<TABLE>
<CAPTION>

                                                   AJAY SPORTS, INC. AND SUBSIDIARIES
                                                       Consolidated Balance Sheets
                                                     as of December 31, 1998 and 1997
                                                   (in thousands, except share amounts)

ASSETS                                                                          December 31,                  December 31,
                                                                                    1998                          1997
                                                                               ----------------              ---------------
<S>                                                                          <C>                           <C>
Current assets:
     Cash                                                                    $               6             $            234
     Marketable  securities                                                                396                            -
     Accounts receivable, net of allowance of $95 and $243,
         respectively                                                                    1,889                        5,060
     Inventories                                                                         5,680                        6,398
     Prepaid expenses and other                                                            485                          304
     Deferred tax benefit                                                                    -                          363
                                                                               ----------------
                                                                               ----------------              ---------------

            Total current assets                                                         8,456                       12,359

Fixed assets, net                                                                        1,708                        1,723
Other assets                                                                               179                          106
Deferred tax benefit                                                                     1,119                          756
Goodwill                                                                                 1,621                        1,670
                                                                               ----------------              ---------------

            Total assets                                                     $          13,083             $         16,614
                                                                               ================              ===============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
     Notes payable to affiliates                                             $               -             $            160    $
     Notes payable to banks                                                                195                          107
     Current portion of capital lease                                                        4                            4
     Accounts payable                                                                    2,225                        3,204
     Accrued expenses                                                                      380                          684
                                                                               ----------------              ---------------

            Total current liabilities                                                    2,804                        4,159

Notes payable to affiliates  -  long term                                                1,587                        4,212
Notes payable to banks - long term                                                       5,951                        9,017
Commitments and contingencies                                                                -                            -
                                                                               ----------------              ---------------
                                                                                        10,342                       17,388
                                                                               ----------------              ---------------
Stockholders' equity (deficit):
     Preferred stock - 10,000,000 shares authorized
         Series B, $0.01 par value, 12,500
            shares outstanding at liquidation value                                      1,250                        1,250
         Series C, $10.00 par value, 264,177 and 296,170 shares
            outstanding, respectively at stated value                                    2,642                        2,962
           Series D, $0.01 par value, 6,000,000 shares                                      60                            -
     Common stock, $0.01 par value, 100,000,000 shares authorized,
         3,956,815 and 3,879,007 shares outstanding, respectively                           40                          233
     Additional paid-in capital                                                         14,762                        9,313
     Accumulated deficit                                                               (16,006)                     (14,532)
     Accumulated unrealized losses on securities                                            (7)                           -
                                                                               ----------------              ---------------

            Total stockholders' equity (deficit)                                         2,741                         (774)
                                                                               ----------------              ---------------

Total liabilities and stockholders' equity                                   $          13,083             $         16,614
                                                                               ================              ===============

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

                                       F-2

</TABLE>


<PAGE>
<TABLE>
<CAPTION>

                                                            AJAY SPORTS, INC. AND SUBSIDIARIES
                                                           Consolidated Statements of Operations
                                                   for the years ended December 31, 1998, 1997 and 1996
                                                        (in thousands, except per share amounts)

<S>                                                          <C>                      <C>                     <C>
                                                                                          Year Ended
                                                               -----------------------------------------------------------------
                                                                December 31,             December 31,            December 31,
                                                                    1998                     1997                    1996
                                                               ----------------         ---------------         ----------------
Operating data:
     Net sales                                               $          22,925        $         30,330        $          24,341
     Cost of sales                                                      19,477                  26,585                   20,759
                                                               ----------------         ---------------         ----------------
         Gross profit                                                    3,448                   3,745                    3,582
     Selling, general and administrative expenses                        3,868                   5,837                    5,067
                                                               ----------------         ---------------         ----------------

     Operating income (loss)                                              (420)                 (2,092)                  (1,485)
                                                               ----------------         ---------------         ----------------

Nonoperating income (expense):
     Interest expense  -  affiliates                                      (337)                   (194)                     (60)
     Interest expense   -   non-affiliates                                (802)                 (1,086)                  (1,043)
     Other, net                                                             84                    (144)                     (38)
                                                               ----------------         ---------------         ----------------

     Total non operating expense                                        (1,055)                 (1,424)                  (1,141)
                                                               ----------------         ---------------         ----------------

Income (loss) before income taxes                                       (1,475)                 (3,516)                  (2,626)

Income tax expense (benefit)                                                 -                       -                     (893)
                                                               ----------------         ---------------         ----------------

Net loss                                                     $          (1,475)       $         (3,516)       $          (1,733)
                                                               ================         ===============         ================

Basic and diluted earnings per share  (a)                    $           (0.47)       $          (1.01)       $           (0.55)
                                                               ================         ===============         ================

Weighted average common shares
     outstanding  (b)                                                    3,909                   3,879                    3,874
                                                               ================         ================        ================




     Net loss as reported above                                         (1,475)                 (3,516)                  (1,733)
     Undeclared cumulative preferred dividends                            (380)                   (396)                    (396)
                                                               ----------------         ---------------         ----------------

     Loss applicable to common stock                         $          (1,855)       $         (3,912)       $          (2,129)
                                                               ================         ===============         ================



     (a)     Computed  by  dividing   net  loss  after   deducting   undeclared,
             cumulative  preferred  stock  dividends,  by the  weighted  average
             number of common shares outstanding.

     (b)     Current and prior years  restated to reflect  result of reverse 1:6
             common stock split effective August 14, 1998.





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

                                                                             F-3


</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                                                    AJAY SPORTS, INC. AND SUBSIDIARIES
                                                  Consolidated Statements of  Stockholders' Equity  for the years  ended
                                                    December 31, 1998,  1997 and 1996 (in  thousands,  except shares)

<S>                              <C>         <C>         <C>           <C>       <C>           <C>       <C>           <C>

                                      Total
                                   Preferred Stock           Common Stock        Add'l Paid-in  Accum     Unrealized   Stockholders'
                                 ---------------------  -----------------------
                                   Shares     Amount      Shares       Amount      Capital     (Deficit) Loss on Secs  Equity
                                 ----------- ---------  ------------  ---------  ------------  --------  ------------- -------------
Balances at January 1, 1996         326,290     4,388     3,889,625 $      234 $       9,123 $  (8,981)$            -  $     4,764

Common shares received as an
   acquisition incentive adjustment        -      -         (58,334)        (3)            4         -              -            -

Preferred stock converted into
  common stock                      (17,620)     (176)       42,716          2           174         -              -            -

Stock  option  exercise                    -      -           5,000           -           12         -              -           12

Dividends                                  -      -          -                -            -      (301)             -         (301)

Net  loss                                  -      -          -                -            -    (1,733)             -       (1,733)
                                 ----------- ---------  ------------  ---------  ------------  --------  --------------  -----------

Balances at December 31, 1996       308,670     4,212     3,879,007        233         9,313   (11,015)             -        2,743

Net loss                                  -       -          -                -            -    (3,516)             -       (3,516)
                                 ----------- ---------  ------------  ---------  ------------  --------  --------------  -----------

Balances at December 31, 1997       308,670     4,212     3,879,007        233         9,313   (14,531)             -         (773)

Common stock reverse 1:6 split            -       -             250       (194)          194         -              -            -

Other adjustments                         -       -          -                -           (4)        -              -           (4)

Preferred stock converted  into
common stock                        (31,993)     (320)       77,558          1           319         -              -            -

Debt  converted  into
preferred  stock                  6,000,000        60             -           -        4,940         -              -        5,000

COMPREHENSIVE INCOME

Net loss                                  -       -               -           -            -    (1,475)             -       (1,475)

Unrealized loss on securities             -       -               -           -            -         -             (7)          (7)
                                 ----------- ---------  ------------  ---------  ------------  --------  --------------  -----------

Balances at December 31, 1998     6,276,677  $  3,952     3,956,815  $      40   $    14,762  $ 16,006)  $         (7)  $    2,741
                                 =========== =========  ============  =========  ============  ========  ==============  ===========













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

                                                    F-4



</TABLE>



<PAGE>
<TABLE>
<CAPTION>

                                                    AJAY SPORTS, INC. AND SUBSIDIARIES
                                                   Consolidated Statements of Cash Flows
                                             for the years ended December 31, 1998, 1997 and 1996
                                                                (in thousands)

<S>                                                                         <C>             <C>             <C>

                                                                                  1998            1997            1996
                                                                               ------------    ------------   -------------
Cash flows from operating activities:

     Net loss                                                                $      (1,475)  $      (3,516) $       (1,733)
     Adjustments to reconcile to net cash flows from operating
         activities:
     Loss on sale of assets                                                              -              42               6
     Depreciation and amortization                                                     381             358             366
     (Increase) in investments                                                        (396)              -               -
     (Increase) decrease in accounts receivable, net                                 3,171             214             (78)
     Decrease in inventories                                                           718           1,559             952
     (Increase) in deferred tax benefits                                                 -               -            (911)
     (Increase) decrease in prepaid expenses                                          (181)             58               3
     (Increase) decrease in other assets                                               (75)            202             (84)
     Increase in accounts payable                                                     (979)             97             945
     Increase (decrease) in accrued expenses                                          (303)            186             (64)
                                                                               ------------    ------------   -------------

         Net cash provided by (used in) operating activities                           861            (800)           (598)
                                                                               ------------    ------------   -------------

Cash flows from investing activities:

     Acquisitions of property plant and equipment                                     (319)           (250)           (276)
     Goodwill associated with acquisitions                                               -               -            (387)
     Disposal of equipment                                                               -               -             (29)
                                                                               ------------    ------------   -------------

         Net cash (used in) investing activities                                      (319)           (250)           (692)
                                                                               ------------    ------------   -------------

Cash flows from financing activities:

     Net increase in advances from affiliates                                        2,215           3,487             885
     Net increase (decrease) in bank notes payable                                  (2,978)         (2,193)            396
     Dividends paid                                                                      -             (74)           (301)
     Unrealized losses from securities                                                  (7)              -               -
     Stock options exercised                                                             -               -              12
                                                                               ------------    ------------   -------------

         Net cash provided by (used in) financing activities                          (770)          1,220             992
                                                                               ------------    ------------   -------------

Net increase (decrease) in cash                                                       (228)            170            (298)

Cash at beginning of period                                                            234              64             362
                                                                               ------------    ------------   -------------

Cash at end of period                                                        $           6   $         234  $           64
                                                                               ============    ============   =============


Supplemental schedule of non-cash financing activities:

   The Company issued 6,000,000 shares of preferred stock
   series D upon the conversion of $5,000,000 of long-term
   debt owed to affiliates during 1998.   (See Note 12)


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

                                      F -5

</TABLE>
<PAGE>


                       AJAY SPORTS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





   1.    SIGNIFICANT ACCOUNTING POLICIES
         -------------------------------

         BASIS OF PRESENTATION - The consolidated  financial  statements include
         the  accounts of Ajay  Sports,  Inc.  ("Sports")  and its  wholly-owned
         operating company subsidiaries,  Ajay Leisure Products,  Inc. ("Ajay"),
         Leisure  Life,  Inc.("Leisure"),  and Palm Springs  Golf,  Inc.  ("Palm
         Springs"),  collectively  referred  to  herein  as the  "Company".  The
         inventories  and fixed  assets  purchased  from  Korex  Corporation  on
         October 2, 1995 have been merged with Ajay Leisure  Products,  Inc. All
         significant   intercompany   balances  and   transactions  hav  e  been
         eliminated.

         INVENTORIES  -  Inventories  are  stated at the lower of cost or market
         with cost determined using the first-in, first-out method.

         FIXED  ASSETS - Fixed  assets  are  stated  at cost,  less  accumulated
         depreciation  of $1,329,000  and $1,026,000 as of December 31, 1998 and
         1997  respectively.  Fixed assets of the Company  consist  primarily of
         machinery and equipment, office equipment, and a building. Depreciation
         is computed using the  straight-line  method over the estimated  useful
         lives of the assets, which range from three to thirty-nine years.

         GOODWILL - The  Company has  recorded  goodwill as a result of the 1995
         acquisitions of Palm Springs and Korex. The goodwill is being amortized
         over forty  years.  Amortization  expense  related to the  goodwill was
         $44,000  for the  year  ended  December  31,  1998.  As of each  annual
         year-end date, management assesses whether there has been an impairment
         in the carrying value of goodwill.  This assessment  involves comparing
         the unamortized  goodwill carrying value with  undiscounted  cumulative
         estimated  future cash flows expected to be derived from utilization of
         the  intangibles  underlying the related  goodwill.  To the extent that
         undiscounted  cumulative  cashflow is  expected to exceed the  carrying
         value of goodwill, the asset is considered to be unimpaired.

         OTHER  ASSETS - Other  assets at December  31, 1998 and 1997 consist of
         patents  and   trademarks   held  and  applied  for  by  Leisure,   and
         additionally, at December 31, 1998 a lawsuit judgment.

         PRODUCT  LIABILITY AND WARRANTY COSTS - Product  liability  exposure is
         insured  with  insurance  premiums  provided  during the year.  Product
         warranty  costs are based on experience and attempt to match such costs
         with the related product sales.

         REVENUE  RECOGNITION  - The Company  recognizes  revenue when goods are
         shipped.

         INCOME TAXES - Effective January 1, 1992, the Company adopted Statement
         of Financial Accounting Standards (SFAS) No. 109, Accounting for Income
         Taxes. Under SFAS No. 109, deferred income taxes are recognized for the
         tax  consequences  of  temporary   differences  between  the  financial
         statement  carrying  amounts and the tax bases of  existing  assets and
         liabilities, using enacted statutory rates applicable to future years.

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


                                      F-6
<PAGE>


                       AJAY SPORTS, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


         COMMON STOCK - The Company  reverse split its common stock in a 1-for-6
         ratio  effective with  commencement of trading on August 14, 1998. As a
         result  of  this  transaction,  all  historic  data  in  the  financial
         statements which reference common shares,  options,  earnings per share
         or preferred conversion ratios have been restated to reflect this split
         as if it preceded all prior  reporting.  Historic  actual common shares
         outstanding  at December 31, 1997 were  23,274,039 and were restated to
         3,879,007 in this report.

   2.    RELATED PARTY TRANSACTIONS
         --------------------------

         The Company's related parties include the following:

         First Equity Corporation  ("First Equity") - First Equity is owned by a
         family member of the president,  chief executive officer,  and chairman
         of the Company.  First Equity held, at December 31, 1997,  demand notes
         in the amount of  $748,000  as a result of loans made to the company in
         1996 and 1997.  These notes were  assumed by Williams in the  financial
         restructuring in 1998.

         Enercorp, Inc. ("Enercorp") - is a business development company engaged
         in the business of investing in and providing managerial  assistance to
         developing companies. The Company's president, chief executive officer,
         chairman and  principal  shareholder  is a significant  shareholder  in
         Enercorp.  Enercorp  holds 310,787  common shares  acquired in 1994 and
         1995 and 2,000  shares of series C preferred  stock.  Enercorp  held at
         December 31,  1997,  demand notes in the amount of $200,000 as a result
         of loans made to the  Company.  These notes were assumed by Williams in
         the financial restructuring in 1998.

         Williams Controls,  Inc.  ("Williams") - Williams has the same chairman
         as the  Company,  which  individual  is a  major  shareholder  of  each
         company.  Williams owns 686,275  shares of the Company's  common stock,
         1,851,813  common  stock  options  and  6,000,000  shares  of  Series D
         cumulative convertible preferred stock as of December 31, 1998.

         During 1996 and 1997 the Company paid  Williams  0.50% per annum of the
         outstanding  revolving loan balances in consideration for providing its
         guarantee of a revolving loan from U. S. Bank. Fees totaled $39,750 and
         $60,411 for the years ended  December  31, 1997 and 1996  respectively.
         From July 11, 1997  through  June 30,  1998 the  Company  and  Williams
         shared a joint and  several  loan  obligation.  On June 30,  1998,  the
         Company  restructured  its credit  facility with Wells Fargo Bank, N.A.
         ("Wells") to separate its credit  facility from that of Williams.  As a
         result of this  transaction,  the Company will no longer have joint and
         several  liability,  cross  collateral  agreements or  guarantees  with
         Williams.

         In connection with the restructuring of the Wells credit facility,  the
         Company was  advanced  $2,000,000  additional  funds by Williams in the
         form  of a long  term  note  and  marketable  securities  and  Williams
         converted  $5,000,000  of Company  debt into a newly  created  series D
         cumulative convertible preferred stock.

                                      F-7
<PAGE>

                       AJAY SPORTS, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


      The Company's  interest expense paid to Williams was $346,000 and $194,450
      for the years ended December 31, 1998 and 1997 respectively. (See Note 4).


      During  1997 and 1996 the Company  borrowed  from  related and  affiliated
      parties until it obtained  bank  financing in mid 1997. As of December 31,
      1997,  the Company owed  $4,372,000 to related and  affiliated  parties at
      interest  rates ranging from 9.0% to 9.5%.  These notes were  converted to
      preferred stock in 1998. (See Note 4).

3.    INVENTORIES
      -----------

      Inventories consist of the following (in thousands):


                                           December 31,
                                        ------------------
                                        1998          1997
                                       ------        ------
         Raw materials                 $1,493        $1,499
         Work-in-progress               1,052         1,026
         Finished goods                 3,135         3,873
                                       ------        ------

         Total                         $5,680        $6,398
                                       ======        ======

4.    DEBT
      ----
      On December 31, 1998 the Company's total debt was $7,724,000 owed to banks
      and Williams. This compares to $13,479,000 for December 31, 1997 which was
      owed banks,  Williams and other affiliates.  From July 11, 1997 until June
      30, 1998 the Company shared in a combined  credit  agreement with Williams
      (the  "Joint  Loan").  As of June 30, 1998 the  Company  restructured  its
      credit  facility with Wells to separate from the joint and several  credit
      facility  with  Williams.   This  new  credit  facility  eliminates  cross
      collateral  and guarantee  agreements  involving the Company and Williams.
      The revolving loan facility  allows the Company to borrow up to the lesser
      of  $9,500,000  or the Borrowing  Base.  The Borrowing  Base consists of a
      formula including certain eligible receivables, inventories and letters of
      credit at rates established by Wells. The present credit agreement matures
      June 30, 2001.

      The  proceeds  from the Joint  Loan were used to repay the  Company's  and
      Williams  then  outstanding  loans from the previous  lender,  U. S. Bank,
      except for a bridge loan in the total amount of  $2,140,000 to the Company
      by U. S. Bank.  This  bridge  loan is to be repaid from the sale of assets
      and/or excess cash flows of Williams and/or the Company, and is guaranteed
      up to  $1,000,000  by the  Company's  president.  The balance owed on this
      bridge loan at December 31, 1998 is  $1,985,000.  In  connection  with the
      1998 credit facility restructuring, the Company was advanced $2,000,000 of
      additional funds by Williams and Williams converted  $5,000,000 of company
      debt into preferred stock.


                                      F-8
<PAGE>

                       AJAY SPORTS, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


      The Company's Bank borrowings consisted of the following:


      ($000)
                                                     December 31,
                                             -------------------------
      Revolving credit facility:             1998                1997
                                             ------              ------
        Balance                            $  3,467           $  6,017
        Interest rate                          8.75%               9.0%
        Unused amount of facility          $    350           $     96
        Average amount outstanding
        during the period                  $  4,997           $  6,091

        Weighted average interest rate          9.1%               9.0%
        Maximum amount outstanding
        during the period                  $  6,771           $  7,218

      Outstanding commercial letters of credit totaled approximately $60,000 and
      $526,000 at December 31, 1998 and 1997 respectively.

      Other  December  31, 1998 debt  consisted of  $1,587,000  from related and
      affiliated  parties,  a $488,000  machinery and  equipment  term loan with
      Wells  Fargo,  the  $1,985,000  (bridge)  term  loan with U. S. Bank and a
      $197,000 real estate loan.

      Debt payments are as scheduled ($000):

                       1999              $   216
                       2000                1,954
                       2001                 5,554  (Term Loans & Revolver)
                       2002                    0
                       2003                    0
                       2004 and thereafter     0

      The seasonal nature of the Company's sales creates  fluctuating demands on
      its  cash  flow,   due  to  the  temporary   build-up  of  inventories  in
      anticipation  of, and receivables  subsequent to, the peak seasonal period
      which  historically  has been from February  through May of each year. The
      Company has relied and continues to rely heavily on its  revolving  credit
      facility for its working capital requirements.


5.    INCOME TAXES
      ------------
      As discussed in Note 2, the Company  adopted SFAS No. 109 at the beginning
      of 1992. There was no cumulative  effect of this accounting change and its
      adoption had no impact on 1992 net income.



                                      F-9
<PAGE>

                       AJAY SPORTS, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


      The actual income tax expense  (benefit) differs from the statutory income
      tax expense (benefit) as follows (in thousands):


                                          Year Ended December 31,
                                        -------------------------
                                        1998       1997       1996
                                        -----      -----      -----
      Statutory tax expense
        (benefit) at 34%               $(502)    $(1,195)    $ (893)
      Utilization of net
        operating loss
        carry forward                      -           -          -
      Loss producing no current
        tax benefit                      502       1,195        893
                                       ------    -------     -------
                                       $   -     $     -      $   -
                                       ======    =======     =======

      The components of the net deferred tax asset/liability were as follows (in
      thousands):

                                                   December 31,
                                                 ---------------
                                                 1998       1997
                                                 -----      -----
      Deferred tax assets:
        Accrued expenses                        $   45     $   42
        Reserves                                   151        329
        NOL carryforwards                        4,766      4,072

        Sub total                               $4,962     $4,443

      Deferred tax liability,
        principally depreciation and amortization  (99)       (97)
        Valuation allowance                     (3,744)    (3,227)
                                                -------    -------

         Net                                    $1,119      $1,119
                                                =======    ========

      The Company  has  assessed  its past  earnings  history and trends,  sales
      backlog,  budgeted sales, and expiration  dates of  carryforwards  and has
      determined that it is more likely than not that $1,119,000 of deferred tax
      assets will be realized.  The remaining  valuation allowance of $3,744,000
      is maintained on deferred tax assets which the Company has not  determined
      to be more  likely than not  realizable  at this time.  The  Company  will
      continue to review this valuation  allowance on a quarterly basis and make
      adjustments as appropriate.


                                      F-10
<PAGE>


                       AJAY SPORTS, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued



The Company had net  operating  loss carry  forwards for Federal tax purposes of
approximately  $14,018,000 at December 31, 1998, which expire in varying amounts
in  the  years  2006  through  2018.  Operating  loss  carry  forwards  totaling
$1,144,000,  $4,270,000,  $2,139,000 and $727,000 are available to offset future
state  taxable  income of  Sports,  Ajay,  Leisure  Life and Palm  Springs  Golf
respectively,  which expire in varying  amounts in the years 2006 through  2018.
Future changes in ownership,  as defined by section 382 of the Internal  Revenue
Code, could limit the amount of net operating loss carryforwards used in any one
year.

6.    STOCKHOLDERS' EQUITY
      --------------------

      (a)   Preferred Stock

            In October  1994 the  Company  created  its  Series B 8%  cumulative
            convertible  preferred  stock and  allowed  for its  exchange,  on a
            share-for-share  basis, with the Company's Series A preferred stock.
            The holder  exchanged  29,500 shares of Series A preferred stock for
            29,500  shares  of the newly  issued  Series B  preferred  stock and
            immediately  converted 17,000 shares of its Series B preferred stock
            for 5,040,000 (840,000 post split) shares of the common stock of the
            Company,  as the Series B preferred  stock  allowed for a conversion
            rate of 1 share of Series B preferred stock for 294.12 shares of the
            Company's common stock. In November 1997, the conversion rate on the
            remaining 12,500 Series B shares was revised to 555.56 and after the
            1:6 reverse  common  stock  split of August 14, 1998 the  conversion
            rate as of December 31, 1998 is 92.5926.

            In July  1995  the  Company  sold  325,000  shares  of  Series C 10%
            cumulative  convertible  preferred  stock and 325,000  warrants in a
            registered  public  offering.   The  Series  C  preferred  stock  is
            convertible   into  shares  of  the  Company's  common  stock  at  a
            conversion rate of 2.42424 common shares for each share of preferred
            stock.  Cumulative  dividends  are payable on the Series C preferred
            stock at an  annual  rate of  $1.00  per  share.  The  warrants  are
            redeemable  by the  Company  at  $0.05  per  warrant  under  certain
            conditions.  The  terms  of  these  warrants  are  identical  to the
            Company's  publicly-held  warrants to purchase common stock. In 1995
            the Company used the $2.8 million of net proceeds for  inventory and
            accounts receivable financing and to acquire certain assets of Korex
            and Palm Springs.

            At December 31, 1998, 1997 and 1996,  dividends in arrears on the 8%
            cumulative  convertible  preferred  Series B stock  were  $1,006,575
            ($80.53 per share), $906,575 ($72.53 per share) and $806,575 ($64.53
            per  share)  respectively.  Dividends  on the  Series  C  cumulative
            convertible  preferred stock were declared and paid through December
            31, 1996.  No dividends  were  declared or paid for 1998 or 1997. At
            December  31,  1998  and  1997,  dividends  in  arrears  on the  10%
            cumulative convertible preferred Series C stock were $576,174 ($2.00
            per share) and $296,000 ($1.00 per share). The Company has dedicated
            all available funds to support continuing  operations of the Company
            until sufficient cash availability allows declaration and payment of
            dividends.

      (b)   Stock issued to officers

            The Company has a stock  incentive plan for officers of the Company,
            under  which up to  150,000  shares  of the  Company's  stock may be
            granted annually. No stock was issued to officers under this plan in
            1996, 1997 or 1998.

                                      F-11
<PAGE>


                       AJAY SPORTS, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued



      (c)   Stock Issued for Acquisitions

            In 1994 the Company acquired the outstanding common stock of Leisure
            Life,  Inc. for 1,500,000  (post split 250,000) shares of its common
            stock to the owner of Leisure Life.  During the periods  1995,  1996
            and 1997 one half of the  originally  issued shares were returned to
            the Company due to unmet performance requirements.

      (d)   Warrants and Options

            A summary of activity  related to  warrants  and options to purchase
            Company common stock is as follows:

                                            Warrants and     Price
                                            Options    (i)   Per  Share (i)
                                            ------------     ----------

            Balance, January 1, 1996           2,561,683     $ 2.04 - 6.00

            Exercised by Employees                (5,000)      2.40
            Issued to Directors                    1,668       3.75        (ii)
            Issued to Employees                  116,667       2.40       (iii)
            Issued for Acquisition               133,334       4.50 - 5.40 (iv)
            Expired                              (40,417)      4.80 - 6.00
                                               ----------
            Balance, December 31, 1996         2,767,935     $ 2.04 - 6.00

            Issued to Employees                    8,334       2.40         (v)
            Expired                              (27,500)      2.40 - 3.75
            Repriced options                  (2,151,313)      2.04 - 3.00 (vi)
            Repriced options                   2,151,313       1.08        (vi)

            Balance, December 31, 1997         2,748,769$      1.08 - 6.00

            Expired                             (122,287)      2.40 -4.125
            Issued to Directors                    1,668       1.50       (vii)
                                              -----------

            Balance, December 31, 1998         2,628,150     $ 1.08 - 6.00




      (i)   All options  were  adjusted  for the effect of a 1:6 reverse  common
            stock split effective August 14, 1998.

      (ii)  Director stock options.


                                      F-12
<PAGE>


                       AJAY SPORTS, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


      (iii) Employee  stock  options of which 42,917 were vested and 30,834 were
            canceled since issuance.


      (iv)  Issued to former shareholders of Palm Springs Golf Company,  Inc., a
            business acquired by the Company in October 1995.

      (v)   Employee stock options of which none were vested.

      (vi)  All non-public, non-employee, non-board member options were repriced
            to $.18 market in November 1997.

      (vii) Director options  - 33% vested.



7.    MAJOR CUSTOMERS
      ---------------

      The  Company  operates  in two  lines of  business,  the  manufacture  and
      distribution  of sports  equipment  and  outdoor  leisure  furniture.  The
      Company's  customers  are  principally  in the retail  sales  market.  The
      Company  performs ongoing credit  evaluations of its customers'  financial
      conditions and does not generally require collateral.


      Sales to customers which represent over 10% of the Company's net sales are
      as follows:

                                Year  ended   December 31,
                             ------------------------------
      Customer                  1998       1997      1996
      --------               -------      ------     ------
         A                       28%         30%        29%
         B                       26%         15%        14%
         C                         *         11%          *


                                      * Amounts are less than 10% of net sales.












                                      F-13
<PAGE>


                       AJAY SPORTS, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued



8.    BUSINESS SEGMENT REPORTING
      --------------------------

      The relative contributions to net sales, operating profit and identifiable
      assets of the Company's two industry segments for the years ended December
      31, 1998 and 1997 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                     GOLF
                                               --------------------
                                                Mass      Specialty
       1998                         Furniture   Merchant  Golf Stores  Corporate  Consolidated
      ----------                    ---------   --------  -----------  ---------  -------------
<S>                                 <C>         <C>       <C>          <C>        <C>

      Sales                           $ 3,785    $17,916      $ 1,224          -        $22,925
      Operating profit/(loss)            (241)       863         (494)      (548)          (420)
      Assets                            2,673      8,564        1,846          -         13,083
      Depreciation/Amortization            92        229           60          -            381
      Capital Expenditures                175        144            -          -            319


                                                     GOLF
                                                -------------------
                                                Mass      Specialty
       1997                         Furniture   Merchant  Golf Stores  Corporate  Consolidated
      ----------                    ---------   --------  -----------  ---------  -------------
      Sales                           $ 4,358    $21,623      $ 4,349          -        $30,330
      Operating profit/(loss)            (186)       915       (2,090)      (731)        (2,092)
      Assets                            2,456     10,914        3,244          -         16,614
      Depreciation/Amortization            80        215           63          -            358
      Capital Expenditures                136        103           11          -            250

</TABLE>


9 .   SPALDING AND GARY PLAYER LICENSE AGREEMENTS
      -------------------------------------------

      Ajay  has  operated  since  1983  under a  license  from  Spalding  Sports
      Worldwide to utilize the Spalding  trademark in conjunction  with the sale
      and  distribution  of golf bags,  golf gloves,  hand pulled golf carts and
      certain other golf accessories in the United States. On March 8, 1999, the
      Company announced a limited extension of its existing agreement to provide
      a phaseout  period of up to 18 months for its Spalding  labeled  products.
      The Company will pay Spalding  $240,000  during the phase out period.  The
      most recent  Spalding  agreement  previously  contained  a minimum  annual
      royalty of $550,000 plus 2%  advertising  of which 1% was paid direct.  On
      March 8, 1999 the Company  entered into a new license  agreement with Gary
      Player Group, Inc. The Company will work toward developing the Gary Player
      brand for  marketing  its  products.  The new Gary Player  agreement has a
      5-year term and covers  golf bags,  gloves,  carts and certain  other golf
      accessories  sold into the U. S. market.  The newly  executed  Gary Player
      agreement  requires  an annual  $25,000  rights  fee and a minimum  annual
      royalty  of $5,000  for the  sixteen  months  commencing  on March 8, 1999
      through  June 30,  2000 and  increases  annually by $5,000 for each of the
      remaining 4 years of the contract. (See Note 14).

      Earned  royalty  expense due Spalding was $448,000,  $553,000 and $480,000
      for the years ended December 31, 1998, 1997 and 1996, respectively.

                                      F-14

<PAGE>


                       AJAY SPORTS, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued




10.   LEASES
      ------

      Future  aggregate  minimum lease  payments under  noncancelable  operating
      leases  with  initial  or  remaining  terms in  excess  of one year are as
      follows ($000):


                  1999                       $     613
                  2000                             581
                  2001                             372
                  2002                             176
                  2003                             170
                  2004 and thereafter                0
                                             ---------
                                             $   1,912
                                             =========

      Total rental expense ($000) under operating leases (net of sublease rental
      income from an affiliate of $0, $0 and $8,  respectively)  was $605,  $701
      and  $618  for  the  years  ended  December  31,  1998,   1997  and  1996,
      respectively.

11.   NET  (LOSS) PER COMMON SHARE
      ----------------------------

      Earnings or loss per share has been  computed  by  dividing  net income or
      loss,  after reduction for preferred  stock dividends in 1998  ($380,000),
      1997  ($396,000),  and 1996  ($401,000) by the weighted  average number of
      common shares outstanding. No exercise of outstanding warrants was assumed
      in  1998,  1997  or  1996,   since  any  exercise  of  warrants  would  be
      antidilutive.

      SFAS No. 128,  "Earnings  Per Share",  became  effective  for fiscal years
      ending after December 15, 1997. This statement  replaces the  presentation
      of primary earnings per share ("EPS") with a presentation of basic EPS. It
      also  requires dual  presentation  of basic and diluted EPS on the face of
      the income statement for all entities with complex capital  structures and
      requires  reconciliation of the numerator and denominator of the basic EPS
      computations   to  the  numerator  and  denominator  of  the  diluted  EPS
      computation.  Basic  EPS  excludes  dilution.  Diluted  EPS  reflects  the
      potential  dilution that could occur if  securities or other  contracts to
      issue  common  stock were  exercised  or  converted  into common  stock or
      resulted in the  issuance of common stock that then shared the earnings of
      the entity. Diluted EPS is computed similar to fully diluted EPS. SFAS No.
      128 requires  restatement of all EPS data that was presented in previously
      filed reports.  Earnings per share for 1996 has not changed under SFAS No.
      128 since the warrants outstanding are anti-dilutive.






                                      F-15
<PAGE>

                       AJAY SPORTS, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued




12.   SUPPLEMENTAL CASH FLOW INFORMATION
      ----------------------------------

      Cash paid for interest was  $1,209,693,  $776,077 and  $1,098,819  for the
      years ended December 31, 1998, 1997 and 1996, respectively.

      Non cash financing and investing transactions were as follows:

            In exchange for acquiring in 1994 all of the common stock of Leisure
            Life, Inc. the Company issued  1,500,000 (post split 250,000) shares
            of its common stock to the owner of Leisure Life. During the periods
            1995,  1996 and 1997 one half of the  originally  issued shares were
            returned to the Company due to unmet performance requirements.

            During 1996  ,17,620  preferred  stock  shares were  converted  into
            42,716 shares of common stock.

            In 1996 an  employee  exercised  options  to  acquire  5,000  common
            shares.

            In 1997 there were no stock transactions.

            During 1998  preferred  stock in the quantity of 31,993  shares were
            converted into 77,558 shares of common stock.

            During  1998   long-term  debt  of  $5,000,000  was  converted  into
            6,000,000 shares of Series D preferred stock.

            The Company  added new leases  during 1998 and 1997 which  represent
            asset values respectively,  if purchased,  of approximately $103,000
            and  $57,000  and result in annual  lease  payments  of $27,000  and
            $18,732 with terms expiring up to the year 2003.


13.   COMMITMENTS  AND  CONTINGENCIES
      -------------------------------

            The  Company is subject  to certain  claims in the normal  course of
      business which management intends to vigorously  contest.  The outcomes of
      these  claims are not  expected to have a material  adverse  affect on the
      Company's consolidated  financial position or results of operations.  (See
      also notes 4 and 9).










                                      F-16
<PAGE>


                       AJAY SPORTS, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued




14.   SUBSEQUENT  EVENTS
      ------------------

      a.    Spalding and Gary Player License Agreements
            -------------------------------------------

            Ajay has operated  since 1983 under a license from  Spalding  Sports
            Worldwide to utilize the Spalding  trademark in conjunction with the
            sale and  distribution of golf bags,  golf gloves,  hand pulled golf
            carts and certain other golf  accessories in the United  States.  On
            March 8, 1999,  the  Company  announced a limited  extension  of its
            existing  agreement to provide a phaseout  period of up to 18 months
            for its  Spalding  labeled  products.  The Company will pay Spalding
            $240,000  during  the phase out  period.  The most  recent  Spalding
            agreement  previously contained a minimum annual royalty of $550,000
            plus 2% advertising of which 1% was paid direct.

            On March 8, 1999, the Company  entered into a new license  agreement
            with Gary Player Group, Inc. The Company will work toward developing
            the Gary  Player  brand for  marketing  its  products.  The new Gary
            Player  agreement  has a 5-year term and covers  golf bags,  gloves,
            carts and certain other golf accessories sold into the U. S. Market.
            The newly executed Gary Player agreement  requires an annual $25,000
            rights fee and a minimum  annual  royalty of $5,000 for the  sixteen
            months  commencing  on  March 8,  1999  through  June  30,  2000 and
            increases  annually  by $5,000 for each of the  remaining 4 years of
            the contract.


                                      F-17
<PAGE>



                                                                  Schedule II


                       AJAY SPORTS, INC. AND SUBSIDIARIES
                        Valuation and Qualifying Accounts
                  Years ended December 31, 1998, 1997, and 1996
                             (Amounts in Thousands)




                                                                      Balance
                            Beginning   Charged to   Deducted from    at end
                            Balance     expense      Reserve          of period
                            ---------   ----------   -------------    ---------

Reserve for Product Warranty:

   Year ended:

     December 31, 1998          $152        $  70            $119  (1)    $103
     December 31, 1997            85          309             242          152
     December 31, 1996           136          203             254           85


Reserve for Doubtful Receivables:

   Year ended:

     December 31, 1998          $243        $  50            $198  (2)    $ 95
     December 31, 1997           140          355             252          243
     December 31, 1996           287           91             238          140


Reserve for Inventory Obsolescence:

   Year ended:

     December 31, 1998          $425        $292             $417         $300
     December 31, 1997           491         398              464          425
     December 31, 1996           384         498              391          491



Notes:
------

(1)  Represents amounts paid for product warranty claims.

(2)  Represents amounts charged off as uncollectible.



                                      F-18
<PAGE>