<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

          (Mark One)
     [X]       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                  EXCHANGE ACT OF 1934
                   For the Fiscal Year Ended December 31, 1998
                                       OR
     [ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE ACT OF 1934
                        For the transition period from _________ to __________

                         Commission File Number 0-21632

                              ELLETT BROTHERS, INC.
             (Exact name of Registrant as specified in its charter)

     SOUTH CAROLINA                                57-0957069
     (State or other jurisdiction of               (I.R.S. Employer
     incorporation or organization)                Identification Number)

     267 Columbia Avenue, Chapin, South Carolina    29036
     (Address of principal executive offices)       (Zip Code)

       Registrant's telephone number, including area code: (803) 345-3751

           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)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes  X    No
                                       ----     ------

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]

As of February 26, 1999 there were 4,296,518 shares of common stock of the
Registrant outstanding, and the aggregate market value of the shares of common
stock held by nonaffiliated shareholders (based upon the closing price for the
stock on the Nasdaq National Market on February 26, 1999) was $22,689,912.

                       Documents Incorporated by Reference

Portions of the Registrant's Proxy Statement in connection with the Registrant's
1999 Annual Meeting of Shareholders to be held May 12, 1999 are incorporated by
reference into Part III of this report.


                                  Page 1 of 30
<PAGE>   2

Advisory Note Regarding Forward-Looking Statements

Certain of the statements contained in PART I, Item 1 (Business) and in PART II,
Item 7 (Management's Discussion and Analysis of Financial Condition and Results
of Operations) that are not historical facts are forward-looking statements
subject to the safe harbor created by the Private Securities Litigation Reform
Act of 1995. The Company cautions readers of this Annual Report on Form 10-K
that such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from those expressed
or implied by such forward-looking statements. Although the Company's management
believes that their expectations of future performance are based on reasonable
assumptions within the bounds of their knowledge of their business and
operations, there can be no assurance that actual results will not differ
materially from their expectations. Factors which could cause actual results to
differ from expectations include, among other things, reductions in, or lack of
growth of, firearm sales; potential negative effects of existing and future gun
control legislation on consumer demand for firearms; the potential negative
impact on gross margins from shifts in the Company's product mix toward lower
margin products; seasonal fluctuations in the Company's business; competition
from national, regional and local distributors and various manufacturers who
sell products directly to the Company's customer base; competition from sporting
goods mass merchandisers or "superstores" which sell in competition with the
Company's primary customer base; exposure to product liability lawsuits; the
challenges and uncertainties in the implementation of the Company's expansion
and development strategies; the Company's dependence on key personnel; and other
factors described in this report and in other reports filed by the Company with
the Securities and Exchange Commission.

PART I

Item 1.    BUSINESS

                                   BACKGROUND

General

Ellett Brothers, Inc. and subsidiaries (the "Company") is a nationwide marketer
and supplier of natural outdoor sporting goods products. The Company markets and
distributes a broad line of products and accessories for hunting and shooting
sports, marine, camping, archery, and other related outdoor activities. The
Company's product line, which contains over 60,000 stock-keeping units (SKU's),
includes firearms, ammunition, marine electronics, small engine replacement
parts, electric trolling motors, binoculars, cutlery, archery equipment, leather
goods, flashlights, tents, lanterns, sportsmen's gifts, camping accessories,
decorative boxes, licensed nostalgia items, and a variety of other natural
outdoor sporting goods products. During fiscal years 1998, 1997, and 1996,
revenues from sales of firearms and ammunition comprised approximately 50.7%,
49.8%, and 49.2%, respectively, of the Company's revenues. The Company features
such recognized brand names as Remington, Ruger, Winchester, Daisy, Rocky Shoes
and Boots, LaCrosse, Motorguide, Coleman, Rubbermaid, Swiss Army, Bear Archery,
and Nikon. The Company's mailing address is 267 Columbia Avenue, Chapin, South
Carolina, 29036, and its telephone number is (803) 345-3751.

In late 1988, the Company began broadening its product line from primarily
hunting and shooting goods to include marine accessories. The Company's marine
accessories business has proven to be a natural extension of Ellett Brothers'
("Ellett") traditional sporting goods business, with sales increasing from $2.6
million in 1989 to $23.9 million in 1998. In 1994, Ellett formed a new sales
group to specifically target archery retailers. The archery group has shown
continued growth since its inception, reaching $6.3 million in sales in 1998.

During 1995, Ellett implemented its acquisition strategy by acquiring assets of
entities with products that complement Ellett's existing product lines as well
as opening the possibility of new markets or channels of distribution. As a
result, substantially all of the assets of Evans Sports, Inc. ("Evans") and
Vintage Editions, Inc. ("Vintage") were acquired in April and September 1995,
respectively. Evans is a manufacturer of outdoor sporting accessories and wooden
nostalgia boxes. Vintage is a manufacturer of specialty licensed nostalgia
products. While their products are similar in nature, they are very distinct in
quality and marketing approaches. The Company expects to continue to seek
expansion of the wood products of both companies to provide additional sales to
both current and new customers. All of the assets of Evans and Vintage were
transferred at the time of each respective purchase to wholly-owned subsidiaries
that were incorporated in the state of South Carolina.

In August 1995, Ellett purchased the accounts receivable and inventory of
Safesport Manufacturing Company ("Safesport"), an importer and marketer of
outdoor leisure products, specializing in camping accessories and cutlery items.
In June 1997, executive management and the Board of Directors concluded that the
ongoing operation of the Safesport subsidiary was not in the best interest of
the Company and began liquidation. The liquidation process was substantially
completed by the fourth quarter of 1997 (see Note 4 to the financial statements
in Item 8, Part II which is incorporated herein by reference).


                                  Page 2 of 30
<PAGE>   3
                             DESCRIPTION OF BUSINESS

Marketing

The Company currently sells to more than 20,000 active customer accounts
(defined as customers who have made a purchase from the Company within the last
twelve months), the majority of which are independent natural outdoor sporting
goods retailers (as opposed to mass merchandisers). The Company's largest
customer was responsible for approximately 2.3% of 1998 sales, and sales to the
Company's ten largest customers represented approximately 4.7% of 1998 sales.
The Company seeks to expand its existing customer base further through the
identification of new or alternative channels for its product lines.
Distribution channels targeted by the Company include specialty pro shop
retailers of archery products, industry organization groups and larger sporting
goods stores.

Ellett's customer base in its traditional distribution business is organized
into individual business units. Each sales associate, after ten weeks of
intensive training, is promoted to manager of an individual business unit
serving a designated customer base. Each business unit manager participates in
the development of an annual profit plan, receives monthly profit and loss
statements, and is accountable for the performance of the business unit.
Business unit managers continually update each customer's file with product,
sales and other customer-specific information to tailor the Company's services
to better suit the customer's needs. Customers regularly contact their personal
business unit managers to obtain current information regarding compatible
products and accessories, product warranties, and product availability.

The Company believes this organizational structure is unique in its industry
because the business unit managers are incentivized to develop strong one-on-one
relationships with their customers and to enhance their sales, marketing, and
management skills. The Company believes this enhances the overall productivity
of each business unit.

Ellett's commitment to ongoing training and professional development of its
business unit managers is a key feature of the organization. Ellett trains each
business unit manager to be a constant source of product information for that
business unit's customers. Management believes this teleservicing approach is
unique to Ellett. Each business unit manager receives 500 hours of training in
the manager's first year and approximately 200 hours of training each year
thereafter. Prior to any customer contact, each business unit manager must
successfully complete an intensive 10 week training, testing, and analysis
process, which addresses product knowledge and a broad range of selling and
management skills. Every business unit manager begins each day with a training
meeting designed to build on earlier training and provide updates on Company
direction, product promotions, and new marketing opportunities. In addition,
periodic career enhancement classes provide in-depth training on a wide range of
topics.

Because of Ellett's business unit approach and state-of-the-art
telecommunications technology, we do not need an outside sales force in our
traditional distribution business. Ellett's business unit approach, combined
with our teleservicing, enables us to communicate frequently with our entire
customer base, providing timely updates on market developments, new products,
promotions, and order status. In 1998, Ellett averaged approximately 4,800
outbound customer contacts and 3,700 inbound customer contacts daily, with a
collective total of 400 hours of telephone time daily. Ellett believes that it
is capable of contacting its entire customer base in two days rather than the
weeks typically required by a traditional field sales force.

Evans and Vintage rely on an inside marketing staff as well as independent sales
representatives. The products of the subsidiaries are also cross-marketed to
traditional Ellett customers by Ellett's sales associates to help generate
additional sales for the subsidiaries.

A key part of Ellett's marketing strategy is the production of complete annual
product catalogs, as well as frequent promotional mini-catalogs. Annual catalogs
are produced for each of our major product groups, including hunting and
shooting sports products, archery products, marine accessories, Evans' products,
and Vintage's products. The hunting and shooting, archery, and marine catalogs
are produced in two separate formats. The Ellett version is designed to be used
at a retail sales counter by store employees as a reference tool and sales
guide. Ellett also sells catalogs to its customer base with the retail store's
name on the front cover, which the retailers generally give to their best
customers. Management believes that through this process our catalogs are found
in the hands of the most active consumers in the marketplace. In 1998, we
distributed over 105,000 copies of our annual catalogs.

In 1998, Ellett's distribution business produced over 36 different mini-catalogs
(periodic promotional flyers) with 36% of our sales being from items featured in
these mini-catalogs. These promotional, business-to-business mail order vehicles
are designed to focus our customers and business unit managers on a narrow range
of products, including special values, new products, and upcoming seasonal items
for a short period of time. In 1998, we issued mini-catalogs for our hunting and
shooting sports products, archery products, and marine accessory products.


                                  Page 3 of 30
<PAGE>   4

Distribution

Ellett's ability to ship orders in a timely fashion is an important element in
maintaining successful customer relationships. Our distribution centers pride
themselves on generally having customer orders ready for shipment within six
business hours of the receipt of an order, resulting in virtually no backlog of
orders. Consequently, Ellett serves as a "just-in-time" inventory supplier to
many of our distribution business customers. Our electronic inventory management
system enables us to manage over 60,000 stock keeping units, minimizing
out-of-stock situations and provides what we believe to be one of the highest
fulfillment rates in our industry.

The Company utilizes United Parcel Service for delivery services to the majority
of its customers, while a few customers pick up merchandise. The use of UPS has
allowed the Company to avoid the substantial fixed costs associated with
regional warehouse locations and a fleet of trucks. Following the 1997 UPS
strike, management reviewed this relationship and determined that the benefits
exceed the risks of any future strike.

Purchasing and Suppliers

The Company currently purchases products from approximately 1,100 manufacturers
and other suppliers. The Company's four largest suppliers accounted for
approximately 27.7%, 26.9%, and 30.2% of the Company's purchases during 1998,
1997, and 1996, respectively. Management believes that the Company's size,
reputation, prompt payment history, and overall knowledge of independent
sporting goods retailers have contributed to strong relationships with its
suppliers. The majority of the suppliers provide advertising allowances to the
Company to assist in the promotion and sale of their products, via the catalogs
and mini-catalogs, while many are actively involved in on-site promotion efforts
at Ellett.

Ellett's purchasing associates play a key role in merchandising. They are
responsible for the initial buying decisions, including selection and pricing,
and coordination of supplier promotional efforts. All distribution products are
evaluated on a 2 to 3 week cycle and must perform to guidelines established by
the Company. Raw materials for the manufacturing and assembly operations are
evaluated as each major purchase cycle is encountered. Purchasing associates are
regularly involved in reviewing new products or current product performance for
the addition or discontinuance of items.

Competition

The industry in which Ellett competes is extremely competitive. The principal
methods of competition within the natural outdoor sporting goods distribution
industry include purchasing convenience, customer service, inventory selection,
price, and rapid customer order turnaround. Ellett believes that it
differentiates itself by its strategies of servicing each customer through that
customer's own personal business unit manager, providing customers with ongoing
product and market information, after-the-sale follow-up, carrying one of the
most extensive selections of inventory in its various product categories, and
having customer orders generally ready for shipment within six business hours of
the order being received by a business unit manager.

Ellett's customer base for its distribution business consists almost exclusively
of independent sporting goods retailers located across the United States. Ellett
competes with other national distributors, various regional and local
distributors and various manufacturers who sell certain products directly to
these retailers. Ellett has identified approximately 60 distributors, of whom
approximately six are national in scope, competing in the hunting and shooting
sports, camping and archery products and outdoor accessories markets, and has
identified approximately 50 other distributors competing in the marine
accessories markets. Certain of these competitors may have substantially greater
financial resources, larger sales and support staffs and greater purchasing
power than Ellett. Ellett's ability to compete successfully depends on factors
both within and outside its control, including its ability, if necessary, to
support reductions in selling prices through reductions in operating expenses,
the timing and success of product introductions, access to high demand products,
successful inventory management, suitable product quality, reliability and
price, and general economic conditions. Ellett also indirectly competes with
sporting goods mass merchandisers or "superstores," to which Ellett generally
does not sell, but which generally sell in competition with the Ellett's primary
customer base of independent sporting goods retailers.

Although our distribution business shares customers with our subsidiaries,
competition in the markets of the subsidiaries differs from Ellett's traditional
distribution business. Management believes Evans and Vintage hold the majority
of the market for nostalgic and licensed decorative boxes, with a few smaller
companies competing for market share. Evans' customer base is dominated by mass
merchandisers and Vintage's sales are predominately through specialty catalogs
and gift shops. The main competitive factor for Evans and Vintage is being able
to produce a product timely and at a price level commensurate to the quality of
the item.

Government Regulation and Licenses

In recent years, an increasing amount and variety of legislation aimed at
eliminating or limiting the production, sale, possession, ownership and use of
certain kinds of firearms has been introduced in the United States Congress and
in various state legislatures, and the Company expects that such legislation
will continue to be introduced in the future. In addition, certain states and
other 


                                  Page 4 of 30
<PAGE>   5

local governments have already adopted, or are currently considering the
adoption of, laws aimed at the control of firearm possession and ownership by
the public. There can be no assurance that existing and future gun control
legislation will not have a substantial negative impact on consumer demand for
firearms and result in a material adverse effect on the Company's financial
condition, results of operations, and cash flows.

The Company is also subject to a variety of federal, state and local laws and
regulations relating to, among other things, advertising, the sale and handling
of firearms, the offering and extension of credit and workplace and product
safety, including various regulations concerning the storage of gunpowder.
Certain governmental licenses and permits are also necessary in connection with
the Company's operations. In particular, as with any seller of firearms, the
Company is required to maintain a federal firearms license that imposes various
restrictions and conditions on the Company's operations, including a requirement
that the Company resell firearms and ammunition only to federally licensed
firearms dealers. In addition, all exports of firearms and ammunition require
federal government licenses in advance of shipment. In the event that the
Company should be determined to be in violation of any applicable regulations,
licenses or permits, the Company could become subject to cease and desist
orders, injunctions, civil fines and other penalties. Any such penalties could
have a material adverse effect on the Company's business, financial condition,
results of operations, and cash flows.

Associates

The Company views all of its personnel as associates of the Company, rather than
merely as employees. As of February 26, 1999, the Company employed approximately
370 associates, none of whom was a member of an industry trade union or
collective bargaining unit. Part-time workers (primarily clerical and
distribution) are also utilized over the course of the year as needed to assist
the Company during periods of peak sales.

Company Tradenames and Trademarks

The Company utilizes several trade names, trademarks and service marks in the
course of its business, including, among others, the Ellett Brothers(R), Ellett
Brothers As Big As All Outdoors(R), and As Big As All Outdoors(R) trademarks.
Although the Company's operations are not dependent upon any single trade name
or trademark, other than the Ellett Brothers trademark, the Company considers
its various trademarks and trade names to be valuable to its business.

Item 2.    PROPERTIES

The Company's operations are carried out at four separate locations. The
following table sets forth certain information regarding each of these
facilities:

<TABLE>
<CAPTION>
                                                         Approximate
                                                      Aggregate Usable
                                                         Square Feet             Status 
                    <S>                               <C>                        <C>
                    Chapin, South Carolina                 190,000                Owned
                    Newberry, South Carolina               140,000                Owned
                    Houston, Missouri                       62,000               Leased
                    Taylorsville, North Carolina            30,000               Leased
</TABLE>

The Company's headquarters is housed in the 190,000 square foot, two-story
office and warehouse facility located on 12 acres of land owned by the Company.
The second floor of this facility, approximately 40,000 square feet, encompasses
the Company's teleservicing sales and administrative departments, including a
complete media workshop as well as a video and photography studio. Both of the
Chapin, South Carolina facilities serve as collateral under the Company's
industrial revenue refunding bonds. See Note 10 to the Financial Statements in
Item 8, Part II which is incorporated herein by reference. The Newberry
facility, located on 16.4 acres of land owned by the Company, includes 34,000
square feet of warehouse space added in February 1996.

Item 3.    LEGAL PROCEEDINGS

The Company is not involved in any material legal proceedings. See Note 16 to
the Financial Statements in Item 8, Part II which is incorporated herein by
reference.

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

No matters were submitted to a vote of shareholders of Ellett Brothers, Inc.
during the fourth quarter of fiscal year 1998.


                                  Page 5 of 30
<PAGE>   6
PART II

Item 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The common stock of Ellett Brothers, Inc. is traded on the Nasdaq National
Market System under the symbol ELET. As of March 8, 1999, the Company had a
total of approximately 75 shareholders of record. Certain of these shareholders
of record hold shares in nominee name for other beneficial owners.

The following table sets forth the quarterly high and low sale prices per share
for the common stock as reported on the Nasdaq National Market and dividends on
common stock.

<TABLE>
<CAPTION>
Quarter Ended:                 High                  Low               Dividend
-------------------------------------------------------------------------------
<S>                           <C>                  <C>                  <C>
March 31, 1997                $ 5.63               $ 4.38               $ 0.02
June 30, 1997                   5.38                 4.13                 0.02
September 30, 1997              6.38                 4.88                 0.02
December 31, 1997               6.25                 5.13                 0.02
March 31, 1998                  6.50                 5.50                 0.02
June 30, 1998                   6.25                 4.44                 0.02
September 30, 1998              5.13                 3.25                 0.02
December 31, 1998               4.88                 3.56                 0.02
</TABLE>

The Company did not sell any equity securities during the fiscal year ended
December 31, 1998 which were not registered under the Securities Act of 1933.

Item 6.    SELECTED FINANCIAL DATA(3)

<TABLE>
<CAPTION>
(in thousands except per share and other data)      1998           1997            1996           1995            1994
-------------------------------------------------------------- -------------- --------------- -------------- ---------------
<S>                                                <C>            <C>            <C>             <C>            <C>     
Sales                                              $147,130       $152,500       $147,666        $150,411       $160,187
Income (loss) before income taxes                     4,750         (1,353)         2,673           7,384          9,722
Net income (loss)(3)                                  3,012           (815)         1,687           4,634          6,156
Basic and diluted earnings (loss) per share(3)          0.61          (0.16)          0.33            0.89           1.29
Dividends paid per share(1)                             0.08           0.08           0.08            0.08           0.18
Weighted average number of
     shares outstanding                               4,955          5,148          5,135           5,230          4,783
Working capital                                      46,538         48,140         55,029          50,512         45,678
Total assets                                         64,769         63,614         73,688          70,275         61,236
Long-term debt obligations                           32,297         33,187         38,472          33,533         30,089
Shareholders' equity                                 22,932         23,336         24,637          24,548         20,332
Other data:
Number of business units at year end                    127            139            145             160            151
Number of customers served during year(2)            20,677         23,800         25,890          25,737         20,228
</TABLE>

(1)      Includes quarterly dividends at $0.02 per share paid in March, June,
         September and December 1998, 1997, 1996, 1995, and 1994, and a special
         dividend at $0.10 per share paid in March 1994.
(2)      Due to the potential for errors in elimination of mutual customers
         between subsidiaries, the numbers for 1998, 1997, 1996, and 1995 are
         approximations. Management feels that any differences are
         insignificant.
(3)      In June 1997, executive management and the Board of Directors concluded
         that ongoing operation of the Safesport Manufacturing Company
         subsidiary was not in the best interest of the Company and began
         liquidation of this subsidiary. The liquidation was substantially
         concluded by December 31, 1997 with a net after tax loss of $2,276
         ($0.44 per share).


                                  Page 6 of 30

<PAGE>   7


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

1998 COMPARED TO 1997

Sales for the year ended December 31, 1998 were $147.1 million as compared to
$144.4 million in 1997, excluding the sales from the liquidation of Safesport
Manufacturing Company in 1997, an increase of $2.7 million or 1.9%. Including
Safesport in the 1997 total, sales were $152.5 million. Total sales in our
distribution business were up 3.3% in 1998 as compared to 1997. The marine
accessory products led the way with a 14.5% increase when compared to 1997,
while sales of our camping, archery and outdoor accessories increased by 8.2%.
Although sales of our hunting and shooting sports products declined 1.3% in 1998
as compared to 1997, this decline occurred in the first half of the year, as our
sales were up 4.8% over 1997 in the second half of the year.

Sales from our subsidiaries in 1998, excluding Safesport, were $6.1 million, as
compared to $7.9 million, a decrease of $1.8 million or 22.8%. Sales to our
major accounts did not materialize as expected, especially in the fourth
quarter, resulting in the decline in sales.

Gross profit for the year ended December 31, 1998 was $26.4 million (18.0% of
sales) as compared to $25.3 million (17.5% of sales), excluding Safesport from
last year's results. Efforts to increase gross profit in 1998 as a percentage of
sales in our distribution operations were successful in all four quarters.
Including Safesport in 1997, total gross profit was $23.1 million (15.2% of
sales).

Selling, general and administrative expenses in 1998 were $19.7 million (13.4%
of sales) as compared to $19.5 million (13.5% of sales), excluding Safesport
from last year's results, an increase of 1.0%. Recoveries in our bad debt
expense along with collections of Safesport receivables previously written off
in 1997 contributed to a lower total expense as a percentage of sales. Including
Safesport, selling, general and administrative expenses were $21.8 million
(14.3% of sales) in 1997.

Interest expense for the year ended December 31, 1998 was $2.5 million (1.7% of
sales) as compared to $3.3 million (2.2% of sales) in 1997.

Income tax expense in 1998 was $1.7 million as compared to $1.3 million in 1997,
excluding Safesport. The effective tax rate was 36.6% in 1998 as compared to
36.5% in 1997. Including Safesport in 1997, the income tax benefit was $538,000,
which was an effective tax rate of 39.8%.

Net income for 1998 was $3.0 million, or $0.61 per basic and diluted share, as
compared to $2.3 million, or $0.44 per basic and diluted share, in 1997,
excluding the impact of Safesport from the 1997 amounts. Including Safesport in
1997, the net loss for 1997 was $815,000, or $0.16 per basic and diluted share.

1997 COMPARED TO 1996

Sales for the year ended December 31, 1997 were $152.5 million, as compared to
$147.7 million in 1996, an increase of $4.8 million or 3.2%. Excluding the
impact of Safesport from the two years, sales for 1997 would have been $144.4
million, as compared to $141.4 million in 1996, an increase of $3.0 million or
2.1%. During 1997, sales of hunting and shooting sports products declined 0.4%
when compared to 1996 sales. Also during 1997, sales of camping, archery and
outdoor accessories increased by 0.6% when compared to 1996 sales. The marine
accessory group showed continued growth, with an 8.6% increase when compared to
1996 sales. The 1997 results for the distribution operations were generally
favorable, with the exception of the impact of the UPS strike in the third
quarter. Our best estimate is that the strike reduced sales by $2.8 million.
Management believes, except for the impact of the UPS strike, that retail sales
corresponding to all areas of the Company's business improved slightly in 1997.

Sales in 1997 from the remaining subsidiaries, Evans Sports and Vintage
Editions, were $7.9 million, as compared to $6.5 million in 1996, an increase of
$1.4 million or 21.8%. The improvement was brought about by new product
introductions and increased market penetration.

Gross profit was $23.1 million for the year ended December 31, 1997, as compared
to $27.0 million in 1996, a decrease of $3.9 million or 14.3%. As a percentage
of sales, gross profit was 15.2% in 1997, as compared to 18.3% in 1996. The
decline in gross profit as a percentage of sales was almost entirely due to the
impact of the liquidation of the Safesport inventory in the third and fourth
quarters. Excluding the impact of Safesport from the two years, gross profit for
1997 would have been $25.3 million, or 17.5% of sales, as compared to $25.0
million, or 17.7% of sales, in 1996. The remaining decline resulted from
competitive pressures within the traditional distribution business.

Selling, general, and administrative expenses in 1997 were $21.8 million (14.3%
of sales), as compared to $21.4 million (14.5% of sales) in 1996, an increase of
$0.4 million or 1.7%. Increased expenses were incurred as a result of a planned
increase in costs incurred with the computer equipment and information system
upgrades, catalog and mini-catalog production, and personnel costs. Excluding
the impacts of Safesport, selling, general, and administrative expenses for 1997
were $19.5 million, as compared to 


                                  Page 7 of 30
<PAGE>   8

$18.7 million in 1996. However, certain fixed expenses previously allocated to
Safesport, primarily depreciation and interest expenses totaling approximately
$435,000, will continue into future years.

Interest expense in both 1997 and 1996 was $3.3 million (2.2% of sales). The
benefit from reduced borrowings due to lower inventories, primarily resulting
from the Safesport liquidation, was offset by higher interest rates.

Income tax benefit in 1997 was $538,000, as compared to a $1.0 million expense
in 1996. The effective rate for 1997 was 39.8%, as compared to 36.9% for 1996.
The difference in rates is primarily the result of the impact of the Safesport
liquidation on the deferred tax calculation in 1997.

The net loss for 1997 was $815,000, or $0.16 per basic and diluted share, as
compared to net income of $1.7 million, or $0.33 per basic and diluted share, in
1996. The loss for 1997 includes $2.3 million ($0.44 per basic and diluted
share) of one-time losses from the closing of Safesport, excluding which net
income for 1997 would have been $1.5 million, or $0.29 per basic and diluted
share. Excluding all impacts of Safesport operations from 1997 and 1996, net
income would have been $2.3 million in 1997, as compared to $2.5 million in
1996.

SEASONALITY AND QUARTERLY INFORMATION

Historically the Company's business has been seasonal. The sales of hunting and
shooting sports products, as well as camping, archery and outdoor accessories,
usually increase in the third quarter of each year and peak early in the fourth
quarter. Sales of marine accessories usually increase in the first quarter of
each year, then peak midway through the second quarter and continue at similar
levels through the first half of the third quarter. Operations of the
subsidiaries acquired during 1995 have been seasonal, producing significantly
higher sales and gross profit during the third and fourth quarters, with losses
in the first and second quarters. The Company's operating results may also be
affected by a wide variety of factors, such as legislative and regulatory
changes, competitive pressures, and general economic conditions.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary sources of liquidity are results of operations and
borrowings under its revolving credit facility. Pursuant to its operating
strategy, the Company maintains minimal cash balances and is substantially
dependent on, among other things, the availability of adequate working capital
financing to support inventories and accounts receivable.

Net cash provided by operating activities was $5.9 million during the year ended
December 31, 1998, as compared to $7.4 million in 1997. Cash provided from
operating activities in 1998 resulted mainly from net income earned along with
an increase in accounts payable. The decrease in cash provided from operating
activities compared to 1997 primarily relates to increases in inventories in the
current year compared to decreases in inventories in the prior year related to
the liquidation of Safesport.

Net cash used in investing activities was $1.6 million during the year ended
December 31, 1998, as compared to $1.2 million in 1997. The net cash used in
investing activities was mainly due to the purchase of computer equipment and
information system upgrades.

Net cash used by financing activities was $4.5 million during the year ended
December 31, 1998, as compared to $5.9 million net cash used in 1997. The
Company primarily used the cash provided by operations in 1998 to repurchase
stock. The Company also used a portion of the net cash provided by operating
activities in both 1998 and 1997 to make principal payments on long-term debt
and to pay dividends.

Working capital requirements for the Company's traditional distribution business
have historically been somewhat seasonal in nature. Accounts receivable have
generally increased in the first quarter primarily because of the customary
industry practice during the first quarter of each year to offer customers
extended payment terms for purchases of certain products, thereby extending the
payment due dates for a portion of its sales into the third and fourth quarters
of the year. Accounts receivable have generally increased further early in the
third quarter as additional 60 to 90 day extended terms have been offered to
stimulate sales in advance of the Company's highest volume quarters. Accounts
receivable usually decrease in the fourth quarter as payments are received on
prior quarters' sales and a larger percentage of current sales are made with
shorter payment terms. Inventory generally builds during the first two quarters
and peaks in the third quarter to support the higher sales volumes of the third
and fourth quarters.

Working capital requirements have been seasonal for the subsidiaries.
Inventories generally have increased during the first half of the year to
accommodate the sales in the third and fourth quarters. Accounts receivable
generally decline to their lowest point in the second quarter just before the
sales increase in the second half of the year.

Principal maturities on the Company's industrial revenue refunding bonds for
1999, 2000, and 2001 will be $567,000, $617,000, and $667,000, respectively. The
annual interest charges, at the fixed rate of 7.5%, will be $568,000, $525,000,
and $449,000 for 1999, 2000, and 2001, respectively (see Note 10 to the
Financial Statements in Item 8, Part II which is incorporated herein by
reference).


                                  Page 8 of 30
<PAGE>   9

Management believes that cash generated from operations, and available under the
Company's revolving credit facility, will be sufficient to finance its
operations, expected working capital needs, capital expenditures, debt service
requirements, and business acquisitions during 1999 and for the foreseeable
future.

YEAR 2000

The Company is devoting resources throughout its business operations to minimize
the risk of potential disruption from the Year 2000 ("Y2K") problem. This
problem is a result of computer programs having been written using two digits
(rather than four) to define the applicable year. Any information technology
("IT") systems that have time-sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000, which could result in
miscalculations and system failures. The problem also extends to many "Non-IT"
systems; that is, operating and control systems that rely on embedded chip
systems. In addition, like every other business enterprise, the Company is at
risk from Y2K failures on the part of its major business counterparts, including
suppliers and customers, as well as potential failures in public and private
infrastructure services.

System failures resulting from the Y2K problem could adversely affect operations
and financial results of the Company. Y2K failures on the part of our major
vendors would limit our available inventory for resale. Failures at our customer
level would result in lower revenue. Public infrastructure failures could
adversely affect power and communications.

In late 1996, the Company determined that its operating system would not be Y2K
compliant and made a decision to purchase new operating software (purchasing,
distribution, and financial) to run its business. In connection with this
decision, new hardware was purchased that moved the Company from a mainframe to
a client/server environment. System modifications and testing have been ongoing
with installation of the new system anticipated to begin in the second quarter
of 1999 with completion in the third quarter of 1999.

In the second half of 1998, the Company put together a project team headed up by
an executive of the Company with the assistance of the department heads. A plan
was put together to assess all internal Non-IT systems as well as key suppliers
and customers.

An inventory was taken of all internal Non-IT systems. From this inventory, 39%
of the systems were identified as critical to business operations. Of the
critical systems, 87% have been identified as Y2K compliant or unaffected by
computer dates. Of the remaining ones, 7% will be addressed by the new operating
system and the other 6% are still being investigated.

All critical vendors have been surveyed as well as all major customers as to
their Y2K readiness. The Company is currently evaluating the responses to
determine what action is necessary, if any.

The Company will be developing contingency plans as a precautionary measure for
all systems that are not expected to be Y2K compliant. This planning will begin
in the second quarter of 1999 and will be completed by the third quarter of
1999.

The cost of the system upgrades, which includes hardware and software, since
inception through completion, is expected to be approximately $3.8 million,
which includes $1.5 million incurred in 1998. As of December 31, 1998, of the
$3.8 million expected to be spent by the Company related to Y2K, the Company had
spent $3.3 million. This amount was funded out of working capital and the
Company's revolving credit line. Amounts incurred to-date and expected to be
incurred in the future do not include amounts for internal manpower or
additional amounts determined as a result of the contingency programs to be
developed, if any.

Based upon its efforts to-date, the Company believes that the vast majority of
both its IT and its Non-IT systems, including all critical and important
systems, will remain up and running after January 1, 2000. Accordingly, the
Company does not currently anticipate that internal systems failures will result
in any material adverse effect to its operations or financial condition.

The nature and focus of the Company's efforts to address the Y2K problem may be
revised periodically as interim goals are achieved or new issues are identified.
In addition, it is important to note that the description of the Company's
efforts necessarily involves estimates and projections with respect to
activities required in the future. These estimates and projections are subject
to change as work continues, and such changes may be substantial.


                                  Page 9 of 30
<PAGE>   10


Item 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's exposure to market risk for a change in interest rates relates
solely to its debt under its revolving credit facility ($26.5 million at
December 31, 1998). The Company does not currently use derivative financial
instruments.

Approximately $6.4 million of the Company's debt at December 31, 1998 was
subject to fixed interest rates and principal payments. This debt is comprised
of the Company's long-term debt under its industrial revenue refunding bonds
which carry an interest rate of 7.5%.

The Company is exposed to changes in interest rates primarily as a result of its
debt in a revolving credit facility ("Facility") used to maintain liquidity and
fund the Company's business operations. Pursuant to the Company's operating
strategies, it maintains minimal cash balances and is substantially dependent
on, among other things, the availability of adequate working capital financing
to support inventories and accounts receivables. The Facility provides the
Company with a revolving line of credit and letters of credit. The maximum
amount that can be outstanding at anytime is $40.0 million. The term of the
Facility expires on September 30, 2001. Borrowings under the Facility bear
interest at a rate equal to, at the Company's option, prime rate plus 0.375% or
2.25% above the 30 or 90 day LIBOR rate. Combinations of these rates can be used
for the various loans that comprise the total outstanding balance under the
Facility. The interest rates of the Facility are subject to change based on
changes in the Company's leverage ratio and net income. At December 31, 1998,
the interest rate was 7.80% (see Note 10 to the Financial Statements in Item 8,
Part II which is incorporated herein by reference). The definitive extent of the
Company's interest rate risk under the Facility is not quantifiable or
predictable because of the variability of future interest rates and business
financing requirements.

The Company's long-term debt has a fair value, based upon current interest
rates, of approximately $33.9 million at December 31, 1998 ($34.4 million at
December 31, 1997). Fair value will vary as interest rates change. The following
table presents the aggregate maturities and historical cost amounts of the fixed
debt principal and interest rates by maturity dates at December 31, 1998:

<TABLE>
<CAPTION>
                          Maturity Date                  Fixed Rate Debt                 Interest Rate
                  ------------------------------- ------------------------------ -------------------------------
                  <S>                             <C>                            <C>
                               1999                        $    567,000                       7.5%
                               2000                             617,000                       7.5%
                               2001                             667,000                       7.5%
                               2002                             716,000                       7.5%
                               2003                             767,000                       7.5%
                            Thereafter                        3,069,000                       7.5%
                  ------------------------------- ------------------------------ -------------------------------
                                                           $  6,403,000                       7.5%
</TABLE>


                                 Page 10 of 30
<PAGE>   11
Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

(A) Financial Statements

<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS (in thousands)                                                    December 31,           
---------------------------------------------------------------------------------------------------------------------
Assets                                                                                   1998               1997     
---------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                 <C>    
Current assets:
     Cash and cash equivalents                                                     $      183          $     395
     Accounts receivable, less allowance for doubtful accounts of $605
         and $769 at December 31, 1998 and 1997, respectively                          20,066             19,201
     Other accounts receivable                                                          1,716              1,820
     Inventories                                                                       32,140             31,535
     Prepaid expenses                                                                     948              1,488
     Deferred income tax asset                                                            440                534     
---------------------------------------------------------------------------------------------------------------------
              Total current assets                                                     55,493             54,973     
---------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, at cost, less
     accumulated depreciation and amortization                                          7,567              6,703
Other assets:
     Intangible assets, at cost, less accumulated amortization                          1,682              1,936
     Other assets                                                                          27                  2     
---------------------------------------------------------------------------------------------------------------------
              Total other assets                                                        1,709              1,938     
---------------------------------------------------------------------------------------------------------------------
                                                                                   $   64,769          $  63,614
---------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
---------------------------------------------------------------------------------------------------------------------
Current liabilities:
     Accounts payable, trade                                                       $    7,149          $   4,424
     Accrued expenses                                                                   1,239              1,884
     Current portion of long-term debt                                                    567                525     
---------------------------------------------------------------------------------------------------------------------
              Total current liabilities                                                 8,955              6,833     
---------------------------------------------------------------------------------------------------------------------
Revolving credit facility                                                              26,461             26,788
Long-term debt                                                                          5,836              6,399
Deferred income tax liability                                                             585                258
Commitments and Contingencies (see Notes 11 and 16)
Shareholders' equity:
     Preferred stock, no par value (5,000 shares authorized,
         no shares issued or outstanding)                                                   -                  -
     Common stock, no par value (20,000 shares authorized, 4,297
         and 5,121 shares issued and outstanding as of December 31,
         1998 and 1997, respectively)                                                   9,559             12,833
     Common stock subscribed                                                               93                  -
     Unearned compensation                                                                (55)              (177)
     Subscription receivable                                                             (423)              (452)
     Retained earnings                                                                 13,716             11,111
     Accumulated other comprehensive income                                                42                 21     
---------------------------------------------------------------------------------------------------------------------
              Total shareholders' equity                                               22,932             23,336     
---------------------------------------------------------------------------------------------------------------------
                                                                                   $   64,769          $  63,614
---------------------------------------------------------------------------------------------------------------------
</TABLE>

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


                                 Page 11 of 30
<PAGE>   12

CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                 For the year ended December 31,       
-----------------------------------------------------------------------------------------------------------------------
                                                                            1998              1997               1996  
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>                <C>                <C>         
Sales                                                              $     147,130      $    152,500       $    147,666
Cost of goods sold                                                       120,685           129,372            120,683  
-----------------------------------------------------------------------------------------------------------------------
              Gross profit                                                26,445            23,128             26,983
Selling, general and administrative expenses                              19,706            21,785             21,420  
-----------------------------------------------------------------------------------------------------------------------
              Income from operations                                       6,739             1,343              5,563  
-----------------------------------------------------------------------------------------------------------------------
Other income (expenses):
     Interest income                                                         481               454                444
     Interest expense                                                     (2,497)           (3,297)            (3,289)
     Other income (expense)                                                   27               147                (45) 
-----------------------------------------------------------------------------------------------------------------------
              Total other expense, net                                    (1,989)           (2,696)            (2,890) 
-----------------------------------------------------------------------------------------------------------------------
              Income (loss) before income taxes                            4,750            (1,353)             2,673
Income tax expense (benefit)                                               1,738              (538)               986  
-----------------------------------------------------------------------------------------------------------------------
Net income (loss)                                                  $       3,012      $       (815)      $      1,687
-----------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings (loss) per common share                 $        0.61      $      (0.16)      $       0.33
-----------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding                                        4,955             5,148              5,135
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

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


                                 Page 12 of 30
<PAGE>   13
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands)
                                     
<TABLE>
<CAPTION>
                                                                                                                Accumulated
                                              Common                                                               Other
                                    Common     Stock        Unearned    Subscription   Retained   Comprehensive Comprehensive
                                    Stock    Subscribed   Compensation   Receivable    Earnings   Income (Loss)     Income   Total
-----------------------------------------------------------------------------------------------------------------------------------
<S>                               <C>        <C>          <C>           <C>            <C>        <C>           <C>          <C>
Shareholders' equity at 12/31/95  $ 13,487       $    --      $   --        $ --       $ 11,061                        --   $24,548
Comprehensive income:                       
     Net income                         --            --          --          --          1,687          1,687         --     1,687
                                                                                                      ========
Dividends paid, $0.08 per share         --            --          --          --           (411)                       --      (411)
Repurchase of 223 shares of            
     common stock                   (1,277)           --          --          --             --                        --    (1,277)
Issuance of 58 shares of common
     stock to executive officers       340            --        (340)         --             --                        --        --
Amortization of unearned
     compensation                       --            --          90          --             --                        --        90
--------------------------------------------------------------------------------------------------              -------------------
Shareholders' equity at 12/31/96    12,550             --        (250)         --       $ 12,337                        --    24,637
Comprehensive loss:                    
     Net loss                           --            --          --                       (815)          (815)        --      (815)
     Change in unrealized gain
       on available for sale                                                                                  
       securities in the IRB reserve    --            --          --          --             --             21         21        21
                                                                                                      --------
Comprehensive loss                                                                                    $   (794)
                                                                                                      ========
Dividends paid, $0.08 per share         --            --          --          --           (411)                       --      (411)
Repurchase of 56 shares of
     common stock                     (276)           --          --          --             --                        --      (276)
Issuance of 112 shares of
common stock to executive officers     559            --         (84)       (452)            --                        --        23
Amortization of unearned
     compensation                       --            --         157          --             --                        --       157
--------------------------------------------------------------------------------------------------              -------------------
Shareholders' equity at 12/31/97    12,833            --        (177)       (452)        11,111                        21    23,336
Comprehensive income:                
     Net income                         --            --          --          --          3,012          3,012         --     3,012
     Change in unrealized gain
      on available for sale                                                                                                         
      securities in the                                                                                                             
      IRB reserve                       --            --          --          --             --             21         21        21
                                                                                                      --------

Comprehensive income                                                                                  $  3,033
                                                                                                      ========
Dividends paid, $0.08 per share         --            --          --          --           (407)                       --      (407)
Repurchase of 824 shares of
     common stock                   (3,274)           --          --          64             --                        --    (3,210)
Issuance of 20 shares of common
     stock to an executive officer      --            93          --          --             --                        --        93
Interest on subscription receivable     --            --          --         (35)            --                        --       (35)
Amortization of unearned
     compensation                       --            --         122          --             --                        --       122
--------------------------------------------------------------------------------------------------              -------------------
Shareholders' equity at 12/31/98  $  9,559       $    93       $ (55)      $(423)      $ 13,716                  $     42  $ 22,932
==================================================================================================              ===================
</TABLE>


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


                                 Page 13 of 30
<PAGE>   14
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)                                           For the year ended December 31,      
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                           1998             1997             1996   
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>              <C>                <C>    
Cash flows from operating activities:
     Net income (loss)                                                                 $   3,012        $     (815)        $ 1,687
     Adjustments to reconcile net income (loss) to net cash provided
         by (used in) operating activities:
              Depreciation and amortization                                                  983               973             901
              Deferred income taxes                                                          421              (146)           (303)
              Provision for loss on accounts receivable                                      374             1,568             933
              Amortization of unearned compensation                                          122               157              90
              Stock award to executive officer                                                93                 -               -
              Other                                                                            -                 7             (17)
              Changes in assets and liabilities:
                  Accounts receivable                                                     (1,135)           (1,655)         (2,224)
                  Inventories                                                               (605)            8,221          (1,304)
                  Prepaid expenses                                                           540             2,239             213
                  Accounts payable, trade                                                  2,725            (3,485)         (1,125)
                  Accrued expenses                                                          (645)              188            (949)
                  Other assets                                                               (25)              162             (13) 
------------------------------------------------------------------------------------------------------------------------------------
                      Net cash provided by (used in) operating activities                  5,860             7,414          (2,111) 
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
     Purchase of property and equipment                                                   (1,596)           (1,257)         (1,332)
     Purchase of intangibles and other assets                                                  -                 -            (121)
     Proceeds from sale of property and equipment                                              3                15              40
     Proceeds from sale of intangibles                                                         -                 -              25
     Change in industrial revenue refunding bond reserve                                       -                 -              23  
------------------------------------------------------------------------------------------------------------------------------------
                      Net cash used in investing activities                               (1,593)           (1,242)         (1,365) 
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
     Gross borrowings on revolving credit facility                                       150,304           151,592         154,200
     Gross repayments on revolving credit facility                                      (150,606)         (156,332)       (148,764)
     Principal payments on long-term debt                                                   (517)             (467)           (416)
     Principal payments on capital lease obligations                                          (8)              (45)            (42)
     (Increase) decrease in subscription receivable                                          (35)               23               -
     Repurchase of common stock                                                           (3,210)             (276)         (1,277)
     Dividends to shareholders                                                              (407)             (411)           (411) 
------------------------------------------------------------------------------------------------------------------------------------
                      Net cash provided by (used in) financing activities                 (4,479)           (5,916)          3,290  
------------------------------------------------------------------------------------------------------------------------------------
                      Net increase (decrease) in cash and cash equivalents                  (212)              256            (186)
Cash and cash equivalents:
     Beginning of year                                                                 $     395        $      139       $     325 
----------------------------------------------------------------------------------------------------------------------------------
     End of year                                                                       $     183        $      395       $     139
----------------------------------------------------------------------------------------------------------------------------------
     Cash payments for interest                                                        $   2,491        $    3,339       $   3,246
----------------------------------------------------------------------------------------------------------------------------------
     Cash payments for income taxes                                                    $   1,080        $      438       $   1,297
----------------------------------------------------------------------------------------------------------------------------------

Supplemental disclosure of non-cash investing and financing activities:
</TABLE>

-   The change in net unrealized gain on investment securities available for 
    sale was $21 for the years ended December 31, 1998 and 1997.
-   During 1998, the Company repurchased 16 shares of common stock from an
    executive officer in exchange for the forgiveness of a $64 subscription
    receivable.

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


                                 Page 14 of 30
<PAGE>   15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)

1.     BASIS OF PRESENTATION

Ellett Brothers, Inc. (the Company) is principally a supplier of goods and
customer services to independent retailers who serve the natural outdoor
sporting goods market, primarily in the United States. The Company's products
are diversified among a wide variety of outdoor sporting goods equipment
including a wide selection of styles and brand names. In addition, the Company
operates two wholly-owned subsidiaries. One is a manufacturer of outdoor
sporting accessories and wooden nostalgia boxes. The other subsidiary
manufactures specialty licensed nostalgic products.

2.     SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation
---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.

Use of estimates
----------------
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Cash and cash equivalents
-------------------------
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. 

Revenue recognition
-------------------
The Company recognizes revenue from product sales at the time of shipment.

Inventories
-----------
Inventories, consisting principally of purchased goods held for resale, are
stated at the lower of cost or market, with cost determined under the first-in,
first-out (FIFO) method. 

Credit risk 
-----------
The Company performs ongoing evaluations of its customers and generally does not
require collateral. An allowance for doubtful accounts is provided in an amount
equal to the estimated collection losses. At December 31, 1998 and 1997 prepaid
expenses included prepayments in the amounts of $257 and $548, respectively, on
future purchases of inventory from certain suppliers for which the Company will
receive favorable discounts.

Advertising costs 
-----------------
The Company has elected to expense all advertising costs as incurred or the
first time advertising takes place, with the exception of direct response
advertising, which is capitalized and amortized over the period of its expected
future benefit. At December 31, 1998 and 1997, the Company did not have any
significant amounts capitalized as direct response advertising. The Company
incurred total advertising expenditures of $587, $735, and $808 during the years
ended December 31, 1998, 1997, and 1996, respectively. 

Property, plant and equipment 
-----------------------------
Property, plant and equipment are depreciated or amortized using the
straight-line method over the estimated useful lives of the respective assets
which range as follows:
<TABLE>
<CAPTION>
             Description                                                                         Years
             --------------------------------------------------------------------------------------------
             <S>                                                                                 <C>
             Buildings and improvements                                                          25 - 39
             Furniture, fixtures and equipment                                                    3 - 10
</TABLE>

Expenditures for repairs and maintenance are charged to expense as incurred. The
costs of major renewals and betterments are capitalized and depreciated over
their estimated useful lives. The cost and related accumulated depreciation of
property, plant and equipment are removed from the accounts upon disposition and
any resulting gain or loss is reflected in results of operations. 

The Company reviews long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable, in accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Accordingly,
when indicators of impairment are present, the Company evaluates the carrying
value of property, plant and equipment, and intangibles in relation to operating
performance. 


                                 Page 15 of 30

<PAGE>   16

Intangible assets
-----------------

Intangible assets principally represent the amount by which
costs of acquired net assets exceeded their related fair value ("goodwill") and
costs of acquired non-compete agreements. The carrying value of goodwill is
reviewed periodically, and if the facts and circumstances suggests that it is
impaired, the impairment will be accounted for in accordance with SFAS No. 121.
The non-compete agreements are being amortized over the original terms of the
agreements. Intangible assets are amortized using the following methods and
estimated useful lives.

<TABLE>
<CAPTION>
                  Description                                 Method                             Years  
                  --------------------------------------------------------------------------------------
                  <S>                                         <C>                                <C>
                  Deferred financing costs                    Effective interest                   20
                  Licenses and trademarks                     Straight-line                      5 - 20
                  Goodwill                                    Straight-line                        10
                  Non-compete agreements                      Straight-line                        10
</TABLE>


Fair values of financial instruments
------------------------------------

The Company owns certain debt securities held on deposit with the trustee for
payment of interest and principal on the IRB bond (see Note 10). Market values
of bond issues outstanding are based on quotes received from securities dealers
or the present value of principal and interest payments at the current market
rates. The revolving credit facility is carried at current value which
approximates the fair market value. 

Income taxes 
------------

Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized. 

Stock based compensation 
------------------------

The Company continues to account for stock-based compensation using the
intrinsic value method prescribed in APB Opinion No. 25, "Accounting for Stock
Issued to Employees." Compensation costs for stock options, if any, are measured
as the excess of the quoted market price of the Company's stock at the date of
the grant over the amount an associate must pay to acquire the stock.

SFAS No. 123, "Accounting for Stock-Based Companies", established accounting and
disclosure requirements using a fair value-based method of accounting for
stock-based employee compensation plans. The Company has elected to continue its
current method of accounting as described above, and has adopted the disclosure
requirements of SFAS No. 123. 

Earnings per common share 
-------------------------

In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share." SFAS No. 128 is designed to improve the earnings per share
information provided in financial statements by simplifying the prior
computational guidelines, revising the disclosure requirements, and increasing
comparability of earnings per share data on an international basis. This
pronouncement, which became effective for periods ending after December 15,
1997, requires the restatement of earnings per share data for all periods
presented in the form of basic earnings per share and diluted earnings per
share. Although the Company had options outstanding during portions of the three
years ended December 31, 1998, they have an antidilutive effect on earnings per
share for each year. As such, the earnings per share calculations previously
reported by the Company equal basic and diluted earnings per share calculated
under the provisions of SFAS No. 128. Basic and diluted earnings per share for
the years ended December 31, 1998, 1997, and 1996 are earnings divided by the
weighted average shares outstanding.

Investment securities
---------------------

The Company accounts for investment securities in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." This
statement requires investment securities to be classified into three types:

(a) Securities Held to Maturity - Debt securities that the Company has the
    positive intent and ability to hold to maturity are reported at amortized
    cost.

(b) Trading Securities - Debt and equity securities that are bought and held
    principally for the purpose of selling in the near term are reported at fair
    value, with unrealized gains and losses included in earnings.

(c) Securities Available for Sale - Debt and equity securities not classified
    as either securities held to maturity or trading securities are reported at
    fair value, with unrealized gains and losses reported as a separate
    component of shareholders' equity.

The classification of securities is generally determined at the date of
purchase. Gains and losses on sales of investment securities, computed based on
the specific identification method, are included in other income at the time of
sale.


                                 Page 16 of 30
<PAGE>   17

Reclassifications
-----------------
Certain amounts in the 1997 financial statements have been reclassified to
conform to the 1998 presentation with no effect on previously reported net
income or retained earnings.

Recent Accounting Pronouncements
--------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. SFAS No. 133 is effective for financial statements for all
fiscal quarters of all fiscal years beginning after June 15, 1999. The Company
intends to adopt SFAS No. 133 when required; however, SFAS No. 133 is not
expected to have a material impact on the Company's consolidated financial
position, results of operations, or cash flows.

3.     COMPREHENSIVE INCOME

On January 1, 1998 the Company adopted SFAS No. 130 "Reporting Comprehensive
Income." As required by the SFAS No. 130, prior year information has been
modified to conform with the new presentation.

Comprehensive income includes net income and all other changes to the Company's
equity, with the exception of transactions with shareholders ("other
comprehensive income"). The Company's only components of other comprehensive
income relate to unrealized gains and losses on available for sale securities.

4.     CLOSING OF SUBSIDIARY OPERATION

In June 1997, executive management and the Board of Directors concluded that
ongoing operation of the Safesport Manufacturing Company subsidiary was not in
the best interest of the Company, and began liquidation of this subsidiary. The
liquidation was substantially concluded by the end of 1997. An after tax reserve
of $2,725, or $0.53 per share, was established as of June 30 for the purpose of
this liquidation. The reserve was reviewed as of September 30, 1997 and adjusted
to reflect the liquidation efforts through that point. The reserves were
adjusted to the values noted below, resulting in $208 of net income for the
three months ended September 30, 1997. As of December 31, 1997, the liquidation
was substantially concluded and the reserves were adjusted to zero, resulting in
$241 of net income for the three months ended December 31, 1997. The reserve was
composed of the following components as of June 30, 1997 and as of September 30,
1997.
<TABLE>
<CAPTION>
                                                              June 30, 1997             September 30, 1997
                  ----------------------------------------------------------------------------------------
                  <S>                                         <C>                       <C>    
                  Inventory reserve                               $ 3,548                       $ 1,246
                  Accounts receivable reserve                         207                           580
                  Accrued expenses                                    255                            10
                  Current tax benefit                              (1,285)                         (688)    
                  ------------------------------------------------------------------------------------------
                      Net reserve                                 $ 2,725                       $ 1,148
</TABLE>

5.     INVENTORIES

       Inventories consisted of the following at December 31:
<TABLE>
<CAPTION>
                                                                     1998                          1997     
                  ------------------------------------------------------------------------------------------
                  <S>                                           <C>                           <C>      
                  Finished goods                                $  31,112                     $  30,406
                  Raw materials                                       881                           885
                  Work in progress                                    147                           244     
                  ------------------------------------------------------------------------------------------
                                                                $  32,140                     $  31,535
</TABLE>


6.     PROPERTY, PLANT AND EQUIPMENT

       Property, plant and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
                                                                    1998                         1997       
                  ------------------------------------------------------------------------------------------
                  <S>                                           <C>                           <C>      
                  Land                                          $    216                      $     216
                  Buildings and improvements                       6,751                          6,751
                  Furniture, fixtures and equipment                8,021                          6,428     
                  ------------------------------------------------------------------------------------------
                                                                  14,988                         13,395
                  Less accumulated depreciation
                       and amortization                            7,421                          6,692     
                  ------------------------------------------------------------------------------------------
                                                                $  7,567                      $   6,703
</TABLE>


                                 Page 17 of 30
<PAGE>   18
7.     INTANGIBLE ASSETS

       Intangible assets consisted of the following at December 31:

<TABLE>
<CAPTION>
                                                                    1998                           1997     
                  ------------------------------------------------------------------------------------------
                  <S>                                           <C>                           <C>      
                  Deferred financing costs                      $    336                      $     336
                  Licenses                                           203                            203
                  Goodwill                                           528                            528
                  Non-compete agreements                           1,700                          1,700     
                  ------------------------------------------------------------------------------------------
                                                                   2,767                          2,767
                  Less accumulated amortization                    1,085                            831     
                  ------------------------------------------------------------------------------------------
                                                                $  1,682                      $   1,936
</TABLE>

8.       INVESTMENT SECURITIES

       The amortized cost and estimated market value of investment securities at
December 31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                                     Gross            Gross             Gross          Estimated
                                                                   Amortized       Unrealized        Unrealized         Market
       Year                                                          Cost             Gains            Losses            Value      
       -----------------------------------------------------------------------------------------------------------------------------
       <S>        <C>                                             <C>                <C>               <C>              <C>     
       1998       Available for Sale: Bond Reserve                $   1,122          $     43          $   (1)          $  1,164
       1997       Available for Sale: Bond Reserve                $   1,147          $     25          $   (4)          $  1,168
</TABLE>

9.     REVOLVING CREDIT FACILITY

In 1994, the Company entered into a revolving credit facility (the "Agreement")
with an affiliate of First Union National Bank of North Carolina, N.A. The
Agreement is collateralized by substantially all of the Company's assets other
than real estate. The initial term of the Agreement was for three years ending
in June 1997. The Agreement was amended in September 1997 to extend the term to
September 30, 2001. Effective August 1, 1996, borrowings under the Agreement
bear interest at a rate equal to, at the Company's option, prime rate plus .375%
or 2.25% above the 30 or 90 day LIBOR rate. Combinations of these rates can be
used for the various loans which comprise the total facility outstanding
balance. The interest rates of the facility are subject to change based on
changes in the Company's leverage ratio and net income. At December 31, 1998,
the interest rate was 7.80%.

The Agreement provides the Company with a revolving line of credit and letters
of credit. The revolving line of credit provides loans of up to 70% of the
eligible inventories and up to 85% of eligible receivables. The maximum amount
that can be outstanding at any time under the Agreement is $40,000. At December
31, 1998 the Company had $11,110 available under the Agreement.

The Agreement contains various restrictions which, among other things, limit
capital expenditures and limit cash dividends. The Agreement also requires the
Company to meet various minimum financial covenants.

10.    LONG-TERM DEBT

       Long-term debt consisted of the following at December 31:

<TABLE>
<CAPTION>
                                                                                                          1998            1997 
       ------------------------------------------------------------------------------------------------------------------------
       <S>                                                                                           <C>             <C>
       Industrial Revenue Refunding Bonds, Series 1988 ("IRB") collateralized by
           real estate. The fixed interest of 7.5% due to bond holders
           semi-annually is required to be deposited with the Trustee monthly in
           an amount equal to one-sixth of the next interest payment. The
           Company also pays one-twelfth of the next principal payment (by way
           of annual maturity or annual mandatory
           sinking fund redemption) to the Trustee monthly in addition to the interest               $   7,567       $   8,084

       Industrial revenue refunding bond reserve on deposit with the Trustee                            (1,164)         (1,168)

       Capital lease agreement collateralized by computer equipment. The
           original cost of the equipment was $138 and the lease required a
           total of 42 monthly payments of $4                                                                -               8 
       ------------------------------------------------------------------------------------------------------------------------
                                                                                                         6,403           6,924
       Less, current portion                                                                              (567)           (525)
       ------------------------------------------------------------------------------------------------------------------------
                                                                                                     $   5,836       $   6,399
</TABLE>

Under the terms of the IRB, the Company is required to maintain a reserve fund
with a fair market value in the amount of $1,050 on deposit with the Trustee.
The Company may, depending upon market value fluctuations of the bonds held in
the reserve fund, be required to make payments to bring the fund up to the
$1,050. If for any reason, the reserve fund is in excess of the required 


                                 Page 18 of 30
<PAGE>   19
amount, such excess may be used to reduce required sinking fund payments.
Reserve fund balances may also be used toward the redemption of the outstanding
IRB obligations. In September 1997, the agreement was amended to reduce the
interest rate from 10.65% to 7.5%, and to eliminate the ability for early
redemption.

The fair market value of the IRB at December 31, 1998 and 1997 was approximately
$7,486 and $8,084, respectively.

Principal maturities and sinking fund requirements for long-term debt at
December 31, 1998 are as follows:

<TABLE>
                  For year ending December 31,
                  <S>                                               <C>
                  1999                                              $    567
                  2000                                                   617
                  2001                                                   667
                  2002                                                   716
                  2003                                                   767
                  Thereafter                                           3,069
                  ----------------------------------------------------------
                                                                    $  6,403
                  ----------------------------------------------------------
</TABLE>

Under the bond agreement, as amended, annual cash dividends are limited to 60%
of annual net income (adjusted for non-cash charges), a required minimum fixed
charge ratio of 1.25:1 (adjusted for non-cash charges), a required minimum
current ratio of 1.17:1, and a required minimum shareholders' equity level (as
defined) of $6,000 at December 31, 1996 and thereafter.

11.    OPERATING LEASES

The Company entered into three significant leases for computer equipment in
conjunction with the first phase of an information system upgrade. The Company
incurred $279, $279, and $169 in rental expenses related to these leases in
1998, 1997, and 1996, respectively. The future minimum lease payments as of
December 31, 1998 are $109 for the year ended December 31, 1999.

The Company's subsidiaries lease the manufacturing and office space under
non-cancelable operating leases. These leases expire through 2005. The Company
has the right to cancel these leases with a 90 day notice beginning in 1998 for
one lease and in 2000 for the other one.

Rent expense under these subsidiaries leases approximated $125 in each of the
years ended December 31, 1998, 1997, and 1996. The following is a summary of the
future rental payments as of December 31, 1998:

<TABLE>
<CAPTION>
                  For the year ending December 31,                                               
                  <S>                                                                      <C>
                  1999                                                                     $  125
                  2000                                                                        125
                  2001                                                                        125
                  2002                                                                        125
                  2003                                                                        125
                  Thereafter                                                                  181
                  -------------------------------------------------------------------------------
                                                                                           $  806
                  -------------------------------------------------------------------------------
</TABLE>

12.      COMMON AND PREFERRED STOCK

In January 1997, the Company issued 112 shares of common stock for total
consideration of $475 ($452 in promissory notes and $23 of cash) to two
executives of the Company in exchange for the cancellation of 112 fully vested
and outstanding options of the officers with an exercise price of $7.00 per
share. The promissory notes bear interest at 5.6%, payable semi-annually, and
become due on a pro-rata basis as the shares are sold by the executives. The
shares carry restrictions over their transferability which will be lifted over a
two-year period ending January 1999. The market value of the common stock at the
date of the transaction was $559. The difference between the market value and
the price at which the shares were sold to the executives is reflected as
unearned compensation and is being amortized over the two-year period. In June
of 1998, the Company reacquired 34 shares from one of the former executives and
recorded it using the cost method of accounting for treasury stock.

During 1998, the Company awarded 20 shares to an executive officer when the
market value of these shares was $93. Compensation expense was recognized at the
time of the award and shareholders' equity reflects the stock subscribed. During
1996, the Company awarded 58 shares of restricted common stock to two executives
of the Company. The restrictions are scheduled to be released pro-rata over a
three to four year period, based on certain criteria. The stock awards were
valued at the market price per share at the time of each award, and unearned
compensation was recorded in equity. Compensation expense is recognized as the
awards vest over the three to four year period.


                                 Page 19 of 30
<PAGE>   20

The Company reacquired 100, 93, and 30 shares of its common stock in April, July
and September of 1996, respectively; reacquired 46 and 10 shares in June and
December of 1997, respectively; and reacquired 142, 448, and 200 shares of its
common stock in September, October, and December of 1998, respectively. The
Company recorded these acquisitions using the cost method of accounting for
treasury stock.

The Company is authorized to issue 20,000 shares of no-par-value common stock.
Additionally, the Board of Directors of the Company is authorized to issue, at
its discretion, up to 5,000 shares of preferred stock in one or more series with
the number of shares, designation, relative rights and preferences, and
limitations to be determined by resolution of the Board of Directors. However,
no share of stock of any class shall be subject to preemptive rights or have
cumulative voting provisions.

13.      STOCK COMPENSATION PLANS

The Company has two stock option plans that provide for the granting of up to
500 options to associates. The options granted are normally at an exercise price
equal to the fair value of the shares at the date of the grant. During 1998
under the stock option program ("the Plan"), one executive was granted an option
to acquire 50 shares of common stock at $10 per share, and 50 shares of stock at
$15 per share. The options expire five years from the date granted.

A summary of the status of the Plan as of December 31, 1998 and changes during
the year then ended is presented below:

<TABLE>
<CAPTION>
                                                                              1998
                                                       ----------------------------------------------------
                                                                                      Weighted Average
                                                                Shares                 Exercise Price
                                                       -------------------------- -------------------------
                  <S>                                  <C>                        <C>
                 Outstanding at beginning of year                   -                   $        -
                 Granted                                          100                        12.50
                                                       -------------------------- -------------------------
                 Outstanding at end of year                       100                      $ 12.50
                                                       -------------------------- -------------------------
                 Options exercisable                              100                     $ 12.50
                                                       -------------------------- -------------------------
</TABLE>

The following table summarizes information about the Plan's stock options at
December 31, 1998:

<TABLE>
<CAPTION>
                                                Options Outstanding                                  Options Exercisable
                            ------------------------------------------------------------- -----------------------------------------
                             Number Outstanding   Weighted Average                         Number Exercisable
                                at 12/31/98          Remaining        Weighted Average        and Vested at      Weighted Average
 Range of Exercise Prices                         Contractual Life     Exercise Price           12/31/98          Exercise Price
--------------------------- ------------------------------------------------------------- -----------------------------------------
<S>                         <C>                                       <C>                 <C>                      <C>
        $10 - $15                   100                 4.50              $ 12.50                  100                $ 12.50
</TABLE>

Had compensation cost been recognized based on the fair value of the options at
the grant dates for awards under the Plan consistent with the method of SFAS No.
123, the Company's net income would have been decreased to the pro forma amount
of $2,976 and earnings per share would have been $0.60 for the year ended
December 31, 1998.

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants. The weighted average fair value of options granted
during the year ended December 31, 1998 was approximately $.37.

<TABLE>
<CAPTION>
                                                               1998
                                                               ----
                    <S>                                       <C>  
                    Dividend yield                             2.00%
                    Expected volatility                       36.72%
                    Risk-free interest rate                    5.40%
                    Expected lives, in years                       5
</TABLE>

At December 31, 1998 the Company had 400 shares reserved for future grants of
stock options.


                                 Page 20 of 30
<PAGE>   21

14.    INCOME TAXES

       Income tax expense (benefit) consisted of the following:

<TABLE>
<CAPTION>
                                                                           For the year ended December 31,
                  ----------------------------------------------------------------------------------------
                                                                     1998            1997             1996
                  ----------------------------------------------------------------------------------------
                  <S>                                            <C>               <C>            <C>
                  Current:
                  Federal                                        $  1,273          $ (573)        $  1,186
                  State                                                44             181              103
                  ----------------------------------------------------------------------------------------
                                                                    1,317            (392)           1,289
                  ----------------------------------------------------------------------------------------
                  Deferred:
                  Federal                                             342             103             (278)
                  State                                                79            (249)             (25)
                  -----------------------------------------------------------------------------------------
                                                                      421            (146)            (303)
                  -----------------------------------------------------------------------------------------
                                                                 $  1,738          $ (538)        $    986
                  -----------------------------------------------------------------------------------------
</TABLE>

       Components of the net deferred income tax liability (asset) were as
follows:

<TABLE>
<CAPTION>
                                                                                        As of December 31,
                  ----------------------------------------------------------------------------------------
                                                                     1998                             1997
                  ----------------------------------------------------------------------------------------
                  <S>                                            <C>                              <C>     
                  Depreciation and amortization                  $    538                         $    448
                  Bad debt expense                                   (217)                            (246)
                  Inventory capitalization                           (212)                            (343)
                  State net operating loss                             (6)                            (169)
                  Other                                                42                               34
                  ----------------------------------------------------------------------------------------
                  Total                                          $    145                         $   (276)
                  ----------------------------------------------------------------------------------------
</TABLE>

       Income tax expense varied from statutory federal income taxes as follows:

<TABLE>
<CAPTION>
                                                                           For the year ended December 31,
                  ----------------------------------------------------------------------------------------
                                                                     1998            1997             1996
                  ----------------------------------------------------------------------------------------
                  <S>                                            <C>               <C>            <C>
                  Income taxes at 34% statutory federal rate     $  1,615          $ (460)        $    909
                  State income taxes, net of federal tax benefit       81             (45)              52
                  Other                                                42             (33)              25
                  ----------------------------------------------------------------------------------------
                  Income tax expense                             $  1,738          $ (538)        $    986
                  ----------------------------------------------------------------------------------------
</TABLE>


The Company had approximately $3,667 of state net operating loss carryforwards
at December 31, 1998. These carryforwards will expire in 2002 through 2012, if
not utilized.

15.    EMPLOYEE BENEFIT PLAN

The Company has a 401(k) defined contribution plan (the "Plan") covering
substantially all full-time associates who meet certain age and length of
service requirements. Participants are eligible to contribute up to 20% of their
annual compensation, not to exceed legal limits, and the Company, at its
discretion, makes matching contributions to the Plan. Participants vest
immediately in their contributions and after three years in the Company's
contributions. The Company incurred expenses related to the Plan of $84, $67,
and $49 for the years ended December 31, 1998, 1997, and 1996, respectively.

16.    Contingency

The Company is currently a defendant in certain product liability lawsuits that
arose in the normal course of business. It is the opinion of management that the
Company has meritorious defenses and the disposition of these matters will not
have a material adverse effect on the consolidated financial position, results
of operations or liquidity of the Company.


                                 Page 21 of 30
<PAGE>   22

17.    QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following table of supplementary financial information presents selected
unaudited quarterly results of the Company's operations over the last eight
quarters:

<TABLE>
<CAPTION>
                                                      1997                                              1998
------------------------------- ------------------------------------------------- -------------------------------------------------
                                   First       Second      Third       Fourth       First       Second      Third        Fourth
                                  Quarter     Quarter     Quarter      Quarter     Quarter     Quarter     Quarter      Quarter
------------------------------- ------------ ----------- ----------- ------------ ----------- ----------- ----------- -------------
<S>                              <C>          <C>         <C>         <C>          <C>         <C>         <C>         <C>     
Sales                            $ 36,801     $ 34,671    $ 41,326    $ 39,702     $ 34,032    $ 31,856    $ 39,625    $ 41,617
Gross profit                        6,343        2,677       6,842       7,266        5,906       5,748       7,227       7,564
Selling, general,
     and administrative             5,149        5,802       5,421       5,413        4,795       4,554       5,206       5,151
Income (loss) from
     operations                     1,194       (3,125)      1,421       1,853        1,111       1,194       2,021       2,413
Net income (loss)                     392       (2,626)        465         954          451         500         884       1,177
Basic and diluted earnings
     (loss) per share                0.08       (0.51)        0.09        0.19         0.09        0.10        0.17        0.26
------------------------------- ------------ ----------- ----------- ------------ ----------- ----------- ----------- -------------
</TABLE>

18.      Business Segment Information

In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information" ("SFAS No. 131") was issued effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 requires the Company to report
information about its operating segments. In 1998, Ellett Brothers adopted SFAS
No. 131. The adoption of SFAS No. 131 did not affect results of operations or
financial position.

The Company's reportable segments are business units that offer different
products and have separate management teams and infrastructures. The business
units have been aggregated into two reportable segments. These segments are:
Hunting, Shooting, Camping, Archery & Outdoor Products ("HS&A") and Marine
Products. The "Other" segment includes the Company's subsidiaries. For the years
ended December 31, 1997 and 1996, the "Other" segment information included the
Safesport operation.

The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based upon operating income of the business units.

The following table presents information about reported segments for the years
ended December 31 (in millions):

<TABLE>
<CAPTION>
----------------------------------------------------------- ----------------- ---------------- ----------------- -----------------
                           1998                                   HS&A            Marine            Other             Total
----------------------------------------------------------- ----------------- ---------------- ----------------- -----------------
<S>                                                              <C>              <C>              <C>                <C>    
Sales                                                            $ 117.1          $   23.9         $    6.1           $ 147.1
Operating income                                                     4.4               1.7               .6               6.7
Identifiable segment assets                                         43.8               6.5              2.0              52.3
Capital expenditures                                                 1.6                .0               .0               1.6
Depreciation                                                          .5                .1               .1                .7
----------------------------------------------------------- ----------------- ---------------- ----------------- -----------------
----------------------------------------------------------- ----------------- ---------------- ----------------- -----------------
                           1997                                   HS&A            Marine            Other             Total
----------------------------------------------------------- ----------------- ---------------- ----------------- -----------------
Sales                                                            $ 115.5          $   21.0          $  16.0           $ 152.5
Operating income                                                     3.8               1.3             (3.8)              1.3
Identifiable segment assets                                         41.0               6.7              3.2              50.9
Capital expenditures                                                 1.2                .0               .1               1.3
Depreciation                                                          .5                .1               .1                .7
----------------------------------------------------------- ----------------- ---------------- ----------------- -----------------

----------------------------------------------------------- ----------------- ---------------- ----------------- -----------------
                           1996                                   HS&A            Marine            Other             Total
----------------------------------------------------------- ----------------- ---------------- ----------------- -----------------
Sales                                                         $    115.6       $      19.3      $      12.8       $     147.7
Operating income                                                     4.5               1.3              (.2)              5.6
Identifiable segment assets                                         43.6               6.1              9.9              59.6
Capital expenditures                                                 1.2                .0               .1               1.3
Depreciation                                                          .5                .1                -                .6
----------------------------------------------------------- ----------------- ---------------- ----------------- -----------------
</TABLE>


                                 Page 22 of 30
<PAGE>   23

A reconciliation of total segment operating income to total consolidated income
before taxes for the years ended December 31 (in millions) as follows:

<TABLE>
<CAPTION>
----------------------------------------------------------- ----------------------- ---------------------- -----------------------
                                                                     1998                   1997                    1996
----------------------------------------------------------- ----------------------- ---------------------- -----------------------
<S>                                                               <C>                    <C>                      <C>    
Operating income                                                  $   6.7                $   1.3                  $   5.6
Interest income and other income, net                                  .5                     .6                       .4
Interest expense                                                     (2.5)                  (3.3)                    (3.3)
----------------------------------------------------------- ----------------------- ---------------------- -----------------------
Income before taxes                                               $   4.7                $  (1.4)                 $   2.7
----------------------------------------------------------- ----------------------- ---------------------- -----------------------
</TABLE>
A reconciliation of identifiable segment assets to total assets for the year
ended December 31 (in millions) is as follows:

<TABLE>
<CAPTION>
----------------------------------------------------------- ----------------------- ---------------------- -----------------------
                                                                     1998                   1997                    1996
----------------------------------------------------------- ----------------------- ---------------------- -----------------------
<S>                                                               <C>                    <C>                      <C>    
Identifiable segment assets                                       $  52.3                $  50.9                  $  59.6
Other corporate assets                                               12.5                   12.7                     14.1
----------------------------------------------------------- ----------------------- ---------------------- -----------------------
      Total assets                                                $  64.8                $  63.6                  $  73.7
----------------------------------------------------------- ----------------------- ---------------------- -----------------------
</TABLE>


                                 Page 23 of 30
<PAGE>   24


REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
Ellett Brothers, Inc.

         In our opinion, the consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of Ellett
Brothers, Inc. and subsidiaries at December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. In addition, in our opinion, Schedule II - Valuation and Qualifying
Accounts, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information required to
be included therein. These financial statements and financial statement schedule
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.

PricewaterhouseCoopers, LLP

Raleigh, North Carolina
February 12, 1999


                                  Page 24 of 30
<PAGE>   25
Item 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE

None.

PART III

Information called for by Part III (Items 10, 11, 12 and 13) of this report on
Form 10-K has been omitted as the Company intends to file with the Securities
and Exchange Commission not later than April 30, 1999, a definitive proxy
statement pursuant to Regulation 14A promulgated under the Securities Exchange
Act of 1934. Such information will be set forth in such Proxy Statement and is
incorporated herein by reference.

Item 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by the Item is incorporated by reference from the
section of the Company's Proxy Statement relating to the Annual Meeting of
Shareholders to be held May 12, 1999, under the caption "DIRECTORS AND EXECUTIVE
OFFICERS."

Item 11.   EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference from those
sections of the Company's Proxy Statement relating to the Annual Meeting of
Shareholders to be held May 12, 1999 under the captions "EXECUTIVE
COMPENSATION", "COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION" AND
"PERFORMANCE GRAPH."

Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated by reference from the
section of the Company's Proxy Statement relating to the Annual Meeting of
Shareholders to be held May 12, 1999 under the caption "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."

Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated by reference from the
section of the Company's Proxy Statement relating to the Annual Meeting of
Shareholders to be held May 12, 1999 under the caption "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS."


                                 Page 25 of 30
<PAGE>   26
PART IV

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

(a) The following documents are filed as part of this Form 10-K:

         1. Financial Statements: See Item 8 of this report on Form 10-K.
            --------------------

         2. Financial Statement Schedules:
            -----------------------------

                  Schedule II - Valuation and Qualifying Accounts - Page 27

         All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions, or are inapplicable, or the required information
is disclosed elsewhere, and therefore, have been omitted.

         3. Exhibits: The Exhibits listed on the accompanying Index to Exhibits
            --------  on pages 29 and 30 are filed as part of this report.

(b) There were no reports filed on Form 8-K for the quarter ended December 31,
1998.


                                 Page 26 of 30
<PAGE>   27


                              ELLETT BROTHERS, INC.

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

               For the Years Ended December 31, 1998, 1997, & 1996

                                 (In Thousands)
<TABLE>
<CAPTION>
                                                         Balance at      Charged to       Charged to                      Balance at
                                                         Beginning          Cost/           Other                             End
                             Description                 of Period        Expenses         Accounts       Deductions       of Period
                             -----------                 ---------       ----------       ----------      ----------      ----------
  1998
<S>              <C>                                       <C>             <C>              <C>             <C>   
                 Allowance for Doubtful Accounts           $  769          $  374           $  750 (B)      $1,288 (A)      $  605
                                                           ======          ======           ======          ======          ======

                 Allowance for Obsolete Inventory          $  697(C)       $    -(D)        $    -          $  128          $  569
                                                           ======          ======           ======          ======          ======


  1997

                 Allowance for Doubtful Accounts           $  750          $1,568           $  899(B)       $2,448(A)       $  769
                                                           ======          ======           ======          ======          ======

                 Allowance for Obsolete Inventory          $  500(C)       $3,745(D)        $    -          $3,548          $  697
                                                           ======          ======           ======          ======          ======


  1996

                 Allowance for Doubtful Accounts           $  712          $  933           $1,471(B)       $2,366(A)       $  750
                                                           ======          ======           ======          ======          ======

                 Allowance for Obsolete Inventory          $  500(C)       $    -(D)        $    -          $    -          $  500
                                                           ======          ======           ======          ======          ======
</TABLE>
---------------
The information above is provided in support of the financial statements as
further described in Note 2 to the financial statements.

(A)      Represents actual write-off of uncollectable accounts.

(B)      Recoveries.

(C)      The Company maintains a general reserve for excess or obsolete
         inventory and for lower of cost or market adjustments. As part of the
         Company's inventory management, slow moving items are identified and
         prices are reduced until the items are liquidated. These sales are part
         of sales and cost of sales.

(D)      Reflected as cost of sales. See Note C above.


                                 Page 27 of 30
<PAGE>   28

                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

ELLETT BROTHERS, INC.
(Registrant)

Date: March 31, 1999                   By:   /s/ Joseph F. Murray, Jr.          
                                           -------------------------------------
                                           Joseph F Murray, Jr.
                                           President and Chief Executive Officer

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

<TABLE>
<CAPTION>
            Signature                                             Title                                      Date
--------------------------------                      -------------------------------             ----------------------------
<S>                                                   <C>                                         <C> 
/s/ Robert D. Gorham, Jr.                                Chairman of the Board                           March 31, 1999
--------------------------------
Robert D. Gorham, Jr.

/s/ Joseph F. Murray, Jr.                               Director, President and                          March 31, 1999
--------------------------------
Joseph F. Murray, Jr.                                   Chief Executive Officer

/s/ George E. Loney                                     Chief Financial Officer                          March 31, 1999
--------------------------------
George E. Loney

/s/ E. Wayne Gibson                               Director, Chairman of the Executive                    March 31, 1999
E. Wayne Gibson                                         Committee and Secretary

/s/ William H. Batchelor                                        Director                                 March 31, 1999
--------------------------------
William H. Batchelor

/s/ Charles V. Ricks                                            Director                                 March 31, 1999
--------------------------------
Charles V. Ricks

/s/ William H. Stanley                                          Director                                 March 31, 1999
--------------------------------
William H. Stanley
</TABLE>


                                 Page 28 of 30
<PAGE>   29
                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
       Exhibit
       Number                              Description
       -------                             -----------
       <S>        <C>
       3(a)       Articles of Incorporation of the Corporation. Incorporated by
                  reference to Exhibit 3(a) filed as part of the Corporation's
                  Registration Statement on Form S-1 (File No. 33-61490).

       3(b)       Bylaws of the Corporation. Incorporated by reference to
                  Exhibit 3(b) filed as part of the Corporation's Registration
                  Statement on Form S-1 (File No. 33-61490).

       4(a)       Specimen Stock Certificate for the Common Stock of the
                  Corporation. Incorporated by reference to Exhibit 4(a) filed
                  as part of the Corporation's Registration Statement on Form
                  S-1 (File No. 33-61490).

       4(b)       Loan Agreement between Lexington County, South Carolina and
                  Ellett Brothers Limited Partnership dated as of November 1,
                  1988. Incorporated by reference to Exhibit 4(c) filed as part
                  of the Corporation's Registration Statement on Form S-1 (File
                  No. 33-61490).

       4(c)       Promissory Note of Ellett Brothers Limited Partnership to
                  Lexington County, South Carolina dated December 1, 1988.
                  Incorporated by reference to Exhibit 4(d) filed as part of the
                  Corporation's Registration Statement on Form S-1 (File No.
                  33-61490).

       4(d)       Trust Indenture between Lexington County, South Carolina and
                  Ellett Brothers Limited Partnership dated as of November 1,
                  1988. Incorporated by reference to Exhibit 4(e) filed as part
                  of the Corporation's Registration Statement on Form S-1 (File
                  No. 33-61490).

       4(e)       Mortgage and Security Agreement between Ellett Brothers
                  Limited Partnership and Citizens and Southern Trust Company
                  (South Carolina), National Association, dated as of November
                  1, 1988. Incorporated by reference to Exhibit 4(f) filed as
                  part of the Corporation's Registration Statement on Form S-1
                  (File No. 33-61490).

       4(f)       Form of Amendment dated June 3, 1992 between Ellett Brothers
                  Limited Partnership, NationsBank, Allstate Municipal Income
                  Opportunities Trust and Allstate Municipal Income Trust II
                  relating to the Loan Agreement filed as Exhibit 4(b).
                  Incorporated by reference to Exhibit 4(i) filed as part of the
                  Corporation's Annual Report on Form 10-K for the year ended
                  December 31, 1993.

       4(g)       Form of Letter Agreement dated July 29, 1992 among Allstate
                  Municipal Income Opportunities Trust, Allstate Municipal
                  Income Trust II, Ellett Brothers Limited Partnership,
                  NationsBank and Lexington County relating to the Loan
                  Agreement filed as Exhibit 4(b). Incorporated by reference to
                  Exhibit 4(j) filed as part of the Corporation's Annual Report
                  on Form 10-K for the year ended December 31, 1993.

       4(h)       Letter dated February 23, 1993 of Allstate Municipal Income
                  Opportunities Trust and Allstate Municipal Income Trust II to
                  Ellett Brothers Limited Partnership relating to the Loan
                  Agreement filed as Exhibit 4(b). Incorporated by reference to
                  Exhibit 4(k) filed as part of the Corporation's Registration
                  Statement on Form S-1 (File No. 33-61490).

       4(i)       Form of Assignment and Assumption Agreement dated June 9, 1993
                  between Ellett Brothers Limited Partnership and Ellett
                  Brothers, Inc. relating to the Loan Agreement filed as Exhibit
                  4 (b). Incorporated by reference to Exhibit 4(l) filed as part
                  of the Corporation's Annual Report on Form 10-K for the year
                  ended December 31, 1993.

       4(j)       First Amendatory Loan Agreement between Lexington County,
                  South Carolina, the Corporation and The Bank of New York dated
                  as of September 12, 1997. Incorporated by reference to Exhibit
                  4(j) filed as part of the Corporation's Annual Report on Form
                  10-K for the year ended December 31, 1997.

       4(k)       First Supplemental Trust Indenture between Lexington County,
                  South Carolina, the Corporation and The Bank of New York dated
                  as of September 12, 1997. Incorporated by reference to Exhibit
                  4(k) filed as part of the Corporation's Annual Report on Form
                  10-K for the year ended December 31, 1997.

       4(l)       Mortgage Modification Agreement between the corporation and
                  The Bank of New York dated as of September 12, 1997.
                  Incorporated by reference to Exhibit 4(l) filed as part of the
                  Corporation's Annual Report on Form 10-K for the year ended
                  December 31, 1997.

       4(m)       Modification of Note between the Corporation and The Bank of
                  New York dated as of September 12, 1997. Incorporated by
                  reference to Exhibit 4(m) filed as part of the Corporation's
                  Annual Report on Form 10-K for the year ended December 31,
                  1997.
</TABLE>
                                 Page 29 of 30
<PAGE>   30


                                INDEX TO EXHIBITS
                                   (continued)
<TABLE>
<CAPTION>
       Exhibit
       Number                           Description
       -------                          -----------
       <S>        <C>
       10(a)      Financing and Security Agreement dated June 10, 1994 between
                  First Union Commercial Corporation and the Corporation.
                  Incorporated by reference to Exhibit 10(d) filed as part of
                  the Corporation's quarterly report on Form 10-Q for the
                  quarter ended June 30, 1994.

       10(b)      Amendment dated April 21, 1995 to the Financing and Security
                  Agreement filed as exhibit 10(a). Incorporated by reference to
                  Exhibit 10(e) filed as part of the Corporation's Annual Report
                  on Form 10-K for the year ended December 31, 1995.

       10(c)      Amendment dated December 23, 1996 to the Financing and
                  Security Agreement filed as Exhibit 10(a). Incorporated by
                  reference to exhibit 10(f) filed as part of the Corporation's
                  Annual Report on Form 10-K for the year ended December 31,
                  1996.

       10(d)      Amendment dated March 31, 1997 to the Financing and Security
                  Agreement filed as Exhibit 10(a). Incorporated by reference to
                  Exhibit 10(d) filed as part of the Corporation's Annual Report
                  on Form 10-K for the year ended December 31, 1997.

       10(e)      Amendment dated September 26, 1997 to the Financing and
                  Security Agreement filed as Exhibit 10(a). Incorporated by
                  reference to Exhibit 10(e) filed as part of the Corporation's
                  Annual Report on Form 10-K for the year ended December 31,
                  1997.

       10(f)      Amendment dated December 30, 1997 to the Financing and
                  Security Agreement filed as Exhibit 10(a). Incorporated by
                  reference to Exhibit 10(f) filed as part of the Corporation's
                  Annual Report on Form 10-K for the year ended December 31,
                  1997.

       10(g)      Amendment dated December 31, 1998 to the Financing and
                  Security Agreement filed as Exhibit 10(a).

       21         Subsidiaries of the Registrant. Incorporated by reference to
                  Exhibit 21 filed as part of the Corporation's Annual Report on
                  Form 10-K for the year ended December 31, 1997.

       27         Financial data schedule. (for SEC use only).
</TABLE>

                                 Page 30 of 30