<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                               -------------------

                                    FORM 10-K

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                    For fiscal year ended September 30, 1998

                         Commission file number 0-21630
                              --------------------

                       ACTION PERFORMANCE COMPANIES, INC.
             (Exact Name of Registrant as Specified in Its Charter)

                     ARIZONA                           86-0704792
            (State of Incorporation)      (I.R.S. Employer Identification No.)

                              4707 E. Baseline Road
                             Phoenix, Arizona 85040
                                 (602) 337-3700
   (Address, including zip code, and telephone number, including area code, of
                          principal executive offices)

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

      Securities registered pursuant to Section 12(g) of the Exchange Act:

                     Common Stock, par value $.01 per share

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. [ ]

The aggregate market value of Common Stock held by nonaffiliates of the
registrant (14,495,355 shares) based on the closing price of the registrant's
Common Stock as reported on the Nasdaq National Market on December 15, 1998, was
$510,055,304. For purposes of this computation, all officers, directors and 10%
beneficial owners of the registrant are deemed to be affiliates. Such
determination should not be deemed to be an admission that such officers,
directors or 10% beneficial owners are, in fact, affiliates of the registrant.

As of December 15, 1998, there were outstanding 16,657,632 shares of
registrant's Common Stock, par value $.01 per share.

Documents incorporated by reference: Portions of the registrant's definitive
Proxy Statement for the 1999 Annual Meeting of Shareholders are incorporated by
reference into Part III of this Report.

<PAGE>   2

                       ACTION PERFORMANCE COMPANIES, INC.
                           ANNUAL REPORT ON FORM 10-K
                      FISCAL YEAR ENDED SEPTEMBER 30, 1998
                                TABLE OF CONTENTS

                                                                            PAGE

                                     PART I

ITEM 1.     BUSINESS.........................................................1
ITEM 2.     PROPERTIES......................................................28
ITEM 3.     LEGAL PROCEEDINGS...............................................29
ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............29

                                     PART II

ITEM 5.     MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
            STOCKHOLDER MATTERS.............................................30
ITEM 6.     SELECTED FINANCIAL DATA.........................................31
ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            CONDITION AND RESULTS OF OPERATIONS............................32
ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......40
ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................41
ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
            AND FINANCIAL DISCLOSURE........................................41

                                    PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............41
ITEM 11.    EXECUTIVE COMPENSATION..........................................41
ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT......................................................41
ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................41

                                     PART IV

ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
            FORM 8-K........................................................42
SIGNATURES  ................................................................45

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................................F-1

                        ---------------------------------

                 STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

     The statements contained in this Report on Form 10-K that are not purely
historical are forward-looking statements within the meaning of applicable
securities laws. Forward-looking statements include statements regarding the
Company's "expectations," "anticipation," "intentions," "beliefs," or
"strategies" regarding the future. Forward-looking statements also include
statements regarding revenue, margins, expenses, and earnings analysis for
fiscal 1999 and thereafter; future products or product development; the
Company's product and distribution channel development strategies; potential
acquisitions or strategic alliances; the success of particular product or
marketing programs; revenue generated as a result of licensing arrangements; and
liquidity and anticipated cash needs and availability. All forward-looking
statements included in this Report are based on information available to the
Company as of the filing date of this Report, and the Company assumes no
obligation to update any such forward-looking statements. The Company's actual
results could differ materially from the forward-looking statements. Among the
factors that could cause actual results to differ materially are the factors
discussed in Item 1, "Special Considerations."


                                      -i-
<PAGE>   3

                                     PART I

ITEM 1. BUSINESS

                                  INTRODUCTION

     The Company is a worldwide leader in the design and sale of licensed
motorsports collectible and consumer products. The Company's products include
die-cast scaled replicas of motorsports vehicles, apparel (including t-shirts,
hats, and jackets), and souvenirs. The Company markets its products under
license arrangements with popular race car drivers (including seven-time Winston
Cup champion Dale Earnhardt, three-time Winston Cup champion Jeff Gordon, 1989
Winston Cup champion Rusty Wallace, eight-time National Hot Rod Association
("NHRA") Funny Car champion John Force, and Formula One champions Jacques
Villeneuve and Mika Hakkinen), car owners, car sponsors, automobile
manufacturers, and the National Association for Stock Car Auto Racing
("NASCAR"). Third parties manufacture all of the Company's motorsports
collectibles and most of the Company's apparel and souvenirs, generally
utilizing the Company's designs, tools, and dies.

     The Company markets its products to approximately 11,500 specialty
retailers throughout the world, either directly or through its wholesale
distributor network; to motorsports enthusiasts directly through its Racing
Collectibles Club of America (the "Collectors' Club"), which had approximately
148,000 members as of September 30, 1998; and through mobile trackside souvenir
stores, promotional programs for corporate sponsors, and fan clubs. The Company
also distributes certain of its products to mass-market retailers through its
in-house sales force and wholesale distributors. In addition, the Company has a
license agreement with Hasbro, Inc. ("Hasbro"), a multi-billion dollar toy and
game manufacturer, covering the exclusive sale by Hasbro of a line of
motorsports-related products in the mass-merchandise market. The Company plans
to begin electronic commerce sales of its products through its recently acquired
"goracing.com" web site as well as the nascar.com web site during calendar 1999.

     The Company's products and other programs capitalize on the rapidly growing
popularity of motorsports. See Item 1, "Business - Industry Overview." The
Company focuses on developing long-term relationships with the most popular
drivers, car owners, car sponsors, car manufacturers, and others in the various
top racing categories. During fiscal 1997, fiscal 1998, and the first quarter of
fiscal 1999, the Company entered into long-term licensing arrangements with a
number of the most popular motorsports licensors, including drivers Dale
Earnhardt, Jeff Gordon, and Rusty Wallace; team owners Robert Yates Racing,
Inc., Richard Childress Racing Enterprises, Inc., Joe Gibbs Racing, Inc., and
Dale Earnhardt, Inc.; and NASCAR and Championship Auto Racing Teams ("CART").
The Company continually strives to strengthen its relationships with licensors
and to develop opportunities to market innovative licensed collectible and
consumer products that appeal to motorsports enthusiasts. The Company believes
that its license agreements with popular NASCAR and other motorsports
personalities, teams, and sponsors significantly enhance the collectible value
and marketability of its products. The Company also believes that it will be
able to leverage its relationships to attract additional drivers in order to
generate increased revenue for the Company as well as increased earnings for the
drivers.

     Historically, the Company designed and marketed die-cast collectibles
featuring NASCAR drivers and vehicles. The Company has aggressively expanded its
lines of die-cast collectibles to include replicas of motorsports vehicles from
Formula One, NHRA drag racing, NASCAR's "Busch" and "Craftsman Truck" racing
series, CART racing, United States Auto Club ("USAC") racing, and "World of
Outlaws" sprint car racing. In fiscal 1997, the Company began an aggressive
program to expand its product offerings and distribution channels through a
series of strategic acquisitions and licensing arrangements. The following table
sets forth certain information with respect to those acquisitions, which
represent an aggregate base purchase price, including assumed liabilities but
excluding contingent payments, of approximately $142.8 million.

<PAGE>   4

                               RECENT ACQUISITIONS

       ACQUISITIONS(1)            DATE                    BUSINESS
------------------------------ ------------  -----------------------------------
Sports Image, Inc.             November      Markets and distributes licensed
                               1996          motorsports apparel and souvenirs;
                                             trackside sales; Dale Earnhardt
                                             fan club

Motorsport Traditions          January       Markets and distributes licensed
  Limited Partnership and      1997          motorsports apparel and souvenirs;
  Creative Marketing and                     trackside sales
  Promotions, Inc.

Robert Yates Promotions, Inc.  July 1997     Markets and distributes licensed
                                             motorsports apparel and souvenirs;
                                             trackside sales

Image Works, Inc.              July 1997     Manufactures and markets licensed
                                             motorsports apparel through the
                                             mass-merchandise markets

Motorsports collectibles       August 1997   Manufactures and markets licensed
  product lines of Simpson                   "mini-helmets" and
  Products, Inc.                             other motorsports collectibles and
                                             souvenirs

Assets related to sales of     December      Markets and distributes licensed
  merchandise licensed by      1997          motorsports apparel and souvenirs;
  NASCAR driver Rusty Wallace                trackside sales

Assets related to motorsports  December      Manufactures and markets "Revell"
  die-cast collectible         1997          licensed die-cast
  product lines of                           collectibles; strategic alliance
  Revell-Monogram, Inc.                      with Revell involving
                                             extensive product licensing and
                                             distribution arrangements

Brookfield Collectors Guild,   January       Markets and distributes licensed
  Inc.                         1998          motorsports collectibles
                                             and ensembles

Chase Racewear, L.L.C.         May 1998      Licensed motorsports apparel and
                                             accessories 

Paul's Model Art/MiniChamps    August 1998   Markets and distributes die-cast
                                             replicas of Formula One and GT race
                                             cars as well as factory production
                                             cars, driver figurines, and other
                                             motorsports collectibles

Performance Plus               September     Develops and markets
  Nutritional, L.L.C.          1998          driver-endorsed nutritional
                                             products, including vitamins,
                                             energy bars, and energy drinks

Intellectual Properties        October       Creates and develops promotional
  Group, Inc.                  1998          programs for corporate sponsors of
                                             motorsports

Tech 2000 Worldwide, Inc.      November      Operates the "goracing.com"
                               1998          Internet web site; designs,
                                             develops, implements, and
                                             maintains motorsports-related and
                                             other Internet web sites,
                                             including electronic commerce
                                             capabilities

-----------------

(1)  The acquisitions listed consist of the purchase of assets of Sports Image,
     Inc. ("Sports Image"); the purchase of assets of Motorsport Traditions
     Limited Partnership and the stock of Creative Marketing and Promotions,
     Inc. (together, "Motorsport Traditions"); the purchase of stock of Robert
     Yates Promotions, Inc. ("RYP"); the purchase of assets of Image Works, Inc.
     ("Image Works"); the purchase of motorsports collectibles-related assets of
     Simpson Products, Inc. ("Simpson"); the purchase of assets related to sales
     of merchandise licensed by Rusty Wallace ("Wallace") (the "Rusty Wallace
     Acquisition"); the purchase of assets from Revell-Monogram, Inc. ("Revell")
     (the "Revell Acquisition"); the purchase of assets from Brookfield
     Collectors Guild, Inc. ("Brookfield"); the acquisition of 80% of the
     membership interests of Chase Racewear, L.L.C. ("Chase"); the acquisition
     of an 80% interest in Paul's Model Art, GmbH, MiniChamps, GmbH, Lang
     Miniaturen, GmbH, and Spielwaren Danhausen, GmbH (collectively
     "MiniChamps"); the acquisition of 58% of the membership interests of
     Performance Plus Nutritional, L.L.C. ("Performance Plus"); the purchase of
     stock of Intellectual Properties Group, Inc. ("IPG"); and the purchase of
     stock of Tech 2000 Worldwide, Inc. ("Tech 2000").

     During fiscal 1998, the Company continued to expand its development of
promotional programs for corporate sponsors of motorsports, which feature the
Company's products and which are intended to increase the brand awareness of the
products and services of the corporate sponsors. The Company also has begun to


                                       2
<PAGE>   5

represent a number of popular race car drivers in a broad range of licensing and
other revenue-producing opportunities, including product licenses, corporate
sponsorships, endorsement contracts, and speaking engagements.

     The Company pursues a strategy designed to enhance its leadership position
in the motorsports collectible and consumer products industry. Key aspects of
this strategy include (i) continuing to enhance its existing products and
introduce new products and services that appeal to racing enthusiasts, (ii)
expanding and strengthening its licensing arrangements, (iii) pursuing strategic
acquisitions and alliances, (iv) expanding existing and identifying new
distribution channels, and (v) developing promotional programs for corporate
sponsors.

     The Company was incorporated in Arizona in 1992. The Company's principal
executive offices are located at 4707 East Baseline Road, Phoenix, Arizona
85040, and its telephone number is (602) 337-3700. As used herein, the term
"Company" refers to Action Performance Companies, Inc. and its subsidiaries and
operating divisions.

                                    BUSINESS

INDUSTRY OVERVIEW

      Motorsports racing consists of several distinct segments, each with its
own organizing bodies and events. The largest segment in the United States, in
terms of attendance and media exposure, is stock car racing, which is dominated
by NASCAR. The other principal segments in the United States are drag racing,
with NHRA the most prominent organizing body, and Indy car racing, controlled by
CART and the Indy Racing League ("IRL"). According to USA Today, motorsports
racing is the fastest growing spectator sport in the United States. The
following table summarizes attendance figures for motorsports in the United
States, based on the most current published statistics:

<TABLE>
<CAPTION>
                                                                   AVERAGE
                                                                ATTENDANCE PER
                       TOTAL ATTENDANCE                             EVENT
               ----------------------------------  NUMBER OF  -------------------
                                       PERCENTAGE   EVENTS
                 1996        1997      INCREASE    1996/1997   1996       1997
               ----------  ----------  ----------  ---------  --------   --------
<S>            <C>         <C>         <C>         <C>        <C>        <C>
All U.S.                                                                         
Motorsports.  15,430,637  16,861,291     9.27%     215/230     71,770     73,310
NASCAR......   5,588,069   6,091,356     9.01%      31/32     180,260    190,355
NHRA........   1,869,437   2,168,481    16.00%      19/22      98,391     98,567
CART........   2,366,440   2,491,050     5.27%      16/17     147,902    146,532
IRL.........   1,144,002   1,347,000    17.74%       5/8      228,800    168,375
</TABLE>

     Internationally, the Federation Internationale de l'Automobile governs
motorsports and administers the Formula One Grand Prix championship. Formula One
racing uses handcrafted, open-wheeled cars that look similar to Indy racers but
are the most technologically advanced and expensive racing vehicles in the
world. According to The Wall Street Journal, more than 300 million people attend
or tune in to each of 17 Grand Prix events held each year in Europe, Asia,
Canada, and South America.

     Motorsports events also have achieved significant success on television in
the United States, with coverage of NASCAR and NHRA races provided by broadcast
and cable television networks, such as ABC, CBS, ESPN, TBS, and TNN, in addition
to regional sports networks. Several leading cable companies joined forces to
launch Speedvision, a motorsports cable network. USA Today reports that TV
ratings are growing even faster than attendance. According to Nielson Media
Research reports, more than 115 million people tuned in to NASCAR's televised
events in 1997. The Company believes that the new super speedways in Los
Angeles, California; Dallas/Ft. Worth, Texas; Las Vegas, Nevada; and other major
cities will stimulate continued growth in the motorsports industry through
increased exposure to new racing enthusiasts and markets.


                                       3
<PAGE>   6

     Large corporate advertisers have recognized the growing popularity of
motorsports. According to NASCAR, more than 70 of the Fortune 500 companies
utilize motorsports sponsorship or other activities as part of their marketing
strategies. Published reports indicate that corporate sponsors were expected to
spend an estimated $1.1 billion on motorsports marketing programs in the United
States in 1998, with NASCAR teams and venues attracting an estimated $476
million. The Wall Street Journal reports that Formula One attracts more than
$750 million per year from sponsors. The increasing popularity of motorsports
also has created significant demand among its patrons for a variety of
race-related merchandise and souvenirs. Industry reports indicate that total
NASCAR-related merchandise sales (which includes various product categories in
addition to the types of products sold by the Company) increased from
approximately $80 million in 1990 to approximately $770 million in 1997. These
reports state that industry insiders estimate that total NASCAR-related
merchandise sales will increase to approximately $1.0 billion by 2000.

GROWTH STRATEGY

      The Company pursues a strategy designed to continue its leadership
position in the motorsports collectible and consumer products industry and to
provide top race car drivers and other licensors with a broad range of
revenue-producing opportunities throughout their careers. Key aspects of this
strategy include (i) continuing to enhance its existing products and introduce
new products that appeal to racing enthusiasts, (ii) expanding and strengthening
its licensing arrangements, (iii) pursuing strategic acquisitions and alliances,
(iv) expanding existing and identifying new distribution channels, and (v)
developing promotional programs for corporate sponsors.

Enhancing Existing and Introducing New Products

     The Company continually seeks to enhance its existing products and to
introduce new products designed to appeal to enthusiasts of every major racing
series. During the last two years, the Company has expanded its lines of
die-cast collectibles to include Formula One, NHRA drag racing, and NASCAR's
"Busch" and "Craftsman Truck" racing series. The Company continually expands its
product offerings by developing and introducing new lines of collectible
products, such as the higher-priced "Elite" series of die-cast collectibles,
which feature detailed equipment such as spark plug wires, braided hoses, and
realistic suspension systems. The Revell Acquisition provides the Company with
additional lines of high-quality die-cast motorsports collectibles that the
Company markets under various well-recognized "Revell" trademarks at price
points that differ from those of the Company's other die-cast product lines. The
Company also has expanded its consumer product offerings to include licensed
motorsports apparel, souvenirs, nutritional supplements, and other consumer
products. In addition, the Company participates in the retail mass-merchandise
market through a license agreement with Hasbro, under which Hasbro manufactures
and markets, with the Company's assistance, a line of motorsports products that
do not compete with the Company's core products.

     The Company believes that its ongoing investment in tooling enables it to
produce die-cast products of higher quality and detail than those produced by
its competitors. The Company has invested more than $30.2 million in its
proprietary tooling, which contributes significantly to the quality of the
Company's products and is critical to imparting the high level of detail and
quality that collectors demand. The Company intends to continue investing in its
proprietary tooling in order to upgrade and expand existing product lines and to
add new products. The Company strives to enhance the demand for and to increase
the value of its collectible products by offering limited numbers of each item.

Expanding and Strengthening Licensing Arrangements

     The Company focuses on expanding and strengthening its relationships with
existing licensors as well as entering into licensing arrangements with
additional motorsports personalities in order to further solidify its position
as the leader in the motorsports marketplace. The Company believes that its
licensing arrangements with top race car drivers (including Dale Earnhardt, Jeff
Gordon, Rusty Wallace, Dale Jarrett, and John Force), car owners, manufacturers,
sanctioning bodies, and corporate sponsors provide the Company with a
competitive advantage. These licensing arrangements enable the Company to
manufacture and distribute distinctive collectibles and other products to the
growing market of motorsports enthusiasts.


                                       4
<PAGE>   7

Pursuing Strategic Acquisitions or Alliances

     The Company seeks to acquire existing businesses and to enter into
strategic alliances that it believes will enable it to introduce new products or
expand its product lines, to leverage or expand its licensing arrangements, or
to improve its distribution channels. In evaluating a proposed acquisition
candidate, the Company considers a number of factors, including the quality of
its management; its historical operating results and future earnings potential;
the unique characteristics of its products, license rights, or distribution
channels; the size and anticipated growth of the market it serves and its
relative position in that market; and competitive factors. Following each
acquisition, the Company takes steps to enhance the operating efficiencies of
the acquired business. In evaluating a potential strategic alliance, the Company
analyzes the potential synergies that the alliance can provide; the strength of
the alliance partner's product lines, marketing capabilities, manufacturing
capacities, or distribution channels; and the potential opportunities presented
by the alliance.

Expanding Existing and Identifying New Distribution Channels

     The Company plans to continue to expand its existing distribution channels
and to identify new distribution channels. Prior to the Company's fiscal 1997
and 1998 acquisitions, the Company distributed its products primarily to
approximately 5,000 specialty retailers in the United States through its
wholesale distribution network and directly to motorsports enthusiasts through
its Collectors' Club. The Company intends to continue to develop new programs
designed to enhance sales through the Collectors' Club and its wholesale
distribution network. The fiscal 1997 acquisitions of Sports Image and
Motorsport Traditions, which distributed products directly to many of those
5,000 specialty retailers, added complementary distribution channels, such as
mobile trackside souvenir stores and fan clubs, and provide the Company with the
opportunity to cross-market its die-cast, apparel, and souvenir products through
all of its distribution channels. As a result of the acquisition of MiniChamps
in fiscal 1998, the Company intends to utilize MiniChamps' international
wholesale distribution network to expand sales of its products throughout the
world. In addition, the acquisition of Tech 2000 and the goracing.com web site
provides the Company with the technology and expertise required to develop
electronic commerce sales via the Internet.

      The acquisition of Image Works provided the Company with immediate access
to mass merchandising channels for its licensed motorsports apparel and other
products through large retailers, such as Wal-Mart, K-Mart, and Target, as well
as Image Works' catalog merchandising programs targeted at corporate motorsports
sponsors. In addition, the license agreement with Hasbro has provided the
Company with a source of licensing revenue from the mass-merchandise market
without committing substantial resources to manufacturing and marketing
activities. The Company believes that targeting products to specific market
niches identified by its database management systems, distributing its products
through the distribution channels of major corporate sponsors of motorsports,
distributing its products in international markets, and developing on-line
ordering capabilities on its Internet web site will represent increasingly
important new distribution channels in the future.

Developing Corporate Promotional Programs

      The Company provides complete marketing services to create corporate
promotional programs for large corporate sponsors. Promotional programs
typically involve special productions of the Company's licensed die-cast
replicas, apparel, souvenirs, or other consumer products as a low-cost or free
award to increase brand awareness and name recognition of the corporate sponsor.
The Company successfully completed large-scale promotional programs featuring
Elvis Presley, Bass Pro Shops, DuPont ChromaLusion paints, the "Small Soldiers"
motion picture, "Batman and Joker," and Coca-Cola during calendar 1998. The
Company plans to expand its efforts to develop promotional programs and
currently is in discussions to develop additional programs with major corporate
sponsors.


                                       5
<PAGE>   8

PRODUCTS AND SERVICES

Die-Cast Scaled Replica Vehicles

      The Company designs and markets scaled replicas of motorsports-related
vehicles that are constructed using die-cast bodies and chassis with
free-spinning wheels and tires. The Company designs its die-cast replicas as
high-quality collectible items and not as toys. The Company markets its die-cast
racing collectibles under approximately 300 active licenses with race car
drivers, team owners, and sponsors as well as under license agreements with
NASCAR, CART, Ford Motor Company, and several divisions of General Motors Corp.
The die-cast collectibles offered by the Company relate to NASCAR Winston Cup,
"Busch," and "Craftsman Truck" racing series; Formula One; NHRA drag racing; GT
and other sports car racing; USAC racing; and "World of Outlaws" sprint car
racing. The Company also produces die-cast replicas of certain factory
production cars. The Company's die-cast collectibles consist primarily of the
following:

       ------------------------------------------------------------------
               SCALE                   PRODUCT           APPROXIMATE SIZE
       ------------------------------------------------------------------
              1:12           Racing Vehicles                15 inches
       ------------------------------------------------------------------
              1:16           Pit Wagon                       7 inches
       ------------------------------------------------------------------
              1:18           Racing Vehicles                11 inches
       ------------------------------------------------------------------
              1:24 and 1:25  Racing Vehicles                 8 inches
       ------------------------------------------------------------------
              1:24 and 1:25  Dually Trucks with Trailers    26 inches
       ------------------------------------------------------------------
              1:32           Racing Vehicles                 6 inches
       ------------------------------------------------------------------
              1:43           Racing Vehicles and             5 inches
                             Production Cars
       ------------------------------------------------------------------
              1:64           Racing Vehicles                 3 inches
       ------------------------------------------------------------------
              1:64           Vehicle Transporters           13 inches
       ------------------------------------------------------------------
              1:96           Vehicle Transporters            9 inches
       ------------------------------------------------------------------

      The Company's die-cast replicas typically range in price at retail from
approximately $10.00 to $85.00 per item, depending on size, type of vehicle, and
level of detail. A 1:24th scale replica of an actual racing vehicle typically
retails for $35.00. Certain of the Company's more highly detailed die-cast
collectibles retail for as much as $400.00. The Company offers its die-cast
collectibles primarily through its wholesale distributor network to specialty
retailers, through its Collectors' Club, through its mobile trackside stores,
and through corporate promotional programs. See Item 1, "Business - Sales and
Distribution."

      Historically, the Company designed and marketed die-cast collectibles
featuring drivers and vehicles from the NASCAR Winston Cup series. In recent
years, the Company has expanded its die-cast collectible product lines to offer
vehicles from other popular motorsports, including Winston NHRA drag racing,
NASCAR's "Busch" and "Craftsman Truck" series, Formula One, and CART.

      The Company also has developed new die-cast collectible product lines that
feature a variety of unique and appealing collectible items with different
features and at different price points. During the second half of fiscal 1997,
the Company introduced the "Elite" series of die-cast replicas of NASCAR racing
vehicles, which feature highly detailed equipment such as spark plug wires,
braided hoses, and realistic suspension systems. Elite products also feature
special display packaging that includes a 22-karat gold-plated coin. The Company
sells the Elite series of collectibles exclusively through the Collectors' Club
for approximately $80.00 per replica vehicle. As a result of the Revell
Acquisition in fiscal 1998, the Company now offers "Revell" branded die-cast
collectibles in different scales and with different features than its other
lines of die-cast products. Certain Revell-branded products feature special
packaging that includes a display case and certificate of authenticity. The
Company also offers "Brookfield Collectors Guild" ensembles, which typically
feature a limited edition race car packaged with a crew cab dually pick-up truck
and trailer.


                                       6
<PAGE>   9

     In fiscal 1998, the Company acquired MiniChamps, which is a leading
European marketer of die-cast replicas of Formula One racing vehicles.
MiniChamps also designs and markets die-cast replicas of GT sportscar racing
vehicles, CART racing vehicles, and certain factory production cars. The Company
intends to combine MiniChamps' high-quality, highly detailed product lines and
licensing arrangements with leading Formula One teams with the Company's
marketing and promotional expertise to expand the markets for the Company's
existing products and to create and market exciting new products in the future.

     The Company enhances the collectible value and appeal of its products
through various measures. These measures include (i) designing die-cast
collectibles that include features that are not offered by the Company's
competitors; (ii) limiting the quantities of each item that it produces and
sells; (iii) specifying on the packaging material of certain die-cast
collectibles the quantity of that limited-edition item actually produced; (iv)
offering certain items only through its Collectors' Club; and (v) designing and
developing new packaging concepts to improve the display of each collectible
item.

Motorsports Consumer Products

     The Company markets various licensed motorsports apparel, souvenirs, and
other consumer products, including t-shirts, jackets, hats, coffee mugs, pins,
key chains, knives, coolers, and tote bags. Each of the motorsports consumer
products generally features the name, likeness, and car number of a popular race
car driver. The Company intends to acquire licenses with additional drivers and
to develop new motorsports consumer products, including items bearing the
"NASCAR" and "CART" names and logos in connection with the Company's license
agreements with NASCAR and CART.

      The Company's licensed motorsports apparel items utilize unique and
creative designs that are printed or applied to high-quality shirts, hats,
jackets, and other products. The Company designs and sells its motorsports
apparel products in sizes ranging from infant to youth to men's and women's
adult sizes.

      The Company designs its motorsports consumer products primarily for
distribution through retail outlets, mobile trackside stores, and promotional
programs with corporate sponsors of racing teams and racing events. See Item 1,
"Business - Sales and Distribution."

Other Motorsports Collectible and Specialty Items

      In addition to its extensive line of collectible die-cast replicas of
racing vehicles, the Company designs and markets an increasing variety of other
motorsports collectible and specialty products. These products include 1:43 and
1:18 scale plastic driver figurines; 1:12, 1:8, 1:4 and 1:3 scale miniature
replica helmets with simulated Nomex(TM) padded interiors, flip-up visors, and
plastic display cases; 1:24 scale replicas of racing vehicles made from 26% lead
crystal, which feature laser-engraved graphics and engine details formed out of
crystal; limited edition art prints featuring popular drivers and racing themes;
and books featuring drivers and other popular racing personalities.

Mass-Merchandise License

      The Company licenses Hasbro to produce a line of motorsports-related
products specifically designed for the mass-merchandise market. See Item 1,
"Business - Licenses." Under this license, Hasbro markets a line of die-cast
replicas of racing vehicles, which was jointly developed by the Company and
Hasbro, under the "Winner's Circle" brand name. The mass-market die-cast
products manufactured and marketed by Hasbro are completely distinct from the
Company's other products and do not compete directly with the Company's
limited-edition motorsports die-cast collectible products. Under the agreement,
Hasbro may market other licensed motorsports products, including
radio-controlled cars, slot car sets, games (such as electronic and CD-ROM
interactive games), plush toys, figurines, play sets, walkie talkies, and other
items similar to products that Hasbro currently markets under the "Kenner,"
"Tonka," and "Milton Bradley" brand names.

      The Company believes that the license agreement with Hasbro allows the
Company to capitalize on opportunities in the mass-merchandise market. The
agreement enables the Company to remain focused on its core


                                       7
<PAGE>   10

business of designing and marketing motorsports collectibles, apparel, and
souvenir products while enabling the Company to benefit from Hasbro's retail
mass-merchandise marketing expertise and resources. The agreement also provides
a means of expanding the Company's product offerings without committing
substantial resources to manufacturing and marketing activities or subjecting it
to the risks inherent in the mass-merchandise market.

Corporate Promotional Programs

      The Company provides comprehensive marketing services designed to create
corporate promotional programs for large corporate sponsors that advertise in
motorsports. Many corporations sponsor racing vehicles or events and advertise
at motorsports events and in motorsports-related media in order to increase
awareness of their brands among consumers and to encourage consumers to purchase
their products. The Company provides design services, graphic artists, and the
capacity to deliver a wide array of promotional products, such as die-cast
replicas, t-shirts, and hats. The corporate sponsors use these products either
as free or low-cost awards with the purchase of their own products or in
sweepstakes or other promotions. For example, in fiscal 1997 the Company
completed a promotional program that appeared on boxes of Wheaties(TM) cereal
and offered two special-edition Dale Earnhardt Wheaties(TM) die-cast replicas, a
t-shirt, and a hat. The Company also provides in-house marketing and
distribution support for its promotional programs, including in-bound order
processing, order fulfillment, sweepstakes processing, and redemption programs.
Die-cast replica vehicles sold as promotional items are not sold through the
Company's wholesale distribution network or through its Collectors' Club.

      In fiscal 1997, the Company began developing and implementing extensive
corporate promotional programs that feature special, one-time themes or events
intended to provide the Company, the corporate sponsor, and other licensors with
unique marketing opportunities. For example, during calendar 1998 the Company,
Miller Brewing Company, and other corporate sponsors implemented a program in
which Rusty Wallace and John Force drove specially painted "Elvis Presley" cars
at selected races; the Company, Robert Yates Racing, Inc., DC Comics, Ford Motor
Company, and Texaco combined to produce the "Showdown in Charlotte" program in
which Dale Jarrett and Kenny Irwin, Jr. drove specially painted "Batman" and
"Joker" race cars; and the Company developed a program for the Coca-Cola Company
in which Dale Earnhardt and Dale Earnhardt, Jr. competed against one another for
the first time at the Coca-Cola 500 in Japan. The Company and the corporate
sponsors market a broad variety of specially designed die-cast vehicles and
other collectibles, apparel, and souvenirs based on these programs. As a result
of the acquisition of IPG in October 1998, the Company intends to expand its
efforts to develop and implement similar large-scale corporate programs in the
future.

Other Products and Services

     Fan Clubs. The Company currently operates fan clubs for several popular
race car drivers and for NASCAR, including "Club E," which is the Dale Earnhardt
Fan Club; the Dale Jarrett Fan Club; the Rusty Wallace Fan Club; the Bobby
Labonte Fan Club; the John Force Fan Club; and the NASCAR Fan Club. The fan
clubs operated by the Company had a total of approximately 75,000 members as of
December 1, 1998. Membership packages typically include a quarterly newsletter,
personalized membership card, and exclusive benefits and discounts that are
provided only to club members. Fan club members also may purchase an exclusive
membership kit that includes an embroidered logo hat, lapel pin, and 1:64th
scale die-cast car. The Company provides to fan club members unique product
offerings and other benefits that it does not offer through any other
distribution channels.

     Chase-branded Apparel. During fiscal 1998, the Company acquired an 80%
interest in Chase, a motorsports-related apparel and licensing company. Chase
creates and markets apparel and clothing accessories that bear "Chase" brand
marks including "Chase Authentics," "Competitor's View," and a stylized "C."
Several of the top NASCAR drivers (including Dale Earnhardt, Jeff Gordon, Rusty
Wallace, Dale Jarrett, Terry Labonte, and Bobby Labonte) have agreed that,
subject to certain exceptions, they will ensure that licensed apparel products
bearing their names, likenesses, or signatures will also bear "Chase" brand
marks. These drivers also have agreed to endorse Chase-branded apparel as the
exclusive trackside apparel of top NASCAR drivers.

      Performance-Plus Nutritional Products. Through its 58% ownership interest
in Performance Plus, the Company now markets the Performance Plus Nutritional
line of products as the officially licensed nutritional


                                       8
<PAGE>   11

supplement of NASCAR. Performance Plus nutritional supplements include a 24-hour
adult multivitamin and mineral supplement; "Power 3" energy drinks; "Hi
Performance" energy bars; and a chewable children's multivitamin shaped to look
like Dale Earnhardt's race car and packaged with a toy Dale Earnhardt race car.
Mr. Earnhardt granted Performance Plus a 15-year license to use his name,
signature, and license in connection with Performance Plus nutritional products.
Mr. Earnhardt also entered into a 15-year exclusive endorsement agreement with
Performance Plus under which he will endorse Performance Plus nutritional
products.

     Action Sports Management. The Company represents a number of top race car
drivers in a broad range of licensing and other revenue-producing opportunities,
including product licenses, corporate sponsorships, endorsement contracts, and
speaking engagements. The Company provides a number of services designed to
enable drivers to maximize revenue opportunities throughout their careers. Since
the commencement of its sports management business in fiscal 1996, the Company
has entered into exclusive agreements to represent NASCAR drivers Dale Jarrett
and Kenny Irwin, Jr. and NHRA Funny Car champion John Force. As a result of the
Company's ability to represent drivers effectively in obtaining favorable
licensing arrangements and other revenue opportunities, the Company believes
that it is well-positioned to attract and retain top race car drivers.

SALES AND DISTRIBUTION

     The Company markets its die-cast collectibles worldwide to approximately
11,500 specialty retailers through its wholesale distributor network, through
its Collectors' Club, through its mobile trackside stores, and through corporate
promotional programs. The Company markets its motorsports consumer products
primarily through direct trackside sales to race fans; through an in-house sales
force and independent representatives to approximately 5,000 specialty retailers
and to major discount and department stores, retail automotive product outlets,
and convenience stores; and through promotional programs with corporate
sponsors.

Wholesale Distribution

     Die-Cast Collectibles. The Company markets its die-cast collectibles on a
wholesale basis through approximately 28 distributors operating in the United
States and approximately 65 distributors operating in approximately 40 countries
throughout the world. The distributors solicit orders for the Company's die-cast
products from approximately 5,000 specialty retailers throughout the United
States and approximately 6,500 specialty retailers in other countries throughout
the world. The retailers include stores specializing in motorsports collectibles
and apparel and stores specializing in other sports collectible items. As a
result of the Revell Acquisition, the Company markets certain of the Company's
die-cast collectibles to hobby shops that sell Revell's model kits. Employees of
the Company attend trade shows in an effort to attract new distributors and
retailers to its network. The Company advertises its die-cast collectibles in
newspapers and magazines covering motorsports and the collectibles markets.
These advertisements encourage consumers to contact the nearest retailers to
purchase the Company's die-cast collectibles. The Company also takes measures to
increase consumer awareness of its products through radio and television
advertising, including promotion of its collectibles on "home shopping"
television programs (such as QVC Network's "For Race Fans Only" program) and
advertising during popular television programs of interest to motorsports
enthusiasts.

     Consumer Products. The Company's in-house sales force and independent
representatives market certain motorsports consumer products on a wholesale
basis to major discount and department stores, such as Wal-Mart, K-Mart, and
Target, to automotive retail stores, and to convenience stores. The Company also
utilizes its distributor network as well as an in-house sales force and
independent representatives to market its motorsports apparel, souvenirs, and
other consumer products on a wholesale basis to the same specialty retailers
that sell its die-cast collectibles.

Collectors' Club

     The Company markets certain of its die-cast collectibles exclusively
through its Collectors' Club. Members of the Company's Collectors' Club pay a
lifetime membership fee that entitles them to receive a membership kit, a
quarterly magazine, catalogs, and other special sales materials highlighting the
Company's collectibles and other products. Membership in the Collectors' Club
increased from approximately 22,000


                                       9
<PAGE>   12

members in September 1994 to approximately 148,000 members as of September 30,
1998. The Company strives to increase collector interest in its products and to
enhance its products' value as collectibles by (i) offering certain items
exclusively through its Collectors' Club; (ii) producing a limited number of
each collectible; and (iii) limiting the number of a particular item that each
member may purchase. Following the acquisitions of Sports Image and Motorsport
Traditions, the Company developed a line of licensed motorsports apparel and
souvenirs to offer exclusively through its Collectors' Club. The Company
advertises its Collectors' Club in publications that focus on motorsports or the
collectibles industry and through limited radio and television advertisements.

      The Company employs customer service representatives and an automated call
distribution telephone system to take membership applications, take customer
orders, and handle customer inquiries. The Company utilizes an advanced
telephone and computer system that combines telemarketing functions,
computerized order processing, and automated warehouse operations to answer and
process telephone orders to its Collectors' Club more effectively and
efficiently and to accommodate the significant growth in club membership in
recent years. The system verifies the callers' membership status and credit card
number, allows club members to check product availability without placing an
order, and informs members whether a desired product is in stock or the Company
is taking pre-orders. The system also enables the Company to track the
effectiveness of each advertisement and to target its marketing and advertising
programs accurately for enhanced impact.

Trackside Sales

      Average attendance at NASCAR Winston Cup racing events grew to
approximately 190,000 fans per race during 1997. The Company currently operates
22 fully equipped mobile trackside stores to capitalize on this large base of
potential customers. Some or all of the Company's mobile trackside stores travel
to each NASCAR Winston Cup race (34 events in 1998) as well as to other selected
racing events. Each mobile trackside store is decorated with the logos and color
scheme of a particular racing team and driver and sells a complete assortment of
licensed motorsports apparel, souvenirs, and die-cast collectibles dedicated to
that team and driver. These mobile stores represent the only trackside
opportunities for racing enthusiasts to purchase motorsports products using the
name and likeness of the driver and racing team featured in each store. In
connection with the Revell Acquisition, the Company acquired the exclusive
rights to market "Revell" plastic model kits at trackside stores at all NASCAR,
NHRA, and other major motorsports events throughout the United States.

Corporate Promotional Programs

      The Company creates promotional programs for large corporate sponsors of
motorsports. The Company plans to pursue future promotional programs and
currently is in discussions with major race car drivers and corporate sponsors
in its effort to develop such programs. See Item 1, "Business Products -- and
Services - Corporate Promotional Programs."

Electronic Commerce Sales

      In November 1998, the Company acquired Tech 2000, which operates the
goracing.com Internet website. Goracing.com, which currently attracts
approximately 12.0 million "impressions" per month, is the official online
"home" of 12 motorsports sanctioning bodies and provides in-depth coverage of 20
professional racing series, including NASCAR, CART, Formula One, and NHRA.
Goracing.com also provides motorsports-related multimedia content and search
capabilities, racing event and television coverage schedules, chat rooms,
contests, and other popular online features. The Company's artists, web
designers, systems specialists, and sales and marketing personnel currently are
designing and developing "SpeedMall.com" as a state-of-the-art virtual shopping
mall that will be linked to the traffic generated by goracing.com. SpeedMall
will feature the Company's products as well as motorsports and other
automotive-related products and services offered by other companies. The Company
and its various operating divisions will serve as the "anchor tenants" of
SpeedMall. The Company plans to "lease" more than 200 virtual retail stores in
SpeedMall, including opportunities for other motorsports-related specialty
stores, on-line banking services, travel agencies, interactive arcades, and
entertainment facilities. The Company currently anticipates that SpeedMall will
debut in February 1999.


                                       10
<PAGE>   13

      During 1998, the Company entered into a 15-year electronic commerce
alliance with NASCAR. Under this alliance, NASCAR intends to develop and
maintain an Internet website that will offer NASCAR-related merchandise to the
public (the "NASCAR Mall"). The Company has agreed to make available for sale on
the NASCAR Mall any NASCAR-licensed products that the Company offers on
SpeedMall or any other websites that the Company operates. The Company generally
must offer products on the NASCAR Mall under the same terms that it offers on
its websites. The Company will pay NASCAR royalty payments based on a percentage
of the wholesale price of products sold by the Company through the NASCAR Mall.

DESIGN AND PRODUCTION

Die-cast Scaled Replica Vehicles

      The Company designs each die-cast collectible that it markets. The
Company's design artists take numerous photographs of the actual racing cars,
trucks, and other vehicles to be produced as die-cast replicas. Working from
these photographs, the Company's artists and engineers use computer software to
create detailed scale renderings of the vehicles. After approval of the
rendering by the vehicle owner, driver, or racing team sponsor, the Company
supplies computerized renderings to one of its manufacturers in the People's
Republic of China ("China"). The manufacturer produces a sample or model, which
the Company then inspects for quality and detail. After final approval, the
manufacturer produces the die-cast replicas, packages them, and ships the
finished products to the Company or, in certain instances, directly to the
Company's customers.

      The Company's die-cast collectibles (other than products produced by
MiniChamps and products sold under the "Brookfield" trademarks) are manufactured
under an exclusive agreement with a third-party manufacturer in China. The term
of the agreement currently extends through December 31, 1999 and automatically
renews for successive one-year terms unless terminated by either party by giving
written notice to the other party at least 90 days prior to the end of the
then-current term.

      The Company owns a significant portion of the tooling that the third-party
manufacturer uses to produce die-cast collectibles for the Company and has
partial control over the production of its die-cast collectibles under the
manufacturing agreement. This tooling includes the tooling and dies utilized to
manufacture the Revell-trademarked lines of die-cast products, which the Company
recently relocated to its primary manufacturer's facility from the facilities of
two unaffiliated third-party manufacturers in China. The Company invested
approximately $7.0 million in fiscal 1997 and $17.0 million in fiscal 1998 in
tooling for its proprietary line of die-cast collectibles. The Company believes
the breadth and quality of the tooling program provides the Company with a
competitive advantage in the motorsports collectible market. The Company intends
to make additional investments in tooling in order to support the growth of its
business.

      The Company also devotes a significant amount of time and effort to the
production of its die-cast collectibles to ensure that the resulting products
display a level of quality and detail that is superior to competing products,
including opening hoods and trunks, detailed engines, working suspensions, and
pad printing instead of stickers or decals. The Company believes that its
overseas manufacturer of die-cast collectibles is dedicated to high quality and
productivity as well as support for new product development. Although the
Company believes that there are alternative manufacturing arrangements available
if needed, there are significant risks inherent in relying on a single
manufacturer for a substantial portion of its die-cast products. See Item 1,
"Business - Special Considerations - Dependence on Third Parties for
Manufacturing." An affiliate of the Company's China-based die-cast manufacturer
currently owns 450,000 shares of the Company's Common Stock. The Company
believes that this ownership interest further aligns the interests of the
manufacturer with those of the Company.

      The Company obtains the die-cast collectibles marketed by MiniChamps and
die-cast collectibles sold under the "Brookfield" trademarks from three other
manufacturers in China. The Company currently does not have a formal, long-term
arrangement with any of these manufacturers.


                                       11
<PAGE>   14

Motorsports Consumer Products

      The Company currently obtains substantially all of its licensed
motorsports apparel, souvenirs, and other consumer products on a purchase order
basis from approximately 190 third-party manufacturers and suppliers located
primarily in the United States. The Company also screen prints and embroiders a
portion of the licensed motorsports apparel that it sells. The apparel and
souvenir suppliers present product ideas and artistic designs to the Company.
The Company then selects those unique products and artistic designs that it
believes will appeal to motorsports enthusiasts and distinguish the Company's
apparel and souvenir products from those of its competitors. The Company engages
in a bidding process for certain items, such as embroidered hats or t-shirt
blanks, in order to negotiate favorable prices and other terms. The Company also
purchases and resells certain finished items, such as tote bags and coolers,
from companies that have licenses for those items with the drivers and other
licensors.

      The Company works closely with the third-party apparel and souvenir
manufacturers in order to ensure that the products conform to design
specifications and meet or exceed quality requirements. The Company believes
that a number of alternative manufacturers for each of these products is readily
available in the event that the Company is unable to obtain products from any
particular manufacturer. The Company owns the tooling and dies used to
manufacture certain of its motorsports consumer products. As the Company
develops new motorsports consumer products that require specialized tooling, the
Company intends to build or purchase the new tooling that will be required to
permit the third-party manufacturers to produce those items.

LICENSES

      The Company focuses on developing long-term relationships with and engages
in comprehensive efforts to license the most popular drivers and car owners in
each top racing category, their sponsors, and others in the motorsports
industry. The Company continually strives to strengthen its relationships with
licensors and to develop opportunities to market innovative collectible and
consumer products that appeal to motorsports enthusiasts. The Company believes
that its license agreements with top race car drivers significantly enhance the
collectible value and marketability of its products. By aligning itself with top
racing personalities and providing them with a broad range of revenue
opportunities, the Company believes that it will be able to leverage those
relationships to attract additional drivers in order to generate increased
revenue for the Company as well as increased earnings for the drivers.

Significant Driver License and Endorsement Agreements; Significant Team Owner
Licenses

      During fiscal 1997 and 1998, the Company entered into long-term license
agreements with NASCAR Winston Cup champions Dale Earnhardt, Jeff Gordon, and
Rusty Wallace and NHRA Funny Car champion John Force. These licenses generally
provide the Company with a right of first refusal to market certain die-cast,
apparel, and other products bearing the driver's name and likeness. The license
agreements also generally provide that to the extent that the Company exercises
its right of first refusal, the driver will not personally market and will not
permit others to market, through the same channels of distribution used by the
Company, any products bearing his likeness that are the same or similar to
products marketed by the Company. Each of the license agreements requires the
Company to pay the licensor royalties based on a percentage of the wholesale
price of licensed products sold by the Company. Certain of the license
agreements also provide for minimum royalty payments each year during the term
of the agreement.

      In October 1998, the Company also entered into an amended personal service
and endorsement agreement with Jeff Gordon and an affiliate of Mr. Gordon (the
"Endorsement Agreement"). During the term of the Endorsement Agreement, the
Company has the right to use Mr. Gordon's name, likeness, signature, and
endorsement in connection with the advertisement, promotion, and sale of the
die-cast collectibles and other products approved by Mr. Gordon and produced by
the Company. The Endorsement Agreement expires on December 31, 2005.

      During fiscal 1997, the Company entered into license agreements with
several of the most popular NASCAR race car team owners (the "Team Owner
Licenses"), including Robert Yates Racing, Inc.; Richard


                                       12
<PAGE>   15

Childress Racing Enterprises, Inc.; Joe Gibbs Racing, Inc.; and Dale Earnhardt,
Inc. The Team Owner Licenses provide the Company with either the exclusive right
or a right of first refusal to market products bearing the likeness and number
of each owner's Winston Cup cars and other racing vehicles. To the extent that
the Company exercises its right of first refusal, the Team Owner Licenses
provide that the licensor will not permit others to market, through the same
distribution channels used by the Company, any of the licensed products. Certain
of the Team Owner Licenses also provide that the licensors will not directly
market any of the licensed products through such channels. Each of the license
agreements with the team owners requires the Company to pay the licensor
royalties based on a percentage of the wholesale price of licensed products sold
by the Company. Certain of the license agreements also provide for minimum
royalty payments to the licensors.

      The following table sets forth certain information with respect to the
license agreements with the drivers and team owners described above:

      LICENSOR                   DRIVER                  EXPIRATION DATE
      --------                   ------                  ---------------
Dale Earnhardt and            Dale Earnhardt             November 7, 2011
Dale Earnhardt, Inc.

JG Motorsports, Inc.          Jeff Gordon                December 31, 2005

Rusty Wallace, Inc.           Rusty Wallace              December 31, 2004

John Force Racing             John Force                 January 10, 2001

Robert Yates Racing, Inc.     Dale Jarrett               December 31, 2012
                              Kenny Irwin, Jr.

Richard Childress Racing      Dale Earnhardt             December 31, 2007
Enterprises, Inc.             Mike Skinner

Redline Sports Marketing,     Bobby Labonte              December 31, 2002
Inc. (Joe Gibbs race team)    Tony Stewart

Dale Earnhardt, Inc.          Steve Park                 December 31, 2000
                              Dale Earnhardt, Jr.
                              Ron Hornaday

Additional Product Licenses

      In addition to the driver and team owner licenses described above, the
Company currently maintains approximately 300 licenses with various other
drivers, car owners, sponsors, and manufacturers. Other popular drivers under
license with the Company include NASCAR Winston Cup driver Terry Labonte; NHRA
drag racers Kenny Bernstein and Joe Amato; Formula One drivers Jacques
Villeneuve and Mike Hakkinen; and NASCAR Craftsman Truck series drivers Ron
Hornaday, Mike Bliss, and Rick Carelli. The Company also has licenses with
popular car owners and car sponsors as well as with NASCAR, CART, Ford Motor
Company, several divisions of General Motors Corp., and PACCAR, Inc. (the
manufacturer of Kenworth and Peterbilt trucks). These licenses generally provide
for the following:


                                       13
<PAGE>   16

--------------------------------------------------------------------------------
                       LICENSES WITH           LICENSES WITH     LICENSES WITH
                      RACE CAR DRIVERS        RACE CAR OWNERS    MANUFACTURERS
--------------------------------------------------------------------------------
TERM :           One to three years.        One to three years. Two or more
                                                                years.
--------------------------------------------------------------------------------
RIGHTS GRANTED:  Use of the driver's name,  Use of the car      Right to
                 photograph, likeness, and  number and colors.  reproduce the
                 autograph.                                     cars or trucks.
--------------------------------------------------------------------------------
RENEWAL:         Individual agreements      Same.               Same.
                 either renew
                 automatically, may be
                 renewed or extended upon
                 written request by the
                 Company, or expire at the
                 end of the specified term.
--------------------------------------------------------------------------------
PAYMENTS TO      Either (i) a fixed dollar  Same.               Same.
LICENSORS:       amount, which may include
                 a substantial advance to
                 the licensor; (ii) a fixed
                 amount per item sold by
                 the Company pursuant to
                 the license; (iii) a
                 percentage of the net
                 sales for a program or a
                 percentage of the
                 Company's wholesale price
                 per item sold by the
                 Company pursuant to the
                 license; or (iv) a
                 combination of the above.
--------------------------------------------------------------------------------

      The license agreements with various sponsors generally provide for terms
of one to three years and permit the Company to reproduce the sponsors' decals
and logos as they appear on the cars or trucks. Although the Company directly or
indirectly pays license fees to the primary sponsors of most of the racing
vehicles, the license agreements with certain sponsors do not require payments
by the Company to the licensors because of the advertising value provided to the
licensor as a result of having its decals and logos displayed on the Company's
products. The Company continually strives to renew existing agreements or to
enter into new license agreements with existing or new drivers, car owners, and
car sponsors and to develop new product programs pursuant to its license
agreements in its effort to maintain its leadership position in the motorsports
licensed products industry.

Revell License Agreement

      In connection with the Revell Acquisition, the Company entered into a
license agreement with Revell (the "Revell License") that gives the Company the
exclusive right to use the "Revell Racing," "Revell Select," and "Revell
Collection" trademarks in connection with sales of NASCAR, NHRA, and certain
other motorsports-related die-cast collectibles in the United States and Canada.
In addition, the Company has a non-exclusive right under the Revell License to
use the Revell trademarks described above in connection with up to $5.0 million
per year of sales of NASCAR, NHRA, and certain other motorsports-related
die-cast products outside the United States and Canada. The term of the Revell
License runs through December 31, 2007, at which time it will automatically
renew for successive one-year terms unless either party elects to terminate by
giving written notice at least 90 days prior to the end of the initial term or
any successive one-year term.

Hasbro License Agreement

     The license agreement between the Company and Hasbro (the "Hasbro License")
covers the exclusive sale by Hasbro in the mass-merchandise market of specific
motorsports-related products for which the Company has or will secure exclusive
or non-exclusive licenses from race car drivers, owners, manufacturers, and
sponsors. The Company believes that the Hasbro License provides the Company with
a source of revenue from the mass-merchandise market without committing
substantial resources to manufacturing and marketing activities


                                       14
<PAGE>   17

or subjecting the Company to the risks inherent in the mass-merchandise market.
Under the Hasbro License, the Company is responsible for acquiring and
maintaining the license rights with the licensors, and Hasbro is responsible for
all costs and other arrangements relating to tooling, manufacturing,
transportation, marketing, distribution, and sales of licensed products. Hasbro
is responsible for and pays or reimburses the Company for all license fees and
royalties, including advances and guarantees, paid to licensors for licensed
products. The licensed products consist of (i) die-cast replicas of motorsports
vehicles and a 1:18th-scale plastic toy car, for which Hasbro pays a specified
royalty, and (ii) all other products that Hasbro may market as licensed
motorsports; products, including, for example, radio-controlled cars, slot car
sets, games (including electronic and CD-ROM interactive games), plush toys,
figurines, play sets, walkie talkies, and other products, for which Hasbro pays
a specified royalty. Hasbro currently markets similar products under the
"Kenner," "Tonka," "Milton Bradley," and other brand names. Hasbro pays the
Company guaranteed minimum annual royalty payments of $500,000 to $1.0 million,
depending on certain circumstances.

      Hasbro's initial focus under the Hasbro License has been to develop, with
the Company's assistance, a line of motorsports die-cast products for the retail
mass-merchandise market. Hasbro funds all capital requirements for this product
line and manufactures, distributes, and markets the products under the "Winner's
Circle" brand name. This product line has been recently introduced to
mass-market retailers. The mass-market die-cast products manufactured and
marketed under the Hasbro License are completely distinct from the Company's
current products and do not compete directly with the Company's limited-edition
motorsports die-cast collectible products.

      The Hasbro License provides for a term ending on December 31, 2001. Hasbro
may extend the Hasbro License for an additional three-year term, provided that
total wholesale revenue of licensed products exceeds a specified amount during
the initial term.

NASCAR License Agreement

      During fiscal 1997, the Company entered into a licensing agreement and
marketing alliance with NASCAR that gives the Company the non-exclusive right to
use the "NASCAR" name and logo on all of its NASCAR-related products and product
packaging as well as on related sales, marketing, and promotional materials.
Under the NASCAR license, the Company is an official licensee of the "NASCAR
50th Anniversary" program and has developed several product lines in connection
with that promotion, including the "NASCAR 50th Anniversary 1998 Ford Taurus"
die-cast collectible.

      During fiscal 1998, the Company and NASCAR expanded the scope of the
licensing arrangement to enable the Company to develop and operate the NASCAR
Fan Club for NASCAR. In addition, the Company and NASCAR currently are working
together to develop other promotional programs targeted at many of NASCAR's
corporate sponsors.

      The Company pays NASCAR royalty payments based on a percentage of the
wholesale price of licensed products sold by the Company, with minimum royalty
payments in each year through 2000. The licensing arrangement expires on (i)
October 7, 2003 with respect to licensed products that bear both the NASCAR mark
and the name, image, or likeness of a NASCAR driver, team, or track, and (ii) on
December 31, 2000 with respect to all other licensed products. The license
agreement with NASCAR will automatically renew for two additional five-year
terms unless it has been terminated in accordance with its terms.

CART License Agreement

      In November 1998, the Company entered into a license agreement with the
licensing affiliate of CART (the "CART License"). Because CART provides the
licensing rights of the sanctioning body as well as all participating drivers,
race teams, and tracks, the CART License provides the Company with (i) exclusive
(subject to certain pre-existing licenses) licensing rights to the CART and
"FedEx Championship Series" logos; (ii) exclusive (subject to certain
pre-existing licenses) licensing rights to five of the top race teams (currently
Newman/Haas Racing, PacWest Racing Group, Target/Chip Ganassi Racing, Team
Green, Inc. and Team Rahal,


                                       15
<PAGE>   18

Inc.) and their drivers; and (iii) non-exclusive licensing rights for a minimum
of 75% of the other teams and drivers participating in CART-sanctioned race
events.

      The rights granted permit the Company to develop and market a line of
CART-based die-cast collectible vehicles consistent with its existing die-cast
product lines. The CART License also grants the Company the exclusive rights to
market or sublicense a broad range of CART-based toy products, including plastic
and remote control vehicles, action figures, miniature helmets, board games,
plush toys, and puzzles.

      The Company will pay the licensor royalty payments based on a percentage
of the wholesale price of licensed products sold by the Company, with minimum
royalty payments each year during the term of the agreement. The CART License
expires on December 31, 2003. The Company will have the right to renew the CART
License for an additional five-year term if certain minimum sales requirements
are achieved.

COMPETITION

      The motorsports collectible and consumer product industry is extremely
competitive. The Company competes with major domestic and international
companies, some of which have greater market recognition and substantially
greater financial, technical, marketing, distribution, and other resources than
the Company possesses. The Company's motorsports die-cast collectibles compete
with die-cast and other motorsports collectibles and, to a certain extent,
die-cast replicas of motorsports vehicles that are sold through mass retail
channels. The Company's motorsports apparel and souvenirs compete with similar
products sold or licensed by drivers, owners, sponsors, and other licensors with
which the Company currently does not have licenses as well as with sports
apparel licensors and manufacturers in general. Emerging companies also may
increase their participation in these markets. The Company's promotional
products compete for advertising dollars against other specialty advertising
programs and media, such as television, radio, newspapers, magazines, and
billboards.

      The Company believes that its relationships and licenses with top race car
drivers, car owners, and other popular licensors represent a significant
advantage over its competitors in the motorsports collectible and consumer
products industry. The Company strives to expand and strengthen these
relationships and to develop opportunities to market innovative licensed
collectible and consumer products that appeal to motorsports enthusiasts. The
ability of the Company to compete successfully depends on a number of factors
both within and outside its control, including the quality, features, pricing,
and diversity of its products; the quality of its customer services; its ability
to recognize industry trends and anticipate shifts in consumer demands; its
success in designing and marketing new products; the availability of adequate
sources of manufacturing capacity and the ability of its third-party
manufacturers to meet delivery schedules; its efficiency in filling customer
orders; the continued popularity of the motorsports personalities with whom the
Company has licensing arrangements; its ability to renew existing licensing
arrangements and enter into new licensing arrangements; its ability to develop
and maintain effective marketing programs that enable it to sell its products to
motorsports enthusiasts; product introductions by the Company's competitors; the
number, nature, and success of its competitors in a given market; and general
market and economic conditions. See Item 1, "Business - Special Considerations."

TRADEMARKS AND PATENT RIGHTS

      Although the Company's business historically has not depended on trademark
or patent protection, the Company recognizes the increasing value of its various
trade names and marks. The Company is taking steps designed to protect,
maintain, and increase the value of its trade names and marks. The Company does,
however, license valuable trademarks and other rights from third parties. See
Item 1, "Business - Licenses."

INSURANCE

      The Company maintains a $2.0 million product liability insurance policy to
cover the sale of its die-cast and other products. The Company maintains an
additional $25.0 million commercial umbrella liability coverage. The Company
also maintains a $6.0 million insurance policy to cover its molds and dies
located at its third-party manufacturer in China and a $5.0 million insurance
policy to cover lost revenue in the event of certain


                                       16
<PAGE>   19

interruptions of business with its overseas manufacturer of die-cast
collectibles. The Company believes its insurance coverage is adequate.

EMPLOYEES

      As of December 15, 1998, the Company had 622 full-time employees. The
Company has experienced no work stoppages and is not a party to a collective
bargaining agreement. The Company believes that it maintains good relations with
its employees.

                               EXECUTIVE OFFICERS

      The following table sets forth certain information regarding each of the
executive officers of the Company.

                NAME               AGE                POSITION HELD
                ----               ---                -------------\
      Fred W. Wagenhals..........  57        Chairman of the Board, President,
                                                and Chief Executive Officer
      Tod J. Wagenhals...........  34        Executive Vice President,
                                                Secretary, and Director
      Christopher S. Besing......  38        Vice President, Chief Financial
                                                Officer, Treasurer, and Director
      David A. Husband...........  29        Vice President - Finance and
                                                Accounting and Chief Accounting
                                                Officer

      Fred W. Wagenhals has served as Chairman of the Board, President, and
Chief Executive Officer of the Company since November 1993 and served as
Chairman of the Board and Chief Executive Officer from May 1992 until
September 1993 and as President from July 1993 until September 1993.  Mr.
Wagenhals co-founded Racing Champions, Inc. in April 1989 and served as a
director of that company until April 1993.  From October 1990 until May 1992,
Mr. Wagenhals served as Chairman of the Board and Chief Executive Officer of
Race Z, Inc. and Action Performance Sales, Inc. ("APS"), which were engaged
in sales of promotional products and collectible items related to the racing
industry.

      Tod J. Wagenhals has served as Executive Vice President of the Company
since July 1995, as a director of the Company since December 1993, and as
Secretary of the Company since November 1993.  Mr. Wagenhals served as a Vice
President of the Company from September 1993 to July 1995.  Mr. Wagenhals
served in various marketing capacities with the Company from May 1992 until
September 1993 and with APS from October 1991 until May 1992.  Mr. Wagenhals
was National Accounts Manager of Action Products, Inc. from January 1989 to
October 1991.  Mr. Wagenhals is the son of Fred W. Wagenhals.

      Christopher S. Besing has served as a Vice President and the Chief
Financial Officer of the Company since joining the Company in January 1994, as a
director of the Company since May 1995, and as Treasurer of the Company since
February 1996. Prior to joining the Company, Mr. Besing held several financial
and accounting positions with Orbital Sciences Corporation ("OSC") from
September 1986 to December 1993, most recently as Director of Accounting and
Controller of OSC's Launch Systems Group in Chandler, Arizona. Prior to joining
OSC, Mr. Besing was employed as an accountant with Arthur Andersen & Co. from
January 1985 to August 1986. Mr. Besing is a Certified Public Accountant.

      David A. Husband has served as a Vice President - Finance and
Accounting and as the Chief Accounting Officer of the Company since May
1998.  Mr. Husband was employed as an accountant with Arthur Andersen LLP
from July 1992 to May 1998, where he was primarily engaged in auditing
publicly held companies.  Mr. Husband is a Certified Public Accountant.


                                       17
<PAGE>   20

                             SPECIAL CONSIDERATIONS

      The following factors, in addition to those discussed elsewhere in this
Report, should be carefully considered in evaluating the Company and its
business.

A VARIETY OF FACTORS COULD ADVERSELY AFFECT OPERATING RESULTS

      A wide variety of factors could adversely impact the Company's operating
results. These factors include the following:

     -    the Company's ability to identify trends in the motorsports
          collectibles and consumer markets and to create and introduce on a
          timely basis products and services that take advantage of those trends
          and that compete effectively on the basis of price and consumer tastes
          and preferences;

     -    the Company's ability to identify popular motorsports personalities,
          teams, and other licensors and to enter into and maintain mutually
          satisfactory licensing arrangements with them;

     -    the racing success of the key motorsports personalities, teams, and
          other licensors with whom the Company has license arrangements;

     -    the Company's ability to design and arrange for the timely production
          and delivery of its products;

     -    the market acceptance of the Company's products or services;

     -    the level and timing of orders placed by customers;

     -    seasonality;

     -    the popularity and life cycles of and customer satisfaction with
          products designed and marketed by the Company; and

     -    competition and competitive pressures on prices.

Many of the factors described above are beyond the control of the Company.

THE COMPANY DEPENDS ON LICENSE ARRANGEMENTS

     The Company markets its products under licensing arrangements with race car
drivers, race car owners, race car sponsors, automobile and truck manufacturers,
NASCAR, CART, and other entities. The licensing arrangements vary in scope and
duration, but generally authorize the Company to sell specified licensed
products for short periods of time. Some license agreements require the Company
to pay minimum royalties or other fixed amounts regardless of the level of sales
of products licensed under that agreement or the profitability of those sales.
The success of licensing arrangements depends on many factors, including the
reasonableness of license fees in relationship to revenue generated by sales of
licensed products, the continued popularity of licensors, and the absence of
their sickness, incapacity, or death. In addition, the Company's ability to
enforce its rights under licensing agreements with non-U.S. licensors may be
limited by the interpretation and enforcement of those agreements under the laws
of countries other than the United States. The termination, cancellation, or
inability to renew or enforce material licensing arrangements, or the inability
to develop and enter into or enforce new licensing arrangements, would have a
material adverse effect on the Company.

THE COMPANY DEPENDS ON THIRD PARTIES FOR MANUFACTURING

     The Company depends upon third parties to manufacture all of its
motorsports collectibles and most of its consumer products. In particular, the
Company relies on one manufacturer, which operates a single facility in China,
to produce most of its die-cast products. Although the Company owns most of the
tools, dies, and molds utilized in the manufacturing processes of its
collectible products and owns the tooling and dies used to manufacture certain
of its consumer products, the Company has limited control over the manufacturing
processes themselves. As a result, any difficulties encountered by the
third-party manufacturers, which result in product


                                       18
<PAGE>   21

defects, production delays, cost overruns, or the inability to fulfill orders on
a timely basis, could have a material adverse effect on the Company.

      The Company does not have long-term contracts with its third-party
manufacturers. Because it owns most of the tools and dies used in the
manufacturing process, the Company believes it would be able to secure other
third-party manufacturers to produce its products. The Company's operations
would be adversely affected, however, by the loss of its relationship with
certain of its current suppliers (including particularly its primary
manufacturer of die-cast products), by the disruption or termination of the
operations of its current suppliers, or by the disruption or termination of sea
or air transportation with its China-based die-cast manufacturers, even for a
relatively short period of time. For example, MiniChamps has experienced
significant delays in completing production of certain 1998 product lines as a
result of the transition of those products to new manufacturers. Those delays
resulted from the time required to move and install the tools, dies, and molds
at the new manufacturers' facilities as well as the additional time required to
train the new manufacturers' personnel and to achieve satisfactory quality
control levels.

      Significant damage to the facilities of the Company's third-party
manufacturers (particularly the facilities used by its die-cast product
manufacturers in China) could result in the loss of or damage to a material
portion of the Company's key tools, dies, and molds in addition to production
delays while new facilities were being arranged and replacement tools, dies, and
molds were being produced. The Company does not maintain an inventory of
sufficient size to provide protection for any significant period against an
interruption of supply, particularly if it were required to obtain alternative
sources of supply.

      The Company does not itself purchase the raw materials used to manufacture
most of its products. The Company, however, may be subject to variations in the
prices it pays its third-party manufacturers for products, depending on their
raw materials costs. Although to date the Company has been able to increase the
prices at which it sells its products in order to cover the increased prices
that it pays for such products, the Company may not be able to continue to pass
along such price increases to its customers in the future.

THE COMPANY FACES RISKS ASSOCIATED WITH ACQUISITIONS AND INTEGRATION OF
BUSINESS OPERATIONS

      The Company completed a number of acquisitions during fiscal 1997, fiscal
1998, and the first quarter of fiscal 1999. Except for the recent acquisition of
Tech 2000, the Company has consolidated substantially all of the operations of
the U.S.-based acquired entities into the Company's operations in Phoenix,
Arizona and the Charlotte, North Carolina, vicinity. The Company continues to
coordinate and integrate certain of the product development, sales and
marketing, administrative, licensing, and other operations of MiniChamps with
its U.S. operations. The Company cannot provide assurance that it will be able
to

     -    complete effectively the integration of the operations of the acquired
          companies with its operations;

     -    manage effectively the combined operations of the acquired businesses;

     -    achieve its operating and growth strategies with respect to these
          businesses;

     -    obtain increased revenue opportunities as a result of the anticipated
          synergies created by expanded product offerings and additional
          distribution channels;

     -    reduce the overall selling, general, and administrative expenses
          associated with the acquired operations; or

     -    obtain, renew, or extend licensing agreements necessary to
          successfully continue and expand the acquired operations.

The integration of the management, operations, and facilities of the acquired
companies and any other businesses the Company may acquire in the future could
involve unforeseen difficulties, which could have a material adverse effect on
the Company's business, financial condition, and operating results.


                                       19
<PAGE>   22

      The Company conducts due diligence reviews of each acquired business and
receives representations and warranties regarding each acquired business.
Unforeseen liabilities and difficulties, however, can arise in connection with
the operation of acquired businesses. For example, during 1997 the Company was
named as a defendant in a lawsuit based upon actions alleged to have been taken
by several acquired businesses prior to the Company's acquisitions of those
entities. The Company currently is unable to quantify the amount of liability,
if any, that it may incur as a result of the lawsuit. See Item 3, "Legal
Proceedings." Contractual or other remedies available to the Company may not be
sufficient to compensate it in the event unforeseen liabilities or other
difficulties arise. In addition, the Company's ability to enforce its rights or
remedies in connection with acquisitions of businesses outside the United States
may be limited by the interpretation and enforcement of those agreements under
the laws of countries other than the United States.

      The Company strives to take advantage of the opportunities created by the
combination of acquired operations to achieve significant revenue opportunities
and substantial cost savings, including increased product offerings and
decreased operating expenses as a result of the elimination of duplicative
facilities and personnel associated with sales, marketing, administrative,
warehouse, and distribution functions. Significant uncertainties, however,
accompany any business combination. The Company may not be able to achieve
revenue increases; integrate its facilities, functions, and personnel in order
to achieve operating efficiencies; or otherwise realize cost savings as a result
of acquisitions. The inability to achieve revenue increases or cost savings
could have a material adverse effect on the Company's business, financial
condition, and operating results.

      As part of its acquisition strategy, the Company frequently engages in
discussions with various motorsports-related and other businesses regarding
their potential acquisition by the Company. In connection with these
discussions, the Company and each potential acquisition candidate exchange
confidential operational and financial information, conduct due diligence
inquiries, and consider the structure, terms, and conditions of the potential
acquisition. In certain cases, the prospective acquisition candidate agrees not
to discuss a potential acquisition with any other party for a specific period of
time and agrees to take other actions designed to enhance the possibility of the
acquisition. Potential acquisition discussions frequently take place over a
longer period of time and often involve difficult business integration and other
issues, including in some cases retention of management personnel and related
matters. As a result of these and other factors, a number of potential
acquisitions that from time to time appear likely to occur may not result in
binding legal agreements and may not be consummated.

THE COMPANY MUST EFFECTIVELY MANAGE ITS GROWTH

      Since 1993, the Company's business operations have undergone significant
changes and growth, including the expansion of its collectible product lines,
the acquisition of its motorsports consumer products lines, the acquisition or
development of expanded distribution channels, and significant investments in
tooling and licensing arrangements. The failure of the Company to manage its
growth on an effective basis could have a material adverse effect on the
Company's business, financial condition, and operating results. In order to
manage effectively any significant future growth, the Company must

     -    integrate successfully the operations of any acquired businesses with
          the Company's operations and further enhance its operational,
          financial, and management systems;

     -    expand its facilities and equipment;

     -    design, develop, produce, and receive products from third-party
          manufacturers on a timely basis;

     -    develop and maintain its various distribution channels in order to
          maximize product sales volumes and profit margins;

     -    effectively manage inventory levels; and

     -    successfully hire, train, retain, and motivate additional employees.


                                       20
<PAGE>   23

     The Company may be required to increase staffing and other expenses as well
as make expenditures on capital equipment and manufacturing sources in order to
meet the anticipated demand of its customers. Sales of the Company's collectible
and consumer products are subject to changing consumer tastes, and customers for
the Company's promotional items generally do not commit to firm orders for more
than a short time in advance. The Company's profitability would be adversely
affected if it increases its expenditures in anticipation of future orders that
do not materialize. Certain customers may increase orders for the Company's
products on short notice, which would place an excessive short-term burden on
the Company's resources.

THE COMPANY MUST RESPOND TO RAPID MARKET CHANGES

     The markets for the Company's products are subject to rapidly changing
customer tastes, a high level of competition, seasonality, and a constant need
to create and market new products. Demand for motorsports collectible and
consumer products depends upon a wide variety of factors, including the
following:

     -    the popularity of certain drivers, teams, and other licensors;

     -    the popularity of current product concepts or themes;

     -    cultural and demographic trends;

     -    marketing and advertising expenditures; and

     -    general economic conditions.

Because these factors can change rapidly, customer demand also can shift
quickly. New motorsports collectible and consumer products frequently can be
successfully marketed for only a limited time.

     The Company's ability to increase its sales and marketing efforts to
stimulate customer demand and its ability to monitor third-party manufacturing
arrangements in order to maintain satisfactory delivery schedules and product
quality are important factors in its long-term prospects. Because of the amount
of time and financial resources that may be required to bring new products to
market, the Company may not always be able to accurately forecast required
inventory levels or to respond to changes in customer tastes and demands. The
Company could experience a material adverse effect on its business, financial
condition, and operating results if it is unable to respond quickly to market
changes or a slowdown in demand for its products as a result of ineffective
marketing efforts, manufacturing difficulties, changing cultural and demographic
trends, changing consumer tastes and spending patterns, economic conditions, or
other broad-based factors.

THE COMPANY DEPENDS ON NEW PRODUCTS AND SERVICES

      The Company's operating results depend to a significant extent on its
ability to continue to develop and introduce on a timely basis new products and
services that compete effectively in terms of price and that address customer
tastes, preferences, and requirements. The success of new product and service
introductions depends on various factors, including the following:

     -    proper new product selection;

     -    successful sales and marketing efforts;

     -    timely production and delivery of new products; and

     -    consumer acceptance of new products.

New products or services may not receive or maintain substantial market
acceptance. The failure of the Company to design, develop, and introduce popular
products and services on a timely basis would adversely affect its future
operating results.


                                       21
<PAGE>   24

COMPETITION

     The motorsports collectible and consumer products markets are extremely
competitive. The Company competes with major domestic and international
companies. Some of these competitors have greater market recognition and
substantially greater financial, technical, marketing, distribution, and other
resources than the Company.

      The Company's motorsports die-cast collectibles compete with die-cast and
other motorsports collectibles and, to a certain extent, die-cast replicas of
motorsports vehicles that are sold through mass retail channels. The Company's
motorsports apparel and souvenirs compete with similar products sold or licensed
by drivers, owners, sponsors, and other licensors with which the Company
currently does not have licenses as well as with sports apparel licensors and
manufacturers in general. Emerging companies also may increase their
participation in these motorsports markets. The Company's promotional programs
must compete for advertising dollars against other specialty advertising
programs and media, such as television, radio, newspapers, magazines, and
billboards. The Company competes primarily on

     -    the current popularity of the race car drivers, teams, and others with
          whom it has licenses;

     -    its ability to obtain favorable licensing arrangements with other
          popular licensors;

     -    the appeal of its products and services; and

     -    the cost, design, and delivery schedules of its products and services.

The Company cannot provide assurance that it will continue to be able to compete
successfully in the future.

REGULATION OF CORPORATE SPONSORSHIP MAY ADVERSELY AFFECT THE MOTORSPORTS
INDUSTRY

      Tobacco and alcohol companies provide a significant amount of advertising
and promotional support of racing events, drivers, and car owners. In 1996, the
U.S. Food and Drug Administration (the "FDA") published final regulations that
would substantially restrict tobacco industry sponsorship of sporting events,
including motorsports. In April 1997, a federal district judge ruled that the
FDA did not have the authority to regulate tobacco marketing. That ruling, if
upheld on appeal, would have the effect of overturning the FDA regulations. The
FDA regulations, if ultimately approved, and any other legislation, regulations,
or other initiatives that limit or prohibit advertisements of tobacco and
alcohol products at sporting events, including racing events, could ultimately
affect the popularity of motorsports, which could have a material adverse effect
on the Company's business and operating results.

      In November 1998, certain major manufacturers of cigarettes and smokeless
tobacco products (the "Participating Manufacturers") and the attorneys general
of 46 states (the "Settling States") agreed to settle certain lawsuits filed by
more than 40 of the Settling States and potential claims that could be brought
by the remaining Settling States (the "Settlement"). The terms of the
Settlement, among other things, limit sponsorship of racing events by the
Participating Manufacturers and, subject to certain limited exceptions,
eliminate outdoor advertising of tobacco products and any marketing or
distribution of tobacco brand name merchandise. The Settlement, however, permits
the Participating Manufacturers to engage in one "Brand Name Sponsorship" of
racing events in any 12-month period. For purposes of the Settlement,
sponsorship of a single national or multi-state series or tour (e.g., the
Winston Cup championship) or sponsorship of one or more events within a single
national or multi-state series or tour constitutes one Brand Name Sponsorship.
In addition, promoting a driver or team in any event or series that is not
sponsored by the Participating Manufacturer constitutes one Brand Name
Sponsorship. In connection with any Brand Name Sponsorship, the Participating
Manufacturers may

     -    promote an event on apparel or merchandise sold at the site of an
          event;

     -    promote the brand name on a vehicle used by a driver or team in an
          event; and


                                       22
<PAGE>   25

     -    use outdoor signs at the site of an event to promote the event,
          provided that such promotion begins no more than 90 days prior to the
          start of the initial event of the series and ends within 10 days after
          the last sponsored event of the series.

The Participating Manufacturers may not refer to any Brand Name Sponsorship
event, driver, or team in its other advertisements of tobacco products.

      The terms of the Settlement will limit or prohibit the Company's ability
to sell licensed motorsports collectible and consumer products that include a
tobacco brand name following the expiration of existing license agreements for
those products. The Company currently does not anticipate that the restrictions
on sales of products that bear a tobacco brand name will have a material adverse
effect on its operating results. The limitations on tobacco company sponsorship
imposed by the Settlement and any further limitations imposed on tobacco or
alcohol sponsorship of racing events, however, could ultimately affect the
popularity of motorsports, which could have a material adverse effect on the
Company's business and operating results. Domestic and international tobacco
advertisers heavily subsidize certain NASCAR, NHRA, CART, and Formula One racing
series and teams, and those series and teams may be challenged to find similar
sponsorships. The Company believes, however, that other major consumer products
companies would quickly replace tobacco and alcohol companies as sponsors of
motorsports in the event that advertisement of those products declines.

THE COMPANY EXPERIENCES SEASONAL FLUCTUATIONS IN SALES

      Because the auto racing season is concentrated between the months of
February and November, the second and third calendar quarters of each calendar
year (the Company's third and fourth fiscal quarters) generally are
characterized by higher sales of motorsports products. Seasonal fluctuations in
quarterly sales may require the Company to take temporary measures, including
changes in its personnel levels, borrowing amounts, and production and marketing
activities, and could result in unfavorable quarterly earnings comparisons. The
Company believes, however, that holiday sales of its products are increasing,
which has the effect of reducing seasonal fluctuations in its sales.

THE COMPANY FACES RISKS ASSOCIATED WITH ITS INTERNATIONAL OPERATIONS,
INTERNATIONAL TRADE, EXCHANGE, AND FINANCING

      The Company obtains its die-cast collectibles and other replicas under
manufacturing arrangements with third-party manufacturers in China. The Company
believes that the overseas production of its die-cast products enables the
Company to obtain these items on a cost basis that allows the Company to market
them profitably. In addition, as a result of the acquisition of MiniChamps, the
Company now maintains operations in Germany and markets motorsports collectible
products throughout the world. The Company's reliance on its third-party
manufacturers to provide personnel and facilities in China, and the Company's
maintenance of personnel, equipment, and inventories abroad, expose it to
certain economic and political risks.
These risks include the following:

     -    management of a multi-national organization;

     -    compliance with local laws and regulatory requirements, as well as
          changes in such laws and requirements;

     -    restrictions on the repatriation of funds;

     -    employment and severance issues;

     -    overlap of tax issues;

     -    the business and financial condition of the third-party manufacturers;

     -    political and economic conditions abroad; and


                                       23
<PAGE>   26
         -       the possibility of
 
                 --       expropriation or nationalization of assets
                 --       supply disruptions
                 --       currency controls
                 --       exchange rate fluctuations
                 --       changes in tax laws, tariffs, and freight rates.

         Protectionist trade legislation in either the United States or foreign
countries, such as a change in the current tariff structures, export compliance
laws, or other trade policies, could adversely affect the Company's ability to
purchase its products from foreign suppliers or the price at which the Company
can obtain those products.

         All of the Company's purchases from its foreign manufacturers are
denominated in U.S. dollars or in Hong Kong dollars, which are pegged to the
U.S. dollar. As a result, the foreign manufacturers bear any risks associated
with exchange rate fluctuations subsequent to the date the Company places its
orders with those manufacturers. Although the financial crisis that began in
Asia in October 1997 has not resulted in any short-term changes in the prices
that the Company pays for its die-cast products as of the date of this Report,
an extended period of financial pressure on overseas markets or a devaluation of
the Chinese currency that results in a financial setback to the Company's
overseas manufacturers could have an adverse impact on the Company's operations.
Purchases of die-cast products from the China-based manufacturers generally
require the Company to provide an international letter of credit in an amount
equal to the purchase order. Although the Company currently has in place
financing arrangements in an amount that it considers adequate for anticipated
purchase levels, the inability to fund any letter of credit required by a
supplier would have an adverse impact on the Company's operations.

         Substantially all of the Company's sales are denominated in either U.S.
dollars or Deutschmarks. As a result, international customers for the Company's
products bear any risks associated with exchange rate fluctuations subsequent to
the date the order is placed. The Company, however, may experience losses as a
result of exchange rate fluctuations between the dollar and the Deutschmark. In
the future, the Company may seek to limit such exposure by entering into forward
foreign exchange contracts or engaging in similar hedging strategies. Any
currency exchange strategy may be unsuccessful in avoiding exchange-related
losses, and the failure to manage currency risks effectively may have a material
adverse effect on the Company's business, financial condition, and operating
results. In addition, revenue of the Company earned in foreign countries may be
subject to taxation by more than one jurisdiction, which would adversely affect
the Company's earnings.

         Beginning in January 1999, a new currency called the "Euro" will be
introduced in certain Economic and Monetary Union ("EMU") countries. All EMU
countries are expected to be operating with the Euro as their single currency by
2002. Although a significant amount of uncertainty exists as to the effect the
Euro currency will have on the marketplace generally, the Company currently does
not believe that introduction of the Euro will create a material adverse effect
on the Company's business or operating results. The Company intends to monitor
the impact, if any, that introduction of the Euro currency will have on its
internal systems and the sale of its products and to take appropriate actions to
address those issues if required. The Company cannot predict the impact, if any,
that introduction of the Euro will have on its business, financial condition, or
results of operations.

         Under the terms of its license agreement with Hasbro, Hasbro's royalty
payments to the Company for sales by Hasbro in foreign countries are based on
the exchange rates in effect on the last day of the calendar quarter for which
such royalties are owed. As a result, the Company bears any risks that may be
associated with exchange rate fluctuations between the date on which Hasbro
records overseas sales of products subject to the license agreement and the last
day of the calendar quarter in which the sales are made. The Company currently
does not believe that royalties from overseas sales of products by Hasbro will
represent a material percentage of the Company's total revenue. As a result, the
Company currently does not anticipate that it will engage in hedging
transactions intended to offset potential adverse consequences of exchange rate
fluctuations with respect to royalty payments due from Hasbro for sales in
foreign countries.

                                       24

<PAGE>   27

THE COMPANY MAY REQUIRE ADDITIONAL CAPITAL TO SUPPORT GROWTH

         The Company's business operations have grown considerably in recent
years as a result of various factors, including the following:

         -        an increase in the number of licensing arrangements with race
                  car drivers, car owners, sponsors, automobile manufacturers,
                  and others;

         -        expansion of the Company's product offerings, including
                  additional lines of die-cast replicas that have required
                  substantial investments in new tooling; and

         -        significant acquisitions of complementary businesses.

The Company has financed this growth through cash generated by operations, debt
and equity financings, and the issuance of Common Stock in acquisitions.
Continued rapid growth, whether externally through additional acquisitions or
internally through new licensing arrangements or new product offerings, could
require substantial additional capital in excess of cash resources, cash
generated by operations, and funds available to the Company through its existing
credit facility. The Company cannot predict the timing and amount of any such
capital requirements at this time. Although the Company has been able to obtain
adequate financing on acceptable terms in the past when necessary, such
financing may not continue to be available on acceptable terms. If such
financing is not available on satisfactory terms, the Company may be unable to
expand its business at the rate desired, which may adversely affect the
Company's operating results. Debt financing increases expenses and must be
repaid regardless of operating results. Equity financing could result in
additional dilution to existing shareholders.

THE COMPANY DEPENDS ON MANAGEMENT AND OTHER KEY PERSONNEL

         The Company's development and operations to date have been, and its
proposed operations will be, substantially dependent upon the efforts and
abilities of its senior management, including Fred W. Wagenhals, the Company's
Chairman of the Board, President, and Chief Executive Officer. The loss of
services of one or more of its key employees, particularly Mr. Wagenhals, could
have a material adverse effect on the Company. The Company maintains key person
insurance on the life of Mr. Wagenhals in the amount of $3.0 million. The
Company does not maintain such insurance on any of its other officers.

THE COMPANY HAS SIGNIFICANT INDEBTEDNESS

         As of September 30, 1998, the Company had outstanding approximately
$135.6 million of indebtedness. This indebtedness includes $20.0 million
principal amount of senior notes that mature on January 2, 1999, $100.0 million
principal amount of 4 3/4% Convertible Subordinated Notes due 2005 (the
"Notes"), and approximately $15.6 million of other secured and unsecured
indebtedness. The Company intends to use available cash resources to repay the
$20.0 million principal amount of senior notes at maturity. The Company in the
future may face risks related to servicing its debt obligations as interest or
principal payments are due. If the Company is unable to service its debt, it
will be required to restructure or refinance its debt or pursue alternative
sources of financing, which may include selling additional equity securities.
The Company may not be able to successfully implement alternative strategies on
satisfactory terms in the event that it becomes necessary to do so.

VOLATILITY OF MARKET PRICE OF COMMON STOCK AND NOTES

         The market price of the Company's Common Stock has increased
dramatically during the last three years. See Item 5, "Market for the
Registrant's Common Equity and Related Stockholder Matters." The period was
marked by generally rising stock prices, extremely favorable industry
conditions, and substantially improved operating results by the Company. These
favorable conditions may not continue. The trading price of the Company's Common
Stock in the future could be subject to wide fluctuations in response to a
number of factors, including the following:



                                       25
<PAGE>   28

         -        quarterly variations in operating results of the Company;

         -        actual or anticipated announcements of new products by the
                  Company or its competitors;

         -        changes in analysts' estimates of the Company's financial
                  performance;

         -        general conditions in the markets in which the Company
                  competes;

         -        worldwide economic and financial conditions; and

         -        other events or factors.

The stock market also has experienced extreme price and volume fluctuations that
have affected the market prices for many rapidly expanding companies and that
often have been unrelated to the operating performance of such companies. These
broad market fluctuations and other factors may adversely affect the market
price of the Company's Common Stock.

         The trading price of the Notes will depend on the factors described
above as well as on other factors, such as prevailing interest rates,
perceptions of the Company's creditworthiness, the market price of the Company's
Common Stock into which the Notes are convertible, and the market for similar
securities. As a result, the market price of the Notes may trade at a discount
from their principal amount based on such factors.

OTHER RISKS ASSOCIATED WITH AN INVESTMENT IN THE NOTES

         The Notes are general unsecured obligations, subordinated in right of
payment to all existing and future senior indebtedness of the Company. As a
result of such subordination, in the event of any insolvency, liquidation or
reorganization of the Company or upon acceleration of the Notes due to an event
of default (as defined in the Indenture governing the Notes), the assets of the
Company will be available to pay obligations on the Notes only after the
administrative expenses of any bankruptcy proceeding and all senior
indebtedness, if any, has been paid in full. As a result, there may not be
sufficient assets remaining to pay amounts due on the Notes and any other
subordinated indebtedness of the Company then outstanding. The Indenture does
not prohibit or limit the incurrence of additional indebtedness, including
senior indebtedness, by the Company. The incurrence of such indebtedness could
adversely affect the Company's ability to pay its obligations under the Notes.
In addition, the Notes are not guaranteed by any subsidiary of the Company. As a
result, the Notes effectively rank junior to all creditors of the subsidiaries
of the Company.

         Upon the occurrence of certain adverse events, each holder of Notes may
require the Company to repurchase all or a portion of such holder's Notes. If
such an event were to occur, the Company may not have sufficient financial
resources or may not be able to arrange financing to pay the repurchase price
for all Notes tendered by holders thereof. The Company's ability to repurchase
the Notes in such event may be limited by law, the Indenture, and the terms of
other agreements relating to borrowings that constitute senior indebtedness, as
such indebtedness or agreements may be entered into, replaced, supplemented, or
amended from time to time. The Company may be required to refinance senior
indebtedness in order to make any such repurchase payments. If the Company is
prohibited from repurchasing the Notes, such failure would constitute an event
of default under the Indenture, which may constitute a further default under
certain of the Company's existing agreements relating to borrowings and the
terms of other indebtedness that the Company may enter into from time to time.
In such circumstances, the subordination provisions in the Indenture would
prohibit payments to the holders of the Notes. Furthermore, the Company may not
have the financial ability to repurchase the Notes in the event that maturity of
senior indebtedness is accelerated as a result of a default under the applicable
loan or similar agreement. The repurchase of Notes under the circumstances
described above, or the inability of the Company to repurchase Notes as
required, could have a material adverse affect on the Company's financial
condition and operating results.

LITIGATION

         In March 1998, the Company settled one lawsuit and reached an agreement
to settle another lawsuit. The Company took a one-time charge of approximately
$950,000 in the second quarter of fiscal 1998 with respect 



                                       26
<PAGE>   29

to one of these settlements. The final terms of the pending settlement are
subject to the execution of a definitive settlement agreement by the respective
parties.

         During 1997, the Company was named as a defendant in a class action
lawsuit alleging that the defendants engaged in certain price fixing and other
anti-competitive activities in violation of federal antitrust laws. See Item 3,
"Legal Proceedings." The Company is actively defending this lawsuit. A decision
adverse to the Company in this lawsuit could have a material adverse effect on
the Company's business, financial condition, and operation results. The
Company's financial statements currently reflect no provision for this lawsuit.

YEAR 2000 COMPLIANCE

         Many currently installed computer systems and software products are
coded to accept only two-digit entries to represent years in the date code
field. Computer systems and products that do not accept four-digit year entries
will need to be upgraded or replaced to accept four-digit entries to distinguish
years beginning with 2000 from prior years.

         During 1997, the Company commenced a program to install new computer
software programs that are intended to integrate the Company's management
information systems throughout its organizational structure, as well as to
comply with "Year 2000" requirements. The Company has experienced delays in
completing this program and currently anticipates that these software systems
will be operational in the second quarter of calendar 1999. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance." The Company believes that its new software
systems will comply with the Year 2000 requirements, and the Company currently
does not anticipate that it will experience any material disruption to its
operations as a result of the failure of any of its systems to function properly
beyond December 31, 1999. The Company cannot provide assurance, however, that it
will successfully complete installation and testing of the new systems prior to
January 1, 2000. In addition, computer systems operated by third parties,
including customers, vendors, credit card transaction processors, and financial
institutions, with which the Company's systems interface may not continue to
properly interface with the Company's systems and may not otherwise be compliant
on a timely basis with Year 2000 requirements. Any failure of the Company's
computer system or the systems of third parties to timely achieve Year 2000
compliance could have a material adverse effect on the Company's business,
financial condition, and operating results.

RIGHTS TO ACQUIRE SHARES; POTENTIAL ISSUANCE OF ADDITIONAL SHARES

         As of December 15, 1998, options to acquire a total of approximately
899,340 shares were outstanding under the Company's 1993 Stock Option Plan and
1998 Non-Qualified Stock Option Plan. Holders of such options will have the
opportunity to profit from an increase in the market price of Common Stock, with
resulting dilution in the interests of holders of Common Stock. The existence of
such stock options could adversely affect the terms on which the Company can
obtain additional financing, and the option holders can be expected to exercise
such options at a time when the Company, in all likelihood, would be able to
obtain additional capital by offering shares of its Common Stock on terms more
favorable to the Company than those provided by the exercise of such options.

SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL DEPRESSIVE EFFECT ON STOCK PRICE

         Sales of substantial amounts of Common Stock by shareholders of the
Company, or even the potential for such sales, may have a depressive effect on
the market price of the Common Stock. Of the 16,657,632 shares of Common Stock
outstanding as of December 15, 1998, 14,119,663 shares currently are eligible
for resale in the public market without restriction or further registration
unless held by an "affiliate" of the Company, as that term is defined under
applicable securities laws. The 2,537,969 remaining shares of Common Stock
outstanding are "restricted securities," as that term is defined in Rule 144
under the securities laws, and may be sold only in compliance with Rule 144,
pursuant to registration under the Securities Act, or pursuant to an exemption
therefrom. The Company has registered an aggregate of approximately 455,800
shares of such "restricted securities" for resale pursuant to an effective
registration statements. Affiliates also are subject to certain of the resale
limitations of Rule 144 as promulgated under the securities laws. Generally,
under Rule 144, each person 



                                       27
<PAGE>   30

who beneficially owns restricted securities with respect to which at least one
year has elapsed since the later of the date the shares were acquired from the
Company or an affiliate of the Company may, every three months, sell in ordinary
brokerage transactions or to market makers an amount of shares equal to the
greater of 1% of the Company's then-outstanding Common Stock or the average
weekly trading volume for the four weeks prior to the proposed sale of such
shares. An aggregate of approximately 2,101,056 shares held by certain officers
and directors currently are available for sale under Rule 144.

CHANGE IN CONTROL PROVISIONS

         The Company's Amended and Restated Articles of Incorporation (the
"Restated Articles"), Amended and Restated Bylaws, and Arizona law contain
provisions that may have the effect of making more difficult or delaying
attempts by others to obtain control of the Company, even when those attempts
may be in the best interests of shareholders. The Restated Articles also
authorize the Board of Directors, without shareholder approval, to issue one or
more series of preferred stock, which could have voting, liquidation, dividend,
conversion, or other rights that adversely affect or dilute the voting power of
the holders of Common Stock.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

         Certain statements and information contained in this Report under the
headings "Business," "Special Considerations," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" concerning future,
proposed, and anticipated activities of the Company, certain trends with respect
to the Company's revenue, operating results, capital resources, and liquidity or
with respect to the markets in which the Company competes or the motorsports
industry in general, and other statements contained in this Report regarding
matters that are not historical facts are forward-looking statements, as such
term is defined in the securities laws. Forward-looking statements, by their
very nature, include risks and uncertainties, many of which are beyond the
Company's control. Accordingly, actual results may differ, perhaps materially,
from those expressed in or implied by such forward-looking statements. Factors
that could cause actual results to differ materially include those discussed
elsewhere under this Item 1, "Special Considerations."

ITEM 2.    PROPERTIES

         The Company leases a newly constructed, approximately 140,000 square
foot building in Phoenix, Arizona. The Company uses approximately 38,000 square
feet of this facility for its corporate headquarters and approximately 102,000
square feet for warehouse space and packaging operations. The initial term of
the lease expires in August 2007, with two five-year renewal options. The
Company currently is seeking to sublease its previous facility in Tempe,
Arizona, but there can be no assurance that it will be able to do so on
favorable terms or at all.

         The Company also leases a newly constructed, approximately 121,000
square foot facility in the Charlotte, North Carolina, vicinity for its
operations in that area. The Company utilizes approximately 42,000 square feet
of the new facility for offices and approximately 79,000 square feet for
warehouse space and distribution operations. The initial term of the lease
expires in June 2018, with four five-year renewal options.

         The Company currently leases two facilities in Atlanta, Georgia, for
its Image Works operations. One facility consists of approximately 77,400 square
feet, of which the Company utilizes approximately 14,000 square feet for offices
and approximately 63,400 square feet for manufacturing and warehouse operations.
The lease on this facility expires in January 2001. The second facility consists
of approximately 21,900 square feet, of which the Company utilizes approximately
19,400 square feet for warehouse and distribution operations and approximately
2,500 square feet for offices. The lease on this facility expires in February
1999.

         The Company owns a newly constructed, approximately 55,000 square foot
facility in Aachen, Germany, for its MiniChamps operations. The Company utilizes
approximately 39,000 square feet of this facility for its European warehouse and
distribution operations, and currently is completing construction of office
space in the remaining 16,000 square feet of the facility. The Company currently
is leasing 5,000 square feet of office space in Aachen, Germany, from the spouse
of Paul G. Lang, a director of the Company.



                                       28
<PAGE>   31

ITEM 3.    LEGAL PROCEEDINGS

         On March 4, 1997, two class action lawsuits were filed against the
Company and approximately 28 other defendants in the United States District
Court for the Northern District of Georgia. The lawsuits allege that the
defendants engaged in price fixing and other anti-competitive activities in
violation of federal antitrust laws. The alleged class of plaintiffs consists of
all purchasers of souvenirs or merchandise from licensed vendors at any NASCAR
Winston Cup race or supporting event during the period commencing January 1,
1991. The Company was named as a defendant based upon actions alleged to have
been taken by Sports Image, Inc., a North Carolina corporation ("Sports Image
N.C.") and Creative Marketing & Promotions, Inc. ("CMP") prior to the Company's
acquisitions of the assets and capital stock, respectively, of those entities.
The actions were subsequently consolidated by order of the court. The caption of
the consolidated action is "In re Motorsports Merchandise Antitrust Litigation"
and the files are maintained under Master File No. 1-97-CV-0569-CC. On May
30,1997, a consolidated amended complaint was filed, which deleted the Company
as a defendant with respect to claims based upon actions alleged to have been
taken by Sports Image N.C. and named the Company's wholly owned subsidiary,
Sports Image, Inc., an Arizona corporation ("Sports Image AZ"), as a defendant
with respect to those claims. The Company remains a defendant with respect to
claims based upon actions alleged to have been taken by CMP.

         On July 31,1997, the Company acquired all of the outstanding capital
stock of RYP, which is another defendant in the motorsports merchandise
antitrust litigation. Accordingly, the Company has assumed the defense of this
matter with respect to claims based upon actions alleged to have been taken by
RYP and will be responsible for costs, fees, expenses, damages, payments,
credits, rebates, and penalties, if any, arising out of this matter with respect
to RYP. The seller of RYP has agreed to be responsible for amounts, if any, in
excess of $400,000 (the "$400,000 Cap"). The $400,000 Cap excludes attorneys
fees and certain other costs and expenses that the Company may incur in
defending or settling this matter. The plaintiffs have requested injunctive
relief and monetary damages of three times an unspecified amount of damages that
the plaintiffs claim to have actually suffered. On August 1, 1997, answers were
filed on behalf of the Company and Sports Image AZ denying the allegations of
the complaint. Pursuant to an agreement between the plaintiffs and Sports Image
AZ to toll the running of the statute of limitations with respect to any claims
against Sports Image AZ, on November 17, 1997 the plaintiffs filed a motion to
dismiss Sports Image AZ from the case without prejudice. The court granted the
motion on March 20, 1998. On March 2, 1998, the plaintiffs filed, pursuant to an
order of the court, a second consolidated amended complaint intended to set
forth certain of the allegations with greater specificity. The Company intends
to vigorously defend the claims asserted in this lawsuit.

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

         Not applicable.


                                       29

<PAGE>   32


                                    PART II

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

         The Company's common stock, par value $.01 per share (the "Common
Stock") has been quoted on the Nasdaq National Market under the symbol "ACTN"
since April 27, 1993. The following table sets forth the quarterly high and low
closing sale prices of the Company's Common Stock for the calendar periods
indicated on the Nasdaq National Market, as adjusted for the two-for-one stock
split effected as a stock dividend on May 28, 1996.

<TABLE>
<CAPTION>
                                                                          COMMON STOCK
                                                                          ------------
                                                                         HIGH       LOW
                                                                         ----       ---
1995:
<S>                                                                     <C>       <C>  
    First Quarter.............................................          $3.69     $2.38
    Second Quarter............................................           4.63      3.19
    Third Quarter.............................................           9.25      4.25
    Fourth Quarter............................................           9.81      6.13

1996:
    First Quarter.............................................         $11.63     $6.38
    Second Quarter............................................          20.50     10.75
    Third Quarter.............................................          14.75      9.75
    Fourth Quarter............................................          19.50     12.50

1997:
    First Quarter.............................................         $24.25    $16.50
    Second Quarter............................................          29.00     18.00
    Third Quarter.............................................          36.13     25.38
    Fourth Quarter............................................          38.00     23.00

1998:
    First Quarter.............................................         $38.88    $30.75
    Second Quarter............................................          37.13     25.91
    Third Quarter.............................................          37.25     23.13
    Fourth Quarter (through December 15, 1998)................          36.50     18.63
</TABLE>

         As of December 15, 1998, there were approximately 310 holders of record
and approximately 9,400 beneficial owners of the Company's Common Stock. On
December 15, 1998, the closing sales price of the Company's Common Stock on the
Nasdaq National Market was $35.19 per share.

         On February 3, 1998, the Company issued 9,486 shares of Common Stock to
Dale Earnhardt and Teresa Earnhardt and 414 shares of Common Stock to Donald G.
Hawk, Jr. in connection with a race car sponsorship. The Company issued the
shares without registration under the Securities Act of 1933 in reliance on
Section 4(2) of the Securities Act.


                                       30
<PAGE>   33

ITEM 6.  SELECTED FINANCIAL DATA

         The selected historical financial data presented below as of and for
the five years ended September 30, 1998 are derived from the Company's
consolidated financial statements, which have been audited by Arthur Andersen
LLP, independent public accountants. The selected financial data should be read
in conjunction with Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and the Notes thereto included elsewhere in this Report.

<TABLE>
<CAPTION>
                                                                 FISCAL YEAR ENDED SEPTEMBER 30,                   
                                                                 -------------------------------                   
                                                   1994         1995          1996        1997(1)       1998(2)
                                                   ----         ----          ----        -------       -------
                                                            (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                         <C>             <C>           <C>           <C>          <C>       
STATEMENT OF OPERATIONS DATA:
Sales:
   Collectibles........................     $     12,802    $   23,443    $   40,904    $  63,846    $  129,348
   Apparel and souvenirs...............              143         1,190         1,961       60,430       106,712
   Other(3)............................            3,924         1,498         1,351        6,104        15,817
                                            ------------    ----------    ----------    ---------    ----------
     Net sales.........................           16,869        26,131        44,216      130,380       251,877
Cost of sales..........................           10,488        15,882        25,296       80,995       157,079
                                            ------------    ----------    ----------    ---------    ----------
Gross profit...........................            6,381        10,249        18,920       49,385        94,798
Selling, general and administrative
   expenses............................            5,808         6,115         9,262       24,564        45,344
Settlement costs (4)...................               --            --            --        5,400           950
Amortization of goodwill and other
   intangibles.........................               --             4             4        1,286         4,392
                                            ------------    ----------    ----------    ---------    ----------
                                                   5,808         6,119         9,266       31,250        50,686
                                            ------------    ----------    ----------    ---------    ----------
Income from operations.................              573         4,130         9,654       18,135        44,112
Interest income (expense) and other,
   net.................................            (164)            24           216      (1,225)       (2,945)
                                            ------------    ----------    ----------    ---------    ----------
Income before provision for
   (benefit from) income taxes.........              409         4,154         9,870       16,910        41,167
Provision for (benefit from) income
   taxes...............................            (224)         1,384         3,917        6,764        16,391
Minority interest in earnings..........               --            --            --           --           189
                                            ------------    ----------    ----------    ---------    ----------
Net income.............................     $        633    $    2,770    $    5,953    $  10,146    $   24,587
                                            ============    ==========    ==========    =========    ==========
Net income per common
   share, assuming dilution(5).........     $       0.08    $     0.26    $     0.46    $    0.69    $     1.48
                                            ============    ==========    ==========    =========    ==========
Weighted average number of
   common shares, assuming 
   dilution(5).........................            9,566        10,899        13,028       14,624        16,647

OTHER FINANCIAL DATA:
Ratio of earnings to fixed charges(6)..             2.2x         14.8x         44.7x         7.8x          7.3x

CONSOLIDATED BALANCE SHEET DATA
   (AT END OF PERIOD):
Working capital........................     $      5,699    $   11,922    $   18,094    $  56,975    $   86,939
Total assets...........................           11,656        23,351        31,649      141,325       305,934
Total debt.............................              266           288           365       22,586       135,596
Shareholders' equity...................            6,909        18,890        26,996      103,168       136,432
</TABLE>


--------------------

(1)      Fiscal 1997 results include the results of operations of Sports Image,
         Motorsports Traditions, RYP, Image Works, and Simpson, beginning as of
         their respective dates of acquisition. See Item 7, "Management's
         Discussion and Analysis of Financial Condition and Results of
         Operations - Overview."


                                       31
<PAGE>   34

(2)      Fiscal 1998 results include the results of operations of the Rusty
         Wallace Acquisition, the Revell Acquisition, and the acquisitions of
         Brookfield, Chase, MiniChamps, and Performance Plus, beginning as of
         their respective dates of acquisition. See Item 7, "Management's
         Discussion and Analysis of Financial Condition and Results of
         Operations - Overview."

(3)      Includes (a) the revenue of the Company's M-Car(TM) operations through
         the discontinuation of those operations in September 1994, (b) the
         revenue of the Company's mini vehicle operations through the
         discontinuation of those operations in March 1995, and (c) royalty and
         license fees beginning in fiscal 1997. See Item 7, "Management's
         Discussion and Analysis of Financial Condition and Results of
         Operations - Overview."

(4)      Represents (a) a one-time charge of approximately $5.4 million for
         settlement costs and related legal and other expenses in fiscal 1997,
         and (b) a one-time charge of approximately $950,000 for settlement
         costs and related legal and other expenses in fiscal 1998.

(5)      Adjusted to reflect the two-for-one stock split effected as a stock
         dividend on May 28, 1996, and restated to reflect the adoption of
         Statement of Financial Accounting Standards No. 128, "Earnings per
         Share."

(6)      For purposes of calculating the ratio of earnings to fixed charges,
         earnings consist of income before provision for income taxes plus fixed
         charges. Fixed charges consist of interest expense (including the
         amortization of debt issuance costs) plus that portion of rental
         payments on operating leases deemed representative of the interest
         factor.

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

OVERVIEW

         The Company designs and markets licensed motorsports products,
including die-cast scaled replicas of motorsports vehicles, apparel, and
souvenirs. The Company also develops promotional programs for sponsors of
motorsports that feature the Company's die-cast replicas or other products and
that are intended to increase brand awareness of the products or services of the
corporate sponsors. In addition, the Company represents popular race car drivers
in a broad range of licensing and other revenue-producing opportunities,
including product licenses, corporate sponsorships, endorsement contracts, and
speaking engagements. Third parties manufacture all of the Company's motorsports
collectibles and most of the Company's apparel and souvenirs, generally
utilizing the Company's designs, tools, and dies. The Company screen prints and
embroiders a portion of the licensed motorsports apparel that it sells.

         The Company was incorporated in Arizona in May 1992 and began marketing
die-cast collectibles in July 1992. In August 1994, the Company acquired certain
assets and liabilities of Fan Fueler, Inc. and began marketing licensed
motorsports consumer products. During fiscal 1993 and 1994, the Company also
conducted the business of staging M-Car(TM) Grand Prix Races for charitable and
other organizations, in which participating sponsors purchased specialized
gas-powered, one-third scale racing vehicles from the Company. In September
1994, the Company sold the assets and liabilities related to its M-Car(TM)
operations and discontinued its M-Car(TM) Grand Prix Race operations. During
fiscal 1993 and 1994 and the first two quarters of fiscal 1995, the Company
designed and marketed pedal, electric, and gas-powered mini vehicles, primarily
as specialty promotional items. The Company sold the assets related to its mini
vehicle operations in March 1995.

         In November 1996, the Company acquired Sports Image and in January 1997
the Company acquired Motorsport Traditions, both of which marketed and
distributed licensed motorsports apparel, die-cast collectibles, and other
souvenir items. In July 1997, the Company acquired RYP, which had operations
similar to those of Sports Image and Motorsport Traditions, and Image Works,
which manufactures and markets licensed motorsports apparel through the
mass-merchandising markets. The Company acquired certain assets and assumed
certain liabilities related to the mini-helmet collectible business of Simpson
in August 1997. Following these acquisitions, the Company took a number of
actions intended to integrate the operations of the acquired companies with the
Company's existing operations and to reduce overall selling, general, and
administrative expenses associated with the acquired entities. These efforts had
a meaningful impact on the Company's results of operations beginning in the
second half of fiscal 1997.



                                       32
<PAGE>   35

         In December 1997, the Company completed the Rusty Wallace Acquisition,
in which it acquired assets related to sales of motorsports merchandise licensed
by NASCAR driver Rusty Wallace. The Company and an affiliate of Rusty Wallace
also entered into a seven-year license agreement. See "Business - Licenses." In
December 1997, the Company also completed the Revell Acquisition, in which it
acquired the assets related to certain "Revell" trademarked die-cast products.
The Company and Revell also entered into a 10-year license agreement and a
long-term strategic alliance involving extensive marketing and distribution
arrangements. See "Business Licenses."

         In January 1998, the Company acquired the assets and assumed certain
liabilities of Brookfield, which distributes various motorsports collectibles
and other die-cast replicas. In May 1998, the Company acquired a majority
interest in Chase, a motorsports apparel and licensing company that creates and
markets apparel, toiletries, and clothing accessories that bear "Chase" branded
marks. In August 1998, the Company acquired an 80% interest in MiniChamps, which
markets and distributes die-cast replicas of Formula One and GT race cars as
well as factory production cars, driver figurines, and other motorsports
collectibles. In September 1998, the Company acquired a majority interest in
Performance Plus, which develops and markets driver-endorsed nutritional
products, including vitamins, energy bars, and energy drinks.

         In addition to the cost savings described above, the Company believes
that the acquisitions described above provide the potential for enhanced revenue
opportunities as a result of the synergies created by expanded product offerings
and additional distribution channels. For example, in fiscal 1997 the Company
began developing new lines of licensed motorsports apparel and souvenirs for
exclusive sales through its Collectors' Club. The Company also believes that
these acquisitions provide opportunities for additional sales growth of the
Company's die-cast products through trackside sales, promotional programs, and
fan clubs.

         Prior to the fiscal 1997 and 1998 acquisitions, the Company's revenue
consisted primarily of sales of die-cast collectibles, and the revenue of the
acquired businesses consisted primarily of sales of either die-cast or other
collectibles or licensed motorsports apparel and souvenirs. Promotional revenue
consists of sales of products developed for corporate promotion programs.
Beginning in fiscal 1997, the Company's revenue includes royalty income as a
result of the license agreement with Hasbro.

         The Company's cost of sales consists primarily of the cost of products
procured from third-party manufacturers, royalty payments to licensors, and
depreciation of tooling and dies. Significant factors affecting the Company's
cost of sales as a percentage of net sales include (i) the overall percentage of
net sales represented by sales of die-cast collectible products, which typically
carry higher gross margins than the Company's other products, (ii) the
percentage of sales of die-cast collectible products represented by sales
through the Collectors' Club, which typically carry higher gross margins than
sales of such products through wholesale distributors, and (iii) the effect of
amortizing the fixed cost components of cost of sales, primarily depreciation of
tooling and dies, over varying levels of net sales. The Company believes that
the increased sales of licensed apparel and souvenirs following the fiscal 1997
acquisitions will result in lower overall gross margins as a result of lower
gross margins generally associated with these acquired product lines. The
Company believes, however, that the effect of these lower gross margins will be
mitigated at least to some extent by cost reductions and other operational
efficiencies associated with the combination of the acquired entities and by the
license agreement with Hasbro. The agreement with Hasbro provides the Company
with a source of license royalties without significant related cost of sales. In
addition, the license agreement provides the Company with access to the
mass-merchandise market without committing capital for manufacturing and with
limited marginal expenditures for administrative and marketing activities.

         Selling, general, and administrative expenses include general corporate
expenses. The Company anticipates that it will continue to achieve a reduction
in selling, general, and administrative expenses as a percentage of sales as a
result of consolidation and the cost-reduction efforts described above. The
Company recorded goodwill and other intangibles of approximately $50.0 million
in connection with the fiscal 1997 acquisitions and recorded an additional $61.8
million of goodwill and other intangibles from the acquisitions completed in
fiscal 1998. The Company is amortizing the goodwill and other intangibles over
three to 25 years.

                                       33
<PAGE>   36

RESULTS OF OPERATIONS

         The following table sets forth, for the periods indicated, the
percentage of total revenue represented by certain expense and revenue items.

<TABLE>
<CAPTION>
                                                                    YEAR ENDED SEPTEMBER 30,
                                                                    ------------------------
                                                  1994         1995         1996          1997           1998
                                                  ----         ----         ----          ----           ----
<S>                                               <C>         <C>          <C>            <C>          <C>  
Sales
   Collectibles.........................           75.9%        89.7%        92.5%         49.0%         51.4%
   Apparel and souvenirs................            0.8          4.6          4.4          46.3          42.4
   Other................................           23.3          5.7          3.1           4.7           6.2
                                                 ------       ------       ------        ------        ------
     Net sales..........................          100.0        100.0        100.0         100.0         100.0
Cost of sales...........................           62.2         60.8         57.2          62.1          62.4
                                                 ------       ------       ------        ------        ------
Gross profit............................           37.8         39.2         42.8          37.9          37.6
Selling, general and administrative                                                                               
   expenses.............................           34.4         23.4         21.0          18.8          18.0
Settlement costs(1).....................            --           --           --            4.2           0.4
Amortization of goodwill and other                                                                                
   intangibles..........................            --           --           --            1.0           1.7
                                                 ------       ------       ------        ------        ------
Income from operations..................            3.4         15.8         21.8          13.9          17.5
Interest income (expense) and other,                                                                              
   net..................................           (1.0)         0.1          0.5          (0.9)         (1.2)
                                                 ------       ------       ------        ------        ------ 
Income before provision for                                                                                       
   (benefit from) income taxes..........            2.4         15.9         22.3          13.0          16.3
Provision for (benefit from) income                                                                               
   taxes................................           (1.4)         5.3          8.8           5.2           6.5
Minority interest in earnings...........            --           --           --            --            0.1
                                                 ------       ------       ------        ------        ------
Net income..............................            3.8%        10.6%        13.5%          7.8%          9.7%
                                                 ======       ======       ======        ======        ======
</TABLE>
------------------

(1)  Fiscal 1997 includes a one-time charge of approximately $5.4 million for
     costs and legal and other expenses related to the settlement of a lawsuit.
     Excluding the one-time charge, fiscal 1997 income from operations, income
     before provision for income taxes, and net income would have been
     approximately 18.1%, 17.1%, and 10.3% of net sales, respectively. Fiscal
     1998 includes a one-time charge of approximately $950,000 for costs and
     other expenses related to the settlement of a lawsuit. Excluding the
     one-time charge, fiscal 1998 income from operations, income before
     provision for income taxes, and net income would have been 17.9%, 16.7%,
     and 10.0% of net sales, respectively.

FISCAL YEAR ENDED SEPTEMBER 30, 1998 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER
30, 1997

         Net sales increased 93.2% to $251.9 million for the year ended
September 30, 1998 from $130.4 million for the year ended September 30, 1997.
The Company attributes the improvement in sales during fiscal 1998 primarily to
(i) revenue from the Company's fiscal 1997 and 1998 acquisitions, (ii) the
Company's ability to capitalize on the continued strong growth in the base of
motorsports enthusiasts and to produce and sell increased quantities of
souvenirs, apparel, and die-cast collectible goods, and (iii) an increase in
membership in the Company's Collectors' Club to approximately 148,000 members at
September 30, 1998 from approximately 100,000 members at September 30, 1997.

         Gross profit increased to $94.8 million in fiscal 1998 from $49.4
million in fiscal 1997, representing 37.6% and 37.9% of net sales, respectively.
The decrease in gross profit as a percentage of net sales resulted primarily
from increased sales of die-cast collectibles through wholesale channels, which
typically provide lower margins than sales of such products through the
Collectors' Club.



                                       34
<PAGE>   37

         Selling, general and administrative expenses increased to $45.3 million
in fiscal 1998 from $24.6 million in fiscal 1997, representing 18.0% and 18.8%
of net sales, respectively. The decrease in such expenses as a percentage of
sales resulted primarily from cost savings achieved with the integration and
consolidation of operations of the businesses acquired in fiscal 1997 and 1998.
The integration and consolidation included the relocation of Motorsport
Traditions into Sports Image's facility, the integration of management
information systems, and a reduction in excess labor.

         Amortization of goodwill and other intangibles increased to $4.4
million for fiscal 1998 from $1.3 million for fiscal 1997. The increase in
amortization of goodwill and other intangibles is related to the acquisitions of
Sports Image, Motorsport Traditions, and other entities. The Company recorded
goodwill and other intangibles of $50.0 million in connection with the fiscal
1997 acquisitions, and recorded an additional $61.8 million of goodwill and
other intangibles from the acquisitions completed in fiscal 1998. The Company is
amortizing the goodwill and other intangibles over periods of three to 25 years.

         Interest income (expense) and other, net, changed to approximately
$(2.9 million) for fiscal 1998 from approximately $(1.2 million) for fiscal
1997. The change was primarily attributable to an increase in interest expense
of approximately $3.5 million related to the issuance of $100.0 million of Notes
in March 1998, offset by an increase in interest income of approximately $1.8
million related to proceeds from the Company's Common Stock offering in June
1997 and the sale of the Notes in March 1998.

FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER
30, 1996

         Net sales increased 195% to $130.4 million for the year ended September
30, 1997 from $44.2 million for the year ended September 30, 1996. The Company
attributes the improvement in sales during fiscal 1997 primarily to (i) revenue
from Sports Image and Motorsport Traditions, which were acquired by the Company
during the first and second quarters of fiscal 1997, respectively; (ii) the
Company's ability to capitalize on the continued strong growth in the base of
motorsports enthusiasts and to produce and sell increased quantities of
souvenirs, apparel, and die-cast collectible goods; and (iii) an increase in
Collectors' Club membership. The number of members in the Collectors' Club
increased to approximately 100,000 members at September 30, 1997 from
approximately 72,000 members at September 30, 1996.

         Gross profit increased to $49.4 million in fiscal 1997 from $18.9
million in fiscal 1996, representing 37.9% and 42.8% of net sales, respectively.
The decrease in gross profit as a percentage of net sales resulted primarily
from increased sales of apparel and souvenirs, which typically provide lower
margins than sales of the Company's collectible products.

         Selling, general and administrative expenses increased to $24.6 million
in fiscal 1997 from $9.3 million in fiscal 1996, representing 18.8% and 21.0% of
net sales, respectively. The decrease in such expenses as a percentage of sales
resulted primarily from cost savings achieved with the integration and
consolidation of operations for the acquired entities of Sports Image and
Motorsport Traditions. The integration and consolidation included the relocation
of Motorsport Traditions into Sports Image's facility, the integration of
management information systems, and a reduction in personnel.

         Settlement costs of $5.4 million for the year ended September 30, 1997
resulted from a one-time charge for the settlement of a lawsuit and related
legal charges. This settlement represented 4.1% of net sales in fiscal 1997.

         Amortization of goodwill and other intangibles increased to $1.3
million for the year ended September 30, 1997 from $4,000 for the year ended
September 30, 1996. The increase in amortization of goodwill and other
intangibles is related to the acquisitions of Sports Image, Motorsport
Traditions, and other entities. The Company recorded goodwill and other
intangible assets of $50.0 million in connection with the fiscal 1997
acquisitions. The Company is amortizing the goodwill and other intangible assets
over a period of three to 25 years.

         Interest income (expense) and other, net, changed to $(1.2 million) in
fiscal 1997 from approximately $216,000 in fiscal 1996. The change was primarily
attributable to an increase in interest expense of 



                                       35
<PAGE>   38

approximately $2.0 million related to debt incurred in connection with the
acquisitions of Sports Image and Motorsport Traditions.

PRO FORMA RESULTS OF OPERATIONS

         The following table sets forth the unaudited pro forma income statement
data of the Company for the fiscal years ended September 30, 1997 and 1998,
giving effect to the acquisitions of Sports Image, Motorsport Traditions, RYP,
Image Works, Simpson, the Rusty Wallace Acquisition, the Revell Acquisition, and
the acquisitions of Brookstone, Chase, MiniChamps, and Performance Plus as if
they had occurred on October 1, 1996, using the purchase method of accounting
for business combinations. The unaudited pro forma income statement data
presented herein does not purport to represent what the Company's actual results
of operations would have been had those acquisitions occurred on that date or to
project the Company's results of operations for any future period.

<TABLE>
<CAPTION>
                                                                                     FISCAL YEAR ENDED
                                                                                     -----------------
                                                                       SEPTEMBER 30, 1997       SEPTEMBER 30, 1998
                                                                       ------------------       ------------------
                                                                          (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                                         <C>                       <C>     
Net sales.......................................................            $213,954                  $283,702
Net income(1)...................................................              13,356                    26,728
Net income per common share, assuming dilution(1)...............          $     0.90                $     1.60
</TABLE>

--------------------

(1)      Pro forma amounts for fiscal 1997 exclude the one-time charge of
         approximately $5.4 million, or $0.22 per share, for legal settlement
         costs and related charges. Pro forma amounts for fiscal 1998 exclude
         the one-time charge of approximately $950,000, or $0.03 per share, for
         legal settlement costs and related charges.

         The pro forma results shown above do not account for efficiencies
gained upon the consolidation of operations, including the elimination of
duplicative functions and reduction of salary expense and other related costs.
The difference in earnings per share on a pro forma basis for fiscal 1997 is
primarily attributable to lower gross margins as a result of the write-down of
inventory by Motorsport Traditions immediately prior to the date of acquisition.
The Company has implemented improvements to the management and control of
inventories of the acquired companies intended to reduce the need for seasonal
adjustments to inventory. The pro forma results of operations for the years
ended September 30, 1997 and 1998, reflect the amortization of goodwill and
other intangibles arising from the fiscal 1997 and fiscal 1998 acquisitions and
include additional interest expense associated with the financing of the
acquisitions of Sports Image, Motorsport Traditions, Chase, and MiniChamps.

QUARTERLY RESULTS OF OPERATIONS

         The following table sets forth certain unaudited quarterly results of
operations for each of the eight quarters in the fiscal years ended September
30, 1997 and 1998. All quarterly information was obtained from unaudited
financial statements not otherwise contained herein. The Company believes that
all necessary adjustments have been made to present fairly the quarterly
information when read in conjunction with the Consolidated Financial Statements
and Notes thereto included elsewhere in this Report. The operating results for
any quarter are not necessarily indicative of the results for any future period.

                                       36
<PAGE>   39

<TABLE>
<CAPTION>
                                                            (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                                                           FISCAL 1997                             
                                                                           -----------                             
                                                1ST QUARTER       2ND QUARTER    3RD QUARTER(1)      4TH QUARTER
                                                -----------       -----------    --------------      -----------

<S>                                             <C>              <C>               <C>              <C>       
Net sales..............................         $ 15,175         $  28,302         $   39,632       $   47,270
Gross profit...........................            6,395            10,781             14,684           17,525
Income from operations.................            2,843             4,583              2,349            8,361
Net income.............................         $  1,568         $   2,437         $    1,098       $    5,043
Net income per common share,
   assuming dilution...................         $   0.12         $    0.17         $     0.08       $     0.31
Weighted average number of common
   shares, assuming dilution...........           13,455            14,129             14,430           16,450
</TABLE>

<TABLE>
<CAPTION>
                                                                           FISCAL 1998                             
                                                                           -----------                             
                                                1ST QUARTER     2ND QUARTER(2)     3RD QUARTER       4TH QUARTER
                                                -----------     --------------     -----------       -----------
<S>                                             <C>              <C>               <C>              <C>       
Net sales..............................         $ 42,918         $  53,155         $   76,793       $   79,011
Gross profit...........................           15,056            20,061             29,528           30,052
Income from operations.................            6,375             7,467             15,032           15,237
Net income.............................         $  3,656         $   4,036         $    8,548       $    8,347
Net income per common share,
   assuming dilution...................         $   0.22         $    0.24         $     0.50       $     0.49
Weighted average number of common
   shares, assuming dilution...........           16,568            16,666             18,766           18,781
</TABLE>

--------------------

(1)      Includes a one-time charge of approximately $5.4 million for costs and
         legal and other expenses related to the settlement of a lawsuit.
         Excluding the one-time charge, income from operations, net income, and
         net income per common share, assuming dilution, for the third quarter
         of fiscal 1997 would have been approximately $7,749, $4,338, and $0.30,
         respectively.

(2)      Includes a one-time charge of approximately $950,000 for costs and
         legal and other expenses related to the settlement of a lawsuit.
         Excluding the one-time charge, income from operations, net income, and
         net income per common share, assuming dilution, for the second quarter
         of fiscal 1998 would have been approximately $8,417, $4,606, and $0.28,
         respectively.

         The Company's revenue and operating results may be subject to quarterly
and other fluctuations as a result of a variety of factors. As a result of the
fiscal 1997 and 1998 acquisitions, the Company believes that quarter-to-quarter
comparisons of its past financial results may not necessarily be meaningful and
should not be relied upon as an indication of future performance.

SEASONALITY

         Because the auto racing season is concentrated between the months of
February and November, the second and third calendar quarters of each year (the
Company's third and fourth fiscal quarters) generally are characterized by
higher sales of motorsports products. The Company believes, however, that
holiday sales of its products are increasing, which has the effect of reducing
seasonal fluctuations in its sales.

LIQUIDITY AND CAPITAL RESOURCES

         The Company's working capital position increased to $86.9 million at
September 30, 1998 from $57.0 million at September 30, 1997. The increase of
$29.9 million is primarily attributable to the private placement of Notes in
March 1998, as described below, and results from operations.



                                       37
<PAGE>   40

         Capital expenditures for the year ended September 30, 1998 totaled
approximately $21.7 million, of which approximately $12.9 million was utilized
for the Company's continued investment in tooling.

         On October 3, 1997 the Company issued 34,940 shares of Common Stock to
Richard Childress Racing Enterprises, Inc. ("RCR") as a portion of the license
fee pursuant to a license agreement entered into between the Company and RCR on
that date. On February 3, 1998, the Company issued 9,486 shares of Common Stock
to Dale Earnhardt and Teresa Earnhardt and 414 shares of Common Stock to Donald
G. Hawk, Jr. in connection with a race car sponsorship.

         During the year ended September 30, 1998, the Company issued 425,990 
shares of Common Stock upon the exercise of stock options, resulting in total
proceeds to the Company of approximately $1.6 million.

         On January 2, 1997, the Company entered into a credit facility with
First Union National Bank of North Carolina ("First Union"). On August 5, 1998,
the Company entered into an amended and restated credit agreement with First
Union (the "Credit Facility"). The Credit Facility consists of a revolving line
of credit for up to $20.0 million, which includes up to $5.0 million for standby
letters of credit (the "Line of Credit") and a $30.0 million trade letter of
credit/bankers' acceptance facility (the "Letter of Credit/BA Facility"). The
Line of Credit bears interest, at the Company's option, at a rate equal to (i)
the Alternate Base Rate (as described below) plus an applicable margin as
defined in the credit agreement or (ii) LIBOR plus an applicable margin as
defined in the credit agreement. The "Alternate Base Rate" under the Line of
Credit is the greater of (a) the bank's publicly announced prime rate or (b) the
Federal Funds Effective Rate (as defined) plus 0.5%. The Line of Credit matures
on April 1, 2001 with respect to the revolving line of credit portion of the
Line of Credit, and on April 1, 1999 with respect to the standby letter of
credit portion of the Line of Credit and the Letter of Credit/BA Facility,
subject to extensions by First Union. The Credit Facility is guaranteed by the
Company's subsidiaries. The Line of Credit also contains certain provisions that
require the Company to comply with certain financial covenants and that limits
the Company's ability to incur additional indebtedness or make certain
investments, to sell assets, to engage in certain mergers or consolidations, or
to pay dividends. The Company did not have any outstanding borrowings under the
Line of Credit as of September 30, 1998. The Company had outstanding purchase
commitments of approximately $3.7 million under the Letter of Credit/BA Facility
as of September 30, 1998.

         On January 2, 1997, the Company issued an aggregate of $20.0 million
principal amount of senior notes to three insurance companies (the "Senior
Notes"). The Senior Notes bear interest at the rate of 8.05% per annum, provide
for semi-annual payments of accrued interest, and mature on January 2, 1999. The
Company may not prepay the Senior Notes prior to maturity, but must offer to
redeem the Senior Notes in the event of a "Change of Control" of the Company, as
defined in the Senior Notes. The Senior Notes contain certain provisions that,
among other things, require the Company to comply with certain financial ratios
and net worth requirements and limit the ability of the Company and its
subsidiaries to incur additional indebtedness, to sell assets or engage in
certain mergers or consolidations. The Senior Notes are guaranteed by the
Company's subsidiaries. The Company intends to use available cash resources to
repay the Senior Notes at maturity.

         On March 24, 1998, the Company sold $100.0 million of 4 3/4%
Convertible Subordinated Notes due 2005. The Notes are convertible, at the
option of the holders, into shares of Common Stock at the initial conversion
price of $48.20 per share, subject to adjustments in certain events. Interest on
the Notes is payable semi-annually on April 1 and October 1 of each year,
beginning October 1, 1998. The Notes mature on April 1, 2005. The Notes are
general unsecured obligations of the Company, subordinated in right of payment
to all existing and future senior indebtedness of the Company, as defined in the
Notes. The Indenture governing the Notes does not limit or prohibit the
incurrence of additional indebtedness, including senior indebtedness, by the
Company or its subsidiaries. The Company, at its option, may redeem the Notes in
whole or in part at any time on or after April 1, 2001, at redemption prices set
forth in the Indenture governing the Notes. Upon the occurrence of a "change in
control" or a "termination of trading," as defined in the Indenture, the holders
of the Notes will have the right to require the Company to repurchase all or any
part of such holders' Notes at 100% of their principal amount, plus accrued and
unpaid interest. The net proceeds to the Company from the offering were
approximately $96.5 million, after deducting offering expenses of approximately
$500,000 and the Initial Purchasers' discount of 3.0%.



                                       38
<PAGE>   41

         On December 9, 1997, the Company acquired certain assets and assumed
certain liabilities related to sales of motorsports merchandise licensed by
NASCAR Winston Cup driver Rusty Wallace for approximately $6.0 million in cash.
The Company paid $2.5 million at closing and paid the remainder in four
installments during fiscal 1998. In connection with the acquisition, the Company
entered into a seven-year license agreement for the name and likeness of Mr.
Wallace. The terms of this acquisition were determined by arms-length
negotiations between representatives of Mr. Wallace and representatives of the
Company.

         On December 19, 1997, the Company completed the Revell Acquisition,
pursuant to which the Company acquired certain assets and assumed certain
liabilities related to Revell's motorsports die-cast collectible product lines.
The preliminary price, which is subject to certain adjustments, consists of an
initial cash payment of $14.8 million and $1.0 million per year for 10 years
beginning on January 1, 1998, provided that certain conditions are met. Revell
had sales of die-cast collectibles of approximately $20.0 million during 1997.
The Company markets the Revell-trademarked products through its existing
distribution channels, but with different features and at different price points
from its current lines of die-cast collectibles. The Company and Revell also
entered into a 10-year license agreement under which the Company has the right
to utilize certain Revell trademarks in connection with sales of its die-cast
products. See Item 1, "Business - Licenses." In addition, the Company and Revell
have formed a long-term strategic alliance under which (i) the Company will
assist Revell to obtain licenses with top race car drivers for Revell's line of
plastic model kits; (ii) Revell has appointed the Company as the exclusive
distributor for trackside sales of Revell plastic model kits and as a
non-exclusive distributor for retail sales of Revell plastic model kits through
the Company's wholesale distribution network; and (iii) the Company will have
certain Revell-trademarked die-cast collectibles manufactured to enable Revell
to fulfill commitments for 1998 mass market sales, and the Company will
manufacture other licensed motorsport die-cast products for Revell's sales as
promotional and premium products. The terms of this acquisition were determined
by arms-length negotiations between representatives of Revell and
representatives of the Company.

         On January 8, 1998, the Company acquired certain assets and assumed
certain liabilities of Brookfield. The purchase price consisted of (i)
approximately $800,000 in cash and (ii) up to 27,397 shares of Common Stock,
subject to certain adjustments, to be issued upon completion of certain purchase
price adjustments by the Company and the seller. Brookfield distributes various
motorsport die-cast collectibles as well as various other die-cast replicas. The
terms of this acquisition were determined by arms-length negotiations between
representatives of the seller and representatives of the Company.

         On April 20, 1998, the Company made a $1.0 million equity investment in
LBE Technologies, Inc. ("LBET") and entered into a five-year strategic alliance
with LBET. The strategic alliance provides the Company with exclusive
merchandising rights at each of LBET's "NASCAR Silicon Motor Speedway" centers,
which are located in large shopping malls and feature real-time interactive
racing simulators that duplicate on-track racing sensations for participants.

         On May 22, 1998 the Company acquired a controlling interest in Chase, a
motorsports-related apparel branding and licensing company. Pursuant to the
terms of the acquisition and operating agreements, the Company acquired an 80%
interest in Chase for an aggregate of $10.0 million in cash. The terms of the
acquisition agreement also include a three-year earn-out payment of up to $4.0
million if certain financial criteria are met. The terms of this acquisition
were determined by arms-length negotiations between representatives of the
sellers and representatives of the Company.

         On August 28, 1998, the Company acquired an 80% interest in MiniChamps
for cash of approximately $21.5 million. MiniChamps markets and distributes
die-cast replicas of Formula One and GT race cars as well as factory production
cars, driver figurines, and other motorsports collectibles. MiniChamps generated
revenue of approximately $26.0 million in the 12-month period ended December 31,
1997. The terms of this acquisition were determined by arms-length negotiations
between representatives of the sellers and representatives of the Company.

         In September 1998, the Company acquired 58% of the membership interests
of Performance Plus, which develops and markets driver-endorsed nutritional
products, including vitamins, energy bars, and energy drinks. Although the
Company did not make any initial cash payment for its membership interests, it
will provide 



                                       39
<PAGE>   42

working capital up to $4.0 million under a line of credit bearing interest at
8%. The Company also will provide management support services to Performance
Plus under an operating agreement for which it will receive a fee based on a
percentage of Performance Plus' revenue.

         The Company is a defendant in various lawsuits. See Item 3, "Legal
Proceedings." The Company has made no provision in its financial statements with
respect to these matters. The imposition of damages in one or more of the cases
against the Company could have a material adverse effect on the Company's
results of operation and financial position.

         The Company believes that its current cash resources, the Credit
Facility, and expected cash flow from operations will be sufficient to fund the
Company's capital needs during the next 12 months at its current level of
operations, apart from capital needs resulting from additional acquisitions.
However, the Company may be required to obtain additional capital to fund its
planned growth during the next 12 months and beyond. Potential sources of any
such capital may include the proceeds from the exercise of outstanding options,
bank financing, strategic alliances, and additional offerings of the Company's
equity or debt securities. There can be no assurance that such capital will be
available from these or other potential sources, and the lack of such capital
could have a material adverse effect on the Company's business.

YEAR 2000 COMPLIANCE

         During 1997, the Company commenced a program to install new computer
software programs that are intended to integrate the Company's management
information systems throughout its organizational structure, as well as to
comply with Year 2000 requirements. The Company has experienced delays in
completing this program. As of the filing date of this Report, the installation
program is approximately 75% complete and the Company currently anticipates that
the new software systems will be operational in the second quarter of calendar
1999. The Company believes that its new software systems will comply with the
Year 2000 requirements, and the Company currently does not anticipate that it
will experience any material disruption to its operations as a result of the
failure of any of its systems to function properly beyond December 31, 1999.

         Computer systems operated by third parties, including customers,
vendors, credit card transaction processors, and financial institutions, with
which the Company's systems interface may not continue to properly interface
with the Company's systems and may not otherwise be compliant on a timely basis
with Year 2000 requirements. The Company's third-party manufacturers of
die-cast, apparel, and other products do not rely heavily on computer-operated
systems in their manufacturing processes. Accordingly, the Company does not
believe that Year 2000 issues pose a significant risk with respect to the
manufacture of its products. Because the Company's business typically does not
generate a large volume of purchase orders for its products, the Company
believes it could rely on non-automated ordering systems if its vendors'
computer systems fail as a result of Year 2000 issues. Any failure of the
Company's computer system or the systems of third parties to timely achieve Year
2000 compliance, however, could have a material adverse effect on the Company's
business, financial condition, and operating results.

         As of the filing date of this Report, the Company has not developed a
contingency plan to address Year 2000 issues. If by April 1, 1999, the Company
has not completed the installation and start-up of its new computer software
systems or it determines that any third party on which it relies will not be
able to adequately address Year 2000 issues, the Company intends to immediately
begin development of an appropriate contingency program.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Not applicable.



                                       40
<PAGE>   43

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Reference is made to the financial statements, the notes thereto, and
report thereon, commencing at page F-1 of this Report, which financial
statements, notes, and report are incorporated herein by reference.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
           FINANCIAL DISCLOSURE

         Not applicable.

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information required by this Item relating to directors of the
Company is incorporated herein by reference to the definitive Proxy Statement to
be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") for the Company's 1999 Annual Meeting of
Shareholders. The information required by this Item relating to executive
officers of the Company is included in Item 1, "Business - Executive Officers."

ITEM 11.   EXECUTIVE COMPENSATION

         The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement to be filed pursuant to Regulation
14A of the Exchange Act for the Company's 1999 Annual Meeting of Shareholders.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement to be filed pursuant to Regulation
14A of the Exchange Act for the Company's 1999 Annual Meeting of Shareholders.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement to be filed pursuant to Regulation
14A of the Exchange Act for the Company's 1999 Annual Meeting of Shareholders.



                                       41
<PAGE>   44

                                    PART IV

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

(a)      FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

         (1)      Financial Statements are listed in the Index to Consolidated
                  Financial Statements on page F-1 of this Report.

         (2)      No Financial Statement Schedules are included because such
                  schedules are not applicable, are not required, or because
                  required information is included in the Consolidated Financial
                  Statements or Notes thereto.

(b)      REPORTS ON FORM 8-K

         Not applicable.

(c)      EXHIBITS

Exhibit
Number                                Exhibit
------                                -------

1.0      Form of Underwriting Agreement (1)

3.1      First Amended and Restated Articles of Incorporation of Registrant(2)

3.2      Amended and Restated Bylaws of Registrant(2)

4.1      Form of Certificate of Common Stock(3)

4.2      Indenture dated as of March 24, 1998, between Action Performance
         Companies, Inc. and First Union National Bank, as Trustee, including
         forms of Notes(4)

10.4.2   1993 Stock Option Plan, as amended and restated through January 16,
         1997(5)

10.8     Form of Indemnification Agreement entered into with the Directors of
         the Registrant(3)

10.21    Lease between the Company and F.W. Investments dated January 1, 1994(6)

10.27    Manufacturing Agreement between the Company and Early Light
         International (Holdings) Ltd. dated December 5, 1994(7)

10.33    Asset Purchase Agreement dated as of November 7, 1996, among Action
         Performance Companies, Inc., SII Acquisition, Inc., Sports Image, Inc.,
         and R. Dale Earnhardt and Teresa H. Earnhardt(8)

10.34    Promissory Note dated November 7, 1996, in the principal amount of
         $24,000,000 issued by SII Acquisition, Inc., as Maker, to Sports Image,
         Inc., as Payee, together with Guarantee of Action Performance
         Companies, Inc.(8)

10.35    Security Agreement dated November 7, 1996, between Sports Image, Inc.
         and SII Acquisition, Inc.(8)

10.36    Registration Agreement dated as of November 7, 1996, among Action
         Performance Companies, Inc., Sports Image, Inc., and R. Dale Earnhardt
         and Teresa H. Earnhardt(8)

10.37    License Agreement dated as of November 7, 1996, among SII Acquisition,
         Inc., Dale Earnhardt, and Action Performance Companies, Inc.(8)

10.39    Asset Purchase Agreement dated as of January 1, 1997, among Action
         Performance Companies, Inc., MTL Acquisition, Inc., Motorsport
         Traditions Limited Partnership, Midland Leasing, Inc., and Motorsports
         By Mail, Inc.(9)

10.40    Exchange Agreement dated as of January 1, 1997, among Action
         Performance Companies, Inc., Kenneth R. Barbee, and Jeffery M.
         Gordon(9)

10.41    Promissory Note dated January 1, 1997, in the principal amount of
         $1,600,000 issued by MTL Acquisition, Inc., as Maker, to Motorsport
         Traditions Limited Partnership, as Payee, together with Guarantee of
         Action Performance Companies, Inc.(9)

10.42    Note Purchase Agreement dated as of January 2, 1997, among Action
         Performance Companies, Inc., Jefferson-Pilot Life Insurance Company,
         Alexander Hamilton Life Insurance Company of America, 



                                       42
<PAGE>   45

         and First Alexander Hamilton Life Insurance Company, together with form
         of Note, form of Subsidiary Guaranty, and form of Subsidiary Joinder(9)

10.42A   First Amendment dated as of March 18, 1998 to Note Purchase Agreement
         dated as of January 2, 1997, among Action Performance Companies, Inc.,
         Jefferson-Pilot Life Insurance Company, Alexander Hamilton Life
         Insurance Company of America, and First Alexander Hamilton Life
         Insurance Company(4)

10.43    Credit Agreement dated as of January 2, 1997, among Action Performance
         Companies, Inc., Sports Image, Inc., MTL Acquisition, Inc., and First
         Union National Bank of North Carolina(9)

10.43A   Amendment and Consent to Credit Agreement dated March 18, 1998, by and
         among Action Performance Companies, Inc., various subsidiary
         guarantees, and First Union National Bank of North Carolina(4)

10.43B   Amended and Restated Credit Agreement dated as of August 5, 1998, among
         Action Performance Companies, Inc., certain subsidiaries and
         affiliates, as guarantors, and First Union National Bank.

10.44    Registration Agreement dated as of January 1, 1997, among Action
         Performance Companies, Inc., Motorsport Traditions Limited Partnership,
         Midland Leasing, Inc., and Motorsports By Mail, Inc.(9)

10.45    Registration Agreement dated as of January 1, 1997, among Action
         Performance Companies, Inc., Kenneth R. Barbee, and Jeffery M.
         Gordon(9)

10.46    Employment Agreement dated as of January 1, 1997, between Action
         Performance Companies, Inc. and Kenneth R. Barbee(9)

10.47    Consulting Agreement dated as of January 1, 1997, between Action
         Performance Companies, Inc. and John Bickford(9)

10.48    Common Stock Purchase Agreement dated January 16, 1997, between Hasbro,
         Inc. and Action Performance Companies, Inc.(10)

10.49    Standard Form Industrial Lease dated April 8, 1997, between
         Hewson/Breckner-Baseline, L.L.C. and Action Performance Companies,
         Inc.(11)

10.50    Lease Agreement dated July 9, 1997, by and between Performance Park
         Partners, LLC and Sports Image, Inc.(11)

10.51    Asset Purchase Agreement dated as of December 19, 1997, between Action
         Performance Companies, Inc. and Revell-Monogram, Inc.(12)

10.52    1998 Non-qualified Stock Option Plan(4)

10.53    Purchase Agreement dated March 18, 1998 among Action Performance
         Companies, Inc., NationsBanc Montgomery Securities LLC, CIBC
         Oppenheimer Corp., EVEREN Securities, Inc. and Piper Jaffray Inc.(4)

10.54    Registration Rights Agreement dated March 24, 1998, by and among Action
         Performance Companies, Inc., NationsBanc Montgomery Securities LLC,
         CIBC Oppenheimer Corp., EVEREN Securities, Inc., and Piper Jaffray
         Inc.(4)

11.1     Computation of Primary Earnings Per Share

11.2     Computation of Fully Diluted Earnings Per Share

12.1     Computation of Ratio of Earnings to Fixed Charges

21.1     List of Subsidiaries of Action Performance Companies, Inc.

23.1     Consent of Arthur Andersen LLP

25.1     Statement of Eligibility of Trustee under the Trust Indenture Act of
         1939 on Form T-1(13)

27.1     Financial Data Schedule

--------------------

(1)      Incorporated by reference to the Registrant's Registration Statement on
         Form S-3 and Amendment No. 1 thereto (Registration No. 333-27485).

(2)      Incorporated by reference to the Registrant's Form 10-QSB for the
         quarter ended March 31, 1996, as filed with the Securities and Exchange
         Commission on May 2, 1996.

(3)      Incorporated by reference to the Registrant's Registration Statement on
         Form SB-2 and amendments thereto (Registration No. 33-57414-LA).

(4)      Incorporated by reference to the Registrant's Form 10-Q for the quarter
         ended March 31, 1998, as filed with the Securities and Exchange
         Commission on May 15, 1998.



                                       43
<PAGE>   46

(5)      Incorporated by reference to the Registrant's Form 10-Q for the quarter
         ended March 31, 1997, as filed with the Securities and Exchange
         Commission on May 15, 1997.

(6)      Incorporated by reference to the Registrant's Form 10-QSB for the
         quarter ended March 31, 1994, as filed with the Securities and Exchange
         Commission on May 16, 1994.

(7)      Incorporated by reference to the Registrant's Form 10-KSB for the year
         ended September 30, 1994, as filed with the Securities and Exchange
         Commission on December 22, 1994.

(8)      Incorporated by reference to the Registrant's Form 8-K filed with the
         Securities and Exchange Commission on November 22, 1996, as amended by
         Form 8-K/A filed on January 13, 1997.

(9)      Incorporated by reference to the Registrant's Form 8-K filed with the
         Securities and Exchange Commission on January 23, 1997, as amended by
         Form 8-K/A filed on February 24, 1997.

(10)     Incorporated by reference to the Registrant's Registration Statement on
         Form S-3 (Registration No. 333-22943).

(11)     Incorporated by reference to the Registrant's Form 10-K for the year
         ended September 30, 1997, as filed with the Securities and Exchange
         Commission on December 22, 1997.

(12)     Incorporated by reference to the Registrant's Registration Statement on
         Form S-3 (Registration No. 333-45991).

(13)     Incorporated by reference to the Registrant's Registration Statement on
         Form S-3 (Registration No. 333-53413).




                                       44
<PAGE>   47


                                   SIGNATURES


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

                                  ACTION PERFORMANCE COMPANIES, INC.



Date:  December 28, 1998          /s/ Fred W. Wagenhals                         
                                  ----------------------------------------------
                                  Fred W. Wagenhals, Chairman of the Board,
                                  President, and Chief Executive Officer


         In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the date indicated.

<TABLE>
<CAPTION>
Signature                                        Capacity                                              Date
---------                                        --------                                              ----
<S>                                     <C>                                                    <C> 
/s/ Fred W. Wagenhals                   Chairman of the Board, President, and Chief            December 28, 1998
------------------------------------    Executive Officer (Principal Executive Officer)
Fred W. Wagenhals                      

/s/ Tod J. Wagenhals                    Executive Vice President, and Director                 December 28, 1998
------------------------------------
Tod J. Wagenhals

/s/ Christopher S. Besing               Vice President, Chief Financial Officer, Treasurer,    December 28, 1998
------------------------------------    and Director (Principal Financial Officer)
Christopher S. Besing                  

/s/ David A. Husband                    Vice President and Chief Accounting Officer            December 28, 1998
------------------------------------    (Principal Accounting Officer)
David A. Husband                        

/s/ Melodee L. Volosin                  Vice President - Wholesale Division and Director       December 28, 1998
------------------------------------
Melodee L. Volosin

/s/ John S. Bickford                    Vice President - Strategic Alliances and Director      December 28, 1998
------------------------------------
John S. Bickford

/s/ Jack M. Lloyd                       Director                                               December 28, 1998
------------------------------------
Jack M. Lloyd

/s/ Robert H. Manschot                  Director                                               December 28, 1998
------------------------------------
Robert H. Manschot

                                        Director                                               December   , 1998
------------------------------------
Donald G. Hawk, Jr.

/s/ Edward J. Bauman                    Director                                               December 28, 1998
------------------------------------
Edward J. Bauman

/s/ Paul G. Lang                        Managing Director of MiniChamps and Director           December 28, 1998
------------------------------------
Paul G. Lang
</TABLE>




                                       45
<PAGE>   48
                     ACTION PERFORMANCE COMPANIES, INC.
                INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                          PAGE

Report of Independent Public Accountants...........................        F-2

Consolidated Balance Sheets as of September 30, 1998 and 1997......        F-3

Consolidated Statements of Operations for the Years
       Ended September 30, 1998, 1997, and 1996....................        F-4

Consolidated Statements of Shareholders' Equity for the Years
       Ended September 30, 1998, 1997, and 1996....................        F-5

Consolidated Statements of Cash Flows for the Years
       Ended September 30, 1998, 1997, and 1996....................        F-6

Notes to Consolidated Financial Statements.........................        F-7




                                       F-1
<PAGE>   49
                              ARTHUR ANDERSON LLP

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To Action Performance Companies, Inc.:


We have audited the accompanying consolidated balance sheets of ACTION 
PERFORMANCE COMPANIES, INC. (an Arizona corporation) and subsidiaries as of 
September 30, 1998 and 1997, and the related consolidated statements of 
operations, shareholders' equity and cash flows for each of the three years in 
the period ended September 30, 1998. These financial statements are the 
responsibility of the Company's management. Our responsibility is to express an 
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing 
standards. Those standards require that we plan and perform the audit to obtain 
reasonable assurance about whether the financial statements are free of 
material misstatement. An audit includes examining, on a test basis, evidence 
supporting the amounts and disclosures in the financial statements. An audit 
also includes assessing the accounting principles used and significant 
estimates made by management, as well as evaluating the overall financial 
statement presentation. We believe that our audits provide a reasonable basis 
for our opinion.

In our opinion, the financial statements referred to above present fairly, in 
all material respects, the financial position of Action Performance Companies, 
Inc. and subsidiaries as of September 30, 1998, and the results of their 
operations and their cash flows for each of the three years in the period ended 
September 30, 1998, in conformity with generally accepted accounting principles.

                                        /s/ Arthur Andersen LLP


Phoenix, Arizona,
 November 13, 1998, except with respect
 to matters discussed in Note 12 as to
 which the date is December 1, 1998.


                                      F-2

<PAGE>   50
                       ACTION PERFORMANCE COMPANIES, INC.
                           CONSOLIDATED BALANCE SHEETS
                           SEPTEMBER 30, 1998 AND 1997
                        (IN THOUSANDS, EXCEPT SHARE DATA)


<TABLE>
<CAPTION>
ASSETS                                                       1998          1997
------                                                       ----          ----
<S>                                                        <C>          <C>
CURRENT ASSETS:
  Cash and cash equivalents ..........................     $ 60,867     $ 29,318
  Accounts receivable, net of allowance for
   doubtful accounts of $986 and $837,
   respectively ......................................       36,314       17,802
  Inventories ........................................       35,790       17,855
  Prepaid royalties ..................................        5,745        4,967
  Prepaid expenses and other assets ..................        4,961        2,603
                                                           --------     --------
    Total current assets .............................      143,677       72,545

PROPERTY AND EQUIPMENT, net ..........................       46,053       20,017

GOODWILL AND OTHER INTANGIBLES, net ..................      106,146       46,409

OTHER ASSETS, net ....................................       10,058        2,354
                                                           --------     --------
                                                           $305,934     $141,325
                                                           --------     --------

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable ...................................     $ 11,430     $  6,680
  Accrued royalties ..................................       10,589        5,098
  Accrued expenses and other .........................       10,973        2,318
  Current portion of long-term debt ..................       23,746        1,474
                                                           --------     --------
    Total current liabilities ........................       56,738       15,570
                                                           --------     --------

LONG-TERM DEBT:
  Convertible subordinated notes .....................      100,000           --
  Other long-term debt ...............................       11,850       22,586
                                                           --------     --------
    Total long-term debt .............................      111,850       22,586
                                                           --------     --------

MINORITY INTEREST ....................................          914           --
                                                           --------     --------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
  Preferred stock, no par value, 5,000,000 shares
   authorized, no shares issued and outstanding ......           --           --
  Common stock, $.01 par value, 25,000,000 shares
   authorized; 16,423,238 and 15,952,083 shares
   issued and outstanding, respectively ..............          164          160
  Additional paid-in capital .........................       91,974       84,984
  Cumulative translation adjustment ..................        1,682           --
  Retained earnings ..................................       42,612       18,025
                                                           --------     --------
    Total shareholders' equity .......................      136,432      103,169
                                                           --------     --------
                                                           $305,934     $141,325
                                                           ========     ========
</TABLE>


The accompanying notes are an integral part of these consolidated balance sheets

                                       F-3
<PAGE>   51
                       ACTION PERFORMANCE COMPANIES, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

             FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996

                      (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                               1998         1997         1996
                                               ----         ----         ----
<S>                                         <C>          <C>          <C>
Sales:
Collectibles ............................   $ 129,348    $  63,846    $  40,904
  Apparel and souvenirs .................     106,712       60,430        1,961
  Other .................................      15,817        6,104        1,351
                                            ---------    ---------    ---------
    Net sales ...........................     251,877      130,380       44,216

Cost of sales ...........................     157,079       80,995       25,296
                                            ---------    ---------    ---------

Gross profit ............................      94,798       49,385       18,920
                                            ---------    ---------    ---------

Operating expenses:
  Selling, general and
    administrative expenses .............      45,344       24,564        9,262
  Settlement costs ......................         950        5,400           --
  Amortization of goodwill and
    other intangibles ...................       4,392        1,286            4
                                            ---------    ---------    ---------
    Total operating expenses ............      50,686       31,250        9,266
                                            ---------    ---------    ---------
Income from operations ..................      44,112       18,135        9,654
                                            ---------    ---------    ---------

Other income (expense):
  Interest income and other, net ........       2,588          796          296
  Interest expense ......................      (5,533)      (2,021)         (80)
                                            ---------    ---------    ---------
    Total other income (expense) ........      (2,945)      (1,225)         216
                                            ---------    ---------    ---------

Income before provision for
  income taxes ..........................      41,167       16,910        9,870

Provision for income taxes ..............      16,391        6,764        3,917
Minority interest in earnings ...........         189           --           --
                                            ---------    ---------    ---------

NET INCOME ..............................   $  24,587    $  10,146    $   5,953
                                            =========    =========    =========

NET INCOME PER COMMON SHARE:
  Basic .................................   $    1.52    $    0.72    $    0.50
                                            =========    =========    =========
  Diluted ...............................   $    1.48    $    0.69    $    0.46
                                            =========    =========    =========

WEIGHTED AVERAGE SHARES OUTSTANDING:
  Basic .................................      16,135       14,047       11,789
                                            =========    =========    =========
  Diluted ...............................      16,647       14,624       13,028
                                            =========    =========    =========
</TABLE>


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

                                      F-4
<PAGE>   52
                       ACTION PERFORMANCE COMPANIES, INC.
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
             FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
                        (IN THOUSANDS, EXCEPT SHARE DATA)


<TABLE>
<CAPTION>
                                                                     CONVERTIBLE          ADDITIONAL               CUMULATIVE
                                            COMMON STOCK           PREFERRED STOCK         PAID-IN    RETAINED     TRANSLATION
                                        SHARES       AMOUNT       SHARES      AMOUNT       CAPITAL    EARNINGS     ADJUSTMENT
                                        ------       ------       ------      ------       -------    --------     ----------
<S>                                   <C>          <C>            <C>         <C>      <C>           <C>          <C>
BALANCE, SEPTEMBER 30, 1995 .......   11,221,408   $      112          500    $   --   $   16,852    $    1,926   $       --
Common stock issued upon conversion
  of convertible preferred stock ..    1,000,000           10         (500)       --          (10)           --           --
Common stock issued upon exercise
  of options ......................      239,247            2           --        --          801            --           --
Tax benefit from stock options ....           --           --           --        --          838            --           --
Common stock issued upon exercise
 of warrants ......................      149,114            2           --        --          510            --           --
Net income ........................           --           --           --        --           --         5,953           --
                                      ----------   ----------   ----------    ------   ----------    ----------   ----------
BALANCE, SEPTEMBER 30, 1996 .......   12,609,769   $      126           --    $   --   $   18,991    $    7,879   $       --
Common stock issued in conjunction
 with purchase of businesses ......      765,542            8           --        --       10,041            --           --
Common stock issued upon exercise
  of options ......................      296,092            3           --        --        1,708            --           --

Common stock issued in
  public offering .................    2,085,000           21           --        --       49,822            --           --
Tax benefit from stock options ....           --           --           --        --        1,651            --           --
Issuance of common stock in
 private placements ...............      195,680            2           --        --        2,771            --           --
Net income ........................           --           --           --        --           --        10,146           --
                                      ----------   ----------   ----------    ------   ----------    ----------   ----------
BALANCE, SEPTEMBER 30, 1997 .......   15,952,083   $      160           --    $   --   $   84,984    $   18,025   $       --
Common stock issued upon exercise
  of options ......................      426,315            4           --        --        1,633            --           --
Tax benefit from stock options ....           --           --           --        --        4,100            --           --
Issuance of common stock in
  private placements ..............       44,840           --           --        --        1,257            --           --
Cumulative translation adjustment .           --           --           --        --           --            --        1,682
Net income ........................           --           --           --        --           --        24,587           --
                                      ----------   ----------   ----------    ------   ----------    ----------   ----------
BALANCE, SEPTEMBER 30, 1998 .......   16,423,238   $      164           --    $   --   $   91,974    $   42,612   $    1,682
                                      ==========   ==========   ==========    ======   ==========    ==========   ==========
</TABLE>


<TABLE>
<CAPTION>


                                          TOTAL
                                          -----
<S>                                    <C>
BALANCE, SEPTEMBER 30, 1995 .......    $   18,890
Common stock issued upon conversion
  of convertible preferred stock ..            --
Common stock issued upon exercise
  of options ......................           803
Tax benefit from stock options ....           838
Common stock issued upon exercise
 of warrants ......................           512
Net income ........................         5,953
                                       ----------
BALANCE, SEPTEMBER 30, 1996 .......    $   26,996
Common stock issued in conjunction
 with purchase of businesses ......        10,049
Common stock issued upon exercise
  of options ......................         1,711

Common stock issued in
  public offering .................        49,843
Tax benefit from stock options ....         1,651
Issuance of common stock in
 private placements ...............         2,773
Net income ........................        10,146
                                       ----------
BALANCE, SEPTEMBER 30, 1997 .......    $  103,169
Common stock issued upon exercise
  of options ......................         1,637
Tax benefit from stock options ....         4,100
Issuance of common stock in
  private placements ..............         1,257
Cumulative translation adjustment .         1,682
Net income ........................        24,587
                                       ----------
BALANCE, SEPTEMBER 30, 1998 .......    $  136,432
                                       ==========
</TABLE>


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


                                      F-5
<PAGE>   53
                       ACTION PERFORMANCE COMPANIES, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

             FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                    1998         1997          1996
                                                    ----         ----          ----
<S>                                              <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................   $  24,587    $  10,146    $   5,953
  Adjustments to reconcile net income to
   net cash provided by operating activities:
  Depreciation and amortization ..............      11,839        4,477        1,692
  Undistributed earnings to minority
    shareholders .............................         189           --           --
  Change in assets and liabilities, net of
   businesses acquired:
    Accounts receivable ......................     (12,937)      (3,623)      (3,440)
    Inventories ..............................     (14,406)      (5,009)      (3,143)
    Prepaid royalties ........................        (120)      (2,672)      (1,186)
    Prepaid expenses and other assets ........      (1,233)        (665)         922
    Accounts payable .........................        (373)      (1,633)         565
    Accrued royalties ........................       4,106        2,395          320
    Accrued expenses and other ...............       6,004          917         (823)
                                                 ---------    ---------    ---------
     Net cash provided by operating activities      17,656        4,333          860
                                                 ---------    ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment ........     (21,687)     (11,192)      (3,879)
  Proceeds from sale of equipment ............         383          321           --
  Acquisition of businesses and other
   intangibles, less cash acquired ...........     (55,885)     (11,082)          --
                                                 ---------    ---------    ---------
    Net cash used in investing activities ....     (77,189)     (21,953)      (3,879)
                                                 ---------    ---------    ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Borrowings on line of credit ...............       9,600        4,879        5,222
  Payments on line of credit .................      (9,600)     (10,279)      (5,222)
  Net proceeds from issuance of
   common stock ..............................       1,637       54,327        1,315
  Issuance of convertible subordinated notes .     100,000           --           --
  Payments for offering-related expenses .....      (3,500)          --           --
  Payments on long-term debt, net ............      (7,096)      (6,972)        (105)
  Issuance of note receivable ................        (150)          --           --
  Collections on notes receivable ............         135           --           32
                                                 ---------    ---------    ---------
   Net cash provided by financing
    activities ...............................      91,026       41,955        1,242
                                                 ---------    ---------    ---------

  Effect of exchange rate changes on
    cash and cash equivalents ................          56           --           --
                                                 ---------    ---------    ---------

  Net change in cash and cash equivalents ....      31,549       24,335       (1,777)
  Cash and cash equivalents,
   beginning of year .........................      29,318        4,983        6,760
                                                 ---------    ---------    ---------
  Cash and cash equivalents, end of year .....   $  60,867    $  29,318    $   4,983
                                                 =========    =========    =========
</TABLE>

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

                                       F-6
<PAGE>   54
                       ACTION PERFORMANCE COMPANIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       SEPTEMBER 30, 1998, 1997, and 1996


(1)      THE COMPANY

OPERATIONS

Action Performance Companies, Inc., an Arizona corporation, (the "Company")
designs and markets licensed motorsports products, including die-cast scaled
replicas of motorsports vehicles, apparel, and souvenirs. The Company also
develops promotional programs for sponsors of motorsports that feature the
Company's die-cast replicas or other products and that are intended to increase
brand awareness of the products or services of the corporate sponsors. In
addition, the Company represents popular race car drivers in a broad range of
licensing and other revenue-producing opportunities, including product licenses,
corporate sponsorships, endorsement contracts, and speaking engagements. The
Company's motorsports collectibles, which are primarily produced in China, and
most of the Company's apparel and souvenirs are manufactured by third parties,
generally utilizing the Company's designs, tools, and dies. The Company screen
prints and embroiders a portion of the licensed motorsports apparel that it
sells.

(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION AND PRESENTATION

The consolidated financial statements include the accounts of the Company and
its wholly owned and majority owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.

Certain reclassifications have been made in prior period financial statements to
conform to the current presentation.

REVENUE RECOGNITION

The Company recognizes revenue upon shipment. Customer deposits received in
advance of delivery are deferred and recognized when the related product is
shipped.

CONCENTRATIONS OF CREDIT RISK

Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of cash and accounts receivable. The Company
places its cash with federally insured institutions and limits the amount of
credit exposure to any one institution. Concentrations of credit risk with
respect to accounts receivable are limited due to the large number of customers
comprising the Company's credit base and the geographical dispersion of the
customers.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.


                                       F-7
<PAGE>   55
FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash, accounts receivable, and accounts payable
approximate fair value because of the short maturity of these financial
instruments. Except for the Convertible Subordinated Notes, the carrying amounts
of long-term debt approximate fair value based on current market prices for
similar debt instruments. The fair value of the Company's Convertible
Subordinated Notes on September 30, 1998 was $78.1 million based on current
market information. Fair value estimates are made at a specific point in time,
based on relevant market information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect these estimates.

FOREIGN CURRENCY TRANSLATION

Financial information relating to the Company's foreign subsidiaries is reported
in accordance with FAS No. 52 "Foreign Currency Translation." The financial
statements of non-U.S. subsidiaries are measured using the local currency as the
functional currency. Assets and liabilities of these non-U.S. subsidiaries are
translated at exchange rates in effect as of the end of each balance sheet date,
and related revenues and expenses are translated at average exchange rates in
effect during the period.

CASH AND CASH EQUIVALENTS

The Company classifies as cash equivalents all highly liquid investments with
original maturities of three months or less. Cash equivalents principally
consist of commercial paper and United States Treasury securities.

INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out method) or
market, and consist of the following at September 30, 1998 and 1997 (in
thousands):

<TABLE>
<CAPTION>
                                                       1998                1997
                                                       ----                ----
<S>                                                  <C>                  <C>
        Purchased components.......................  $  3,252             $ 2,418
        Finished goods.............................    32,538              15,437
                                                     --------             -------
                                                     $ 35,790             $17,855
                                                     ========             =======
</TABLE>

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets,
which range from one to ten years.

Property and equipment consist of the following at September 30, 1998 and 1997
(in thousands):

<TABLE>
<CAPTION>
                                                             1998         1997
                                                           --------     -------
<S>                                                       <C>           <C>
        Building and land..........................       $  6,207      $     -
        Tooling and molds..........................         30,217       15,237
        Furniture, fixtures and equipment..........         15,099        6,667
        Autos and trucks...........................          3,158        2,578
        Leasehold improvements.....................          2,984        2,066
                                                          --------      -------
                                                            57,665       26,548
        Less - accumulated depreciation............        (11,612)      (6,531)
                                                          --------      -------
                                                          $ 46,053      $20,017
                                                          ========      =======
</TABLE>

Maintenance and repairs of approximately $697,000, $277,000, and $64,000 for the
years ended September 30, 1998, 1997, and 1996, respectively, were charged to
expense as incurred. The cost of renewals and betterments that materially extend
the useful lives of assets or increase their productivity are capitalized.

                                       F-8
<PAGE>   56
GOODWILL AND OTHER INTANGIBLES

Goodwill represents the cost in excess of the fair value of net assets acquired
in business combinations and is amortized using the straight-line method over
periods ranging from fifteen to twenty-five years. Other intangibles are
amortized using the straight-line method over their estimated useful lives,
which ranges from three to fifteen years. Amortization expense of $4.4 million,
$1.3 million, and $4,000 is included in the accompanying financial statements
for the years ended September 30, 1998, 1997, and 1996, respectively. The
following table sets forth the components of goodwill and other intangibles as
of September 30, 1998 and 1997, respectively (in thousands).

<TABLE>
<CAPTION>
                  Amortization
                  Period (Years)         1998          1997
                  --------------         ----          ----
<S>                   <C>             <C>            <C>
                       3-5            $  2,190       $     -
                       6-10             11,247             -
                      11-15             11,855         6,263
                      16-25             86,542        41,431
                                      --------       -------
                                       111,834        47,694
Less accumulated amortization           (5,688)       (1,285)
                                      --------       -------
                                      $106,146       $46,409
                                      ========       =======
</TABLE>

LICENSE AGREEMENTS

Royalties paid under various licensing agreements are recorded as expense at the
time the related sales are made.

LONG-LIVED ASSETS

The Company periodically evaluates the carrying value of long-lived assets in
accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." Under SFAS No. 121, long-lived
assets and certain identifiable intangible assets to be held and used in
operations are reviewed for impairment whenever events or circumstances indicate
that the carrying amount of an asset may not be fully recoverable. An impairment
loss is recognized if the sum of the expected long-term undiscounted cash flows
is less than the carrying amount of the long-lived assets being evaluated.

SUPPLEMENTAL CASH FLOW INFORMATION

The supplemental cash flow disclosures and non-cash transactions for the years
ended September 30, 1998, 1997, and 1996 are as follows (in thousands):


<TABLE>
<CAPTION>
                                            1998      1997      1996
                                            ----      ----      ----
<S>                                       <C>       <C>       <C>
Supplemental disclosures:
  Interest paid .......................   $ 4,690   $ 1,505   $    79
  Income taxes paid ...................    10,600     5,396     3,992

Non-cash transactions:
  Common stock issued in acquisitions .   $    --   $10,049   $    --
  Debt and liabilities incurred or
    assumed in acquisitions ...........    29,002    44,446        --
  Acquisition of property and equipment
    under notes payable and
    capital leases ....................     2,961     1,515       233
  Tax benefits on various common
    stock options .....................     4,100     1,651       838
  Common stock issued in connection
    with licensing and sponsorship
    agreements ........................     1,257        --        --
Sale of equipment for note receivable .        35       446        --
</TABLE>

                                       F-9
<PAGE>   57
NET INCOME PER COMMON SHARE

Net income per common share is computed based on the weighted average number of
common shares and common share equivalents outstanding using the treasury stock
method, except when common share equivalents have an antidilutive effect. The
Company's Convertible Subordinated Notes (see Note 4) were antidilutive for the
fiscal year ended September 30, 1998. All share amounts and per share data have
been restated to reflect the two-for-one stock split effected as a stock
dividend on May 28, 1996. The calculation of diluted net income per common share
for the years ended September 30, 1998, 1997, and 1996 are as follows (in
thousands, except per share data):

<TABLE>
<CAPTION>
                                              1998      1997      1996
                                              ----      ----      ----
<S>                                          <C>       <C>       <C>
Shares:
Weighted average number of common
  shares outstanding ....................    16,135    14,047    11,789

Additional shares assuming conversion of:
  Stock options .........................       512       577       539
  Warrants ..............................        --        --        33
  Preferred stock .......................        --        --       667
                                            -------   -------   -------

Diluted weighted average shares
  outstanding ...........................    16,647    14,624    13,028
                                            =======   =======   =======

Net income attributable to diluted
  weighted average shares outstanding ...   $24,587   $10,146   $ 5,953
                                            =======   =======   =======

Diluted earnings per share ..............   $  1.48   $  0.69   $  0.46
                                            =======   =======   =======
</TABLE>

ACCOUNTING PRONOUNCEMENTS NOT YET REQUIRED TO BE ADOPTED

In fiscal 1999, the Company will be required to adopt SFAS No. 130, "Reporting
Comprehensive Income," issued by the Financial Accounting Standards Board. The
adoption of SFAS No. 130 is not expected to have a material effect on the
Company's financial position or results of operations.

In fiscal 1999, the Company will be required to adopt SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information", issued by the
Financial Accounting Standards Board. The adoption of SFAS No. 131 is not
expected to have a material effect on the Company's financial position or 
results of operations.

In fiscal 2000, the Company will be required to adopt SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," issued by the Financial
Accounting Standards Board. Statement No. 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. The new statement requires all derivatives to be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The Company believes the adoption of Statement No. 133 will not have any
material impact in the Company's financial position or results of operations.

(3)      ACQUISITIONS AND LICENSING AGREEMENTS

ACQUISITION OF SPORTS IMAGE, INC.

In November 1996, the Company purchased substantially all of the assets and
assumed certain liabilities of Sports Image, Inc.("Sports Image"). The purchase
price was approximately $30,000,000, consisting of a $24,000,000 promissory note
due January 2, 1997 and 403,361 shares of the Company's Common Stock valued at
$12.10 per share. On January 2, 1997, the Company repaid the $24,000,000
promissory note with the proceeds from the issuance of senior notes and a
portion of the borrowings under the Company's new credit facility. Sports Image
sells and distributes a variety of licensed motorsports products through
wholesale distributor networks, corporate sponsors, and mobile trackside stores.
In fiscal 1996, the Company derived 16% of its net sales from Sports Image, a
distributor of the Company's die-cast collectible products. Sports Image had
sales of approximately $41.8 million of apparel, die-cast replicas, souvenirs,
and other motorsports consumer products during the period from January 1, 1996
to November 7, 1996 (which includes sales of 

                                      F-10
<PAGE>   58
die-cast collectibles purchased from the Company at an aggregate cost of
approximately $5.8 million). This transaction was accounted for as a purchase.

ACQUISITIONS OF MOTORSPORT TRADITIONS LIMITED PARTNERSHIP AND CREATIVE MARKETING
& PROMOTIONS, INC.

On January 8, 1997, the Company acquired substantially all of the assets and
assumed certain liabilities of Motorsport Traditions Limited Partnership and
acquired all of the stock of Creative Marketing & Promotions, Inc. (collectively
"Motorsport Traditions"). The effective date of the acquisition of Motorsport
Traditions was January 1, 1997. The purchase price paid by the Company for
Motorsport Traditions consisted of (i) cash in the amount of $5.4 million; (ii)
a promissory note in the principal amount of $1.6 million issued by a wholly
owned subsidiary of the Company; and (iii) an aggregate of 342,857 shares of the
Company's Common Stock valued at $13.80 per share. The promissory note bears
interest at 4% per annum, matures on December 31, 1998, and has been guaranteed
by the Company. Motorsport Traditions sells and distributes licensed motorsports
products through a network of wholesale distributors and mobile trackside
stores. Prior to the acquisitions, Motorsport Traditions generated approximately
$33.0 million in annual revenue from its design, manufacturing, and sales and
distribution activities. This transaction was accounted for as a purchase.

ACQUISITION OF ROBERT YATES PROMOTIONS, INC.

In July 1997, the Company acquired all of the outstanding common stock of Robert
Yates Promotions, Inc. ("RYP") for $5.7 million. RYP sells licensed motorsports
products through trackside trailers and generated approximately $5.0 million in
revenue during calendar year 1996. Concurrent with the acquisition of RYP, the
Company entered into a 15-year license agreement with Robert Yates Racing, Inc.
("Yates Racing"). Pursuant to the license agreement, the Company will pay
royalties for the use of certain trademark rights associated with Yates Racing
Nascar Winston Cup teams. This transaction was accounted for as a purchase. RYP
is a defendant in certain litigation. See Note 10. The purchase price is
preliminary with respect to such litigation.

ACQUISITION OF IMAGE WORKS, INC.

In July 1997, the Company acquired substantially all of the assets and assumed
certain liabilities of Image Works, Inc. ("Image Works"). The Company paid $4.25
million in cash and issued a three-year promissory note for a minimum principal
amount of $750,000, with additional contingent payments of up to an aggregate of
$1.4 million based upon the attainment of certain revenue objectives through
September 30, 2000. The Company paid the $750,000 and $1.4 million contingent
payments in May 1998. Image Works designs and manufactures screen printed and
embroidered motorsports apparel items for distribution through mass retailers
and corporate accounts. Image Works generated approximately $22.0 million in
revenue during calendar year 1996. This transaction was accounted for as a
purchase.

ACQUISITION OF COLLECTIBLE BUSINESS FROM SIMPSON PRODUCTS, INC.

In August 1997, the Company acquired certain assets and assumed certain
liabilities related to the licensed mini-helmet collectible business of Simpson
Products, Inc. ("Simpson"). The consideration paid by the Company for the
purchased assets consisted of approximately $653,000 in cash, with additional
contingent payments of up to an aggregate of $1.5 million based upon the
attainment of certain revenue objectives. In connection with the purchase of the
assets and assumption of liabilities of Simpson, the Company also entered into a
25-year license agreement with respect to certain rights used in connection with
the purchased assets. This transaction was accounted for as a purchase.

                                      F-11
<PAGE>   59
LICENSING AGREEMENT WITH RICHARD CHILDRESS RACING ENTERPRISES, INC.

On October 3, 1997, the Company entered into a ten-year license agreement with
Richard Childress Racing Enterprises, Inc. ("RCR") with respect to various
rights used in connection with Dale Earnhardt licensed products. In connection
with this agreement, the Company paid RCR a license fee consisting of cash plus
34,940 shares of the Company's Common Stock. The license agreement also requires
the Company to pay to RCR certain minimum annual royalties during the term of
the agreement, plus royalties based on sales of licensed products in each year
during the term of the agreement.

ACQUISITION OF RUSTY WALLACE MERCHANDISE PROGRAM

On December 9, 1997, the Company acquired certain assets and assumed certain
liabilities related to sales of motorsports merchandise licensed by NASCAR
Winston Cup driver Rusty Wallace from an affiliate of Mr. Wallace. The purchase
price consisted of cash of $6.0 million, of which $2.5 million was paid at the
closing and the remaining $3.5 million was paid during fiscal 1998. In
connection with the acquisition of the assets and assumption of the liabilities,
the Company entered into a seven-year license agreement with another affiliate
of Mr. Wallace for the name and likeness of Mr. Wallace and acquired a five-year
sublicense with a wholly owned subsidiary of Penske Motorsports, Inc. The
license agreement and sublicense agreement both contain options that permit the
Company to renew for two additional five-year terms. The license agreement with
the affiliate of Mr. Wallace requires the Company to pay royalties on sales of
licensed products, plus a license fee if sales of licensed products exceed a
specified amount each year during the initial term of the license. This
transaction was accounted for as a purchase.

ACQUISITION OF DIE-CAST DIVISION OF REVELL MONOGRAM, INC.

On December 19, 1997, the Company acquired the assets and assumed certain
liabilities related to the motorsports die-cast collectible product lines of
Revell-Monogram, Inc. ("Revell"). The preliminary price of $24.8 million, which
is subject to certain adjustments, consists of an initial cash payment of $14.8
million and $1.0 million per year for 10 years, which is treated as a note
payable with an imputed interest rate of 8% in the accompanying financial
statements. Revell distributed die-cast collectibles through a network of
wholesale distributors and a collectible club, which together generated die-cast
collectible sales of approximately $20.0 million during 1997. The Company and
Revell also entered into a 10-year license agreement under which the Company has
the right to utilize certain "Revell" trademarks in connection with sales of its
die-cast products. This transaction was accounted for as a purchase.

ACQUISITION OF BROOKFIELD COLLECTORS GUILD, INC.

On January 8, 1998, the Company acquired certain assets and assumed certain
liabilities of Brookfield Collectors Guild, Inc. ("Brookfield"). The purchase
price consisted of (i) approximately $800,000 in cash and (ii) up to 27,397
shares of Common Stock, subject to certain adjustments, to be issued upon
completion of certain purchase price adjustments by the Company and the seller.
Brookfield distributed various motorsports die-cast collectibles and ensembles
as well as various other die-cast replicas. This transaction was accounted for
as a purchase.

ACQUISITION OF MINORITY INTEREST IN LBE TECHNOLOGIES, INC.

On April 20, 1998, the Company made a $1.0 million equity investment in LBE
Technologies, Inc. ("LBET") and entered into a five-year strategic alliance. The
strategic alliance provides the Company with exclusive merchandising rights at
each of LBET's "NASCAR Silicon Motor Speedway" centers.


                                      F-12
<PAGE>   60
ACQUISITION OF CONTROLLING INTEREST IN CHASE RACEWEAR, LLC

On May 22, 1998, the Company acquired a controlling interest in Chase Racewear,
L.L.C. ("Chase"), a North Carolina motorsports-related apparel branding and
licensing company. Pursuant to the terms of the acquisition and operating
agreements, the Company acquired an 80% interest in Chase for an aggregate of
$10.0 million in cash. The terms of the acquisition agreement also include a
three-year earn-out payment of up to $4.0 million if certain financial criteria
are met. This transaction was accounted for as a purchase.

ACQUISITION OF CONTROLLING INTEREST IN MINICHAMPS

On August 31, 1998, the Company acquired a majority interest in Paul's Model
Art, GmbH; MiniChamps, GmbH; Lang Miniaturen, GmbH; and Spielwaren Danhausen,
GmbH (collectively referred to as "MiniChamps") by purchasing an 80% interest
for approximately $21.5 million in cash. MiniChamps designs and markets die-cast
scaled replicas of motor vehicles, including models of Formula One and GT race
cars as well as factory production cars. Its products are marketed pursuant to
licensing agreements with race car drivers, team owners, and car manufacturers.
MiniChamps generated revenue of approximately $25.0 million during 1997. This
transaction was accounted for as a purchase.

UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS DATA

The following unaudited pro forma combined statements of operations data for the
years ended September 30, 1998 and 1997 present the results of operations of the
Company as if the acquisitions of the businesses acquired during fiscal 1997 and
fiscal 1998 had occurred as of October 1, 1996. Pro forma results are as follows
(in thousands, except per share data):

<TABLE>
<CAPTION>
                                                       1998*         1997*
                                                     --------      --------
<S>                                                  <C>           <C>
         Revenues...............................     $283,702      $213,954
         Net income.............................       26,728        13,356
         Net income per common share, diluted...     $   1.60      $   0.90
</TABLE>

* Excludes charges for legal settlement costs of $950,000, or $0.03 per share,
in fiscal 1998 and $5.4 million, or $0.22 per share, in fiscal 1997.

 (4)     FINANCING ACTIVITIES

Long-term debt at September 30, 1998 and 1997 consists of the following (in
thousands):

<TABLE>
<CAPTION>
                                                                                     1998          1997
                                                                                     ----          ----
<S>                                                                                <C>          <C>
Senior notes, interest at 8.05% payable semi-annually, principal payable January
1999, secured by the Company's subsidiaries ....................................   $  20,000    $  20,000

4 3/4% Convertible Subordinated Notes due 2005 .................................     100,000           --

Unsecured notes payable, interest ranging
from 4% to 8% ..................................................................       7,458        2,197

Notes payable, interest ranging from 7.9% to 8.5%,
secured by property and equipment ..............................................       7,839        1,409

Obligations under capital leases of vehicles and
equipment, interest from 8.0% to 9.5%, payable monthly .........................         299          454
                                                                                   ---------    ---------

Total ..........................................................................     135,596       24,060

Less:  current portion .........................................................     (23,746)      (1,474)
                                                                                   ---------    ---------

                                                                                   $ 111,850    $  22,586
                                                                                   =========    =========
</TABLE>


                                      F-13
<PAGE>   61
CONVERTIBLE SUBORDINATED NOTES

On March 24, 1998, the Company sold $100.0 million of 4 3/4% Convertible
Subordinated Notes due 2005 (the "Notes"). The Notes are convertible, at the
option of the holders, into shares of Common Stock at the initial conversion
price of $48.20 per share, subject to adjustments in certain events. The Notes
are general unsecured obligations of the Company, subordinated in right of
payment to all existing and future senior indebtedness of the Company, as
defined in the Notes. The Indenture governing the Notes does not limit or
prohibit the incurrence of additional indebtedness, including senior
indebtedness, by the Company or its subsidiaries. The Company, at its option,
may redeem the Notes in whole or in part at any time on or after April 1, 2001,
at redemption prices set forth in the Indenture governing the Notes. Upon the
occurrence of a "change in control" or a "termination of trading," as defined in
the Indenture, the holders of the Notes will have the right to require the
Company to repurchase all or any part of such holders' Notes at 100% of their
principal amount, plus accrued and unpaid interest. The net proceeds to the
Company from this offering were approximately $96.5 million, after deducting
offering expenses and the Initial Purchasers' discount of 3.0%. The offering
expenses and Initial Purchasers discount are included in other assets in the
accompanying financial statements and are being amortized into interest expense
using the effective interest rate method.

CREDIT FACILITY

On January 2, 1997 the Company entered into a credit facility with First Union
National Bank of North Carolina ("First Union"). On August 5, 1998, the Company
entered into an amended and restated credit agreement with First Union (the
"Credit Facility"). The Credit Facility consists of a revolving line of credit
for up to $20.0 million, which includes up to $5.0 million for standby letters
of credit (the "Line of Credit") and a $30.0 million letter of credit/bankers'
acceptance facility (the "Letter of Credit/BA Facility"). The Company did not
have any outstanding borrowings under the Line of Credit as of September 30,
1998. The Company had outstanding purchase commitments of approximately $3.7
million under the Letter of Credit/BA Facility as of September 30, 1998. The
Line of Credit bears interest, at the Company's option, at a rate equal to (i)
the Alternate Base Rate (as described below) plus an applicable margin as
defined in the credit agreement or (ii) LIBOR plus an applicable margin as
defined in the credit agreement. The "Alternate Base Rate" under the Line of
Credit is the greater of (a) the bank's publicly announced prime rate or (b) the
Federal Funds Effective Rate (as defined) plus 0.5%. The Line of Credit matures
on April 1, 2001 with respect to the revolving line of credit portion of the
Line of Credit, and on April 1, 1999 with respect to the standby letter of
credit portion of the Line of Credit and the Letter of Credit/BA Facility,
subject to extensions by First Union. The Credit Facility is guaranteed by the
Company's subsidiaries.

DEBT COVENANTS

The Company's senior notes and Credit Facility agreements contain certain
provisions that, among other things, require the Company to comply with certain
financial ratios and net worth requirements and will limit the ability of the
Company and its subsidiaries to incur additional indebtedness, pay dividends,
sell assets, or engage in certain mergers or consolidations.

FUTURE MATURITIES OF LONG-TERM DEBT

Aggregate future maturities of long-term debt are as follows (in thousands):

<TABLE>
<CAPTION>
                       Year Ending
                      September 30,
                      -------------
<S>                                               <C>
                          1999                  $ 23,746
                          2000                     1,997
                          2001                     1,662
                          2002                     1,941
                          2003                     1,503
                      Thereafter                 104,747
                                                --------
                         Total                  $135,596
                                                ========
</TABLE>


                                      F-14
<PAGE>   62
(5)      SHAREHOLDERS' EQUITY

All share amounts and per share data have been restated to reflect the
two-for-one stock split effected as a stock dividend on May 28, 1996.

CONVERTIBLE PREFERRED STOCK

In March 1995, the Company completed the sale of 500 shares of Class A
Convertible Preferred Stock (the "Preferred Stock") to an affiliate of its
principal manufacturer of die-cast collectibles, for a purchase price of $2.0
million. The sale was effected primarily as a long-term strategic transaction
intended to align the interests of the manufacturer with those of the Company.
The shares were converted into an aggregate of 1,000,000 shares of Common Stock
during May 1996.

ISSUANCE OF STOCK IN PRIVATE PLACEMENTS

In January 1997, the Company sold 187,500 shares of Common Stock to Hasbro, Inc.
at a price of $14.50 per share, with net proceeds to the Company of
approximately $2.6 million. In August 1997, the Company issued (i) 8,180 shares
of Common Stock valued at $23.02 per share to Dale Jarrett in connection with a
three-year personal services contract, and (ii) 19,324 shares of Common Stock
valued at $22.59 to E.J. Simpson as a portion of the license fee pursuant to a
license agreement. In October 1997, the Company issued 34,940 shares of Common
Stock valued at $28.62 per share to Richard Childress Racing, Inc. See Note (3).
In February 1998, the Company issued 9,900 shares of Common Stock valued at
$26.00 per share in connection with a race car sponsorship.

1997 PUBLIC OFFERING

On June 24, 1997, the Company sold 1,770,000 shares of its Common Stock in
connection with an underwritten public offering. On July 17, 1997, the Company
sold an additional 315,000 shares of its Common Stock pursuant to the exercise
of the underwriters' over-allotment option. The net proceeds to the Company from
this offering were approximately $49.8 million, after deducting offering
expenses and underwriting discounts and commissions.

STOCK OPTIONS

Under the Company's 1993 Stock Option Plan (the "1993 Plan"), the Board of
Directors may from time to time grant to key employees, consultants, and
independent contractors who provide valuable services to the Company (i)
incentive stock options and non-statutory stock options to purchase shares of
the Company's Common Stock, (ii) stock appreciation rights, (iii) shares of the
Company's Common Stock, or (iv) cash awards. The 1993 Plan also includes an
automatic program providing for automatic grants of stock options to
non-employee directors of the Company. The exercise price for all incentive
stock options granted under the 1993 Plan may not be less than the fair market
value of the Company's Common Stock on the date of the grant, except that the
option price may not be less than 110% of the fair market value of the Company's
Common Stock on the date of the grant in the case of incentive stock options
granted to any person possessing more than 10% of the combined voting power of
the Company's Common Stock or any parent or subsidiary corporation. In the case
of non-statutory stock options, the exercise price may not be less than 85% of
the fair market value of the Company's Common Stock on the date of the grant.
Options granted under the 1993 Plan generally have a six-year term. Options that
were granted prior to July 1995 are fully vested and exercisable. The option
agreements for options granted beginning in July 1995 generally provide that
one-third of the options vest and become exercisable on each of the first,
second, and third anniversaries of the date of grant. A total of 2,750,000
shares of Common Stock may be issued pursuant to the 1993 Plan. The 1993 Plan
expires in 2001.

Under the Company's 1998 Non-qualified Stock Option Plan (the "1998 Plan"), the
Board of Directors may from time to time grant to key employees of the Company,
other than directors or executive officers, non-statutory stock options to
purchase shares of the Company's Common Stock. The exercise price, term, vesting
conditions, and other terms for all stock options granted under the 1998 Plan
will be determined at the time of grant by the Board of Directors or a board
committee appointed to administer the 1998 Plan. A total of 500,000 shares of
Common Stock may be issued pursuant to the 1998 Plan. The 1998 Plan expires in
2008.

                                      F-15
<PAGE>   63
A summary of the status of the Company's stock option plans at September 30,
1998, 1997, and 1996 and for the years then ended is presented in the table
below:

<TABLE>
<CAPTION>
                               1998                1997                 1996
                        ------------------  ------------------   -------------------
                                     Wtd                 Wtd        
                        Number       Avg     Number      Avg      Number      Wtd Avg
                          of       Exercise    of      Exercise     of       Exercise
                        Shares      Price    Shares     Price     Shares        Price
                        ------      -----    ------     -----     ------        -----
<S>                    <C>          <C>     <C>         <C>      <C>           <C>
 Outstanding at
  beginning of year.   1,032,710    $ 6.58  1,110,053   $ 4.16   1,111,200     $ 2.90
 Granted............     503,500     27.92    220,250    17.76     240,700       9.28
 Exercised..........    (425,990)     4.01   (296,092)    5.80    (239,247)      3.45
 Canceled...........    (179,409)    30.63     (1,501)    9.43      (2,600)      5.25

 Outstanding at
  end of year.......     930,811     14.61  1,032,710     6.58   1,110,053       4.16

 Options exercisable
  at end of year....     563,058      9.79    714,950     3.09     881,774       2.91

 Options available
  for grant.........     572,860              396,951              365,700

 Weighted average
  fair value of
  options granted...                $11.74              $ 7.33                 $ 3.77
</TABLE>

Options outstanding and exercisable by price range as of September 30, 1998 are
as follows:

<TABLE>
<CAPTION>
                              Options Outstanding                Options Exercisable
                    ---------------------------------------   ----------------------
                                    Weighted
                                     Average       Weighted                  Weighted
                                    Remaining       Average                   Average
   Range of           Options      Contractual     Exercise      Options     Exercise
Exercise Prices     Outstanding       Life           Price     Exercisable     Price
---------------     -----------       ----           -----     -----------     -----
<S>                 <C>            <C>             <C>         <C>           <C>
$ 1.25 - $11.04       447,307         2.32          $ 4.92       407,232      $ 6.22
$11.05 - $22.09       171,169         4.43           18.41        69,825       18.49
$22.10 - $36.81       312,335         6.74           26.40        86,001       28.22
                      -------         ----          ------       -------      ------
$ 1.25 - $36.81       930,811         4.20          $14.61       563,058      $ 9.79
                      =======         ====          ======       =======      ======
</TABLE>

The Company accounts for its stock-based compensation plans under APB No. 25,
under which no compensation expense has been recognized, as all options have
been granted with an exercise price equal to the fair value of the Company's
Common Stock on the date of grant. The Company adopted SFAS No. 123 for
disclosure purposes in fiscal 1997. For SFAS No. 123 purposes, the fair value of
each option grant has been estimated as of the date of grant using the
Black-Scholes option pricing model with the following assumptions: risk-free
interest rates ranging between 5.29% and 6.34%; expected life of three years;
dividend rate of 0.0%; and expected volatility of 54.715%. Using these
assumptions, the fair value of the stock options granted, net of cancellations,
is $3,553,957, $1,614,623, and $908,153 for the years ended September 30, 1998,
1997, and 1996, respectively. These amounts would be amortized as compensation
expense over the vesting period of the options. Options generally vest equally
over three years. Had compensation costs been determined consistent with SFAS
No. 123, utilizing the assumptions detailed above, the Company's net income and
earnings per share would have been reduced to the following pro forma amounts:

<TABLE>
<CAPTION>
                                                       1998              1997             1996
                                                     --------          --------         -------
<S>                                                  <C>               <C>              <C>
  Net Income:
    As Reported.............................         $ 24,587          $ 10,146         $ 5,953
    Pro Forma...............................         $ 22,460          $  9,305         $ 5,650
  Basic EPS:
    As Reported.............................         $   1.52          $   0.72         $  0.50
    Pro Forma...............................         $   1.39          $   0.66         $  0.48
  Diluted EPS:
    As Reported.............................         $   1.48          $   0.69         $  0.46
    Pro Forma...............................         $   1.35          $   0.64         $  0.43
</TABLE>

                                      F-16
<PAGE>   64
(6)      RELATED PARTY TRANSACTIONS

The Company currently leases a building in Tempe, Arizona, containing
approximately 46,000 square feet, which the Company utilized for its corporate,
administrative, sales offices, and warehouse facilities prior to September 1997.
Prior to March 1998, Fred W. Wagenhals, a shareholder, director, and officer of
the Company, owned a one-third interest in F.W. Investments, a partnership that
owned this facility. In March 1998, Mr. Wagenhals became the sole owner of this
facility. The Company paid F.W. Investments or Mr. Wagenhals rent of
approximately $175,000, $183,000, and $177,000 for the years ended September 30,
1998, 1997, and 1996 respectively. During fiscal 1998, the Company made a
refundable deposit of $900,000 to Mr. Wagenhals towards the purchase of the
facility. The Company is currently negotiating the final purchase agreement with
Mr. Wagenhals and intends to either sell or lease the facility to an
unaffiliated third party.

(7)      EMPLOYEE BENEFIT PLANS

In October 1994, the Company established a defined contribution plan that
qualifies as a cash or deferred profit sharing plan under Sections 401(a) and
401(k) of the Internal Revenue Code. The plan is available to substantially all
domestic employees. Under the plan, participating employees may defer from 1% to
15% of their pre-tax compensation. The Company contributes fifty cents for each
dollar contributed by the employee, with a maximum contribution of 2% of the
employee's defined compensation. In addition, the plan provides for an annual
employer profit sharing contribution in such amounts as the Board of Directors
may determine. The Company expensed approximately $141,000, $41,000, and $26,000
under the plan for the years ended September 30, 1998, 1997, and 1996
respectively.

The Company has no other programs that require payment by the Company of
post-employment benefits to current or retired employees.

(8)      INCOME TAXES

The Company provides for income taxes under SFAS No. 109, "Accounting for Income
Taxes." SFAS No. 109 requires the use of an asset and liability approach in
accounting for income taxes. Deferred tax assets and liabilities are recorded
based on the differences between the financial statement and tax bases of assets
and liabilities and the tax rates in effect when these differences are expected
to reverse. The principal differences arise as a result of the use of
accelerated depreciation and amortization methods for federal income tax
reporting purposes, certain inventory costs required to be capitalized for tax
purposes, and certain reserves expensed currently for financial reporting
purposes.

SFAS No. 109 requires the reduction of deferred tax assets by a valuation
allowance if, based on the weight of available evidence, it is more likely than
not that some or all of the deferred tax assets will not be realized. The
ultimate realization of this deferred tax asset depends on the Company's ability
to generate sufficient taxable income in the future. A valuation allowance has
not been recorded as of September 30, 1998 or 1997.

The provision for income taxes consists of the following for the years ended
September 30 (in thousands):

<TABLE>
<CAPTION>
                                    1998             1997              1996
                                  -------           ------           -------
<S>                               <C>              <C>               <C>
Current:
    Federal.....................  $15,300          $ 5,828           $ 3,258
    State.......................    2,181              822               753
                                  -------          -------           -------
                                   17,481            6,650             4,011

Deferred income taxes...........   (1,090)             114               (94)
                                  -------          -------           -------

Provision for income taxes......  $16,391          $ 6,764           $ 3,917
                                  =======          =======           =======
</TABLE>



                                      F-17
<PAGE>   65
Reconciliation of the federal income tax rate to the Company's effective rate
for the years ended September 30 are as follows:

<TABLE>
<CAPTION>
                                         1998        1997       1996
                                        ------      ------     ------
<S>                                    <C>          <C>        <C>
Statutory federal rate..................35.00%      35.00%     34.00%

State taxes, net of federal benefit
  and other............................. 5.00        5.00       5.69
                                        ------      ------     ------
                                        40.00%      40.00%     39.69%
                                        ======      ======     =======
</TABLE>

The components of deferred taxes are as follows at September 30 (in thousands):

<TABLE>
<CAPTION>
                                              1998         1997
                                             ------       -------
<S>                                          <C>          <C>
  Deferred tax assets (liabilities):
    Accelerated tax depreciation........     $ (438)      $ (391)
    Accelerated tax amortization........       (675)        (306)
    Inventory cost capitalization.......      1,179          547
    Valuation reserves and accruals.....      1,902          821
    Deferred compensation...............         40          247
                                             ------       ------
      Net deferred tax asset............     $2,008       $  918
                                             ======       ======
</TABLE>

(9)      LEGAL SETTLEMENTS

In June 1997, the Company agreed to settle a breach of contract suit with Action
Products, Inc. for $4.9 million (the "API Settlement"). Pursuant to the API
Settlement, in July 1997 the Company made a payment of $4.9 million to the
plaintiff, and all parties executed mutual releases. The accompanying 1997
financial statements include a charge of $5.4 million for the API Settlement and
related legal fees.

In March 1998, the Company agreed to settle a lawsuit with Petty Enterprises,
Inc. and an affiliate of Petty Enterprises, Inc. Under the financial terms of
the settlement, the Company will pay a total of approximately $700,000 to Petty
Enterprises, Inc. as payment in full for royalties and other fees in connection
with licenses for future sales of licensed products. The settlement is subject
to the execution of definitive settlement agreements. The accompanying 1998
financial statements include a charge of $950,000 incurred as a result of this
settlement and related charges.

In March 1998, the Company and other defendants settled an environmental lawsuit
with the State of Arizona. Under the agreement, the former shareholders of F.W.
& Associates, Inc., including Fred W. Wagenhals, the Company's Chairman of the
Board, President, and Chief Executive Officer, paid an aggregate of $800,000 to
the state and certain parties seeking indemnity from the Company. The Company
did not incur any costs in connection with this settlement.

(10)     COMMITMENTS AND CONTINGENCIES

On March 4, 1997, two class action lawsuits were filed against the Company and
approximately 28 other defendants in the United States District Court for the
Northern District of Georgia. The lawsuits allege that the defendants engaged in
price fixing and other anti-competitive activities in violation of federal
anti-trust laws. The Company was named as a defendant based upon actions alleged
to have been taken by Sports Image, Inc., a North Carolina corporation ("Sports
Image N.C.") and Creative Marketing & Promotions, Inc. ("CMP") prior to the
Company's acquisitions of the assets and capital stock, respectively, of those
entities. The actions were subsequently consolidated by order of the court. The
caption of the consolidated action is "In re Motorsports Merchandise Antitrust
Litigation" and the files are maintained under Master File No. 1-97-CV-0569-CC.
On May 30, 1997, a consolidated amended complaint was filed, which deleted the
Company as a defendant with respect to claims based upon actions alleged to have
been taken by Sports Image N.C. and named the Company's wholly owned subsidiary,
Sports Image, Inc., an Arizona corporation ("Sports Image AZ"), as a defendant
with respect to those claims. The Company remains a defendant with respect to
claims based upon actions alleged to have been taken by CMP. On July 31, 1997,
the Company acquired all of the outstanding capital stock of RYP, which is
another defendant in this matter. Accordingly, the Company has assumed the
defense of this matter with respect to claims based upon actions alleged to have
been taken by RYP and has agreed to be responsible for and to pay any costs,
fees, expenses, damages, payments, credits,



                                      F-18
<PAGE>   66
rebates, and penalties, if any, arising out of this matter with respect to RYP.
The seller of RYP has agreed to be responsible for amounts, if any, in excess of
$400,000 (the "$400,000 Cap"). The $400,000 Cap excludes attorneys fees and
certain other costs and expenses that the Company may incur in defending or
settling this matter. The plaintiffs have requested injunctive relief and
monetary damages of three times an unspecified amount of damages that the
plaintiffs claim to have actually suffered. On August 1, 1997, answers were
filed on behalf of the Company and Sports Image AZ denying the allegations of
the complaint. Pursuant to an agreement between the plaintiffs and Sports Image
AZ to toll the running of the statute of limitations with respect to any claims
against Sports Image AZ, on November 17, 1997 the plaintiffs filed a motion to
dismiss Sports Image AZ from the case without prejudice. The court granted the
motion on March 20, 1998. On March 2, 1998, the plaintiffs filed, pursuant to a
court order, a second consolidated amended complaint intended to set forth
certain allegations with greater specificity. The Company intends to vigorously
defend the claims asserted in this lawsuit.

The Company leases certain equipment and office space under noncancellable
operating leases. Rent expense related to these lease agreements totaled
approximately $ 3.1 million, $935,000, and $437,000 for the fiscal years ended
September 30, 1998, 1997, and 1996 respectively.

Future lease payments under the noncancellable operating leases are
approximately as follows (in thousands):

<TABLE>
<CAPTION>
            Year Ending
            September 30,
<S>                                   <C>
                 1999                 $ 3,299
                 2000                   2,933
                 2001                   2,441
                 2002                   2,115
                 2003                   1,872
              Thereafter               23,782
                                      -------
                Total                 $36,442
                                      =======
</TABLE>

Certain of the Company's licensing agreements require the Company to make
minimum annual guaranteed royalty payments through the term of the agreements.
To date, the Company has recovered all such minimum annual guaranteed royalty
payments through normal product sales. There can be no assurance, however, that
the Company will generate sufficient product sales in the future to recover such
payments.

The Company is subject to certain other asserted and unasserted claims
encountered in the normal course of business. In the opinion of management, the
resolution of these matters will not have a material adverse effect on the
Company's financial position or results of operations.

(11)     SUBSEQUENT EVENTS

On October 27, 1998, the Company acquired all of the outstanding stock of
Intellectual Properties Group, Inc. ("IPG") in exchange for 35,000 shares of the
Company's restricted common stock. IPG creates and develops promotional programs
for corporate sponsors of motorsports. The transaction will be accounted for as
a pooling-of-interests. Prior period financial statements will not be restated
because IPG's historical operating results and financial position are not
material in relation to the Company's operating results and financial position.

(12)     EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT

On November 23, 1998, the Company acquired Tech 2000 Worldwide, Inc. ("Tech
2000"), a privately held Massachusetts-based Internet company, through a merger
of Tech 2000 and Action Interactive, Inc., a wholly owned subsidiary of the
Company. Under the terms of the merger agreement, the Company issued 137,925
shares of its restricted common stock in exchange for all of the issued and
outstanding common stock of Tech 2000. The transaction will be accounted for as
a pooling-of-interests. Prior period financial statements will not be restated
because Tech 2000's historical operating results and financial position are not
material in relation to the Company's operating results and financial position.


                                      F-19
<PAGE>   67
On November 30, 1998, the Company entered into an exclusive licensing agreement
with CART Licensed Products, L.P., the licensing arm of Championship Auto Racing
Teams, Inc. ("CART"). Under the terms of the licensing agreement, the Company
obtained the exclusive rights to the CART series and FedEx Championship Series
logos, as well as exclusive rights to five teams in the CART series, including
Newman/Haas Racing, PacWest Racing Group, Target/Chip Ganassi Racing, Team
Green, Inc., and Team Rahal, Inc. In addition, the Company also obtains the
non-exclusive rights for a minimum of 75% of the other teams and drivers that
participate in CART sanctioned race events. The rights granted under the
agreement allow the Company to create a line of collectible vehicles consistent
with the detail and quality featured in its existing die-cast collectibles and
allow the Company to market or sublicense a broad range of toy products such as
plastic and remote control vehicles, action figures, miniature helmets, board
games, plush toys, and puzzles. The initial term of the agreement is for five
years with a five-year renewal option.



                                      F-20
<PAGE>   68
                                 EXHIBIT INDEX

Exhibit
Number                                Exhibit
------                                -------

1.0      Form of Underwriting Agreement (1)

3.1      First Amended and Restated Articles of Incorporation of Registrant(2)

3.2      Amended and Restated Bylaws of Registrant(2)

4.1      Form of Certificate of Common Stock(3)

4.2      Indenture dated as of March 24, 1998, between Action Performance
         Companies, Inc. and First Union National Bank, as Trustee, including
         forms of Notes(4)

10.4.2   1993 Stock Option Plan, as amended and restated through January 16,
         1997(5)

10.8     Form of Indemnification Agreement entered into with the Directors of
         the Registrant(3)

10.21    Lease between the Company and F.W. Investments dated January 1, 1994(6)

10.27    Manufacturing Agreement between the Company and Early Light
         International (Holdings) Ltd. dated December 5, 1994(7)

10.33    Asset Purchase Agreement dated as of November 7, 1996, among Action
         Performance Companies, Inc., SII Acquisition, Inc., Sports Image, Inc.,
         and R. Dale Earnhardt and Teresa H. Earnhardt(8)

10.34    Promissory Note dated November 7, 1996, in the principal amount of
         $24,000,000 issued by SII Acquisition, Inc., as Maker, to Sports Image,
         Inc., as Payee, together with Guarantee of Action Performance
         Companies, Inc.(8)

10.35    Security Agreement dated November 7, 1996, between Sports Image, Inc.
         and SII Acquisition, Inc.(8)

10.36    Registration Agreement dated as of November 7, 1996, among Action
         Performance Companies, Inc., Sports Image, Inc., and R. Dale Earnhardt
         and Teresa H. Earnhardt(8)

10.37    License Agreement dated as of November 7, 1996, among SII Acquisition,
         Inc., Dale Earnhardt, and Action Performance Companies, Inc.(8)

10.39    Asset Purchase Agreement dated as of January 1, 1997, among Action
         Performance Companies, Inc., MTL Acquisition, Inc., Motorsport
         Traditions Limited Partnership, Midland Leasing, Inc., and Motorsports
         By Mail, Inc.(9)

10.40    Exchange Agreement dated as of January 1, 1997, among Action
         Performance Companies, Inc., Kenneth R. Barbee, and Jeffery M.
         Gordon(9)

10.41    Promissory Note dated January 1, 1997, in the principal amount of
         $1,600,000 issued by MTL Acquisition, Inc., as Maker, to Motorsport
         Traditions Limited Partnership, as Payee, together with Guarantee of
         Action Performance Companies, Inc.(9)

10.42    Note Purchase Agreement dated as of January 2, 1997, among Action
         Performance Companies, Inc., Jefferson-Pilot Life Insurance Company,
         Alexander Hamilton Life Insurance Company of America, 



<PAGE>   69

         and First Alexander Hamilton Life Insurance Company, together with form
         of Note, form of Subsidiary Guaranty, and form of Subsidiary Joinder(9)

10.42A   First Amendment dated as of March 18, 1998 to Note Purchase Agreement
         dated as of January 2, 1997, among Action Performance Companies, Inc.,
         Jefferson-Pilot Life Insurance Company, Alexander Hamilton Life
         Insurance Company of America, and First Alexander Hamilton Life
         Insurance Company(4)

10.43    Credit Agreement dated as of January 2, 1997, among Action Performance
         Companies, Inc., Sports Image, Inc., MTL Acquisition, Inc., and First
         Union National Bank of North Carolina(9)

10.43A   Amendment and Consent to Credit Agreement dated March 18, 1998, by and
         among Action Performance Companies, Inc., various subsidiary
         guarantees, and First Union National Bank of North Carolina(4)

10.43B   Amended and Restated Credit Agreement dated as of August 5, 1998, among
         Action Performance Companies, Inc., certain subsidiaries and
         affiliates, as guarantors, and First Union National Bank.

10.44    Registration Agreement dated as of January 1, 1997, among Action
         Performance Companies, Inc., Motorsport Traditions Limited Partnership,
         Midland Leasing, Inc., and Motorsports By Mail, Inc.(9)

10.45    Registration Agreement dated as of January 1, 1997, among Action
         Performance Companies, Inc., Kenneth R. Barbee, and Jeffery M.
         Gordon(9)

10.46    Employment Agreement dated as of January 1, 1997, between Action
         Performance Companies, Inc. and Kenneth R. Barbee(9)

10.47    Consulting Agreement dated as of January 1, 1997, between Action
         Performance Companies, Inc. and John Bickford(9)

10.48    Common Stock Purchase Agreement dated January 16, 1997, between Hasbro,
         Inc. and Action Performance Companies, Inc.(10)

10.49    Standard Form Industrial Lease dated April 8, 1997, between
         Hewson/Breckner-Baseline, L.L.C. and Action Performance Companies,
         Inc.(11)

10.50    Lease Agreement dated July 9, 1997, by and between Performance Park
         Partners, LLC and Sports Image, Inc.(11)

10.51    Asset Purchase Agreement dated as of December 19, 1997, between Action
         Performance Companies, Inc. and Revell-Monogram, Inc.(12)

10.52    1998 Non-qualified Stock Option Plan(4)

10.53    Purchase Agreement dated March 18, 1998 among Action Performance
         Companies, Inc., NationsBanc Montgomery Securities LLC, CIBC
         Oppenheimer Corp., EVEREN Securities, Inc. and Piper Jaffray Inc.(4)

10.54    Registration Rights Agreement dated march 24, 1998, by and among Action
         Performance Companies, Inc., NationsBanc Montgomery Securities LLC,
         CIBC Oppenheimer Corp., EVEREN Securities, Inc., and Piper Jaffray
         Inc.(4)

11.1     Computation of Primary Earnings Per Share

11.2     Computation of Fully Diluted Earnings Per Share

12.1     Computation of Ratio of Earnings to Fixed Charges

21.1     List of Subsidiaries of Action Performance Companies, Inc.

23.1     Consent of Arthur Andersen LLP

25.1     Statement of Eligibility of Trustee under the Trust Indenture Act of
         1939 on Form T-1(13)

27.1          Financial Data Schedule

--------------------

(1)      Incorporated by reference to the Registrant's Registration Statement on
         Form S-3 and Amendment No. 1 thereto (Registration No. 333-27485).

(2)      Incorporated by reference to the Registrant's Form 10-QSB for the
         quarter ended March 31, 1996, as filed with the Securities and Exchange
         Commission on May 2, 1996.

(3)      Incorporated by reference to the Registrant's Registration Statement on
         Form SB-2 and amendments thereto (Registration No. 33-57414-LA).

(4)      Incorporated by reference to the Registrant's Form 10-Q for the quarter
         ended March 31, 1998, as filed with the Securities and Exchange
         Commission on May 15, 1998.



<PAGE>   70

(5)      Incorporated by reference to the Registrant's Form 10-Q for the quarter
         ended March 31, 1997, as filed with the Securities and Exchange
         Commission on May 15, 1997.

(6)      Incorporated by reference to the Registrant's Form 10-QSB for the
         quarter ended March 31, 1994, as filed with the Securities and Exchange
         Commission on May 16, 1994.

(7)      Incorporated by reference to the Registrant's Form 10-KSB for the year
         ended September 30, 1994, as filed with the Securities and Exchange
         Commission on December 22, 1994.

(8)      Incorporated by reference to the Registrant's Form 8-K filed with the
         Securities and Exchange Commission on November 22, 1996, as amended by
         Form 8-K/A filed on January 13, 1997.

(9)      Incorporated by reference to the Registrant's Form 8-K filed with the
         Securities and Exchange Commission on January 23, 1997, as amended by
         Form 8-K/A filed on February 24, 1997.

(10)     Incorporated by reference to the Registrant's Registration Statement on
         Form S-3 (Registration No. 333-22943).

(11)     Incorporated by reference to the Registrant's Form 10-K for the year
         ended September 30, 1997, as filed with the Securities and Exchange
         Commission on December 22, 1997.

(12)     Incorporated by reference to the Registrant's Registration Statement on
         Form S-3 (Registration No. 333-45991).

(13)     Incorporated by reference to the Registrant's Registration Statement on
         Form S-3 (Registration No. 333-53413).