
                                                                ------------    ------------
                 Current deferred tax asset:                       <C>            <C>
                   Allowances for accounts receivable              $1,329         $   568
                   Accrued Liabilities ........................     4,153           3,656
                   Other ......................................       534             155
                                                                   ------         -------
                      Current deferred tax asset...............     6,016           4,379
                                                                   ------         -------
                 Noncurrent deferred tax asset:
                   Tax over book depreciation .................    (4,274)         (4,056)
                   Net operating loss carryforward.............     3,154           6,480
                   Accrued Interest on Senior Discount Notes...     2,094             644
                   Recapitalization costs .....................       735           1,104
                   Other ......................................       615             552
                   Valuation Allowance                               (749)              -
                                                                   ------         -------
                       Noncurrent deferred tax asset............    1,575           4,724
                                                                   ------         -------
                 Net deferred tax asset .......................    $7,591         $ 9,103
                                                                   ======         =======
</TABLE>
            The Company has net operating loss carryforwards of $8,170,000 to
          apply against future taxable  income. Such carryforwards expire  
          between 2011 and 2018.
<PAGE>
            The Company has recorded current taxes receivable of $6,745,000.
          This receivable consists of an overpayment of Canadian and U.S.
          taxes of $1,200,000 and the carryback of $5,545,000 of net
          operating losses.

            The valuation allowance fully reserves deferred tax assets
          associated with the Company's operations in the United Kingdom,
          which are not expected to be realized. However, the Company
          believes it is more likely than not to realize the remaining net
          deferred tax asset and accordingly no valuation allowance has been
          provided. This conclusion is based on, (i) projections (which
          include the ERO and Montreal Divisions) of sufficient taxable U.S.
          income to fully realize the net operating loss carryforwards by
          the end of calendar year 1999, (ii) the tax loss carryforwards
          included in the net deferred tax asset were generated in very
          recent periods and do not begin to expire until the years 2011-2018,
          (iii) the significant excess of book basis over tax basis relative
          to the net assets of ERO, Inc. and (iv) the carryback of $5,545,000
          million in net operating loss carryforwards which will result in a
          1999 tax refund of $6,745,000. Management continually evaluates the
          realizability of the net deferred tax assets and the need for a
          valuation allowance on such assets.

          8. EMPLOYEE BENEFIT PLANS:

            All employees of the Bedford  and Ashland Divisions are  eligible
          to participate in either the Union Employees' Tax Sheltered Savings
          Plan or the tax-sheltered Savings Plan (collectively the  "Hedstrom
          Plans"), depending upon the employment  status of the employees  as
          union or  nonunion after  meeting certain  requirements. The  Union
          Employees' Tax Sheltered Savings Plan covers all union employees 18
          years of age or older who  have worked for 1,000 consecutive  hours
          within a 12-month period. The tax-sheltered Savings Plan covers all
          nonunion employees 18 years of age or older who have been  employed
          for 120 consecutive days within a 12-month period.

            For the Hedstrom Plans, the employees  may contribute from 1%  to
          15% of  their compensation  (either before  tax,  after tax,  or  a
          combination thereof) to  the Plans. The  Company provides  matching
          contributions at the rate of 50% of the employee's contribution  up
          to 6% of gross wages as defined by the Plans agreements.

            The Company may  make annual discretionary  contributions to  the
          Hedstrom Plans. Discretionary contributions during the fiscal years
          ended December 31, 1998, December 31,  1997, the five months  ended
          December 31, 1996,  and for the  fiscal year ended  July 31,  1996,
          aggregated   approximately   $730,000,   $607,000,   $218,000   and
          $634,000, respectively.

            U.S. Employees of the ERO and Montreal Divisions are covered by a
          contributory  profit  sharing  plan  established  pursuant  to  the
          provisions of Section  401(k) of  the Internal  Revenue Code  which
          provides retirement benefits for eligible employees of the  Company
          (the "ERO Plan").  Eligible employees may contribute from 1% to 15%
          of  their   compensation.   The  Company   may   provide   matching
          contributions at the rate of 50% of the employee's contribution  up
          to 6% of the employee's  gross wages.  Discretionary  contributions
          during the fiscal years  ended December 31,  1998 and December  31,
          1997, were $179,000 and $171,000, respectively.
<PAGE>
          9. STOCK-BASED COMPENSATION PLAN:

            The company  maintains two  stock option  plans, the  1995  Stock
          Option Plan  and the  1997 Stock  Option Plan  (the "Plans")  which
          authorize grants of stock options of up to 2,446,236 and  2,750,000
          shares, respectively, to key employees of the Company. Options  are
          granted at  the  fair  market  value  at  the  date  of  grant,  as
          determined by management.

            Options issued under the Plan expire ten years from date of grant
          and vest equally  over periods of  time ranging from  two to  three
          years, as determined by the Company's Option Committee of the Board
          of Directors.
       
            The following is a summary of stock option transactions from July
          31, 1996 through December 31, 1998:
<TABLE>                                                                                          Average
                                                             Shares        Option Prices      Exercise Price
                                                            ---------      -------------      --------------
              <S>                                           <C>                    <C>             <C>
              Shares under option at July 31, 1996.......   2,174,216              $1.00           $1.00
                Options granted .........................     200,000               1.00            1.00
                Options exercised .......................           _                  _               _
                Options terminated ......................           -                  -               -
                                                            ---------     --------------       ---------
              Shares under option at December 31, 1996...   2,374,216              $1.00           $1.00
                                                            ---------     --------------       ---------
                Options granted .........................   1,767,912               1.25            1.25
                Options exercised .......................           -                  -               -
                Options terminated ......................           -                  -               -
                                                            ---------      -------------       --------- 
              Shares under option at December 31, 1997...   4,142,128      1.00 to  1.25            1.11
                                                            ---------      -------------       ---------
                Options granted                               765,000               1.65            1.65
                Options exercised                                   _                  _               _
                Options terminated                           (135,000)              1.25            1.25
                                                            ---------     --------------        --------
              Shares exercisable at December 31, 1998       4,772,128     $1.00 to $1.65           $1.23
                                                            =========     ==============        ========
              Shares under option at December 31, 1998      2,896,853     $1.00 to $1.65           $1.05
              Shares exercisable at December 31, 1997       1,516,144              $1.00           $1.00
              Shares exercisable at December 31, 1996         724,739              $1.00           $1.00
              Shares exercisable at July 31, 1996                   -                  -               -

</TABLE>
            At December 31,  1998, 22,020 and  402,088 remaining options  are
          available for grant under the 1995  Stock Option Plan and the  1997
          Stock Option  Plan, respectively.  The weighted  average  remaining
          contractual life of shares under option at December 31, 1998 was  8
          years.

            The Company has adopted APB Opinion 25 "Accounting for Stock
          Issued to Employees" and related interpretations in accounting for
          its stock option plan. Accordingly, no compensation cost has been
          recognized for the stock option plans. Due to the Acquisition, net
          income per share for the fiscal year ended July 31, 1996 have no
          significant relevance to current amounts. Had compensation cost for
          the Company's plans been determined based on the fair value at the
          date of grant for awards in the fiscal years ended December 31,
          1998 and December 31, 1997, the Company's total and per share net
          income would have been as follows (dollars in thousands, except per
          share amounts):
<PAGE>
                                                         1998             1997
            Net income:                                  ----             ----
              As reported .........................    $(6,727)          $9,576
              Pro forma ...........................     (7,004)           9,212
            Basic net income per common share
              As reported .........................     $(0.10)           $0.18
              Pro forma ...........................      (0.10)            0.18
            Diluted net income per common share
             and common share equivalent:
              As reported .........................     $(0.10)           $0.18
              Pro forma ...........................      (0.10)            0.18

            The weighted average fair value of options granted is $1.06 and
          $0.71 during the fiscal years ended December 31, 1998 and December
          31, 1997, respectively. The fair value of each option is estimated
          on the date of the grant using the minimum value method with the
          following assumptions used for the grant in December 1998; risk
          free interest rates of 4.53%; expected dividend yield of 0% and
          expected life of ten years.

          10. COMMITMENTS AND CONTINGENCIES:

          Leases

            The Company leases production equipment under capital leases with
          terms expiring at various times through 2004. The net capital lease
          asset of $2,276,0000  and $1,825,000 as  of December  31, 1998  and
          December 31, 1997,  respectively, is included  in property,  plant,
          and equipment  on  the accompanying  consolidated  balance  sheets.
          Aggregate future minimum lease  payments related to capital  leases
          are as follows: 1999 - $662,000; 2000 - $662,000; 2001 -  $613,000;
          2002 - $492,000;  2003 - $281,000;  and thereafter - $89,000.  The
          portion related to interest over the remaining life of the  capital
          leases was $309,000 at December 31, 1998.

            The Company  leases production  equipment under  operating  lease
          agreements with terms expiring at various times through 2003.  Rent
          expense under operating leases for the fiscal years ended  December
          31, 1998, December 31, 1997, for the five months ended December 31,
          1996, and  for the  fiscal year  ended  July 31,  1996,  aggregated
          $2,232,000,  $2,309,000,  $936,000  and  $2,500,000,  respectively.
          Aggregate  future  minimum  lease  commitments  for   noncancelable
          operating leases  that have  initial or  remaining lease  terms  in
          excess of one year as of December 31, 1998, are as follows: 1999  -
          $2,017,000; 2000; - $1,459,000; 2001  - $946,000; 2002 -  $626,000;
          2003 - $195,000; and thereafter $388,000.

          Legal Matters

            There are various  claims and pending  legal actions against  the
          Company, primarily involving product liability, seeking damages  in
          varying amounts.  In  the  opinion of  management,  the  amount  of
          ultimate  liability  with  respect   to  these  actions  will   not
          materially affect the financial  position or results of  operations
          of the Company.
<PAGE>
          11. RELATED-PARTY TRANSACTIONS:

            On October  27, 1995,  in  connection with  the  recapitalization
          discussed in Note 12, the Company entered into a ten-year agreement
          with Hicks Muse, pursuant to which it pays Hicks Muse an annual fee
          (initially  $175,000)  for  management  and  advisory  services  in
          connection with the organization, management, and operations of the
          Company. The annual fee is adjustable  each July 31st to an  amount
          equal to 0.1% of the consolidated  net sales of the Company  during
          the previous twelve  months, but in  no event  less than  $175,000.
          Management fees and related expenses under this agreement  amounted
          to $329,000, $257,000,  $82,000 and $207,000  for the fiscal  years
          ended December 31,  1998, December 31,  1997, for  the five  months
          ended December 31,  1996, and for  the fiscal year  ended July  31,
          1996, respectively,  and  are  included in  selling,  general,  and
          administrative expenses on the accompanying income statements.

            On October  27, 1995,  in  connection with  the  recapitalization
          discussed in Note 12, the Company entered into a ten-year agreement
          with an affiliate  of Hicks  Muse pursuant  to which  it paid  this
          affiliate a financial advisory  fee of approximately $1,175,000  as
          compensation for its  services as financial  advisor in  connection
          with the recapitalization. In  addition, this Hicks Muse  affiliate
          will be entitled to receive a fee equal to 1.5% of the  transaction
          value, as  defined, for  each add-on  transaction, as  defined,  in
          which the Company is involved.

          12. RECAPITALIZATION:

            Prior to October 27, 1995, the majority of Holdings common  stock
          was held by Arnold E. Ditri, President and Chief Executive Officer,
          and Alastair H. McKelvie,  Executive Vice President. The  remaining
          common stock  was  held  by  John  H.  Hurshman  and  the  Fidelity
          Investment Charitable Gift Trust.

            On October 27, 1995, Holdings was purchased by Hicks, Muse,  Tate
          & Furst Equity Fund II, L.P.  ("HM Fund II"). Concurrently, all  of
          the outstanding  preferred  stock  was  redeemed,  the  outstanding
          common stock held by John H.  Hurshman and the Fidelity  Investment
          Charitable Trust was redeemed, a majority of the outstanding common
          stock of Arnold E. Ditri and Alastair H. McKelvie was redeemed, new
          common shares were issued to HM  Fund II, new debt facilities  were
          obtained and existing debt  facilities were repaid  as part of  the
          transaction. As Arnold  Ditri and Alastair  H. McKelvie retained  a
          minority investment in Holdings, the transaction was accounted  for
          as a recapitalization, and  existing account balances were  carried
          forward. The Company expensed all of its costs associated with  the
          recapitalization, which totaled approximately $9,600,000.

            In connection  with  the recapitalization,  Holdings  effected  a
          common stock split of  39,095.40 shares for  one and increased  the
          authorized shares from  1,000 (par value  $.01) to 50,000,000  (par
          value $.01). After the recapitalization, the majority of the common
          stock is held by HM Fund II. The remaining common stock was held by
          Arnold E. Ditri,  Alastair H.  McKelvie, various  other members  of
          management, and various other investment groups.

          13. SEGMENT AND GEOGRAPHIC INFORMATION:
<PAGE>
            Effective January 1, 1998, the Company adopted SFAS No. 131,
          "Disclosure About Segments of an Enterprise and Related
          Information." SFAS 131 requires companies to identify their
          operating segments based upon the internal financial information
          reported to the company's chief operating decision maker. The
          Company's operating decision maker is its Chief Executive Officer
          (CEO). Financial information reported to the CEO reflects five
          business segments: the Bedford Division, the Ashland Division, the
          ERO Division, the Montreal Division and the International Division.
          The CEO evaluates performance of each segment based upon the
          operating earnings (loss) of each segment. The accounting policies
          of segments are the same as those described in the summary of
          accounting policies in Note 1 to the consolidated financial
          statements.

          The Company develops, manufactures and sells a variety of
          children's leisure and activity products.

          The Bedford Division principally manufactures and markets in the
          United States and Canada outdoor gym sets, wood gym kits and
          slides, spring horses, trampolines and gym accessories.

          The Ashland Division principally manufactures and markets in the
          United States a wide variety of children's playballs and ball pit
          products.

          The Montreal Division principally manufactures and markets
          children's products including arts and crafts, game tables, certain
          other children's bulk play products such as play kitchens and
          battery-operated ride-on vehicles. In addition, this division
          includes a broad line of school supplies featuring popular licensed
          characters.

          The ERO Division  produces the Slumber Shoppe line of products
          including products such as indoor sleeping bags and play tents
          featuring popular licensed characters, a water sports line of
          products including flotation jackets, masks, fins, goggles and
          snorkels.  Additionally the division produces licensed room
          decorations for young children, consisting principally of stick-on
          and peel-off wall decorations.

          The International Division produces and distributes gym sets and
          other products, manufactured by its domestic divisions, outside of
          the United States.

<TABLE>
                                                                   For the Five    For the Fiscal
                                            For the Fiscal Years   Months Ended      Year Ended  
                                             Ended December 31,    December 31,      July 31,    
                                             ------------------    ------------     -------------
                                               1998       1997          1996            1996
                                               ----       ----          ----            ----        
             <S>                             
             Bedford Division                <C>        <C>            <C>             <C>       
                Net revenues                 $109,031   $84,784        $12,652         $83,891
                Operating earnings (loss)       4,558     7,873         (4,959)         (1,601)
                Identifiable assets            56,092    61,111         43,388          55,442
                Capital expenditures            4,514     1,861            681           4,919
                Depreciation and amortization   4,364     3,987          1,454           2,507
<PAGE>
             Ashland Division
                Net revenues                    38,846   36,837         11,341          49,303
                Operating earnings (loss)        2,498    1,891           (566)          5,124
                Identifiable assets             22,102   25,336         27,410          28,169
                Capital expenditures             2,106    1,756            695           1,819
                Depreciation and amortization    1,433    1,267            454             907

             ERO Division
                Net revenues                    73,442    60,517             -               -   
                Operating earnings (loss)       15,190    12,582             -               -
                Identifiable assets             40,316    35,930             -               -
                Capital expenditures             1,670       354             -               -
                Depreciation and amortization    1,574       707             -               -

             Montreal Division
                Net revenues                    61,193    64,785             -               -
                Operating earnings (loss)        3,896    14,320             -               -
                Identifiable assets             65,226    66,796             -               -
                Capital expenditures             2,784     2,424             -               -
                Depreciation and amortization    4,917     3,107             -               -

             International Division
                Net revenues                    19,184     9,225             -               -
                Operating earnings (loss)       (1,970)       38             -               -
                Identifiable assets              6,063     2,076             -               -
                Capital expenditures               218         -             -               -
                Depreciation and amortization      257         -             -               -

             Corporate, other non-segments
              and Intercompany Eliminations
                Identifiable assets            205,968  196,290          1,277           1,413
                Depreciation and amortization    6,475    3,246             68               -

             Consolidated totals from
              continuing operations
                Net revenues                   301,696  256,146         23,994         133,194
                Operating earnings (loss)       24,172   36,704         (5,525)          3,523
                Identifiable assets            395,767  387,539         72,075          85,024
                Capital expenditures            11,292    6,395          1,376           6,738
                Depreciation and amortization   19,020   12,314          1,976           3,414
</TABLE>
          Significant Concentration of Customers

            All trade accounts receivable are unsecured.  A significant level
          of the Company's net sales is generated from four retail companies
          that serve national markets.  Sales to the Company's top four
          customers aggregated approximately $166.2 million, $137.4 million,
          $61.3 million and $63.9 million for the fiscal years ended December
          31, 1998, December 31, 1997, for the five months ended December 31,
          1996 and for the fiscal year ended July 31, 1996, respectively.   
          Three of the Company's customers accounted for over 10% of the
          Company's net sales during the fiscal year ended December 31, 1998.
          Total revenues generated from each of these three customers were
          $65.9 million, $50.1 million and $34.2 million, respectively. Two of
          the Company's customers each accounted for over 10% of the
          Company's net sales during the fiscal year ended December 31, 1997.
          Total revenues generated from each of these two customers were
 <PAGE>
          $54.9 million, and $41.7 million, respectively. Three of the
          Company's customers each accounted for over 10% of the Company's
          net sales for the five months ended December 31, 1996. Total
          revenues generated from each of these three customers were $3.6
          million, $2.9 million and $2.6 million, respectively. Three of
          the Company's customers each accounted for over 10% of the
          Company's net sales during the fiscal year ended July 31, 1996.
          Total revenues generated from each of these three customers were
          $25.3 million, $16.0 million and $16.0 million, respectively.
          Sales to the aforementioned major customers are made by all of
          the Company's divisions.

            During fiscal years ended December 31, 1998 and 1997, the
          Company's outdoor gym set product line, produced by the Bedford
          Division, accounted for approximately 20% of the Company's net
          sales for the fiscal year. No other product line accounted for more
          than 10% of the Company's net sales for the fiscal years ended
          December 31, 1998 and 1997. For the five month period ended
          December 31, 1996 gym sets accounted for 28% of the Company's net
          sales, while wood kits, produced at the Bedford division, accounted
          for 18% of the Company's net sales and Ball Pits, produced at the
          Ashland Division, accounted for 13% of the Company's net sales. No
          other product line accounted for more  than 10% of the Company's
          net sales for the five month period ended December 31, 1996. For
          the fiscal year ended July 31, 1996, the Company's outdoor gym set
          product line accounted for approximately 51% of the Company's net
          sales and the undecorated play ball product line, produced at the
          Ashland Division, accounted for 11% of the Company's net sales. No
          other product line accounted for more than 10% of the Company's net
          sales for the fiscal year ended July 31, 1996.

            Summarized geographic information as of and for the fiscal years
          ended December 31, 1998 and December 31, 1997 is as follows (in
          thousands):
<TABLE>                                                                               Other
                                                                             -------------------------
                                                     United                   Foreign
                                                     States       Canada     Operations    Elminations     Total
                                                    --------     -------     ----------    -----------    --------
          <S>
          Fiscal Year Ended December 31, 1998
          -----------------------------------       <C>          <C>          <C>           <C>           <C>
          Sales to unaffiliated customers......     $265,611     $19,988      $16,097       $      -      $301,696
          Transfers between geographic areas...        7,665      37,436            -        (45,101)            -
                                                    --------     -------      -------       --------      --------
          Total net sales......................     $273,276     $57,424      $16,097       $(45,101)     $301,696
                                                    ========     =======      =======       ========      ========          
          Operating  income....................     $ 14,537     $12,422      $(2,731)      $    (56)     $ 24,172
                                                    ========     =======      =======       ========      ========
          Identifiable assets..................     $355,475     $38,272      $(9,368)      $ (7,348)     $395,767
                                                    ========     =======      =======       ========      ========

          Fiscal Year Ended Decmeber 31, 1997
          -----------------------------------
          Sales to unaffiliated customers......     $229,601     $14,322       $12,223      $      -      $256,146
          Transfers between geographic areas...        5,344      38,306             -       (43,650)            -
                                                    --------     -------       -------      --------      --------
          Total net sales......................     $234,945     $52,628       $12,223      $(43,650)     $256,146
                                                    ========     =======       =======      ========      ========
          Operating  income....................     $ 23,936     $13,259       $  (451)     $    (40)     $ 36,704
                                                    ========     =======       =======      ========      ========       
          Indentifiable assets.................     $360,968     $52,176       $ 8,440      $(34,045)     $387,539
                                                    ========     =======       =======      ========      ========
</TABLE>
<PAGE>
          The Company generated no material foreign income for the fiscal 
          years ended July 31, 1996 and 1995 and owned no material foreign
          assets at July 31, 1996 and 1995.

          14. QUARTERLY FINANCIAL DATA (unaudited; in thousands):
<TABLE>
 Fiscal Year Ended December 31, 1998
 -----------------------------------
                                              1st           2nd          3rd           4th
                                            Quarter       Quarter      Quarter       Quarter      Total
                                             ------        ------       ------        ------     -------
 <S>                                        <C>           <C>          <C>           <C>        <C>
 Net sales ...............                  $78,389       $83,272      $64,353       $75,682    $301,696
 Gross profit ............                   22,064        23,081       23,544        22,400      91,089
 Net income (loss)(loss)(loss)                 (259)         (339)         150        (6,279)     (6,727)
 Basic net income (loss) per common share     $0.00        $(0.01)       $0.00        $(0.09)     $(0.10)
 Diluted net income (loss) per common
 share  and common share equivalents           0.00         (0.01)        0.00         (0.09)      (0.10)



 Fiscal Year Ended December 31, 1997
 -----------------------------------
                                              1st           2nd           3rd          4th
                                            Quarter       Quarter      Quarter        Quarter     Total
                                             ------        ------       ------        ------     -------
 <S>                                        <C>           <C>          <C>           <C>        <C>
 Net sales                                  $47,937       $56,114      $61,462        $90,633   $256,146
 Gross profit                                13,396        17,076       19,740         33,544     83,756
 Net income (loss)(loss)(loss)                3,216         2,769         (919)         4,510      9,576
 Basic net income (loss) per common share     $0.10         $0.05       $(0.01)         $0.07      $0.18
 Diluted net income (loss) per common
 share and common share equivalents            0.10          0.05        (0.01)          0.07       0.18

</TABLE>


          15. SUBSIDIARY GUARANTORS/NONGUARANTORS FINANCIAL INFORMATION

            The following is financial information pertaining to Hedstrom and
          its subsidiary guarantors and subsidiary nonguarantors (with
          respect to the Senior Subordinated Notes and the Senior Credit
          Facilities) for the periods in which they are included in Holding's
          accompanying consolidated financial statements.

<PAGE>
<TABLE>

                                                     HEDSTROM CORPORATION AND SUBSIDIARIES

                                                         CONSOLIDATING BALANCE SHEETS
                                                                (In thousands)

                                                                    ASSETS

                                               At December 31, 1998                             At December 31, 1997
                                  ---------------------------------------------      --------------------------------------------
                                               Hedstrom                                           Hedstrom
                                  Hedstrom    Subsidiary                             Hedstrom    Subsidiary
                                 Subsidiary      Non-      Adjustments/   Total      Subsidiary      Non-    Adjustments/   Total
                                 Guarantors   Guarantors  Eliminations   Hedstrom    Guarantors   Guarantor  Eliminations  Hedstrom
                                 ----------   ----------  ------------   --------    ----------   ---------  ------------  --------
 <S>                              <C>            <C>         <C>        <C>          <C>         <C>          <C>         <C>
 CURRENT ASSETS:
   Cash and cash equivalents      $  1,839       $ 2,495     $      -   $  4,334     $  8,984    $  1,860     $      -    $ 10,844
   Trade accounts receivable,
     net ..............             59,193        10,329            -     69,522       73,625       9,077            -      82,702
   Taxes receivable ...              6,095           650            -      6,745            -           -            -           -
   Inventories ........             40,742        13,036          (56)    53,722       38,429       9,075          (40)     47,464
   Deferred income taxes             6,016             -            -      6,016        4,379           -            -       4,379
   Prepaid expenses and other        3,849           281            -      4,130        4,310         491            -       4,801
                                  --------      --------     --------   --------     --------    --------     --------    --------
         Total current assets      117,734        26,791          (56)   144,469      129,727      20,503          (40)    150,190
                                  --------      --------     --------   --------     --------    --------     --------    --------
 PROPERTY, PLANT, AND
   EQUIPMENT,  net                  31,361        16,741            -     48,102       27,448      15,375            -      42,823
 GOODWILL, net ........            165,835        20,991            -    186,826      152,457      18,484            -     170,941
 OTHER ASSETS:
   Investment in and Advances
    to Nonguarantor
    Subsidiaries ......             56,190             -      (56,190)         -       44,799           -      (44,799)          -
   Deferred financing fees, net     13,357             -            -     13,357       16,328           -            -      16,328
   Deferred charges and
    other, net ...........             500             -            -        500        1,387           -            -       1,387
   Deferred income taxes             1,092        (1,611)           -       (519)       4,602        (522)           -       4,080
                                  --------      --------     --------   --------     --------    --------     --------    --------
        Total other assets         236,974        19,380      (56,190)   200,164      219,573      17,962      (44,799)    192,736
                                  --------      --------     --------   --------     --------    --------     --------    --------
          Total assets            $386,069      $ 62,912     $(56,246)  $392,735     $376,748    $ 53,840     $(44,839)   $385,749
                                  ========      ========     ========   ========     ========    ========     ========    ========
</TABLE>
<PAGE>
<TABLE>
                                                     HEDSTROM CORPORATION AND SUBSIDIARIES
                                                         CONSOLIDATING BALANCE SHEETS
                                                                (In thousands)

                                                                    ASSETS

                                               At December 31, 1998                             At December 31, 1997
                                  ---------------------------------------------      --------------------------------------------
                                               Hedstrom                                           Hedstrom
                                  Hedstrom    Subsidiary                             Hedstrom    Subsidiary
                                 Subsidiary      Non-      Adjustments/   Total      Subsidiary      Non-    Adjustments/   Total
                                 Guarantors   Guarantors  Eliminations   Hedstrom    Guarantors   Guarantor  Eliminations  Hedstrom
                                 ----------   ----------  ------------   --------    ----------   ---------  ------------  --------

LIABILITIES AND STOCKHOLDER'S EQUITY
 <S>
 CURRENT LIABILITIES:             <C>            <C>         <C>        <C>           <C>        <C>           <C>        <C>
   Revolving line of credit       $ 34,920       $     -     $      -   $ 34,920      $33,282    $  2,218      $     -    $ 35,500
   Current portion of long
    term debt and capital leases    11,417           488            -     11,905        8,492         730            -       9,222
   Advances from
    Nonguarantor Subsidiaries            -        39,091      (39,091)         -            -      31,956      (31,956)          -
   Accounts payable(c)              17,170         3,539            -     20,709       20,784       2,597            -      23,381
   Accrued expenses(c)              20,520         2,198          (23)    22,695       25,061       2,432          (16)     27,477
                                  --------      --------     --------   --------     --------    --------     --------    --------
       Total current liabilities    84,027        45,316      (39,114)    90,229       87,619      39,933      (31,972)     95,580
                                  --------      --------     --------   --------     --------    --------     --------    --------
 LONG-TERM DEBT(a):
   Senior subordinated notes       110,000             -            -    110,000      110,000           -            -     110,000
   Term loans .........            123,736             -            -    123,736      104,375           -            -     104,375
   Capital leases .....              1,690             -            -      1,690        1,605           -            -       1,605
   Other ..............              1,667           487            -      2,154        1,857       1,057            -       2,914
                                  --------      --------     --------   --------     --------    --------     --------    --------
         Total long-term debt      237,093           487            -    237,580      217,837       1,057            -     218,894
                                  --------      --------     --------   --------     --------    --------     --------    --------
 STOCKHOLDER'S EQUITY
         Total Stockholder's
          equity (deficit)(b)       64,949        17,109      (17,132)    64,926       71,292      12,850      (12,867)     71,275
                                  --------      --------     --------   --------     --------    --------     --------    --------
         Total liabilities and
          Stockholder's equity    $386,069      $ 62,912     $(56,246)  $392,735     $376,748    $ 53,840     $(44,839)   $385,749
                                  ========      ========     ========   ========     ========    ========     ========    ========


                                                                                       footnotes to follow
  
</TABLE>
<PAGE>
<TABLE>
                                                      HEDSTROM CORPORATION AND SUBSIDIARIES
                                                         CONSOLIDATING INCOME STATEMENTS
                                                                   (In thousands)

                                                                                  
                                  Fiscal Year Ended December 31, 1998                  Fiscal Year Ended December 31, 1997
                          ------------------------------------------------      ----------------------------------------------
                                        Hedstrom                                            Hedstrom
                          Hedstrom     Subsidiary                               Hedstrom   Subsidiary
                          Subsidiary      Non-      Ajustments/      Total     Subsidiary     Non-      Ajustments/    Total
                          Guarantors   Guarantors  Eliminations     Hedstrom   Guarantors  Guarantors  Eliminations   Hedstrom
                          ----------   ----------  ------------     --------   ----------  ----------  ------------   --------
  <S>                      <C>          <C>           <C>           <C>          <C>        <C>
  NET SALES ....           $286,159     $60,638       $(45,101)     $301,696     $243,344   $56,452     $ (43,650)    $256,146
  COST OF SALES             213,124      42,528        (45,045)      210,607      175,834    40,166       (43,610)     172,390
                           --------     -------       --------      --------      -------   -------     ---------     --------
       Gross profit          73,035      18,110            (56)       91,089       67,510    16,286           (40)      83,756
  SG&A EXPENSES              57,412       9,505              -        66,917       42,655     4,397             -       47,052
                           --------     -------       --------      --------     --------   -------     ---------     --------
  Operating income
    (loss) .......           15,623       8,605            (56)       24,172       24,855    11,889           (40)      36,704
  INTEREST EXPENSE(c)        25,546       2,034              -        27,580       15,614     1,492             -       17,106
                           --------     -------       --------      --------     --------   -------     ---------     --------
  INCOME (LOSS) BEFORE
  TAXES ........             (9,923)      6,571            (56)       (3,408)       9,241    10,397           (40)      19,598
  INCOME TAX EXPENSE
    (BENEFIT) ....           (1,773)      2,899            (23)        1,103        4,532     4,263           (16)       8,779
                           --------     -------       --------      --------     --------   -------     ---------     --------
  NET INCOME (LOSS)        $ (8,150)    $ 3,672       $    (33)     $ (4,511)    $  4,709   $ 6,134     $     (24)    $ 10,819
                           ========     =======       ========      ========     ========   =======     =========     ========

</TABLE>
<PAGE>
<TABLE>


                                                     HEDSTROM CORPORATION AND SUBSIDIARIES
                                                         CONSOLIDATING INCOME STATEMENTS
                                                                   (In thousands)

                                       For the Five Months Ended              For the Fiscal Year Ended
                                           December 31, 1996                           July 31, 1996
                                 --------------------------------         ---------------------------------
                                                                                         Hedstrom
                                 Hedstrom     Subsidiary                  Hedstrom     Subsidiary
                                Subsidiary     Non-         Total        Subsidiary       Non-        Total
                                Guarantors    Guarantor    Hedstrom      Guarantors    Guarantors    Hedstrom
                                ----------    ---------    --------      ----------    ----------    --------
 <S>                              <C>            <C>        <C>            <C>           <C>         <C>
 NET SALES                        $23,074        $920       $23,994        $129,074      $4,120      $133,194
 COST OF SALES                     21,238         735        21,973         101,482       3,586       105,068
                                  -------        ----       -------        --------      ------      --------
     Gross profit                   1,836         185         2,021          27,592         534        28,126
 SG&A EXPENSES                      7,225         321         7,546          23,659         944        24,603
                                  -------        ----       -------        --------      ------      --------
     Operating income (loss)       (5,389)       (136)       (5,525)          3,933        (410)        3,523
 RECAPITALIZATION EXPENSE               -           -             -           9,600           -         9,600
 INTEREST EXPENSE(c)                2,010           1         2,011           5,674          34         5,708
                                  -------        ----       -------        --------      ------      --------
 INCOME (LOSS) BEFORE TAXES        (7,399)       (137)       (7,536)        (11,341)       (444)      (11,785)
 INCOME TAX EXPENSE (BENEFIT)      (2,775)        (54)       (2,829)         (3,786)          -        (3,786)
                                  -------        ----       -------        --------      ------      --------
 NET INCOME (LOSS)                $(4,624)       $(83)      $(4,707)       $ (7,555)     $ (444)     $ (7,999)
                                  =======        ====       =======        ========      ======      ========

                                                                                  footnotes to follow
 
</TABLE>
<PAGE>
<TABLE>

                                                            HEDSTROM CORPORATION AND SUBSIDIARIES
                                                           CONSOLIDATING STATEMENTS OF CASH FLOWS
                                                                        (In thousands)

                                     Fiscal Year Ended December 31, 1998              Fiscal Year Ended December 31, 1997
                                  -------------------------------------------    --------------------------------------------
                                              Hedstrom                                        Hedstrom
                                  Hedstrom   Subsidiary                          Hedstrom     Subsidiary
                                  Subsidiary    Non-     Adjustments/   Total   Subsidiary      Non-     Adjustments/   Total
                                  Guarantors Guarantors  Eliminations  Hedstrom Guarantors   Guarantors  Eliminations  Hedstrom
                                  ---------  ----------  ------------  -------- ----------   ----------  ------------  --------
  <S>                               <C>        <C>        <C>         <C>        <C>           <C>        <C>         <C>
  CASH FLOWS FROM OPERATING
    ACTIVITIES:
    Net income (loss)(c)            $(8,150)   $ 3,672    $   (33)    $ (4,511)   $  4,709     $6,134      $  (24)    $ 10,819
    Depreciation and amortization    12,633      2,883          -       15,516       9,212      1,328           -       10,540
    Deferred income tax
      provision (benefit)(c)         (5,122)     1,089          -       (4,033)      6,916          -           -        6,916
    Gain on the disposition of
      property, plant and equipment      (1)         -          -           (1)         (1)         -           -           (1)
    Provision for losses on
      accounts Receivable             2,683        500          -        3,183       1,246          -           -        1,246
    Changes in assets and
      liabilities:
      Accounts receivable            11,718     (1,752)         -        9,966     (40,150)    (6,604)          -      (46,754)
      Taxes receivable               (6,095)      (650)         -       (6,745)          -          -           -            -
      Inventories .....                (984)    (3,315)        56       (4,243)        461      4,373          40        4,874
      Prepaid expenses and other        551        210          -          761         789       (491)          -          298
      Accounts payable(c)            (4,572)       942          -       (3,630)      2,535       (534)          -        2,001
      Accrued expenses(c)             1,748       (574)       (23)       1,151      (1,768)     1,935         (16)         151
                                    -------    -------     ------      -------    --------      -----      ------     --------
      Net cash provided by (used
       for) Operating activities      4,409      3,005          -        7,414     (16,051)     6,141           -       (9,910)
                                    -------    -------     ------      -------    --------      -----      ------     --------
  CASH FLOWS FROM INVESTING
    ACTIVITIES:
    Acquisition of ERO, Inc.         (3,037)         -          -       (3,037)   (122,600)         -           -     (122,600)
    Acquisition of certain
     assets of Bollinger
     Industries, Inc.                     -          -          -            -     (14,928)         -           -      (14,928)
    Acquisitions of PP&E             (8,317)    (2,975)         -      (11,292)     (6,395)         -           -       (6,395)
    Other acquisitions              (16,884)    (3,500)         -      (20,384)     (2,322)         -           -       (2,322)
    Proceeds from the sale of PP&E        -          -          -            -           8          -           -            8
                                    -------    -------     ------      -------    --------      -----      ------     --------
       Net cash used for
        investing Activities        (28,238)    (6,475)         -      (34,713)   (146,237)         -           -     (146,237)
                                    -------    -------     ------      -------    --------      -----      ------     --------
<PAGE>

  CASH FLOWS FROM FINANCING
    ACTIVITIES
    Net proceeds from issuance
     of Senior Subordinated notes         -          -          -            -     110,000          -           -      110,000
    Net proceeds from issuance
     of new term loans ...           30,000          -          -       30,000     110,000          -           -      110,000
    Equity contribution from
      Holdings(b) .....                   -          -          -            -      63,750          -           -       63,750
    Borrowings on new revolving
      line of credit ..               1,638     (2,218)         -         (580)     35,500          -           -       35,500
    Repayments of new Term Loans     (7,956)         -          -       (7,956)     (1,125)         -           -       (1,125)
    Repayments of old term loans          -          -          -            -     (87,017)    (5,750)          -      (92,767)
    Debt financing cost(b)                -          -          -            -     (19,750)         -           -      (19,750)
    Repayments on old revolving
      lines of credit, net                -          -          -            -     (42,400)         -           -      (42,400)
    Advances to-(from)
      Nonguarantor Subsidiaries      (7,135)     7,135          -            -      (1,078)     1,078           -            -
    Other .............                 137       (812)         -         (675)      2,395          -           -        2,395
                                    -------    -------    -------     --------    --------     ------     -------     --------
        Net cash provided by (used
          for) Financing activities  16,684      4,105          -       20,789     170,275     (4,672)          -      165,603
                                    -------    -------    -------     --------    --------     ------     -------     --------
  NET (DECREASE) INCREASE IN
   CASH AND CASH EQUIVALENTS         (7,145)       635          -       (6,510)      7,987      1,469           -        9,456
  CASH AND CASH EQUIVALENTS:
    Purchased Cash                        -          -          -            -         530        325           -          855
    Beginning of period               8,984      1,860          -       10,844         467         66           -          533
                                    -------    -------    -------     --------    --------     ------     -------     --------
    End of period .....             $ 1,839    $ 2,495    $     -     $  4,334      $8,984     $1,860     $     -      $10,844
                                    =======    =======    =======     ========    ========     ======     =======     ========
                                                                                                     footnotes to follow

</TABLE>
<PAGE>
<TABLE>
                                                          HEDSTROM CORPORATION AND SUBSIDIARIES
                                                          CONSOLIDATING STATEMENTS OF CASH FLOWS
                                                                       (In thousands)


                                       For the Five Months Ended
                                           December 31, 1996                   For the Fiscal Year Ended July 31, 1996
                                    -------------------------------------         ----------------------------------
                                                   Hedstrom                                      Hedstrom
                                    Hedstrom      Subsidiary                      Hedstrom      Subsidiary
                                   Subsidiary        Non-           Total        Subsidiary       Non-         Total
                                   Guarantors     Guarantors       Hedstrom      Guarantors     Guarantor     Hedstrom
                                   ----------     ----------       --------      ----------     ---------     --------
   <S>                               <C>             <C>           <C>            <C>            <C>          <C>
   CASH FLOWS FROM OPERATING
     ACTIVITIES:
     Net income (loss)(c)            $(4,624)        $  (83)       $(4,707)       $(7,555)       $ (444)      $(7,999)
     Depreciation and amortization     1,973              3          1,976          3,407             7         3,414
     Deferred income tax provision
      (benefit)(c) ........           (2,862)             -         (2,862)        (3,808)            -        (3,808)
     Gain on the disposition of
      property, plant and equipment      (60)             -            (60)             -             -             -
     Provision for losses on
      accounts receivable                 64              -             64              -             -             -
     Other                                                                           (145)            -          (145)
     Changes in assets and
      liabilities
       Accounts receivable             8,794            940          9,734           (817)          (75)         (892)
       Inventories .....              (2,089)            47         (2,042)           (64)          (75)         (139)
       Prepaid expenses and other       (132)            13           (119)           (20)           26             6
       Accounts payable(c)             1,793             (6)         1,787         (8,012)          (11)       (8,023)
       Accrued expenses(c)              (163)          (630)          (793)            26          (184)         (158)
                                      ------          -----         ------        -------        ------       -------
         Net cash provided by (used
          for) operating activities    2,694            284          2,978        (16,988)         (756)      (17,744)
                                      ------          -----         ------        -------        ------       -------
   CASH FLOWS FROM INVESTING
     ACTIVITIES:
     Acquisition of ERO, Inc.              -              -              -              -             -             -
     Acquisition of certain assets
      of Bollinger Industries, Inc.        -              -              -              -             -             -
     Acquisitions of PP&E             (1,375)            (1)        (1,376)        (6,735)           (3)       (6,738)
     Other acquisitions                    -              -              -              -             -             -
     Proceeds from the sale of PP&E       67              -             67            248             -           248
                                      ------          -----         ------        -------        ------       -------
        Net cash used for
          investing activities        (1,308)            (1)        (1,309)        (6,487)           (3)       (6,490)
                                      ------          -----         ------        -------        ------       -------
<PAGE>

   CASH FLOWS FROM FINANCING
     ACTIVITIES
     Redemption of common stock            -              -              -        (29,772)            -       (29,772)
     Redemption of preferred stock         -              -              -         (3,072)            -        (3,072)
     Proceeds from sale of common
      stock                                -              -              -         29,742             -        29,742
     Term loan borrowings                  -              -              -         35,000             -        35,000
     Repayments of new term loans          -              -              -              -             -             -
     Repayments of old term loans          -              -              -              -             -             -
     Debt financing cost(b)                -              -              -              -             -             -
     Repayments on old revolving
       lines of credit, net           (8,728)          (322)        (9,050)        (3,162)          802        (2,360)
     Advances to-(from)                    -              -              -              -             -             -
   Nonguarantor Subsidiaries
     Other .............                 (84)             -            (84)         1,597             -         1,597
                                      ------          -----         ------        -------        ------       -------
       Net cash provided by (used
        for) financing activities     (8,812)          (322)        (9,134)        30,333           802        31,135
                                      ------          -----         ------        -------        ------       -------
   NET (DECREASE) INCREASE IN
   CASH AND CASH EQUIVALENTS          (7,426)           (39)        (7,465)         6,858            43         6,901

   CASH AND CASH EQUIVALENTS:
     Purchased Cash                        -              -              -              -             -             -
     Beginning of period               7,893            105          7,998          1,035            62         1,097
                                      ------          -----         ------        -------        ------       -------
     End of period .....               $ 467         $   66         $  533        $ 7,893        $  105       $ 7,998
                                      ======         ======         ======        =======        ======       =======


      footnotes to follow

</TABLE>
<PAGE>

                         HEDSTROM CORPORATION AND SUBSIDIARIES

                                       FOOTNOTES

            Each   domestic   subsidiary   of   Hedstrom   (the  "Subsidiary
          Guarantors") has fully  and unconditionally  guaranteed the  Senior
          Subordinated Notes on a joint and  several basis.  The Company  has
          not presented separate financial  statements and other  disclosures
          concerning  the  Subsidiary   Guarantors  because  management   has
          determined that such information is not material to investors.

            The column "Total Hedstrom" represents the consolidated financial
          statements of Hedstrom Corporation and its subsidiaries.   Hedstrom
          Corporation  is  Holdings'  only  direct  subsidiary.  The  primary
          differences  between   the   consolidated   amounts   of   Hedstrom
          Corporation  and   the  consolidated   amounts  included   in   the
          accompanying consolidated financial statements  of Holdings are  as
          follows:

          (a) Hedstrom Corporation's Long-Term Debt does not include a  $2.5
          million note payable issued by Holdings in  connection   with   its
          1995 recapitalization,  and the  Senior  Discount Notes  valued  at
          $26.6 million at December 31, 1998.
          (b) Hedstrom Corporation's stockholder's equity included Holdings'
          stockholders' equity plus, as of December 31, 1998 and 1997 only,
          $21.6 million in proceeds  from the  issuance of  Senior Discount
          Notes, which proceeds were contributed as equity by Holdings to
          Hedstrom Corporation  and  the  loss  incurred  by  Holding's
          discontinued subsidiary Holdings II and as of both  December 31,
          1997 and December 31, 1996, the $2.5 million  note payable
          described in  (a) above.
          (c) Accounts payable,  interest expense,  income tax  expense  and
          accrued expenses do not reflect the accrued interest,     interest
          expense and the tax benefit of accrued interest on the  obligations
          discussed in (a) above.

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

          None.

                                       PART III                             

          Item 10.  Directors and Executive Officers of the Registrant      

          MANAGEMENT

          Directors and Executive Officers of Holdings and Hedstrom   
<PAGE>
            The following table sets forth the age and the position of the
          directors and executive officers of each of Holdings and Hedstrom.

             Name                  Age              Position                
             ---------------       ---    ----------------------------------  
             Robert H. Elman......  60    Chairman of the Board of Directors of
                                          Holdings and Hedstrom
             Alan B. Menkes.......  39    Director of Holdings and Hedstrom
             Jack D. Furst......... 40    Director of Holdings and Hedstrom
             Arnold E. Ditri....... 62    Director of Holdings and Hedstrom;
                                          Chief Executive Officer and
                                          President of Holdings and Hedstrom
             David F. Crowley...... 49    Chief Financial Officer of Holdings
                                          and Hedstrom
             Alastair H. McKelvie.. 67    Executive Vice President - Operations
                                          of Hedstrom
             Michael J. Johnston... 51    Executive Vice President - 
                                          Manufacturing of Hedstrom
             Alfred C. Carosi, Jr.. 51    Executive Vice President - Sales and
                                          Marketing of Hedstrom               

            Robert H. Elman has been the Chairman of the Board of Holdings
          and Hedstrom since July 1997 and has been a director of Holdings
          and Hedstrom since October 1995. Mr. Elman is Chairman and Chief
          Executive of DESA International, Inc. ("DESA International"), a
          manufacturer of indoor and outdoor heating products and specialty
          tools. Mr. Elman has served in that capacity since March 1985 when
          DESA International was formed as part of the leveraged buy out of
          AMCA International, Inc.'s Consumer Products Division. Prior to
          1985, he served as Senior Group Vice President of AMCA
          International with responsibilities for the Consumer, Automotive
          Products, Aerospace, and Food Packaging Divisions. Mr. Elman joined
          AMCA International in 1975 when it acquired DESA Industries, a
          company he assisted in forming in 1969. Prior to forming DESA
          Industries, Mr. Elman was employed with ITT and Singer in various
          management positions in the United States and Europe.

            Alan B. Menkes has been a director of Holdings and Hedstrom since
          October 1995. Mr. Menkes is a Partner of Thomas Weisel Partners
          LLC, a privately held merchant banking firm. From 1996 to 1998, Mr
          Menkes was a Managing Director and Principal of Hicks Muse. Prior
          thereto, Mr. Menkes served as a Vice President of Hicks Muse from
          1992 to 1995. Before joining Hicks Muse in 1992, Mr. Menkes was
          employed for five years by The Carlyle Group, a Washington D.C.-

          based private investment firm, most recently as a Senior Vice
          President.

            Jack D. Furst has been a director of Holdings and Hedstrom since
          July 1997. Mr. Furst is a Managing Director and Principal of Hicks
          Muse and has held such position since 1989. Prior to joining Hicks
          Muse, Mr. Furst was a Vice President and subsequently a Partner of
          Hicks & Haas, Incorporated, a Dallas-based private investment firm
          from 1987 to May 1989. From 1984 to 1986, Mr. Furst was a merger
          and acquisition/corporate finance specialist for The First Boston
          Corporation in New York. Mr. Furst serves on the board of directors
          of Omni America Holdings Corporation, International Wire Holding
          Company, Viasystems Group, Inc., Viasystems, Inc. and Cooperative
          Computing Holding Company, Inc.
<PAGE>
            Arnold E. Ditri was Chairman of the Board of Hedstrom from
          December 1991 until October 1995 and has been a director of
          Holdings and Hedstrom since October 1995. He has been President and
          Chief Executive Officer of Hedstrom since March 1993 and of
          Holdings since October 1995. Mr. Ditri served as President of Ditri
          Associates, Inc. from 1981 until 1994. Ditri Associates, with a
          number of financial partners, specialized in acquiring and building
          under-achieving companies. From 1984 through 1988, Ditri Associates
          built Eagle Industries, Inc. in partnership with Great American
          Management, Inc. of Chicago. From 1961 to 1981, Mr. Ditri was a
          management consultant with Booz Allen & Hamilton and Touche Ross &
          Co. He was a partner in Touche Ross from 1967 to 1981.

            David F. Crowley has been Chief Financial Officer of Hedstrom
          since 1994 and of Holdings since October 1995. Prior to joining
          Hedstrom, Mr. Crowley served as Chief Financial Officer and/or Vice
          President of Finance for various companies owned and operated by
          Ditri Associates. Prior to joining Ditri Associates, from 1986 to
          1990, Mr. Crowley was Treasurer of the Ring Screw Works Company in
          Detroit, Michigan. From 1974 to 1985, he was employed by Price
          Waterhouse where he was a Retail and Banking Industry Specialist
          and served in London, England for two years managing strategic
          planning and technical projects for the firm.

            Alastair H. McKelvie has been Executive Vice President of
          Operations with Hedstrom since 1991. Mr. McKelvie has over 40 years
          of experience chiefly in manufacturing and general management
          positions covering a wide range of products, processes, and
          geographic locations. From 1989 to 1991, Mr. McKelvie served as
          Executive Vice President for various companies owned and operated
          by Ditri Associates. Prior to 1989, he served as Executive Vice
          President of Eagle Industries. From 1965 to 1982, Mr. McKelvie held
          a number of line and staff positions in the Singer Company
          including Vice President of Manufacturing in its International
          Group and General Manager of its two most profitable operating
          divisions.

           Michael J. Johnston has been Executive Vice President of
          Manufacturing of Hedstrom since November 1997. Prior to joining
          Hedstrom, Mr. Johnston served as Senior Vice President and General
          Manager Services Company for Philips Consumer Electronics from 1994
          to 1997.  From 1991 to 1994, he was Vice President of Manufacturing
          for Black & Decker Household Products Group.  From 1989 to 1991,
          Mr. Johnston was Senior Vice President and General Manager of Danly
          Die Set, a division of Connell Ltd. Partnership.  From 1970 to
          1989, he served in various manufacturing-related positions with
          General Electric Co.
<PAGE>
            Alfred A. Carosi, Jr. has been Executive Vice President of Sales
          and Marketing with Hedstrom since December 1996. In this position
          he is also responsible for corporate product development. Prior to
          joining Hedstrom, Mr. Carosi was Senior Vice President of Marketing
          and Marketing Services for the Parker Brothers Division of Hasbro,
          Inc. from 1991 to 1995. From 1990 to 1991, he was Vice President of
          Children's and Family Programs at NBC. Before joining NBC, Mr.
          Carosi served as Senior Vice President of Marketing and Marketing
          Services for Hasbro, Inc. from 1989 to 1990 and for Hasbro's
          Playskool Division from 1987 to 1988. Prior to 1987, Mr. Carosi
          worked in various marketing-related capacities for Procter and
          Gamble, Sara Lee Corp. and Anheuser Busch, Inc.

          Item 11.   Executive Compensation                                  

          Summary Compensation Table

            The following table sets forth the compensation awarded to or
          earned by the President and Chief Executive Officer of Hedstrom and
          each other executive officer of Hedstrom whose total annual salary
          and bonus for the year ended December 31, 1998 was in excess of
          $100,000 (the "Named Executive Officers"). Fiscal years 1997 and
          1998 represent the fiscal years ended December 31, 1997 and
          December 31, 1998. Fiscal year 1996 represents the twelve months 
          ended July 31, 1996.

<TABLE>
                                                                                          Long Term           
                                                                                         Compensation
                                                     Annual Compensation        -------------------------------
                                                  --------------------------     Securities         All Other
                                          Fiscal                                 Underlying       Compensation
        Name and Principal Postion         Year    Salary($)(1)  Bonus($)(2)    Options(#)(3)       ($)(4)
        --------------------------        ------   ------------  ----------     -------------    --------------
        <S>                                <C>       <C>         <C>              <C>               <C>
        Arnold E. Ditri ................   1998      $505,000           _               -           $4,072
         President and Chief Executive     1997       340,000     197,500          456,446           3,791
          Officer                          1996       333,938           _          543,544           3,205

        David F. Crowley(5) ............   1998       171,900           -                -           4,876
          Chief Financial Officer          1997       121,900      48,760           28,233             251
                                           1996       107,705          _           271,777             270

        Alfred A. Carosi, Jr. (6).......   1998       239,635          _                 -          25,875
          Executive Vice President -       1997       220,644     90,000           200,000          39,774
           Sales and Marketing             1996        17,917          _           200,000               -

        Alastair H. McKelvie(7).........   1998       130,000          _                 -               -              
          Executive Vice President -       1997        90,000     36,000            28,233           6,408
           Operations                      1996        82,500          -           271,777               -

        Michael J. Johnston (7).........   1998       255,000    127,500                 -         172,839
          Executive Vice President -       1997        29,423          -           400,000               -
           Operations                      1996             -          -                 -               -

</TABLE>
          __________
          (1) Includes the following amounts deferred by Messrs. Ditri,
              Carosi and Johnston, respectively, pursuant to the Company's
              Savings Plan for the following fiscal years: 1998- $23,575,
              $10,000 and $3,433; 1997- $18,837, $10,014 and $0; 1996-
              $15,766, $0, $0 and $0.
<PAGE>
          (2) Amount includes bonuses accrued during each fiscal year but
              paid shortly thereafter.

          (3) All stock option grants were made pursuant to the Company's
              1995 and 1997 Stock Option Plans.
            
          (4) Represents premiums paid by the Company under a group term life
              insurance plan, and the reimbursement of Mr. Johnston's
              relocation expenses in 1998 and Mr. Carosi's relocation
              expenses in 1997.

          (5) Mr. Crowley was named Chief Financial Officer of the Company
              effective November, 1994.

          (6) Mr. Carosi was named Executive Vice President of Sales and
              Marketing of the Company effective December, 1996.

          (7) Mr. Johnston was named Executive Vice President of Operations
              effective November 10, 1997.

          __________

          No option grants were made during the year ended December 31, 1998
          to the named executive officers.
          __________

            The following table summarizes the value of options to acquire
          Holdings Common Stock held by the Named Executive Officers as of
          December 31, 1998.

          Option Exercises and Year-End Option Value Table

                  Aggregated Option Exercises in Last Fiscal Year and
                           Fiscal Year End Option Values(1)

<TABLE>
                                                Number of Securities
                                               Underlying Unexercised         Value of Unexercised
                                                     Options at              In-the-Money Options at
                                                 December 31, 1998             December 31, 1998 (2)
                                            ----------------------------    ---------------------------
                                            Exercisable    Unexercisable    Exercisable   Unexercisable
                                            -----------    -------------    -----------   -------------
                 <S>                         <C>             <C>             <C>            <C>
                 Arnold E. Ditri..........   695,693         304,297         $414,163       $121,719
                 David F. Crowley ........   281,188          18,822          180,419          7,529 
                 Alfred A. Carosi, Jr.....   200,000         200,000          113,333         96,667
                 Michael J. Johnston......   133,333         266,667           53,333        106,667
                 Alastair H. McKelvie ....   281,188          18,922          180,419          7,529
</TABLE>
          __________
          (1) No options were exercised by a Named Executive Officer in 1998.

          (2) Assumes a fair market value of $1.65 per share. Because
              Holdings Common Stock is privately-held, for purposes of the
              calculation of the value of unexercised options as of December
              31, 1998, Hedstrom has assumed a per share fair market value for
              Holdings Common Stock equal to the per share exercise price of
              most recently issued options.
<PAGE>
          Item 12.  Security Ownership of Certain Beneficial Owners 
                    and Management                       

                       STOCK OWNERSHIP AND CERTAIN TRANSACTIONS

          Stock Ownership

            All of the issued and outstanding capital stock of Hedstrom is
          owned by Holdings. The following table sets forth certain
          information regarding the beneficial ownership of the outstanding
          Holdings Common Stock by each person who is known by Holdings to
          beneficially own more than 5% of the Holdings Common Stock and by
          the directors of Holdings and the Named Executive Officers,
          individually, and by the directors and executive officers of
          Holdings as a group as of March 30, 1999.
<TABLE>
                                                                      Shares of Holidings
                                                                          Common Stock
                                                                       Beneficially Owned
                                                                      -------------------
                                                                                     Percent
                                                                        Number of       of
                                                                         Shares       Class
                 <S>                                                  ------------    ------
                 5% Stockholders                                       <C>            <C>
                   HM Parties(1) .................................     56,030,600     82.8%               
                   c/o Hicks, Muse, Tate & Furst Incorporated
                   200 Crescent Court, Suite 1600
                   Dallas, Texas 75201
                 Officers and Directors            
                   Robert H. Elman ................................     1,625,000      2.4%
                   Alan B. Menkes  ................................        36,370       *
                   Jack D. Furst (1)(2) ...........................    55,451,640     82.0%
                   Arnold E. Ditri (3) ............................     4,601,993      6.8%
                   David F. Crowley (4) ...........................       312,767       *
                   Alastair H. McKelvie (5) .......................     2,074,888      3.1%
                   Alfred C. Carosi, Jr. (6) ......................       200,000       *
                   Michael J. Johnston (6) ........................       133,333       *
                   All executive officers and directors as a
                    group (10 persons .............................    64,435,991     95.2%
</TABLE>
          __________
           * Represents less than 1%
          (1) Includes (i) 23,829,000 shares owned of record by HM Fund II, a
            limited partnership of which the sole general partner is HM2/GP
            Partners, L.P., a limited partnership of which the sole general
            partner is Hicks, Muse GP Partners, L.P., a limited partnership
            of which the sole general partner is Hicks, Muse, Tate & Furst
            Fund II Incorporated, a corporation affiliated with Hicks Muse;
            (ii) 31,520,000 shares of Non-Voting Common Stock owned of
            record by HM Fund II which are convertible into shares of
            Holdings Common Stock, on a one-for-one basis, at the option of
            HM Fund II, (iii) 479,400 shares owned of record by Thomas O.
            Hicks; and (iv) 202,200 shares owned of record by four
            children's trusts of which Mr. Hicks serves as trustee. Mr.
            Hicks is a controlling stockholder of Hicks Muse and serves as
            Chairman of the Board, Chief Executive Officer and Secretary of
<PAGE>
            Hicks Muse. Accordingly, Mr. Hicks may be deemed to be the
            beneficial owner of Holdings Common Stock held by HM Fund II.
            John R. Muse, Charles W. Tate, Jack D. Furst, Lawrence D.
            Stuart, Jr.,  and Michael J. Levitt are officers, directors and
            minority stockholders of Hicks Muse and as such may be deemed to
            share with Mr. Hicks the power to vote or dispose of Holdings
            Common Stock held by HM Fund II. Each of Messrs. Hicks, Muse,
            Tate, Furst, Stuart and Levitt disclaims the existence of a
            group and disclaims beneficial ownership of Holdings Common
            Stock not respectively owned of record by him.

          (2) Includes 102,640 shares owned of record by Mr. Furst. Mr. Furst
            disclaims beneficial ownership of shares not owned of record by
            him.

          (3) Includes (i) 3,106,300 shares owned of record by Mr. Ditri,
            (ii) 800,000 shares owned of record by certain members of Mr.
            Ditri's family, and (iii) 695,693 shares subject to options that
            are exercisable within 60 days. Mr. Ditri disclaims beneficial
            ownership of shares not owned of record by him.

          (4) Includes (i) 31,579 shares owned of record by Mr. Crowley and
            (ii) 281,188 shares subject to options that are exercisable
            within 60 days.

          (5) Includes (i) 1,793,700 shares owned of record by Mr. McKelvie
            and (ii) 281,188 shares subject to options that are exercisable
            within 60 days.

          (6) Consists of shares subject to options that are exercisable
          within 60 days.

          Item 13.  Certain Relationships and Related Transactions

          Certain Transactions

          Monitoring and Oversight Agreement

            On October 27, 1995, Holdings and Hedstrom entered into a ten-
          year agreement (the "Monitoring and Oversight Agreement") with
          Hicks, Muse & Co. Partners, L.P. ("Hicks Muse Partners"), pursuant
          to which they pay Hicks Muse Partners an annual fee (initially
          $175,000) for oversight and monitoring services to Holdings and
          Hedstrom. The annual fee is adjustable each July 31st to an amount
          equal to 0.1% of the consolidated net sales of Hedstrom during the
          previous twelve months, but in no event less than $175,000. Mr.
          Furst, director of Holdings and Hedstrom, is a principal of Hicks
          Muse Partners. In addition, Holdings and Hedstrom have agreed to
          indemnify Hicks Muse Partners, its affiliates and their respective
          directors, officers and controlling persons, if any, and, agents
          and employees of Hicks Muse Partners or any of its affiliates from
          and against all claims, liabilities, losses, damages, and expenses,
          including legal fees, arising out of or in connection with the
          services rendered by Hicks Muse Partners in connection with the
          Monitoring and Oversight Agreement.
<PAGE>
            The Monitoring and Oversight Agreement makes available the
          resources of Hicks Muse Partners concerning a variety of financial
          and operational matters. The services that have been and will
          continue to be provided by Hicks Muse Partners could not otherwise
          be obtained by Holdings and Hedstrom without the addition of
          personnel or the engagement of outside professional advisors. In
          management's opinion, the fees provided for under this agreement
          reasonably reflect the benefits received and to be received by
          Holdings and Hedstrom.

          Financial Advisory Agreement

            On October 27, 1995, Holdings and Hedstrom entered into a ten-
          year agreement (the "Financial Advisory Agreement") with
          HM2/Management Partners, L.P. ("HM2"), pursuant to which they paid
          HM2 a cash financial advisory fee of approximately $1.175 million
          as compensation for its services as financial advisor in connection
          with the acquisition of Holdings and Hedstrom by Hicks Muse. HM2
          also will be entitled to receive a fee equal to 1.5% of the
          transaction value (as defined) for each add-on transaction (as
          defined) in which Hedstrom is involved. The term "transaction
          value" means the total value of any add-on transaction (excluding
          any fees payable pursuant to the Financial Advisory Agreement in
          connection with such add-on transaction) including the amount of
          any indebtedness, preferred stock or similar items assumed (or
          remaining outstanding). The term "add-on transaction" means any
          future proposal for a tender offer, acquisition, sale, merger,
          exchange offer, recapitalization, restructuring, or other similar
          transaction directly or indirectly involving Holdings, Hedstrom, or
          any of their respective subsidiaries, and any other person or
          entity.

            Mr. Furst, a director of Holdings and Hedstrom, is a principal of
          HM2. In addition, Holdings and Hedstrom have agreed to indemnify
          HM2, its affiliates and their respective directors, officers and
          controlling persons, if any, and agents and employees of HM2 from
          and against all claims, liabilities, losses, damages, and expenses,
          including legal fees, arising out of or in connection with the
          services rendered by HM2 in connection with the Financial Advisory
          Agreement. The Financial Advisory Agreement makes available the
          resources of HM2 concerning a variety of financial matters. The
          services that have been and will continue to be provided by HM2
          could not otherwise be obtained by Holdings and Hedstrom without
          the addition of personnel or the engagement of outside professional
          advisors. In management's opinion, the fees provided for under this
          agreement reasonably reflect the benefits received and to be
          received by Holdings and Hedstrom.
<PAGE>
          Stockholders Agreement

            The investors who purchased or received Holdings Common Stock in
          connection with or subsequent to the acquisition of Holdings and
          Hedstrom by Hicks Muse and its affiliates (other than persons who
          acquired shares of Holdings Common Stock in connection with
          Holdings Discount Notes offering and their transfers) have entered
          into a stockholders agreement (the "Stockholders Agreement"). The
          Stockholders Agreement grants preemptive rights and certain piggy-
          back registration rights to the parties thereto and contains
          provisions requiring the parties thereto to sell their shares of
          Holdings Common Stock in connection with certain sales of Holdings
          Common Stock by HM Fund II ("drag-along rights") and grants the
          parties thereto other than HM Fund II the right to include a
          portion of their shares of Holdings Common Stock in certain sales
          in which HM Fund II does not exercise its drag-along rights ("tag-
          along rights"). The Stockholders Agreement terminates on its tenth
          anniversary date, although the preemptive rights, drag-along rights
          and tag-along rights contained therein will terminate earlier upon
          the consummation of a registered underwritten public offering of
          Holdings Common Stock by Holdings.

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

          (a) (1) Financial Statements                                      

                  Report of Independent Accountants

                  Consolidated Balance Sheets as of December 31, 1998 and 1997

                  Consolidated  Income  Statements  for  the  Fiscal  Years
                  Ended December 31, 1998 and December 31, 1997, for the Five
                  Months  Ended December 31,  1996 and for  the Fiscal Year
                  Ended July 31, 1996.

                  Consolidated Statements of Cash Flows for the Fiscal Years
                  Ended December 31, 1998 and December 31, 1997, for the
                  Five Months Ended December 31, 1996 and for the Fiscal Year
                  Ended July 31, 1996.

                  Consolidated Statements of Stockholders' Equity for the
                  Fiscal Years Ended December 31, 1998 and December 31, 1997,
                  for the Five Months Ended December 31, 1996 and for the
                  Fiscal Year Ended July 31, 1996.

                  Notes to Consolidated Financial Statements

              (2) Financial Statement Schedule                               

                  Schedule IX - Valuation and Qualifying Accounts and Reserves

                  All other schedules have been omitted because they are not
                  applicable or are not required, or because the required 
                  information has been included in the Consolidated Financial
                  Statements or Notes thereto.
<PAGE>
              (3) Exhibits                                                    
                                      Description of Exhibits                
                                      -----------------------

                   (1)   2.1 - Agreement and Plan of Merger, dated as of
                               April 10, 1997, among Hedstrom Corporation
                               HC Acquisition Corp. and ERO, Inc.

                   (1)   3.1 - Restated Certificate of Incorporation of
                               Hedstrom Holdings, Inc., as filed with the
                               Secretary of State of the State of Delaware
                               on October 27, 1995.

                   (1)   3.2 - Certificate of Amendment of Restated
                               Certificate of Incorporation of Hedstrom
                               Holdings,
                               Inc., as filed with the Secretary of State of
                               the State of Delaware on June 6, 1997.

                   (1)   3.3 - Restated Bylaws of Hedstrom Holdings, Inc.

                   (1)   3.4 - Certificate of Incorporation of New Hedstrom
                               Corp., as filed with the Secretary of
                               State of the State of Delaware on November 20,
                               1990.

                   (1)   3.5 - Certificate of Amendment of the Certificate
                               of Incorporation of New Hedstrom Corp., as
                               filed with the Secretary of State of the State
                               of Delaware on January 14, 1991.

                   (1)   3.6 - By-Laws of Hedstrom Corporation.

                   (1)   3.7 - Amended and Restated Certificate of
                               Incorporation of ERO, Inc., as filed as Annex
                               A to that certain Certificate of Ownership and
                               & Merger filed with the Secretary of State of
                               the State of Delaware on June 12, 1997 merging
                               HC Acquisition Corp. with and into
                               ERO, Inc.

                   (1)  3.8 -  Amended and Restated Bylaws of ERO, Inc.

                   (1)   3.9 - Certificate of Incorporation of ERO
                               Industries, Inc., as filed as Annex A to that
                               certain Certificate of Merger filed with the
                               Secretary of State of the State of Delaware on
                               July 15, 1988 merging GTC Leisure, Inc. with
                               and into ERO Industries, Inc.

                   (1)  3.10 - By-Laws of ERO Industries, Inc.

                   (1)  3.11 - Articles of Incorporation of ERO Marketing,
                               Inc., as filed with the Secretary of State
                               of the State of Illinois on January 21, 1992.

                   (1)  3.12 - Bylaws of ERO Marketing, Inc.
<PAGE>
                   (1)  3.13 - Certificate of Incorporation of Priss Prints
                               Acquisition Corp., as filed with the Secretary
                               of State of the State of Delaware on September
                               19, 1986.

                   (1)  3.14 - Certificate of Amendment of Certificate of
                               Incorporation of Priss Prints Acquisition
                               Corp., as filed with the Secretary of State of
                               the State of Delaware on November 5, 1986.

                   (1)  3.15 - By-Laws of Priss Prints, Inc.

                   (1)  3.16 - Certificate of Incorporation of Impact, Inc.,
                               as filed with the Secretary of State of the
                               State of Delaware on November 3, 1993.

                   (1)  3.17 - By-Laws of Impact, Inc.

                   (1)  3.18 - Certificate of Incorporation of ERO Canada,
                               Inc., as filed with the Secretary of State of
                               the State of Delaware on August 3, 1994.

                   (1)  3.19 - By-Laws of ERO Canada, Inc.

                   (1)  3.20 - Certificate of Incorporation of ERO NY
                               Acquisition, Inc., as filed with the Secretary
                               of State of the State of Delaware on October
                               12,1995.


                   (1)  3.21 - Certificate of Amendment of Certificate of
                               Incorporation of ERO NY Acquisition,
                               Inc., as filed with the Secretary of State of
                               the State of Delaware on January 23, 1996.

                   (1)  3.22 - By-Laws of Montreal Industries, Inc.

                   (1)   4.1 - Indenture, dated as of June 1, 1997, among
                               Hedstrom Corporation, Hedstrom
                               Holdings, Inc., the Subsidiary Guarantors
                               identified on the signature pages thereto and
                               IBJ Schroder Bank & Trust Company, as Trustee.

                   (1)   4.2 - Form of Senior Subordinated Note.

                   (1)   4.3 - Indenture, dated as of June 1, 1997, among
                               Hedstrom Holdings, Inc. and United States
                               Trust Company of New York, as Trustee.
                               
                   (1)   4.4 - Form of Discount Note.

                   (1)   4.5 - [Intentionally Omitted]

                   (1)   4.6 - Registration Rights Agreement, dated as of
                               June 9, 1997, among Hedstrom Corporation and
                               Hedstrom Holdings, Inc., as Issuers, and Credit
                               Suisse First Boston Corporation, Societe
                               Generale Securities Corporation and UBS
                               Securities LLC, as Initial Purchasers.
<PAGE>
                   (1)   4.7 - Common Stock Registration Rights Agreement,
                               dated as of June 9, 1997, among Hedstrom
                               Holdings, Inc. and Credit Suisse First
                               Boston Corporation, Societe Generale
                               Securities Corporation and UBS Securities LLC,
                               as Initial Purchasers.

                   (1)  10.1 - Credit Agreement, dated as of June 12, 1997,
                               among Hedstrom Corporation Hedstrom Holdings,
                               Inc., the Lenders from time to time parties
                               thereto, Societe Generale, as Documentation
                               Agent, UBS Securities LLC, as Syndication
                               Agent, and Credit Suisse First Boston
                               Corporation, as Administrative Agent.
                   (1)  10.2 - Form of Tranche A Note.

                   (1)  10.3 - Form of Tranche B Note.

                   (1)  10.4 - Form of Revolving Credit Note.

                   (1)  10.5 - Form of Swing Line Note.

                   (1)  10.6 - Master Guarantee and Collateral Agreement,
                               dated as of June 12, 1997, made by

                   (1)  10.7 - Open  End  Mortgage,  dated  as  of  June
                               12,  1997,  from   Hedstrom   Corporation,
                               as Mortgagor, to Credit Suisse First Boston
                               Corporation, as Mortgagee.

                   (1)  10.8 - Open End Mortgage and Security Agreement,
                               dated as of June 12, 1997, from Hedstrom
                               Corporation, as Mortgagor, to Credit Suisse
                               Corporation, as Mortgagee.

                   (1)  10.9 - Deed and Security Agreement, dated as of June
                               12, 1997, from ERO Industries, Inc., as
                               Grantor, to Credit Suisse First Boston
                               Corporation, as Grantee.

                   (1) 10.10 - Mortgage of Shares, dated as of June 12,
                               1997, between Hedstrom Corporation, as
                               Chargor, and Credit Suisse First Boston, as
                               Administrative Agent.

                   (1) 10.11 - Mortgage of Shares, dated as of June 12,
                               1997, between Montreal Industries, Inc., as
                               Chargor, and Credit Suisse First Boston, as
                               Administrative Agent.

                   (1) 10.12 - Stockholders Agreement, dated as of October
                               27, 1995, among Hedstrom Holdings and
                               the holders listed on the signature pages
                               thereof.
<PAGE>
                   (1) 10.13 - First Amendment to Stockholders Agreement,
                               dated as of June 1, 1997, between
                               Hedstrom Holdings, Inc. and Hicks, Muse,
                               Tate & Furst Equity Fund II, L.P.

                   (1) 10.14 - Form of Subordinated Note issued by Hedstrom
                               Holdings, Inc.

                   (1) 10.15 - Amendment and Waiver, dated as of June 12,
                               1997, between Hedstrom Holdings, Inc.
                               and Alan Plotkin, as Holder Representative,
                               regarding the Subordinated Notes of
                               Hedstrom Holdings, Inc.

                   (1) 10.16 - Form of Promissory Note (Series A) issued by
                               Hedstrom Holdings, Inc.

                   (1) 10.17 - Amendment and  Waiver,  dated  as  of  June
                               12,  1997,  between  Hedstrom  Holdings,
                               Inc. and Alan Plotkin, as  Holder
                               Representative, regarding  the  Promissory
                               Notes (Series A) of Hedstrom Holdings, Inc.

                   (1) 10.18 - Form of Promissory Note (Series B) issued by
                               Hedstrom Holdings, Inc.

                   (1) 10.19 - Amendment and Waiver, dated as of June 12,
                               1997, between Hedstrom Holdings, Inc.
                               and Alan Plotkin, as Holder Representative,
                               regarding the Promissory Notes (Series B)
                               of Hedstrom Holdings, Inc.

                   (1) 10.20 - Executive Employment Agreement, dated as of
                               October 27, 1995, among Hedstrom
                               Holdings, Inc., Hedstrom Corporation and
                               Arnold E. Ditri

                   (1) 10.21 - Executive Employment Agreement, dated as of
                               October 27, 1995, between Hedstrom
                               Corporation and Alastair McKelvie.

                   (1) 10.22 - Monitoring and Oversight Agreement, dated as
                               of October 27, 1995, among Hedstrom
                               Holdings, Inc., Hedstrom Corporation and Hicks,
                               Muse & Co. Partners, L.P.

                   (1) 10.23 - Financial Advisory Agreement, dated as of
                               October 27, 1995, among Hedstrom
                               Holdings, Inc., Hedstrom Corporation and
                               HM2/Management Partners, L.P.

                   (1) 10.24 - Hedstrom Holdings, Inc. 1995 Stock Option
                               Plan.
                         
                   (2) 10.25 - The Third Restatement of ERO Industries,
                               Inc. Retirement Income Plan (401(k)).
<PAGE>
                   (4) 10.26 - The Hedstrom Corporation Tax Sheltered
                               Savings Plan (401(k)).

                   (4) 10.27 - 1997 Hedstrom Holdings, Inc. Stock Option
                               Plan.

                   (4) 10.28 - Amendment Number One, dated November 11,
                               1997, and Amendment Number Two, dated
                               December 19, 1997, to the Credit Agreement,
                               dated as of June 12, 1997, among Hedstrom
                               Corporation, Hedstrom Holdings, Inc., the
                               financial institutions party thereto
                               and Credit Suisse First Boston, as agent.

                  (4)  10.29 - Specimen and listing of all license
                               agreements between Disney Enterprises, Inc. and
                               Hedstrom Corporation and its Subsidiaries.

                  (3)  10.30 - Second Amendment to the Third Restatement of
                               ERO Industries, Inc. Retirement Income Plan
                               (401(k)).

                  (5)  10.31 - Stock Purchase Agreement, dated July 24,
                               1998 by and between Hedstrom Corporation
                               and Richard Boyer.

                  (5)  10.32 - Amendment Number Three dated July 24, 1998
                               to the Credit Agreement, dated as of
                               June 12, 1997, among Hedstrom Corporation,
                               Hedstrom Holdings, Inc., the financial
                               institution party thereto and Credit Suisse
                               First Boston, as agent.

                  (5)  10.33 - Collective Bargaining Agreement,  dated
                               October 3, 1998 by and between Hedstrom 
                               Corporation and The United Steel Workers of
                               America, AFL-CIO-CLC, on behalf of
                               its affiliated Local Union No. 524L

                       10.34 - Amendment Number Four dated December 30, 1998
                               to the Credit Agreement, dated as of June 12,
                               1997, among Hedstrom Corporation, Hedstrom
                               Holdings, Inc., the financial institutions
                               party thereto and Credit Suisse First Boston,
                               as agent.

                        11.1 - Computation of Earnings Per Share.

                  (1)   21.1 - Subsidiaries of the Company.

                        23.1 - Consent of Arthur Andersen LLP, independent
                               auditors.

                        27.1 - Financial Data Schedule
               ____________
               (1)       Incorporated by reference to the respective exhibit
                         to Holdings' and Hedstrom's Registration Statement on
                         Form S-1 (File Nos. 333-32385-05 and 333-32385).
<PAGE>
               (2)       Incorporated by reference to ERO, Inc.'s Report on
                         Form 10-K (File No. 0-19942) for the fiscal
                         year ended December 31, 1993.

               (3)       Incorporated by reference to ERO, Inc.'s Report on
                         Form 10-K (File No. 0-19942) for the fiscal
                         year December 31, 1996.

               (4)       Incorporated by reference to Holdings' and
                         Hedstrom's Report on Form 10-K (File Nos. 333-32385-05
                         and 333-32385) for the fiscal year December 31, 1997.

               (5)       Incorporated by reference to Holdings' and
                         Hedstrom's Report on Form 10-Q (File Nos. 333-32385-05
                         and 333-32385) for the quarterly period ended June 30,
                         1998.

          (b)    Reports on Form 8-K                                

                 No reports on Form 8-K were filed by the Company during the
                 fourth quarter of 1998.
<PAGE>>
                                     SIGNATURE PAGE

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, each of the Co-Registrants has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Mount
Prospect, State of Illinois, on the 30th day of March, 1999.

                               HEDSTROM HOLDINGS, INC.
                               HEDSTROM CORPORATION

                                   /s/ ARNOLD E. DITRI
                               By  -------------------
                                     Arnold E. Ditri
                                     President and  Chief
                                     Executive Officer

Pursuant to the requirements of the Securities Act of 1934, as
amended, this report has been signed by the following persons in
the capacities and on the dates indicated.

Signature               Title                               Date
-------------------     ---------------------------------   --------------
/s/  ROBERT H. ELMAN    Chairman of the Board of Directors  March 30, 1999
---------------------   Direcotr of the Co-Registrants 
     Robert H. Elman    listed above
                        

/s/  ARNOLD E. DITRI    President, Chief Executive Officer  March 30, 1999
---------------------   and Director of the Co-Registrants
     Arnold E. Ditri    listed above
                        (Principal Executive Officer)
                       

/s/  DAVID F. CROWLEY   Chief Financial Officer of the      March 30, 1999
---------------------   Co-Registrants listed above
     David F. Crowley   (Principal Financial and
                        Accounting Officer)
                       

/s/  ALAN B. MENKES     Director of the Co-Registrants      March 30, 1999
---------------------   listed above
     Alan B. Menkes     

/s/  JACK D. FURST      Director of the Co-Registrants      March 30, 1999
---------------------    listed above
     Jack D. Furst     

<PAGE>
<TABLE>
                                           Hedstrom Holdings, Inc.
                                                Schedule IX
                                Valuation and Qualifying Accounts and Reserves
                   As of and for the Fiscal Years Ended December 31, 1998, December 31, 1997
                                                and as of and
                                 for the Fiscal Year Ended July 31, 1996 

                                                                   Additions                 Deletions
                                                              --------------------   -----------------------
                                                                                                   Foreign
                                                  Balance at  Charged to  Charged                 Currency   Balance at
                                                  Beginning   Costs and   to Other               Translation     End
                                                   of Year    Expenses    Accounts    Write-offs  Adjustment   of Year
                                                  ----------  ----------  ----------   ----------  ---------- ----------         
      <S>
      1998
                                                 <C>         <C>         <C>          <C>          <C>       <C>
      Allowance for doubtful accounts ........   $2,297,000  $3,183,000   $151,000(3)  $ (344,000)  $(7,000)  $5,280,000
      Accumulated amortization of goodwill ...    2,384,000   4,957,000          -              -         -    7,341,000
      Amortization ofdeferred financing fees..    3,246,000   6,475,000          -              -         -    9,721,000
      Accumulated amortization of deferred
        charges ..............................    1,629,000     743,000          -              -         -    2,372,000

      1997

      Allowance for doubtful accounts..........     505,000   1,258,000    751,000(1)    (196,000)  (21,000)   2,297,000
      Accumulated amortization of goodwill.....           -   2,384,000          -              -         -            -
      Amortization of deferred financing fees..           -           -          -              -         -            -
      Accumulated amortization of deferred
        charges ...............................      747,000    882,000          -              -         -    1,629,000

      1996
      Allowance for doubtful accounts...........     405,000     76,000          -        (39,000)   (1,000)     441,000
      Accumulated amortization of deferred
         charges................................   2,907,000    520,000          -     (3,030,000)(2)     -      397,000

          (1) Represents reserve established on the opening balance sheet
          pursuant to the ERO, Inc. acquisition.

          (2) Represents a write-off in connection with the Company's 1995
          Recapitalization.

          (3) Represents reserve established on the opening balance sheet
          pursuant to the Backyard Products, Ltd. acquisition.
</TABLE>