<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                    For the fiscal year ended AUGUST 30, 1997

                         Commission file number 0-21800

                       NORWOOD PROMOTIONAL PRODUCTS, INC.
             (Exact name of registrant as specified in its charter)

             TEXAS                                               74-2553074
(State or other Jurisdiction of                             (I.R.S. Employer
 incorporation or organization)                             Identification No.)

106 E. SIXTH STREET, SUITE 300, AUSTIN, TEXAS                       78701
     (Address of principal executive offices)                    (Zip Code)

       Registrant's telephone number, including area code: (210) 341-9440

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

           Securities registered pursuant to Section 12(g) of the Act:
                           COMMON STOCK, NO PAR VALUE
                                (Title of Class)

     INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIODS 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. 
          ---

     The aggregate market value of the voting stock held by non-affiliates of
the registrant as of November 24, 1997 was approximately $56,100,000 based upon
the last  sales price on November 24, 1997 on the NASDAQ National Market for
the Company's common stock. The registrant had 5,070,043 shares of Common Stock
outstanding on November 24, 1997.

                       DOCUMENTS INCORPORATED BY REFERENCE

     PORTIONS OF REGISTRANT'S DEFINITIVE PROXY STATEMENT TO BE FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION NOT LATER THAN 120 DAYS AFTER THE CLOSE OF
THE REGISTRANT'S FISCAL YEAR ARE INCORPORATED BY REFERENCE INTO PART III OF THIS
FORM 10-K.


<PAGE>   2

                       NORWOOD PROMOTIONAL PRODUCTS, INC.
                               INDEX TO FORM 10-K
                           YEAR ENDED AUGUST 30, 1997

<TABLE>
<CAPTION>
                                                                                               PAGE NO.
                                                                                               --------

<S>                                                                                              <C>
                                     PART I

Item 1.   Business                                                                                 3
Item 2.   Properties                                                                              18
Item 3.   Legal Proceedings                                                                       19
Item 4.   Submission of Matters to a Vote of Security Holders                                     19

                                     PART II

Item 5.   Market for Registrant's Common Equity and Related Shareholder Matters                   19
Item 6.   Selected Financial Data                                                                 19
Item 7.   Management's Discussion and Analysis of Financial Condition and Results of
               Operations                                                                         21
Item 7A.  Quantitative and Qualitative Disclosures about Market Risk                              27
Item 8.   Financial Statements and Supplementary Data                                             28
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial
               Disclosure                                                                         51

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant                                      51
Item 11.  Executive Compensation
Item 12.  Security Ownership of Certain Beneficial Owners and Management                          51
Item 13.  Certain Relationships and Related Transactions                                          51

                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K                         51
</TABLE>


                                       2
<PAGE>   3

THE DISCUSSION IN THIS DOCUMENT CONTAINS ANALYSIS OR TRENDS AND OTHER FORWARD
LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF
1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. THESE STATEMENTS INVOLVE MANAGEMENT ASSUMPTIONS AND ARE SUBJECT TO
RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED UNDER "BUSINESS-RISK FACTORS"
BELOW.

PART I

ITEM 1. BUSINESS

     References herein to the "Company" mean Norwood Promotional Products, Inc.,
its predecessors, and its and their subsidiaries, unless the context requires
otherwise.

GENERAL

     The Company is a leading supplier of promotional products in the United
States. The Company has grown, through internal growth and selective
acquisitions, from sales of $49.3 million in fiscal 1993 to $175.8 million in
fiscal 1997, and from income from continuing operations of $1.8 million in
fiscal 1993 to $6.1 million in fiscal 1997. The Company has been active in
expanding its product lines in the major product categories and price points in
the promotional products industry through a series of acquisitions. The Company
acquired the certain assets of Wesburn Golf and Country Club, Inc. (the "Wesburn
acquisition") and DM Apparel, Inc. (the "DMA acquisition") in February 1997. The
Company acquired Tee-Off Enterprises, Inc. (the "Tee-Off acquisition") and Alpha
Products, Inc. (the "Alpha acquisition") in January and April 1996,
respectively. The Company acquired the assets of The Bob Allen Companies, Inc.
(the "Bob Allen acquisition"), Designer Plastics, Inc. (the "Designer Line
acquisition"), BTS Group (the "BTS acquisition") and Ocean Specialty
Manufacturing Corporation (the "Ocean acquisition") in March, June, July and
November, 1995, respectively. These acquisitions followed the purchases of the
assets of Key Industries, Inc. (the "Key acquisition") in May 1994 and Barlow
Specialty Advertising, Inc. (the "Barlow acquisition") in May 1992 and the
purchase of all of the stock of ArtMold Products Corporation (the "ArtMold
acquisition") in July 1994.

     The Company's operating companies and their major product lines are:

<TABLE>
<CAPTION>
Group   Operating Companies                       Product Lines
-----   -------------------                       -------------

<S>                                               <C>
RADIO CAP GROUP:
    Radio Cap Company, Inc. (RCC)                 RCC(TM), Trendco(TM), Koozie(R) and Alpha Products(TM)
    Air-Tex Corporation (Air-Tex)                 Air-Tex(R), Designer Line(R)_and DM Apparel(TM)
BARLOW GROUP:
    Barlow Promotional Products, Inc. (Barlow)    Barlow(R) , BTS(TM), Value Line(TM) and Salm(R)
    ArtMold Products Corporation (ArtMold)        The Action Line(R), Tee-Off(TM) and Wesburn Golf(TM)
    Key Industries, Inc. (Key)                    Econ-O-Line(R) and The California Line(TM)
</TABLE>



                                       3
<PAGE>   4

PROMOTIONAL PRODUCTS INDUSTRY

     Promotional products are functional items imprinted with the name, logo or
message of an advertiser and are typically given free by the advertiser to a
target audience to generate goodwill and repeat advertising exposure. The United
States market for promotional products, measured by sales of distributors to
advertisers, has grown from approximately $4.5 billion in 1989 to approximately
$9.5 billion in 1996, according to data published by The Counselor, an industry
trade publication. The promotional products industry is highly fragmented, with
the 20 largest suppliers accounting for approximately 20% of total industry
sales in 1996. The industry includes over 2,500 suppliers, including the
Company, who decorate and customize products, and over 15,000 independent
distributors who solicit orders from and sell directly to advertisers.

     The Company believes that the growth of the industry in recent years has
resulted from the greater acceptance by advertisers of promotional products as
an important form of advertising and an increase in the number of distributors.
Promotional product advertising generally represents a lower cost alternative to
more traditional advertising media and, because promotional products are
designed for use or display, they provide repeat exposure of an advertiser's
message to a targeted audience. Some of the largest purchasers of promotional
products are healthcare providers, banks, insurance agencies, pharmaceutical and
high technology companies.

     Within the promotional products industry, there are two principal
distribution channels: independent distributors and mail order companies.
Independent distributors solicit orders from and sell directly to advertisers.
Mail order companies sell directly to advertisers through corporate catalogs and
other direct mail advertising, without using outside sales personnel. Orders by
advertisers placed through distributors and by direct mail typically are for
small quantities of custom-imprinted items and require prompt delivery. The
Company sells its products to independent distributors and mail order companies.
Although it periodically evaluates different distribution methods, the Company
currently does not sell directly to advertisers.

STRATEGY

     The Company's business strategy is to continue to improve its market
position in each of its existing product lines and to expand into new product
lines and distribution channels. Key elements of this strategy include: (i)
expanding product offerings by developing new products and innovative imprinting
and decorating techniques and applications; (ii) increasing penetration of
existing markets through enhanced customer service and coordinated marketing
efforts among its operating companies; (iii) making selective acquisitions to
add new product lines and expand distribution; (iv) introducing new management
and operating systems to reduce order processing times, increase production
efficiency and increase processing capacities of existing and acquired
businesses; and (v) exploring new markets, primarily through international
marketing and alternative distribution arrangements.

Expanding Product Offerings

     The Company has increased the number of products and product lines it
offers through acquisitions and by developing new products and new imprinting
and decorating techniques and applications. Since 1983, the Company has expanded
its product offerings from approximately ten individual products within one
product category to approximately 2,400 products in eight major product
categories. The broad range of its product offerings, in part, has enabled the
Company to expand its primary customer base to more than 11,900 independent
distributors.



                                       4
<PAGE>   5

Enhancing Customer Service and Coordinated Marketing

     Providing a high level of service to customers is a key element of the
Company's marketing strategy. The Company offers toll-free telephone service for
orders and other customer needs and places an emphasis on customer service by
sales and order-entry staff. Several of the Company's largest operating
companies have formed key account groups to provide customer service and sales
support to their largest distributors. The Company has also installed systems
providing credit approval at all operating companies for each distributor who
has an account with any other operating company.

     While each operating company handles its own customer service, the Company
has begun to coordinate sales and marketing activities among the operating
companies. Over the last two years, the Company has realigned its operating
companies and product lines into two groups: the Radio Cap Group and the Barlow
Group. This realignment is designed to allow the Company's core operating
companies to provide sales and marketing support for smaller operating companies
and new acquisitions. Management of the Company believes that the realignment of
product lines into strategic groups will allow the Company to better coordinate
sales and marketing of all product lines to the Company's large base of
distributors.

     The Company has introduced several catalogs on top-selling products from
each of the Company's product lines to demonstrate the scope of the Company's
product offerings and to introduce its products to distributors familiar with
some but not all of the operating companies and their respective product lines.
Sales staff of the operating companies also make joint sales presentations to
distributors. The Company believes that its coordinated marketing efforts will
lead to increased awareness of the Company's brands by distributors and enable
the Company to obtain increased revenue from distributors for its existing
product lines, new products and newly acquired brands.

Making Selective Acquisitions

     The Company intends to continue its strategy of making selective
acquisitions to strengthen its position in the fragmented promotional products
industry and to add new product lines and expand distribution. The Company
believes that the competition for the acquisition of suppliers within the
industry is limited. The Company is engaged in ongoing evaluations of and
discussions with third parties regarding possible acquisitions. At the date of
this report, the Company had no binding agreements or commitments with respect
to any acquisitions.

Improving Management and Operating Systems

     The promotional products industry is characterized by the processing of a
large number of small, custom- imprinted orders. The Company has become a leader
in the promotional products industry through the rapid fulfillment of customer
orders and in responsive and professional customer service. The Company has
implemented advanced management systems, such as Manufacturing Resource Planning
("MRP II"), a pull order-flow processing system and statistical process
controls. Through these measures, the Company believes it has achieved a
significant reduction in order processing times, increased production efficiency
and increased processing capacities. In addition, various managers from the
operating companies meet regularly to exchange information regarding sales and
marketing trends, imprinting methods, information systems, new technologies and
training.



                                       5
<PAGE>   6

ACQUISITIONS

     The promotional products industry is highly fragmented and is characterized
by numerous suppliers and independent distributors. There are over 2,500
suppliers in the industry, most of which are small, closely held or family owned
businesses offering a limited number and range of products. To date, the
industry has not experienced significant consolidation.

     The Company seeks acquisitions which it believes will enable it to
accomplish some or all of the following objectives: (i) expand its product
offerings by adding new brands, penetrate a new product category, expand the
number and variety of products in an existing category or cover a major price
point in a specific product category; (ii) broaden its distribution network; or
(iii) leverage its management and operating systems to improve the processing
efficiency of recently acquired businesses.

     Since 1983, the Company has diversified its product lines and increased its
market presence through internal growth and a series of strategic acquisitions.
The Company has completed the following acquisitions since 1992:

     o    In May 1992, the Company completed the Barlow acquisition, including
          the Barlow (R) and Salm (R) product lines, adding new products that
          enabled the Company to enter the recognition awards and business gifts
          and pocket specialties and accessories product categories and to
          expand its product offerings to cover all of the major price points in
          the promotional products industry.

     o    In April 1993, the Company acquired a ceramic mug imprinting facility
          in Pittsburgh, Pennsylvania. The addition of this facility for mugs
          and glassware, which incur significant freight charges when shipped
          over long distances, has enabled the Company to be more price
          competitive in the Northeastern United States.

     o    In May 1994, the Company completed the Key acquisition, in which it
          acquired a supplier of economically priced promotional products such
          as paper products, plastic items, pens, magnets and buttons. The
          addition of these products augmented the Company's pocket specialties
          and desk and business accessories categories.

     o    In July 1994, the Company completed the ArtMold acquisition, expanding
          its offerings in the writing instruments, pocket specialties and desk
          accessories categories, and adding a line of golf items such as tees,
          ball markers and divot repair tools.

     o    In March and June 1995, the Company entered the textiles product
          category by adding sport, travel, and tote bags to its product lines
          with the Air-Tex and Designer Line acquisitions.

     o    In July 1995, the Company completed the BTS acquisition, in which it
          acquired a supplier of high-quality recognition and gift items. This
          acquisition further expanded the Company's high-end recognition awards
          and business gifts product line.

     o    In November 1995, the Company completed the Ocean acquisition
          expanding the Company's pocket

                                       6
<PAGE>   7

          specialties and desk and business accessories lines.

     o    In January 1996, the Company completed the Tee-Off acquisition in
          which it acquired a supplier of custom imprinted golf balls and
          accessories, which augmented the golf accessories offered by the
          Company.

     o    In April 1996, the Company completed the Alpha acquisition, in which
          it acquired a supplier of custom imprinted drinkware, further
          expanding the Company's product line of insulated beverage products,
          mugs and glassware.

     o    In February 1997, the Company completed the Wesburn acquisition, in
          which it acquired a supplier of custom imprinted golf balls. With the
          Tee-Off and Wesburn acquisitions, the Company has become a leading
          supplier of custom imprinted golf balls.

     o    In February 1997, the Company completed the DMA acquisition, in which
          it acquired a supplier of jackets, further expanding the Company's
          wearables product category with a new product line.

PRODUCT CATEGORIES

     The Company currently supplies approximately 2,400 custom-imprinted items
to over 11,900 independent distributors nationwide through its operating
companies. The Company's products are primarily marketed at price points ranging
from $0.50 to $50.00 in eight general categories:

     o    Sporting goods and leisure products: Koozie (R) beverage insulators,
          sport bottles, cups and insulated coolers, custom imprinted golf
          balls.

     o    Wearables: golf, fashion and baseball-style caps and other headwear,
          jackets.

     o    Mugs and glassware: porcelain, ironstone and plastic mugs, glassware.

     o    Textiles: sport, travel and tote bags.

     o    Writing instruments: pens, pencils, markers and gift sets.

     o    Recognition awards and business gifts: rosewood, walnut and laminated
          wood awards, crystal awards, plaques, brass coasters, briefcases and
          portfolios, and other business gift items.

     o    Pocket specialties and accessories: tape measures, pocket knives, key
          chains and holders, buttons, badges, magnets and lapel pins, and other
          pocket specialty items.

     o    Desk and business accessories: desk accessories, note pads and other
          paper products, and personal gift items.

     The following table sets forth the amount and percentages of the Company's
sales for its product categories over the past three fiscal years.


                                       7
<PAGE>   8

<TABLE>
<CAPTION>
                                                               FISCAL YEAR
                                                          (Dollars in thousands)

                                                 1995                 1996 (b)              1997 (b)
                                        -------------------- ---------------------  --------------------
                                                      % OF                   % OF                  % OF
                                         SALES       SALES    SALES         SALES    SALES        SALES
                                        -------     -------- --------      -------  --------    --------

<S>                                    <C>            <C>    <C>             <C>   <C>            <C>  
Sporting goods and leisure products    $ 22,678        21.8% $ 34,200        23.7% $ 56,019        31.9%
Wearables                                14,523        14.0    15,817        11.0    16,195         9.2
Mugs and glassware                       13,027        12.5    17,180        11.9    23,294        13.2
Textiles                                  9,387         9.0    19,997        13.9    20,671        11.8
Writing instruments                       8,672         8.4     8,872         6.2     9,375         5.3
Recognition and business gifts            1,231         1.2     6,049         4.2     6,081         3.5
Pocket specialties and accessories
 and desk and business accessories(a)    34,341        33.1    41,932        29.1    44,200        25.1
                                       --------     -------  --------      ------  --------      ------

       Total                           $103,860       100.0% $144,048       100.0% $175,835       100.0%
                                       ========     =======  ========      ======  ========      ======
</TABLE>

(a)  Separate results for these two product categories are not available for the
     periods presented.

(b)  Excludes sales from the Alpha Products retail division, which has been
     discontinued.

Sporting Goods and Leisure Products

     The Company's sporting goods and leisure products consist primarily of
Koozie (R) insulated beverage products, sports bottles and custom imprinted golf
balls.

     The Company acquired its Koozie (R) product line in 1984, which originally
consisted of a single product, the Koozie (R) beverage insulator. A Koozie (R)
beverage insulator is a customized colored foam sleeve with a bottom that fits
around a beverage can or bottle for insulation. The Company believes it is the
leading supplier of beverage insulators in the United States promotional
products industry. Since 1984, the Company has expanded this product line to
include 27 products marketed in a variety of colors and styles. Koozie(R)
products accounted for $24.3 million, or 13.8%, of the Company's sales in fiscal
1997.

     Through the Alpha acquisition in fiscal 1996, the Company now offers a
wider variety of sports bottles and other insulated beverage products. Sales
from the Alpha Products promotional products division amounted to $17.5 million
in fiscal 1997.

     Through the Tee-Off acquisition in fiscal 1996 and the Wesburn acquisition
in fiscal 1997, the Company expanded its golf accessories line to include custom
imprinted golf balls. The Company believes it is a leading supplier of custom
imprinted golf balls in the United States promotional products industry. Sales
from the Tee-Off and Wesburn Golf divisions amounted to $22.6 million in fiscal
1997.

Wearables

     The Company's wearables product line consists primarily of golf, fashion
and baseball-style headwear in

                                       8
<PAGE>   9

a wide variety of styles, colors and fabrics. The Company believes that it is a
leading headwear supplier in the United States promotional products industry. A
substantial majority of the Company's headwear is imported, allowing the Company
to compete at lower price points for these items. The Company also manufactures
headwear to enable it to produce customized products with short lead times.
These products are sold primarily under the RCC (TM) brand.

     In February 1997, the Company expanded into the jacket product line with
the DMA acquisition. With the DMA acquisition, the Company plans to offer both
import and domestic jackets in a variety of styles, colors and fabrics. Sales
from the DM Apparel division amounted to $1.9 million in fiscal 1997.

Mugs and Glassware

     The Company offers a variety of styles of porcelain, ironstone and plastic
mugs, along with glassware. The Company believes that it is a leading supplier
of mugs in the United States promotional products industry. Styles vary in size,
shape and color. In addition to standard color decorations, the Company offers
advertisers the ability to customize their artwork through the use of special
decorations on the mugs, including 22-carat gold and platinum imprints,
microwaveable gold imprints, iridescent inks and certain brighter colored inks.

Textiles

     Through the Air-Tex and Designer Line acquisitions in fiscal 1995, the
Company entered the textiles product category by adding sport, travel, and tote
bags. This product line consists of both import and domestic bags marketed under
the tradenames Air-Tex (R) and Designer Line (R).

Writing Instruments

     In fiscal 1991, the Company began marketing economically priced writing
instruments, including pens, pencils, and gift sets, along with retractable pens
and highlighters. In fiscal 1992, with the Barlow acquisition, the Company
expanded into marketing higher-priced writing instruments. Through the Key and
ArtMold acquisitions in fiscal 1994, the writing instrument lines were further
expanded to include mid-priced styles which rounded out all price point ranges.

Recognition Awards and Business Gifts

     Through the Barlow acquisition in May 1992, the Company began to offer its
recognition and award items and business gifts generally under the
Salm(R)_brand. The products in this line make creative and distinctive awards
and gifts and are generally highly customized. Because it is a high-end product
line, the recognition awards and business gifts are more oriented toward
corporate gifts and awards than strictly to advertising uses. With the BTS
acquisition in fiscal 1995, the Company expanded into products incorporating
decorative brass medallions in items such as coasters, wall and desk plaques,
picture frames, and other custom products.

Pocket Specialties and Accessories

     Through the Barlow acquisition in May 1992, the Company began to offer
pocket specialties and

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<PAGE>   10

accessories. With the Key and ArtMold acquisitions in fiscal 1994 and the Ocean
acquisition in November 1995, the Company now sells products under the Barlow
(R), Econ-O-Line (R), The Action Line (R) and The California Line (TM) brand
names and offers a full complement of items, including tape measures, key chains
and holders, buttons, badges, magnets, pocket knives and lapel pins.

Desk and Business Accessories

     Through the Key, ArtMold and Ocean acquisitions, the Company expanded into
economically priced products marketed under the trademarks Econ-O-Line (R), The
Action Line (R) and The California Line (TM). These product lines consist
primarily of items such as note pads, desk calendars and other paper products
and desk accessories and personal gift items.

OPERATIONS

     A key to the Company's internal growth has been its ability to process
rapidly a large number of small, custom- imprinted orders at competitive prices
while maintaining a high level of product quality. During fiscal 1997, the
Company processed approximately 500,000 orders with an average order size of
approximately $350. For most products, the Company ships orders on a rapid
response basis, generally within one to two weeks after receipt of an order.

     Over the past two years, the Company has realigned its operating companies
into two groups: the Radio Cap Group and the Barlow Group. This realignment
reflects a restructuring of the Company's sales and marketing functions and
other organizational changes that are designed to provide enhanced operational,
sales and marketing support by the Company's existing operating companies for
the more recently acquired operating companies and divisions. For example, in
order to maximize selling efforts, the number of sales staff was increased in
these groups while the territory covered by each salesperson was decreased. This
allows each salesperson to offer a greater variety of products to a more focused
group of distributors. This realignment also makes over 11,900 distributors more
accessible to the smaller operating companies, each of which previously sold to
between 1,500 and 3,000 distributors.

     Each operating group has a separate management team, lead by a group
president with substantial experience in the promotional products industry. The
Company has assembled a management team with significant industry experience to
implement its business strategy. The executive officers of the Company and the
group presidents have an average of 14 years experience in the promotional
products industry. The Company gives the management of the operating groups
significant autonomy. The Company believes that it is able to be more responsive
to its distributors, the substantial majority of which are relatively small
operations in a highly fragmented industry, by delegating authority to
management of the operating groups. In particular, each operating company
concentrates its sales and marketing efforts on specific product lines, enabling
it to more effectively penetrate the distribution network. The presence of a
strong management team at each operating group also allows the Company to
maintain the focus of its corporate staff on the continued growth of the Company
and the coordination and implementation of the Company's strategic objectives.

     The Company has implemented various management and operational systems at
the operating companies. These systems are continually evaluated by management,
and systems which have proven successful at one operating company are introduced
at other operating companies where appropriate.



                                       10
<PAGE>   11

Strategic Initiatives

     During the fourth quarter of 1997, the Company decided to discontinue the
operations of the Alpha Products retail division ("retail division"). Alpha
Products historically had poor operating results prior to the Alpha acquisition
in April 1996. The Company acquired the Alpha Products assets with the intention
of improving its promotional products division, as well as taking advantage of
its retail division. The Alpha Products promotional products division sold to
the same distributor base as the Company. The retail division, however,
represented a new customer base that mainly consisted of mass merchandisers and
convenient stores. The Company hoped to stabilize Alpha Products deteriorating
retail customer base and then introduce some of the Company's existing products
into this retail division, thus creating one or more new distribution networks
for its products.

     Following the Alpha acquisition, the Company was able to improve and grow
the Alpha Products promotional division, which is where the Company's management
team has industry experience. The retail division, however, continued to
deteriorate. The retail customer base was in much worse shape than originally
thought and the Company determined that it did not have the expertise to effect
a turnaround in this division. The Company has decided to discontinue the
retail division and is currently negotiating with a prospective buyer for its
assets and business. The Company will close the Lithia Springs, Georgia
facility where Alpha Products is presently located. As a result, the operations
of the Alpha Products promotional products division, which the Company believes
is a viable growing business, will be relocated to other existing Company
facilities.

     The Company is also in the process of evaluating other divisions to
determine whether they fit with the Company's business strategy. In first
quarter of fiscal 1998, the Company sold Air-Tex's Bob Allen Sportswear
division. The Bob Allen Sportswear division is a manufacturer of shooting
accessories for the hunting industry. The Company determined that this division
did not fit with the Company's business strategy since it did not serve the
promotional industry and it was not in an industry in which the Company wanted
to participate. The impact of the sale of Bob Allen Sportswear division is not
material to the financial results of the Company.

Management Systems

     The Company utilizes a number of management systems designed to reduce
order processing time, enhance planning, lower operating costs and improve
customer service. The MRP II systems in place at various operating companies,
which are based upon sales forecasts, are designed to enable the Company to plan
labor, inventory and other resource requirements in order to meet customers'
delivery requirements and maximize processing efficiency. Certain operating
companies utilize a specially designed pull order-flow processing system
designed to process a large number of orders efficiently and economically.
Additionally, certain operating companies utilize a bar-coding system to monitor
the status of orders within the production cycle. These systems are designed to
enable the Company to quickly respond to customer inquiries and adjust shipping
schedules to meet customer demands.

     The Company uses statistical process control ("SPC") to evaluate its
manufacturing processes at each of the operating companies. SPC is designed to
enable the Company to differentiate between statistically insignificant
fluctuations in processing performance and substantive processing problems.
Management believes that SPC serves to focus both management and staff on the
objective of continually enhancing the Company's

                                       11
<PAGE>   12

production processes.

     The Company utilizes computer communication technology, such as electronic
data interface system ("EDI") and 'Internet E-mail', designed to improve order
processing and expedite shipments. The Company receives orders electronically
from several of its largest customers through an industry-wide EDI system. RCC
allows its largest customers to obtain real-time information on the status of
their orders through its own EDI and 'Internet E-mail' system.

Product Development

     The Company believes that a key to its success is its ability to expand
product offerings by developing new products, imprinting techniques and by
applying existing imprinting and decorating methods to create new products.

     The Company is developing new products that should capitalize on its 
proprietary SpectraColor printing process, which is designed to provide a low
cost method to process multi-color imprints. The Company continues to work with
suppliers and distributors in all product categories to identify opportunities
to add value to best-selling products without increasing the cost to the
distributor. The Company is also working toward utilizing and joining forces
with a network of other suppliers to provide a more regional presence, creating
shorter lead times and lower freight costs for distributors.

     The recent realignment of the operating companies allows for the exchange 
of materials and processes. The Company also evaluates materials and processes
from other industries for adaptation into the Company's products. Research into
emerging imprint technologies, including digital direct printing, laser
imaging, heat applied graphics and photopoymer through dimensional graphics is
ongoing.

     New overseas supplier relationships are continually being developed to
decrease costs of existing products and assist in the development of new
products and additional product lines in wood, metal, glass and textiles.

Custom Decorating and Manufacturing Processes

     Each of the operating companies has a full-service graphic arts department
to assist customers in generating custom graphics. The Company applies custom
graphics to promotional products using a variety of decorating processes such as
silk-screening, screen transfer, embroidering, engraving (including laser
engraving), vinyl screen printing, cloisonne enameling (enamels baked at high
temperatures) and hot stamping. Each arts department is also available to assist
customers or advertisers in creating original artwork. All operating companies
have installed systems to receive customer artwork electronically. The Company
has implemented a system to link the arts departments to allow designs created
for an advertiser at one operating company to be used throughout the Company,
eliminating the need to recreate the same design for that advertiser at other
operating companies. The Company also seeks to improve processing efficiency by
coordinating work flow among various arts departments.

     All of the mugs and glassware, plastic molded products and writing
instruments, as well as most caps and other headwear and certain sport, travel
and tote bags sold by the Company are manufactured in blank (i.e. , without
decoration) by third party suppliers according to Company specifications. Koozie
(R) beverage

                                       12
<PAGE>   13

insulators, note pads and other paper products, brass and laminated wood awards,
domestic jackets, and the remaining caps, other headwear, and domestic sport,
travel and tote bags are manufactured by the operating companies at the
Company's production facilities.

Sales and Marketing

     During fiscal 1997, the Company sold its products to approximately 11,900
customers, mainly independent promotional product distributors. In fiscal 1997,
the Company's ten largest customers accounted for approximately 12% of the
Company's total sales, and no one customer accounted for more than 3% of sales.
The Company's largest customers are among the largest distributors in the
industry based on sales.

     Generally, before a customer orders a product from the Company, the
customer has already received an order for the product from an advertiser. The
Company's products are sold on the basis of purchase orders. Established
customers generally have 30-day payment terms, and newer customers purchase
products from the Company on the basis of payment before processing. As a result
of its credit management practices, the Company has experienced bad debt
expense, as a percentage of sales, of less than 0.25% for each of the past three
fiscal years.

     The Company believes that most other promotional products suppliers sell
only through independent multi-line sales representatives who serve more than
one supplier. The Company's operating companies employ a total of 30 salespeople
to market products in regional territories covering the United States, and 139
customer-service personnel to support these salespeople. The Company believes
that this direct sales staff gives the Company a competitive advantage by
allowing more focused selling efforts.

     The Company's sales staff attends industry trade shows and makes sales
calls on distributors and other potential customers. Each operating company
distributes annual product catalogs. From time to time, the Company produces an
intercompany product catalog that features the top-selling products from each of
its operating companies. Key employees of the Company and each of its operating
companies also conduct coordinated marketing presentations to distributors
throughout the United States.

SUPPLIERS

     During fiscal 1997, the Company derived a significant portion of its sales
from products supplied by manufacturers located in China, Taiwan, Sri Lanka,
Bangladesh, Korea, Japan, Canada, Hong Kong, India, Philippines, Cambodia,
Germany, and Italy. The Company's senior management and agents periodically
visit its foreign suppliers to observe the manufacture of products and to help
ensure timely delivery and compliance with Company manufacturing specifications.
Representatives from the Company's leading suppliers periodically visit the
Company's facilities to review quality standards and product specifications. The
Company is not a party to any long-term contractual arrangements with any
supplier and relies on its long-term relationships to ensure timely delivery of
quality products.

     The Company's reliance on foreign sources of supply subjects it to a number
of risks, including transportation delays and interruptions, political and
economic disruptions, the imposition of tariffs, quotas and other import or
export controls, currency fluctuations and changes in governmental policies. The
Company's reliance on foreign suppliers also requires it to order products
further in advance of orders by customers than would generally be the case if
such products were manufactured domestically. There can be no assurance that

                                       13
<PAGE>   14

the Company can replace its suppliers without delay; however, the Company
attempts to reduce the risk of such a delay and to alleviate the problem of
having to order its foreign products further in advance by using its management
systems to predict more accurately the Company's product needs.

     The Company relies on one supplier for the insulation material necessary to
make Koozie (R) beverage insulators and certain other Koozie (R) products. The
Company buys insulation material on a purchase order basis and does not have any
contract, agreement or commitment from this supplier to furnish insulation
material. Since the Company began purchasing from this supplier in 1983, the
Company has not experienced any significant disruptions or delays in its supply.

     The Company also relies on a single supplier for the laminated wood used in
the BTS(TM) product line. The Company has not experienced any significant
disruptions or delays in its supply.

     The Company obtains its other materials from numerous sources. Prices for
materials used by the Company may fluctuate for a variety of reasons. The
Company has not experienced, and does not anticipate, any difficulty in
obtaining an adequate supply of the materials it uses.

BACKLOG

     A majority of the Company's orders are processed on a rapid response basis,
generally within one to two weeks after receipt of an order. As a result, the
Company does not believe that the dollar amount of its unfilled customer orders
at any time is a useful indicator of future business activity.

COMPETITION

     The promotional products industry is highly fragmented and competitive. The
Company competes with a large number of other promotional products suppliers,
some of which have diversified product offerings, and others that market only a
limited number of products or lines. The Company competes primarily on the basis
of customer service and price. Certain competitors are divisions of
significantly larger companies that have substantially greater financial and
other resources than the Company. While the Company has competitors within each
of its product lines, no one supplier competes with the Company in all of its
lines. In addition, entry into the promotional products industry is generally
not difficult, and new competitors regularly enter the industry. The Company
believes it is difficult to manage and process efficiently large numbers of
small orders and produce a high-quality product and that its processing
efficiency gives the Company a competitive advantage within the industry. The
Company believes its established relationships with distributors gives it an
advantage over its competitors, especially new entrants in the industry. The
promotional products industry also competes against other advertising media,
such as television, radio, newspapers, magazines, billboards and the Internet.

TRADEMARKS

     The Company owns a number of trademarks registered with the United States
Patent and Trademark Office and claims various common law trademarks. The
Company considers its trademarks to be important to

                                       14
<PAGE>   15

its business and actively defends and enforces them.

EMPLOYEES

     As of November 21, 1997, the Company employed approximately 1,900 persons.
Approximately 120 employees of Key are represented by the Manufacturing,
Production and Service Workers Union of the AFL-CIO, under a collective
bargaining agreement expiring in 1998. The Company considers its employee
relations to be good.

ENVIRONMENTAL MATTERS

     The Company's facilities are subject to federal, state and local
environmental laws and regulations, including those relating to discharges to
air, water and land, the treatment, storage and disposal of solid and hazardous
waste and the cleanup of properties affected by hazardous substances. The
Company believes that it is in compliance with such laws and regulations and
does not anticipate any material adverse effect on its operations or financial
condition as a result of its efforts to comply with, or its liabilities under,
such laws and regulations. The Company does not anticipate any material capital
expenditures for environmental control facilities or equipment. Some risk of
environmental liability is inherent in the Company's business, however, and
there can be no assurance that material environmental costs will not arise in
the future. In particular, the Company might incur capital and other costs to
comply with increasingly stringent environmental laws and enforcement policies.
The Company does not expect such capital and other costs to have a material
adverse effect on the Company's net cash flows.

RISK FACTORS

     The Company's business is subject to various risks and uncertainties. The
following factors should be carefully considered in reading this report.

Risks Relating to Growth Strategy

     During the past five years, the Company has experienced significant growth.
This growth has resulted from internal growth and from selective acquisitions of
other businesses, both of which continue to be important elements of the
Company's business strategy. There can be no assurance that the Company will be
able to maintain or accelerate its internal growth or that the Company will be
able to manage its expanding operations effectively. The Company's ability to
continue to grow through acquisitions will depend, among other things, on the
availability of suitable acquisition opportunities and the Company's ability to
finance these transactions. There can be no assurance that future acquisitions
can be accomplished on terms favorable to the Company or that the Company will
be able to obtain financing for such acquisitions. The success of the Company's
strategy also depends upon its ability to integrate acquired businesses into its
operations. The Company may acquire companies, brands or product lines that
dilute earnings or that do not generate positive cash flow initially or for some
period of time following their acquisition. In addition, as the Company has
expanded through acquisitions, its management has become more decentralized, and
it relies primarily on the operating companies to implement systems designed to
ensure responsive and efficient operations. The failure of the Company to
implement its growth strategy, to maintain or upgrade operating controls and
systems, to recruit or retain sufficient qualified personnel or to effectively
integrate acquired businesses with the Company's operations could have a
material adverse effect on the Company's business, financial condition and
results of operations.



                                       15
<PAGE>   16

Reliance on Foreign Sources of Supply

     The Company derives a significant portion of its sales from products
supplied by foreign manufacturers. The Company's reliance on foreign sources of
supply subjects it to a number of risks, including, among others, transportation
delays and interruptions, political and economic disruptions, the imposition of
tariffs, quotas and other import or export controls, currency fluctuations and
changes in government policies. The Company's reliance on foreign manufacturers
also requires it to order products further in advance of orders by customers
than would generally be the case if products were manufactured domestically. In
fiscal 1997, a significant portion of the Company's sales were derived from
products, mainly headwear, ceramic mugs, and sport and travel bags, purchased by
the Company from manufacturers located in the People's Republic of China
("China"). China currently enjoys "most favored nation" ("MFN") trading status
with the United States. Under the Trade Act of 1974, the President of the United
States is authorized, upon making specified findings, to waive certain
restrictions that would otherwise render China ineligible for MFN treatment. The
President has waived these provisions each year since 1979. Such waiver is
subject to renewal in June 1998. No assurance can be given that China will
continue to enjoy MFN status in the future. Further, any United States
legislation or action revoking or placing further conditions on China's MFN
status or imposing substantially higher import duties, if enacted or imposed,
could have a material adverse effect on the cost of the Company's headwear,
ceramic mugs, and sport and travel bags. The Company currently has alternative
suppliers of headwear and sport and travel bags (but not ceramic mugs) located
in other countries and continues to evaluate additional sources of supply.

Dependence on Key Personnel

     The Company's success depends in part on the efforts of a few key
management personnel, including Frank P. Krasovec, its Chairman, Chief Executive
Officer and President. While Mr. Krasovec currently devotes all of his time to
the Company, he is involved in other businesses and investments from time to
time. If for any reason Mr. Krasovec does not continue to be active in the
Company's management, the Company's operations could be materially adversely
affected. None of the Company's executive officers are subject to employment or
non-competition agreements. The Company does not have key-man life insurance on
any of its executive officers.

Leverage

     At August 30, 1997, the Company had total indebtedness of $61.4 million and
additional borrowings of up to $78.0 million were available under its new credit
facility ("1997 Credit Facility"). The Company's ability to satisfy its
financial obligations under its indebtedness outstanding from time to time will
depend on its future operating performance, which is subject to prevailing
economic conditions, levels of interest rates and financial, business and other
factors, many of which are beyond the Company's control. Indebtedness under the
1997 Credit Facility is subject to interest rate fluctuations. Although the
Company currently believes that cash flow from operations and available
borrowing under the 1997 Credit Facility will be sufficient to meet the
Company's working capital and capital expenditure requirements and future debt
service obligations there can be no assurance that this will be the case.



                                       16
<PAGE>   17

Reliance on Sales/Supplier of Certain Products

     The Company relies on one supplier for the insulation material necessary to
make Koozie (R) beverage insulators and certain other Koozie (R) products. The
Company believes that competitors who make products similar to Koozie (R)
beverage insulators also purchase their insulation material from this supplier
and that currently there is no other known supplier of this material. The
Company buys insulation material on a purchase order basis and does not have any
contract, agreement or commitment from this supplier to furnish insulation
material. Since the Company began purchasing from this supplier in 1983, the
Company has not experienced any significant disruptions or delays in its supply.
However, any significant interruption in the supply of insulation material or
substantial price increases for this material could have a material adverse
effect on the Company's business and the results of its operations.

Competition

     The promotional products industry is highly fragmented and competitive.
Certain competitors in the promotional products industry are affiliated with
significantly larger companies which have greater financial and other resources
than the Company. Entry into the promotional products industry is generally not
difficult, and new competitors regularly enter the industry. The promotional
products industry also competes against other advertising media, such as
television, radio, newspaper, magazines, billboards and the Internet.






                                       17
<PAGE>   18

ITEM 2. PROPERTIES

          The Company owns or leases the following physical properties:

<TABLE>
<CAPTION>
                                                                                             SQUARE       OWNED OR
   COMPANY                      LOCATION                              USE                     FEET         LEASED
   -------                      --------                              ---                     ---          ------
<S>                          <C>                               <C>                            <C>          <C>      
Executive                    Austin, Texas                     Executive offices              1,860        Leased
Corporate                    San Antonio, Texas                Corporate offices (a)          7,990        Leased
Radio Cap Group:
     RCC                     San Antonio, Texas                Sales, production             86,000         Owned
                             San Antonio, Texas                Production                    21,500        Leased
                             San Antonio, Texas                Warehouse                     89,350        Leased
                             Pittsburgh, Pennsylvania          Production                    23,000        Leased
                             Lithia Springs, Georgia           Sales, production (b)        199,950        Leased
     Air-Tex                 Des Moines, Iowa                  Sales, production             52,500         Owned
                             Des Moines, Iowa                  Warehouse                     14,810        Leased
                             Logan, Utah                       Production (c)                20,400        Leased
                             Hampton, Arkansas                 Production                    44,100        Leased
Barlow Group:
     Barlow                  Los Angeles, California           Sales, production             67,000        Leased
                             St. Paul, Minnesota               Production (d)                38,000        Leased
                             Reno, Nevada                      Sales, production             58,000        Leased
     Key                     East Peoria, Illinois             Sales, production             49,000        Leased
                             Chatsworth, California            Sales, production             28,260        Leased
     ArtMold                 Cranston, Rhode Island            Sales, production             75,000        Leased
                             Readfield, Wisconsin              Sales, production             15,148         Owned
</TABLE>

     (a)  In August 1997, the Company announced it plans to consolidate its
          Corporate offices with its Executive offices in Austin, Texas. This
          consolidation is expected to be completed during 1998.

     (b)  The Company is in the process of closing its Lithia Springs, Georgia
          facility. Operations related to the retail division are being
          discontinued, while its promotional products division is being
          relocated to other existing Company facilities.

     (c)  The Company is in the process of closing its Logan, Utah facility.
          Operations are being relocated to other existing Company facilities.

     (d)  The Company is in the process of closing its St. Paul, Minnesota
          facility. Operations are being relocated to other existing Company
          facilities.

     The Company believes that its existing facilities are adequate and provide
sufficient operating capacity to meet its current requirements, and does not
anticipate the need for significant expansion in the near future. The Company
expects to be able to extend the terms of its leases as they expire or that
other suitable space will be available, as needed by the Company.




                                       18
<PAGE>   19

ITEM 3. LEGAL PROCEEDINGS

     The Company and its subsidiaries are subject to litigation from time to
time in the ordinary course of business. Although the amount of any liability
with respect to currently pending litigation cannot be determined, in the
opinion of management, such liability will not have a material adverse effect on
the Company's financial condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the fiscal year ended August 30, 1997.

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

     The Company's common stock, no par value ("Common Stock"), is listed for
quotation on The Nasdaq Stock Market's National Market ("NASDAQ/NMS") under the
symbol "NPPI." The following table sets forth the high and low closing sales
prices for the Common Stock for the fiscal periods indicated, as reported by the
Nasdaq/NMS.

<TABLE>
<CAPTION>
                                                                                                 HIGH                LOW
                                                                                              -----------        ----------

<S>                                                                                              <C>               <C>  
Fiscal 1996:
First quarter (ended December 2, 1995)              ........................................     19.00             15.50
Second quarter (ended March 2, 1996)                ........................................     20.50             16.25
Third quarter (ended June 1, 1996)                  ........................................     24.00             17.00
Fourth quarter (ended August 31, 1996)              ........................................     22.75             12.75

Fiscal 1997:
First quarter (ended November 30, 1996)             ........................................     18.25             14.00
Second quarter (ended March 1, 1997)                ........................................     21.50             15.25
Third quarter (ended May 31, 1997)                  ........................................     17.50             12.50
Fourth quarter (ended August 30, 1997)              ........................................     16.25             12.00
</TABLE>

As of November 24, 1997, there were 71 shareholders of record of the Common
Stock.

     The Company has not paid any cash dividends or distributions on its Common
Stock since 1989 and intends to retain earnings for use in its business
expansion. The Company paid dividends to holders of its Preferred Stock between
fiscal 1990 and fiscal 1993. None of the Preferred Stock is currently
outstanding. The Company's 1997 Credit Facility limits the payment of cash
dividends on its capital stock and, in any event, the Company does not
anticipate paying any cash dividends in the foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA

SELECTED CONSOLIDATED FINANCIAL DATA

     The following selected consolidated financial data regarding the Company
for the five years ended August 30, 1997 were derived from the consolidated
financial statements of the Company which have been

                                       19
<PAGE>   20

audited by Ernst & Young LLP, independent auditors. The information below should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and consolidated financial statements and
notes thereto of the Company included elsewhere herein.

<TABLE>
<CAPTION>
                                                                            FISCAL YEAR ENDED (a)
                                                                    (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                          -----------------------------------------------------------
                                                          AUGUST 28,  SEPTEMBER 3, SEPTEMBER 2, AUGUST 31, AUGUST 30,
                                                             1993         1994       1995       1996 (c)      1997
                                                          --------      --------   --------   --------      --------

<S>                                                       <C>           <C>        <C>        <C>           <C>     
STATEMENT OF INCOME DATA (B):
  Sales                                                   $ 49,300      $ 62,385   $103,860   $144,048      $175,835
  Cost of sales                                             33,860        43,207     70,963    100,245       125,732
                                                          --------      --------   --------   --------      --------
     Gross profit                                           15,440        19,178     32,897     43,803        50,103
  Operating expenses:
     Sales and marketing                                     5,678         6,886     11,290     16,441        18,119
     General and administrative                              4,266         5,065      9,037     12,171        13,125
     Amortization expense                                      724           889      2,119      3,538         3,885
     Restructuring and unusual charges                          --            --         --      1,640         1,816
                                                          --------      --------   --------   --------      --------
        Total operating expenses                            10,668        12,840     22,446     33,790        36,945
                                                          --------      --------   --------   --------      --------
    Operating income                                         4,772         6,338     10,451     10,013        13,158
  Interest expense                                           1,982         1,030      3,619      3,246         3,002
                                                          --------      --------   --------   --------      --------
    Income before income taxes                               2,790         5,308      6,832      6,767        10,156
  Provision for income taxes                                 1,032         1,979      2,800      2,705         4,091
                                                          --------      --------   --------   --------      --------
   Income from continuing operations before                  1,758         4,062      6,065
     extraordinary loss                                      3,329         4,032
  Net income                                              $  1,183(d)   $  3,329   $  4,032   $  4,155(f)   $  1,004(f)
                                                          ========      ========   ========   ========      ========   
  Income available to common shareholders                 $  1,116(e)   $  3,329   $  4,032   $  4,155      $  1,004
  Net income per common share:
    Primary                                               $   0.62      $   0.93   $   1.11   $   0.82      $   0.18
    Fully diluted                                         $   0.50      $   0.93   $   1.10   $   0.82      $   0.18
  Weighted average number of common 
    shares outstanding:
    Primary                                                  1,803         3,576      3,636      5,090         5,500
    Fully diluted                                            2,231         3,576      3,668      5,090         5,500
BALANCE SHEET DATA (AT END OF PERIOD):
 Working capital                                          $ 12,246      $ 18,668   $ 31,083   $ 35,248      $ 37,876
  Total assets                                              25,941        55,702     94,859    121,376       135,194
  Total debt:
    Bank credit facility                                     6,146        27,100     50,500     33,725        46,990
    Other debt and capital leases                            1,828         5,097     12,410     13,953        14,432
  Total shareholders' equity                                13,546        16,871     21,034     57,380        51,276
OTHER DATA:
  EBITDA (g) (h)                                          $  6,597      $  8,526   $ 14,476   $ 16,686      $ 21,313
  Depreciation expense                                       1,101         1,299      1,906      3,135         4,270
  Amortization expense                                         724           889      2,119      3,538         3,885
  Capital expenditures                                       1,199         1,426      2,073      4,919         4,863
  Dividends (i)                                                132            --         --         --            --
</TABLE>

     (a)  The Company's fiscal year is a 52- or 53-week period ending on the
          Saturday closest to August 31. All references to fiscal 1993, 1994,
          1995, 1996


                                       20
<PAGE>   21

          and 1997 are to the fiscal years ended August 28, 1993, September 3,
          1994, September 2, 1995, August 31, 1996 and August 30, 1997,
          respectively.

     (b)  The Company's results of operations for the periods presented were
          significantly affected by the Key and ArtMold acquisitions in fiscal
          1994, the Air- Tex, Designer Line and BTS acquisitions in fiscal 1995,
          the Ocean, Tee-Off and Alpha acquisitions in fiscal 1996, the Wesburn
          and DMA acquisitions in fiscal 1997 and by the public offerings of
          Common Stock in June 1993 and December 1995. These factors affect the
          comparability of sales and results of operations from period to
          period. See "Management's Discussion and Analysis of Financial
          Condition and Results of Operations."

     (c)  The fiscal 1996 amounts have been restated to reflect the activity for
          the five months of ownership of the Alpha Products retail division as
          discontinued operations.

     (d)  After deducting a one-time charge to earnings of $575,000, net of
          taxes, related to the write-off of unamortized debt costs and the
          termination of a product financing arrangement in connection with the
          Company's initial public offering of Common Stock in June 1993, which
          resulted in a reduction in primary and fully diluted earnings per
          share of $0.32 and $0.26, respectively.

     (e)  Reflects the deduction of dividends on outstanding Junior Preferred
          Stock which was redeemed in fiscal 1993.

     (f)  After deducting gain (loss) on discontinued operations, net of tax, of
          $93,000 and ($1.96) million in fiscal 1996 and fiscal 1997,
          respectively, and estimated loss of $2.86 million on disposal of
          discontinued operations, net of tax, in fiscal 1997. Additionally, an
          extraordinary loss from debt extinguishment of $241,000, net of tax,
          was recognized in fiscal 1997.

     (g)  EBITDA is defined as income from continuing operations before
          extraordinary loss, income taxes, interest expense, depreciation and
          amortization. The Company believes that the presentation of EBITDA
          facilitates an investor's understanding of the effects on the
          Company's operations of amortization of goodwill and other intangibles
          and increased interest expense under indebtedness incurred in
          connection with various acquisitions which substantially impacted net
          income, net income per common share and cash flows. EBITDA should not
          be considered by an investor as an alternative to net income as an
          indicator of the Company's operating performance or to cash flows as a
          measure of liquidity. EBITDA is not used in the presentation of
          financial statements prepared in accordance with generally accepted
          accounting principles.

     (h)  Excluding the restructuring and unusual charges of $1.6 million in
          fiscal 1996 and $1.8 million in fiscal 1997, EBITDA in fiscal 1996 and
          fiscal 1997 was $18.3 million and $23.1 million, respectively.

     (i)  The Company paid dividends to holders of its Preferred Stock between
          fiscal 1990 and fiscal 1993. None of the Preferred Stock is currently
          outstanding.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

     The Company's fiscal year is a 52- or 53-week period ending on the Saturday
closest to August 31. All references to fiscal 1995, 1996 and 1997 are to the
fiscal years ended September 2, 1995, August 31, 1996 and August 30, 1997,
respectively.

     The Company's results of operations for the periods discussed below were
significantly affected by the Air-Tex, Designer Line and BTS acquisitions in
fiscal 1995, the Ocean, Tee-Off and Alpha acquisitions in fiscal 1996, the
Wesburn and DMA acquisitions in fiscal 1997, and the related levels of debt
incurred. The Company has recorded as goodwill the excess of the purchase prices
over the estimated value of the assets acquired and is amortizing this goodwill
over 15 to 25 years. In addition, the Company's financial results were
significantly impacted by the public offering of Common Stock in December 1995
and open market purchases of 575,100 shares of the Company's Common Stock in
fiscal 1997. These factors affect the comparability of sales and results of
operations from period to period.

     The Company's sales from continuing operations continued to grow from
$103.9 million during fiscal 1995 to $175.8 million in fiscal 1997, a compound
annual growth rate of 26.6%. This increase was a result of (i) an internal
annual growth rate of 7.1%, or $14.1 million over the two-year period, supported
by internal product line expansion, including expanded product and price point
offerings and (ii) acquisitions, which contributed aggregate sales of $57.8
million over the two-year period. Through the acquisitions, the Company expanded
its product range, both by product type and price points within existing product
categories. By moving into new product areas, both through acquisitions and the
internal development of new products, the Company has gained

                                       21
<PAGE>   22

new independent distributors and increased its business with existing
independent distributors. The Company's strategy is to grow through further
expansion and diversification of its existing product offerings and distributor
base and by making selective acquisitions.

     The Company in its ongoing review of its operations has taken several
initiatives in fiscal 1996 and 1997 to restructure its businesses.

     In August 1997, the Company decided to discontinue the operations of the
Alpha Products retail division ("retail division") and is actively searching for
a buyer for its assets and business. As a result, the promotional products
division of Alpha Products will be relocated to other existing Company
facilities. The Company is expected to cease operations of the retail division
and relocate the Alpha Products promotional products division by the end of
calendar 1997. The loss on the disposal of the retail division and the closing
of the facility is expected to be approximately $2.9 million (net of tax benefit
of $1.9 million), which includes estimated losses from operations for the retail
division until operations are discontinued. Revenues for the retail division for
the five months of ownership in fiscal year 1996 and for fiscal year 1997 were
$7.9 million and $8.7 million, respectively. Earnings for the retail division
for the five months of ownership in fiscal year 1996 was $93,000 (net of taxes
of $65,000) and a loss of $1.96 million (net of tax benefit of $1.4 million) for
fiscal year 1997.

     In the fourth quarter of 1997, the Company recorded restructuring and
unusual nonrecurring or one-time charges of approximately $1,816,000 ($1,084,000
net of tax) based on its decision to consolidate its Corporate offices with its
Executive offices, realign its divisions to capitalize on processing capacity
and product line restructurings, and to write-off certain capitalized costs
associated with its decision to terminate its negotiations related to the
acquisition of the Rou bill Group in the fourth quarter of 1997. The
consolidation of the Corporate offices with its Executive offices is expected to
be completed in early 1998. A provision for closure of the Corporate offices
totaling approximately $350,000, including write-off of certain leasehold
improvements, has been accrued. Additionally, approximately $291,000 has been
accrued for realignment of its divisions, including product line restructurings.
In conjunction with the above activities, a total of $425,000 of severance and
benefits has been accrued. Capitalized professional fees and organizational
costs totaling $750,000 associated with the Rou bill Group acquisition were
expensed in the fourth quarter of 1997.

     In the fourth quarter of 1996, the Company recorded restructuring and
unusual nonrecurring or one-time charges of approximately $1,640,000 ($984,000
net of tax) based on its decision to consolidate certain facilities into other
existing facilities, terminate certain employees, and write-off certain
capitalized costs associated with a target acquisition. A provision for closure
of these facilities totaling approximately $890,000, including the write-off of
certain leasehold improvements, has been accrued or paid. Approximately $560,000
of future salary and benefits owed to three terminated employees under their
existing employment agreements was accrued or paid in the fourth quarter of
1996. These employment agreements have remaining terms that expire over the next
year. Additionally, capitalized acquisition related costs of approximately
$190,000 were expensed in the fourth quarter of 1996.

     On August 28, 1997, the Company entered into a new credit agreement with a
syndicate of banks and other financial institutions providing for $125.0 million
in secured credit facilities. In conjunction with the repayment of the existing
bank facility debt, the Company recognized an extraordinary loss on the
write-off of the previous bank facility deferred financing and loan origination
costs of approximately $241,000, net of tax

                                       22
<PAGE>   23

benefit of approximately $161,000.

RESULTS OF CONTINUING OPERATIONS

     The following information is qualified by reference to, and should be read
in conjunction with, the Company's consolidated financial statements and the
notes thereto included elsewhere herein. The following table presents, for the
periods indicated, selected items from the Company's consolidated statements of
income expressed as a percentage of sales. The fiscal 1996 amounts have been
restated to reflect the activity for the five months of ownership of the Alpha
Products retail division as discontinued operations.

<TABLE>
<CAPTION>
                                                FISCAL YEAR ENDED
                                           --------------------------
                                           SEPT. 2, AUG. 31, AUG. 30,
                                             1995     1996    1997
                                           -------- -------- --------
STATEMENT OF INCOME DATA:
<S>                                          <C>     <C>     <C>    
Sales                                        100.0%  100.0%  100.0%
Cost of sales                                 68.3    69.6    71.5
Gross profit                                  31.7    30.4    28.5
Operating expenses                            21.6    22.3    20.0
Restructuring and unusual charges               --     1.1      1.0
Operating income                              10.1     7.0     7.5
Interest expense                               3.5     2.3     1.7
Income from continuing operations before
  income taxes and extraordinary loss          6.6     4.7     5.8
Income from continuing operations before
  extraordinary loss                           3.9     2.8     3.4
</TABLE>

FISCAL YEAR ENDED AUGUST 30, 1997 COMPARED WITH FISCAL YEAR ENDED AUGUST 31,
1996 (restated for discontinued operations)

     Sales for fiscal 1997 increased $31.8 million, or 22.1%, to $175.8 million
from restated $144.0 million in fiscal 1996. Of this increase, $8.1 million was
attributable to increased sales of the Company's existing product lines, $12.6
million was due to inclusion of sales from the Wesburn and DMA acquisitions
which were completed during fiscal 1997, and $11.1 million was attributable to
the full-year impact of the Ocean, Tee-Off and Alpha acquisitions which were
completed in fiscal 1996. Internal sales growth was fueled by, among other
things, the Value Line (TM) product line with sales growth of 41.8% and the
Econ-O-Line (R) product line with sales growth of 16.5% in fiscal 1997.

     Cost of goods sold for fiscal 1997 increased $25.5 million, or 25.4%, to
$125.7 million from restated $100.2 million in fiscal 1996. Of this increase,
$5.7 million was attributable to the increased sales of the Company's existing
product lines, $11.3 million was due to the inclusion of sales from the fiscal
1997 acquisitions and $8.5 million was attributable to the inclusion of the
full-year impact of the fiscal 1996 acquisitions. As a majority of the purchase
orders by the Company are denominated in United States dollars, the foreign
currency translation risk is immaterial. The Company believes that there are
relatively minor differences

                                       23
<PAGE>   24

in quality between products manufactured in-house and those imported, while
imported products, as a general rule, are less expensive.

     Gross profit for fiscal 1997 increased $6.3 million, or 14.4%, to $50.1
million from restated $43.8 million in fiscal 1996. Gross profit as a percentage
of sales decreased from 30.4% to 28.5%. This decrease is primarily due to the
fiscal 1996 and 1997 acquisitions of imprinted golf ball operations (Tee-Off and
Wesburn Golf), which traditionally have a lower gross profit margin than the
Company's existing businesses. Excluding the gross profit and sales for the
imprinted golf ball operations, gross profit as a percentage of sales decreased
from 30.8% in fiscal 1996 to 30.4% in fiscal 1997.

     Total operating expenses for fiscal 1997 increased $3.1 million, or 9.2%,
to $36.9 million from $33.8 million in fiscal 1996. This increase was primarily
attributable to the fiscal 1996 and 1997 acquisitions and the fiscal 1996 and
1997 restructuring and unusual charges. Exclusive of the fiscal 1996 and 1997
restructuring and unusual charges, operating expenses as a percentage of sales
decreased from 22.3% to 20.0%. This decrease is primarily attributable to the
fiscal 1996 and 1997 acquisitions of the imprinted golf ball operations, which
operate with a low overhead structure and to the cost savings achieved from the
restructuring initiatives undertaken in fiscal 1996 and 1997.

     Operating income for fiscal 1997 increased $3.2 million, or 32.0%, to $13.2
million from $10.0 million in fiscal 1996. Operating income as a percentage of
sales increased from 7.0% to 7.5%. Exclusive of the 1996 and 1997 restructuring
and unusual charges, operating income as a percentage of sales increased from
8.1% to 8.5%. This increase is mainly attributable to the cost savings achieved
from the restructuring initiatives undertaken in fiscal 1996 and 1997.

     Interest expense was $3.0 million in fiscal 1997 compared to $3.2 million
in fiscal 1996. This decrease was attributable to the use of December 1995 stock
offering proceeds to pay down debt, offset by borrowings used to finance the
fiscal 1996 and 1997 acquisitions and open market purchases of 575,100 shares of
the Company's Common Stock.

     The Company's effective tax rate was 40.3% in fiscal 1997 as compared with
40.0% in fiscal 1996.

     As a result of the above, income from continuing operations for fiscal 1997
increased $2.0 million, or 48.8%, to $6.1 million from $4.1 million in fiscal
1996.

FISCAL YEAR ENDED AUGUST 31, 1996 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER 2,
1995 (restated for discontinued operations)

     Sales for fiscal 1996 increased $40.1 million, or 38.6%, to $144.0 million
from $103.9 million in fiscal 1995. Of this increase, $5.7 million was
attributable to increased sales of the Company's existing product lines, $13.8
million was due to inclusion of sales from the Ocean, Tee-Off and Alpha
acquisitions which were completed during fiscal 1996, and $20.6 million was
attributable to the full-year impact of the Air-Tex, Designer Line and BTS
acquisitions, which were completed in fiscal 1995. Internal sales growth was
supported by product line expansion, including the Koozie (R) cooler bag
products introduced by RCC in January 1994, with sales of $7.8 million, and the
Value Line (TM) product line expansion and crystal product offerings introduced
by Barlow in June 1993, with aggregate sales of $5.8 million.



                                       24
<PAGE>   25

     Cost of goods sold for fiscal 1996 increased $29.2 million, or 41.1%, to
$100.2 million from $71.0 million in fiscal 1995. Of this increase, $4.9 million
was attributable to the increased sales of the Company's existing product lines,
$11.3 million was due to the inclusion of sales from the fiscal 1996
acquisitions and $13.0 million was attributable to the inclusion of the
full-year impact of the fiscal 1995 acquisitions.

     Gross profit for fiscal 1996 increased $10.9 million, or 33.1%, to $43.8
million from $32.9 million in fiscal 1995. Excluding the fiscal 1996
acquisitions, gross profit as a percentage of sales increased from 31.7% to
31.8%. Including the fiscal 1996 acquisitions, gross profit as a percentage of
sales decreased from 31.7% to 30.4%. This decrease was mainly attributable to
fiscal 1996 acquisitions of businesses which operate with lower gross profit
margins than the Company's then existing businesses.

     Total operating expenses for fiscal 1996 increased $11.4 million, or 50.9%,
to $33.8 million from $22.4 million in fiscal 1995. This increase was primarily
attributable to the fiscal 1995 and 1996 acquisitions and the fiscal 1996
restructuring and unusual charges. Exclusive of the fiscal 1996 restructuring
and unusual charges, operating expenses as a percentage of sales increased from
21.6%.to 22.3%. This increase is due primarily to additional amortization
expense incurred from the fiscal 1995 and 1996 acquisitions.

     Operating income for fiscal 1996 decreased $438,000, or 4.4%, to $10.0
million from $10.5 million in fiscal 1995. Exclusive of the fiscal 1996
restructuring and unusual charges, operating income as a percentage of sales
decreased from 10.1% to 8.1%. This decrease was mainly attributable to the
fiscal 1996 acquisitions of businesses which operate with lower gross profit
margins than the Company's then existing businesses and to lower than expected
performance from the Ocean, Designer Line and Artmold acquisitions.

     Interest expense was $3.2 million in fiscal 1996 compared to $3.6 million
in fiscal 1995. This decrease was attributable to lower effective interest rates
and the use of December 1995 stock offering proceeds to pay down debt, offset by
borrowings used to finance the fiscal 1995 and fiscal 1996 acquisitions.

     The Company's effective tax rate was 40.0% in fiscal 1996 as compared with
41.0% in fiscal 1995.

     As a result of the above, income from continuing operations for fiscal 1996
increased $30,000, or 0.7%, to $4.1 million from $4.0 million in fiscal 1995.

LIQUIDITY AND CAPITAL RESOURCES

     The Company has financed its business activities primarily with borrowings
under bank credit facilities, notes payable to the former owners of acquired
businesses, the sale of Common Stock and cash provided from operations.

     On August 28, 1997, the Company entered into a credit agreement with a
syndicate of banks and other financial institutions providing for up to $125.0
million in new credit facilities (collectively, the "1997 Credit Facility"). The
1997 Credit Facility consists of a $40 million senior term loan, all of which
was used to repay the Company's then existing bank facility debt ($40.0 million
outstanding at November 24, 1997), a $60 million senior reducing revolver credit
loan to be used for acquisitions ($0 million outstanding at November 24, 1997)
and a $25 million revolver credit loan to be used for working capital purposes
($2.6 million outstanding

                                       25
<PAGE>   26

at November 24, 1997).

     Pursuant to the terms of the 1997 Credit Facility, the Company is required
to maintain certain financial ratios and is subject to limitation on dividends,
additional indebtedness, liens, investments, issuance of stock, mergers and
acquisitions, and sales of assets. The Company is required to make quarterly
amortization payments on the term loan through maturity at the end of fiscal
2005. The reducing revolver credit facility and the revolver credit facility
terminate at the end of fiscal 2003. See note 8 to the consolidated financial
statements of the Company included elsewhere herein. Amounts outstanding under
the 1997 Credit Facility bear interest at a rate equal to either the agent
bank's prime rate or the London Interbank Offered Rate, plus an interest rate
spread which varies based on the Company's leverage ratio (determined under the
credit agreement). Indebtedness under the 1997 Credit Facility is secured by a
first priority security interest in substantially all the assets of the
Company. Additionally, any assets acquired with financing under the 1997 Credit
Facility will serve as security. Borrowings under the 1997 Credit Facility are
jointly and severally guaranteed by all existing, acquired or created
subsidiaries of the Company.

     On December 20, 1995, the Company completed the sale of 2,015,481 shares of
Common Stock in a public offering. The net proceeds of this offering of
approximately $31 million were used to repay indebtedness outstanding under the
Company's previous bank credit facility.

     In connection with certain acquisitions, the Company issued promissory
notes to the former owners of the acquired businesses. At August 30, 1997, the
aggregate principal amount outstanding on these promissory notes amounted to
$6.3 million. These promissory notes are generally payable over five years from
the dates of the respective acquisitions and bear interest at annual rates
ranging from 5.5% to 9.0%. Of these notes, $3.6 million are convertible into
Common Stock at prices ranging from $17.00 to $20.00 per share and $1.1 million
are secured by an irrevocable letter of credit. The Company is also obligated to
make payments aggregating $6.1 million over the next ten years under the terms
of non-compete agreements with certain of the former owners of these acquired
businesses.

     During fiscal 1997, net cash provided by operating activities was $8.8
million. The net use of cash in investing activities was $13.4 million,
primarily representing $8.2 million as the aggregate cash consideration paid in
the Wesburn and DMA acquisitions, and $4.9 million in capital expenditures.
Financing activities provided net cash of $5.4 million primarily from borrowings
under the Company's bank credit facilities. The proceeds from the borrowings
were used primarily to finance the Wesburn and DMA acquisitions, as well as open
market purchases of 575,100 shares of the Company's Common Stock.

     During fiscal 1996, net cash provided by operating activities was $6.9
million. The net use of cash in investing activities was $23.1 million,
primarily representing $17.6 million as the aggregate cash consideration paid in
the Ocean, Tee-Off and Alpha acquisitions, and $5.0 million in capital
expenditures. Financing activities provided net cash of $15.9 million primarily
from borrowings under the bank credit facility and proceeds from the December
1995 stock offering. The proceeds from the borrowings were used primarily to
finance the Ocean, Tee-Off and Alpha acquisitions.

     The Company's principal capital needs will be to finance any future
acquisitions and ongoing capital expenditures. Although the Company currently
believes that cash flow from operations and available borrowings under the 1997
Credit Facility will be sufficient to meet the Company's expected working
capital

                                       26
<PAGE>   27

and capital expenditure requirements and future debt service obligations for the
foreseeable future, there can be no assurance that this will be the case. The
Company believes its fiscal 1998 capital expenditure requirements, excluding
acquisitions, will be approximately $4.0 million. The Company anticipates that
such capital expenditures will be required primarily to acquire additional
processing equipment, management information systems, furniture and fixtures and
leasehold improvements.

SEASONALITY

     The Company believes that the promotional products industry traditionally
tends to generate lower sales during the Company's second fiscal quarter. The
Company attempts to offset seasonal demand by offering promotional programs on a
variety of items. The Company generates a significant portion of its revenues
during its third and fourth quarters due in part to the golf season and the
warmer weather of the summer months.

SUPPLEMENTAL DATA

     The Company's income from continuing operations before extraordinary loss,
income taxes, interest expense, depreciation and amortization ("EBITDA") grew at
a compound annual growth rate of 23.7%, from $14.5 million in fiscal 1995 to
$23.1 million in fiscal 1997 ($21.3 million in fiscal 1997 net of restructuring
and unusual charges of $1.8 million). The non-cash amortization impact to net
income per share for fiscal 1996 and 1997, after tax, was equal to $0.46 and
$0.47, respectively. The Company believes that the presentation of EBITDA
facilitates an investor's understanding of the effects on the Company's
operations of amortization of goodwill and other intangibles and increased
interest expense under indebtedness incurred in connection with various
acquisitions which substantially impacted net income, net income per common
share and cash flow. EBITDA should not be considered by an investor as an
alternative to net income, as an indicator of the Company's operating
performance or to cash flow as a measure of liquidity. EBITDA is not used in the
presentation of financial statements prepared in accordance with generally
accepted accounting principles.

INFLATION

     Inflation affects the cost of goods and services used by the Company. The
competitive environment somewhat limits the ability of the Company to recover
higher costs by raising prices, although the Company does selectively increase
prices for certain products. Moreover, the Company's products are sold to
distributors based on catalog prices. Catalogs are published annually, and the
Company generally is not able to raise prices until a new catalog is published.
The Company attempts to mitigate the adverse effects of future inflation through
selective price increases, improved productivity and cost containment efforts.

NEW FINANCIAL STANDARDS

     In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share", which is required to be adopted in February
1998. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods. 
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options will be excluded. The impact on basic and
fully diluted earnings per share is not expected to be material.

     Also, in June 1997, the FASB issued SFAS No. 131. "Disclosures about
Segments of an Enterprise and Related Information" SFAS 131 establishes
standards for the reporting of financial information from operating segments in
annual and interim financial statements. This Statement requires that for
evaluating segment performance and deciding how to allocate resources to
segments. Because this Statement addresses how supplemental financial
information is disclosed in annual and interim reports, the adoption will have
no material impact on the financial statements.  SFAS No. 131 will become
effective for the Company's fiscal year 1999.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Not applicable
        
                                       27
<PAGE>   28

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NORWOOD PROMOTIONAL PRODUCTS, INC.

Annual Financial Statements

Report of Ernst & Young LLP, Independent Auditors

Consolidated Balance Sheets as of August 31, 1996 and August 30, 1997

Consolidated Statements of Income for the years ended September 2, 1995, August
31, 1996 and August 30, 1997

Consolidated Statements of Shareholders' Equity for the years ended September 2,
1995, August 31, 1996 and August 30, 1997

Consolidated Statements of Cash Flows for the years ended September 2, 1995,
August 31, 1996 and August 30, 1997

Notes to Consolidated Financial Statements




                                       28
<PAGE>   29

                         REPORT OF INDEPENDENT AUDITORS



Board of Directors and Shareholders
Norwood Promotional Products, Inc.

     We have audited the accompanying consolidated balance sheets of Norwood
Promotional Products, Inc. as of August 31, 1996 and August 30, 1997 and the
related consolidated statements of income, shareholders' equity, and cash flows
for the years ended September 2, 1995, August 31, 1996 and August 30, 1997. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule 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.

     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 also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Norwood
Promotional Products, Inc. at August 31, 1996 and August 30, 1997, and the
consolidated results of their operations and their cash flows for the years
ended September 2, 1995, August 31, 1996 and August 30, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.


                                                 ERNST & YOUNG LLP
San Antonio, Texas
October 10, 1997


                                       29
<PAGE>   30

                       NORWOOD PROMOTIONAL PRODUCTS, INC.
                           CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                AUGUST 31,    AUGUST 30,
                                                                  1996          1997
                                                                ---------    ---------

<S>                                                             <C>          <C>      
     ASSETS
     Current Assets:
       Cash and cash equivalents                                $   1,861    $   2,609
       Accounts receivable                                         21,621       24,282
       Income taxes receivable                                         --          551
       Other receivables                                              724          713
       Inventories                                                 31,823       32,105
       Prepaid expenses and other current assets                    2,231        2,464
                                                                ---------    ---------
         Total current assets                                      58,260       62,724

     Property, plant and equipment, net                            19,585       21,141
     Deferred income taxes                                            751        2,549
     Goodwill                                                      35,266       39,009
     Other assets                                                   7,514        9,771
                                                                ---------    ---------
          Total assets                                          $ 121,376    $ 135,194
                                                                =========    =========

     LIABILITIES AND SHAREHOLDERS' EQUITY
     Current Liabilities:
       Trade accounts payable                                   $  10,269    $  11,299
       Accrued liabilities                                          5,920       11,197
       Income taxes payable                                           129           --
       Current portion of long-term debt                            6,378        1,871
       Current portion of lease obligation                            316          481
                                                                ---------    ---------
         Total current liabilities                                 23,012       24,848

     Long-term debt, excluding current portion                     40,447       58,859
     Capital lease obligation, excluding current portion              537          211

     Shareholders' equity:
       Common stock, no par value; 20,000,000 shares
         authorized; 5,615,791 and 5,638,789 shares issued at
         August 31, 1996 and August 30, 1997, respectively         22,597       22,858
       Additional paid-in capital                                  29,340       29,340
       Less cost of treasury stock; 1,430 and 576,530 shares
         at August 31, 1996 and August 30, 1997, respectively          (8)      (7,391)
       Retained earnings                                            5,465        6,469
                                                                ---------    ---------
                                                                   57,394       51,276
       Less receivables for purchase of common stock                  (14)          --
                                                                ---------    ---------
         Total shareholders' equity                                57,380       51,276
                                                                ---------    ---------
         Total liabilities and shareholders' equity             $ 121,376    $ 135,194
                                                                =========    =========
</TABLE>


                             See accompanying notes



                                       30
<PAGE>   31

                       NORWOOD PROMOTIONAL PRODUCTS, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                           YEAR ENDED
                                              ------------------------------------
                                              SEPTEMBER 2, AUGUST 31,   AUGUST 30,
                                                  1995       1996         1997
                                              ------------ ----------   ----------

<S>                                            <C>         <C>         <C>      
Sales                                          $ 103,860   $ 144,048   $ 175,835
Cost of sales                                     70,963     100,245     125,732
                                               ---------   ---------   ---------
Gross profit                                      32,897      43,803      50,103

Operating expenses:
  Sales and marketing                             11,290      16,441      18,119
  General and administrative                       9,037      12,171      13,125
  Amortization                                     2,119       3,538       3,885
  Restructuring and unusual charges                   --       1,640       1,816
                                               ---------   ---------   ---------
Total operating expenses                          22,446      33,790      36,945
                                               ---------   ---------   ---------

Operating income                                  10,451      10,013      13,158

Interest expense                                   3,619       3,246       3,002
                                               ---------   ---------   ---------
Income from continuing operations before
  income taxes and extraordinary loss              6,832       6,767      10,156

Provision for income taxes                         2,800       2,705       4,091
                                               ---------   ---------   ---------
Income from continuing operations before
  extraordinary loss                               4,032       4,062       6,065

Discontinued operations:
  Gain (loss) from operations, net of tax             --          93      (1,960)
  Loss on disposal, net of tax                        --          --      (2,860)

Extraordinary loss from debt extinguishment,
net of tax                                            --          --        (241)
                                               ---------   ---------   ---------

Net income                                     $   4,032   $   4,155   $   1,004
                                               =========   =========   =========
</TABLE>



                                       31
<PAGE>   32

                       NORWOOD PROMOTIONAL PRODUCTS, INC.
                  CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                             YEAR ENDED
                                                             ------------------------------------------
                                                             SEPTEMBER 2,    AUGUST 31,      AUGUST 30,
                                                                1995           1996             1997
                                                             ----------      ----------      ----------

<S>                                                          <C>             <C>             <C>       
Net income (loss) per common share:
 Primary:
  Income from continuing operations
    before extraordinary loss                                $     1.11      $     0.80      $     1.10
  Discontinued operations                                            --            0.02           (0.88)
  Extraordinary loss                                                 --              --           (0.04)
                                                             ----------      ----------      ----------
  Net income                                                 $     1.11      $     0.82      $     0.18
                                                             ==========      ==========      ==========
 Fully diluted:
  Income from continuing operations
    before extraordinary loss                                $     1.10      $     0.80      $     1.10
  Discontinued operations                                            --            0.02           (0.88)
  Extraordinary loss                                                 --              --           (0.04)
                                                             ----------      ----------      ----------
  Net income                                                 $     1.10      $     0.82      $     0.18
                                                             ==========      ==========      ==========
Weighted average number of common shares outstanding:
  Primary                                                     3,636,259       5,090,000       5,500,000
  Fully diluted                                               3,668,175       5,090,000       5,500,000
</TABLE>

                             See accompanying notes

                                       32
<PAGE>   33

                       NORWOOD PROMOTIONAL PRODUCTS, INC.
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                             RECEIVABLES
                                                                                FOR
                                                        ADDITIONAL  RETAINED   PURCHASES                TOTAL
                                     COMMON STOCK        PAID-IN   EARNINGS   OF COMMON     TREASURY SHAREHOLDERS'
                                   SHARES    AMOUNT      CAPITAL  (DEFICIT)     STOCK        STOCK      EQUITY
                                -------------------------------------------------------------------------------

<S>                                <C>     <C>        <C>        <C>         <C>         <C>         <C>     
Balance at September 3, 1994        3,539   $ 19,613   $    369   $ (2,722)   $   (385)   $     (4)   $ 16,871
  Treasury stock purchases             --         --         --         --          (4)         --          (4)
  Exercise of stock options             3          4         --         --          --          --           4
  Payment on shareholder notes         --         --         --        131          --         131
  Net income                           --         --      4,032         --          --       4,032
                                -------------------------------------------------------------------------------
Balance at September 2, 1995        3,542     19,617        369      1,310        (254)         (8)     21,034
  Exercise of stock options            --         --         --         --           3          15          15
  Payment on shareholder notes         --         --         --        240          --          --         240
  Conversion of notes payable          --         --         --         --          56         950         950
  Sale of common stock              2,015      2,015     28,971         --          --          --      30,986
  Net income                           --         --      4,155         --          --       4,155
                                -------------------------------------------------------------------------------
Balance at August 31, 1996          5,616     22,597     29,340      5,465         (14)         (8)     57,380
  Treasury stock purchases             --         --         --         --      (7,383)     (7,383)
  Exercise of stock options           124         --         --         --          --         124          13
  Sale of common stock                137         --         --         --          --         137          10
  Payment on shareholder notes         --         --         --         14          --          --          14
  Net  income                          --         --      1,004         --          --       1,004
                                -------------------------------------------------------------------------------
Balance at August 30, 1997          5,639   $ 22,858   $ 29,340   $  6,469    $     --    $ (7,391)   $ 51,276
                                ===============================================================================
</TABLE>


                             See accompanying notes

                                       33
<PAGE>   34

                       NORWOOD PROMOTIONAL PRODUCTS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                            YEAR ENDED
                                                             --------------------------------------
                                                             September 2,  August 31,    August 30,
                                                                 1995          1996          1997
                                                             ------------  ----------    ----------

<S>                                                            <C>          <C>          <C>      
OPERATING ACTIVITIES
Net income                                                     $   4,032    $   4,155    $   1,004
Adjustments to reconcile net income to net cash provided by
  operating activities:
  Depreciation                                                     1,906        3,135        4,270
  Amortization                                                     2,119        3,538        3,885
  Loss on disposal of discontinued operations                         --           --        4,766
  (Gain) loss on disposal of equipment                                (5)         (21)          14
  Deferred income taxes                                             (258)        (502)      (1,798)
  Changes in operating assets and liabilities, net of effect
    of acquisitions:
    Accounts receivable                                           (2,148)      (1,041)      (1,274)
    Other receivables                                               (431)         (97)          11
    Inventories                                                   (1,671)      (2,957)         (24)
    Prepaid expenses and other assets                               (219)        (141)        (415)
    Trade accounts payable                                        (1,196)         279       (1,059)
    Accrued liabilities                                              287        1,256          123
    Income taxes receivable/payable                                  532         (738)        (659)
                                                               ---------    ---------    ---------
Net cash provided by operating activities                          2,948        6,866        8,844
INVESTING ACTIVITIES
Payments on capital leases                                          (302)        (601)        (401)
Purchases of property, plant and equipment                        (2,073)      (4,919)      (4,863)
Proceeds from sale of property, plant and equipment                   56           32           45
Acquisitions, net of cash acquired                               (22,446)     (17,596)      (8,229)
                                                               ---------    ---------    ---------
Net cash used in investing activities                            (24,765)     (23,084)     (13,448)
FINANCING ACTIVITIES
Proceeds from long-term debt                                      59,684       65,500      120,880
Principal payments on long-term debt                             (36,119)     (80,787)    (106,735)
Treasury stock purchases                                              (4)          --       (7,383)
Sale of common stock                                                  --       30,986          137
Exercise of stock options                                              4            1          124
Payment on shareholder notes                                         131          240           14
Debt issuance fees                                                  (191)         (35)      (1,685)
                                                               ---------    ---------    ---------
Net cash provided by financing activities                         23,505       15,905        5,352
                                                               ---------    ---------    ---------
Net change in cash and cash equivalents                            1,688         (313)         748
Cash and cash equivalents at beginning of period                     486        2,174        1,861
                                                               ---------    ---------    ---------
Cash and cash equivalents at end of period                     $   2,174    $   1,861    $   2,609
                                                               =========    =========    =========
Cash paid during the period for:
  Interest                                                     $   3,396    $   3,420    $   3,898
  Income taxes                                                     2,572        2,945        3,197
</TABLE>


                             See accompanying notes


                                       34
<PAGE>   35

                       Norwood Promotional Products, Inc.
                   Notes to Consolidated Financial Statements
             September 2, 1995, August 31, 1996 and August 30, 1997

1.  DESCRIPTION OF THE BUSINESS

     Norwood Promotional Products, Inc. (the Company) is engaged in the
manufacture and sale of promotional products and has operations throughout the
United States. Products are manufactured domestically as well as imported and
then decorated with an advertiser's message. The Company's product lines are:
wearables; mugs and glassware; sporting goods and leisure products; writing
instruments; sport, travel and tote bags; jackets; pocket specialties and
accessories; desk and business accessories; recognition awards and business
gifts; buttons, badges, magnets, paper products; and golf related items.

2.  SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

     The accompanying financial statements include the accounts of Norwood
Promotional Products, Inc. and its directly and indirectly wholly owned
subsidiaries, Norcorp, Inc., Radio Cap Company, Inc. (RCC), Barlow Promotional
Products, Inc. (Barlow), Key Industries, Inc. (Key), ArtMold Products
Corporation (ArtMold), Air-Tex Corporation (Air- Tex) and Norwood Travel, Inc.
All significant intercompany balances and transactions have been eliminated in
consolidation.

Accounts Receivable

     The Company manufactures and sells promotional products to various
distributors. The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Credit losses
have been within management's expectations. Bad debt expense approximated
$169,000, $330,000 and $181,000 for the years ended September 2, 1995, August
31, 1996 and August 30, 1997, respectively.

     Accounts receivable is shown net of the allowance for doubtful accounts of
$704,000 and $642,000 at August 31, 1996 and August 30, 1997, respectively.

Inventories

     Raw materials and purchased finished goods are stated at the lower of cost
(first-in, first-out method) or market. Work-in-process and manufactured
finished goods inventories are stated at the lower of cost (moving average
method) or market.

Property, Plant and Equipment

     Property, plant and equipment are stated at cost. Major renewals and
betterments are charged to the property accounts while replacements,
maintenance, and repairs which do not improve or extend the lives of the
respective assets are expensed currently. Depreciation is

                                       35
<PAGE>   36

                       Norwood Promotional Products, Inc.
                   Notes to Consolidated Financial Statements
             September 2, 1995, August 31, 1996 and August 30, 1997

provided at amounts calculated to amortize the cost of the assets over their
estimated useful economic lives using the straight-line method. Estimated useful
lives are five to thirty-one years for buildings and improvements and three to
seven years for machinery and equipment.

Federal Income Taxes

     The Company records income taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.

Fiscal Year

     The Company has a fiscal year of 52- or 53-week periods that end on the
Saturday closest to August 31. All references to 1995, 1996 and 1997 herein are
to the fiscal years ended September 2, 1995 (52-week period), August 31, 1996
(52-week period) and August 30, 1997 (52-week period), respectively.

Cash Equivalents

     Cash equivalents are highly liquid investments with a maturity date no
longer than 90 days.

Fair Value of Financial Instruments

     The carrying amount reported in the balance sheet for cash and cash
equivalents, accounts receivable, accounts payable, and long-term debt
approximates its fair value. The Company estimates the fair value of long-term
debt by discounting the future cash flows of the instrument, using the Company's
incremental rate of borrowing for a similar instrument.

Earnings Per Share

     Earnings per common share is computed using the weighted average number of
shares of common stock and common stock equivalents outstanding during each
period.

     The dilutive effect of stock options and common stock warrants are
calculated using the treasury stock method. In determining the dilutive effect
of these stock options and warrants, the common stock equivalents were
calculated based upon the greater of the closing price on the last day of the
year or the average price of the Company's common stock for the year in applying
the treasury stock method to the fully diluted earnings per share calculation.

     In February 1997, the FASB issued Statement No. 128, Earnings per Share,
which is required to be adopted on December 31, 1997. At that time, the Company
will be required to

                                       36
<PAGE>   37

                       Norwood Promotional Products, Inc.
                   Notes to Consolidated Financial Statements
             September 2, 1995, August 31, 1996 and August 30, 1997

change the method currently used to compute earnings per share and to restate
prior periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options and warrants will be excluded. In
addition for calculating fully diluted earnings per share, the treasury stock
method will be applied using the average price for the period rather than the
higher of the average price or the closing price on the last day of the year.
The impact is expected to result in an increase in primary earnings per share of
$0.01 to $0.03 for 1995, 1996 and 1997. The impact on the calculation of fully
diluted earnings per share is not expected to be material.

Concentration of Foreign Suppliers

     The Company derives a significant portion of its sales from products
supplied by Far East manufacturers. While the Company is not dependent on any
single manufacturer in the Far East, the Company could be adversely affected by
political or economic disruptions affecting the business or operations of third
party manufacturers located in the Far East.

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 reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

Reclassification and Restatement

     Certain prior year balances have been reclassified for comparative
purposes. The fiscal 1996 amounts have been restated to reflect the activity for
the five months of ownership of the Alpha Products retail division as
discontinued operations.

3.  ACQUISITIONS

     On February 14, 1997, the Company acquired substantially all of the assets
of Wesburn Golf (Wesburn) and DM Apparel, Inc. (DMA). In connection with the
acquisition of Wesburn, the Company (through its wholly owned subsidiary
ArtMold) paid $4.8 million in cash, issued $2.0 million in notes payable and
non-compete agreements and assumed or incurred liabilities of $1.8 million. In
connection with the acquisition of DMA, the Company (through its wholly owned
subsidiary Air-Tex) paid $885,000 in cash and assumed or incurred liabilities of
$600,000. Wesburn and DMA are suppliers of promotional products.

     On November 20, 1995, January 23, 1996 and April 1, 1996, the Company
acquired substantially all of the assets of Ocean Specialty Manufacturing
Corporation (Ocean), Tee-Off

                                       37
<PAGE>   38

                       Norwood Promotional Products, Inc.
                   Notes to Consolidated Financial Statements
             September 2, 1995, August 31, 1996 and August 30, 1997

Enterprises, Inc. (Tee-Off) and Alpha Products, Inc. (Alpha), respectively. In
connection with the acquisition of Ocean, the Company (through its wholly owned
subsidiary Key) paid $2.5 million in cash, issued $1.0 million in convertible
notes and other debt and assumed or incurred liabilities of $1.4 million. In
connection with the acquisition of Tee-Off, the Company (through its
wholly owned subsidiary ArtMold) paid $6.0 million in cash, issued $1.5 million
in notes and other debt and assumed or incurred liabilities of $1.7 million. In
connection with the acquisition of Alpha, the Company (through its wholly owned
subsidiary RCC) paid $6.7 million in cash and assumed or incurred liabilities of
$3.2 million. Ocean, Tee-Off and Alpha are suppliers of promotional products.

     On March 1, 1995, June 13, 1995 and July 31, 1995, the Company acquired
substantially all of the assets of Air- Tex, Designer Plastics, Inc. (Designer)
and BTS Group, Inc. (BTS), respectively. In connection with the acquisition of
Air-Tex, the Company paid $13.3 million in cash, issued $2.5 million in
convertible notes and other debt, issued 60,294 warrants to purchase the
Company's common stock at $17.00 per share and assumed or incurred liabilities
of $2.4 million. In connection with the acquisition of Designer, the Company
(through its wholly owned subsidiary Air-Tex) paid $2.4 million in cash, issued
$1.5 million in notes payable and non-compete agreements and assumed liabilities
of $1.0 million. In connection with the acquisition of BTS, the Company (through
its wholly owned subsidiary Barlow) paid $6.3 million in cash, issued $3.5
million in notes payable and non-compete agreements and assumed liabilities of
$1.4 million. Additionally in 1997, the former owners of BTS received an
additional $500,000 under the non-compete agreement due to certain earnings
goals being achieved. Air-Tex, Designer and BTS are suppliers of promotional
products.

     The condensed pro forma results of operations presented below summarize on
an unaudited pro forma basis approximate results of the Company's consolidated
operations for the years ended September 2, 1995, August 31, 1996 and August 30,
1997, assuming that the acquisition of Air-Tex, Designer and BTS occurred at
the beginning of fiscal 1994, the acquisition of Ocean, Tee-Off and Alpha
occurred at the beginning of fiscal 1995 and the acquisition of Wesburn and DMA
occurred at the beginning of fiscal 1996.

<TABLE>
<CAPTION>
                    (in thousands, except per share amounts)

                                                     Years ended
                                      ----------------------------------------
                                      September 2,    August 31,    August 30,
                                         1995            1996          1997
                                      ------------    ----------    ----------

<S>                                    <C>             <C>          <C>     
Net sales                              $160,550        $179,941     $184,008
Operating income                         11,344          10,414       13,130         
Income from continuing operations
  before income taxes                     4,756           6,108        9,880
Income from continuing operations         2,803           3,695        5,902
Earnings per share from continuing
  operations:
</TABLE>


                                       38
<PAGE>   39

                       Norwood Promotional Products, Inc.
                   Notes to Consolidated Financial Statements
             September 2, 1995, August 31, 1996 and August 30, 1997

<TABLE>
<S>                           <C>          <C>                  <C>  
       Primary                $  0.77      $ 0.73               $1.07
       Fully diluted          $  0.76      $ 0.73               $1.07
</TABLE>

     All of the acquisitions were accounted for by the purchase method of
accounting, and accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based on the estimated fair values at the
respective dates of acquisition. The results of Air-Tex, Designer, BTS, Ocean,
Tee-Off, Alpha, Wesburn and DMA have been included in the Company's consolidated
financial statements since their respective acquisition dates.

4.   INVENTORIES

     Net inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                AUGUST 31,           AUGUST 30,
                                   1996                  1997
                                ---------            ---------

<S>                             <C>                  <C>      
Finished goods:
 Imprinted                      $   1,347            $   1,548
 Unimprinted                       20,245               20,095
                                ---------            ---------
                                   21,592               21,643
Work in process                     1,099                1,298
Raw materials                       9,132                9,164
                                ---------            ---------
                                $  31,823            $  32,105
                                =========            =========
</TABLE>

     Inventory obsolescence reserves were $768,000 and $689,000 at August 31,
1996 and August 30, 1997, respectively.

5.   PROPERTY, PLANT AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                              AUGUST 31,         AUGUST 30,
                                                 1996               1997
                                              ----------         ----------

<S>                                            <C>               <C>      
Land                                           $   478           $     478
Buildings and improvements                       6,863               6,789
Machinery and equipment                         20,108              26,843
Machinery and equipment under lease              2,111               1,245
                                               -------           ---------
                                                29,560              35,355
Less accumulated depreciation                   (9,975)            (14,214)
                                               -------           ---------
                                               $19,585           $  21,141
                                               =======           =========
</TABLE>




                                       39
<PAGE>   40
                       Norwood Promotional Products, Inc.
                   Notes to Consolidated Financial Statements
             September 2, 1995, August 31, 1996 and August 30, 1997

6.   GOODWILL AND OTHER ASSETS

     Goodwill and other assets consist of the following balances (in thousands):


<TABLE>
<CAPTION>
                                                                 AUGUST 31,     AUGUST 30,
                                                                    1996           1997
                                                                 ----------     ----------
<S>                                                              <C>            <C>       
Goodwill, less accumulated amortization
    of  $4,573 and $7,283                                        $   35,266     $   39,009
                                                                 ==========     ==========

Non-compete agreement, less accumulated
    amortization of $1,943 and $1,771                                 5,882          6,429
Refinancing and loan origination costs, less
    amortization of $245 and $0                                         488          1,685
Favorable lease, less accumulated amortization of
    $291 and $359                                                       119             51
Long-term deposits                                                      960          1,053
Other                                                                    65            553
                                                                 ----------     ----------
                                                                 $    7,514     $    9,771
                                                                 ==========     ==========
</TABLE>

     Goodwill, resulting from business acquisitions, is amortized on a
straight-line method over their estimated useful lives ranging from 15 to 25
years. Other intangible assets are amortized on a straight-line method over
their estimated useful lives ranging from three to ten years.

     The carrying value of intangible assets is reviewed if the facts and
circumstances suggest that they may be impaired. If this review indicates that
the intangible assets will not be recoverable, the Company's carrying value of
the intangible assets would be reduced by the estimated shortfall of future
discounted cash flows or to market value.

7.   ACCRUED LIABILITIES

     Accrued liabilities consist of the following balances (in thousands):


<TABLE>
<CAPTION>
                                                                 AUGUST 31,     AUGUST 30,
                                                                    1996           1997
                                                                 ----------     ----------
<S>                                                              <C>            <C>       
Salaries, wages and bonuses                                      $    2,554     $    2,736
Discontinued operations                                                  --          4,763
Restructuring cost                                                    1,028          1,386
Professional fees                                                       136            137
Property tax                                                            298            213
Interest                                                                417            126
Sample rebates                                                          410            300
Miscellaneous                                                         1,077          1,536
                                                                 ----------     ----------
                                                                 $    5,920     $   11,197
</TABLE>

                                       40

<PAGE>   41
                       Norwood Promotional Products, Inc.
                   Notes to Consolidated Financial Statements
             September 2, 1995, August 31, 1996 and August 30, 1997

8.   LONG-TERM DEBT

     The Company's long-term debt is summarized below (in thousands):

<TABLE>
<CAPTION>
                                                                                               AUGUST 31,     AUGUST 30,
                                                                                                  1996           1997
                                                                                               ----------     ----------
<S>                                                                                            <C>            <C>
Senior term note payable, interest at prime or LIBOR plus an interest spread
     based on a leverage coverage ratio (8.1% at August 30, 1997), payable
     quarterly, principal payable in quarterly installments of $100,000 through
     August 2003, then quarterly installments of $4.7 million through August
     2005; secured by substantially all assets; subject to certain restrictive
     convenants as further described below                                                             --     $   40,000
Senior revolver credit loan, interest at prime or LIBOR plus an interest spread
     based on a leverage coverage ratio ($3.7 and $3.29 million at 9.0% and
     7.38%, respectively, at August 30, 1997), payable quarterly, principal
     payable on August 27, 2003; secured by substantially all assets; subject to
     certain restrictive convenants as further described below                                         --          6,990
Senior reducing revolver credit loan, interest at prime or LIBOR plus an
     interest spread based on a leverage coverage ratio, payable quarterly,
     principal payable on August 27, 2003; secured by substantially all assets;
     subject to certain restrictive convenants as further described below. No
     borrowings outstanding at August 30, 1997                                                         --             --
Term note payable to a bank, interest at prime or LIBOR plus an interest spread
     based on an interest coverage ratio (7.875% at August 31, 1996). Term note
     payable paid in full in 1997                                                              $    7,525             --
Revolving line of credit to a bank, interest at prime or LIBOR plus an interest
     spread based on an interest coverage ratio ($4.4, $4.0 and $3.1 million at
     8.50%, 7.598% and 7.625%, respectively, at August 31, 1996). Revolving line
     of credit paid in full in 1997                                                                11,450             --
Acquisition note payable to a bank, interest at prime or LIBOR plus an interest
     spread based on an interest coverage ratio ($9.0 and $5.75 million at 7.848% 
     and 7.91%, respectively, at August 31, 1996). Acquisition note payable paid 
     in full in 1997                                                                               14,750             --
</TABLE>

                                       41
<PAGE>   42
                       Norwood Promotional Products, Inc.
                   Notes to Consolidated Financial Statements
             September 2, 1995, August 31, 1996 and August 30, 1997

<TABLE>
<CAPTION>
                                                                                               AUGUST 31,     AUGUST 30,
                                                                                                  1996           1997
                                                                                               ----------     ----------
<S>                                                                                            <C>            <C>
Non-Compete payable to former owners of Air-Tex, Designer, BTS, Ocean, Tee-Off
     and Wesburn. Payments are due over the life of each respective Non-Compete
     Agreements and range from two to ten years                                                     5,557          6,122
Note payable to a bank, interest at 7%. Note paid in full in 1997                                     948             --
Notes payable to former owners of Key, interest at 8%, payable quarterly,
     balance due May 1, 1999; secured by irrevocable letter of credit issued by
     Company's primary lender                                                                       1,125          1,125
Notes payable to former owners of Key, interest at 8%, payable quarterly,
     balance due May 1, 1999; convertible at $17.00 per share into the Company's
     common stock. In May 1996, $950,000 of the notes payable was converted into
     55,882 shares of the Company's common stock                                                    1,300          1,300
Notes payable to former owners of Air-Tex, interest at 9%, payable quarterly,
     balance due March 1, 2000                                                                        200            200
Notes payable to former owners of Air-Tex, interest at 9%, payable quarterly,
     balance due March 1, 2000, convertible at $17.00 per share into the
     Company's common stock                                                                           400            400
Notes payable to former owners of Air-Tex, interest at 6%, payable quarterly,
     balance due March 1, 2000, convertible at $17.00 per share into the
     Company's common stock                                                                           625            625
Notes payable to former owner of Wesburn, interest at 8%, payable annually,
     principal payable in five annual installments of $200,000                                         --          1,000
Notes payable to former owners of Designer, interest at 7%, payable quarterly,
     balance due June 9, 2000, convertible at $17.00 per share into the
     Company's common stock                                                                           500            500
Notes payable to former owners of BTS, interest at 8%, payable quarterly, balance
     due July 14, 2000, convertible at $18.30 per share into the Company's
     common stock                                                                                     500            500
Notes payable to former owners of Ocean, interest at 6%, payable quarterly,
     balance due November 17, 2000, convertible at $20.00 per share into the
     Company's common stock                                                                           300            300
Notes payable to former owners of Tee-Off, interest at 5.5%, payable
     bi-annually, balance due January 22, 2001                                                        456            364
Other notes payable                                                                                 1,189          1,304
                                                                                               ----------     ----------
                                                                                                   46,825         60,730
Less current maturities                                                                             6,378          1,871
                                                                                               ----------     ----------
                                                                                               $   40,447     $   58,859
                                                                                               ==========     ==========
</TABLE>

                                       42
<PAGE>   43
                       Norwood Promotional Products, Inc.
                   Notes to Consolidated Financial Statements
             September 2, 1995, August 31, 1996 and August 30, 1997

The aggregate maturities of long-term debt as of August 30, 1997 are as follows
(in thousands):

<TABLE>
          <S>                      <C>       
          1998                     $    1,871
          1999                          4,204
          2000                          5,007
          2001                          2,681
          2002                          1,192
          Thereafter                   45,775
                                   ----------
                                   $   60,730
                                   ==========
</TABLE>

     On August 28, 1997, the Company entered into a new credit agreement with a
syndicate of banks and other financial institutions providing for up to $125.0
million in new credit facilities (collectively, the "1997 Credit Facility"). The
1997 Credit Facility consists of a $40 million senior term loan used to repay
the Company's previous bank facility debt, a $60 million senior reducing
revolver credit loan to be used for acquisitions and a $25 million revolver
credit loan to be used for working capital purposes. The final maturity of the
term loan portion of the 1997 Credit Facility is the end of fiscal 2005. The
reducing revolver facility and the revolver credit facility under the 1997
Credit Facility each terminate at the end of fiscal 2003. Borrowings under the
1997 Credit Facility are jointly and severally guaranteed by all subsidiaries
of the Company, including acquired or created subsidiaries.

     Pursuant to the terms of the 1997 Credit Facility, the Company is required
to maintain certain financial ratios and is subject to limitation on dividends,
additional indebtedness, liens, investments, issuance of stock, mergers and
acquisitions, and sales of assets. The Company is obligated to pay a commitment
fee ranging from .1875% to .375% of the unused portion of the 1997 Credit
Facility.

     In conjunction with the repayment of the previous bank facility debt, the
Company recognized an extraordinary loss on the write-off of the previous bank
facility deferred financing and loan origination costs of approximately
$241,000, net of tax benefit of approximately $161,000.

9.   INCOME TAXES

     Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows (in thousands):

                                       43
<PAGE>   44
                       Norwood Promotional Products, Inc.
                   Notes to Consolidated Financial Statements
             September 2, 1995, August 31, 1996 and August 30, 1997

<TABLE>
<CAPTION>
                                                                 AUGUST 31,     AUGUST 30,
                                                                    1996           1997
                                                                 ----------     ----------
<S>                                                              <C>            <C>       
Deferred tax liabilities:
   Tax over book depreciation                                    $      589     $    1,048
   Prepaid expenses                                                      55             13
   Catalog and sample expenses                                          234            223
   Other - net                                                           88             77
                                                                 ----------     ----------
        Total deferred tax liabilities                                  966          1,361

Deferred tax assets:
   Restructuring costs                                                  465          2,434
   Uniform capitalization of inventory costs                            268            337
   Valuation allowance on inventory                                     127            148
   Vacation accrual                                                     265            322
   Bad debt reserve                                                     162            156
   Amortization of non-compete agreement                                430            513
                                                                 ----------     ----------
        Total deferred tax assets                                     1,717          3,910
                                                                 ----------     ----------
        Net deferred tax asset                                   $      751     $    2,549
                                                                 ==========     ==========
</TABLE>

     Management has determined that existing deductible temporary differences
will reverse within three years and may be carried back against prior taxable
earnings. Therefore, it is management's opinion that it is more likely than not
that the entire benefit of existing deductible temporary differences will be
realized and no valuation allowance for deferred tax assets is necessary at
August 30, 1997. Significant components of the provision (benefit) for income
taxes are as follows (in thousands):

<TABLE>
<CAPTION>
                                                   YEAR ENDED
                                   ------------------------------------------
                                  SEPTEMBER 2,     AUGUST 31,      AUGUST 30,
                                      1995            1996            1997
                                   ----------      ----------      ----------
<S>                                <C>             <C>             <C>       
Current:
  Federal                          $    2,813      $    2,994      $    2,249
  State                                   260             312             130
                                   ----------      ----------      ----------
     Total current                      3,073           3,306           2,379
Deferred:
  Federal                                (225)           (491)         (1,720)
  State                                   (48)            (45)            (78)
                                   ----------      ----------      ----------
     Total deferred                      (273)           (536)         (1,798)
                                   ----------      ----------      ----------
                                   $    2,800      $    2,770      $      581
                                   ==========      ==========      ==========
</TABLE>

     The provision for income taxes of $581,000 at August 30, 1997 consists of
$4,091,000 from continuing operations offset by the tax benefit of $3,349,000
from discontinued operations

                                       44

<PAGE>   45

                       Norwood Promotional Products, Inc.
                   Notes to Consolidated Financial Statements
             September 2, 1995, August 31, 1996 and August 30, 1997

and $161,000 from extraordinary loss from debt extinguishment. The provision for
income taxes of $2,770,000 at August 31, 1996 consists of $2,705,000 from
continuing operations and $65,000 from discontinued operations.

     The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is (in thousands):

<TABLE>
<CAPTION>
                                                                                YEAR ENDED
                                                  ---------------------------------------------------------------------
                                                     SEPTEMBER 2,              AUGUST 31,                 AUGUST 30,
                                                           1995                    1996                      1997
                                                  -------------------     --------------------      -------------------
                                                    AMOUNT         %        AMOUNT          %         AMOUNT         %
                                                  ----------       --     ----------        --      ----------       --
<S>                                               <C>              <C>    <C>               <C>     <C>              <C>
Tax at U.S. statutory rates                       $    2,323       34     $    2,301        34      $    3,453       34
State income taxes, net of federal tax
  benefit                                                212        3            267         4              52        1
Amortization of goodwill                                 202        3            206         3             206        2
Other - net                                               63        1            (69)       (1)            380        3
                                                  ----------       --     ----------        --      ----------       --
Provision for income taxes before
  discontinued operations and
  extraordinary loss                                   2,800       41          2,705        40           4,091       40
                                                  ==========       ==     ==========        ==      ==========       ==
</TABLE>


10.  COMMITMENTS AND CONTINGENCIES

     The Company has entered into leases for facilities and office equipment.
Leases that expire generally are expected to be renewed or replaced by other
leases. A summary of minimum lease commitments at August 30, 1997 that have
initial or remaining noncancelable lease terms in excess of one year are as
follows:

<TABLE>
<CAPTION>
                                                                  Capital       Operating
                                                                 ----------     ----------
<S>                                                              <C>            <C>       
1998                                                             $      437     $    2,645
1999                                                                    215          1,942
2000                                                                     74          1,463
2001                                                                     14            959
2002                                                                     --            845
Thereafter                                                               --          4,494
                                                                 ----------     ----------
Total minimum lease payments                                            740     $   12,348
                                                                                ==========
Less amounts representing interest                                      (48)
                                                                 ----------
Present value of net minimum lease
  payments                                                       $      692
                                                                 ==========
</TABLE>


     Total expense under operating leases amounted to approximately $1,726,000,
$2,708,000

                                       45
<PAGE>   46
                       Norwood Promotional Products, Inc.
                   Notes to Consolidated Financial Statements
             September 2, 1995, August 31, 1996 and August 30, 1997

and $2,901,000 for the years ended September 2, 1995, August 31, 1996 and August
30, 1997, respectively.

     The Company is subject to litigation from time to time in the ordinary
course of business. Although the amount of any liability with respect to
currently pending litigation cannot be determined, in the opinion of management,
such liability will not have a material adverse effect on the Company's
financial condition or results of operations.

11.  STOCK OFFERING

     On December 20, 1995, the Company completed the sale of 2,015,481 shares of
Common Stock in a public offering. The net proceeds of this offering of
approximately $31 million were used to repay indebtedness under the previous
bank facility. The Company restated its 1996 Common stock and Additional
paid-in capital accounts to reflect as Additional paid-in capital the net
proceeds received from the sale of the above shares in excess of $1 per share.

12.  STOCK OPTIONS AND WARRANTS

     The FASB issued Statement No. 123, Accounting for Stock-Based Compensation
(FASB 123), which encourages, but does not require, the recognition of
compensation expense for virtually all stock options based on their fair value
on the date of grant. The Company has elected to continue to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25), and related interpretations in accounting for its employee stock options.
Under APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. Because the Company has elected to continue
to follow APB 25, FASB 123 requires disclosure of pro forma net income and
earnings per share as if the new fair value accounting method was adopted.

     The Company's 1989 and 1994 incentive stock option plans allow the
granting to officers and other key employees incentive stock options and other
stock-based incentive compensation. A total of 330,000 shares of common stock,
which was increased to 550,000 shares in 1997, has been reserved for issuance
under these stock option plans. Under the terms of these plans, the purchase
price of the shares will not be less than the fair market value at the time the
option is granted and each option granted shall become exercisable in three
annual installments beginning on the third anniversary of the date of grant.

     The Company also has a non-qualified stock option plan under which it
granted 11,028 options to various employees at not less than fair value at the
date of grant. The options vested on June 4, 1996.

 A summary of the Company's stock option activity, and related information for
1995, 1996 and 1997 follows:

                                       46
<PAGE>   47
                       Norwood Promotional Products, Inc.
                   Notes to Consolidated Financial Statements
             September 2, 1995, August 31, 1996 and August 30, 1997

<TABLE>
<CAPTION>
                                    1995                     1996                    1997
                                    ----                     ----                    ----
                              Options     Exercise    Options     Exercise    Options    Exercise
                              (000's)      Price      (000's)      Price      (000's)     Price
                               ----      ---------     ----      ---------     ----     ---------
<S>                           <C>        <C>          <C>        <C>          <C>       <C>
Outstanding - beginning
   of year                      144       $1 - $13      234       $1 - $16      300      $1 - $23
Granted                          96      $11 - $16       81      $14 - $23       78     $14 - $19
Exercised                        (3)       $1 - $5       (3)            $1      (13)     $1 - $10
Forfeited                        (3)       $1 - $5      (12)      $1 - $16      (46)     $1 - $19
                               ----                    ----                    ----
Outstanding - end of
   year                         234       $1 - $16      300       $1 - $23      319      $1 - $23
                               ====                    ====                    ====
Exercisable at end of year       16        $1 - $5       34        $1 - $9       69      $1 - $13
</TABLE>


     If the Company had adopted the fair value accounting method under FASB 123,
pro forma net income for 1996 and 1997 would be $4.1 million and $0.8 million,
respectively, and proforma earnings per share for 1996 and 1997 would be $0.80
and $0.14, respectively. Because FASB 123 is applicable only to options granted
subsequent to August 31, 1995, its proforma effect will not be fully reflected
until fiscal 1998. The fair value of these options was estimated using a
Black-Scholes option pricing model with a risk-free interest rate of 6%, a
volatility factor of .30, a dividend yield of 0%, and an expected option life of
six years. The weighted average fair value of options granted during 1996 and
1997 was $7.13 and $6.94, respectively.

     On June 23, 1993, the Company issued to its underwriting representatives in
its initial security offering nontransferable warrants to purchase 150,000
shares of the Company's common stock, exercisable for a period of four years
commencing one year from June 23, 1993, at an exercise price of $11.00 per
share.

     On November 8, 1993, the Company adopted the Norwood Promotional Products,
Inc. 1993 Non-Employee Director Stock Purchase Plan, which is designed to
attract and retain highly qualified non-employee directors, reserving 30,000
shares of common stock. Under the terms of this plan, each non-employee director
received warrants to purchase 6,000 shares as of the date of adoption or on
their respective date of election, the purchase price of the shares subject to
each warrant granted shall be $11.00 per share, warrants may not be granted
after five years from the date of adoption and all warrants issued may only be
exercised after the first anniversary date through the fifth anniversary date
from the date of grant. During the year ended August 30, 1997, no warrants were
granted under the non-employee director stock purchase plan. Warrants to
purchase 24,000 shares of the Company's Common Stock were exercisable as of
August 30, 1997.

     In 1995, 1996 and 1997, certain directors were granted warrants in lieu of
director's fees. The warrants were issued at the fair market value at the date
of grant and are exercisable

                                       47
<PAGE>   48
                       Norwood Promotional Products, Inc.
                   Notes to Consolidated Financial Statements
             September 2, 1995, August 31, 1996 and August 30, 1997

immediately. A total of 12,000, 9,456 and 18,000 warrants were issued to
director's in 1995, 1996 and 1997, respectively. None of these warrants have 
been exercised as of August 30, 1997.

13.  EMPLOYEE BENEFIT PLAN

     The Company adopted the Norwood Promotional Products, Inc. Employee 401(k)
Plan for the purpose of providing retirement benefits for substantially all
employees. Contributions to the Plan are made both by the employees and the
Company. The Company matches 30% of the first $1,000 of an employee's deferred
compensation to a maximum of $300 per year. Company-matched contributions vest
to the employees based upon their number of years of service to the Company.
Contributions to this Plan of $42,000, $77,000 and $117,000 were charged to
expense for the years ended September 2, 1995, August 31, 1996 and August 30,
1997, respectively.

     Effective May 9, 1996, the Company adopted the Employee Stock Purchase Plan
of Norwood Promotional Products, Inc. for the purpose of providing substantially
all employees the opportunity to purchase common stock of the Company. During
1997, employees purchased 9,644 shares of common stock under the Employee Stock
Purchase Plan.

     The Company does not offer or provide post-retirement health care benefits
to any of its employees.

14.  RESTRUCTURING AND UNUSUAL CHARGES

     The Company in its ongoing review of its operations has taken several
initiatives in fiscal 1996 and 1997 to restructure its businesses.

     In the fourth quarter of 1997, the Company recorded restructuring and
unusual charges of approximately $1,816,000 ($1,084,000 net of tax) based on its
decision to consolidate its Corporate offices with its Executive offices,
realign its divisions to capitalize on processing capacity and product line
restructurings, and to write-off certain capitalized costs associated with its
decision to terminate its negotiations related to the acquisition of the Rou
bill Group in the fourth quarter of 1997. The consolidation of the Corporate
offices with its Executive offices is expected to be completed in early 1998. A
provision for closure of the Corporate offices totaling approximately $350,000,
including write-off of certain leasehold improvements, has been accrued.
Additionally, approximately $291,000 has been accrued for realignment of its
divisions, including product line restructurings. In conjunction with the above
activities, a total of $425,000 of severance and benefits has been accrued.
Capitalized professional fees and organizational costs totaling $750,000
associated with the Rou bill Group acquisition were expensed in the fourth
quarter of 1997.

     In the fourth quarter of 1996, the Company recorded restructuring and
unusual charges of approximately $1,640,000 ($984,000 net of tax) based on its
decision to consolidate certain

                                       48

<PAGE>   49
                       Norwood Promotional Products, Inc.
                   Notes to Consolidated Financial Statements
             September 2, 1995, August 31, 1996 and August 30, 1997

facilities into other existing facilities, terminate certain employees, and
write-off certain capitalized costs associated with a target acquisition. A
provision for closure of these facilities totaling approximately $890,000,
including the write-off of certain leasehold improvements, has been accrued or
paid. Approximately $560,000 of future salary and benefits was accrued or paid
in the fourth quarter of 1996. These employment agreements have remaining terms
that expire over the next year. Additionally, capitalized acquisition-related
costs of approximately $190,000 were expensed in the fourth quarter of 1996.

15.  DISCONTINUED OPERATIONS

     The Company has decided to discontinue the operations of the Alpha Products
retail division ("retail division") and is actively searching for a buyer for
its assets and business. As a result, the promotional products division of Alpha
Products will be relocated to other existing Company facilities. The Company is
expected to cease operations of the retail division and relocate the Alpha
Products promotional products division by the end of calendar 1997. The loss on
the disposal of the retail division and the closing of the existing Alpha
Products facility is expected to be approximately $2.9 million (net of tax
benefit of $1.9 million), which includes estimated losses from operations for
the retail division until operations are discontinued.

     Revenues for the retail division for the five months of ownership in fiscal
year 1996 and for fiscal year 1997 were $7.9 million and $8.7 million,
respectively. Earnings for the retail division for the five months of ownership
in fiscal year 1996 was $93,000 (net of taxes of $65,000) and a loss of $1.96
million (net of tax benefit of $1.4 million) for fiscal year 1997.

     Net assets of the discontinued retail division at the end of 1996 and 1997
consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                          1996         1997
                                        --------     --------
<S>                                     <C>          <C>     
          Accounts receivable           $  1,799     $  1,210
          Inventories                      1,547        1,540
          Property, plant and
               equipment, net              2,208        1,758
          Other assets                        52          197
                                        --------     --------
                                        $  5,606     $  4,705
                                        ========     ========
</TABLE>

                                       49

<PAGE>   50
                       Norwood Promotional Products, Inc.
                   Notes to Consolidated Financial Statements
             September 2, 1995, August 31, 1996 and August 30, 1997

16.  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

     Selected results of operations for each of the fiscal quarters during the
year ended August 31, 1996 and August 30, 1997 are as follows (in thousands,
except per share data):

<TABLE>
<CAPTION>
                                                                1ST            2ND             3RD             4TH
                                                              QUARTER        QUARTER         QUARTER         QUARTER
                                                            ----------      ----------      ----------      ---------- 
<S>                                                         <C>             <C>             <C>             <C>       
Year Ended August 31, 1996
  Net sales                                                 $   33,368      $   30,086      $   41,362      $   39,232
  Gross profit                                                  10,623           8,462          13,085          11,633
  Income from continuing operations                              1,356              88           2,397             221
  Income (loss) from discontinued operations                        --              --             130             (37)
  Net income                                                     1,356              88           2,527             184
  Income per common share:
    Continuing operations                                         0.37            0.02            0.42            0.04
    Discontinued operations                                         --              --            0.02           (0.01)
    Net Income                                              $     0.37      $     0.02      $     0.44      $     0.03

Year Ended August 30, 1997
  Net sales                                                 $   39,818      $   35,268      $   51,816      $   48,933
  Gross profit                                                  12,229          10,007          15,308          12,559
  Income from continuing operations                              1,902             622           3,325             216
  Income (loss) from discontinued operations                      (462)           (457)           (549)           (492)
  Loss on disposal of discontinued operations                       --              --              --          (2,860)
  Extraordinary loss                                                --              --              --            (241)
  Net income (loss)                                              1,440             165           2,776          (3,377)
  Income per common share:
    Continuing operations                                         0.33            0.11            0.62            0.04
    Discontinued operations                                      (0.08)          (0.08)          (0.10)          (0.65)
    Extraordinary loss                                              --              --              --           (0.05)
    Net Income (loss)                                       $     0.25      $     0.03      $     0.52      $    (0.66)
</TABLE>

Quarterly results of operations were impacted by business acquisitions as
follows:

<TABLE>
<CAPTION>
                               INITIAL
         ACQUISITIONS          DATE ACQUIRED                QUARTER IMPACTED
         ------------          -------------                ----------------
         <S>                   <C>                          <C>
         Ocean                 November 20, 1995            1st Quarter, 1996
         Tee-Off               January 23, 1996             2nd Quarter, 1996
         Alpha                 April 1, 1996                3rd Quarter, 1996
         Wesburn               February 14, 1997            2nd Quarter, 1997
         DMA                   February 14, 1997            2nd Quarter, 1997
</TABLE>

                                       50
<PAGE>   51

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

     The information called for by item 10 of Form 10-K is incorporated herein
by reference to such information included in the Company's Proxy Statement for
the 1998 Annual Meeting of Shareholders, under the captions "Election of
Directors" and "Executive Officers."

ITEM 11. EXECUTIVE COMPENSATION

     The information called for by item 11 of Form 10-K is incorporated herein
by reference to such information included in the Company's Proxy Statement for
the 1998 Annual Meeting of Shareholders, under the caption "Compensation of
Executive Officers."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information called for by item 12 of Form 10-K is incorporated herein
by reference to such information included in the Company's Proxy Statement for
the 1998 Annual Meeting of Shareholders, under the caption "Principal
Shareholders and Stock Ownership of Management."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information called for by item 13 of Form 10-K is incorporated herein
by reference to such information included in the Company's Proxy Statement for
the 1998 Annual Meeting of Shareholders, under the caption "Certain
Transactions."

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

INDEX TO FINANCIAL STATEMENTS

     (a) The following documents are filed as part of this Annual Report or are
incorporated by reference as indicated.

     1. The following financial statements are included under Item 8:

     Report of Ernst & Young LLP, Independent Auditors

     Consolidated Balance Sheets as of August 31, 1996 and August 30, 1997

                                       51
<PAGE>   52

     Consolidated Statements of Income for the years ended September 2, 1995,
     August 31, 1996 and August 30, 1997

     Consolidated Statements of Shareholders' Equity for the years ended
     September 2, 1995, August 31, 1996 and August 30, 1997

     Consolidated Statements of Cash Flows for the years ended September 2,
     1995, August 31, 1996 and August 30, 1997

     Notes to Consolidated Financial Statements


     2. The following financial statement schedules are included under Item 14:

     Schedule VIII -- Valuation and Qualifying Accounts

     3. Exhibits -- See Index to Exhibits on page 55.


     (b) Reports on Form 8-K -

     The following is the date and description of the events reported on Forms
     8-K filed during fourth quarter of 1997:

     Date of Earliest Event
     Reported on Form 8-K               Description
     --------------------               -----------

     August 11, 1997                    Changes in management and termination
                                        of Rou bill Group letter of intent

     August12, 1997                     Company to discontinue Alpha Products
                                        retail division and other restructuring
                                        and unusual charges

     August 12, 1997                    Closing of a new $125 million credit
                                        facility


                                       52

<PAGE>   53
SIGNATURES

     Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

               NORWOOD PROMOTIONAL PRODUCTS, INC.

               By: /s/ FRANK P. KRASOVEC              Date:   November 18, 1997
                  -------------------------------
               Frank P. Krasovec
               Chairman, Chief Executive Officer 
               and President

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

<TABLE>
<CAPTION>
Signature                               Capacity                                          Date
---------                               --------                                          ----
<S>                                     <C>                                               <C>
/s/ FRANK P. KRASOVEC                   Chairman, Chief Executive Officer,                November 18, 1997
-----------------------------------     President, and Director
Frank P. Krasovec                       (Principal Executive Officer)

/s/ JAMES P. GUNNING, Jr.               Secretary, Treasurer and Chief Financial          November 18, 1997
-----------------------------------     Officer (Principal Financial Officer)
James P. Gunning, Jr.

/s/ ROBERT L. SEIBERT                   Director                                          November 18, 1997
-----------------------------------
Robert L. Seibert

/s/ JOHN H. WILSON III                  Director                                          November 18, 1997
-----------------------------------
John H. Wilson III

/s/ JOHN H. JOSEPHSON                   Director                                          November 18, 1997
-----------------------------------
John H. Josephson

/s/ HAROLD HOLLAND                      Director                                          November 18, 1997
-----------------------------------
Harold Holland

/s/ ROY D. TERRACINA                    Director                                          November 18, 1997
-----------------------------------
Roy D. Terracina
</TABLE>


                                       53
<PAGE>   54

                       NORWOOD PROMOTIONAL PRODUCTS, INC.
               SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                      Additions
                                                Charged to    -------------------------
                                                Balance at    Charged to        Other                             Balance at
                                                Beginning      Costs and       Accounts         Deductions          End of
         Description                            of Period      Expenses        Describe          Describe           Period
         -----------                            ----------    ----------       --------         ----------        ----------
<S>                                             <C>           <C>              <C>              <C>               <C>
Year ended September 2, 1995:

Deducted from asset accounts:

Allowance for doubtful accounts                     227            169            293(3)            149(1)            540

Reserve for inventory obsolescence                  414             21             99(3)            139(2)            395
                                                  -----          -----          -----             -----             -----

Total                                               641            190            392               288               935
                                                  =====          =====          =====             =====             =====

Year ended August 31, 1996:

Deducted from asset accounts:

Allowance for doubtful accounts                     540            330            189(4)            355(1)            704

Reserve for inventory obsolescence                  395             48            347(4)             22(2)            768
                                                  -----          -----          -----             -----             -----

Total                                               935            378            536               377             1,472
                                                  =====          =====          =====             =====             =====

Year ended August 30, 1997:

Deducted from asset accounts:

Allowance for doubtful accounts                     704            181             47(5)            290(1)            642

Reserve for inventory obsolescence                  768             84             --               163(2)            689
                                                  -----          -----          -----             -----             -----

Total                                             1,472            265             47               453             1,331
                                                  =====          =====          =====             =====             =====
</TABLE>


(1)  Uncollectible accounts written off, net of recoveries.
(2)  Inventory written off during year.
(3)  Amounts acquired with the purchase of Air-Tex Corporation, Designer
     Plastics, Inc. and BTS Group.
(4)  Amounts acquired with the purchase of Ocean Specialty Manufacturing
     Corporation, Tee-Off Enterprises, Inc. and Alpha Products, Inc.
(5)  Amounts acquired with the purchase of Wesburn Golf and DM Apparel, Inc.

                                       54
<PAGE>   55

                                INDEX TO EXHIBITS

Each management contract or compensatory plan or arrangement required to be
filed as an exhibit hereto is indicated by an asterisk (*).


EXHIBIT
NUMBER              DESCRIPTION

          3.1   --  Articles of Incorporation of the Registrant, as amended.(1)
          3.2   --  Amended and Restated Bylaws of the Registrant. 
          4.1   --  Specimen stock certificate evidencing the Common Stock.(1)
          10.1  --  1993 Non-qualified Stock Option Plan of the Registrant dated
                    June 4, 1993.(1) (Exhibit 10.18) *
          10.2  --  1993 Non-Employee Director Stock Purchase Plan of the
                    Registrant dated November 8, 1993.(2) (Exhibit 10.26) *
          10.3  --  Employee Stock Purchase Plan of the Registrant dated May 18,
                    1995, as amended and restated effective as of May 9, 1996.
                    (3) (Exhibit 4.7) *
          10.4  --  Amended and Restated 1989 Incentive Stock Option Plan of the
                    Registrant dated August 23, 1996. (4) *
          10.5  --  Amended and Restated 1994 Incentive Stock Compensation Plan
                    of the Registrant dated August 23, 1996. (4) *
          10.6  --  Warrant certificate granted by the Registrant to Allen and
                    Company, Incorporated, dated June 23,1993.(1)
          10.7  --  Form of Warrant certificate granted by the Registrant to
                    Directors in lieu of Director's fees.
          10.8  --  Lease dated March 26, 1973 by and between Don E. Harley
                    Associates, Inc., and Arthur Salm, Inc, assigned to Exchange
                    National Bank of Chicago on June 12, 1973, assigned to
                    Barlow Specialty Advertising, Inc. in June 1986, and
                    assigned to Barlow Promotional Products, Inc. as of May 19,
                    1992.(1) (Exhibit 10.15)
          10.9  --  Lease Agreement by and between Wulfe Investments and Radio
                    Cap Company, Inc. commencing August 1, 1992 relating to
                    certain property located at 817 North Frio in San Antonio,
                    Texas.(1) (Exhibit 10.16)
          10.10 --  Lease Agreement by and between the Utah State Retirement
                    Fund and Radio Cap Company, Inc. entered into November 17,
                    1992 relating to the space at Rittiman East Business Park,
                    Building 12 at 5519 Business Park in San Antonio.(1)
                    (Exhibit 10.17)
          10.11 --  Lease Agreement by and between Joseph S. Scher, not
                    individually, but as Trustee under the Joseph S. Scher Trust
                    dated April 5, 1993, and Key Acquisition Corp., dated as of
                    May 1, 1994.(5) (Exhibit 10.20)
          10.12 --  Sublease by and between MM Realty Associates II, dated
                    November 1, 1981; First Amendment to Sublease by and between
                    MM Realty Associates II, dated March 1, 1983; Second
                    Amendment to Sublease by and between Cranston Partnership
                    (Associates II) formerly MM Realty, dated September 1, 1986
                    and Assignment of and Third Amendment to Sublease by and
                    between Cranston Partnership, Measured Marketing Services,
                    Inc. and ArtMold Products Corporation, dated March 1,
                    1992.(5)
          10.13 --  Office Sublease dated May 1995 between the Registrant and
                    Frito Lay, Inc. (6) (Exhibit 10.28)

<PAGE>   56

          10.14  -- Standard Industrial Commercial--Tenant Lease--Net effective
                    as of November 20, 1995 between Key Industries, Inc. and
                    Harris/Newell Family Partnership. (6)
          10.15  -- Standard Industrial Commercial--Tenant Lease--Net effective
                    as of February 22, 1996 between Barlow Promotional Products,
                    Inc. and AMG Holding, Inc. (7) (Exhibit 10.34)
          10.16  -- Asset Purchase Agreement dated as of November 17, 1995 among
                    Ocean Specialty Manufacturing Corporation, Steve Sherlin,
                    Ron Silverstein, Key Industries, Inc. and the Registrant.
                    (6) (Exhibit 10.30)
          10.17  -- Asset Purchase Agreement dated January 22, 1996 among
                    TEE-OFF Enterprises, Inc., James W. Schmidt, Vicki M.
                    Schmidt, ArtMold Products Corporation and the Registrant (8)
          10.18  -- Asset Purchase Agreement dated April 1, 1996 among Alpha
                    Products,. Inc., Aladdin Industries, Inc., Radio Cap
                    Company, Inc. and the Registrant.(9)
          10.19  -- Credit Agreement dated as of August 28, 1997 among the
                    Registrant, certain Subsidiary Guarantors, Merrill Lynch &
                    Co. and NationsBank, N.A. (10)
          11.1   -- Computation of per share earnings. (filed herewith)
          21.1   -- Subsidiaries of the Registrant.(6) (Exhibit 22.1)
          23.1   -- Consent of Ernst & Young L.L.P. (filed herewith)
          27.1   -- Financial data schedule. (filed herewith)

(1)       Previously filed as an Exhibit to the Registrant's Registration
          Statement on Form S-1 (File No. 33-61740) filed with the Securities
          and Exchange Commission on June 16, 1993 and incorporated herein by
          reference.

(2)       Previously filed as an Exhibit to the Registrant's Form 10-Q for the
          quarter ended November 27, 1993 filed with the Securities and Exchange
          Commission on January 10, 1994 and incorporated herein by reference.

(3)       Previously filed as an Exhibit to the Registrant's Form 10-Q filed
          with the Securities and Exchange Commission on July 15, 1996 and
          incorporated herein by reference.

(4)       Previously filed as an Exhibit to the Registrant's Form 10-K for the
          year ended August 31, 1996 filed with the Securities and Exchange
          Commission on November 26, 1996 and incorporated herein by reference.

(5)       Previously filed as an Exhibit to the Registrants Form 10-Q filed with
          the Securities and Exchange Commission on May 14, 1994 and
          incorporated herein by reference

(6)       Previously filed as an Exhibit to the Registrant's Registration
          Statement on Form S-1 filed with the Securities and Exchange
          Commission on October 17, 1995, as amended by Amendment No. 1 filed
          with the Securities and Exchange Commission on November 24, 1995, and
          incorporated herein by reference.

(7)       Previously filed as an Exhibit to the Registrant's Form 10-Q filed
          with the Securities and Exchange Commission on April 16, 1996 and
          incorporated herein by reference.

(8)       Previously filed as an Exhibit to the Registrant's Form 8-K filed with
          the Securities and Exchange Commission on February 2, 1996 and
          incorporated herein by reference.

(9)       Previously filed as an Exhibit to the Registrant's Form 8-K filed with
          the Securities and Exchange Commission on April 16, 1996 and
          incorporated herein by reference.

(10)      Previously filed as an Exhibit to the Registrant's Form 8-K filed with
          the Securities and Exchange Commission on September 5, 1997 and
          incorporated herein by reference.