<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

(Mark One)

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES 
         EXCHANGE ACT OF 1934
                   For the Fiscal Year Ended December 31, 1998

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934
             For the Transition Period from _________ to __________

                           Commission File No. 1-12559

                             CRAGAR INDUSTRIES, INC.
                 (Name of small business issuer in its charter)

               DELAWARE                                  86-0721001
      (State or other jurisdiction          (I.R.S. Employer Identification No.)
    of incorporation or organization)

                 4636 NORTH 43RD AVENUE, PHOENIX, ARIZONA 85031
                    (Address of principal executive offices)

                                 (602) 247-1300
                           (Issuer's telephone number)

         Securities Registered Under Section 12(b) of the Exchange Act:


                                      None


         Securities Registered Under Section 12(g) of the Exchange Act:

                          COMMON STOCK, $.01 PAR VALUE
                         COMMON STOCK PURCHASE WARRANTS

Check whether the issuer (1) filed all reports required to be filed by 
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]

     Check if disclosure of delinquent filers in response to Item 405 of 
Regulation S-B is not contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. [X]

     The issuer's revenues for the fiscal year ended December 31, 1998 were 
$12,081,884.

     At March 24, 1999, the aggregate market value of Common Stock held by 
non-affiliates of the registrant was $10,582,832, based on the closing sales 
price of the Common Stock on such date as reported by the OTC Bulletin Board.

     The number of shares outstanding of the registrant's Common Stock on 
March 24, 1999 was 2,453,990.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions from the registrant's definitive Proxy Statement relating to its
Annual Meeting of Stockholders to be held May 21, 1999, are incorporated by
reference into Part III of this Annual Report on Form 10-KSB.

Transitional Small Business Disclosure Format (check one):  Yes [ ] No [X]

<PAGE>

                             CRAGAR INDUSTRIES, INC.
                          ANNUAL REPORT ON FORM 10-KSB


                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                            Page
<S>           <C>                                                           <C>
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
              ITEM 1.    DESCRIPTION OF BUSINESS . . . . . . . . . . . . . . .1
              ITEM 2.    DESCRIPTION OF PROPERTY . . . . . . . . . . . . . . 11
              ITEM 3.    LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . 11
              ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF
                         SECURITY HOLDERS. . . . . . . . . . . . . . . . . . 11

PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
              ITEM 5.    MARKET FOR COMMON EQUITY
                         AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . 11
              ITEM 6.    MANAGEMENT'S DISCUSSION AND ANALYSIS OR
                         PLAN OF OPERATION . . . . . . . . . . . . . . . . . 14
              ITEM 7.    FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . 25
              ITEM 8.    CHANGES IN AND DISAGREEMENTS WITH
                         ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                         DISCLOSURES . . . . . . . . . . . . . . . . . . . . 25

PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
              ITEM 9.    DIRECTORS AND EXECUTIVE OFFICERS OF THE
                         REGISTRANT. . . . . . . . . . . . . . . . . . . . . 25
              ITEM 10.   EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . 25
              ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                         OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . 25
              ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED
                         TRANSACTIONS. . . . . . . . . . . . . . . . . . . . 25
              ITEM 13.   EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . 26
</TABLE>

                                        i
<PAGE>

                                     PART I

ITEM 1.    DESCRIPTION OF BUSINESS

GENERAL

         The Company designs, produces, and sells high-quality custom vehicle 
wheels and wheel accessories. The Company believes that the CRAGAR name is 
one of the most widely recognized brand names in the automotive aftermarket 
industry. The Company markets a wide selection of custom wheels and 
components that are designed to appeal to automotive enthusiasts who desire 
to modify the styling, design, or performance of their cars, trucks, or vans. 
CRAGAR sells its wheel products in the automotive aftermarket through a 
national distribution network of value-added resellers, including tire and 
automotive performance warehouse distributors and retailers and mail order 
houses. Major resellers include The Heafner Group, Inc. (which includes J. H. 
Heafner Company, Inc., ITCO Logistics Corp., Speed Merchants dba Competition 
Parts Warehouse and Oliver and Winston, Inc.), Keystone Automotive 
Operations, Inc., RELCO Corp., Buckeye Sales, Inc. and Discount Tire. The 
Company also intends to expand the capabilities of its website or utilize 
other E-commerce websites to enable the marketing and sale of certain of its 
custom vehicle wheels and wheel accessories and other performance replacement 
parts over the Internet.

         Traditionally, the Company's ten largest customers have accounted 
for a substantial portion of the Company's gross sales. For the year ended 
December 31, 1998, the Company's ten largest customers accounted for 
approximately 57.2% of gross sales, with J.H. Heafner Company, Inc. 
accounting for 13.5% of gross sales, Keystone Automotive accounting for 7.7% 
and RELCO Corp. accounting for 5.1% of gross sales. For the year ended 
December 31, 1997, the Company's ten largest customers accounted for a total 
of approximately 66.3% of gross sales, with Super Shops, Inc., ("Super 
Shops") accounting for 27.5%, J.H. Heafner Company, Inc. accounting for 9.6%, 
and Keystone Automotive Operations, Inc. accounting for 6.2% of gross sales. 
The Company does not have any long-term contractual relationships with any of 
its major customers. Due to the significant concentration of sales to the 
Company's top ten customers, the loss of any one such customer has had and 
could continue to have a material impact on the Company's results of 
operations and financial condition. See "Risk Factors - Dependence on Key 
Distributors; Implementation of New Distribution Channels."

In order to appeal to a broad spectrum of consumers, the Company offers a 
wide selection of custom wheels. The Company's products include entry-level 
custom steel wheels, wire and spoked wheels, chrome plated, one-piece cast 
aluminum wheels, and race wheels. The Company's wheels feature classic 
designs that have been sold under the CRAGAR name since the 1960s as well as 
contemporary designs that reflect continually changing consumer preferences. 
The Company sells its products under a variety of brand names, including 
CRAGAR(R), CRAGAR Lite(R), Keystone(R) Klassic(R), S/S(R), Star Wire(TM), 
CRAGAR XLS(TM), TRU=CRUISER(TM), and TRU=SPOKE(R).

ORGANIZATION AND CORPORATE HISTORY

         The Company was incorporated in Delaware in 1992 to acquire certain 
assets, including the accounts receivable, inventory, property, equipment, 
patents, trademarks, and copyrights in a leveraged buyout from the Wheel and 
Tire Division of Mr. Gasket Company, Inc., which had filed for 
reorganization. In December 1996, the Company completed an initial public 
offering of 850,000 shares of its Common Stock, $0.01 par value ("Common 
Stock") and warrants to purchase 850,000 shares of Common Stock (the 
"Warrants"). The initial public offering price was $6.00 per share of Common 
Stock and $0.10 per Warrant. Each Warrant was immediately exercisable and 
entitles the registered holder to purchase one share of Common Stock at a 
price of $6.60. The Warrants expire on December 18, 2001. In connection with 
the offering, the Company issued to the underwriter additional warrants to 
purchase up to 85,000 shares of Common Stock and 85,000 Warrants at an 
exercise price of $7.50 per share of Common Stock and $0.125 per Warrant. The 
underwriter was also granted an over-allotment option of 127,500 shares of 
Common Stock and/or 127,500 Warrants. On December 31, 1996, the underwriter 
exercised a portion of its over-allotment option and purchased 70,000 shares 
of Common Stock and 127,500 Warrants. The underwriters' option to purchase 
the additional 57,500 shares of Common Stock has expired. During 1997, Class 
A, B and C warrants to purchase 243,685 shares were exercised. During 1998, 
no warrants to purchase shares of Common Stock were exercised.

                                       1
<PAGE>

         During January 1998, the Company issued 22,500 shares of preferred 
stock in exchange for $1,650,000 cash and the conversion of $600,000 of 
investor notes payable. The Company also granted 333,333 warrants valued at 
$229,333 to purchase shares of Common Stock in connection with the preferred 
stock issuance. On April 20, 1998, in connection with the establishment of a 
credit facility, the Company issued warrants to NationsCredit Commercial 
Funding valued at $21,960 to purchase 50,000 shares of Common Stock at a 
price of $5.25 per share. On August 8, 1998, the Company agreed to grant 
warrants to certain individuals who provided bridge loans to the Company in 
the aggregate principal amount of $600,000 during December 1997 and January 
1998. For each $100,000 made available to the Company, the Company agreed to 
grant warrants to purchase 1,500 shares of Common Stock at an exercise price 
of $3.00 per share. The principal amounts of the loans were subsequently 
converted into 60,000 shares of Series A Preferred Stock. In addition, the 
Company agreed to grant warrants to certain individuals who pledged assets to 
secure the Company's obligations under the Loan and Credit Agreement with 
NationsCredit Commercial Funding. The Company agreed to grant warrants to 
purchase 7,000 shares of Common Stock for each $100,000 in value of the 
assets pledged on an annual basis, which warrants will be exercisable at an 
exercise price equal to the price of the Company's Common Stock on the date 
of grant. See "Factors That May Affect Future Results and Financial Condition 
- Dependence on External Financing.

INDUSTRY BACKGROUND

SIZE AND GROWTH OF INDUSTRY

         The automotive wheel industry is generally divided into two 
segments, original equipment wheels and custom aftermarket wheels. The custom 
wheel segment, in which the Company operates, represented manufacturer sales 
of approximately $737 million in 1996, an increase of 56.2% over the total of 
$472 million achieved in 1990. The Company believes that revenues in the 
industry increased in 1997 and 1998, but at a lower rate. The Company 
believes, however, that unit sales in the industry remained flat or fell in 
1997 and 1998, primarily as a result of original equipment manufacturers 
providing better wheels from the factory.

         The Company believes that the growth in revenues, as represented 
above, from the custom wheel segment of the automotive wheel industry is 
attributable to several factors, including (i) increased sales of domestic 
cars, sport utility vehicles, and light trucks, which have resulted in 
greater numbers of vehicles in use and, consequently, more potential 
consumers of automotive aftermarket products such as the Company's wheels; 
(ii) increased average vehicle life, which the Company believes contributes 
to greater demand for automotive aftermarket products, such as custom wheels, 
as vehicle owners seek to enhance the appearance of older vehicles; (iii) 
increased sales of custom wheels through tire dealers, performance retailers, 
and other specialty automotive outlets; and (iv) increased price per unit. 


PRODUCT OFFERINGS

         The custom wheel market is generally divided into six product 
categories: one-piece aluminum wheels (representing the largest segment of 
the market based on dollar sales); performance racing wheels; two-piece 
aluminum wheels; steel wheels; wire wheels; and composite wheels. These 
product categories are differentiated by the material content of the wheel, 
the level of technology necessary to produce the wheel, price, target 
customer, styling attributes, and applications. While the Company offers 
products in each of these product categories, the Company believes that the 
market for one- and two-piece aluminum wheels has grown substantially 
relative to the other categories of wheels and will continue to do so in the 
future.

PRODUCT DISTRIBUTION

         Custom wheel manufacturers and assemblers may sell their products to 
wholesalers (such as large warehouse distribution centers), directly to 
product retailers (such as tire and auto parts dealers and performance 
automotive centers), or directly to the public via mail order, sales outlets, 
direct telemarketing, or E-commerce using the Internet. A number of the 
Company's competitors have taken a step toward vertical integration by 
establishing company-owned warehouse distribution centers that can sell their 
products to retailers or directly to the public. To spread the overhead costs 
associated with establishing these company-owned distribution centers, such 
centers often carry competitors' products. In addition to the other 
distribution channels discussed herein, the Company has at


                                       2
<PAGE>

certain times in the past sold its products through distribution centers 
operated by its competitors, such as American Racing Equipment, Inc. and 
Prime Wheel-Golden Wheel.

         The Company believes that a majority of retail custom wheel 
purchases traditionally have been made at four outlet types: new vehicle 
dealers, specialty product and installation outlets, speed shops and 
performance retailers, and mail order companies. The Company anticipates, 
however, that a growing percentage of custom wheel purchases will be made via 
the Internet in E-commerce transactions.

FRAGMENTED NATURE OF INDUSTRY

         The Company believes that the custom wheel industry is highly 
fragmented, with only a few companies holding market share in excess of 10%. 
Like the Company, many of its competitors do not manufacture their own 
wheels, but purchase the wheel components or finished wheels from third 
parties for later assembly and sale to the public. Unlike the Company, 
however, most of its competitors do not offer a full line of custom wheel 
products nor have an established brand identity. The Company believes that 
the fragmented nature of the custom wheel market offers an opportunity for 
certain competitors, such as the Company, to act as market consolidators 
through the acquisition of other custom wheel companies or product lines that 
can complement their existing operations.

The industry data presented herein is derived from information obtained from 
the Specialty Equipment Market Association.

BUSINESS STRATEGY

         The Company's objective is to become the premier supplier of custom 
wheels and wheel accessories in the automotive aftermarket. The Company will 
seek to achieve this objective by pursuing the following strategies:

PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES

         The Company plans to pursue strategic acquisitions and alliances to 
capitalize on the substantial fragmentation of the market for custom wheels, 
wheel accessories and other automotive aftermarket products. Acquisition or 
alliance candidates will be selected based on their potential to reduce 
duplicative expenditures, broaden the Company's product lines or enlarge its 
product offerings, expand the geographical scope of its distribution network 
into new or underserved markets, enhance the Company's marketing, selling, 
distribution or product development capabilities, and reduce unit costs. The 
Company currently has no specific agreements or understandings with respect 
to any acquisitions or alliances; however, the Company has held and will 
continue to hold informal discussions with a variety of candidates.

EXPAND PRODUCT DISTRIBUTION

         The Company is attempting to expand its product distribution 
capabilities in underserved markets, such as California, southern Florida, 
New England, and the mid-Atlantic United States, and has broadened its 
customer base to include major tire distributors that supply both national 
and local retail tire stores. Historically, the Company has focused its 
distribution efforts on selected domestic markets, which are served by 
value-added resellers specializing in selling high-performance automotive 
aftermarket parts and accessories. The Company also has implemented a 
national accounts program in which it sells products directly to mass 
merchandisers that require factory direct service. The Company has 
established a redistribution arrangement necessary to serve these national 
account prospects as well as certain local and regional areas not serviced by 
its current warehouse distributors. In addition, the Company will continue to 
develop and enhance relationships with distributors in selected foreign 
countries, such as Japan, Mexico, Russia, Australia, and Germany, where it 
believes it currently enjoys significant brand name recognition.


                                       3
<PAGE>

ENHANCE EXISTING PRODUCT LINES; DEVELOP NEW PRODUCTS

         The Company is always examining ways to enhance its existing product 
lines by adapting its wheels and accessories to fit additional vehicle 
models, makes, and years and to develop new product lines to meet changing 
consumer demands. During the past two years the Company introduced its CRAGAR 
XLS wheel line, introduced the one-piece aluminum S/S 980 series wheels, and 
broadened its TRU SPOKE line with an eighty spoke design and a new line of 
accessories. The Company also has developed a new line of motorcycle wheels 
for Harley-Davidson Motorcycles and has the engineering and production 
capabilities to develop motorcycle wheels for other cruiser bikes, such as 
those manufactured by Excelsior Henderson, American Quantum, Confederate, 
Titan, Big Dog Cycles, California Motor Cycle and Bikers Dream, although the 
Company has had no discussions with any of these companies other than Titan 
and Bikers Dream.

INCREASE MARKETING EFFORTS

         The Company intends to continue its marketing, advertising, and 
promotional efforts to further enhance and leverage the strength of the 
CRAGAR brand name. Promotional efforts will include a continued relationship 
with drag race drivers and teams participating in events sanctioned by the 
National Hot Rod Association ("NHRA"). The Company, however, anticipates 
reducing future expenditures associated with its NHRA commitment. As a means 
to leverage the strength of its brand names, the Company also will pursue 
licensing arrangements for its brand names to be featured on high-quality 
automotive aftermarket and other products.

INTERNET-BASED MARKETING AND E-COMMERCE

         The Company intends to expand the attributes and functionality of 
its existing website and utilize other E-commerce websites to enable the 
marketing and sale of certain of its custom vehicle wheels and wheel 
accessories through the Internet. In addition, the Company currently is 
seeking to enter into agreements with one or more of the major Internet 
portals to establish E-commerce stores for certain of its products. Although 
the Company believes that marketing and selling its products online could 
significantly expand the market for its products, there can be no assurance 
that the Company will be successful in implementing this strategy or that the 
sale of the Company's products on the Internet will be successful.

IMPROVE OPERATING EFFICIENCIES

The Company intends to continue improving its operating efficiencies by 
enhancing its assembly and materials handling through plant upgrades, the 
purchase of new equipment, and the implementation of more sophisticated 
inventory management and by outsourcing certain of its production processes. 
The Company has continued to selectively outsource the processing, assembly, 
and manufacturing of some of its custom wheels, components, and accessories, 
and expects to explore further outsourcing in the future. The Company 
believes that the outsourcing of selected products and processing operations 
will enable it to devote a greater percentage of its resources to product 
design, marketing, and distribution, and to shift certain inventory, 
warranty, and other risks to its suppliers.


                                       4
<PAGE>

PRODUCTS

         The Company offers a large variety of custom wheels, which can be 
divided into six general categories: (i) composite wheels, known as Legacy 
and CRAGAR Lite wheels; (ii) wire or spoked wheels; (iii) race wheels; (iv) 
one-piece cast aluminum wheels; (v) steel wheels; and (vi) street steel 
wheels. In addition, the Company offers a full line of wheel accessories, 
including lug nuts, spacers, bolts, washers, spinners, and hubcaps.

         The following table provides sales and other information about the 
Company's major product lines:
<TABLE>
<CAPTION>
                            % OF 1998         % OF 1997             TYPE OF
      PRODUCT LINE          GROSS SALES       GROSS SALES         CONSTRUCTION           CUSTOMER NICHE
      ------------          -----------       -----------      -------------------    -------------------
<S>                          <C>               <C>             <C>                    <C>
Legacy and CRAGAR Lite        29.2%             25.7%          Inner cast aluminum    Nostalgia car and
Wheels                                                         disc welded to outer   current line truck
                                                               steel rim              owners

Wire or Spoked Wheels,        20.0%             18.1%          Steel spokes           Urban and inner city
Star Wire                                                      attached to inner      consumers
                                                               steel hub and outer
                                                               steel rim or felly

Race Wheels                   14.4%             16.5%          Two outer aluminum     Pro and amateur race
                                                               rim halves welded      drivers and
                                                               together with          performance car
                                                               aluminum center or     owners
                                                               spacer

One-piece Cast Aluminum       14.9%             15.3%          Cast one-piece         Low and high-end
Wheels                                                         aluminum with          consumers of all
                                                               machined, painted or   types of vehicles
                                                               chrome plated

Steel Wheels                   7.9%             10.4%          Inner steel disc       Low-end consumers of
                                                               welded to outer        all types of vehicles
                                                               steel rim

Street Steel Wheels            7.5%              7.3%          Three-piece steel      Hot rod and race
                                                               and aluminum center    enthusiasts with
                                                               welded to outer        cars and trucks
                                                               steel rim

Wheel Accessories              4.9%              4.5%          Steel and aluminum     All types of
                                                               hub caps, lug nuts,    consumers and
                                                               spinners, locks,       vehicles
                                                               spacers

Miscellaneous                  1.2%              2.2%          Excess wheels and      N/A
                                                               accessories
</TABLE>

                                            5
<PAGE>

LEGACY AND CRAGAR LITE WHEELS

         Legacy and Cragar Lite are composite wheels consisting of a chrome 
plated die cast aluminum centers welded to a chrome plated rolled steel outer 
rim. The Company pioneered the process of attaching the aluminum center to 
the steel rim in 1964. In addition to the Company's popular S/S and SS/T 
composite wheels, the Company in 1995 purchased the exclusive rights to 
manufacture and market the Keystone Klassic, one of the most popular wheels 
in automotive history. The Company believes this product solidifies CRAGAR's 
Legacy Line to include the most popular nostalgia wheels in the market.

WIRE OR SPOKED WHEELS

         The Company offers a complete line of chrome plated wire or spoked 
wheels. The Company sells most of these products under the TRU=SPOKE brand 
name, although it offers a spoked wheel product using patented technology, 
called the Star Wire, which is sold under the Cragar brand name. Wire wheels 
are high-end, niche products that are sold to a limited group of vehicle 
owners. In 1998, the Company introduced a new decorative medallion and 
spinner and a new wheel style, including a wheel with 80 spokes. The Company 
also supplies other companies with wire wheels under private labels.

RACE WHEELS

         CRAGAR race wheels are higher-priced, three-piece, lightweight, 
polished aluminum wheels. These wheels are used by professional drag racers, 
who are sometimes provided CRAGAR wheels without charge in return for their 
promotion of CRAGAR and for displaying a CRAGAR sticker on their cars. The 
Super Race and the Super Star are the Company's two highest-end professional 
race wheels.

         The Company also sells race wheels to amateur racers, professional 
racers, and individuals who want the look of the race wheel for street use. 
The race wheels for this product category are the Dragstar and the Super Lite 
II. In 1998, the Company introduced a steel wheel for truck racing.

ONE-PIECE CAST ALUMINUM WHEELS

         The Company currently offers several styles of one-piece cast 
aluminum wheels. One category of one-piece cast aluminum wheels consists of 
high-end, chrome-plated, polished, machine finish or silver-painted wheels 
with innovative styling. The highest-end styles are designed for CRAGAR's 
"muscle car" or "hot rod" niche, including classic Mustangs, Camaros, 
Firebirds, and Monte Carlos. In addition, these wheels are also popular with 
owners of high-end European and Japanese cars. The Company also offers 
certain other polished and machine finished one-piece, cast aluminum wheels 
designed for light trucks. In 1998, the Company introduced four styles under 
its XLS series and a newly designed version of its S/S style wheel called the 
S/S 980 series. These wheels are currently purchased from manufacturers in 
the United States and Brazil.

STEEL WHEELS

         CRAGAR steel wheels have been sold for over 30 years. While aluminum 
has slowly been replacing steel as the major wheel material, the Company 
continues to sell large quantities of steel wheels, which represent a less 
costly option for many consumers. The Company currently has a supply 
arrangement to purchase fully assembled steel wheels.

STREET STEEL WHEELS

         The Company sells chrome plated steel, look-alike versions of its 
race wheels. The Street Star is a lower-priced copy of the Dragstar, and the 
Street Lite is a copy of the SuperLite II.


                                        6
<PAGE>

WHEEL ACCESSORIES

         The Company offers a large and varied line of accessories, including 
hubcaps, medallions, lug nuts, washers, steel locks, spinners, beadlock 
rings, and trim rings. Accessories are sold both packaged and loose.

         The packaging is either in boxes or shrink wrap with paper board. 
Most of these accessories are purchased from sources in the Far East.

PRODUCT DEVELOPMENT

         The Company currently offers a broad spectrum of products that are 
designed to fit a wide variety of automobiles, vans, and trucks. The Company 
is always evaluating ways to leverage these product lines by adapting its 
wheels and accessories to fit additional vehicle models, makes, and years. 
During the past two years, the Company introduced its CRAGAR XLS wheel line 
and the CRAGAR S/S 980 series, and broadened its TRU SPOKE line with a new 
wheel design with eighty spokes and a new line of accessories. The Company 
has also developed a line of motorcycle wheels for Harley-Davidson 
Motorcycles and has the engineering and production capabilities to develop 
motorcycle wheels for other cruiser bikes, such as those manufactured by 
Excelsior Henderson, American Quantum, Confederate, Titan, Big Dog Cycles, 
California Motor Cycle and Bikers Dream, although the Company has had no 
discussions with any of these companies other than Titan and Bikers Dream.

         To enhance its product development efforts, the Company engages 
experienced outside consultants to assist the Company's in-house product 
development person.

DISTRIBUTION, SALES AND MARKETING

PRODUCT DISTRIBUTION

         The Company currently sells its products through the following 
distribution channels:

WAREHOUSE DISTRIBUTORS

         The Company sells its products to warehouse distributors that sell 
to tire dealers, automotive performance retailers, service stations, and 
specialty boutiques. Some of these customers include The Heafner Group, Inc., 
Keystone Automotive Operations, Inc. and RELCO Corp. Automotive aftermarket 
warehouse distributors often stock a full selection of high-quality 
merchandise. The Company believes that warehouse distributors will continue 
to be an important factor in the Company's penetration of new geographic 
areas. Sales to warehouse distributors accounted for 51.1% and 41.0% of the 
Company's gross sales in 1998 and 1997, respectively.

TIRE DEALERS AND AUTOMOTIVE PERFORMANCE RETAILERS

         The Company sells its custom wheels and other products to major tire 
and automotive performance retailers, including Sears Roebuck & Co., Pep 
Boys-Manny, Moe & Jack, Inc., Discount Tire, and Les Schwab, which specialize 
in selling high-performance aftermarket automotive parts and accessories 
throughout the United States. The Company believes that tire dealers have 
experienced success with "combination" sales of tires with custom wheels and 
that automotive performance retailers serve as an important link to 
automotive enthusiasts. Tire dealers and automotive performance retailers, 
two traditionally separate channels, are beginning to overlap in their 
product coverages. Gross sales to tire dealers and automotive performance 
retailers accounted for 31.5% and 45.3% of the Company's gross sales in 1998 
and 1997, respectively.

MAIL ORDER OUTLETS

         The Company sells its products to mail order catalog houses, 
including Buckeye Sales and Atech Motorsports, for resale to the public. The 
Company believes that inclusion of its products in large mail-order catalogs 
will continue to be a significant factor in promoting the brand-name 
recognition of the Company's products


                                       7
<PAGE>

and increasing direct sales to consumers. Sales to mail order outlets 
accounted for 14.3% and 8.8% of the Company's gross sales in 1998 and 1997, 
respectively.

INTERNATIONAL DISTRIBUTORS

         The Company sells to exporters and directly to distributors in 
select foreign countries. International sales accounted for approximately 
3.1% and 4.8% of the Company's gross sales in 1998 and 1997, respectively.

INTERNET-BASED SALES AND E-COMMERCE

The Company intends to expand the attributes and functionality of its 
existing website or utilize other E-commerce websites to enable the marketing 
and sale of certain of its custom vehicle wheels and wheel accessories 
through the Internet. In addition, the Company currently is seeking to enter 
into agreements with one or more of the major Internet portals to establish 
E-commerce stores for certain of its products. Although the Company believes 
that marketing and selling its products online could significantly expand the 
market for its products, there can be no assurance that the Company will be 
successful in implementing this strategy or that the sale of the Company's 
products on the Internet will be successful.

ADDITIONAL DISTRIBUTION EFFORTS

         In addition to the above product distribution channels, the Company 
intends to increase its distribution capabilities in underserved markets, 
such as California, southern Florida, New England, and the mid-Atlantic 
United States, and to broaden its customer base to include more major tire 
distributors that supply both national and local retail tire stores. The 
Company also has implemented a national accounts program in which it sells 
products directly to mass merchandisers that require factory direct service. 
The Company has established redistribution arrangements necessary to serve 
these national account prospects as well as certain local and regional areas 
not currently serviced by its current warehouse distributors. In addition, 
CRAGAR will continue to develop and enhance relationships with distributors 
in select foreign jurisdictions, such as Japan, Mexico, Russia, Australia and 
Germany, where it believes it currently enjoys significant brand-name 
recognition.

SALES AND MARKETING

         As of December 31, 1998, the Company employed six individuals in its 
sales and marketing department and retained three independent representative 
agencies. The Company's sales and marketing employees, as well as outside 
agencies, are responsible for implementing marketing plans and sales 
programs, providing technical advice and customer service, handling customer 
inquiries, following up on shipments to customers, informing customers of 
special promotions, coordinating the Company's trade shows, and providing 
other types of customer service.

         As one of its marketing programs, the Company sponsors certain 
professional and amateur drag race participants who race in events sanctioned 
by the NHRA. The Company sponsors cars carrying the CRAGAR logo in all three 
professional categories, including the Top Fuel, Funny Car, and Pro Stock 
divisions. Among the many well-known drivers and teams that CRAGAR has 
relationships with are Kenny Bernstein (1996 Top Fuel Champion), Warren 
Johnson (multi-year Pro Stock Champion) and Larry Dixon (1995 Rookie of the 
Year); team owners such as Don "The Snake" Prudhomme (legendary driver and 
former champion); and teams with major sponsors, such as Budweiser, Miller 
Genuine Draft, Skoal Bandit, ProLong, GM Performance Parts, and Mac Tools.

         Outside sales representatives typically interface directly with the 
Company's customers. These individuals approach the Company's customers on a 
frequent basis to solicit orders and are paid a commission on each sale. 
Sales representatives work with a particular internal salesperson and 
together deal with each customer in order to facilitate high levels of 
service.

         For the year ended December 31, 1998, the Company's ten largest 
customers accounted for a total of approximately 57.2% of gross sales, with 
J. H. Heafner Company, Inc. accounting for 13.5%, Keystone Automotive 
Operations, Inc. accounting for 7.7% and RELCO Corp. accounting for 5.1% of 
gross sales. In 1997, the Company's ten largest customers accounted for a 
total of approximately 66.3% of its gross sales, with Super Shops,


                                       8
<PAGE>

J. H. Heafner Company, Inc., and Keystone Automotive Operations, Inc. 
accounting for 27.5%, 9.6%, and 6.2% of gross sales, respectively. The 
Company does not have any long-term contractual relationships with any of its 
major customers. Due to the significant concentration of sales to the 
Company's top ten customers, the loss of any one such customer has had and in 
the future could have a material impact on the Company's results of 
operations and financial condition.

         On September 19, 1997, the Company's principal customer, Super 
Shops, filed for reorganization under Chapter 11 of the Federal Bankruptcy 
Code in the United States Bankruptcy Court, Central District of California. 
At December 31, 1997, the account receivable owed to the Company by Super 
Shops totaled $3,523,028, all of which has been reserved. Super Shops has 
ceased operations and has begun a liquidation plan. Because the Company is an 
unsecured creditor, and liquidation proceeds may not be sufficient to satisfy 
claims of secured creditors, there is no assurance that the Company will 
recover any of the account receivable from Super Shops. Furthermore, even if 
the Company is able to recover a portion of the account receivable, the 
timing and amount of such recovery is uncertain. Accordingly, as of December 
31, 1998, the Company has written off the entire $3,523,028 account 
receivable from Super Shops. It is uncertain whether other current or new 
customers can make up for the lost revenues generated by Super Shops. See 
"Management's Discussion and Analysis or Plan of Operation-Liquidity and 
Capital Resources."

         The Company's standard payment terms generally provide for payment 
by its customers no later than the 25th day of the month following the month 
of the invoice, with a 2% discount offered for payments made by the 10th day 
of the month. Certain customers receive longer terms, and at certain times of 
the year terms are offered which have in the past extended to as much as 180 
days from the date of invoice. The Company's average accounts receivable days 
outstanding was 89 days as of December 31, 1998.

PRODUCTION

         The Company assembles most of its products at its facility in 
Phoenix, Arizona. While outside vendors manufacture most of the component 
parts used in the Company's products, the Company undertakes certain basic 
production operations, including bending spokes on presses; de-flashing 
various components; piercing rims, hubs, and fellies for wire and spoked 
wheels; dimpling rims for wire wheels; and machining a variety of components. 
In recent periods, the Company has begun to outsource selectively the 
processing, assembly, and manufacture of some of its custom wheels, 
components, and accessories, and expects to explore the further outsourcing 
of product production in the future. The Company believes that the 
outsourcing of selected products and processing operations will enable it to 
devote a greater percentage of its resources to product design, marketing, 
and distribution and to shift certain inventory, warranty, and other risks to 
its suppliers. In addition, the Company intends to continue improving its own 
production operations through plant improvements, the purchase of new 
equipment, and the implementation of an enhanced inventory management system.

         The Company maintains its own in-house testing facility for its 
wheels. The Company also utilizes independent test laboratories for all its 
wheels, which certify their results relating to load ratings, cornering 
fatigue, and radial fatigue.

COMPETITION

         The market for the Company's products is highly competitive and 
fragmented with over 100 domestic and foreign sellers of custom wheels. 
Competition is based primarily on product selection (including style and 
vehicle fit), product availability, quality, design innovation, price, 
payment terms, and service. Competition in the custom wheel market is 
intense, and the Company believes that several major wheel manufacturers, 
such as American Racing Equipment, Inc., Prime Wheel-Golden Wheel, 
Progressive Custom Wheels, Inc., Ultra Custom Wheel Co., American Eagle and 
Superior Industries International, as well as suppliers to major automobile 
manufacturers, pose significant competition because of their substantial 
resources.

         The level and source of the Company's competition varies based on 
product category. Cast aluminum wheels comprise the largest portion of the 
custom wheel market. There are numerous competitors in the cast wheel market, 
including American Racing Equipment, Inc., Prime Wheel-Golden Wheel, 
Progressive Custom Wheels, 


                                       9
<PAGE>

Inc., Ultra Custom Wheel Co., American Eagle, Superior Industries 
International and certain smaller domestic companies as well as numerous 
foreign manufacturers. Most of these companies also make composite wheels. In 
race wheels, the Company has two major competitors, Weld Racing, Inc. and 
Center Line Performance Wheels. The largest wire wheel competitors include 
Roadster Wheels, Inc., Crown Wire Wheel Co., Luxor and Dayton Wheel Products, 
Inc. In steel wheels, competitors include Mangels Wheels, Unique Wheel, Inc. 
and American Racing Equipment, Inc.

INTELLECTUAL PROPERTY

         The Company markets its custom wheels and products under a variety 
of brand names designed to capitalize on its reputation. The Company believes 
that its trademarks, most importantly CRAGAR, are critical to its business. 
The Company also owns the rights to certain design and other patents and also 
relies on trade secrets and proprietary know-how, which it seeks to protect, 
in part, through confidentiality and proprietary information agreements. The 
Company has also entered into agreements with its vendors to restrict the use 
of technology provided by the Company. There can be no assurance, however, 
that the Company's patents will preclude the Company's competitors from 
designing competitive products, that the proprietary information or 
confidentiality agreements with employees and others will not be breached, 
that the Company's patents will not be infringed, that the Company would have 
adequate remedies for any breach or infringement, or that the Company's trade 
secrets will not otherwise become known to or independently developed by 
competitors.

         CRAGAR(R), CRAGAR XLS(TM), Keystone(R) Klassic(R), Legacy(TM), 
CRAGAR Lite(R), Star Wire(TM), TRU=CRUISER(TM), Street Pro(R), S/S(R), The 
Wheel People(TM), and TRU=SPOKE(R) are trademarks of the Company.

PRODUCT RETURNS AND WARRANTIES

         Historically, the Company's wheels have been sold with a limited 
one-year warranty from the date of purchase. The Company's warranties 
generally provide that, in the case of defects in material or workmanship, 
the Company, at its option, will either replace or repair the defective 
product without charge. The Company currently maintains product liability 
insurance for its products, with limits of $1.0 million per occurrence and 
$2.0 million in the aggregate, per annum. Such coverage is becoming 
increasingly expensive. There can be no assurance that the Company's 
insurance will be adequate to cover future product liability claims or that 
the Company will be able to maintain adequate liability insurance at 
commercially reasonable rates.

The Company maintains stock adjustment and warranty return policies. The 
Company's stock adjustment return policy allows the customer to return 
certain factory-fresh, resaleable merchandise to the Company for credit. The 
Company's warranty return policy allows customers to return certain defective 
products that are covered under the Company's limited warranty. In both 
cases, customers are only allowed to return a specified percentage, usually 
less than 2%, of the previous year's purchases. Should this specified 
percentage be exceeded, the Company at its discretion can either reject the 
return request or accept the return request and charge a 15% handling fee. On 
a quarterly basis, the Company recognizes a provision for stock adjustments 
and warranty returns in arriving at net sales. The provision is based on a 
historical 12 month moving average of actual return activity. Stock 
adjustment returns were approximately $787,764 in 1998 compared to 
approximately $630,142 for 1997. Warranty returns were approximately $213,355 
in 1998 and approximately $473,458 in 1997. There can be no assurance that 
future warranty claims, returns, or stock adjustments will not be materially 
greater than anticipated and have a material adverse effect on the Company's 
business, financial condition, and results of operations.

EMPLOYEES

         As of December 31, 1998, the Company had 76 employees, the majority 
of whom were full-time employees, and six independent contractors. Employment 
levels vary during the course of a year due to the seasonality of the 
Company's business. The Company considers its employee relations to be good. 
None of the Company's employees are represented by unions.


                                       10
<PAGE>

ITEM 2.   DESCRIPTION OF PROPERTY

         The Company's executive offices, product development, sales, 
accounting, computer, production, and distribution facilities are currently 
housed in a leased industrial building. The 167,000 square foot facility is 
located in Phoenix, Arizona. The lease expires in June 2003, and the Company 
has a right of first refusal to purchase the property. The Company believes 
that the facility is more than adequate for its current operations and those 
contemplated by the Company in the foreseeable future. As a result, the 
Company may attempt to sub-lease a portion of the facility in the future.

ITEM 3.   LEGAL PROCEEDINGS

         The Company is an unsecured creditor in the matter of IN RE SUPER 
SHOPS, INC., ET AL., Case No. LA 97-46094-ER, a bankruptcy action filed by 
Super Shops, Inc., previously the Company's primary customer. Because the 
Company is an unsecured creditor in this matter, the amount and timing of the 
recovery, if any, on its account receivable from Super Shops, Inc. is 
uncertain. In connection with this proceeding, the Company incurred an 
obligation of $125,000 in 1998 for preference payments as a result of the 
on-going liquidation of the bankruptcy estate. There are currently no other 
material pending proceedings to which the Company is a party or to which any 
of its property is subject, although the Company from time to time is 
involved in routine litigation incidental to the conduct of its business.

         The Company currently maintains product liability insurance, with 
limits of $1.0 million per occurrence and $2.0 million in the aggregate per 
annum. However, such coverage is becoming increasingly expensive and 
difficult to obtain. There can be no assurance that the Company will be able 
to maintain adequate product liability insurance at commercially reasonable 
rates or that the Company's insurance will be adequate to cover future 
product liability claims. Any losses that the Company may suffer as a result 
of claims in excess of the Company's coverage could have a material adverse 
effect on the Company's business, financial condition, and results of 
operations.

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

         During the Company's fiscal quarter ended December 31, 1998, there 
were no matters submitted to a vote of security holders.

                                     PART II

ITEM 5.   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

DESCRIPTION OF EXISTING CAPITAL STOCK

         The Company is a Delaware corporation and its affairs are governed 
by its Amended and Restated Certificate of Incorporation ("Certificate of 
Incorporation") and Bylaws and the Delaware General Corporation Law. The 
following description of the Company's capital stock, which is complete in 
all material respects, is qualified in all respects by reference to the 
Company's Certificate of Incorporation and Bylaws, which have been filed as 
exhibits to the Company's Registration Statement on Form SB-2 (Registration 
No. 333-13415), and by the Certificate of Designation relating to the Series 
A Convertible Preferred Stock, a form of which has been filed as an exhibit 
to the Company's Amendment No. 1 to Current Report on Form 8-K filed January 
23, 1998.

         The authorized capital stock of the Company consists of 5,000,000 
shares of Common Stock, $0.01 par value, and 200,000 shares of Preferred 
Stock, $0.01 par value.


                                        11
<PAGE>

COMMON STOCK

         The holders of outstanding shares of Common Stock are entitled to 
receive dividends out of assets legally available thereof at such times and 
in such amounts as the Board of Directors may, from time to time, determine, 
subject to any preferences which may be granted to the holders of Preferred 
Stock. Holders of Common Stock are entitled to one vote per share on all 
matters on which the holders of Common Stock are entitled to vote. The Common 
Stock is not entitled to preemptive rights and is not subject to redemption 
or conversion. Upon liquidation, dissolution, or winding-up of the Company, 
the assets (if any) legally available for distribution to shareholders are 
distributable ratably among the holders of the Common Stock after payment of 
all debt and liabilities of the Company and the liquidated preference of any 
outstanding class or series of Preferred Stock. The rights, preferences, and 
privileges of holders of Common Stock are subject to the preferential rights 
of the Series A Convertible Preferred Stock (the "Series A Preferred Stock") 
and any other outstanding series of Preferred Stock that the Company may 
issue in the future.

PREFERRED STOCK

         The Board of Directors may, without further action of the 
stockholders of the Company, issue shares of Preferred Stock in one or more 
series and fix or alter the rights or preferences thereof, including the 
voting rights, redemption provisions (including sinking fund provisions), 
dividend rights, dividend rates, liquidation preferences, conversion rights, 
and any other rights, preferences, privileges, and restrictions of any wholly 
unissued series of Preferred Stock. The rights of holders of Common Stock are 
subject to, and may be adversely affected by, the rights of holders of the 
Series A Preferred Stock and of any other Preferred Stock that may be issued 
in the future. The Series A Preferred Stock and the issuance of shares of 
additional Preferred Stock could adversely affect the voting power of holders 
of Common Stock and could have the effect of delaying, deferring, or 
preventing a change in control of the Company or other corporate action.

         On January 23, 1998, the Company raised approximately $2.0 million 
from a private placement of 20,000 shares of Series A Preferred Stock and 
related Warrants. The private placement was made to a group of accredited 
investors in reliance on the exemptions from registration provided by 
Sections 4(2) and 4(6) under the 1933 Act, and included the conversion of 
$600,000 of existing debt into equity. As of March 31, 1998, another $250,000 
had been raised from the private placement of 2,500 shares of Series A 
Preferred Stock, for a total of $2.25 million in additional paid-in-capital.

         The Series A Preferred Stock is subject to the terms and conditions 
of the Certificate of Designation and the Series A Convertible Preferred 
Stock Purchase Agreement discussed below and in detail in the Company's Form 
8-K/A filed on January 15, 1998.

         Holders of Series A Preferred Stock are entitled to receive 
cumulative dividends equal to 7% per annum on the Stated Value of the Series 
A Preferred Stock ($100 per share). Dividends are payable in arrears at the 
Company's option in either (i) cash or (ii) additional shares of Series A 
Preferred Stock. Dividends in arrears for Preferred Stock totaled $135,625 at 
December 31, 1998.

         Holders of the Series A Preferred Stock will have no voting rights 
prior to conversion, except that, so long as any shares of Series A Preferred 
Stock remain outstanding, the Company may not, without the affirmative vote 
of the holders of a majority of the Series A Preferred Stock then 
outstanding, (i) alter or change adversely the powers, preferences or rights 
given to the Series A Preferred Stock or (ii) authorize, create, issue or 
increase any class of stock ranking as to dividends or distribution of assets 
upon liquidation senior to or pari passu with the Series A Preferred Stock.

         Upon any liquidation, dissolution, or winding-up of the Company, the 
holders of the Series A Preferred Stock will be entitled to receive out of 
the assets of the Company, for each share of Series A Preferred Stock 
outstanding, an amount equal to the Stated Value per share, plus an amount 
equal to accrued but unpaid dividends per share, before any distribution or 
payment is made to the holders of any securities junior to the Series A 
Preferred Stock.


                                       12
<PAGE>

         Each share of Series A Preferred Stock is convertible into shares of 
the Company's Common Stock at the Series A Conversion Ratio (as defined 
below) at the option of the holder of the Series A Preferred Stock, in whole 
or in part. On the third anniversary of the issuance of the Series A 
Preferred Stock, each share of Series A Preferred Stock remaining outstanding 
will be mandatorily converted into shares of Common Stock at the Series A 
Conversion Ratio. The Series A Conversion Ratio equals a fraction, the 
numerator of which is the Series A Stated Value plus accrued but unpaid 
dividends, and the denominator of which is the Series A Conversion Price (as 
defined below) at such time.

         The Series A Conversion Price for each share of Series A Preferred 
Stock in effect on any conversion date will equal the lesser of the Series A 
Fixed Price or the Series A Floating Price (as defined below). The "Series A 
Fixed Price" will be equal to the greater of 115% of the closing bid price 
per share of the Common Stock on the date of issuance of the Series A 
Preferred Stock, or $6.75, and the Series A Floating Price will be equal to 
97% of the average closing bid price per share of the Company's Common Stock 
during the 10 trading days immediately preceding the date of conversion; 
provided, however, that (i) for each 30-day period following the date of 
issuance of the Series A Preferred Stock, the Series A Floating Price will be 
reduced by an additional 1 1/2% of the closing bid price per share of the 
Company's Common Stock during the 10 trading days prior to the date of 
conversion, (ii) in no event will the Series A Floating Price be reduced 
below 80% of the closing bid price per share of the Company's Common Stock, 
and (iii) in the event any holder of Series A Preferred Stock has directly or 
indirectly taken a "short position" or engaged in any substantially similar 
transaction with respect to the Common Stock at any time during the period 
commencing on the date of issuance of the Series A Preferred Stock through 
the date of conversion of such stock, the Series A Conversion Price for the 
Series A Preferred Stock held by such holder will be the greater of the 
Series A Fixed Price and the Series A Floating Price.

         Because the registration statement to be filed by the Company was 
not declared effective by the Securities and Exchange Commission within 120 
days after the date of issuance of the Series A Preferred Stock, the Series A 
Floating Price was decreased by an additional 1%. Based on the price of the 
Company's Common Stock as of December 31, 1998, the number of shares of 
Common Stock that could have been acquired upon exercise of all outstanding 
shares of Series A Preferred Stock was approximately 750,000.

         The Series A Preferred Stock will be redeemable, in whole or in 
part, at any time upon the payment to the holders of the Series A Preferred 
Stock of (i) a cash payment equal to the closing bid price per share of the 
Company's Common Stock on the date of redemption, multiplied by the number of 
shares of Common Stock that would be issued if the Series A Preferred Stock 
was converted on such date at the Series A Conversion Price, (ii) a cash 
payment equal to all accrued dividends payable with respect to such Series A 
Preferred Stock and (iii) a number of warrants to purchase Common Stock with 
an exercise price equal to the Stated Value of the Series A Preferred Stock 
being redeemed by the Series A Fixed Price, with a term expiring three years 
from the date of redemption.

         In case of any reclassification of the Company's Common Stock, any 
consolidation or merger of the Company with or into another entity, the sale 
or transfer of all or substantially all of the assets of the Company and 
certain other events, the holders of the Series A Preferred Stock then 
outstanding will have the right thereafter to convert such shares only into 
the shares of stock and other securities and property receivable upon or 
deemed to be held by the holders of the Company's Common Stock following such 
reclassification, consolidation, merger, sale, or transfer, and the holders 
of the Series A Preferred Stock will be entitled upon such event to receive 
such amount of securities and property as the holders of the Common Stock of 
the Company into which such shares of Series A Preferred Stock could have 
been converted immediately prior to such reclassification, consolidation, 
merger, sale or transfer would have been entitled.

         In connection with the issuance of the Series A Preferred Stock, the 
Company also granted warrants to the holders of the Series A Preferred Stock 
to acquire up to 333,333 shares of the Company's Common Stock at an exercise 
price of $8.10 per share. The warrants may be exercised at any time on or 
before January 23, 2001, three years after the date of issuance of the Series 
A Preferred Stock.

         Each transaction described above was deemed exempt from registration 
under the Securities Act pursuant to Section 4(2) of the Act regarding 
transaction not involving any public offering.


                                       13
<PAGE>

                     PRICE RANGE OF COMMON STOCK; DIVIDENDS

         The Company's outstanding Common Stock is currently quoted on the 
OTC Bulletin Board under the symbol "CRGR". The Company's Common Stock and 
Warrants were delisted from Nasdaq in October 1998 and from the Boston Stock 
Exchange in March 1999 for failure to meet the minimum listing requirements 
for these exchanges. The following table sets forth the high and low closing 
sale prices of the Common Stock, as reported by Nasdaq through September 30, 
1998 and the OTC Bulletin Board thereafter.

<TABLE>
<CAPTION>
                                                        MARKET PRICE
                                                HIGH                  LOW
                                                -----                ------
<S>                                             <C>                  <C>
FISCAL YEAR 1997

First Quarter                                  $6.00                $4.375
Second Quarter                                  5.375                4.25
Third Quarter                                   5.375                5.00
Fourth Quarter                                  6.50                 4.50

FISCAL YEAR 1998

First Quarter                                   6.00                 5.00
Second Quarter                                  5.75                 5.00
Third Quarter                                   5.1875               4.25
Fourth Quarter                                  4.3125               3.0625

FISCAL YEAR 1999
First Quarter (through March 24, 1999)          5.50                 3.75
</TABLE>

         On March 24, 1999, the last reported sale price of the Common Stock 
on the OTC Bulletin Board was $4.3125 per share. As of March 24, 1999, the 
Company estimates that there were approximately 374 beneficial holders of the 
Company's Common Stock. The Company has never paid cash dividends on its 
Common Stock and does not anticipate doing so in the foreseeable future. It 
is the current policy of the Company's Board of Directors to retain any 
earnings to finance the operations and expansion of the Company's business. 
In addition, the provisions of the Company's outstanding Series A Preferred 
Stock prohibit the payment of dividends on the Common Stock under certain 
circumstances. In addition, the Company's credit facility prohibits payments 
of cash dividends without the lender's consent.

ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

FORWARD LOOKING STATEMENTS

         This report contains forward looking statements. Additional written 
or oral forward looking statements may be made by the Company from time to 
time in filings with the Securities and Exchange Commission or otherwise. 
Such forward looking statements are within the meaning of that term as 
defined in Section 27A of the Securities Act, and Section 21E of the 
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such 
statements may include, but are not limited to, projections of revenues, 
income, or loss, estimates of capital expenditures, plans for future 
operations, products or services, and financing needs or plans, as well as 
assumptions relating to the foregoing. The words "believe," "expect," 
"anticipate," "estimate," "project," and similar expressions identify forward 
looking statements, which speak only as of the date the statement was made. 
Forward looking statements are inherently subject to risks and uncertainties, 
some of which cannot be predicted or quantified. Future events and actual 
results could differ materially from those set forth in, contemplated by, or 
underlying the forward looking statements. The following disclosures, as well 
as other statements in the Company's report, including those contained below 
in this Item 6, "Management's Discussion and Analysis or Plan of Operation," 
and


                                       14
<PAGE>

in the notes to the Company's financial statements, describe factors, among 
others, that could contribute to or cause such differences. Specifically, 
management is uncertain whether the anticipated cash flow from operations 
will be sufficient to meet the Company's anticipated operations and working 
capital needs. Therefore, the Company is seeking to secure additional working 
capital through the sale of equity or debt securities. There can be no 
assurance that the Company's cash flow will be sufficient to finance its 
operations as currently planned or that it will be able to supplement its 
cash flow with additional financing. No assurance can be given regarding the 
Company's ability to obtain such financing on favorable terms, it at all. If 
the Company is unable to obtain additional financing, its ability to meet its 
anticipated operating and working capital needs could be materially and 
adversely affected. As a result of the Company's continued losses and the 
uncertainty surrounding the Company's ability to meet its anticipated 
operating and working capital needs, the independent auditors' report on the 
Company's 1998 financial statements has been modified for a going concern. 
See note 2 to the Company's financial statements.

INTRODUCTION

         The Company designs, produces, and sells high-quality custom vehicle 
wheels and wheel accessories. The Company possesses one of the most widely 
recognized brand names in the automotive aftermarket industry. The Company 
markets a wide selection of custom wheels and components that are designed to 
appeal to automotive enthusiasts who desire to modify the styling, design, or 
performance of their cars, trucks, or vans. CRAGAR sells its wheel products 
in the automotive aftermarket through a national distribution network of 
value-added resellers, including tire and automotive performance warehouse 
distributors and retailers and mail order houses.

         Traditionally, the Company's ten largest customers have accounted 
for a substantial portion of the Company's gross sales. For the year ended 
December 31, 1998, the Company's ten largest customers accounted for a total 
of approximately 57.2% of gross sales, with J. H. Heafner Company, Inc. 
accounting for 13.5%, Keystone Automotive Operations, Inc. accounting for 
7.7%, and RELCO Corp. accounting for 5.1% of gross sales. In 1997, the 
Company's ten largest customers accounted for a total of approximately 66.3% 
of its gross sales, with Super Shops, J. H. Heafner Company, Inc., and 
Keystone Automotive Operations, Inc. accounting for 27.5%, 9.6%, and 6.2% of 
gross sales, respectively. The Company does not have any long-term 
contractual relationships with any of its major customers. Due to the 
significant concentration of sales to the Company's top ten customers, the 
loss of any one such customer could have a material impact on the Company's 
results of operations and financial condition.

         On September 19, 1997, the Company's principal customer, Super 
Shops, filed for reorganization under Chapter 11 of the Federal Bankruptcy 
Code in the United States Bankruptcy Court, Central District of California. 
Super Shops has ceased operations and has begun a liquidation plan. Because 
the Company is an unsecured creditor, and liquidation proceeds may not be 
sufficient to satisfy claims of secured creditors, there is no assurance that 
the Company will be able to recover any of the account receivable from Super 
Shops. Furthermore, even if the Company is able to recover a portion of the 
account receivable, the timing and amount of such recovery is uncertain. 
Accordingly, as of December 31, 1997, the Company established an allowance 
for bad debt that included the entire $3,523,028 account receivable from 
Super Shops and, as of December 31, 1998, the Company had written off the 
entire amount from its financial statements. At the time Super Shops ceased 
operations, the Company lost its largest customer. While the Company has made 
some progress toward replacing the lost revenues generated by Super Shops, it 
is uncertain whether other current or new customers can fully make up for the 
lost revenues.

         The Company was formed in 1992 to acquire certain assets, including 
the accounts receivable, inventory, property, equipment, patents, trademarks, 
and copyrights in a leveraged buyout from the Wheel and Tire Division of Mr. 
Gasket Company, Inc., which had filed for reorganization. The fair value of 
the net assets acquired exceeded the final purchase price, and, accordingly, 
the fair value of the property and equipment, patents, trademarks, and 
copyrights acquired was reduced to zero. The remaining balance of $3,687,341 
was classified as excess of fair value of assets acquired over cost (commonly 
referred to as negative goodwill) and has been amortized to income over five 
years using the straight-line method ($737,468 per annum through December 31, 
1997). As of December 31, 1997, the excess of fair value of assets acquired 
over cost had been fully amortized.


                                       15
<PAGE>

RESULTS OF OPERATIONS

         The following table sets forth, for the periods indicated, the 
percentage of net sales represented by certain items included in the 
Company's Statements of Operations.
<TABLE>
<CAPTION>
                                                                                Years Ended December 31
STATEMENTS OF OPERATIONS DATA:                                          1998              1997             1996
                                                                       ------         -----------        --------
<S>                                                                     <C>               <C>             <C>
 Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  100.0%            100.0%           100.0%

 Cost of goods sold  . . . . . . . . . . . . . . . . . . . . . . . . .   89.1              84.1             91.1
                                                                        ------            ------         -------

 Gross profit  . . . . . . . . . . . . . . . . . . . . . . . . . . . .   10.9              15.9              8.9

 Selling, general and administrative expenses  . . . . . . . . . . . .  (36.5)            (44.7)           (16.6)

 Amortization of excess of fair value of assets acquired over cost . .    -0-               4.5              4.0
                                                                        ------            ------         -------

 Income (loss) from operations . . . . . . . . . . . . . . . . . . . .  (25.6)            (24.3)            (3.7)

 Interest and other expenses, net  . . . . . . . . . . . . . . . . . .   (7.3)             (4.5)            (4.1)

 Extraordinary gain  . . . . . . . . . . . . . . . . . . . . . . . . .    0.0               0.0              1.8
                                                                        ------            ------         -------

 Net loss  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  (32.9)%           (28.8)%           (6.0)%
                                                                        ------            ------         -------
                                                                        ------            ------         -------
</TABLE>


                                        16
<PAGE>

COMPARISON OF YEAR ENDED DECEMBER 31, 1998 AND YEAR ENDED DECEMBER 31, 1997

         Net sales consist of gross sales less discounts, returns, and 
allowances. Net sales for the year ended December 31, 1998 were $12,081,884 
compared to $16,545,159 in the year ended December 31,1997, representing a 
27.0% decline in net sales. The decrease was primarily attributable to the 
lack of shipments to Super Shops, formerly the Company's largest customer, 
which filed for bankruptcy on September 19, 1997 and is currently being 
liquidated. Not including net sales of $5,053,572 to Super Shops, Inc. in 
1997, net sales increased by 5.1%. The Company sold fewer wheels in 1998 as 
compared to 1997. Generally, however, the average net sales per wheel rose 
slightly in 1998 from 1997.

         Gross profit is determined by subtracting cost of goods sold from 
net sales. Costs of goods sold consists primarily of the costs of labor, 
aluminum, steel, raw materials, overhead, and material processing used in the 
production of the Company's products. Gross profit for the year ended 
December 31, 1998 was $1,312,398 versus $2,636,887 for the year ended 
December 31, 1997. As a percentage of net sales, gross profit decreased in 
1998 compared to 1997, from 15.9% to 10.9%. The decrease in gross profit, 
both in terms of dollars and as a percentage of net sales, was primarily 
attributable to the loss of sales to Super Shops resulting in lower overhead 
absorption through the production cycle and a decrease in margins as the 
Company attempted to sell the excess inventory produced based on Super Shops' 
anticipated sales volume.

         Selling, general, and administrative ("SG&A") expenses consist 
primarily of commissions, marketing expenses, promotional programs, salaries 
and wages, product development expenses, office expenses, accounting and 
legal expenses, and non-manufacturing overhead. These expenses for the year 
ended December 31, 1998 were $4,404,391 compared to $7,394,235 for the year 
ended December 31, 1997. This 40.4% decrease was primarily attributable to 
the expense of $3,523,028 recognized in 1997 for bad debt reserve related to 
the past due receivable from Super Shops as described above. Excluding the 
allowance, SG&A for the year ended December 31, 1998 increased $533,184 or 
13.8% over the comparable twelve month period ended December 31, 1997. This 
increase was due, in large part, to the amortization and write-off of certain 
intangible costs, totaling $427,674, related to wheel designs and molds. In 
addition, the Company launched an aggressive non-recurring marketing campaign 
aimed at strengthening the Company's brand name in the aftermath of the Super 
Shops bankruptcy. The increases in marketing expenses and the intangible cost 
write-off were partially offset by the Company's continued focus on reducing 
other expenses. The Company did not receive any benefit from the amortization 
of excess of fair value of assets over acquired cost in 1998. This amount, 
which totaled $737,468 in 1997, was fully amortized by December 31, 1997.

         Interest and other expenses, net, for fiscal 1998 were $879,449 
compared to $748,905 for fiscal 1997. Interest expense increased from 
$752,388 in 1997 to $792,221 in 1998, an increase of $39,833 or 5.3%. This 
increase is attributable to a higher average outstanding debt balance in 1998 
than in 1997. Other revenue (expense), net, decreased from $3,483 in 1997 to 
$(87,228) in 1998. This decrease was primarily attributable to the preference 
payment due as a result of the Super Shops bankruptcy. The initial preference 
payment obligation was substantially higher than the finalized negotiated 
amount due. The Company was successful in negotiating a much smaller 
preference payment without forfeiting its claims against the bankruptcy 
estate. Although there is no assurance the Company will receive any proceeds, 
the Company anticipates the liquidation of the bankruptcy estate will yield 
the Company proceeds in excess of this preference payment.

         Because of the Company's current period net loss and its 
carry-forward losses from previous years, the Company had no income tax 
provision in 1998 and had no provision for alternative minimum taxes in 1998.

         Net loss for the year ended December 31, 1998 was $3,971,442 compared 
to $4,768,785 for the year ended December 31, 1997, a decrease of $797,343. 
Excluding the reserve for bad debts in 1997, the net loss increased 
$2,725,685 from 1997 to 1998. This increase is primarily attributable to the 
decrease in sales due to the loss of sales from Super Shops, non-recurring 
marketing expenses, the amortization of excess of fair value of assets over 
acquired cost, and the preference payment associated with the Super Shops 
bankruptcy.


                                       17
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         On December 18, 1996, the Company sold 850,000 shares of Common 
Stock and 850,000 Common Stock Purchase Warrants in an offering underwritten 
by Dickinson & Co. and RAS Securities Corp. Including the overallotment, the 
aggregate gross proceeds of the offering were $5,617,750. The Company's total 
expenses in connection with the offering, including underwriting discounts 
and commissions, were $1,123,550. The net proceeds of the offering were 
$4,494,200, which significantly increased the Company's cash and equity 
balances. Of these proceeds, $1,500,000 was used to pay off the aggregate 
principal amount of bridge financing notes issued by the Company on July 1, 
1996, $1,100,000 was used for advertising and promotional activities, 
$500,000 was used for product development, and $330,000 was used for 
additional staffing and consultants. The remainder of the proceeds were used 
to reduce the outstanding loan balance on the Company's credit facility with 
Norwest Business Credit, Inc. Upon the completion of the initial public 
offering, an aggregate principal amount of $1,850,000 of the Company's 
promissory notes and related accrued interest of $150,000 automatically 
converted into 359,722 shares of the Company's Common Stock.

         During the quarter ended March 31, 1998, the Company raised 
approximately $2.25 million from a private placement of 22,500 shares of 
Series A Preferred Stock and related Warrants. See "Market For The 
Registrant's Common Stock and Related Stockholder Matters."

         In April 1998, the Company entered into a revolving and term credit 
facility ("Credit Facility") with NationsCredit Commercial Corporation 
("NCFC"). The Credit Facility has a maximum commitment of $8.5 million, 
subject to certain restrictions with respect to the collateral borrowing 
base. The Credit Facility expires April 19, 2003 and is secured by the 
Company's accounts receivable, inventories, intangible assets, property and 
equipment and pledged assets of three investors. Interest is due monthly at 
the prime rate plus 1.25%.

         See "--Factors that May Affect Future Results and Financial 
Condition; Dependence on External Financing," and "History of Previous Losses; 
Stockholders' Deficit; Going Concern Opinion" below.

         As of December 31, 1998, the Company's average accounts receivable 
days outstanding was 89 days as compared to 72 days at December 31, 1997. 
Payment terms for its customers vary from cash on delivery to up to 180 days. 
The allowance for doubtful accounts as a percentage of accounts receivable 
was 54.8% at December 31, 1997, as compared to 3.7% at December 31, 1998. 
This decrease in the allowance reflects the write-off of the Super Shops 
accounts receivable and related reserve. The Company's inventory turnover 
ratio approximated 2.4 for the year ended December 31, 1998 as compared to 
2.5 for the year ended December 31, 1997.

         The Company had negative cash flow from operations of $(2,834,075) 
and $(3,994,258) for 1998 and 1997, respectively. The Company showed an 
improvement in its cash flow used in operations of $1,160,183 from 1997 to 
1998. This improvement is primarily attributable to the amortization of 
excess fair value of assets acquired over cost included in 1997 operations 
and the amortization of other assets expensed in 1998. The Company had net 
cash provided by investing activities of $13,859 in 1998. In 1997, the 
Company used net cash of $(453,317) from investing activities. The difference 
of $467,176, which represents an improvement in cash flows from investing 
activities, is primarily attributable to the Company investing more cash in 
the purchases of property and equipment during 1997. In 1998, the Company 
disposed of assets approximately equal to the amount invested in additional 
property and equipment. The Company had net cash provided by financing 
activities of $2,803,894 in 1998 and $3,600,848 in 1997. Due to the 
improvement in the cash flow used in operations during 1998, the Company did 
not require as much cash flow provided by financing activities. In 1998, of 
the total cash provided by financing activities, the Company received 
$1,650,000 in equity financing. In 1997, the Company received $513,178 of the 
total cash provided by financing activities from equity financing. Overall, 
the Company used net cash from all activities of $16,322 in 1998 and $846,727 
in 1997.

         The Company does not anticipate any major capital budget 
expenditures in 1999, except for the costs associated with upgrading its 
existing computer system to make it Year 2000 compliant. Those costs, 
including internal payroll costs, are estimated not to exceed $75,000. In 
addition, while the Company believes its operating activities will provide 
net cash during 1999, there can be no assurance that the Company's operating 
activities will generate sufficient cash flow to meet its operating cash flow 
requirements and other current obligations. Consequently, the Company will 
likely be required to raise additional funds from equity or debt financings. 
No assurance can be given that such additional financing will be available on 
terms acceptable to the Company, if at all.


SEASONALITY

         Historically, the Company has experienced higher revenue in the 
first two quarters of the year than in the latter half of the year. The 
Company believes that this results from seasonal buying patterns resulting, 
in part, from an increased demand for certain automotive parts and 
accessories associated with more favorable weather conditions, and the fact 
that many of its ultimate customers have added liquidity from income tax 
refunds during the first half of the year.


                                       18
<PAGE>

INFLATION

         Increases in inflation generally result in higher interest rates. 
Higher interest rates on the Company's borrowings would decrease the 
profitability of the Company. To date, general price inflation has not had a 
significant impact on the Company's operations; however, increases in metal 
prices have from time to time, and could in the future, adversely affect the 
Company's gross profit.

FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION

         The Company's future operating results and financial condition are
dependent upon, among other things, the Company's ability to implement its
business strategy. Potential risks and uncertainties that could affect the
Company's profitability are set forth below.

RISK ASSOCIATED WITH BANKRUPTCY OF PRINCIPAL CUSTOMER

         On September 19, 1997, Super Shops, Inc., formerly the Company's 
principal customer, filed for reorganization under Chapter 11 of the Federal 
Bankruptcy Code in the United States Bankruptcy Court, Central District of 
California. At December 31, 1998, the account receivable owed to the Company 
by Super Shops totaled $3,523,028, which has been completely written off. 
Since the date of filing for reorganization, Super Shops has ceased 
operations and has begun a liquidation plan. As an unsecured creditor, there 
is no assurance that the Company will recover any of the account receivable 
from Super Shops. Furthermore, even if the Company should be able to recover 
a portion of the account receivable, the timing and amount of such recovery 
is uncertain. As a result of Super Shops ceasing operations, the Company also 
lost its largest customer, which resulted in decreased revenue during 1998. 
It is uncertain whether other current or new customers can make up for the 
lost revenues generated by Super Shops. During 1998, the Company incurred an 
obligation of $125,000 for preference payments as a result of the on-going 
liquidation of the bankruptcy estate. Although there is no assurance the 
Company will receive any proceeds, the Company anticipates that the 
liquidation of the bankruptcy estate will yield the Company proceeds in 
excess of this preference payment. Failure to resolve this matter 
satisfactorily could have a material adverse effect on the Company's results 
of operations and financial condition.

HISTORY OF PREVIOUS LOSSES; STOCKHOLDERS' DEFICIT; GOING CONCERN OPINION

         The Company was incorporated in December 1992 and has incurred
significant losses in each of its completed fiscal years. For the year ended
December 31, 1998, the Company incurred a net loss of $3,971,442. Net sales for
the year ended December 31, 1998 declined to $12,081,884 from $16,545,159 for
the same period in 1997. As of December 31, 1998, the Company had an accumulated
deficit of $16,368,787 and a total stockholders' deficit of $2,156,394. There
can be no assurance that the Company will be profitable in the future.

         As a result of the Company's continued losses and the uncertainty
regarding the Company's ability to meet its anticipated operating and working
capital needs, the independent auditors' report on the Company's 1998 financial
statements has been modified for a going concern.

DEPENDENCE ON EXTERNAL FINANCING

         On April 20, 1998, the Company executed the NCFC Credit Facility, a 
portion of the proceeds of which were used to pay off the Company's previous 
credit facility with Norwest Business Credit, Inc., which expired on April 
15, 1998. The terms of this new credit facility provide for a maximum 
combined term loan and revolving loan totaling $8.5 million at an interest 
rate of 1.25% above the prime rate. As of December 31, 1998, the outstanding 
amount owed by the Company under the NCFC Credit Facility was approximately 
$6,780,000. The NCFC Credit Facility is secured by substantially all of the 
Company's assets and has a term of four years. The NCFC Credit Facility also 
is secured by certain investment property with a value of approximately 
$800,000 that was pledged to NCFC by three private investors. In exchange for 
that pledge, the Company agreed to grant 


                                     19
<PAGE>

warrants to purchase 7,000 shares of Common Stock for each $100,000 in value 
of assets pledged on an annual basis as long as the pledge remains 
outstanding, which warrants are exercisable at a price equal to the price of 
the Company's Common Stock on the date of grant. These three private 
investors have since temporarily increased the value of the investment 
property securing the NCFC Credit Facility to $1,500,000. As of December 31, 
1998, the Company had approximately $149,000 of excess availability under the 
NCFC Credit Facility. As a result, it is likely that the Company will be 
required to raise additional funds through equity or debt financings. No 
assurance can be given that additional financing will be available on terms 
acceptable to the Company, if at all.

DEPENDENCE ON KEY DISTRIBUTORS; IMPLEMENTATION OF NEW DISTRIBUTION CHANNELS

         A limited number of customers have accounted for a substantial 
portion of the Company's revenue in each year. The financial condition and 
success of its current customers and the Company's ability to obtain orders 
from new customers are critical to the Company's success. The Company's top 
ten customers accounted for approximately 57.2% of the Company's gross sales 
for 1998. The top three customers accounted for 26.3% of gross sales. For the 
year ended December 31, 1998, J. H. Heafner Company, Inc. accounted for 
13.5%, Keystone Automotive Operations, Inc. accounted for 7.7% and RELCO 
Corp. accounted for 5.1% of gross sales. For the year ended December 31, 
1997, the Company's ten largest customers accounted for a total of 
approximately 66.3% of gross sales, with Super Shops, Inc. accounting for 
27.5%, J. H. Heafner Company, Inc. accounting for 9.6%, and Keystone 
Automotive accounting for 6.2% of gross sales.

         The Company's former primary customer, Super Shops, Inc., filed for 
Chapter 11 bankruptcy protection on September 19, 1997 in the United States 
Bankruptcy Court, Central District of California. Super Shops subsequently 
ceased operations and has commenced a liquidation plan. The Company does not 
have any long-term contractual relationships with any of its major customers. 
While the Company's business strategy calls for it to expand its product 
distribution capabilities to additional markets and to broaden its customer 
base so that it can become less dependent on significant customers, any loss, 
material reduction, or delay of orders by any of the Company's major 
customers, including reductions as a result of market, economic, or 
competitive pressures in the automotive aftermarket industry, could adversely 
affect the Company.

RISKS ASSOCIATED WITH ESTABLISHMENT OF INTERNET-BASED MARKETING

         The Company intends to expand the attributes and functionality of 
its website or utilize other E-commerce websites to enable the marketing and 
sale of certain of its custom vehicle wheels and wheel accessories through 
the Internet. In addition, the Company is seeking to establish an E-commerce 
store with one or more of the major Internet portals and sell certain of its 
custom wheels and wheel accessories via the Internet. Although the Company 
has had discussions with various companies regarding such an arrangement, the 
Company has not yet entered into any definitive agreements to sell any of its 
products online nor has the Company sold any of its products directly over 
the Internet. Accordingly, the Company's attempts to market and sell its 
products online may be unsuccessful.

HIGHLY COMPETITIVE INDUSTRY

         The market for the Company's products is highly competitive. The 
Company competes primarily on the basis of product selection (which includes 
style and vehicle fit), timely availability of product for delivery, quality, 
design innovation, price, payment terms, and service. Many of the Company's 
competitors have substantially greater financial, personnel, marketing, and 
other resources than the Company. Increased competition could result in price 
reductions (which may be in the form of rebates or allowances), reduced 
margins, and loss of market share, all of which could have a material adverse 
effect on the Company.

GENERAL ECONOMIC FACTORS

         The Company's business is directly impacted by certain external 
factors, such as the general demand for aftermarket automotive parts, prices 
for raw materials used in producing the Company's products, fluctuations in 
discretionary consumer spending, and general economic conditions, including 
employment levels, business conditions, interest rates, and tax rates. While 
the Company believes that current economic conditions favor stability in the 
markets it serves, various factors, including those listed above, could lead 
to decreased sales and 


                                     20
<PAGE>

increased operating expenses. There can be no assurance that various factors 
will not adversely affect the Company's business in the future or prevent the 
Company from successfully implementing its business strategies.

DEPENDENCE ON THIRD PARTY SUPPLIERS

         The Company's business depends upon the assembly of component parts 
and the shipment of finished wheels and wheel accessories from third-party 
suppliers. From time to time, the Company has experienced delays in the 
delivery of component parts and finished products from vendors. During the 
third quarter ended September 30, 1998, the Company experienced difficulty in 
receiving acceptable chrome plating of centers for its S/S style wheels, 
although the Company now believes it has resolved this problem. In addition, 
one of the Company's significant suppliers is located in China, which from 
time to time has been subject to numerous trading restrictions by the United 
States. The Company also has suppliers in Brazil and Taiwan. The purchase of 
materials from foreign suppliers may be adversely affected by political and 
economic conditions abroad over which the Company has no control. Although to 
date the Company has generally been able to acquire adequate supplies of such 
components and finished product in a timely manner, any extended interruption 
in supply, significant increase in price, or reduction in quality of such 
components could have a material adverse effect on the Company's business, 
financial condition, and results of operations. The Company has been 
selectively outsourcing the production of some of its products and may 
increase such outsourcing in the future. While the Company anticipates that 
such outsourcing programs will stabilize costs and shift certain inventory, 
warranty, and other risks to its suppliers, there can be no assurance that 
the continued or increased outsourcing of its products will have these 
desired effects.

NO ASSURANCE OF SUCCESSFUL ACQUISITIONS

         The Company continues to consider acquisitions of and alliances with 
other companies that could complement the Company's existing business, 
including outsourcing its manufacturing and sales operations and acquisitions 
of complementary product lines. There can be no assurance that suitable 
acquisition or joint venture candidates can be identified, or that, if 
identified, adequate and acceptable financing sources will be available to 
the Company that would enable it to consummate such transactions. 
Furthermore, even if the Company completes one or more acquisitions, there 
can be no assurance that the Company will be able to integrate successfully 
the acquired companies or product lines into its existing operations, which 
could increase the Company's operating expenses in the short-term and 
materially and adversely affect the Company's results of operations. 
Moreover, any acquisition by the Company may result in a potentially dilutive 
issuance of equity securities, the incurrence of additional debt, and 
amortization of expenses related to goodwill and intangible assets, all of 
which could adversely affect the Company's profitability. Acquisitions 
involve numerous risks, such as the diversion of the attention of the 
Company's management from other business concerns, the entrance of the 
Company into markets in which it has had no or only limited experience, and 
the potential loss of key employees of the acquired company, all of which 
could have a material adverse effect on the Company.

VARIABILITY IN OPERATING RESULTS; SEASONALITY

         The Company's results of operations have been and will continue to 
be subject to substantial variations as a result of a number of factors, any 
of which could have a material adverse effect on the Company. In particular, 
the Company's operating results can vary because of the size and timing of 
customer orders, delays in new product enhancements and new product 
introductions, vendor quality control and delivery difficulties, market 
acceptance of new products, product returns, product rebates and allowances, 
seasonality in product purchases by distributors and end users, and pricing 
trends in the automotive aftermarket industry in general and in the specific 
markets in which the Company participates. Historically, the Company's net 
sales have been highest in the first and second quarters of each year. 
Significant variability in orders during any period may have an adverse 
impact on the Company's cash flow or work flow, and any significant decrease 
in orders could have a material adverse effect on the Company's results of 
operations. The Company believes that any period-to-period comparisons of its 
financial results are not necessarily meaningful and should not be relied 
upon as an indication of future performance.


                                     21
<PAGE>

CHANGING CUSTOMER TRENDS; NEED FOR PRODUCT DEVELOPMENT

         The Company's success depends, in part, on its ability to correctly 
and consistently anticipate, gauge, and respond in a timely manner to 
changing consumer preferences. There can be no assurance that the Company's 
core products will continue to enjoy acceptance among consumers or that any 
of the Company's future product offerings will achieve or maintain market 
acceptance. The Company attempts to minimize the risks relating to changing 
consumer trends by offering a wide variety of product styles, analyzing 
consumer purchases, maintaining active product development efforts, and 
monitoring the sales performance of its various product lines. However, any 
misjudgment by the Company of the market for a particular product, or its 
failure to correctly anticipate changing consumer preferences, could have a 
material adverse effect on its business, financial condition, and results of 
operations. In order to enhance its product development efforts, the Company 
may supplement its existing product development staff by hiring one or more 
new employees with product development experience and by engaging an outside 
consultant to assist the Company's product development staff. There can be no 
assurance that the Company will be able to attract and retain such additional 
personnel or that the costs associated with additional product development 
efforts will not have an adverse effect on the Company.

REGULATORY COMPLIANCE

         The Company is subject to various federal and state governmental 
regulations related to occupational safety and health, labor, and wage 
practices as well as federal, state, and local governmental regulations 
relating to the storage, discharge, handling, emission, generation, 
manufacture, and disposal of toxic or other hazardous substances used to 
produce the Company's products. The Company believes that it is currently in 
material compliance with such regulations. Failure to comply with current or 
future environmental regulations could result in the imposition of 
substantial fines on the Company, suspension of production, alteration of its 
production processes, cessation of operations, or other actions which could 
have a material adverse effect on the Company. In the ordinary course of its 
business, the Company uses metals, oils, and similar materials, which are 
stored on site. The waste created by use of these materials is transported 
off-site on a regular basis by a state-registered waste hauler. Although the 
Company is not aware of any material claim or investigation with respect to 
these activities, there can be no assurance that such a claim may not arise 
in the future or that the cost of complying with governmental regulations in 
the future will not have a material adverse effect on the Company.

RELIANCE ON INTELLECTUAL PROPERTY

         The Company owns the rights to certain trademarks and patents, 
relies on trade secrets and proprietary information, technology, and 
know-how, and seeks to protect this information through agreements with 
employees and vendors. There can be no assurance that the Company's patents 
will preclude the Company's competitors from designing competitive products, 
that proprietary information or confidentiality agreements with employees and 
others will not be breached, that the Company's patents will not be 
infringed, that the Company would have adequate remedies for any breach or 
infringement, or that the Company's trade secrets will not otherwise become 
known to or independently developed by competitors.

RISKS ASSOCIATED WITH INTERNATIONAL SALES; CURRENCY FLUCTUATIONS

         In 1998 and 1997, the Company derived approximately 3.1% and 4.8%, 
respectively, of total gross sales from international markets. The Company 
does not anticipate that sales from international markets will increase 
significantly. The Company's international sales efforts are subject to the 
customary risks of doing business abroad, including exposure to regulatory 
requirements, political and economic instability, barriers to trade, trade 
restrictions (including import quotas), tariff regulations, foreign taxes, 
restrictions on transfer of funds, difficulty in obtaining distribution and 
support, and export licensing requirements, any of which could have a 
material adverse effect on the Company. In addition, a weakening in the value 
of foreign currencies relative to the U.S. dollar and fluctuations in foreign 
currency exchange rates could have an adverse impact on the price of the 
Company's products in its international markets.


                                      22
<PAGE>

CONTROL BY EXISTING STOCKHOLDERS

         The directors, officers, and principal stockholders of the Company 
beneficially own approximately 57.4% of the Company's Common Stock, assuming 
exercise of all outstanding options and warrants. As a result, these persons 
have a significant influence on the affairs and management of the Company, as 
well as on all matters requiring stockholder approval, including electing and 
removing members of the Company's Board of Directors, causing the Company to 
engage in transactions with affiliated entities, causing or restricting the 
sale or merger of the Company, and changing the Company's dividend policy. 
Such concentration of ownership and control could have the effect of 
delaying, deferring, or preventing a change in control of the Company even 
when such a change of control would be in the best interest of the Company's 
other stockholders.

EFFECT OF PREFERRED STOCK ON RIGHTS OF COMMON STOCK

         The Company's Amended and Restated Certificate of Incorporation 
authorizes the Board of Directors of the Company to issue "blank check" 
preferred stock, the relative rights, powers, preferences, limitations, and 
restrictions of which may be fixed or altered from time to time by the Board 
of Directors. Accordingly, the Board of Directors is empowered, without 
stockholder approval, to issue preferred stock with dividend, liquidation, 
conversion, voting, or other rights that could adversely affect the voting 
power and other rights of the holders of Common Stock. In the first quarter 
of 1998, for example, the Company issued 22,500 shares of its Series A 
Preferred Stock for approximately $2,250,000 in additional capital, which, as 
of December 31, 1998, could have been converted into approximately 750,000 
shares of Common Stock at the option of the holders of the Series A Preferred 
Stock. Additional series of preferred stock could be issued, under certain 
circumstances, as a method of discouraging, delaying, or preventing a change 
in control of the Company that stockholders might consider to be in the 
Company's best interests. There can be no assurance that the Company will not 
issue additional shares of preferred stock in the future.

DEPENDENCE ON KEY PERSONNEL

         The Company's future success depends, in large part, on the efforts 
and abilities of its management team, including Michael L. Hartzmark, Ph.D., 
its President and Chief Executive Officer. The loss of the services of Dr. 
Hartzmark could have a material adverse effect on the business of the 
Company. While Dr. Hartzmark does not have an employment agreement with the 
Company, Dr. Hartzmark and his family beneficially held, as of December 31, 
1998, more than 18% of the Company's Common Stock, assuming exercise of all 
outstanding options and warrants. The successful implementation of the 
Company's business strategies depends on the hiring and retention of 
additional management, engineering, marketing, product development, and other 
personnel. There can be no assurance that the Company will be able to 
identify and attract additional qualified management and other personnel when 
needed or that the Company will be successful in retaining such additional 
management and personnel if added. Moreover, there can be no assurance that 
the additional costs associated with the hiring of additional personnel will 
not adversely affect the Company's results of operations. The Company does 
not maintain key man life insurance on any of its personnel.

NO CASH DIVIDENDS

         The Company has never paid cash or stock dividends on its Common 
Stock and does not anticipate that it will pay cash dividends in the 
foreseeable future. It is contemplated that any earnings will be used to 
finance the growth of the Company's business. The Company is required to pay 
dividends on its Series A Preferred Stock; however, it anticipates those 
dividends will be paid in kind, rather than in cash, with additional shares 
of Series A Preferred Stock. In addition, the Company's NCFC Credit Facility 
prohibits the payments of cash dividends without the lender's consent.

DATA PROCESSING AND TECHNOLOGY AND YEAR 2000 ISSUES

         The Company recognizes the potential business impacts related to the 
Year 2000 computer system issue and is implementing a plan to assess and 
improve the Company's state of readiness with respect to such issues. The 


                                      23
<PAGE>

Year 2000 issue is one where computer systems may recognize the designation 
"00" as 1900 when it means 2000, resulting in system failure or 
miscalculations.

         The Company has initiated a comprehensive review of its core 
information technology systems, which the Company is dependent upon for the 
conduct of day to day business operations, in order to determine the adequacy 
of those systems in light of future business requirements. Year 2000 
readiness was one of a variety of factors to be considered in the review of 
core systems.

         In recognition of the Year 2000 issue, the Company has started a 
comprehensive review of all information technology and non-information 
technology systems used by the Company. Such review includes testing and 
analysis of Company products and inquiries of third parties supplying 
information technology and non-information technology systems, computer 
hardware and software products and components, and other equipment to the 
Company. In addition, the Company has sent requests for information to its 
critical suppliers requesting information about their Year 2000 readiness and 
plans for Year 2000 compliance.

         As a result of its review to date, the Company has determined that 
certain of its internal software systems are inadequate for the Company's 
future business needs, and need to be upgraded because of various 
considerations, including Year 2000 non-compliance. In certain cases the 
timing of system upgrades is being accelerated because of the Year 2000 
issue, although the Company believes upgrades, modification or replacement 
would have been necessary in the near future regardless of such issues. The 
Company expects to make necessary upgrades to its computer information 
systems, related to Year 2000 non-compliance, prior to the Year 2000. Other 
upgrades, modifications or replacement identified through this review process 
that are not critical to the Year 2000 issue will be undertaken in an orderly 
manner so as to not disrupt the Company's on-going operations. These 
non-critical upgrades, changes or modifications may not be started or 
completed by the Year 2000. The costs for upgrades or replacement of systems 
will be capitalized as assets and subsequently amortized over the estimated 
life of the assets. The costs for modification of systems will be expensed in 
the period incurred. The Company believes the costs of upgrades to the 
current information technology systems will not exceed $75,000, including 
internal payroll costs, and will not have a material affect on its financial 
position or results of operations. The upgrades are expected to be made late 
in the second quarter or early third quarter 1999 and the full integration of 
the upgrades are expected to be complete by September 30, 1999.

         Based on the responses from the Company's critical suppliers, the 
suppliers are either Year 2000 compliant or have developed plans to be Year 
2000 compliant by December 31, 1999. The Company plans to continue monitoring 
its critical suppliers for Year 2000 compliance and take appropriate steps if 
it appears any critical suppliers will not be Year 2000 compliant by December 
31, 1999.

         At this time, the Company has not developed Year 2000 contingency 
plans, other than the review and remedial actions described above, and does 
not intend to do so unless the Company believes such plans are merited by the 
results of its continuing Year 2000 review.

         If the Company or the third parties with which it has relationships 
were to cease or not successfully complete its or their Year 2000 remediation 
efforts, the Company could encounter disruptions to its business that could 
have a material adverse effect on its business, financial position and 
results of operations. The Company could be materially and adversely impacted 
by widespread economic or financial market disruption or by Year 2000 
computer system failures at third parties with which it has relationships.


                                      24
<PAGE>

ACCOUNTING MATTERS

         In June 1997, the Financial Accounting Standards Board issued 
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive 
Income" (SFAS No. 130) which became effective for the Company January 1, 
1999. SFAS No. 130 establishes standards for reporting and displaying 
comprehensive income and its components in a full set of general-purpose 
financial statements. The adoption of SFAS No. 130 did not have a material 
impact on the Company.

         In June 1997, the Financial Accounting Standards Board issued 
Statement of Financial Accounting Standards No. 131, "Disclosures about 
Segments of an Enterprise and Related Information" (SFAS No. 131) which 
became effective for the Company January 1, 1999. SFAS No. 131 establishes 
standards for the way that public enterprises report information about 
operating segments in annual financial statements and requires that those 
enterprises report selected information about operating segments in interim 
reports issued to stockholders. The adoption of SFAS No. 131 did not have a 
material impact on the Company.

         In February 1998, the Financial Accounting Standards Board issued 
Statement of Financial Accounting Standards No. 132, "Employer's Disclosures 
about Pensions and Other Postretirement Benefits" (SFAS No. 132) which 
becomes effective for the Company on January 1, 1999. SFAS No. 132 
establishes standards for the information that public enterprises report in 
annual financial statements. Management does not expect the adoption of SFAS 
No. 132 to have a material impact on the Company.

         In June 1998, the Financial Accounting Standards Board issued 
Statement of Financial Accounting Standards No. 133, "Accounting for 
Derivative Instruments and Hedging Activities" (SFAS No. 133) which becomes 
effective for the Company on July 1, 1999. Management does not expect the 
adoption of SFAS No. 133 to have a material impact on the Company.

ITEM 7.   FINANCIAL STATEMENTS

         The audited financial statements of the Company as of December 31, 
1998 and for each of the years in the two-year period ended December 31, 1998 
are located beginning at page F-1 of this Annual Report on Form 10-KSB.

ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
FINANCIAL DISCLOSURES.

     None.

                                    PART III

ITEM 9.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 10.  EXECUTIVE COMPENSATION

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information respecting the foregoing four Items of Part III is hereby
incorporated by reference to the Company's definitive Proxy Statement relating
to its Annual Meeting of Shareholders to be held May 21, 1999.


                                      25
<PAGE>

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  EXHIBITS

         The exhibits required to be filed as a part of this Annual Report are
listed below.

<TABLE>
<CAPTION>

EXHIBIT                          DESCRIPTION
NUMBER
<S>      <C>
3.1      Second Amended and Restated Certificate of Incorporation of the
         Registrant filed with State of Delaware on October 1, 1996*

3.2      Amended and Restated Bylaws of the Registrant*

3.3      Form of Certificate of Designation***

4.       Form of Certificate representing Common Stock*

4.1      Form of Warrant Agreement**

4.3      Form of Warrant Certificate*

4.4      Loan and Security Agreement, dated as of April 20, 1998, executed by
         and between Registrant and NationsCredit Commercial Corporation ****

4.5      Form of Class A Stock Purchase Warrant Certificate*

4.6      Form of Class B Stock Purchase Warrant Certificate*

4.7      Form of Class C Stock Purchase Warrant Certificate*

4.8      Form of Stock Option / Restricted Stock Grant for grants made pursuant
         to either or both the CRAGAR Industries, Inc. 1996  Non-Employee
         Directors' Stock Option Plan and the CRAGAR  Industries, Inc. 1996
         Stock Option and Restricted Stock Plan*

4.9      Form of Representative's Warrant Agreement, dated December 18, 1996, by
         and between the Registrant and Dickinson & Co.**

4.10     Form of Series A Convertible Preferred Stock Purchase Agreement***

4.11     Form of Warrant***

10.1     CRAGAR Industries, Inc. 1996 Non-Employee Directors' Stock Option Plan*

10.1(a)  First Amendment to the CRAGAR Industries, Inc. 1996 Non-Employee
         Directors' Stock Option Plan, dated October 1, 1996*

10.2     CRAGAR Industries, Inc. 1996 Stock Option and Restricted Stock Plan*

10.2(a)  First Amendment to the CRAGAR Industries, Inc. 1996 Stock Option and
         Restricted Stock Plan, dated October 1, 1996*

10.3     Commercial Lease, dated February 5, 1993, executed by and between
         Registrant and Principal Mutual Life Insurance Company*
</TABLE>


                                      26
<PAGE>

<TABLE>
<S>      <C>
10.4     Purchase Program, dated January 24, 1996, executed by and between
         Registrant and Super Shops*

10.5     Form of 1992 Promissory Note of Registrant, dated December 31, 1992,
         issued in connection with Registrant's original capitalization*

10.5(a)  Form of First Note Amendment of 1992 Promissory Note of Registrant,
         dated September 30, 1994*

10.5(b)  Form of Agreement to Forgive Interest, dated December 14, 1994,
         executed by and between Registrant and certain holders of 1992
         Promissory Notes of Registrant*

10.5(c)  Form of Letter, dated February 16, 1995, issued by Registrant to (i)
         holders of the 1992 Promissory Notes of Registrant, and (ii) holder of
         the $350,000 Note of Registrant, whereby holders of the Notes agreed to
         contribute to capital the 1992 Promissory Notes and the $350,000 Note*

10.6     $108,333 Promissory Note of Registrant, dated December 15, 1994, issued
         to Sidney Dworkin*

10.6(a)  Form of Letter, dated February 16, 1995, issued by Registrant to (i)
         holders of the 1992 Promissory Notes of Registrant, and (ii) holder of
         the $350,000 Note of Registrant, whereby holders of the Notes agreed to
         contribute to capital the 1992 Promissory Notes and the $350,000 Note*

10.7     Cognovit Promissory Note dated September 30, 1993, executed by
         Registrant and payable to Performance Industries, Inc.*

10.7(a)  Cross Receipt executed by and between Lee Hartzmark and Registrant in
         connection with Assignment of Cognovit Promissory Note*

10.8     Wheel & Component Purchase Agreement dated April 3, 1996, executed by
         and between Registrant and Titan Wheel International, Inc.*

10.9     Redistribution Agreement dated November 7, 1996, executed by and
         between Registrant and RELCO Corp.*

10.10    Form of 1993 Convertible Subordinated Secured Note of the Registrant,
         dated September 30, 1993*

10.10(a) Form of First Note Amendment to 1993 Convertible Subordinated Secured
         Note of the Registrant, dated September 30, 1995*

10.10(b) Form of Second Note Amendment to 1993 Convertible Subordinated Secured
         Note of the Registrant*

10.11    $350,000 Promissory Note of the Registrant, dated December 15, 1994,
         issued to Sidney Dworkin*

10.11(a) Agreement between Registrant and Sidney Dworkin, dated October 12,
         1995, amending the terms and conditions of the $350,000 Promissory
         Note*

10.11(b) First Note Amendment to the $350,000 Promissory Note of the Registrant
         issued to Sidney Dworkin*

10.12    Form of 1996 Unsecured Promissory Bridge Note of the Registrant*

21       List of Subsidiaries of the Registrant*

23       Consent of KPMG LLP

27       Financial Data Schedule

99       Form of Lock-Up Agreement, executed by and between the Registrant and
         certain of the Registrant's security-holders.*
</TABLE>

                                      27
<PAGE>

(b)  REPORTS ON FORM 8-K.
         None.

          *  Incorporated by reference to the Company's Registration on Form
             SB-2 (No. 333-13415)

         **  Incorporated by reference to the Company's Annual Report on Form
             10-K for the fiscal year ended December 31, 1996 (No. 1-12559)

        ***  Incorporated by reference to the Company's Current Report on Form
             8-K, filed January 23, 1999 (no. 1-12559)

       ****  Incorporated by reference to the Company's Quarterly Report on Form
             10-QSB, filed on May 15, 1998 (no. 1-12559)


                                       28
<PAGE>

                                   SIGNATURES


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

                                              CRAGAR INDUSTRIES, INC.


                                              By: /s/ Michael L. Hartzmark
                                                --------------------------
                                                Michael L. Hartzmark
                                                President and Chief Executive
                                                Officer

                      Date:   March 31, 1999

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

<TABLE>
<CAPTION>
          SIGNATURE                        TITLE                                  DATE
<S>                               <C>                                       <C>

/s/ Michael L. Hartzmark
--------------------------        President, Treasurer, Chief                March 31, 1999
Michael L. Hartzmark              Executive Officer, and Director
                                  (Principal Executive Officer)


/s/ Richard P. Franke 
--------------------------        Chief Financial Officer                    March 31, 1999
Richard P. Franke                 (Principal Financial Officer)


/s/ Michael Miller
--------------------------        Secretary, Chief Operating                 March 31, 1999
Michael Miller                    Officer, and Director


/s/ Sidney Dworkin
--------------------------        Director                                   March 31, 1999
Sidney Dworkin


/s/ Donald McIntyre
--------------------------        Director                                   March 31, 1999
Donald McIntyre


/s/ Mark Schwartz
--------------------------        Director                                   March 31, 1999
Mark Schwartz
</TABLE>

                                       29
<PAGE>

                             CRAGAR INDUSTRIES, INC.



                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                              PAGE
<S>                                                                                           <C>
Independent Auditors' Report                                                                   F-2

Balance Sheet as of December 31, 1998                                                          F-3

Statements of Operations for the years ended December 31, 1998 and 1997                        F-4

Statements of Stockholders' Deficiency for the years ended December 31,
    1998 and 1997                                                                              F-5

Statements of Cash Flows for the years ended December 31, 1998 and 1997                        F-6

Notes to Financial Statements                                                                  F-7
</TABLE>


                                     F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
CRAGAR Industries, Inc.:


We have audited the accompanying balance sheet of CRAGAR Industries, Inc. as of
December 31, 1998, and the related consolidated statements of operations,
stockholders' deficiency and cash flows for each of the years in the two-year
period ended December 31, 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 CRAGAR Industries, Inc. as of
December 31, 1998, and the results of its operations and its cash flows for each
of the years in the two-year period ended December 31, 1998 in conformity with
generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 2 to the
financial statements, the Company has a stockholders' deficiency and the Company
has suffered recurring losses from operations. These matters raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in note 2. The financial statements
do not include any adjustments that might result from this uncertainty.


                                       KPMG LLP

March 18, 1999

                                     F-2
<PAGE>

                             CRAGAR INDUSTRIES, INC.

                                  BALANCE SHEET

                                December 31, 1998

<TABLE>
<CAPTION>
<S>                                                                                       <C>
                                     ASSETS

Current assets:
     Accounts receivable, less allowance for doubtful accounts of $108,995                 $ 2,879,277
     Inventories, net                                                                        4,352,453
     Prepaid expenses                                                                          200,017
                                                                                           -----------
                 Total current assets                                                        7,431,747

Property and equipment, net                                                                    654,534
Other assets, net                                                                               21,320
                                                                                           -----------
                                                                                          $  8,107,601
                                                                                           -----------
                                                                                           -----------

                    LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current liabilities:
     Line of credit                                                                        $ 2,530,161
     Accounts payable                                                                        2,376,112
     Accrued expenses                                                                        1,032,644
     Accrued interest                                                                           74,678
     Current installments of long-term debt                                                    250,400
                                                                                           -----------
                 Total current liabilities                                                   6,263,995

Line of credit, excluding current installments                                               3,290,333
Long-term debt, excluding current installments                                                 709,667
                                                                                           -----------
                 Total liabilities                                                          10,263,995
                                                                                           -----------
Stockholders' deficiency:
     Preferred stock, par value $.01; authorized 200,000 shares, 22,500 shares
        issued and outstanding                                                                     225
     Additional paid-in capital - preferred                                                  2,090,513
     Common stock, par value $.01; authorized 5,000,000 shares, 2,453,990 shares
        issued and outstanding at December 31, 1998                                             24,540
     Additional paid-in capital - common                                                    12,097,115
     Accumulated deficit                                                                   (16,368,787)
                                                                                           -----------
                 Total stockholders' deficiency                                             (2,156,394)

Commitments, contingencies and subsequent events (notes 7, 12, 13, 14 and 15)
                                                                                           -----------
                                                                                           $ 8,107,601
                                                                                           -----------
                                                                                           -----------
</TABLE>

See accompanying notes to the financial statements.

                                     F-3
<PAGE>


                             CRAGAR INDUSTRIES, INC.

                            Statements of Operations

                     Years ended December 31, 1998 and 1997


<TABLE>
<CAPTION>
                                                                               1998                   1997
                                                                           ------------             ----------
<S>                                                                        <C>                      <C>
Net sales                                                                   $12,081,884             16,545,159
Costs of goods sold                                                          10,769,486             13,908,272
                                                                            -----------             ----------
                 Gross profit                                                 1,312,398              2,636,887

Selling, general and administrative expenses                                  4,404,391              7,394,235
Amortization of excess of fair value of assets acquired over cost                    --               (737,468)
                                                                            -----------             ----------
                 Loss from operations                                        (3,091,993)            (4,019,880)

Other revenues (expenses), net:
     Interest expense, net                                                     (792,221)              (752,388)
     Other, net                                                                  37,772                  3,483
     Settlement                                                                (125,000)                    -- 
                                                                            -----------             ----------
                 Loss before income taxes                                    (3,971,442)            (4,768,785)

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

Net loss                                                                   $ (3,971,442)            (4,768,785)
                                                                            -----------             ----------
                                                                            -----------             ----------

Basic net loss per common share                                            $      (1.67)                 (2.08)
                                                                            -----------             ----------
                                                                            -----------             ----------

Diluted net loss per common share                                          $      (1.67)                 (2.08)
                                                                            -----------             ----------
                                                                            -----------             ----------

Weighted-average shares outstanding - basic and diluted                       2,453,990              2,291,278
                                                                            -----------             ----------
                                                                            -----------             ----------
</TABLE>

See accompanying notes to the financial statements.

                                     F-4
<PAGE>


                             CRAGAR INDUSTRIES, INC.

                     Statements of Stockholders' Deficiency

                     Years ended December 31, 1998 and 1997

<TABLE>
<CAPTION>
                                               COMMON STOCK                     PREFERRED STOCK         
                                      --------------------------            -----------------------
                                      NUMBER OF                             NUMBER OF                   
                                        SHARES           AMOUNT              SHARES          AMOUNT     
                                      ---------         --------            ---------        ------
<S>                                   <C>               <C>                 <C>              <C>
Balances, December 31, 1996           2,210,305          $22,103               --            $  -- 

Issuance of common stock for
      warrants exercised                243,685            2,437               --               -- 

Net loss                                     --               --               --               -- 
                                      ---------         --------             ----            ------

Balances, December 31, 1997           2,453,990           24,540               --               -- 

Issuance of preferred stock                  --               --           22,500              225

Warrants issued with line of
     credit financing                        --               --               --               -- 

Warrants issued with preferred
     stock                                   --               --               --               -- 

Amortization of warrant
     valuation                               --               --               --               -- 

Net loss                                     --               --               --               -- 
                                      ---------           -------           ------            -----
Balances, December 31, 1998           2,453,990           $24,540           22,500            $225
                                      ---------           -------           ------            -----
                                      ---------           -------           ------            -----
</TABLE>

<TABLE>
<CAPTION>
                                             PAID-IN CAPITAL
                                       ---------------------------      ACCUMULATED       STOCKHOLDERS'    
                                       COMMON            PREFERRED        DEFICIT          DEFICIENCY           
                                     ----------          ---------     ------------       ------------
<S>                                  <C>                 <C>           <C>                <C>       
Balances, December 31, 1996          11,335,141               --        (7,558,489)        3,798,755

Issuance of common stock for
      warrants exercised                510,741               --                --           513,178

Net loss                                     --               --        (4,768,785)       (4,768,785)
                                     ----------       ----------       -----------        ----------
Balances, December 31, 1997          11,845,882               --       (12,327,274)         (456,852)

Issuance of preferred stock                  --        2,249,775                --         2,250,000

Warrants issued with line of
     credit financing                    21,900               --                --            21,900

Warrants issued with preferred
     stock                              229,333         (229,333)               --                -- 

Amortization of warrant
     valuation                               --           70,071           (70,071)               -- 

Net loss                                     --               --        (3,971,442)       (3,971,442)
                                     ----------       ----------       -----------        ----------
Balances, December 31, 1998          12,097,115        2,090,513       (16,368,787)       (2,156,394)
                                     ----------       ----------       -----------        ----------
                                     ----------       ----------       -----------        ----------

</TABLE>


See accompanying notes to the financial statements.

                                     F-5
<PAGE>

                             CRAGAR INDUSTRIES, INC.

                            Statements of Cash Flows

                     Years ended December 31, 1998 and 1997

<TABLE>
<CAPTION>
                                                                                     1998                1997
                                                                                 ----------           ----------
<S>                                                                              <C>                  <C>
Cash flows from operating activities:
     Net loss                                                                    $(3,971,442)         (4,768,785)
     Adjustments to reconcile net loss to net cash used in
         operating activities:
           Provision for losses on accounts receivable                               255,120           3,587,861
           Provision for obsolete and slow-moving inventory                          785,000            (260,945)
           Depreciation and amortization of property and equipment                   304,360             306,069
           Amortization of other assets                                              427,674             140,387
           Amortization of excess fair value of assets acquired over cost                 --            (737,468)
           Gain on sale of property and equipment                                     21,900                  --
           Increase (decrease) in cash resulting from changes in:
              Accounts receivable                                                   (136,517)         (3,023,383)
              Inventories                                                           (483,973)          1,910,077
              Prepaid expenses                                                      (188,864)             27,345
              Other assets                                                           (44,734)           (381,525)
              Accounts payable and accrued expenses                                  258,218            (806,034)
              Accrued interest                                                       (60,817)             12,143
                                                                                 -----------         -----------
                    Net cash used in operating activities                         (2,834,075)         (3,994,258)
                                                                                 -----------         -----------

Cash flows from investing activities:
     Purchases of property and equipment                                            (113,823)           (453,317)
     Disposition of property and equipment                                           127,682                  -- 
                                                                                 -----------         -----------
                    Net cash provided by (used in) investing activities               13,859            (453,317)
                                                                                 -----------         -----------

Cash flows from financing activities:
     Proceeds from sale of preferred stock                                         1,650,000                  -- 
     Net borrowings (repayments) on Norwest line of credit                        (5,518,544)          2,561,152
     Net borrowings (repayments) on NCFC line of credit                            5,820,494                  -- 
     Proceeds from issuance of long-term debt                                      1,127,000             600,000
     Repayments of long-term debt                                                   (166,933)             (4,263)
     Repayments of capital lease obligations                                        (108,123)            (69,219)
     Net proceeds from issuance of common stock                                           --             513,178
                                                                                 -----------         -----------
                    Net cash provided by financing activities                      2,803,894           3,600,848
                                                                                 -----------         -----------

Decrease in cash and cash equivalents                                                (16,322)           (846,727)

Cash and cash equivalents at beginning of year                                        16,322             863,049
                                                                                 -----------         -----------

Cash and cash equivalents at end of year                                          $      --               16,322
                                                                                 -----------         -----------
                                                                                 -----------         -----------

Supplemental disclosure of cash flow information:
     Cash paid for interest                                                       $  854,038             805,974
     Cash paid for income taxes                                                           --               3,342
                                                                                 -----------         -----------
                                                                                 -----------         -----------

Noncash financing and investing activities:
     Contribution of subordinated investor debt                                 $         --           2,000,000
     Exchange of asset reducing accounts payable                                          --             130,000
     Conversion of investor notes payable to preferred stock                         600,000                  -- 
                                                                                 -----------         -----------
                                                                                 -----------         -----------
</TABLE>

See accompanying notes to the financial statements.

                                     F-6
<PAGE>

                             CRAGAR INDUSTRIES, INC.

                          Notes to Financial Statements

                                December 31, 1998


(1)   DESCRIPTION OF BUSINESS

      CRAGAR Industries, Inc. (the Company) designs, produces and sells
      composite, aluminum, steel and wire custom wheels and wheel accessories.
      It markets and sells to automotive aftermarket distributors and dealers
      throughout the United States, Canada, Australia and other international
      markets.

(2)   LIQUIDITY

      The Company's financial statements have been presented on the basis that
      it is a going concern, which contemplates the realization of assets and
      the satisfaction of liabilities in the normal course of business. The
      Company has an accumulated deficit of $16,368,787 as of December 31, 1998,
      has generated substantial losses for several years, and has a
      stockholders' deficiency of $2,156,394 as of December 31, 1998. The
      Company's business plan calls for an increase in sales from new and
      existing customers, decrease in operating expenses, and an equity
      investment from a new private offering which management believes will be
      adequate to provide the Company with operating cash flow and to meet its
      current obligations. However, there is no certainty that the Company's
      plans will be successfully carried out. The financial statements do
      not include any adjustments that might result from the outcome of this
      uncertainty.

(3)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      (a)  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 amount 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.

      (b)  CASH AND CASH EQUIVALENTS

           All short-term investments purchased with an original maturity of
           three months or less are considered to be cash equivalents. Cash and
           cash equivalents include cash on hand and amounts on deposit with
           financial institutions.

      (c)  INVENTORIES

           Inventories consist of raw materials and partially and fully
           assembled custom specialty wheels. Inventories are stated at the
           lower of cost or market. Cost is determined using the average cost
           method. Market is based upon current sales price less distribution
           and selling costs. Provisions are made currently for obsolete and
           slow-moving inventory.

      (d)  PROPERTY AND EQUIPMENT

           Property and equipment are stated at cost. Depreciation on furniture,
           fixtures and equipment is provided using the straight-line method
           over the economic lives of the assets ranging from three to seven
           years. Leasehold improvements and equipment held under capital leases
           are amortized over the shorter of the underlying lease terms or the
           asset lives.

                                     F-7
<PAGE>

      (e)  REVENUE RECOGNITION

           Revenue from product sales is recognized upon shipment to the
           customer. Provisions are made currently for estimated product
           returns.

      (f)  EXCESS OF FAIR VALUE OF ASSETS ACQUIRED OVER COST

           The excess of fair value of assets acquired over cost in the original
           amount of $3,687,341 was amortized to operations over five years
           using the straight-line method through December 31, 1997.

      (g)  IMPAIRMENT OF LONG-LIVED ASSETS

           The Company reviews long-lived assets and certain identifiable
           intangibles for impairment whenever events or changes in
           circumstances indicate the carrying amount of an asset may not be
           recoverable. Recoverability of assets to be held and used is measured
           by a comparison of the carrying amount of an asset to future
           undiscounted net cash flows expected to be generated by the asset. If
           such assets are considered to be impaired, the impairment to be
           recognized is measured by the amount by which the carrying amount of
           the assets exceeded the fair value of the assets. Assets to be
           disposed of are reported at the lower of the carrying amount or fair
           value less costs to sell.

      (h)  PRODUCT WARRANTIES

           Costs estimated to be incurred with respect to product warranties are
           provided for at the time of sale based upon estimates derived from
           experience factors.

      (i)  INCOME TAXES

           The Company uses the asset and liability method of accounting for
           income taxes whereby deferred tax assets and liabilities are
           recognized for the future tax consequences attributable to
           differences between the financial statement carrying amounts of
           existing assets and liabilities and their respective tax bases.
           Deferred tax assets and liabilities are measured using enacted tax
           rates expected to apply to taxable income in the years in which those
           temporary differences are expected to be recovered or settled. The
           effect on deferred tax assets and liabilities of a change in tax
           rates is recognized in income in the period that includes the
           enactment date.

      (j)  EMPLOYEE STOCK OPTIONS

           The Company has elected to follow Accounting Principles Board Opinion
           No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) and related
           interpretations in accounting for its employee stock options and to
           adopt the "disclosure only" alternative treatment under Statement of
           Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
           COMPENSATION (SFAS 123). SFAS 123 requires the use of fair value
           option valuation models that were not developed for use in valuing
           employee stock options. Under SFAS No. 123, deferred compensation is
           recorded for the excess of the fair value of the stock on the date of
           the option grant, over the exercise price of the option. The deferred
           compensation is amortized over the vesting period of the option.

                                     F-8
<PAGE>

      (k)  NET LOSS PER COMMON SHARE

           Basic net loss per common share is computed based on weighted average
           shares outstanding and excludes any potential dilution from stock
           options, warrants and other common stock equivalents. Diluted net
           loss per common share reflects potential dilution from the exercise
           or conversion of securities into common stock or from other contracts
           to issue common stock. Assumed exercise of the outstanding stock
           options and warrants at December 31, 1998 and 1997 of 1,642,611 and
           1,264,778, respectively, have been excluded from the calculation of
           diluted net loss per common share as their effect is antidilutive.

      (l)  FAIR VALUE OF FINANCIAL INSTRUMENTS

           Statement of Financial Accounting Standard No. 107 "Disclosure about
           Fair Value of Financial Instruments" requires disclosure of the fair
           value of certain financial instruments. The following methods and
           assumptions were used by the Company in estimating fair value
           disclosures for the financial instruments:

           Limitations -- Fair value estimates are made at a specific point in
           time and are based on relevant market information and information
           about the financial instrument; they are subjective in nature and
           involve uncertainties, matters of judgment and, therefore, cannot be
           determined with precision. These estimates do not reflect any premium
           or discount that could result from offering for sale at one time the
           Company's entire holdings of a particular instrument. Changes in
           assumptions could significantly affect these estimates.

           Since the fair value is estimated as of December 31, 1998, the
           amounts that will actually be realized or paid in settlement of the
           instruments could be significantly different.

           Current assets and current liabilities -- The amounts reported in the
           balance sheet approximates fair value due to the short maturities of
           these instruments.

           Long-term debt -- The terms of the Company's long-term debt
           approximate the terms in the market place at which they could be
           replaced. Therefore, the fair value approximates the carrying value
           of these financial instruments.

      (m)  CONCENTRATION OF CREDIT RISK

           Financial instruments that potentially subject the Company to
           concentrations of credit risk consist principally of accounts
           receivable. As described in note 1, the Company sells its products to
           automotive aftermarket distributors and dealers throughout the United
           States, Canada, Australia and other international markets. The
           Company performs ongoing credit evaluations of its customers'
           financial condition but does not require collateral to support
           customer receivables. The Company establishes an allowance for
           doubtful accounts based upon factors surrounding the credit risk of
           specific customers, historical trends and other information. Due to
           the significant concentration of sales to the Company's top ten
           customers, the loss of any one such customer could have a material
           impact on the Company's results of operations and financial
           condition.

      (n)  SEGMENT REPORTING

           The Company has only one segment, sales of wheels and wheel 
           accessories. The Company's foreign sales totaled 3.1% in 1998 and 
           4.8% in 1997.

                                     F-9
<PAGE>

(4)   INVENTORIES

<TABLE>
     <S>                                                              <C>  
     Inventories as of December 31, 1998 consist of:

     Raw materials and supplies                                       $2,612,857
     Work-in-process                                                     161,164
     Finished goods                                                    2,577,681
                                                                      ----------
                                                                       5,351,702
     Less allowance for obsolete and slow-moving inventory               999,249
                                                                      ----------
                                                                      $4,352,453
                                                                      ----------
                                                                      ----------
</TABLE>

(5)   PROPERTY AND EQUIPMENT

      Property and equipment as of December 31, 1998 consists of the following:

<TABLE>
     <S>                                                             <C>
     Equipment                                                       $1,035,296
     Leasehold improvements                                             558,791
     Furniture and fixtures                                             435,815
                                                                     ----------
                                                                      2,029,902
     Less accumulated depreciation and amortization                   1,375,368
                                                                     ----------
              Property and equipment, net                            $  654,534
                                                                     ----------
                                                                     ----------
</TABLE>

(6)   ACCRUED EXPENSES

      Accrued expenses as of December 31, 1998 consist of the following:

<TABLE>
   <S>                                                             <C>
   Accrual for stock adjustments, rebates, cash discounts,
      advertising, royalty and warranty                            $   502,787
   Payroll and related benefits                                        127,982
   Professional fees                                                   113,590
   Real estate, personal property and other taxes                       90,254
   Settlement                                                          125,000
   Other                                                                73,031
                                                                    ----------
                                                                    $1,032,644
                                                                    ----------
                                                                    ----------
</TABLE>

                                     F-10
<PAGE>

(7)   CREDIT FACILITY

      During 1998, the Company secured a new credit facility with a finance
      company. The terms of the credit facility specify a maximum combined term
      loan and revolving line of credit totaling $8.5 million, subject to
      certain restrictions with respect to the collateral borrowing base. The
      credit facility contains no financial covenants and is collateralized by
      certain assets of the Company under a security agreement, which includes
      accounts receivable, inventories, intangible assets, and property. Certain
      stockholders have also pledged personal investments totaling $1.5 million
      as collateral on the credit facility and a portion of the investments are
      considered in determining the borrowing base. The line of credit bears
      interest at the prime rate plus 1.25% (9.0% at December 31, 1998) and is
      due in full in April 2002. As of December 31, 1998, $5,820,494 was
      outstanding under the line of credit and approximately $149,000 was
      available to borrow under the line of credit.

      In April 1998, the Company borrowed $1,127,000 under the term loan
      component of the credit facility. The term note is payable in monthly
      principal and interest payments based upon the prime rate plus 1.25%
      (9.00% at December 31, 1998) and is due April 2002. As of December 31,
      1998, $960,067 was outstanding under the term loan.

      The credit facility requires the Company to maintain an outstanding
      minimum principal balance and collateral borrowing base of at least $4
      million from the combination of the line of credit and term loans. As this
      minimum balance must be maintained until April 2002, $4 million of the
      total balances due under the credit facility are classified as long-term
      at December 31, 1998.

      Aggregate maturities of the line of credit and term loan over the next
      five years are as follows: 1999 - $2,780,561; 2000 - $250,400; 2001 -
      $250,400; and 2002 - $3,499,200.

(8)   PREFERRED STOCK

      In December 1997, the Company obtained debt financing from two
      stockholders (investors) of the Company totaling $600,000. The notes,
      bearing interest at a rate of 12% per annum, were due in full in January
      1998. In January 1998, the $600,000 notes to stockholders were converted
      into 6,000 shares of Series A Convertible Preferred Stock. Total interest
      expense on investor debt was $3,000 and $2,800 for the years ended
      December 31, 1998 and 1997, respectively.

      During January 1998, the Company issued 22,500 shares of 7% Series A 
      Convertible Preferred Stock for $1,650,000 cash and conversion of $600,000
      of investor notes payable to stockholders, all of which were outstanding 
      at December 31, 1997. Dividends in arrears for preferred stock totaled
      $135,625 at December 31, 1998.


                                     F-11
<PAGE>

(9)   OUTSTANDING WARRANTS

      At December 31, 1998 and 1997, the Company has outstanding Class A
      warrants to purchase 7,877.5 shares of the Company's common stock at $1.43
      per share. These warrants became exercisable on January 1, 1993 and expire
      on December 31, 1999. Class B warrants to purchase 24,500 shares of the
      Company's common stock at $0.36 per share outstanding at December 31, 1996
      were exercised in 1997. At December 31, 1998 and 1997, the Company has
      outstanding Class C warrants to purchase 21,000 shares of the Company's
      common stock at $3.25 per share. These warrants became exercisable on July
      1, 1996 and expire on June 30, 2001. In the opinion of management, the
      exercise price of the Class A, B, and C warrants approximated their fair
      value at the date of grant; therefore, no debt discount was recorded at
      the date of the grant.

      Warrants to acquire 977,500 shares of the Company's common stock at $6.60
      per share and representative's warrants to acquire 85,000 shares of the
      Company's common stock at $7.50 per share were outstanding as of December
      31, 1998 and 1997 as a result of the completion of the Company's initial
      public offering in December 1996.

      During January 1998, the Company granted warrants to purchase 333,333
      shares of the Company's common stock at $8.75 per share in conjunction
      with the preferred stock issuance. These warrants became exercisable in
      January 1998 and expire in January 2001. These warrants were valued at
      $229,333 and recorded as a contra entry to additional paid-in capital -
      preferred. This amount is being amortized to accumulated deficit on a
      straight-line basis over the three-year life of the warrants.

      In April 1998, the Company issued warrants to purchase 50,000 shares of
      the Company's common stock at a price of $5.25 per share to a financing
      company as part of securing its credit facility. The warrants became
      exercisable in April 1998, at the execution of the credit facility, and
      expire in April 2003. These warrants were valued at $21,900 based upon the
      market value of similar publicly traded warrants as of the date of grant.
      This warrant value was fully amortized to interest expense in 1998.

      No warrants to purchase shares of the Company's common stock were
      exercised during 1998.

(10)  STOCK OPTION PLAN

      During 1996, the Company's Board of Directors and stockholders formally
      approved the Company's stock option and restricted stock plan and
      nonemployee director plan (the Plans), which permit the granting of
      options to purchase shares of the Company's common stock to eligible
      employees and directors. The Plans reserve 245,000 shares of the Company's
      common stock for grant. The Plans provide that the options may be either
      incentive or non-incentive stock options. The exercise price for the
      incentive stock options shall not be less than 100% of the fair market
      value of the stock at the date of grant for incentive options and 85% of
      the fair market value with respect to the non-incentive stock options.
      Options granted under the Plans must be exercised in whole or in part
      within 10 years of the date of grant. The Company may also issue stock
      appreciation rights or restricted stock under provisions of the Plans with
      similar terms to the incentive and non-incentive stock options. As of
      December 31, 1998, 90,600 stock options under the Plans were available
      for grant.

                                     F-12
<PAGE>

      The per share weighted-average fair value of stock options granted during
      1998 and 1997 was $3.24 and $3.29, respectively, on the date of grant
      using the Black-Scholes option-pricing model with the following
      weighted-average assumptions: expected dividend yield 0%, expected
      volatility of 40.9% and an expected life of 4 years for both 1998 and
      1997. The risk-free interest rate was 5.46% and 6.50% for 1998 and 1997,
      respectively.

      The Company applies APB Opinion 25 in accounting for its Plan, and
      accordingly, no compensation cost has been recognized for its stock
      options to employees in the financial statements. Had the Company
      determined compensation cost based on the fair value at the grant date for
      its stock options under SFAS No. 123, the Company's net loss and loss per
      share would have been increased to the pro forma amounts indicated below.

<TABLE>
<CAPTION>
                                                  1998              1997
                                               -----------      -----------
     <S>                                       <C>              <C>
     Net loss:
        As reported                            $(3,971,442)      (4,768,785)
        Pro forma                               (4,113,742)      (4,984,985)

     Loss per share:
        As reported                            $    (1.67)            (2.08)
        Pro forma                                   (1.73)            (2.18)
</TABLE>

      The full impact of calculating compensation cost for stock options under
      SFAS No. 123 is not reflected in the pro forma net loss amounts presented
      above because compensation cost is reflected over the options' vesting
      period of four years.

      A summary of the aforementioned stock plan follows:

<TABLE>
<CAPTION>
                                                YEAR ENDED DECEMBER 31, 1998    YEAR ENDED DECEMBER 31, 1997
                                                ----------------------------    ----------------------------
                                                                    WEIGHTED                        WEIGHTED
                                                                    AVERAGE                         AVERAGE
                                                  NUMBER OF         EXERCISE        NUMBER OF       EXERCISE
                                                    SHARES           PRICE           SHARES          PRICE
                                                  ---------         --------       ----------      --------
      <S>                                         <C>               <C>            <C>             <C>
      Balance at the beginning of the year         173,400            $5.26         68,200            $5.52
      Granted                                        6,000             5.25        141,700             5.12
      Forfeited                                    (25,000)            5.12        (36,500)            5.16
      Exercised                                         --               --             --               --
                                                  --------            -----        -------            -----
      Balance at the end of the year               154,400            $5.28        173,400            $5.26
                                                  --------            -----        -------            -----
                                                  --------            -----        -------            -----
      Exercisable at the end of the year           154,400            $5.28        173,400            $5.26
                                                  --------            -----        -------            -----
                                                  --------            -----        -------            -----
      Weighted-average fair value of
         options granted during the year             $3.24                           $3.29
                                                  --------            -----        -------            -----
                                                  --------            -----        -------            -----
</TABLE>

                                     F-13
<PAGE>

      A summary of stock options granted at December 31, 1998 follows:

<TABLE>
<CAPTION>
                                    OPTIONS OUTSTANDING                   OPTIONS EXERCISABLE
                        ------------------------------------------   ------------------------------
                                          WEIGHTED-                        
                            NUMBER         AVERAGE       WEIGHTED-        NUMBER         WEIGHTED-
                        OUTSTANDING AT    REMAINING       AVERAGE    EXERCISABLE AT      AVERAGE
                         DECEMBER 31,    CONTRACTUAL     EXERCISE      DECEMBER 31,      EXERCISE
     EXERCISE PRICES         1998            LIFE          PRICE           1998            PRICE
     ---------------   --------------- ---------------  ----------  ---------------      ---------
     <S>               <C>             <C>              <C>         <C>                  <C>      
       5.12 - 5.14          97,600     8 years, 6 mos.    $ 5.12         97,600           $  5.12
          5.25               6,000     9 years, 7 mos.      5.25          6,000              5.25
          5.60              50,800     7 years, 10 mos.     5.60         50,800              5.60
                           -------                        ------        -------           -------
                           154,400                        $ 5.28        154,400           $  5.28
                           -------                        ------        -------           -------
                           -------                        ------        -------           -------
</TABLE>

(11)  LOSS PER SHARE

      A summary of the Company's basic and diluted loss per share follows:

<TABLE>
<CAPTION>
                                                                        YEARS ENDED DECEMBER 31,
                                                                     ------------------------------
                                                                          1998               1997
                                                                     -----------         ----------
     <S>                                                             <C>                 <C>
     Net loss                                                        $(3,971,442)        (4,768,785)
     Less preferred stock dividends in arrears                          (135,625)                --
                                                                     -----------         ----------
     Loss available to common stockholders                           $(4,107,067)        (4,768,785)
                                                                     -----------         ----------
                                                                     -----------         ----------

     Basic EPS-weighted average shares outstanding                     2,453,990          2,291,278
                                                                     -----------         ----------
                                                                     -----------         ----------

     Basic loss per share                                                 $(1.67)             (2.08)
                                                                     -----------         ----------
                                                                     -----------         ----------

     Basic EPS-weighted average shares outstanding                     2,453,990          2,291,278

     Effect of dilutive securities                                            --                 --
                                                                     -----------         ----------
                                                                     -----------         ----------

     Dilutive EPS-weighted average shares outstanding                  2,453,990          2,291,278
                                                                     -----------         ----------
                                                                     -----------         ----------

     Diluted loss per share                                     $          (1.67)             (2.08)
                                                                     -----------         ----------
                                                                     -----------         ----------

     Stock options and warrants not included in diluted EPS
        since antidilutive                                             1,642,611          1,264,778
                                                                     -----------         ----------
                                                                     -----------         ----------
</TABLE>


                                     F-14
<PAGE>

(12)  INCOME TAXES

      The Company had no current or deferred income taxes for the years ended
      December 31, 1998 and 1997. The reconciliation of the expected income tax
      benefit calculated at the U.S. Federal statutory rate of 34% to loss
      before income taxes for the years ended December 31, 1998 and 1997 is as
      follows:

<TABLE>
<CAPTION>
                                                                          1998                 1997
                                                                       -----------         ----------
      <S>                                                              <C>                 <C>
      Computed "expected" tax benefit                                  $(1,350,290)         (1,621,387)
      Change in the valuation allowance for deferred tax assets          1,397,000           2,193,000
      State and local income taxes, net of federal income tax 
         benefit                                                          (237,515)           (328,682)
      Other, net                                                           190,805            (242,931)
                                                                       -----------           ---------
                                                                       $        --                  --
                                                                       -----------           ---------
                                                                       -----------           ---------
</TABLE>

      The Company has net operating loss carryforwards at December 31, 1998 of
      approximately $13,721,000 for Federal income tax purposes, which begin to
      expire in 2010. In the event of a change in ownership pursuant to Internal
      Revenue Service regulations, utilization of the net operating loss
      carryforwards may be eliminated or significantly reduced.

      The tax effects of temporary differences that give rise to significant
      portions of the deferred tax assets and deferred tax liabilities at
      December 31, 1998 and 1997 are presented below:

<TABLE>
<CAPTION>
                                                                           1998                1997
                                                                       -----------          ----------
      <S>                                                              <C>                  <C>
      Deferred tax assets:
      Accounts receivable, principally due to allowance for
         doubtful accounts                                                 $44,000           1,447,000
      Inventories, principally due to allowance for obsolete
         and slow-moving inventory                                         536,000             883,000
      Differences in basis of assets upon acquisition,
         principally property and equipment and accounts                   
         receivable                                                        169,000             169,000
      Property and equipment, principally due to differences in
         depreciation                                                       59,000             133,000
      Net operating loss carryovers                                      5,488,000           2,334,000
      Rebates and sales discounts accrual                                  106,000              79,000
      Other                                                                122,000              82,000
                                                                         ---------           ---------
                 Total gross deferred tax assets                         6,524,000           5,127,000

      Less valuation allowance                                          (6,524,000)         (5,127,000)
                                                                         ---------           ---------
                 Net deferred tax assets                                        --                  --

      Deferred tax liabilities                                                  --                  --
                                                                         ---------           ---------

                 Net deferred income taxes                               $      --                  --
                                                                         ---------           ---------
                                                                         ---------           ---------
</TABLE>

                                     F-15
<PAGE>

      The net change in the total valuation allowance for the years ended
      December 31, 1998 and 1997 was an increase of $1,397,000 and $2,193,000,
      respectively. In assessing the realizability of deferred tax assets,
      management considers whether it is more likely than not that some portion
      or all of the deferred tax assets will not be realized. The ultimate
      realization of deferred tax assets is dependent upon generation of future
      taxable income during the periods in which those temporary differences
      become deductible. Management believes that the inability to utilize net
      operating loss carryforwards to offset future taxable income within the
      carryforward periods is more likely than not. Accordingly, a 100 percent
      valuation allowance has been recorded against the net deferred tax assets.

(13)  OPERATING LEASES

      The Company leases office and warehouse facilities and various equipment
      items under operating leases. The Company is responsible for all occupancy
      costs including insurance and utility costs. Minimum future rental
      commitments for all noncancelable operating leases having original or
      remaining lease terms in excess of one year and future minimum capital
      lease payments as of December 31, 1998 are as follows:

<TABLE>
     <S>                                                     <C>
     Years ending December 31:
        1999                                                 $  339,799
        2000                                                    360,297
        2001                                                    364,702
        2002                                                    348,090
        2003                                                     55,170
                                                             ----------
     Total lease payments                                    $1,468,058
                                                             ----------
                                                             ----------
</TABLE>

      No renewal options are provided for in the operating lease agreements. In
      the normal course of business, operating leases are generally renewed or
      replaced by other leases. Total rental expense under operating leases with
      a term in excess of one month was $309,909 and $311,467 for the years
      ended December 31, 1998 and 1997, respectively.

(14)  CONCENTRATIONS OF RISK -- MAJOR CUSTOMER

      The Company sold a substantial portion of its product to three customers
      in 1998 and to four customers in 1997. Sales amounts for 1998 and 1997 for
      these customers are as follows:

<TABLE>
<CAPTION>
                                                               1998              1997
                                                            ----------       -----------
                                                            PERCENT OF        PERCENT OF
                                                               SALES             SALES
                                                            ----------       -----------
     <S>                                                    <C>               <C>
     Sales to major customers:
        Heafner Tire                                             13.5%              9.6%
        Reliable Auto - Kansas                                    5.1               5.8
        Keystone Automotive                                       7.7               6.2
        Super Shops                                               --               27.5
                                                                 ----              ----
                                                                 26.3%             49.1%
                                                                 ----              ----
                                                                 ----              ----
</TABLE>

                                     F-16
<PAGE>

      Gross accounts receivable from significant customers as of December 31,
      1998 and 1997 follows:


<TABLE>
<CAPTION>
                                                            1998              1997
                                                         ----------        ----------
                                                         PERCENT OF        PERCENT OF
                                                          ACCOUNTS          ACCOUNTS
                                                         RECEIVABLE        RECEIVABLE
                                                         ----------        -----------
     <S>                                                 <C>               <C>
     Accounts receivable from major customers:
        Keystone Automotive                                 16.2%                3.9%
        Heafner Tire                                        15.7                 2.3
        Reliable Auto - Kansas                               8.8                 4.8
        Super Shops                                          --                 52.0
                                                            ----                ----
                                                            40.7%               63.0%
                                                            ----                ----
                                                            ----                ----
</TABLE>

      On September 19, 1997, Super Shops filed for Chapter 11 bankruptcy
      protection in the United States Bankruptcy Court, Central District of
      California. As a result, the Company established an allowance for bad debt
      of $3,523,028 to reserve for 100% of receivables related to this customer
      at December 31, 1997. In 1998, this receivable was written off against the
      allowance for doubtful accounts.

(15)  CONTINGENCIES

      In 1997, the Company developed a plan to deal with the Year 2000 problem
      and began converting its computer systems to be Year 2000 compliant. The
      plan provides for the conversion efforts to be completed by the end of
      1999. The Year 2000 problem is the result of computer programs being
      written using two digits rather than four to define the applicable year.
      Management has also assessed the Year 2000 remediation efforts of the
      Company's significant suppliers. Although management believes its efforts
      minimize the potential adverse effects on the Company of a supplier's
      failure to be Year 2000 compliant on time, there can be no absolute
      assurance that all its suppliers will become Year 2000 compliant on time
      or in a way that will be compatible with the Company's systems. The
      Company does not believe expenditures to be Year 2000 compliant will be
      material, and is expensing all costs associated with these systems changes
      as the costs are incurred. However, there can be no assurance that the
      Company will be able to completely resolve all Year 2000 issues or that
      the ultimate cost to identify and implement solutions to all Year 2000
      problems will not be material to the Company.

      The Company is involved in various claims and actions arising in the
      ordinary course of business. In the opinion of management, based on
      consultation with legal counsel, the ultimate disposition of these matters
      will not have a material adverse effect on the Company's financial
      position, results of operations or liquidity. Accordingly, no provision
      has been made in the accompanying financial statements for losses, if any,
      that might result from the ultimate resolution of these matters.

                                     F-17