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

                                  FORM 10-KSB/A
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
                        COMMISSION FILE NUMBER 000-23041

                        KARTS INTERNATIONAL INCORPORATED
           (Name of Small Business Issuer as Specified in Its Charter)


               Nevada                                  75-2639196
        (State of Incorporation)            (I.R.S. Employer Identification No.)

   109 Northpark Boulevard, Suite 210                    70433
          Covington, Louisiana                         (Zip Code)
(Address of Principal Executive Offices)

                                 (504) 875-7350
                (Issuer's Telephone Number, Including Area Code)

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

         Securities registered under Section 12 (g) of the Exchange Act:
                         Common Stock, $0.001 par value
                                (Title of Class)
                    Redeemable Common Stock Purchase Warrants
                                (Title of Class)

         Check whether the issuer (1) has 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 issuer 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 there is no disclosure  of  delinquent  filers in response to
Item 405 of  Regulation  S-B contained in this form,  and no disclosure  will be
contained,  to the  best of the  issuer'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 net revenues for the fiscal year ended  December 31, 1997,
were $7,586,476.

         The issuer had 4,854,133  shares of common stock and  1,782,500  public
warrants outstanding as of March 23, 1998.

         The aggregate  market value of the voting and  non-voting  common stock
held by non-affiliates  of the issuer,  computed by reference to the average bid
and asked prices of such common stock as of March 23, 1998, was $11,824,988.



<PAGE>

<TABLE>
<CAPTION>


                     1997 ANNUAL REPORT (S.E.C. FORM 10-KSB)

                                      INDEX

                      Securities and Exchange Commission
                           Item Number and Description


                                     PART I
<S>                                                                             <C>                             <C>   

Item 1    Business............................................................................................... 3
Item 2    Properties............................................................................................ 12
Item 3    Legal Proceedings..................................................................................... 13
Item 4    Submission of Matters to a Vote of Security Holders................................................... 13


                                                      PART II

Item 5    Market for the Company's Common Stock and Related Stockholder Matters................................. 14
Item 6    Management's Discussion and Analysis or Plan of Operation............................................. 15
Item 7    Consolidated Financial Statements..................................................................... 20
Item 8    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................. 20


                                                     PART III

Item 9    Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a)
          of the Exchange Act................................................................................... 21
Item 10   Executive Compensation................................................................................ 22
Item 11   Security Ownership of Certain Beneficial Owners and Management........................................ 25
Item 12   Certain Relationships and Related Transactions........................................................ 26
Item 13   Exhibits, Financial Statements and Reports on Form 8-K................................................ 28


                                SIGNATURES, FINANCIAL STATEMENTS AND EXHIBIT INDEX

Signatures...................................................................................................... 31
Financial Statements........................................................................................... F-1
Exhibit Index

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                                       -2-

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                                     PART I

ITEM 1.   BUSINESS
          --------

General

          Karts   International   Incorporated,   a  Nevada   corporation   (the
"Company"),  through its  wholly-owned  subsidiaries,  Brister's  Thunder Karts,
Inc.,  a Louisiana  corporation  ("Brister's"),  and USA  Industries,  Inc.,  an
Alabama corporation ("USA"), designs,  manufactures and distributes recreational
fun  karts  ("Fun  Karts"),  also  referred  to as "go  karts."  Fun  Karts  are
four-wheeled,  gas-powered  vehicles  typically equipped with engines of five to
eight   horsepower   and  purchased  by  consumers   principally   for  off-road
recreational  use.  Consolidated net revenues of the Company for the fiscal year
ended December 31, 1997 were  approximately  $7,586,476 million as compared with
revenues of approximately  $8,327,316 million for the fiscal year ended December
31, 1996. The Company operates manufacturing  facilities in Roseland,  Louisiana
and  Prattville,  Alabama,  and currently  maintains  its  executive  offices in
Covington,  Louisiana.  It is anticipated that the Company's  executive  offices
will be moved to its Roseland  manufacturing  facility during the second quarter
of fiscal 1998.

          The karts  industry is  comprised  of three  principal  segments,  Fun
Karts,  racing and concession  karts. Fun Karts, the largest segment,  are karts
sold to consumers  for general  recreational  use.  Racing  karts are  specially
designed  for use on  established  tracks in a  controlled  racing  environment.
Concession  karts are designed for use by amusement  and  entertainment  centers
which  provide  karts  and  facilities  for  customers'  use on a rental  basis.
Historically, Brister's and USA have concentrated their efforts in the Fun Karts
market.

          The   Company   offers  a   complete   product   line  of  Fun  Karts,
differentiated  by drive train,  seating  capacity,  tire size and tread design.
Thirty-two Fun Kart models are available in three different colors,  black, blue
and red,  which are sold under the Thunder  Karts and USA Fun Karts brand names.
The Company's models offer a wide range of standard and optional  features which
enhance the safety, operation,  riding comfort and performance of its Fun Karts.
Such features include the exclusive,  patented automatic throttle override; full
safety cage;  safety flag;  three kinds of drive  trains,  including  live axle,
single wheel pull and torque converter;  clutch lubrication  system;  high speed
bearings;  adjustable  throttle and seats; steel rims; band and disc brakes; and
Briggs & Stratton five  horsepower  engines.  The end-users of the Company's Fun
Karts are primarily  seven- to 17-year-old  males,  living with their parents in
suburban and rural markets. Typical Fun Kart purchasers are parents who purchase
Fun Karts for their children.

          The Company  relies on a broad and  diversified  national  independent
dealer network and mass  merchandisers to sell its Fun Karts. Prior to 1996, the
Company  sold its products  through its network of over 700  dealers,  primarily
lawn and garden stores,  motorcycle outlets, hardware stores and specialty karts
dealers, located in 40 states. The major markets for the Company's Fun Karts are
in the  Southeast  and  Southwest  regions of the United  States.  In 1997,  the
Company sold  approximately 79% of its Fun Karts to dealers primarily located in
Louisiana,  Texas, Mississippi and Florida.  Although there are no formal dealer
agreements,  the  Company,  for the  benefit of  certain  of its  higher  volume
dealers,  will agree not to sell to other retailers in a limited geographic area
surrounding  the high volume  dealer.  To become a Fun Kart dealer,  the Company
generally  requires  a  retailer  to  annually  purchase  six or more Fun Karts.
Dealers usually maintain an inventory of three to five Fun Karts which increases
during the Christmas holiday season. For eligible dealers,  the Company offers a
dealer floor plan financing program through an unaffiliated  financial  services
company.

          To  broaden  its  distribution  channels,  the  Company  in 1996 began
selling  its  Fun  Karts  to  mass   merchandisers.   In  1996,  sales  to  mass
merchandisers  represented  approximately 21% of the Company's revenues for such
fiscal year. In 1997, mass merchandisers accounted for approximately 17% of 1997
revenues.  The Company does not believe that any mass  merchandiser will account
for 10% or more of the Company's  1998 revenues.  Management  believes that mass
merchandisers represent a significant untapped market for Fun Karts.



                                       -3-

<PAGE>



          The Company's  operating  strategy is to increase its sales and market
share by producing  safe,  high-quality  and  reliable Fun Karts at  competitive
prices;   continue   to   improve   manufacturing   efficiency;   and   continue
diversification of domestic distribution channels. The Company's growth strategy
is to increase its brand and product recognition by innovative  marketing to its
target  users;  broaden its product lines through  improved  product  design and
development;  and expand its  geographic  presence and market share by continued
emphasis on  expansion of its domestic  dealer and mass  merchandiser  networks,
through further penetration of international  markets,  and through acquisitions
of manufacturers of karts and related products that provide  synergistic  growth
opportunities for the Company.

          On February 28, 1997, effective on March 24, 1997, the Company's Board
of Directors  approved a two- for-three  reverse stock split and a corresponding
reduction of the authorized  shares of Common Stock.  The issued and outstanding
shares  of  Common  Stock  shown in the  historical  consolidated  and  combined
financial  statements  included  elsewhere in this Annual  Report on Form 10-KSB
reflect the effect of the March 24, 1997 reverse  stock split as if this reverse
stock split had occurred as of the beginning of the first period presented.

          Unless otherwise indicated herein, the financial, business activities,
management  and other  pertinent  information  herein  relates on a consolidated
basis to the Company and its wholly-owned  subsidiaries,  Brister's and USA. The
Brister's  and USA  acquisitions  in 1996 were  accounted for using the purchase
method of accounting  for business  combinations.  The Company has allocated the
total purchase price to assets acquired based on their relative fair value.  Any
excess of the purchase price over the fair value of the assets acquired has been
recorded as goodwill.  The financial and other information regarding the Company
set forth herein reflects,  for the periods presented,  the consolidated results
of  operations  of the Company,  Brister's  and USA for the  respective  periods
owned.

          The  address  of  the  Company's  principal  executive  office  is 109
Northpark  Boulevard,  Suite 210, Covington,  Louisiana 70433, and its telephone
number is (504) 875-7350. The Company maintains manufacturing  facilities at 202
Challenge  Avenue,  Prattville,  Alabama  36067 and Highway 51 South,  Roseland,
Louisiana 70456.

Recent Financings

          1997 Public Offering. On September 16, 1997, the Company consummated a
public offering of securities (the "1997 Public  Offering")  whereby the Company
sold an aggregate of 1,550,000 shares of common stock, $.001 par value per share
(the "Common  Stock"),at a price of $4.00 per share,  and  1,550,000  Redeemable
Common Stock  Purchase  Warrants (the  "Warrants")  at $0.125 per Warrant.  Each
Warrant  entitles the holder thereof to purchase one share of Common Stock at an
exercise  price of $4.00 per share  during the four year  period  commencing  on
September 9, 1998 (the "First  Exercise  Date").  The Warrants are redeemable by
the Company at a redemption  price of $0.01 per  Warrant,  at any time after the
First  Exercise  Date,  upon  thirty  (30) days  written  notice to the  Warrant
holders,  if the average  closing  price of the Common  Stock  equals or exceeds
$8.00 per share of Common Stock for the 20 consecutive trading days ending three
days prior to the date of the notice of redemption.

          The Company received net proceeds of approximately $5,017,650 from the
sale of the  securities  offered in the 1997 Public  Offering  after  payment of
offering expenses and underwriting discounts and commissions.  Proceeds from the
1997 Public  Offering were used as follows:  (i) $2,250,000 for the repayment of
indebtedness,  including payment of approximately  $1,200,000 for two promissory
notes owed to Charles Brister,  a director of the Company,  for a portion of the
consideration   for  the  acquisition  of  Brister's  in  1996  (the  "Brister's
Acquisition");  (ii) $625,000 for the  redemption  of the Company's  convertible
preferred  stock;  (iii)  $48,000 for a financial  advising  fee payable to J.P.
Turner  Company,  L.L.C.,  the  representative  of the  underwriters of the 1997
Public  Offering;  (iv)  $200,000  for product  development;  (v)  $400,000  for
advertising  and  marketing  expenses;  and  (vi)  the  remaining  approximately
$1,700,000 for working capital purposes.

          Under the terms of the 1997 Public  Offering,  the  underwriters  were
granted an over-allotment option to purchase 232,500 additional shares of Common
Stock and 232,500 additional Warrants. The over-allotment option


                                       -4-

<PAGE>



was  exercised  and the  transaction  closed in October  1997,  with the Company
selling to the  underwriters  an additional  232,500  shares of Common Stock for
$4.00 per share and 232,500  additional  Warrants for $0.125 per Warrant for net
proceeds  of  approximately  $834,385  after  payment of offering  expenses  and
underwriting  discounts and  commissions.  Net proceeds from the exercise of the
over-allotment option are being used for working capital purposes.

          Bridge  Financing.  On November  15,  1996,  the  Company  completed a
private offer and sale of 25 Units to 17 accredited investors for total proceeds
of  $625,000  (the  "Bridge  Financing").  Each Unit  consisted  of one share of
convertible  preferred  stock  (the  "Convertible  Preferred  Stock")  and 6,667
warrants  (the  "1996  Warrants").  Each 1996  Warrant  entitles  the  holder to
purchase,  for a period of 42 months  after  November  15, 1996 one share of the
Company's Common Stock at an exercise price of $4.50 per 1996 Warrant subject to
further adjustment in certain  circumstances.  Argent Securities,  Inc. acted as
placement  agent  for  the  Company  in  this  offering  and  received   certain
compensation.  On March 6, 1997, each holder of the Convertible  Preferred Stock
agreed to the conversion of the Convertible Preferred Stock at the completion of
the  Company's  1997  Public  Offering  at the  conversion  rate of one share of
Convertible  Preferred  Stock for $25,000,  4,167 shares of Common Stock and the
issuance of an  additional  13,334 1996  Warrants for each share of  Convertible
Preferred Stock held as further  consideration for waiving certain  registration
rights and agreeing to certain  lock-up  provisions.  At the closing of the 1997
Public Offering,  the Company issued to the Convertible  Preferred  Stockholders
104,175  shares of Common  Stock,  333,350 1996  Warrants and paid $625,000 upon
conversion of the outstanding shares of Convertible Preferred Stock.

Seasonality

          Most Fun Karts are sold during the last quarter of the  calendar  year
and are typically  purchased as Christmas  gifts by parents for their  children.
Sales of Fun Karts are  generally  the lowest  during the first  quarter of each
year. Since the Company  typically does not obtain long-term  purchase orders or
commitments  from its customers,  it must anticipate the future volume of orders
based  upon  the   historic   purchasing   patterns  of  its  dealers  and  mass
merchandisers and upon its discussions with its dealers and  representatives  of
mass merchandisers as to their future requirements. Cancellations, reductions or
delays by a major customer could have a material adverse impact on the Company's
business, financial condition and results of operations.

          Traditionally,  many  dealers  have sold Fun  Karts  only  during  the
Christmas  holiday  season.  Recent  market  growth can be attributed to many of
these dealers  beginning to sell Fun Karts year round. The Company believes that
if its  business  strategies  are  successfully  implemented  in 1998 and future
years,  there will be some mitigation of the seasonality aspect of the Company's
Fun Karts sales.  The Company also intends to offset the seasonal aspects of its
current  business  operations  through  acquisitions of manufacturers of product
lines that are  compatible  with the  Company's  business  objectives  and offer
product diversity which have year round demand.

Operating Strategy

          Produce  Safe,  High  Quality and  Reliable  Fun Karts at  Competitive
Prices. The Company believes that it is one of the leaders in the development of
safety-related  features  for Fun  Karts,  which,  along  with  price,  is a key
consideration  for  the  Fun  Kart  purchaser,  the  parent  of  the  seven-  to
17-year-old male. The Company believes it was the first  manufacturer in the Fun
Karts industry to provide full safety cages and adjustable seats,  which are now
standard  features  on most Fun Karts.  The  Company is the  exclusive  Fun Kart
manufacturer  installing its patented  automatic throttle override system on Fun
Karts.   Producing   high  quality,   reliable   products   increases   customer
satisfaction,  and the Company  believes  this is one of the key elements of its
success in the highly  competitive  karts  industry.  The Company  believes  its
strategy of selling its Fun Karts through  independent dealers and selected mass
merchandisers  helps to ensure that the Company's  products are competitive with
those of other manufacturers in terms of safety, consumer acceptability, product
design, quality and price.

          Continue to Improve Manufacturing Efficiency. Management believes that
greater  productivity  will reduce  operating  costs.  The Company believes that
modernization of its manufacturing facilities is essential to


                                       -5-

<PAGE>



improving  the  quality  of the  Company's  products  and  promoting  the  price
competitiveness of its Fun Karts. The Company intends to expand and renovate, as
necessary,  its  manufacturing  facilities,  purchase new equipment and maintain
strict cost  controls as a means to enhance the  production  of high quality Fun
Karts. In 1997, the Company made capital expenditures of approximately  $400,000
for the  installation  of a powder paint system and tube bending  machine at its
manufacturing plant in Prattville,  Alabama. Management continuously reviews the
floor plan of its  manufacturing  facilities  to determine  revisions  that will
enhance  manufacturing  efficiency.  Additional  labor  at  reasonable  costs is
readily  available in the vicinity of the  Company's  manufacturing  facilities.
Management believes that with limited expansion of its current  facilities,  the
Company  will be  able  to meet  projected  increased  customer  demand  for the
Company's products for the foreseeable future.

Growth Strategy

          Increasing  Brand and Product  Recognition By Innovative  Marketing to
Target Users. The Company believes that if it is to further penetrate its target
market,  the seven- to 17-year old male,  the Company  must  advertise  in media
easily accessible by this group and attractively and prominently display its Fun
Karts in locations and at events  frequented  by young males and their  parents.
The Company  intends to increase  its  penetration  of this market by  enhancing
potential  customers' awareness of its products by advertising in youth-oriented
publications, as well as motor racing and motorcycle publications, establishment
of a Company home page on the World Wide Web portion of the Internet, displaying
and  promoting the  Company's  products at NASCAR races,  and through the use of
traditional print, billboard and to a lesser extent, television and radio media.

          Expansion of Geographic  Presence.  The Company  intends to expand its
geographic presence and increase its market share within and outside of its core
and contiguous markets by continued emphasis on the development and expansion of
its dealer  and mass  merchandiser  networks,  establishing  relationships  with
independent  sales  representatives  to serve regions of the United States which
are currently  underpenetrated  by the Company and possible  acquisition of kart
manufacturers and related businesses that offer synergistic growth opportunities
for the Company.  Although  the Company is actively  seeking  acquisitions  that
would  meet  its  strategic  objectives,  it  currently  has  no  agreements  or
understandings  with  respect  to  any  such  acquisition  and  there  can be no
assurance  that the  Company  will be  successful  in its  acquisition  efforts.
Further,  the  ability  of the  Company to effect  its  strategic  plans will be
dependent upon its obtaining financing for such acquisitions, which there can be
no assurance will be available.

Acquisition Strategy

          The  Company  continually  evaluates   acquisition   opportunities  of
operating  entities or product  lines  compatible  with its current  operations.
Target  companies  will be in the Fun Karts or related  business or will provide
the Company with complementary capabilities such as manufacturing,  distribution
or shipping.  Acceptable acquisition candidates are expected to be (i) companies
having three or more years operating  history and annual revenues from $5 to $15
million,  (ii)  businesses  with  different  or expanded  distribution  channels
through  which the Company may market its current  and/or future  products,  and
(iii)  companies with existing  manufacturing  capabilities  which may allow the
Company  greater  operating  efficiencies  through  vertical  integration of its
manufacturing  and  assembly   functions.   There  are  no  current  agreements,
commitments,   letters  of  intent  or   understandings   with  any  acquisition
candidates.   The  Company  intends  to   aggressively   pursue  growth  through
acquisitions, subject to financial and managerial resources.

          Management  believes  that it will be necessary  to obtain  additional
financing  prior  to a major  acquisition.  The  Company  anticipates  that  the
financing of any acquisition will be paid in cash,  issuance of capital stock or
debt  instruments,  or a  combination  thereof.  To the extent  that the Company
issues capital stock in any acquisition,  its stockholders may incur dilution in
their  investment in the Company.  The issuance of debt to finance  acquisitions
may result in the encumbrance of Company assets, impede the Company's ability to
obtain bank financing, decrease the Company's liquidity and adversely affect the
Company's ability to declare dividends to its stockholders.



                                       -6-

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Product Lines

          The Company produces a full line of Fun Karts, currently consisting of
32  models  which are  variations  on 15  different  frames  available  in three
different colors,  black,  blue and red. The models are  differentiated by drive
train (single wheel pull,  live axle or torque  converter),  seating  (single or
double),  tires (standard or custom) and frame size. The Company markets its Fun
Karts under the brand names of Thunder Karts and USA Fun Karts,  which  includes
the Blackhawk, Coyote, Eagle, Cobra and Land Runner models.

          The Company  believes its Fun Karts enjoy a premier  image in its core
markets  and that its Fun Karts  have a  reputation  for  quality,  performance,
style,  comfort,  ride and handling.  The Company's models offer a wide range of
standard and optional  features  which  enhance the  operation,  safety,  riding
comfort and  performance  of its Fun Karts.  Such features  include band brakes,
five horsepower  Briggs & Stratton engine,  automatic  throttle override system,
full safety cage, automatic clutch lubrication system,  powder paint, high speed
bearings and safety flag. The Company's USA Coyote Fun Kart has oversize  wheels
and has the added features of a torque converter and disc brakes.

          The Company's  patented,  exclusive automatic throttle override system
was named the 1995  Product of the Year for the  recreational  kart  industry by
Kart  Marketing  International,  a trade  magazine for the kart  industry.  This
safety feature prohibits throttling and braking at the same time,  regardless of
the  position of the gas pedal.  If the brake pedal is depressed  slightly,  the
engine will revert to the idle position immediately, and will not let throttling
engage until the pedal is released.  Significant benefits of this system include
virtual   elimination   of  throttle   runaways;   enhancement   of  safety  for
inexperienced drivers;  stopping of simultaneous braking and throttling;  easier
braking;  and extended brake life. The Company has an exclusive license from Mr.
Brister to use the automatic  throttle override system on its Fun Karts. See "--
Patents and  Proprietary  Technology"  and  "Certain  Relationships  and Related
Transactions."

Manufacturing Operations

          The  Company,  through  its two  wholly-owned  subsidiaries,  operates
manufacturing  facilities in Roseland,  Louisiana and Prattville,  Alabama.  The
Company's  manufacturing  facilities  include a 48,000  square foot  building in
Roseland and a 20,000 square foot facility located in Prattville. The management
of the Company's manufacturing facilities typically consists of a plant manager,
a production  manager,  a material manager and a quality control manager.  These
mid-level   managers   control   operations  of  the  respective   manufacturing
facilities,  with assistance and guidance from the Company's executive officers.
The Roseland facility is leased from Charles Brister, a director of the Company,
and the Company owns the Prattville  facility which includes a two-acre tract of
land. See "Properties" and "Certain Relationships and Related Transactions."

          Management  believes the  Prattville  facility  could be expanded to a
40,000 square foot facility on the existing  land.  The Company has an option to
acquire two acres adjacent to its Prattville facility for future expansion.  The
Prattville  plant is located in a planned  industrial park with adequate support
utilities and freight services.  The Company is currently expanding its Roseland
facility to provide for approximately 2,400 square feet of additional  executive
office space. The Company intends to move its executive  offices to its Roseland
facility during the second quarter of fiscal 1998. See "Properties."

          Fun Kart production levels at the Company's  manufacturing plants vary
depending on the season. Between January and May, the Company generally utilizes
a  10-hour  work day four  days a week at its  plants.  In June,  the work  week
expands  to five days and peaks in  November  at six days.  Additional  labor at
reasonable  costs  is  readily  available  in  the  vicinity  of  the  Company's
manufacturing facilities. Management believes that with limited expansion of its
current  facilities,  the  Company  will be able  to  meet  projected  increased
customer demand for the Company's products for the foreseeable future.



                                       -7-

<PAGE>



Quality Control, Warranties and Service

          The  Company  adheres to strict  quality  standards  and  continuously
refines its production  procedures to increase  productivity and reduce warranty
costs.  Each Fun Kart is inspected and numbered  during  assembly for compliance
with certain quality control  standards.  The Company  provides the purchaser of
its Fun Karts  with a 90-day  limited  warranty  against  certain  manufacturing
defects in the Fun Kart's  construction.  There are also direct  warranties that
are provided by the manufacturer of the engine and certain  component parts. The
Company's Fun Karts are usually serviced by the dealers.  Neither  Brister's nor
USA have  historically  incurred any significant  warranty claims and have never
had a recall of any of their products.

Patents and Proprietary Technology

          The Company does not own any  patents,  trademarks  or service  marks.
However,  Charles Brister,  a director of the Company,  owns certain patents and
trademarks which are licensed to the Company and which allows the Company to use
certain brand names and utilize the automatic  throttle override system ("ATOS")
on its Fun Karts.  The Company's  success is dependent upon, among other things,
its continued  ability to use these patented items and trademarks.  There can be
no assurance that any patents or trademarks  which may be issued to the Company,
or which the Company may license from third parties or Mr. Brister,  will not be
challenged,  invalidated or circumvented,  or that any rights granted thereunder
would provide proprietary  protection to the Company.  The Company will continue
to  implement  protective  measures  and  intends  to  aggressively  defend  its
proprietary rights. See "Certain Relationships and Related Transactions."

          The  Company,  in March 1996,  entered into a license  agreement  with
Charles Brister under which Mr. Brister has licensed to the Company for a period
of five  years (at no cost to the  Company  during  the  first  year) all of the
Intellectual Property (as hereinafter  defined),  which was owned by Mr. Brister
on March 15, 1996, and all Intellectual  Property  developed and/or owned by Mr.
Brister at any time  subsequent  to March 15, 1996.  After the first year of the
license  agreement,  the Company and Mr. Brister agreed to enter into subsequent
agreements defining the license fee and royalty payments based on terms at least
as  favorable  as  Mr.  Brister  has  received,   or  could  have  received,  in
arms'-length transactions with third parties. "Intellectual Property" is defined
as all  domestic  and foreign  letters,  patents,  patent  applications,  patent
licenses,  software  licenses and know-how  licenses,  trade names,  trademarks,
copyrights,  unpatented inventions,  service marks, trademark  registrations and
applications,   service  mark   registration   and  applications  and  copyright
registration and applications owned or used by Brister's in the operation of its
business.

          On March 15, 1997, the Company and Mr. Brister  entered in an addendum
to the License  Agreement and a related Royalty Agreement which provides for the
payment of a one-time  license fee and future  royalties,  respectively,  by the
Company to Mr. Brister for the use by the Company for a three-year period of the
ATOS developed and patented by Mr. Brister.  The Company has paid Mr. Brister an
initial  $10,000  license fee and agreed during the first year of the three year
extension  to pay him a royalty of $1.00 for each  Company Fun Kart on which the
ATOS was  installed.  During the second  and third  year of the  agreement,  the
Company  agreed to pay during each year a royalty of $1.00 for each  Company Fun
Kart on which the ATOS was installed or $20,000 annually whichever is greater.

Sales and Marketing

          Sales.  The  Company  primarily  relies  on a  broad  and  diversified
national  independent  dealer  network to sell its Fun Karts.  The Company sells
directly to  approximately  700 dealers located in 40 states,  with most dealers
concentrated  in the Southeast and Southwest  regions of the United  States.  In
1997, the Company sold  approximately  79% of its Fun Karts to dealers primarily
located in Louisiana, Texas, Mississippi and Florida.

          The Company  believes that its independent  dealer network enables the
Company to achieve  broader  distribution  of its  products  than if the Company
operated its own retail outlets. Selling through independent dealers also allows
the Company to avoid the  substantial  investment  in  management  and  overhead
associated with the operation of company-owned  retail stores. In addition,  the
Company's strategy of selling its products through


                                       -8-

<PAGE>



independent dealers helps to ensure that the Company's Fun Karts are competitive
with those of other  manufacturers in terms of consumer  acceptability,  product
design,  quality and price.  Accordingly,  a component of the Company's business
strategy is to continually strengthen its dealer relations. The Company believes
its relations with its independent dealers are good.

          While there are no formal  dealer  agreements,  the  Company,  for the
benefit of certain of its higher volume dealers, will agree not to sell to other
dealers in a limited  geographic area  surrounding the location of a high volume
dealer.  To become a dealer,  the  Company  generally  requires  a  retailer  to
annually purchase six or more Fun Karts. Most dealers keep an inventory of three
to five Fun Karts,  which increases during the Christmas holiday season.  Credit
terms  are 30 days  with no  discount.  For  dealers  who  meet  certain  credit
requirements,  the Company offers a dealer floor plan financing  program through
an  unaffiliated  financial  services  company.  The floor plan agreement may be
terminated at any time by the Company or the financial  services company with 30
days written  notice to the other party and may be  terminated  by the financial
services company upon an event of default by the Company, which includes failure
by the Company to pay any  amounts  owed to the lender  when due,  cessation  of
business  or  bankruptcy  of the  Company  or a material  adverse  change in the
Company's financial  condition.  The Company, at its option, will allow approved
dealers  up to  120  days  of  interest-free  financing  under  the  floor  plan
agreement.  The floor plan arrangement  requires the Company to repurchase units
in the  event  of  dealer  default.  The  Company  does not  currently  have any
significant  contingent  liability under the repurchase  obligation of the floor
plan agreement.

          Typical  domestic  dealers  include  lawn and garden  shops,  hardware
stores,  motorcycle shops,  automobile parts stores and specialty karts dealers.
The Company believes the dealer  distribution  channel is  underpenetrated.  The
Company estimates that less than 10% of the lawn and garden stores and less than
5% of the motorcycle dealers in the United States sell Fun Karts.

          Marketing.  The historical marketing strategy of Brister's and USA has
been to build a broad and diverse  independent  dealer  base,  primarily  in the
Southeast  and  Southwest  regions  of the  United  States,  by  offering  safe,
high-quality  and  reliable Fun Karts that are  competitively  priced and timely
delivered.  The Company's future marketing  efforts are designed to maintain and
expand its independent dealer network in the Southern and Western regions of the
United States and in foreign markets through direct  communications with dealers
and   assisting   them  with  their   selling   and   marketing   efforts   with
Company-sponsored  seminars,  discounts  or  rebate  products  and  advertising,
including  product  videos and  brochures,  leaflets,  posters,  signs and other
miscellaneous  promotion items for use by dealers. The Company will also seek to
increase  sales  to  mass  merchandisers  with  direct  communication,  engaging
independent sales  representatives and attendance by Company  representatives at
Fun Kart and industry related trade shows.

Backlog

          The Company  typically fills and ships customer orders within three to
seven  days of receipt of the order and,  therefore,  maintains  no  significant
backlog.

Governmental Regulations

         Consumer  protection  laws  exist in many  states in which the  Company
markets its  products.  Any violation of such laws or  regulations  could have a
material adverse effect on the Company. The Company's  manufacturing  facilities
are inspected by the Occupational Safety and Health Administration.  The Company
believes that it is generally in  compliance  in all material  respects with all
currently applicable federal and state laws and regulations.  Federal, state and
local  environmental  regulations  are not expected to have a material effect on
the  Company's  operations.  However,  if the Company in the future  acquires an
entity which is in violation of consumer or environmental  laws and regulations,
such violations may have a material adverse effect on the Company's operations.

         Management believes certain states, including California, have proposed
legislation  involving  emission  or  other  safety  standards  for the  type of
gas-powered  type engines  installed on the Company's Fun Karts.  The Company is
currently  unable to predict  whether  such  legislation  will be enacted in the
future and, if so, the ultimate impact on the Company and its operations.


                                       -9-

<PAGE>



Employees

         The Company employs approximately 90 employees of which 45 are employed
on a full-time basis. Eight employees are administration and sales personnel, 10
are plant  management  and  supervisory  personnel  and the remainder are hourly
employees  involved in  manufacturing  and  shipping.  In spite of the  seasonal
nature of sales, the Company attempts to keep all personnel employed  year-round
and  increases the hours per work week to meet  seasonal  demand.  The Company's
employees are not  represented by a union or subject to a collective  bargaining
agreement.  The  Company has never  experienced  a strike or work  stoppage  and
considers its relations with its employees to be excellent.

Competition

         The Fun Karts industry is highly competitive, and there is no assurance
that the  Company  will be able to compete  profitably  in this  industry in the
future. The Company expects that it will continue to face intense competition as
its business and acquisition  strategies are  implemented.  Such competition may
result in reduced sales,  reduced  margins,  or both. The Company is and will be
competing  with  larger,  better  capitalized  companies  which  may  be  better
positioned  to respond to shifts in  consumer  demand and other  market  related
changes.  If other  companies  introduce  new and modified  products  before the
Company achieves significant market expansion, the Company may experience growth
below  projected  levels  which  could  have a  material  adverse  effect on the
Company's operating results.  However, the Company believes that it will be able
to compete effectively with its competitors by diversifying its product line and
expanding  its  market  share  through   implementation   of  its  business  and
acquisition strategies.

Business Risk Factors

         Risks Relating to Growth and  Expansion.  The ability of the Company to
execute its growth strategy will depend on certain factors, including ability of
sales and  marketing  personnel to retain and expand the  Company's  dealers and
mass  merchandiser  networks,  market  acceptance of Company's  modified and new
products,  ability to further penetrate the Company's target market and increase
consumer  awareness  of its  products  by  advertising,  ability  to  consummate
acquisitions of kart manufacturers and related businesses,  general economic and
industry conditions,  and other factors, many of which are beyond the control of
the Company.  Even if the Company's  revenues and earnings  grow  rapidly,  such
growth may significantly strain the Company's management and its operational and
technical  resources.  If the Company is successful in obtaining  greater market
penetration  with  its  products,  the  Company  will  be  required  to  deliver
increasing  volumes of its  products  to its  customers  on a timely  basis at a
reasonable  cost to the Company.  No assurance can be given that the Company can
expand its  manufacturing  capacity to meet increased product demand or that the
Company  will be able to satisfy  increased  production  demands on a timely and
cost-effective  basis.  There  can be no  assurance  that the  Company's  growth
strategy will be successful.  Further,  if one or more of the component parts of
the Company's  growth strategy is  unsuccessful,  there can be no assurance that
such lack of success will not have a material  adverse  effect on the  Company's
results of operations or financial condition.

         Seasonality  and  Fluctuations  in  Quarterly  Operating  Results.  The
Company has  historically  experienced  stronger  demand for its products in the
third and fourth quarters of each calendar year. Operating results may fluctuate
due to factors such as the timing of the  introduction  of new  products,  price
reductions  by the  Company  and  its  competitors,  demand  for  the  Company's
products,  new product  mix,  delay,  cancellation  or  rescheduling  of orders,
performance of third party manufacturers,  available inventory levels,  seasonal
cost increases and general  economic  conditions.  A significant  portion of the
Company's  operating  expenses are relatively fixed. Since the Company typically
does not obtain long-term purchase orders or commitments from its customers,  it
must  anticipate the future volume of orders based upon the historic  purchasing
patterns of its dealers and mass merchandisers and upon its discussions with its
dealers  and   representatives   of  mass   merchandisers  as  to  their  future
requirements.  Cancellations, reductions or delays in orders by a large customer
or group of  customers  could have a material  adverse  impact on the  Company's
business, financial condition and results of operations.



                                      -10-

<PAGE>



         Growth Strategy and Risks Relating to Future Acquisitions.  One element
of the Company's  growth  strategy  involves  growth through the  acquisition of
other  companies,  assets or product  lines that would  complement or expand the
Company's  business.  The Company's  ability to grow by acquisition is dependent
upon, and may be limited by, the availability of suitable acquisition candidates
and capital.  Future  acquisitions  by the Company  could result in  potentially
dilutive  issuances  of  securities,  the  incurrence  of  debt  and  contingent
liabilities and  amortization  expenses related to goodwill and other intangible
assets, which could materially affect the Company's profitability.  In addition,
acquisitions  involve risks that could adversely affect the Company's  operating
results,  including the assimilation of the operations and personnel of acquired
companies, and the potential loss of key employees of acquired companies.  There
can be no assurance that the Company will be able to consummate any acquisitions
on  suitable  terms.  Other  than  as  required  by the  Company's  Articles  of
Incorporation, Bylaws and applicable laws, stockholders of the Company generally
will not be entitled to vote upon such acquisitions.

         Potential  Product  Liability and Insurance  Limits.  The nature of the
products  manufactured  by the Company is such that the products may fail due to
material  inadequacies  or  equipment  failures.  Such a failure may subject the
Company to the risk of product  liability  claims and  litigation  arising  from
injuries allegedly caused by the improper functioning or design of its products.
As the Company expands its Fun Karts product lines and distributes more products
into the marketplace,  the Company's  exposure to such potential  liability will
also  increase.  The Company  currently  maintains $5 million  occurrence  basis
product liability insurance with a $50,000 self-insured retention and $5 million
maximum per occurrence  coverage.  The Company currently has six pending product
liability  claims,  none of which are  expected  to exceed the  existing  policy
limits.  The  Company  has  never  had a claim  that  resulted  in an  award  or
settlement  in excess of insurance  coverage.  The Company  believes that as its
sales of Fun  Karts  increase,  product  liability  claims  will be  inevitable,
particularly given the current litigious nature of American consumers.  There is
no assurance that the Company's  insurance  coverage will be sufficient to fully
protect  the  business  and assets of the Company  from all claims,  nor can any
assurances  be given that the  Company  will be able to  maintain  the  existing
insurance  coverage or obtain  additional  coverage at  commercially  reasonable
rates. To the extent product  liability losses are beyond the limits or scope of
the  Company's  insurance  coverage,  the Company  could  experience  a material
adverse  effect upon its business,  operations,  profitability  and assets.  See
"Legal Proceedings."

         The Company Does Not Own Any Patents;  Dependence on License  Agreement
with  Director.  The Company  does not own any  patents,  trademarks  or service
marks. However, Mr. Charles Brister, a director and principal stockholder of the
Company,  owns certain patents,  technology and trademarks which are licensed to
the  Company  and allows the  Company to use brand names and utilize the ATOS on
its Fun Karts. The Company's success is dependent upon, among other things,  its
continued ability to use these patented items and other  proprietary  materials.
The  termination  of the license  agreement  with Mr.  Brister prior to its term
would have an adverse  effect upon the Company's  ability to produce its current
line of Fun Karts.  Furthermore,  there can be no assurance  that if the license
agreement is  terminated  prior to its initial term that the Company  could find
suitable  substitutions  for the licensed  items and  technology or that its Fun
Karts,  produced  without the licensed items and  technology,  would receive the
same market acceptance. Also, there is no assurance that the technology licensed
to the Company,  or that the Company might  license in the future,  will quickly
become  obsolete due to the  development of other,  more advanced  technology by
competitors   of  the   Company.   See   "Certain   Relationships   and  Related
Transactions."

         Concentration of Manufacturing Facilities.  The Company's manufacturing
operations are conducted at, and substantially all of the Company's inventory is
maintained  in, two  facilities,  one in  Roseland,  Louisiana  and the other in
Prattville, Alabama. Any significant casualty loss to, or extended interruptions
of operations at, either  facility  would have a material  adverse effect on the
Company. Replacement of the Company's manufacturing equipment could take several
months and would have a material adverse effect on the Company.

         Informal Supply  Arrangements.  Most of the component parts,  including
engines,  wheels,  tires, seats,  steering wheels,  steering tire rods and other
miscellaneous  parts,  used in the  manufacture  of the  Company's Fun Karts are
purchased from various  domestic vendors under informal  arrangements.  Although
the Company believes its relationship with its vendors to be excellent, the loss
of any vendor may cause the Company to experience a


                                      -11-

<PAGE>



temporary  delay in the  production  of the  Company's  Fun Karts.  The  Company
believes other engine vendors and suppliers of other  component  parts necessary
for the production of Fun Karts are readily available.

         Dependence  on  Independent  Dealers.  The Company has not entered into
written  agreements with its Fun Karts dealers and in turn the dealers are under
no obligation to purchase the Company's Fun Karts. In 1997, approximately 83% of
the  Company's  combined  revenues  were the result of sales to its  independent
dealers.  No one dealer or group of affiliated dealers accounted for 10% or more
of the Company's  1997 revenues.  While the Company  believes that its relations
with its independent  dealers are generally good, there can be no assurance that
the Company will be able to maintain these relationships, that a majority of its
dealers will  continue to sell the  Company's Fun Karts or that the Company will
be able to attract and retain  quality  independent  dealers.  If a  significant
number of the Company's dealers ceased to order Fun Karts from the Company or if
the  Company is unable to expand its dealer  network,  the  Company's  financial
condition and results of operations would be adversely affected.

         Forward-Looking  Statements and Associated  Risk.  Management  believes
that this  Annual  Report on Form  10-KSB for the year ended  December  31, 1997
contains forward-looking statements, including statements regarding, among other
items, the Company's future plans and growth  strategies and anticipated  trends
in the industry in which the Company operates. These forward-looking  statements
are based largely on the Company's  expectations  and are subject to a number of
risks and uncertainties,  many of which are beyond the Company's control. Actual
results  could differ  materially  from these  forward-looking  statements  as a
result of the factors described herein,  including,  among others, regulatory or
economic influences. In light of these risks and uncertainties,  there can be no
assurance that the forward-looking  information  contained in this Annual Report
on Form 10-KSB will in fact transpire or prove to be accurate.


ITEM 2.   PROPERTIES
          ----------

Facilities

         The following  table sets forth  information  concerning  the Company's
facilities:

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

                                   Date Leased                                      Expiration of        Approximate
           Location                or Acquired               Description             Lease Term        Square Footage
------------------------------- -----------------  -----------------------------  -----------------  ----------------
Covington, Louisiana                  1996         Corporate Offices(1)                 2001                3,400
Roseland Louisiana                    1996         Manufacturing facility(2)            2000               48,000
Prattville, Alabama                   1996         Manufacturing facility                (3)               20,000

(1)  The monthly lease payment is $4,058 with adjustments for Consumer Price Index.
(2)  The Company and Charles  Brister,  a director of the Company,  have entered
     into a Real Estate Option Right of First Refusal Agreement.  This agreement
     provides  that the Company may, at its sole  option,  purchase the Roseland
     facility for an  aggregate  purchase  price of $550,000.  The option can be
     exercised  after  December 31, 1997 and expires on December  31,  2000.  On
     March 15, 1996, the Company and Mr. Brister  entered into a lease agreement
     for this  facility  which  provides  for a  two-year  primary  term  with a
     two-year  renewal  option.  The Company has exercised the two-year  renewal
     option.  The monthly lease payment is $6,025 with adjustments for increases
     in  the  Consumer  Price  Index.  The  Company  believes  these  terms  are
     comparable  to existing  market rates in the region.  Approximately  45,000
     square  feet is used for  manufacturing  and 3,000  square feet is used for
     office space at the Roseland facility.  The Company is currently  expanding
     its  Roseland  manufacturing  facility to provide for  approximately  2,400
     square feet of additional  executive  office space.  The Company intends to
     move its executive  offices to the Roseland  manufacturing  facility during
     the  second  quarter  of  1998.  See  "Certain  Relationships  and  Related
     Transactions."
(3)  The  Prattville  facility is situated on a two-acre  tract of land owned by
     the  Company.  This  property is subject to a mortgage  held by a financial
     institution with a principal balance of approximately  $224,295 at December
     31, 1997 with interest at the financial institution's commercial base rate.
     The Company is obligated to make monthly payments of principal and interest
     of $2,626 until 2010. The  Prattville  facility could be expanded to 40,000
     square feet on the existing  land. The Company has an option to acquire two
     acres  adjacent  to its  existing  facilities  for  future  expansion.  The
     Prattville  facility is located in a planned  industrial park with adequate
     support utilities and freight services.


</TABLE>


                                      -12-

<PAGE>



ITEM 3.  LEGAL PROCEEDINGS
         -----------------

         The nature of the products  manufactured and marketed by the Company is
such  that the  products  may fail due to  material  inadequacies  or  equipment
failures.  Such a  failure  may  subject  the  Company  to the  risk of  product
liability  claims and litigation  arising from injuries  allegedly caused by the
improper  functioning  or design of its  products.  As the  Company  expands its
product lines and distributes more products into the marketplace,  the Company's
exposure to such potential  liability will also increase.  The Company currently
maintains $5 million occurrence basis product liability insurance (with coverage
being provided in respect of accidents  which  occurred  during the policy year,
regardless  of when  the  related  claim is made)  with a  $50,000  self-insured
retention and $5 million  maximum per occurrence  coverage.  The Company has six
pending  product  liability  claims.  None of the current claims are expected to
exceed  the  existing  policy  limits.  The  Company  has never had a claim that
resulted in an award or settlement in excess of insurance coverage.  The Company
believes that if it is successful in the sale and distribution of a large number
and variety of Fun Karts and related products,  product liability claims will be
inevitable,   particularly  given  the  current  litigious  nature  of  American
consumers. There is no assurance that such insurance coverage will be sufficient
to fully protect the business and assets of the Company from all claims, nor can
any  assurances  be given that the Company will be able to maintain the existing
coverage or obtain additional coverage at commercially  reasonable rates. To the
extent product  liability losses are beyond the limits or scope of the Company's
insurance coverage,  the Company could experience a material adverse effect upon
its business, operations, profitability and assets.

         In addition to product  liability  claims,  the  Company,  from time to
time, is involved in lawsuits in the ordinary course of business.  Such lawsuits
have not  resulted in any  material  losses to date,  and,  except as  discussed
below,  the Company does not believe  that the outcome of any existing  lawsuits
would have a material adverse effect on its business.

         On February 4, 1997 a lawsuit  was filed in Federal  District  Court in
New  Orleans,  Louisiana  against the  Company,  Brister's  and an  unaffiliated
insurance  broker  by the  Company's  insurance  underwriter  to have  insurance
coverage declared as null and void for an alleged material  misrepresentation on
the insurance application.  This action arose as a result of the payment in 1997
by the insurance  underwriter  of $700,000 in settlement of a product  liability
lawsuit  against  Brister's  and  other  defendants.  The  Company  has  filed a
counterclaim  against  the  Company's  insurance  broker  relating  to  possible
negligence and misrepresentations  made by the insurance broker to the insurance
underwriter  regarding  Brister's prior product  liability  claims history.  The
Company  intends to  vigorously  defend this  lawsuit.  The Company is currently
engaged in discovery and is unable to predict the outcome of this litigation. If
the Plaintiff is successful  in this  litigation  and is awarded a judgement for
damages  against the Company and Brister's,  such judgment could have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations. Under the terms of the Brister's Acquisition, the Company may offset
certain product  liability  claims against certain shares of the Common Stock of
the Company issued to Charles Brister,  a director and principal  stockholder of
the Company, as partial consideration for the Brister's Acquisition.


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

         The Company had no matters  requiring a vote of security holders during
the fourth quarter of fiscal 1997 nor the first quarter of fiscal 1998.





                                      -13-

<PAGE>



                                     PART II

ITEM 5.   MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
          -------------------------------------------------
           RELATED STOCKHOLDER MATTERS
           ---------------------------

         The  Company's  Common  Stock and  Warrants  are  traded on the  Nasdaq
SmallCap  Market system under the symbol "KINT" and "KINTW",  respectively.  The
following  table sets forth the range of high and low closing bid prices for the
Common  Stock and the  Warrants  for the  periods  indicated  as reported by the
National  Quotation Bureau,  Incorporated.  These prices represent  inter-dealer
prices, without adjustment for retail mark-ups, mark-downs or commissions and do
not necessarily represent actual transactions.

<TABLE>

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

                                                       Common Stock                        Warrants
                                                       Bid Price(1)                        Bid Price
                                            -------------------------------     --------------------------------
Calendar Year 1998                                 Low             High                 Low             High
------------------                          -------------------------------     --------------------------------
First Quarter (through March 23, 1998)           $2.75             $3.75               $0.56            $1.19

                                                       Common Stock                        Warrants
                                                       Bid Price(1)                        Bid Price
                                            -------------------------------     --------------------------------
Calendar Year 1997                                 Low             High                 Low             High
------------------                          -------------------------------     --------------------------------
First Quarter                                    $4.13             $4.88                 --               --
Second Quarter                                   $4.00             $4.50                 --               --
Third Quarter(2)                                 $4.00             $5.38               $1.00            $1.50
Fourth Quarter                                   $3.00             $4.75               $0.69            $1.25

                                                       Common Stock
                                                         Bid Price
                                            -------------------------------
Calendar Year 1996                                 Low             High
------------------                          --------------   --------------
Second Quarter(3)                                 $5.63            $5.63
Third Quarter                                     $4.13            $5.63
Fourth Quarter                                    $4.13            $4.88

</TABLE>
-----------------
(1)  Prices have been adjusted to reflect a two-for-three reverse stock split of
     the Company's Common Stock effective March 24, 1997.
(2)  The Common Stock and Warrants began trading on the Nasdaq  SmallCap  Market
     under the symbols "KINT" and "KINTW", respectively, on September 9, 1997.
(3)  The Common Stock traded on the NASD Electronic Bulletin Board from June 27,
     1996 to September 9, 1997.

         On March 23, 1998,  the closing bid and ask prices for the Common Stock
were $3.00 and $3.31, respectively, per share and the closing bid and ask prices
for the Warrants were $0.75 and $1.00,  respectively,  per Warrant.  As of March
23,  1998,  4,854,133  shares of Common  Stock were issued and  outstanding  and
1,782,500 Warrants were outstanding.

         Holders.  As of March 3, 1998, there were  approximately 700 record and
beneficial  holders of the Company's  Common Stock and 300 record holders of the
Warrants.

         Dividends.  The  Company has not paid or declared  any  dividends  with
respect  to its  Common  Stock  or  Convertible  Preferred  Stock,  nor  does it
anticipate paying any cash dividends or other  distributions on its Common Stock
in the  foreseeable  future.  Any  future  dividends  will  be  declared  at the
discretion of the Board of Directors of the Company and will depend, among other
things, on the Company's earnings, if any, its financial requirements for future
operations  and  growth  and such  other  facts  as the  Company  may then  deem
appropriate.  The  Company has agreed  that,  for a period of two years from the
closing of the 1997 Public Offering,  without the consent of the  representative
of the  underwriters,  it shall not redeem or issue any of its securities or pay
any dividends, or make


                                      -14-

<PAGE>



any other cash  distributions  in respect  of its  securities,  in excess of the
amount of the Company's current or retained earnings.


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

         The Company had no significant  business  operations  from 1989 through
March 1996.  Prior to that time, the Company was engaged in the mining industry,
principally  through  joint  ventures  with  related  parties  involving  mining
properties located in Colorado.  The Company is in the business of manufacturing
and marketing Fun Karts for the consumer market.

         Effective  at the close of  business  on March 31,  1996,  the  Company
purchased  100% of the issued and  outstanding  stock of Brister's,  a Louisiana
corporation  organized on August 2, 1976, from Charles  Brister,  a director and
principal stockholder of the Company, for a total purchase price of $6.3 million
(the  "Brister's  Acquisition").  The purchase  price was paid with $2.0 million
cash, issuance of $1.2 million of promissory notes (the "Brister Notes") and the
issuance to Mr. Brister of 516,667  shares of restricted  shares of Common Stock
valued at $3.1 million.  The Brister's  Acquisition  was accounted for using the
purchase method of accounting for business  combinations.  The Company allocated
the total purchase price to assets acquired based on their relative fair values.
Any excess of the purchase  price over the fair value of the assets  acquired is
recorded as goodwill.  Results of  operations  of Brister's  are included in the
Company's  consolidated  financial statements beginning on the effective date of
the Brister's Acquisition.

         Effective at the close of business on November  21,  1996,  the Company
purchased  100%  of  the  issued  and  outstanding  stock  of  USA,  an  Alabama
corporation organized on January 2, 1992, from four USA stockholders for a total
purchase  price of $1,000,000  (the "USA  Acquisition").  The purchase price was
paid  with  $250,000  in cash and the  issuance  to the USA  stockholders  of an
aggregate of 166,667  restricted  shares of the Company's Common Stock valued at
$750,000.  The USA  Acquisition  was accounted for using the purchase  method of
accounting for business  combinations.  The Company allocated the total purchase
price to assets  acquired based on their relative fair value.  Any excess of the
purchase  price  over the fair  value of the  assets  acquired  is  recorded  as
goodwill.   Results  of   operations  of  USA  are  included  in  the  Company's
consolidated  financial  statements  beginning on the effective  date of the USA
Acquisition.

         On September 16, 1997, the Company consummated its 1997 Public Offering
whereby the Company sold an  aggregate of 1,550,000  shares of Common Stock at a
price of $4.00 per share,  and  1,550,000  Warrants at $0.125 per Warrant.  Each
Warrant  entitles the holder thereof to purchase one share of Common Stock at an
exercise  price of $4.00 per share  during the four year  period  commencing  on
September 9, 1998 (the "First  Exercise  Date").  The Warrants are redeemable by
the Company at a redemption  price of $0.01 per  Warrant,  at any time after the
First  Exercise  Date,  upon  thirty  (30) days  written  notice to the  Warrant
holders,  if the average  closing  price of the Common  Stock  equals or exceeds
$8.00 per share of Common Stock for the 20 consecutive trading days ending three
days prior to the date of the notice of redemption.

         The Company received net proceeds of approximately  $5,017,650 from the
sale of the  securities  offered in the 1997 Public  Offering  after  payment of
offering expenses and underwriting discounts and commissions.  Proceeds from the
1997 Public  Offering were used as follows:  (i) $2,250,000 for the repayment of
indebtedness,  including  payment of the Brister  Notes;  (ii)  $625,000 for the
redemption of the Company's  Convertible  Preferred  Stock;  (iii) $48,000 for a
financial   advising  fee  payable  to  J.P.   Turner   Company,   L.L.C.,   the
representative  of the underwriters of the 1997 Public  Offering;  (iv) $200,000
for product  development;  (v) $400,000 for advertising and marketing  expenses;
and (vi) the remaining approximately $1,700,000 for working capital purposes.

         Under the terms of the 1997  Public  Offering,  the  underwriters  were
granted an over-allotment option to purchase 232,500 additional shares of Common
Stock and 232,500 additional Warrants.  The over-allotment  option was exercised
and the  transaction  closed in October  1997,  with the Company  selling to the
underwriters  an additional  232,500  shares of Common Stock for $4.00 per share
and 232,500  additional  Warrants  for $0.125 per  Warrant  for net  proceeds of
approximately $834,385 after payment of offering expenses and underwriting


                                      -15-

<PAGE>



discounts and commissions.  Net proceeds from the exercise of the over-allotment
option are being used for working capital purposes.

         The following  discussion  reflects historical  consolidated  financial
data for the periods ended December 31, 1997 and December 31, 1996.

Results of Operations

         Year Ended  December  31, 1997 as compared to Year Ended  December  31,
1996. The financial  information discussed herein is derived from the historical
consolidated  financial statements of the Company for the respective years ended
December 31, 1997 and 1996 and the  acquisition of USA on November 11, 1996. The
Company  consummated the  acquisition of Brister's  effective as of the close of
business on March 31, 1996.  Accordingly,  the three-month period ended June 30,
1996 was the first inclusive quarter of control of Brister's by the Company. The
Company,  through its Brister's and USA  subsidiaries,  experiences  significant
seasonality of sales with more than 50% of its sales occurring during the fourth
quarter of the calendar year. The amounts  discussed in this section reflect the
consolidated  results of the Company's ownership of Brister's and USA from their
respective  acquisition  dates and the  consolidated  results  of the  Company's
ownership of both Brister's and USA for the entire year presented for 1997.

         The Company experienced  revenues of approximately $7.6 million for the
year ended  December 31, 1997  compared to $8.3 million for the year  comparable
period of 1996. These results continue to reflect weak product demand during the
first half of each fiscal  year due  primarily  to  seasonality  of sales.  Some
seasonality was mitigated by mass merchandiser sales;  however, it is improbable
that the  Company  will be able to maintain a  significant  sales level into the
mass  merchandiser  sales  channel for future  periods.  Management  is pursuing
additional venues,  including other potential mass merchandiser  customers,  and
methods to improve its sales during traditional slow demand periods.

         Selling,   general  and  administrative   expenses  were  approximately
$2,149,000  for the year ended  December  31, 1997 as compared to  approximately
$2,571,000,  including  the  one-time  only  non-cash  charge  of  approximately
$1,008,000 to earnings for the "fair value"  recognition on common stock sold or
issued to Halter Financial  Group.  The increase in comparable  expenses between
1997 and 1996 was  approximately  $1,430,000.  This increase was attributable to
increases  in  advertising  and  marketing  costs,  current  year  research  and
development costs and general corporate  overhead expenses related to the growth
and maturation of the Company's operations and amortization of goodwill incurred
at the respective acquisitions of Brister's and USA. Further, the 1997 financial
statements  reflect the initial full year ownership of both Brister's and USA as
compared  to only the  respective  operations  of  Brister's  and USA from their
respective  acquisition dates during 1996. Management has identified these costs
for  constant  monitoring  and  is  taking  steps  to  control  expenditures  at
anticipated constant or lower levels for future periods.

         During 1997, the Company incurred approximately $34,000 in research and
development  expenses  related to new  products  and  improvements  to  existing
products.  While specific research and development  expenditure  levels have not
been  developed by management,  it is  anticipated  that these types of expenses
will be present in future periods at  fluctuating  levels,  primarily  dependent
upon available resources.

         In the first  quarter of 1996,  the  Company  incurred a one-time  only
non-cash charge to earnings of approximately $1.43 million related to fair value
recognition  on Common  Stock sold or issued to a former  director and to Halter
Financial Group, Inc. ("HFG"), a company owned by Timothy P. Halter, Chairman of
the Board,  Secretary  and a director of the  Company,  for  reorganization  and
restructuring  costs,  at less than "fair  value" as defined in the  appropriate
accounting standards.

         For the year ended December 31, 1997,  the Company  incurred a net loss
of approximately $1,051,000 as compared to a net loss of approximately $960,000,
including the one-time  accounting  charge  discussed  above, for the comparable
year ended  December 31, 1996.  Management  attributes  the increases in the net
loss for fiscal  1997  compared to fiscal 1996 to  increased  general  corporate
overhead expenses and a decline in Fun Kart units sold from previous years.



                                      -16-

<PAGE>



         Basic earnings (loss) per share were approximately $(0.32) for the year
ended  December 31, 1997 and  approximately  $(0.51) for the year ended December
31, 1996.  Excluding the one-time accounting charge, the year ended December 31,
1996 had a proforma earnings per share of approximately $0.25 per share.

         Consolidated  Fiscal  Year  Ended  December  31,  1996 as  compared  to
Combined  Fiscal  Year Ended  December  31,  1995.  The  Company,  on a proforma
combined  basis,  realized  net sales for the year ended  December  31,  1996 of
approximately  $10.7 million as compared to combined  revenues of  approximately
$8.5  million  for  the  year  ended   December  31,  1995  or  an  increase  of
approximately 25%. Management  attributes the increase in sales primarily to the
continued  development  of the Brister's and USA dealer base and the addition of
two mass merchandisers as a distribution channel. Management estimates that unit
sales growth in the Fun Kart industry has been in the 12% to 15% range from 1991
through  1995.  In 1996,  industry-wide  unit  sales were  relatively  stagnant.
Management  believes  the  stagnant  unit  sales in 1996 were the result of high
consumer debt, less than anticipated  retail  Christmas sales,  unusual national
weather patterns and weak sales  performance in the lawn and garden industry,  a
principal network of dealers for Fun Karts.

         The Company  incurred cost of sales of  approximately  $7.6 million for
1996 as compared to approximately  $6.2 million in 1995. These costs allowed the
Company  to achieve a gross  margin of  approximately  $3.1  million in 1996 and
approximately  $2.3 million in 1995 or approximately 28% and 27%,  respectively.
Management continues to focus on expanding its distribution  channels to include
the optimum balance among dealers (lawn/garden,  hardware,  cycle stores, etc.),
mass merchandisers,  home centers, farm stores and other distribution  channels.
In addition,  management has  restructured  its cost  accounting  system to more
effectively manage costs at each of its subsidiary manufacturing locations.

         Operating expenses for 1996 and 1995, respectively,  were approximately
$2.1  million and $1.8  million.  Key expense  increases  from 1995 to 1996 were
related to (i) interest  expense which increased  approximately  $302,000 due to
costs related to the Brister's  Acquisition,  (ii) product  liability  insurance
expenses which  increased  approximately  $265,000 due to increased sales volume
and increased  coverage required by the Company's major customers,  and goodwill
amortization  expenses related to the Brister's and USA  Acquisitions  increased
approximately $172,000. All other operating expenses were maintained at the same
relative levels as the previous year by improved cost controls.

         Operating  expenses reflect  historical levels even though  significant
interest,  insurance and  amortization  expenses were added in 1996.  Additional
sales volume and effective  management  control of variable  operating  expenses
contributed  to   maintaining   the  relatively   constant   operating   expense
relationship to sales on a percentage basis.

         In the first quarter of 1996, the Company incurred a one-time  non-cash
charge  to  earnings  of  approximately  $1.43  million  related  to fair  value
recognition on Common Stock sold or issued to a former  director and to HFG, for
reorganization and restructuring  costs, at less than "fair value" as defined in
the appropriate accounting standards,  resulting in a net loss of $(959,566) for
the year ended December 31, 1996.

         Additional Operations Information.  In 1996 the Company settled several
product   liability   lawsuits  with  a  cumulative   charge  to  operations  of
approximately  $44,000. The Company currently has six product liability lawsuits
outstanding,  none of which are expected to exceed  existing  product  liability
insurance  policy limits.  The Company has never had a claim that resulted in an
award or settlement in excess of insurance coverage.  There is no assurance that
the Company's  insurance  coverage of $5,000,000  per  occurrence and $5,000,000
aggregate  will be  sufficient  to fully  protect the business and assets of the
Company from all claims,  nor can any  assurances be given that the Company will
be able to  maintain  the  existing  coverage or obtain  additional  coverage at
commercially  reasonable rates. Management believes that it has process controls
on its product  operations,  product labeling,  operator's  manuals,  and design
features  which will  assist in a  successful  defense of any  present or future
product  liability claim. To the extent product  liability losses are beyond the
limits  or  scope  of  the  Company's  insurance  coverage,  the  Company  could
experience   a  material   adverse   effect  upon  its   business,   operations,
profitability and assets.

         The Company sold certain securities to a former director of the Company
and to HFG (as hereinafter defined) during the Company's reorganization phase in
early 1996 prior to the Brister's Acquisition. Based on the


                                      -17-

<PAGE>



"fair value" of these transactions, the Company incurred an accounting charge of
approximately  $1.43 million to earnings for the  differential  between the fair
value of these transactions and the actual cash proceeds received.  Further, the
HFG Escrow Shares (as hereinafter  defined),  which were originally purchased by
HFG in  March  1996  for  $350,  or  $0.0015  per  share,  will  be  subject  to
re-evaluation as to these shares  respective "fair value" on March 31, 1998 when
the HFG Escrow Shares are released from escrow. The Company is unable to predict
the fair value of the HFG  Escrow  Shares on March 31,  1998 or the impact  that
such  valuation  will have on the  Company's  Statement of Income for the period
ended March 31, 1998. Future charges of this type may also occur based on future
exercise of outstanding stock options and/or stock warrants and the market price
of the Company's securities at the date of exercise.  See "Certain Relationships
and Related Transactions" and "Notes to Consolidated Financial Statements."

Seasonality

         The Company  experiences  significant  seasonality in its sales pattern
with only  approximately  40% of its sales  recognized  in the first half of the
year.  Approximately  58% of total sales are realized after August of each year.
Sales of Fun Karts are  generally  the lowest  during the first  quarter of each
year. Since the Company  typically does not obtain long-term  purchase orders or
commitments  from its customers,  it must anticipate the future volume of orders
based  upon  the   historic   purchasing   patterns  of  its  dealers  and  mass
merchandisers and upon its discussions with its dealers and  representatives  of
mass merchandisers as to their future requirements. Cancellations, reductions or
delays by a large  volume  dealer or mass  merchandiser  could  have a  material
adverse  impact on the Company's  business,  financial  condition and results of
operations.

         Traditionally,  many  dealers  have  sold Fun  Karts  only  during  the
Christmas  holiday  season.  Recent  market  growth can be attributed to many of
these dealers  beginning to sell Fun Karts year round. The Company believes that
if its  business  strategies  are  successfully  implemented  in 1998 and future
years, there will be some additional mitigation of the seasonality aspect of the
Company's  Fun Karts  sales.  The Company  also  intends to offset the  seasonal
aspects of its current business operations through acquisitions of manufacturers
of product lines that are compatible with the Company's business  objectives and
offer product diversity which have year round demand.

Liquidity and Capital Resources

         During 1996, the Company acquired  Brister's and USA with approximately
$2,250,000 cash,  issuance of approximately $3.2 million in promissory notes and
issuance of  approximately  683,334 shares of Common Stock. The Company paid the
$3.2  million  of debt,  including  the  Brister  Notes,  with a portion  of the
proceeds of the 1997 Public  Offering.  See "Certain  Relationships  and Related
Transactions."

         At December  31,  1997,  the Company had  positive  working  capital of
approximately  $4.05  million.  As of December  31, 1996 and  December 31, 1995,
respectively,  the Company had positive  working capital of  approximately  $4.7
million and $0.7 million,  respectively.  The Company experienced  negative cash
flow from  operations of  approximately  $224,000 and $114,000 for calendar 1997
and 1996,  respectively.  This deficiency was principally caused by increases in
trade accounts  receivable  attributable to sales to mass  merchandisers in 1996
and lower than  expected  sales volume in 1997.  An  aggregate of  approximately
$535,000 in cash resided in Brister's and USA as of their respective acquisition
effective dates which in turn offset this deficiency.

         Additionally,  the Company spent approximately  $533,642 during 1996 in
indirect  costs  associated  with the  acquisition  of Brister's and USA.  These
amounts were funded through the private placement of Company securities in March
1996 and November 1996 and are not anticipated to recur in future periods.

         During the years ended  December 31, 1997 and 1996,  respectively,  the
Company  expended  approximately  $477,000 and $72,000 for capital assets and/or
improvements,  including  the purchase in 1997 of a powder paint system and tube
bending machine for its manufacturing facility in Prattville, Alabama.

         The Company  used the net  proceeds  from the 1997  Public  Offering to
repay $2.2 million in long-term indebtedness, the $300,000 Brister's credit line
and to support the Company's  fixed asset programs and research and  development
efforts.  The combined  effect of the repayment and  conversion of the Company's
long-term debt


                                      -18-

<PAGE>



will yield interest expense  reductions of approximately  $400,000 during the 12
month period after retirement of the debt.

         The Company expects that its cash flow from operations,  along with its
currently  available  lines of credit,  will be sufficient to meet its financing
requirements over the next 12 to 18 months. This is a projection,  however,  and
no assurance can be given that the Company's cash flow from  operations and from
its  available  lines of credit will be  available  to meet the  Company's  cash
requirements over the next 12 to 18 months.

         The  Company's  management  does not believe that  inflation  has had a
significant  effect on the Company's  operations  during the last several years.
The Company's  management believes that USA and Brister's have historically been
able to pass on increased  costs of  production  to the price  charged for their
products;  however,  no assurance can be given that the Company will continue to
be able to pass on such increased costs in the future.

         Liquidity  requirements  mandated by future  business  acquisitions  or
expansions,  if any are specifically  identified or undertaken,  are not readily
determinable  at this  time as no  substantive  plans  have been  formulated  by
management. The Company has limited financial resources for future acquisitions.
The Company will be  dependent  upon the proceeds  from  additional  financings,
including  receiving  proceeds from the future exercise of the Warrants of which
there can be no assurance,  to facilitate a major  acquisition.  The Company may
also need additional  financing to achieve full  implementation of its long-term
growth  strategy  and  for  working  capital.  There  can be no  assurance  that
additional  financing  will be available,  or if available,  that such financing
will be on favorable terms.

Year 2000 Modifications

         The Company is currently  reviewing  its  computer  systems in order to
evaluate  necessary  modifications  for the  year  2000.  The  Company  does not
currently  anticipate  that it will incur material  expenditures to complete any
such modifications.

Other Matters

         In February  1997,  the  Financial  Accounting  Standards  Board issued
Statement of Financial  Accounting  Standards No. 128, Earnings Per Share ("SFAS
128").  SFAS 128 requires  companies with complex  capital  structures that have
publicly held common stock or common stock equivalents to present both basic and
diluted  earnings  per share  ("EPS") on the face of the income  statement.  The
presentation  of basic EPS replaces the  presentation  of primary EPS  currently
required by Accounting Principles Board Opinion No. 15 ("APB No. 15"). Basic EPS
is calculated as income available to common stockholders divided by the weighted
average number of common shares  outstanding  during the period.  Diluted EPS is
calculated  using the "if converted"  method for convertible  securities and the
treasury stock method for options and warrants as prescribed by APB No. 15. This
statement is effective  for financial  statements  issued for interim and annual
periods  ending after December 15, 1997. The adoption of SFAS 128 did not have a
significant impact on the Company's reported EPS.

         In February  1997,  the  Financial  Accounting  Standards  Board issued
Statement of Financial  Accounting Standards No. 129, Disclosures of Information
About Capital Structure ("SFAS 129") which establishes  standards for disclosing
information about an entity's capital structure.  The disclosures are not expect
to have a significant  impact on the  consolidated  financial  statements of the
Company.  SFAS 129 is effective for financial  statements  ending after December
15, 1997.

         In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130") which  established  standards for reporting and  displaying  comprehensive
income and its components (revenues,  expenses,  gains and losses) in a full set
of general purpose financial  statements.  SFAS 130 requires that all items that
are  required to be  recognized  under  accounting  standards as  components  of
comprehensive income be reported in a financial statement that is displayed with
the same  prominence as other  financial  statements.  SFAS 130 is effective for
years  beginning  after  December  15, 1997.  The Company does not  anticipate a
material impact to its consolidated  financial  statements upon adoption of this
standard.



                                      -19-

<PAGE>



         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 131") which establishes  standards for
the way public business  enterprises are to report  information  about operating
segments in annual financial statements and requires those enterprises to report
selected  information  about  operating  segments in interim  financial  reports
issued to  stockholders.  It also  establishes  the  related  disclosures  about
products and services,  geographic areas and major customers.  SFAS 131 replaces
the "industry  segment" concept of Financial  Accounting  Standard No. 14 with a
"management approach" concept as the basis for identifying  reportable segments.
SFAS 131 is effective  for financial  statements  for annual  periods  beginning
after December 15, 1997.  The Company does not  anticipate a material  impact to
its consolidated financial statements upon adoption of this standard.


ITEM 7.   CONSOLIDATED FINANCIAL STATEMENTS
          ---------------------------------

 See Index to Financial Statements and Financial Statement Schedule beginning on
 -------------------------------------------------------------------------------
 Page F-2
 --------

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

         There are not and have not been any  disagreements  between the Company
and its  accountants  on any matter of  accounting  principles  or  practices or
financial statement disclosure.


                                      -20-

<PAGE>



                                    PART III

ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
          -------------------------------------------------------------
          COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
          -------------------------------------------------

Directors and Executive Officers

         The  following  table sets forth  certain  information  concerning  the
directors and executive officers of the Company:


Name                      Age    Position
----                      ---    --------
Robert M. Aubrey          52     President, Chief Executive Officer and Director
Timothy P. Halter(1)      31     Chairman of the Board, Secretary and Director
Charles Brister(1)        45     Director
Gary C. Evans             40     Director
Joseph R. Mannes(2)       38     Director
Ronald C. Morgan          49     Director

-------------------
(1)  Members of the Company's Compensation Committee.
(2)  Members of the Company's Audit Committee.

         The Company  may employ such  additional  management  personnel  as the
Board  of  Directors  of the  Company  deems  necessary.  The  Company  has  not
identified nor reached an agreement or understanding  with any other individuals
to serve in such management positions, but does not anticipate any difficulty in
employing qualified individuals.

         Directors of the Company are elected by the stockholders at each annual
meeting and serve until the next annual meeting of  stockholders  or until their
successors  are duly  elected  and  qualified.  Officers  are  elected to serve,
subject to the discretion of the Board of Directors,  until their successors are
appointed or their earlier resignation or removal from office.

         Information  regarding the  directors and  management of the Company is
set forth below.

         Robert M.  Aubrey  is the  President,  Chief  Executive  Officer  and a
director  of the Company and has served in those  capacities  since  January 30,
1998. From 1973 to 1997, Mr. Aubrey was the Chief  Executive  Officer of Aubrey,
Inc.,  a company  that,  along with its  subsidiaries  Air Care  Industries  and
National  Industries,  developed,  manufactured  and  marketed  residential  air
ventilation  fans,  steel  utility doors and portable  electric  heaters for the
residential,  consumer  and  retail  industries  under  private  label  and  OEM
contracts.  During  that time,  Mr.  Aubrey was  primarily  responsible  for the
increase of Aubrey, Inc.'s revenues from $4 million to annual revenues in excess
of $50  million.  At the time of the  sale of  Aubrey,  Inc.,  it  marketed  its
products under three different brand names,  operated three manufacturing plants
and  employed  over 500  persons.  Mr.  Aubrey  holds a  Bachelors  of  Business
Administration from the University of Wisconsin.

         Timothy P. Halter  has  been Secretary  and a  director  of the Company
since February  1996.  Mr. Halter was elected  Chairman of the Board on February
16, 1998. Since May 1995, Mr. Halter has served as President of Halter Financial
Group, Inc., a Dallas, Texas based financial consulting firm. From 1991 to 1995,
Mr. Halter was President of Halter Capital  Corporation,  a diversified  holding
company.  Mr.  Halter  also  serves on the  Board of  Directors  of  Duncanville
National Bank, located in Duncanville, Texas.

         Charles  Brister is a director  of the  Company  and has served in this
capacity since March 1996. He served as President and Chief Executive Officer of
Brister's from 1986 to April 1996.



                                      -21-

<PAGE>



         Gary C. Evans  has been  a director  of the  Company  since  July 1996.
Mr. Evans has served as  President,  Chief  Executive  Officer and a director of
Magnum Hunter Resources, Inc. ("Magnum"), an American Stock Exchange oil and gas
exploration and development  company,  since December 1995. Mr. Evans previously
served as Chairman,  President and Chief Executive  Officer of Hunter Resources,
Inc.  ("Hunter") from September 1992 until its merger with Magnum. From December
1990 to September  1992, he served as President and Chief  Operating  Officer of
Hunter.  From 1985 to 1990, he was the founder and President of Sunbelt  Energy,
Inc.,  prior to its  merger  with  Hunter.  From  1981 to 1985,  Mr.  Evans  was
associated  with the Mercantile  Bank of Canada where he held various  positions
including Vice President and Manager of the Energy Division of the  southwestern
United States.  From 1977 to 1981, he served in various capacities with National
Bank of Commerce (currently BankTexas, N.A.) including Credit Manager and Credit
Officer.  Mr. Evans  serves on the Board of Directors of Digital  Communications
Technology Corporation, an American Stock Exchange listed company.

         Joseph R. Mannes has been a director  of the  Company  since July 1996,
and since  April  1997 has been Vice  President  and  General  Manager of iMagic
Online  Corporation,   a  Texas  company,  offering  real-time  internet  games.
Previously,  he was the Chief  Financial  Officer,  Secretary  and  Treasurer of
Interactive Creations Incorporated ("ICI"), a predecessor corporation. From 1987
until joining ICI, Mr. Mannes was First Vice President in the Corporate  Finance
Department of Rauscher  Pierce  Refsnes,  Inc., a Dallas,  Texas stock brokerage
company. From 1982 to 1987, Mr. Mannes was in the commercial lending division of
the First  National Bank of Boston,  where he attained the position of Assistant
Vice  President.  Mr. Mannes worked in both the Special  Industry  Group and the
High  Technology  Group at First National Bank of Boston.  Mr. Mannes  graduated
with  an MBA in  Accounting  and  Finance  from  the  Wharton  School,  Graduate
Division,  of the University of  Pennsylvania in 1982 and an A.B. from Dartmouth
College in 1980. Mr. Mannes is a Chartered Financial Analyst.

         Ronald C. Morgan has been a director  of the  Company  since July 1996.
Since  June 1993,  he has  served as Chief  Operating  Officer,  Executive  Vice
President  and Director of The Leather  Factory,  Inc.,  an AMEX listed  company
("TLF"). As a co-founder of The Leather Factory,  Mr. Morgan has served as Chief
Operating Officer,  Executive Vice President and Director since its formation in
1980. Mr. Morgan was employed by the Tandy Corporation and Tandy Leather Company
10 years  prior to 1980.  During  this 10 year  period he was  promoted  through
various  levels  of  management  in  such  a  manner  that  he  progressed  from
Manager-Trainee  to Vice-  President by 1977.  Mr. Morgan was Vice  President of
Tandy Leather  Company from 1977 to 1980,  directing  operations  for 350 retail
stores.  From 1970  through  1976,  Mr.  Morgan  served in several  positions of
management for various companies of Tandy Corporation in New York, Pennsylvania,
California, Arizona, and Texas. Mr. Morgan attended college at Southern Colorado
State  University  and holds a Bachelor of Science  degree from West Texas State
University.

         There are no family  relationships  among any of the Company's officers
and directors.

         Effective April 2, 1998, Robert W. Bell resigned  as a director  of the
Company.  Mr. Bell's resignation was not the result of any disagreement with the
Company's management.


ITEM 10.  EXECUTIVE COMPENSATION
          ----------------------
 
         The  following  Summary  Compensation  Table sets forth,  for the years
indicated,  all cash  compensation  paid,  distributed  or accrued for services,
including  salary and bonus amounts,  rendered in all capacities for the Company
to its Chief  Executive  Officer.  No other  executive  officer  of the  Company
received  remuneration in excess of $100,000 during the referenced periods.  All
other  compensation  related tables required to be reported have been omitted as
there has been no applicable  compensation  awarded to, earned by or paid to any
of the  Company's  executive  officers  in any fiscal year to be covered by such
tables.



                                      -22-

<PAGE>


<TABLE>
<CAPTION>

                                            Summary Compensation Table

<S>                                                                             <C>     <C>                <C>    
                                                            Annual Compensation              Long-Term Compensation
                                                      ------------------------------    -------------------------------
                                                                                                     Awards
                                                                                        -------------------------------
                                                                                                            Securities
                                                                        Other Annual      Restricted        Underlying
Name/Title                                 Year       Salary/Bonus      Compensation     Stock Awards      Options/SARs
----------                                 ----       ------------      ------------    -------------      ------------
V. Lynn Graybill, former Chairman of       1997         $131,250        $   -0-              -0-               -0-
the Board, Chief Executive Officer         1996         $121,731        $15,000(2)           -0-               -0-
and President(1)

(1)  Effective January 15, 1998, V. Lynn Graybill resigned as Chairman of the Board, Chief Executive Officer and President of the
     Company.  See "-- Employment Agreements and Related Matters."
(2)  Represents a signing bonus equal to 10% of Mr. Graybill's base salary, which was paid by issuing Mr. Graybill 140,000
     restricted shares of Common Stock of the Company.

</TABLE>

Employment Agreements and Related Matters

         Effective  January 30, 1998,  the Company  entered  into an  Employment
Agreement (the "Employment Agreement") with Robert M. Aubrey, whereby Mr. Aubrey
agreed to serve as President  and Chief  Executive  Officer of the Company.  The
Employment  Agreement is for a term of three years and provides Mr.  Aubrey with
an annual base salary of $150,000.  Upon execution of the Employment  Agreement,
Mr. Aubrey  received  options to purchase  200,000  shares of Common Stock at an
exercise price of $3.25 per share.  The options vest as follows:  (a) options to
purchase 100,000 shares vest on January 30, 1999; (b) options to purchase 50,000
shares vest on January 30,  2000;  and (c)  options to  purchase  the  remaining
50,000 shares vest on January 30, 2001.  All unvested  options vest  immediately
upon the termination of the Employment  Agreement if such termination is for any
reason other than "for cause," and all unexercised options expire on January 30,
2003.  Mr.  Aubrey may also receive  annual  performance  based stock options to
purchase  up to 50,000  shares of Common  Stock at a price  equal to the  market
value of the Common Stock on the date of issuance, as determined by the Board of
Directors,  and an annual cash bonus not to exceed 15% of his base  salary.  Mr.
Aubrey is entitled to receive  benefits  commensurate  with his title  including
medical  insurance  and other  benefits  offered to executive  management of the
Company. Mr. Aubrey is responsible for the day-to-day  operations of the Company
and for the  preparation  of the  Company's  annual  budget,  monthly  operating
financial  statements,   quarterly  presentations   addressing  qualitative  and
quantitative  issues of the  operations  of the  Company,  and any and all other
matters requested by the Board of Directors.

         The Employment Agreement restricts the ability of Mr. Aubrey to compete
with the Company (the "Covenant Not to Compete") by becoming  involved  directly
or  indirectly  with any business  that designs,  manufactures,  distributes  or
markets Fun Karts during the term of the Employment Agreement or for a period of
two years  following the  termination of the Employment  Agreement by either Mr.
Aubrey or the  Company.  The  enforceability  of the  Covenant Not to Compete is
governed  by the  statutory  and  case law  authority  of the  State  of  Texas.
Generally, a covenant not to compete is enforceable in the State of Texas if the
limitations  contained therein are reasonable as to the time,  geographical area
and  scope  of the  activity  which  they  cover.  Enforceability  is  generally
determined  on a case  by  case  basis  and  hinges  on  the  showing  that  the
limitations  are  reasonable  and they are  necessary to protect the goodwill or
other business interest of the entity seeking enforcement.  The Company believes
the Covenant Not to Compete is enforceable in light of the foregoing  standards.
However, if its enforceability is challenged in a court of law, the Covenant Not
to Compete may be substantially altered to limit the scope of its application.

         In connection  with the  resignation of V. Lynn Graybill as Chairman of
the Board, Chief Executive Officer and President of the Company, the Company and
Mr.  Graybill  entered into a Mutual  Release and  Separation  Agreement,  dated
January 15, 1998 (the "Separation Agreement"), for the purpose of satisfying and
discharging  all  obligations of the Company to Mr.  Graybill under the terms of
Mr. Graybill's  Employment  Agreement,  dated March 15, 1996. Under the terms of
the Separation  Agreement,  the Company agreed to pay to Mr. Graybill a one time
payment of $208,100 (the "Severance  Amount").  As additional  consideration for
the Severance Amount, Mr. Graybill agreed to adhere to the  non-competition  and
non-solicitation   covenants  contained  in  his  Employment  Agreement,   which
covenants expire on January 15, 2001.


                                      -23-

<PAGE>



         To provide for  continuity  of  management,  the Company may enter into
employment agreements with other members of its executive management staff.

Stock Options

         On July 23, 1996, the Board of Directors of the Company adopted a stock
option plan  providing for the  reservation of 66,667 shares of Common Stock for
options to be granted  to  employees  of the  Company at the  discretion  of the
Compensation  Committee  of the Board of  Directors.  In July 1996,  the Company
issued to 30 employees,  who were neither officers nor directors of the Company,
options to purchase an aggregate of 59,355 shares of Common Stock at an exercise
price of $5.63 per share which are currently  exercisable  and expire at various
times during 2001.

         On January 30, 1997,  the Board of  Directors of the Company  adopted a
stock option plan providing for the reservation of 66,667 shares of Common Stock
for options to be granted to employees of the Company.  On January 30, 1997, the
Company  issued  to  each  of  John  V.  Callegari,  Jr.,  the  Vice  President,
Administration  and Chief  Financial  Officer of the  Company,  and  Lawrence E.
Schwall, III, the Vice President,  Sales and Marketing of Brister's,  options to
purchase  6,667  shares of Common Stock at an exercise of $4.875 per share which
are  exercisable  after  January 30, 1998 and expire on January  30,  2002.  Mr.
Callegari's  options  expired as a result of the  termination  of his employment
with the Company in February 1998.  Also on January 30, 1997, the Company issued
to 61 employees, who were neither officers nor directors of the Company, options
to purchase an aggregate of 52,670  shares of Common Stock at an exercise  price
of $4.875 per share which are  exercisable  after January 30, 1998 and expire on
January 30, 2002.

         In  connection  with the  execution of his  Employment  Agreement,  Mr.
Aubrey  received  options  to  purchase  200,000  shares of  Common  Stock at an
exercise price of $3.25 per share.  The options vest as follows:  (a) options to
purchase 100,000 shares vest on January 30, 1999; (b) options to purchase 50,000
shares vest on January 30,  2000;  and (c)  options to  purchase  the  remaining
50,000 shares vest on January 30, 2001.  All unvested  options vest  immediately
upon the termination of the Employment  Agreement if such termination is for any
reason other than "for cause," and all unexpired  options  expire on January 30,
2003.  Furthermore,  in March 1998, the Company  granted  options to purchase an
aggregate  of 20,000  shares of Common  Stock at an exercise  price of $3.50 per
share, to certain  employees of the Company.  The foregoing  options vest on the
first anniversary date of their date of grant, and expire on the earlier of five
years from their  respective date of grant or upon the termination of the option
holder as an employee of the Company.

         The exercise  price per share of all options  issued by the Company was
based on the closing bid price of the Company's Common Stock as quoted on either
the NASD  Electronic  Bulletin Board or the Nasdaq  SmallCap  Market system,  as
applicable,  on the date of grant of such options. The Company intends to submit
for approval a qualified stock  compensation  plan at its next annual meeting of
shareholders  in May 1998. The Company  believes it is necessary to have a stock
compensation  plan  available for  management  and  employees to retain  current
management  and employ  additional  qualified  personnel.  Any stock option plan
which is adopted by the Company  will have terms that are  normally  accepted in
the industry and for public entities.

Compensation of Directors

         Each Director of the Company is entitled to receive annual compensation
of $6,000 for  attendance  of meetings of the Board of  Directors of the Company
and for serving on any committees of the Board of Directors of the Company.  The
Chairman  of the  Board of the  Company  is also  entitled  to  receive  monthly
compensation of $5,000 for every month in which such  individual  serves in such
capacity.  The Company  will  reimburse  directors  for  out-of-pocket  expenses
incurred for attending meetings.



                                      -24-

<PAGE>



Meetings and Committees of the Board of Directors

         The business of the Company is managed under the direction of the Board
of Directors.  The Board of Directors met on four occasions during calendar 1997
and acted by unanimous consent in lieu of meeting on three occasions during such
period.

         The Board of Directors of the Company has  established  a  Compensation
Committee and Audit Committee.  The Compensation Committee makes recommendations
to the Board of Directors  regarding the compensation of executive  officers and
administers  the Company's  employee  benefit  plans,  if any. The  Compensation
Committee met on three  occasions  during  calendar 1997. The Audit Committee is
comprised  of a majority  of  independent  directors  and its  functions  are to
recommend to the Board of Directors the engagement of the Company's  independent
public  accountants,  review with such accountants the plans for and the results
and scope of their  auditing  engagement  and certain other matters  relating to
their  services as  provided  to the  Company.  The Audit  Committee  met on two
occasions during calendar 1997.


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          ---------------------------------------------------
          MANAGEMENT
          ----------

         The following table sets forth certain  information with respect to the
ownership of the Company's shares of Common Stock as of March 3, 1998 by each of
its  directors,   executive  officers  and  persons  known  by  the  Company  to
beneficially  own 5% or more of the  outstanding  shares of the Common Stock and
all executive officers and directors as a group.

<TABLE>

                                                              Shares Beneficially     Percentage of Shares
                        Name(1)                                    Owned              Beneficially Owned
     -------------------------------------------------------  -------------------     --------------------
<S>                                                                                          <C>     

     Robert M. Aubrey(2)....................................           -0-                    -0-
     Charles Brister(3).....................................       516,668                   10.6
     Joseph R. Mannes(4)....................................        63,734                    1.3
     Ronald C. Morgan(4)....................................         3,334                     *
     Gary C. Evans(5).......................................        51,114                    1.1
     Timothy P. Halter(6)...................................       470,254                    9.7
     Halter Financial Group, Inc.(6)........................       470,254                    9.7
     Schlinger Foundation(7)................................       730,288                   15.0
     Evert I. Schlinger(8)..................................       768,066                   15.8
     Officers and directors as a group (6 persons)(9).......     1,105,104                   22.7

</TABLE>
--------------
*Less than 1%.
(1)  Unless otherwise indicated,  each person named in the table has sole voting
     and investment power with respect to the shares  beneficially  owned. Also,
     unless otherwise indicated, the address of each beneficial owner identified
     below is: c/o Karts International  Incorporated,  109 Northpark  Boulevard,
     Suite 210, Covington, Louisiana 70433.
(2)  Mr. Aubrey is the President, Chief Executive  Officer and a director of the
     Company.   
(3)  Mr.  Brister  is  a director  of the  Company.   See "Certain Relationships
     and  Related   Transactions."  
(4)  Messrs. Mannes and Morgan are directors of the Company.  
(5)  Mr. Evans is a director of the Company.  Includes 20,001 s hares of  Common
     Stock underlying 1996 Warrants issued to Mr. Evans in  connection with  the
     Bridge Financing and  conversion of  the Convertible  Preferred Stock.  See
     "Certain Relationships and Related Transactions."
(6)  Mr.  Halter,  the  Chairman  of the Board,  Secretary  and  director of the
     Company,  is  the  sole  stockholder,  director  and  president  of  Halter
     Financial  Group,  Inc.  ("HFG") and is therefore deemed to have beneficial
     ownership of the shares of Common  Stock held by HFG.  Includes the 210,288
     shares of Common Stock subject to the HFG Escrow  Agreement (as hereinafter
     defined).  HFG and Mr.  Halter's  address is 4851 LBJ  Freeway,  Suite 201,
     Dallas, Texas 75244. See "Certain Relationships and Related Transactions."
(7)  The Schlinger Foundation ("Foundation") beneficially owns 520,000 shares of
     the  Company's  Common  Stock,  See  "Certain   Relationships  and  Related
     Transactions."  Mr. Schlinger is the sole trustee of the Foundation and has
     sole voting and  dispositive  power over the shares held by the Foundation.
     However, Mr. Schlinger does not assert any ownership interest in any of the
     shares  of  Common  Stock  of the  Company  owned  by the  Foundation.  Mr.
     Schlinger owns 210,288 of the shares of Common Stock of the Company for his
     own account. See "Certain Relationships and Related Transactions."
(8)  Includes  520,000 shares of Common Stock owned by the  Foundation,  210,288
     shares of Common  Stock owned by Mr.  Schlinger  for his own  account,  and
     37,778 shares of Common Stock held by the Brian Schlinger  Trust. Mr. Evert
     I. Schlinger


                                      -25-

<PAGE>



     is the sole trustee  of the  Brian Schlinger  Trust and has sole voting and
     dispositive power over  the shares held by this trust.   However, Mr. Evert
     I. Schlinger does not claim any ownership interest  in any of the shares of
     Common Stock owned by the Brian Schlinger Trust.
(9)  Includes 20,001 shares of Common Stock underlying 20,001 1996 Warrants held
     by Mr. Evans.


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
          ----------------------------------------------

         On March 31, 1996,  the Company  concluded  the private sale of 233,333
shares of Common Stock to 13 investors (the "Investors") for aggregate  proceeds
of $525,000  (the  "March 1996  Offering").  In  connection  with the March 1996
Offering,  the Company and HFG agreed to issue additional shares of Common Stock
to the  Investors  if on March 31,  1998 (the  "Offering  Valuation  Date")  the
average  closing bid price of the Common  Stock for the 10 trading days prior to
and including  the Offering  Valuation  Date (the "Stock Market  Value") did not
equal or exceed $4.50 per share,  such that each  Investor  would receive for no
additional  consideration  an  additional  number  of  shares  of  Common  Stock
necessary  to  increase  the Stock  Market  Value per share of the Common  Stock
acquired to $4.50 per share.  HFG placed into  escrow  233,333  shares of Common
Stock (the "HFG Escrow  Shares") to be issued to Investors if an adjustment  was
required. Based upon the Stock Market Value of the Company Stock on the Offering
Valuation  Date,  HFG is  obligated  to issue to the  Investors  an aggregate of
76,499 HFG Escrow  Shares.  All  remaining HFG Escrow Shares will be returned to
HFG. The Company is under no obligation to issue to HFG any additional shares of
Common  Stock  as  reimbursement  for  the  HFG  Escrow  Shares  distributed  to
participants in the March 1996 Offering.

         As partial  consideration  for the Brister's  Acquisition,  the Company
issued to Charles Brister, a director of the Company, a subordinated note in the
principal amount of $1,000,000 and a $200,000 note  (collectively,  the "Brister
Notes").  In September  1997,  the Company paid Mr. Brister  approximately  $1.2
million as payment of the Brister Notes plus accrued interest.

         Mr. Brister has deposited  83,334 shares of the Company's  Common Stock
owned by him (the "Offset  Shares") into an escrow account to offset any amounts
that may be owing at any time by Mr.  Brister or Brister's to the Company or HFG
as a result of (i) a claim of  products  liability  for Fun  Karts  manufactured
prior to the  close of the  Brister's  Acquisition  which  results  in  either a
settlement  or award of damages in excess of stated  insurance  policy limits or
(ii) any  failure  or  breach  of any  representation,  warranty,  agreement  or
covenant of  Brister's or Mr.  Brister  under the terms of the  Brister's  stock
purchase  agreement.  If  HFG  or the  Company  determines  that  an  offset  is
appropriate,  notice will be given to Mr.  Brister at least 10 days prior to the
disposition of the Offset Shares.  If conditions upon which the offset are based
are cured by Mr.  Brister  during that  period,  no offset  will be  undertaken.
However,  upon an event of offset, both HFG and the Company have sole discretion
to sell or otherwise dispose of the number of Offset Shares necessary to satisfy
any outstanding  liability or obligation imposed upon either HFG or the Company.
All remaining Offset Shares, upon the expiration of the two-year offset period.

         Concurrent with the Brister's Acquisition,  the Company and Mr. Brister
entered into a Real Estate  Option Right of First Refusal  Agreement.  Under the
terms of this agreement,  the Company may, at its sole option, purchase the real
property and improvements upon which the Facilities are located for an aggregate
purchase price of $550,000. The option can be exercised commencing on January 1,
1998 and expires on December  31,  2000.  The Company and Mr.  Brister have also
entered into a lease  agreement for the Roseland  manufacturing  facility  which
provides for a two-year primary term with a two-year renewal option. The monthly
lease payment for the Roseland facility is $6,025 with adjustments for increases
in the Consumer Price Index.  The Company believes these terms are comparable to
existing market rates in the region.

         The  Company,  in March 1996,  entered  into a license  agreement  with
Charles Brister under which Mr. Brister has licensed to the Company for a period
of five  years (at no cost to the  Company  during  the  first  year) all of the
Intellectual Property (as hereinafter  defined),  which was owned by Mr. Brister
on March 15, 1996, and all Intellectual  Property  developed and/or owned by Mr.
Brister at any time  subsequent  to March 15, 1996.  After the first year of the
license  agreement,  the Company and Mr. Brister agreed to enter into subsequent
agreements defining the license fee and royalty payments based on terms at least
as  favorable  as  Mr.  Brister  has  received,   or  could  have  received,  in
arms'-length transactions with third parties. "Intellectual Property" is defined
as all  domestic  and foreign  letters,  patents,  patent  applications,  patent
licenses,  software  licenses and know-how  licenses,  trade names,  trademarks,
copyrights,  unpatented inventions,  service marks, trademark  registrations and
applications,   service  mark   registration   and  applications  and  copyright
registration and applications owned or used by Brister's in the operation of its
business.


                                      -26-

<PAGE>



         On March 15, 1997, the Company and Mr.  Brister  entered in an addendum
to the License  Agreement and a related Royalty Agreement which provides for the
payment of a one-time  license fee and future  royalties,  respectively,  by the
Company to Mr. Brister for the use by the Company for a three-year period of the
ATOS  developed  and patented by Mr.  Brister.  The Company paid Mr.  Brister an
initial  $10,000  license fee and agreed during the first year of the three year
extension  to pay him a royalty of $1.00 for each  Company Fun Kart on which the
ATOS was  installed.  During the second  and third  year of the  agreement,  the
Company  agreed to pay during each year a royalty of $1.00 for each  Company Fun
Kart on which the ATOS was installed or $20,000 annually,  whichever is greater.
During 1997 the Company  paid Mr.  Brister a total of $17,283  under the License
Agreement.

         The  Company  employed  Mr.  Brister  as a  consultant  on a project by
project  basis  during  1997 to  develop  innovative  safety  and  technological
features  for  the  Company's  Fun  Karts  and to  assist  management  with  the
development  and design of new  products.  During  1997,  Mr.  Brister  received
approximately $30,000 for consulting fees.

         To partially  finance the Brister's  Acquisition,  the Company issued a
promissory note in the principal  amount of $2,000,000  (the "Schlinger  "Note")
payable to The Schlinger  Foundation,  a California  non-profit  public  benefit
corporation  (the  "Foundation").  As further  consideration  for the $2,000,000
loan,  the Company paid the Foundation  $21,000,  consisting of $10,500 cash and
issued the Foundation  70,000  restricted  shares of Common Stock. On August 28,
1997, the Foundation agreed that upon the closing of the 1997 Public Offering it
would  convert $1 million of the  principal  amount of the  Schlinger  Note into
250,000 shares of Common Stock. In October 1997, the Company paid the Foundation
approximately  $1.0 million as payment of the remaining balance of the Schlinger
Note plus accrued interest.

         The  Foundation has agreed not to sell or dispose of the 250,000 shares
of Common Stock issued upon  conversion  of $1 million  principal  amount of the
Schlinger Note until after September 9, 1998. The Foundation has also agreed not
to sell or dispose of the remaining 270,000 shares it owns until after September
9, 1998,  provided the Foundation may sell such shares in the public market at a
price equal to or greater than $7.00 per share without  regard to the provisions
of the lock-up agreement.

         On November  15,  1996,  Mr. Gary C. Evans,  a director of the Company,
purchased a Unit from the Company for $25,000 in  connection  with the Company's
Bridge Financing. At the closing of the 1997 Public Offering, Mr. Evans, and the
other Convertible Preferred Stockholders,  converted the outstanding Convertible
Preferred  Stock into shares of Common  Stock and 1996  Warrants.  In  September
1997,  the Company  paid Mr.  Evans  $25,000  and issued to him 4,167  shares of
Common  Stock  and  13,334  1996  Warrants  upon  conversion  of  one  share  of
Convertible Preferred Stock owned by Mr. Evans.

         The holders of the Convertible  Preferred Stock have agreed not to sell
or otherwise  dispose of, for a period of 18 months  following the completion of
the 1997 Public  Offering,  any of the 104,175 shares of Common Stock,  the 1996
Warrants or 500,025  shares of Common Stock  issuable  upon exercise of the 1996
Warrants which were issued to them upon conversion of the Convertible  Preferred
Stock in September  1997.  Certain  officers  and  directors of the Company have
agreed not to sell or dispose of any of the shares of Common  Stock held by them
without the prior written consent of the  representative  of the underwriters of
the Company's 1997 Public Offering until after September 9, 1999.

         The Company has  granted to the holders of the  underwriters'  warrants
(the "Underwriters' Warrants") issued to the underwriters in connection with the
Company's 1997 Public Offering  registration  rights to require the Company,  at
the Company's expense, to register under the Securities Act of 1933, as amended,
the 155,000  Underwriters'  Warrants and 155,000 shares under the  Underwriters'
Warrants.  The  Company  has also  granted to the  holders of the 1996  Warrants
certain  registration  rights with respect to the 500,025 shares of Common Stock
issuable upon exercise of the 1996 Warrants.

         The Company believes that all the foregoing related-party  transactions
were on terms no less favorable to the Company than could reasonably be obtained
from unaffiliated third parties. All future transactions with affiliates will be
approved by a majority of disinterested directors of the Company and on terms no
less  favorable  to the Company  than those that are  generally  available  from
unaffiliated third parties.





                                      -27-

<PAGE>



                                     PART IV

ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-KSB
         --------------------------------------------------------

(a)(1)   Financial Statements: See Index to Consolidated Financial Statements on
         page F-2.

(a)(2)   Exhibits:


Exhibit
Number                            Description of Exhibit
-------   ----------------------------------------------------------------------
             
   2.1*   Agreement  and Plan of Merger,  dated April 16,  1996,  by and between
          Sarah Acquisition Corporation and the Company.

   2.2*   Stock  Purchase  Agreement,  dated  January 16, 1996,  by and among
          Halter  Financial  Group,  Inc.  on behalf of the  Company,  Brister's
          Thunder Karts, Inc., and Charles Brister (Schedules have been omitted,
          but will be furnished to the Commission upon request).

   2.3*   Amendment to Stock  Purchase  Agreement,  dated March 15, 1996, by and
          among Halter Financial Group, Inc. on behalf of the Company, Brister's
          Thunder Karts, Inc., and Charles Brister (Schedules have been omitted,
          but will be furnished to the Commission upon request).

   2.4*   Stock  Purchase  Agreement,  dated  October 4, 1996,  by and among the
          Company,  USA Industries,  Inc., Jerry Michael Allen, Angela T. Allen,
          Johnny C. Tucker,  and Carol Y. Tucker  (Schedules  have been omitted,
          but will be furnished to the Commission upon request).

   2.5*   Consulting Agreement, dated January 16, 1996, by and between Halter
          Financial Group, Inc. and Sarah Acquisition Corporation.

   3.1*   Articles of Incorporation of the Company. 

   3.2*   Bylaws of the Company.

   3.3*   Certificate to Decrease Authorized Shares of Common Stock, dated March
          12, 1997.

   4.1*   Specimen of Common Stock Certificate.

   4.2*   Form of Warrant Agreement covering the Warrants.

   4.3*   Form of Redeemable Common Stock Purchase Warrants issued in connection
          with the sale of the Warrants.

   4.4*   Form  of  Redeemable  Common  Stock  Purchase  Warrant  issued  in the
          Company's private offering of Units,  completed November 15, 1996 (the
          "1996 Warrants").

   4.5*   Form of Common Stock Purchase Warrant issued in the Company's offering
          of Units  pursuant to Rule 504,  completed  July 2, 1996 (the "Class A
          Warrants").

   4.6*   Certificate of  Designation  Establishing  Series of Preferred  Stock,
          filed with the Secretary of State of Nevada on November 15, 1996.

   4.7*   Specimen of Convertible Preferred Stock Certificate.

   10.1*  Lease  Agreement,  dated  March 18,  1996,  by and  between  Northpark
          Properties, L.L.C. and the Company.

   10.2*  License  Agreement,  dated March 15, 1996,  by and between the Company
          and Charles Brister.

   10.3*  Addendum  "A" to  License  Agreement,  dated  March 15,  1997,  by and
          between the Company and Charles Brister.

   10.4*  Royalty  Agreement,  dated March 15, 1997,  by and between the Company
          and Charles Brister.

   10.5*  $1,000,000   Subordinated  Promissory  Note,  dated  March  15,  1996,
          payable to Charles Brister, executed by Brister's Thunder Karts, Inc.,
          as maker.



                                      -28-

<PAGE>



 Exhibit         
 Number                        Description of Exhibit
 ------   -------------------------------------------------------------------
   10.6*  $200,000  Promissory  Note,  dated  April 1,  1996,  payable to
          Charles Brister, executed by the Company, as maker.

   10.7*  Commercial Security  Agreement,  by and among Charles Brister, as
          secured party,  Brister's Thunder Karts,  Inc., as borrower,  and
          Robert W. Bell and Gary C. Evans, as pledgors.

   10.8*  $2,000,000  Promissory Note, dated March 15, 1996, payable to The
          Schlinger  Foundation,  executed by the Company, as maker, and by
          Brister's Thunder Karts, Inc., as pledgor.

   10.9*  Commercial  Security  Agreement,   by  and  among  The  Schlinger
          Foundation,  as secured  party,  the Company,  as  borrower,  and
          Brister's Thunder Karts, Inc., as pledgor.

   10.10* Vendor  Agreement,  dated June 5, 1996, by and between  Wal-Mart
          Stores, Inc. and Brister's Thunder Karts, Inc.

   10.11* Vendor  Agreement,  dated  September  30,  1996,  by and between
          Wal-Mart Stores, Inc. and USA Industries, Inc.

   10.12* Floor Plan  Agreement,  dated  September  9, 1996,  by and among
          Deutsche  Financial  Services   Corporation,   the  Company,  and
          Brister's Thunder Karts, Inc.

   10.13* Guaranty of Vendor,  dated  September  9, 1996,  executed by the
          Company and Brister's  Thunder  Karts,  Inc. in favor of Deutsche
          Financial Services Corporation.

   10.14* Employment  Agreement,  as amended, dated March 15, 1996, by and
          between the Company and V. Lynn Graybill.

   10.15* Consulting  Engagement  Letter,  dated February 19, 1997, by and
          between Charles Brister, as consultant, and the Company.

   10.16* Letter  Agreement,  dated January 21, 1997, by and between Bobby
          Labonte, as national spokesman for the Company, and the Company.

   10.17* Consulting  Agreement,  dated March 16, 1997, by and between the
          Company and Halter Financial Group, Inc.

   10.18* Form of  Private  Placement  Subscription  Participation  Option
          Notice,  dated March 6, 1997,  relating to the Company's November
          1996 private offering.

   10.19* $300,000  Universal  Note,  dated  August 13,  1996,  payable to
          Deposit  Guaranty  National Bank,  executed by Brister's  Thunder
          Karts, Inc., as borrower.

   10.20* Security  Agreement,  dated  August 13,  1996,  by and  between
          Brister's  Thunder Karts,  Inc., as debtor,  and Deposit Guaranty
          National  Bank,  as  secured  party,  relating  to  the  $300,000
          Universal Note referenced as Exhibit 10.19.

   10.21* Collateral Pledge Agreement, dated August 13, 1996, by Brister's
          Thunder  Karts,  Inc.,  as  pledgor,  relating  to  the  $300,000
          Universal Note referenced as Exhibit 10.19.

   10.22* Guaranty,  dated  August 13, 1996,  executed by the Company,  as
          guarantor,  for the benefit of Deposit Guaranty National Bank, as
          lender, and Brister's Thunder Karts, Inc., as borrower,  relating
          to the $300,000 Universal Note referenced as Exhibit 10.19.

   10.23* $500,000 Loan  Agreement,  dated October 1, 1996, by and between
          USA Industries,  Inc., as debtor,  and Deposit Guaranty  National
          Bank of  Louisiana,  as secured  party,  relating to the $500,000
          Universal Note referenced as Exhibit 10.24.

   10.24* $500,000  Universal Note,  dated October 1, 1996, by and between
          USA Industries,  Inc., as borrower, and Deposit Guaranty National
          Bank, as lender.

   10.25* Security  Agreement,  dated  October 1, 1996, by and between USA
          Industries,  Inc., as debtor,  and Deposit Guaranty National Bank
          of  Louisiana,   as  secured  party,  relating  to  the  $500,000
          Universal Note referenced as Exhibit 10.24.



                                      -29-

<PAGE>



Exhibit
Number                         Description of Exhibit
------   -----------------------------------------------------------------------
   10.26* Financing  Statement,  by and between USA  Industries,  Inc., as
          debtor,  and Deposit  Guaranty  National  Bank of  Louisiana,  as
          secured  party,  relating to the  Universal  Note  referenced  as
          Exhibit 10.24.

   10.27* Guaranty, dated October 1, 1996, executed by Karts International
          Incorporated,  as guarantor,  for the benefit of Deposit Guaranty
          National Bank, as lender, and USA Industries,  Inc., as borrower,
          relating to the $500,000  Universal  Note  referenced  as Exhibit
          10.24.

   10.28* Placement  Agency  Agreement,  dated  November  8, 1996,  by and
          between the Company and Argent Securities, Inc.

   10.29* Option  Agreement,  dated March 15, 1996, by and between Charles
          Brister,  as  seller,  and  Brister's  Thunder  Karts,  Inc.,  as
          Purchaser.

   10.30* Lease of Commercial  Property,  dated September 27, 1995, by and
          between Charles Brister,  as lessor, and Brister's Thunder Karts,
          Inc.,  as lessee,  as amended by that  certain  Amended  Lease of
          Commercial Property,  dated November 30, 1995, as amended by that
          certain First  Amendment to Lease of Commercial  Property,  dated
          March 15, 1996.

   10.31* Non-Competition  Agreement, dated March 15, 1996, by and between
          Charles Brister and the Company.

   10.32* Non-Competition Agreement (Louisiana),  dated March 15, 1996, by
          and between Charles Brister and the Company.

   10.33* Form of Non-Qualified Stock Option Agreement between the Company
          and the participants in the July 1996 Stock Option Plan.

   10.34* Form of Non-Qualified Stock Option Agreement between the Company
          and the participants in the January 1997 Stock Option Plan.

   10.35* Escrow Agreement, dated March 31, 1996, between Halter Financial
          Group, Inc., Securities Transfer Corporation and the Company.

   10.36* Letter  Agreement  between  Brister's  Thunder  Karts,  Inc. and
          Deposit Guaranty National Bank extending the maturity date of the
          $300,000 Universal Note referenced in Exhibit 10.19.

   10.37* Letter  Agreement  between  The  Schlinger  Foundation  and  the
          Company,  dated August 28, 1997,  regarding the  conversion of $1
          million  of the  principal  amount  of the  Schlinger  Note  into
          250,000 shares of Common Stock.

   10.38**Employment Agreement, dated January 30, 1998, by and between the
          Company and Robert M. Aubrey.

   21.1*  Subsidiaries of the Company.

   27.1** Financial Data Schedule.
----------------------
*  Previously  filed as an exhibit to the  Company's  Registration  Statement on
   Form SB-2 (SEC File No. 333-24145) and incorporated by reference herein.
** Previously filed as an exhibit to the Company's Annual Report on Form 10-KSB 
   for the fiscal year ended December 31, 1997, as filed with the U.S. 
   Securities and Exchange Commission on March 30, 1998.
   
(b)  Reports on Form 8-K:  No  reports  on Form 8-K were  filed  during the last
     quarter of fiscal 1997.





                                      -30-

<PAGE>


                                   SIGNATURES

    Pursuant  to  the  requirements  of  Section  13 or  Section  15(d)  of  the
Securities  Exchange Act of 1934,  the Registrant has duly caused this report to
be signed on its behalf by the undersigned,  thereunto duly authorized, on April
16, 1998.


KARTS INTERNATIONAL INCORPORATED
            (Registrant)
By:  /s/ Robert M. Aubrey                             By:  /s/ Timothy P. Halter
     --------------------------------------------          ---------------------
     Robert M. Aubrey, President, Chief Executive          Timothy P. Halter
     Officer and Director                                  (Principal Accounting
     (Principal Executive Officer)                          Officer)

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


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

                 Signature                                          Title                               Date
                 ---------                                          -----                               ----

           /s/ Robert M. Aubrey             President, Chief Executive Officer and Director      April 16, 1998
-------------------------------------------
Robert M. Aubrey                            (Principal Executive Officer)

           /s/ Timothy P. Halter            Chairman of the Board, Secretary and Director        April 16, 1998
-------------------------------------------
Timothy P. Halter                           (Principal Accounting Officer)

            /s/ Charles Brister             Director                                             April 16, 1998
-------------------------------------------
Charles Brister

           /s/ Joseph R. Mannes             Director                                             April 16, 1998
-------------------------------------------
Joseph R. Mannes

           /s/ Ronald C. Morgan             Director                                             April 16, 1998
-------------------------------------------
Ronald C. Morgan

             /s/ Gary C. Evans              Director                                             April 16, 1998
-------------------------------------------
Gary C. Evans


</TABLE>

                                      -31-

<PAGE>

                                                             KARTS INTERNATIONAL
                                                                    INCORPORATED
                                                                AND SUBSIDIARIES


                                                                    Consolidated
                                                            Financial Statements
                                                                             and
                                                                Auditor's Report


                                                      December 31, 1997 and 1996




                           S. W. HATFIELD + ASSOCIATES
                          certified public accountants

                      Use our past to assist your future sm


<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

                                    CONTENTS



                                                                          Page

Report of Independent Certified Public Accountants                          F-3

Consolidated Financial Statements

   Consolidated Balance Sheets
     as of December 31, 1997 and 1996                                       F-4

   Consolidated Statements of Operations
     for the years ended December 31, 1997 and 1996                         F-6

   Consolidated Statement of Changes in Shareholders' Equity
     for the years ended December 31, 1997 and 1996                         F-7

   Consolidated Statements of Cash Flows
     for the years ended December 31, 1997 and 1996                         F-9

   Notes to Consolidated Financial Statements                               F-11





<PAGE>


S. W. HATFIELD + ASSOCIATES
certified public accountants

Members:   American Institute of Certified Public Accountants
               SEC Practice Section
               Information Technology Section
           Texas Society of Certified Public Accountants



               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
               --------------------------------------------------


Board of Directors and Shareholders
Karts International Incorporated

We  have  audited  the  accompanying   consolidated   balance  sheets  of  Karts
International  Incorporated  (a  Nevada  corporation)  and  Subsidiaries  as  of
December  31,  1997  and  1996  and  the  related  consolidated   statements  of
operations, changes in shareholders' equity and cash flows for each of the years
then ended.  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 audits to obtain
reasonable  assurance about whether the  consolidated  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  consolidated
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Karts International
Incorporated  and  Subsidiaries  as of  December  31,  1997  and  1996,  and the
consolidated  results of its operations and its cash flows for each of the years
then ended in conformity with generally accepted accounting principles.




                           S. W. HATFIELD + ASSOCIATES
Dallas, Texas
March 20, 1998




                      Use our past to assist your future sm

           P. O. Box 820392 o Dallas, Texas 75382-0392 o 214-342-9635
        9236 Church Road, Suite 1040 o Dallas, Texas 75231 o 800-244-0639
                  214-342-9601 (fax) o SWHCPA@aol.com (e-mail)
                                       F-3

<PAGE>


<TABLE>
<CAPTION>

                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                           December 31, 1997 and 1996


                                     ASSETS

                                                                                1997            1996
                                                                            ------------    ------------
<S>                                                                             <C>         <C>     

Current assets
   Cash on hand and in bank                                                 $  2,801,746    $    630,028
   Accounts receivable
     Trade, net of allowance for doubtful accounts
       of $3,000 and $5,000, respectively                                        463,045       1,795,802
     Recoverable income taxes                                                    225,000            --
     Other                                                                          --             1,052
   Inventory                                                                     909,214         958,381
   Prepaid expenses                                                              172,139           6,027
                                                                            ------------    ------------

     Total current assets                                                      4,571,144       3,391,290
                                                                            ------------    ------------


Property and equipment - at cost                                               1,262,772         771,374
   Accumulated depreciation                                                     (137,746)        (34,598)
                                                                            ------------    ------------
                                                                               1,157,826         736,776
   Land                                                                           32,800          32,800
                                                                            ------------    ------------

     Net property and equipment                                                1,157,826         769,576
                                                                            ------------    ------------


Other assets
   Deposits and other                                                              8,851          19,060
   Loan costs, net of accumulated amortization
     of approximately $122,033 and $20,120, respectively                            --           101,913
   Organization costs, net of accumulated
     amortization of approximately $38,990 and
     $17,139, respectively                                                        70,265          92,116
   Goodwill, net of accumulated amortization
     of approximately $385,608 and $151,286, respectively                      5,473,815       5,708,137
                                                                            ------------    ------------

     Total other assets                                                        5,552,931       5,921,226
                                                                            ------------    ------------

     TOTAL ASSETS                                                           $ 11,281,901    $ 10,082,092
                                                                            ============    ============

</TABLE>

                                  - Continued -



The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
                                                                             F-4

<PAGE>


<TABLE>
<CAPTION>

                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
                     CONSOLIDATED BALANCE SHEET - CONTINUED
                           December 31, 1997 and 1996


                      LIABILITIES AND SHAREHOLDERS' EQUITY

                                                             1997            1996
                                                        ------------    ------------
<S>                                                                             <C>
                   
Current liabilities                               
   Notes payable to banks                               $       --      $    140,020
   Current maturities of notes payable                        18,357         116,390
   Accounts payable - trade                                  292,083         766,833
   Other accrued liabilities
     Payroll and sales taxes payable                          40,568          55,944
     Interest payable                                           --            33,099
     Other                                                    20,006           1,429
   Federal and State income taxes payable                    137,710         269,217
                                                        ------------    ------------

     Total current liabilities                               508,724       1,382,932
                                                        ------------    ------------


Long-term liabilities
   Notes payable, net of current maturities
     Related parties                                            --         3,200,000
     Banks and individuals                                   230,841         132,660
                                                        ------------    ------------

     Total liabilities                                       739,565       4,715,592
                                                        ------------    ------------


Commitments and contingencies


Convertible Preferred Stock
   $0.001 par value.  25 shares allocated,
     issued and outstanding                                     --           625,000
                                                        ------------    ------------


Shareholders' Equity
   Preferred stock - $0.001 par value 10,000,000
     shares authorized, 25 shares allocated; -0- and
     -0- shares issued and outstanding, respectively            --              --
   Common stock - $0.001 par value 14,000,000
     shares authorized; 4,854,133 and 2,717,458
     shares issued and outstanding, respectively               4,854           2,718
   Additional paid-in capital                             13,040,090       6,190,192
   Accumulated deficit                                    (2,502,608)     (1,451,410)
                                                        ------------    ------------

     Total shareholders' equity                           10,542,336       4,741,500
                                                        ------------    ------------

TOTAL LIABILITIES AND
   SHAREHOLDERS' EQUITY                                 $ 11,281,901    $ 10,082,092
                                                        ============    ============
</TABLE>


The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
                                                                             F-5

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF OPERATIONS
                     Years ended December 31, 1997 and 1996



                                                      1997          1996
                                                 -----------    ----------- 
Revenues
   Kart sales - net                              $ 7,586,476    $ 8,327,316
                                                 -----------    -----------

Cost of sales
   Purchases                                       4,249,409      4,910,692
   Direct labor                                      765,360        570,842
   Other direct costs                              1,005,202        676,604
                                                 -----------    -----------
     Total cost of sales                           6,019,971      6,158,138
                                                 -----------    -----------

Gross profit                                       1,566,505      2,169,178
                                                 -----------    -----------

Operating expenses
   Research and development expenses                  33,968           --
   Selling expenses                                  231,132         30,195
   General and administrative expenses
     Salaries and related costs                      691,857        445,624
     Other operating expenses                        832,491        462,025
   Compensation expense related to common
     stock issuances at less than "fair value"
     for reorganization, restructuring and
     consulting costs                                   --        1,430,287
   Depreciation and amortization                     359,321        203,022
                                                 -----------    -----------

     Total operating expenses                      2,148,769      2,571,153
                                                 -----------    -----------

Loss from operations                                (582,264)      (401,975)

Other income (expense)
   Interest expense                                 (507,696)      (396,589)
   Employment termination settlement                (208,100)          --
   Interest and other income                          93,602         32,573
                                                 -----------    -----------

Loss before income taxes                          (1,204,458)      (765,991)

Income taxes                                         153,260       (193,575)
                                                 -----------    -----------

Net loss                                         $(1,051,198)   $  (959,566)
                                                 ===========    ===========

Net loss per weighted-average share
   of common stock outstanding - Basic           $     (0.32)   $     (0.51)
                                                 ===========    ===========

Weighted-average number of shares
   of common stock outstanding - Basic             3,319,620      1,892,563
                                                 ===========    ===========


The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
                                                                             F-6

<PAGE>


<TABLE>
<CAPTION>

                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
            CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
                     Years ended December 31, 1997 and 1996


                                                       Convertible                               Additional
                                                     Preferred Stock         Common Stock          paid-in     Accumulated
                                                    Shares     Amount      Shares      Amount      capital      deficit      Total
                                                    ------     ------      ------    --------    ---------    ------------ --------
<S>                                                                             <C>  <C>         <C>          <C>          <C>   

Balances at January 1, 1996                           --          --        83,246   $      83   $ 487,751    $(491,844)     (4,010)

Sale of common stock
   to current and former directors in
   February 1996, including "fair
   value" adjustment                                  --          --       784,212         785     885,375         --       886,160

Sale of common stock
   to related party for escrow
     agreement related to March
     1996 private placement
     agreement                                        --          --       233,333         233         117         --           350
   under private placement
       memorandum in March 1996                       --          --       233,333         233     524,767         --       525,000
       less cost of raising capital                   --          --          --          --      (163,100)        --      (163,100)
   under private sale document in July 1996           --          --         6,667           7      34,993         --        35,000

Sale of convertible preferred
   stock under private placement
   memorandum in November 1996                          25     625,000        --          --          --           --          --

Issuance of common stock for
   payment of January 1996 professional
     services for corporate reorganization
     and restructuring, including "fair value"
     adjustment                                       --          --       483,333         483     545,683         --       546,166
   settlement of January 1996 negotiated
     employment contract signing bonus                --          --       140,000         140      14,860         --        15,000
   payment of March 1996 loan
     origination fees                                 --          --        70,000          70      10,430         --        10,500


</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
                                                                             F-7

<PAGE>

<TABLE>
<CAPTION>


                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
      CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY - CONTINUED
                     Years ended December 31, 1997 and 1996


                                                  Convertible                             Additional
                                                Preferred Stock          Common Stock       paid-in     Accumulated
                                             Shares      Amount       Shares     Amount     capital      deficit         Total
                                           --------    --------     ----------  --------  ----------   -------------   ----------  
<S>                                                                             <C>        <C>         <C>             <C>

   July 1996 settlement of the acquisition
     of Brister's Thunder Karts, Inc.           --          --         516,667       517   3,099,483            --       3,100,000
   November 1996 acquisition of
     USA Industries, Inc.                       --          --         166,667       167     749,833            --         750,000

Net loss for the year                           --          --            --        --          --          (959,566)     (959,566)
                                           ---------   ---------    ----------  --------  ----------    ------------   -----------

Balances at December 31, 1996                     25     625,000     2,717,458     2,718   6,190,192      (1,451,410)    4,741,500

Sale of common stock and warrants
   under Form SB-2 Registration
   Statement, including over-allotment
   and Underwriter's warrants                   --          --       1,782,500     1,782   7,351,185            --       7,352,967
   Less costs and expenses of
     raising capital                            --          --            --        --    (1,959,302)           --      (1,959,302)

Redemption of convertible
   preferred stock and issuance
   of common stock upon
   conversion                                    (25)   (625,000)      104,175       104     458,265            --         458,369

Common stock issued upon
   conversion of long-term debt                 --          --         250,000       250     999,750            --       1,000,000

Net loss for the year                           --          --            --        --          --        (1,051,198)   (1,051,198)
                                           ---------   ---------    ----------  --------  ----------    ------------   -----------

Balances at December 31, 1997                   --     $    --       4,854,133  $  4,854 $13,040,090    $ (2,502,608)  $10,542,336
                                           =========   =========    ==========  ======== ===========    ============   ===========

</TABLE>


The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
                                                                             F-8

<PAGE>

<TABLE>
<CAPTION>


                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                     Years ended December 31, 1997 and 1996

                                                                        1997           1996
                                                                    -----------    -----------
<S>                                                                                <C>

Cash flows from operating activities
     Net loss for the year                                          $(1,051,198)   $  (959,566)
     Adjustments to reconcile net loss to net
       cash provided by operating activities
       Depreciation and amortization                                    461,234        223,142
       Reorganization and restructuring costs and related
       effect of common stock issuances at less than "fair value"          --        1,430,287
       Operating expenses paid with common stock                           --           15,000
       (Increase) Decrease in:
         Accounts receivable-trade and other                          1,333,809       (770,825)
         Recoverable income taxes                                      (225,000)          --
         Inventory                                                       49,167        154,485
         Prepaid expenses and other                                    (155,903)        82,517
       Increase (Decrease) in:
         Accounts payable                                              (474,750)      (458,548)
         Other accrued liabilities                                      (29,898)         3,944
         Income taxes payable                                          (131,507)       165,675
                                                                    -----------    -----------
Net cash used in operating activities                                  (224,046)      (113,889)
                                                                    -----------    -----------

Cash flows from investing activities
   Cash received for sale of equipment                                    6,666           --
   Cash paid for property and equipment                                (477,294)       (71,734)
   Cash paid for reorganization costs                                      --         (109,255)
   Cash acquired in acquisition of Brister's
     Thunder Karts, Inc. and USA Industries, Inc.                          --          535,425
   Cash paid for acquisition of Brister's
     Thunder Karts, Inc. and USA Industries, Inc.                          --       (2,533,642)
                                                                    -----------    -----------
Net cash used in investing activities                                  (470,628)    (2,179,206)
                                                                    -----------    -----------

Cash flows from financing activities
   Net activity on bank line of credit                                 (140,020)       100,000
   Cash proceeds from long-term note payable                               --        2,000,000
   Cash paid for long-term note origination fees                           --          (16,783)
   Principal payments on long-term debt                              (2,220,622)       (89,633)
   Cash received from sale of convertible preferred stock                  --          625,000
   Cash paid for redemption of convertible preferred stock             (625,000)          --
   Cash paid for brokerage and placement fees
     related to sale of convertible preferred stock                        --          (94,750)
   Cash received from sale of common stock and warrants               7,352,968        657,139
   Cash paid for brokerage and placement fees
     related to sale of common stock                                 (1,500,934)      (257,850)
                                                                    -----------    -----------
Net cash provided by financing activities                             2,866,392      2,923,123
                                                                    -----------    -----------

Increase in cash                                                      2,171,718        630,028
   Cash at beginning of year                                            630,028           --
                                                                    -----------    -----------
Cash at end of year                                                 $ 2,801,746    $   630,028
                                                                    ===========    ===========
</TABLE>


                                 - Continued -

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
                                                                             F-9

<PAGE>


<TABLE>

<CAPTION>

                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
                CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED
                     Years ended December 31, 1997 and 1996



                                                            1997            1996
                                                        ---------------   ----------
<S>                                                                             <C>     

Supplemental disclosure of interest
   and income taxes paid
     Interest paid for the year                         $       438,882   $  348,730
                                                        ===============   ==========

     Income taxes paid for the year                     $       203,247   $   28,000
                                                        ===============   ==========


Supplemental disclosure of non-cash
   investing and financing activities

   Long-term note payable converted to common stock     $     1,000,000   $     --
                                                        ===============   ==========

   Vehicle acquired with long-term bank note            $        20,770   $     --
                                                        ===============   ==========

   Acquisition price of Brister's Thunder Karts, Inc. 
     settled with common stock and a note payable       $          --     $4,100,000
                                                        ===============   ==========

   Acquisition price of USA Industries, Inc. settled
     with common stock                                  $          --     $  750,000
                                                        ===============   ==========

   Loan origination fees settled with common stock      $          --     $   10,500
                                                        ===============   ==========


</TABLE>



The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
                                                                            F-10

<PAGE>


                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS

Karts  International   Incorporated  (formerly  Sarah  Acquisition  Corporation)
(Company) was  originally  incorporated  on February 28, 1984 as Rapholz  Silver
Hunt, Inc. under the laws of the State of Florida. In June 1984, April 1986, and
November  1987,  respectively,  the Company  changed its corporate name to Great
Colorado Silver,  Inc., Great Colorado Silver Valley Development  Company and J.
R. Gold Mines,  Inc. In January 1996, the Company  changed its corporate name to
Sarah Acquisition Corporation.

The Company has had no significant  business  operations from 1989 through 1996.
Prior to that time, the Company was involved in the mining industry, principally
through joint ventures with related parties involving mining properties  located
in Colorado.

In  December  1995,  the  Company  experienced  a change in  control  due to the
transfer of a controlling  position in issued and  outstanding  shares of common
stock of the Company between  unrelated third parties.  It was the intent of the
new  controlling  shareholders  and management to seek a suitable  situation for
merger or acquisition.

On February 23, 1996, the Company was  reincorporated  in the State of Nevada by
means of a  merger  with and into  Karts  International  Incorporated,  a Nevada
corporation  incorporated  on February 21, 1996.  The Company was the  surviving
entity and changed its corporate name to Karts International  Incorporated.  The
reincorporation  merger  had the  effect of a one for 250  reverse  split of the
Company's issued and outstanding common stock.

The  reincorporation  merger also  modified the Company's  capital  structure to
authorize  the  issuance of up to  20,000,000  shares of $0.001 par value common
stock and authorized the issuance of up to 10,000,000 shares of $0.001 par value
Preferred  Stock.  The  effect of this  transaction  has been  reflected  in the
accompanying  financial  statements  as of the  beginning  of the  first  period
presented.

On February 28, 1997, to be effective on March 24, 1997, the Company's  Board of
Directors  approved  a  two  (2)  for  three  (3)  reverse  stock  split  and  a
corresponding reduction of the authorized shares of common stock in anticipation
of a proposed  underwritten public offering of the Company's common stock during
1997.  The  issued  and  outstanding   shares  of  common  stock  shown  in  the
accompanying  financial  statements reflect the ultimate effect of the March 24,
1997 reverse stock split as if this second  reverse split had occurred as of the
beginning  of  the  first  period  presented  in the  accompanying  consolidated
financial statements.

During  February  and March  1996,  the  Company  sold or  issued  an  aggregate
1,634,650  post-March 24, 1997 reverse split shares of restricted,  unregistered
common stock to a former director and a company  controlled by a current officer
and director during the Company's reorganization phase. The differential between
the aggregate cash proceeds of approximately  $2,039 and the "fair value" of the
shares  issued   created  a  one-time   accounting   charge  to  operations  for
compensation  expense related to  reorganization,  restructuring  and consulting
expenses  of  approximately  $1,430,000.   These  transactions  are  more  fully
discussed in Note J - Common Stock Transactions.

On March 15, 1996,  effective  at the close of business on March 31,  1996,  the
Company acquired 100.0% of the issued and outstanding stock of Brister's Thunder
Karts,  Inc. (a Louisiana  corporation),  a "fun kart"  manufacturer  located in
Roseland,  Louisiana for total consideration of approximately  $6,100,000.  This
acquisition was accounted for as a purchase.



                                                                            F-11

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS - Continued

On November 20,  1996,  effective at the close of business on November 21, 1996,
the  Company  acquired  100.0%  of  the  issued  and  outstanding  stock  of USA
Industries, Inc. (an Alabama corporation),  a "fun kart" manufacturer located in
Prattville,  Alabama for total consideration of approximately  $1,000,000.  This
acquisition was accounted for as a purchase.

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

The Company has a concentration of key raw material  suppliers for kart engines.
In the event of any disruption in engine  availability,  if any, the Company may
experience  a negative  economic  impact.  The Company does not  anticipate  any
foreseeable  interruption  in engine  availability  and believes that  alternate
suppliers are available.

The accompanying consolidated financial statements contain the accounts of Karts
International Incorporated and its wholly-owned subsidiaries,  Brister's Thunder
Karts, Inc. and USA Industries,  Inc. All significant intercompany  transactions
have been eliminated.  The consolidated entities are collectively referred to as
Company.


NOTE B - ACQUISITION OF SUBSIDIARIES

On March 15, 1996, the Company  purchased  100.0% of the issued and  outstanding
stock of Brister's  Thunder Karts,  Inc. (a Louisiana  corporation)  for a total
purchase price of approximately $6,100,000. The acquisition was effective at the
close of business on March 31, 1996. The purchase price was paid with $2,000,000
cash, a note payable for $1,000,000 and 775,000 shares  (516,667  post-March 24,
1997  reverse  split  shares) of  restricted,  unregistered  common stock of the
Company.  Brister's Thunder Karts, Inc. (Brister's) was formed on August 2, 1976
under  the laws of the  State of  Louisiana.  Brister's  is in the  business  of
manufacturing  and  marketing  motorized  "fun karts" for the  consumer  market.
Results of operations of Brister's  are included in the  consolidated  financial
statements beginning on the effective date of the acquisition.

This  acquisition  was accounted for using the purchase method of accounting for
business combinations.  The Company allocates the total purchase price to assets
acquired  based on their  relative fair value.  Any excess of the purchase price
over the fair value of the assets acquired is recorded as goodwill.

     Purchase price                                       $6,100,000
       Assets acquired                                    (2,017,394)
       Liabilities assumed                                   781,367
                                                          ----------
         Goodwill related to Brister's                    $4,863,973
                                                          ==========





                                                                            F-12

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE B - ACQUISITION OF SUBSIDIARIES - Continued

On November 20, 1996, the Company purchased 100.0% of the issued and outstanding
stock of USA  Industries,  Inc. (an Alabama  corporation)  for a total  purchase
price of approximately $1,000,000. The acquisition was effective at the close of
business on November 21, 1996.  The purchase  price was paid with  $250,000 cash
and 250,000  shares  (166,667  post-March  24,  1997  reverse  split  shares) of
restricted, unregistered common stock of the Company. USA Industries, Inc. (USA)
was formed on January 2, 1992 under the laws of the State of Alabama.  USA is in
the  business  of  manufacturing  and  marketing  motorized  "fun karts" for the
consumer  market.  Results of operations of USA are included in the consolidated
financial statements beginning on the effective date of the acquisition.

This  acquisition  was accounted for using the purchase method of accounting for
business combinations.  The Company allocates the total purchase price to assets
acquired  based on their  relative fair value.  Any excess of the purchase price
over the fair value of the assets acquired is recorded as goodwill.

     Purchase price                                                $1,000,000
       Assets acquired                                             (1,496,970)
       Liabilities assumed                                         1,492,420
         Goodwill related to USA                                   $  995,450
                                                                   ==========

Pro forma  unaudited  results  of  operations  relating  to the  acquisition  of
Brister's and USA, as though the acquisition had occurred as of the beginning of
the first period presented, is as follows:

                                                                  1996
                       Revenues                                $10,698,824
                       Net income (loss)                        $(214,984)
                       Earnings per share - basic                  $(0.07)
                                                               ========== 


NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1.   Cash and cash equivalents
     -------------------------

     The  Company  considers  all cash on hand  and in  banks,  certificates  of
     deposit and other highly-liquid investments with maturities of three months
     or less, when purchased, to be cash and cash equivalents.

     Cash  overdraft  positions may occur from time to time due to the timing of
     making bank deposits and releasing checks, in accordance with the Company's
     cash management policies.

2.   Accounts and advances receivable
     --------------------------------

     In the normal course of business,  the Company extends  unsecured credit to
     virtually all of its customers which are located in the Southeastern United
     States,  principally Texas, Louisiana,  Mississippi,  Alabama,  Georgia and
     Florida.  Because of the credit risk  involved,  management has provided an
     allowance for doubtful accounts which reflects its opinion of amounts which
     will   eventually   become   uncollectible.   In  the  event  of   complete
     non-performance, the maximum exposure to the Company is the recorded amount
     of trade accounts receivable shown on the balance sheet at the date of non-
     performance.

                                                                            F-13

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

2.   Accounts and advances receivable - continued
     --------------------------------

     During 1996, the Company had an international sale of approximately $35,000
     and  experienced  no credit risk exposure as a result of this  transaction.
     The Company  anticipates  continuing  international sales in future periods
     and is developing credit policies related to this revenue segment.

3.   Inventory
     ---------

     Inventory  consists of steel,  engines and other related raw materials used
     in the manufacture of "fun karts".  These items are carried at the lower of
     cost or market using the  first-in,  first-out  method.  As of December 31,
     1997 and 1996, inventory consisted of the following components:

                                                       1997               1996
                                                     --------          --------
                     Raw materials                   $765,674          $875,450
                     Work in process                 127,780           37,661
                     Finished goods                    15,760            45,270
                                                     --------          --------
                                                     $909,214          $958,381
                                                     ========          ========

4.   Property, plant and equipment
     -----------------------------

     Property and  equipment are recorded at  historical  cost.  These costs are
     depreciated over the estimated useful lives of the individual  assets using
     the straight-line method.

     Gains and losses from  disposition of property and equipment are recognized
     as incurred and are included in operations.

5.   Loan costs
     ----------

     Costs  incurred  to acquire  notes  payable and to  facilitate  the sale of
     convertible  preferred  stock are deferred and  amortized as a component of
     interest  expense  over  the  life  of  the  related  financing  using  the
     straight-line method. In the event of debt retirement using the proceeds of
     future  equity  offerings,  the  related  unamortized  loan  costs  will be
     reclassified  as a cost of capital and offset  against  additional  paid-in
     capital related to the specific equity sale proceeds.

6.   Organization costs
     ------------------

     Costs related to the restructuring  and  reorganization of the Company have
     been  capitalized  and  are  being  amortized  over  a  five  year  period,
     commencing March 15, 1996, using the straight-line method.




                                                                            F-14

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

7.   Goodwill
     --------

     Goodwill   represents   the  excess  of  the  purchase  price  of  acquired
     subsidiaries  over the fair value of net assets  acquired  and is amortized
     over 25 years using the straight-line method.

     In accordance  with  Statement of Financial  Accounting  Standards No. 121,
     "Accounting  for the  Impairment  of Long-Lived  Assets and for  Long-Lived
     Assets to be Disposed Of", the Company follows the policy of evaluating all
     qualifying  assets as of the end of each reporting  quarter.  For the years
     ended  December 31, 1997 and 1996, no charges to  operations  were made for
     impairments in the recoverability of goodwill.

8.   Income taxes
     ------------

     The Company  utilizes  the asset and  liability  method of  accounting  for
     income  taxes.  At December  31, 1997 and 1996,  the deferred tax asset and
     deferred tax liability  accounts,  as recorded when material,  are entirely
     the  result  of  temporary  differences.  Temporary  differences  represent
     differences  in the  recognition  of  assets  and  liabilities  for tax and
     financial  reporting  purposes,   primarily  accumulated  depreciation  and
     amortization.  No valuation  allowance  was provided  against  deferred tax
     assets, where applicable.

9.   Income (Loss) per share
     -----------------------

     Basic  earnings  (loss) per share is computed  by  dividing  the net income
     (loss) by the weighted-average  number of shares of common stock and common
     stock  equivalents  (primarily  outstanding  options and warrants).  Common
     stock equivalents  represent the dilutive effect of the assumed exercise of
     the  outstanding  stock  options and  warrants,  using the  treasury  stock
     method.  The calculation of fully diluted earnings (loss) per share assumes
     the dilutive effect of the exercise of outstanding  options and warrants at
     either the  beginning  of the  respective  period  presented or the date of
     issuance,  whichever  is later.  As of  December  31,  1997 and  1996,  the
     outstanding  warrants and options are deemed to be anti-dilutive due to the
     Company's net operating loss position.

10.  Reclassifications
     -----------------

     Certain amounts within the accompanying  financial  statements for the year
     ended  December  31,  1996  have  been   reclassified  to  conform  to  the
     presentation for the year ended December 31,1997.

11.  Accounting standards to be adopted
     ----------------------------------

     Upon  the  adoption  of a  formal  stock  compensation  plan,  the  Company
     anticipates   using  the  "fair  value  based  method"  of  accounting  for
     compensation  based  stock  options  pursuant  to  Statement  of  Financial
     Accounting  Standards No. 123,  "Accounting for Stock-Based  Compensation".
     Under the fair value based  method,  compensation  cost will be measured at
     the grant date of the respective option based on the value of the award and
     will be recognized as a charge to operations over the service period, which
     will usually be the respective vesting period of the granted option(s).


                                                                            F-15
<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

10.  Accounting standards to be adopted - continued
     ----------------------------------

     In June 1997, the Financial  Accounting  Standards Board released Statement
     of  Financial  Accounting  Standards  No.  130,  "Reporting   Comprehensive
     Income", (SFAS130) which established standards for reporting and displaying
     comprehensive  income and its  components  (revenues,  expenses,  gains and
     losses)  in a full set of general  purpose  financial  statements.  SFAS130
     requires that all items that are required to be recognized under accounting
     standards as components of comprehensive  income be reported in a financial
     statement  that is displayed  with the same  prominence as other  financial
     statements.  SFAS130 is effective for years  beginning  after  December 15,
     1997. The Company does not anticipate a material impact from this change in
     presentation of its consolidated financial statements upon adoption of this
     standard.

     In June 1997, the Financial  Accounting  Standards Board released Statement
     of Financial Accounting  Standards No. 131,  "Disclosures About Segments of
     an Enterprise and Related Information", (SFAS131) which establishes revised
     standards for the method in which public business enterprises are to report
     information about operating  segments in their annual financial  statements
     and  requires  those  enterprises  to  report  selected  information  about
     operating  segments in interim  financial  reports issued to  shareholders.
     This  statement  also revises the related  disclosures  about  products and
     services,  geographic  areas  and major  customers.  SFAS131  replaces  the
     "industry segment" concept established in Statement of Financial Accounting
     Standard  No.  14 with a  "management  approach"  concept  as the basis for
     identifying  reportable  segments.   SFAS131  is  effective  for  financial
     statements  for years  beginning  after  December  31, 1997 and for interim
     periods  presented after December 31, 1998. The Company does not anticipate
     a  material  impact  from this  change in  disclosure  presentation  in its
     consolidated financial statements upon adoption of this standard.


NOTE D - CONCENTRATIONS OF CREDIT RISK

The Company  maintains  its cash accounts in financial  institutions  subject to
insurance coverage issued by the Federal Deposit Insurance  Corporation  (FDIC).
Under FDIC rules,  the Company and its  subsidiaries  are  entitled to aggregate
coverage of $100,000 per account type per separate  legal entity per  individual
financial institution.  During the year ended December 31, 1997, the Company and
its  subsidiaries  had credit risk  exposures in excess of the FDIC  coverage as
follows:

<TABLE>

                                                          Highest        Low            Number of
                        Entity                           exposure      exposure      days with exposure
              --------------------------               ----------      --------      ------------------
<S>                                                                                        <C>     

           Karts International Incorporated            $1,624,288         $566             146
             Brister's Thunder Karts, Inc.               $830,848         $450             300
                 USA Industries, Inc.                    $447,918          $75             110



</TABLE>

                                                                            F-16

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE D - CONCENTRATIONS OF CREDIT RISK - Continued

Additionally,  the  Company  utilizes a lockbox  system for the  collection  and
deposit of receipts on trade accounts  receivable for each operating  subsidiary
and a corporate cash  concentration  sweep account whereby all excess cash funds
are  concentrated  into  one  primary   depository   account  with  a  financial
institution.  The Company and the  financial  institution  then  participate  in
uncollateralized  reverse-repurchase  agreements  which are  settled on a "next-
business day" basis for the  investment of surplus cash funds.  During 1997, the
Company had unsecured  amounts  invested in reverse  repurchase  agreements on a
daily basis from  February  1997 through  December 31, 1997.  As of December 31,
1997, the Company had an unsecured  outstanding reverse repurchase  agreement of
approximately $2,395,000. The Company incurred no losses during 1997 as a result
of any of these unsecured situations.

NOTE E - PROPERTY AND EQUIPMENT

Property and equipment consist of the following components:
                                                                     Estimated
                                           1997         1996        useful life
                                       -----------     --------    -------------
      Building and improvements        $   384,296     $331,360    5 to 25 years
      Equipment                            670,705      317,665    5 to 10 years
      Transportation equipment              77,820       57,050    3 to 5 years
      Furniture and fixtures               129,951       65,299    5 years
                                       -----------     --------      
                                         1,262,772      771,374
      Accumulated depreciation            (137,746)     (34,598)
                                       -----------     -------- 
                                         1,125,026      736,776
      Land                                  32,800       32,800
                                       -----------     --------
      Net property and equipment       $ 1,157,826     $769,576
                                       ===========     ========

Total  depreciation  expense  charged to operations for the years ended December
31, 1997 and 1996 was approximately $103,148 and $34,598, respectively.

NOTE F - NOTES PAYABLE

Notes payable consist of the following:
                                                        1997              1996
                                                     ----------        ---------
$300,000 line of credit payable to a bank.
   Interest at 8.25%.  Principal and accrued
   interest payable at maturity.  Maturity in
   August 1997.  Secured solely by accounts
   receivable due from a specific customer and
   guaranteed by the Company.                        $       -          $100,000

$40,020 term note payable to a bank.  Interest
   at 10.5%.  Principal and accrued interest
   payable at maturity.  Secured by accounts
   receivable, inventory and equipment of USA
   Industries, Inc.  Paid in full in January 1997.           -            40,020
                                                    ----------          --------

       Total notes payable                          $        -          $140,020
                                                    ==========          ========

                                                                            F-17

<PAGE>


<TABLE>
<CAPTION>

                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE G - LONG-TERM DEBT

Long-term debt consists of the following:
                                                                           1997          1996
                                                                       -----------    -----------
<S>                                                                              <C>  <C>   

Related parties
---------------  
$2,000,000 note payable to a Foundation.
   Interest at 14.0%.  Interest payable on the
   15th day of each month beginning on
   March 15, 1996.  All accrued but unpaid
   interest due on March 14, 2001.  Principal
   payable as follows: $399,996 on March 14,
   1999; $399,996 on March 14, 2000; $1,200,008
   on March 14, 2001.  Secured by accounts
   receivable, inventory, property and equipment
   owned or acquired by the Company.                                   $         -    $2,000,000

$1,000,000 payable to the former  shareholder
   of Brister's  Thunder Karts,  Inc. Interest
   payable at 8.0% in the first loan year and
   escalating 1.0% per year to a  maximum of
   14.0% in the  seventh  loan  year.  Interest
   only  payable quarterly,  starting June 30,
   1996. All unpaid but accrued interest is due 
   at maturity.  Principal payable in annual 
   installments of $250,000 starting on March 31,
   2000.  Collateralized  by certain assets valued
   at $1 million owned by certain members of
   the Company's Board of Directors.                                             -     1,000,000

$200,000 note payable to the former shareholder of
   Brister's Thunder Karts, Inc. Interest  payable at
   10.0%.  Payable  in  quarterly  installments, including
   interest, of $20,000,  $55,000,  $53.750, $52,500 and 
   $51,250,  respectively, commencing on April 1, 1997. 
   Final maturity in April 1998 or immediately upon successful
   completion of an  underwritten  public offering of the
   Company's securities.  Collateralized by certain assets
   valued at $1 million owned by certain members of the
   Company's Board of Directors.                                                 -       200,000
                                                                       -----------     ---------

         Total related party long-term debt                                      -     3,200,000
                                                                       -----------     ---------

</TABLE>



                                                                            F-18

<PAGE>


<TABLE>
<CAPTION>

                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE G - LONG-TERM DEBT - Continued
                                                                           1997          1996
                                                                        ----------    -----------
<S>                                                                             <C>      <C>

Banks and individuals
---------------------

$20,770 installment note payable to a bank.  Interest
   at 7.75%.  Payable in monthly installments of
   approximately $419, including accrued interest.
   Final maturity in May 2002.  Collateralized by
   a vehicle                                                                18,781            -

$240,020 mortgage note payable to a bank.  Interest
   at the Bank's Commercial Base Rate (9.75% at
   December 31, 1996).  Payable in monthly installments
   of approximately $2,626, including accrued interest.
   Final maturity in August 2010.  Collateralized by
   land and a building owned by USA Industries, Inc.                       224,295       235,089

$9,348 installment note payable to a bank.  Interest
   at 10.0%.  Payable in monthly installments of
   approximately $303, including accrued interest.
   Final maturity in April 1999.  Collateralized by
   transportation equipment owned by USA
   Industries, Inc.                                                          4,208         7,553

$27,677 note payable to an individual.  Interest
   at 7.0%.  Payable in semi-monthly installments
   of approximately $200, including interest.
   Secured by equipment owned by Brister's.                                  1,914         6,408
                                                                           -------    ----------

     Total long-term debt to banks and individuals                         249,198       249,050
                                                                           -------    ----------

     Total long-term debt                                                  249,198     3,449,050

     Less current maturities                                               (18,357)     (116,390)
                                                                          --------    ---------- 

     Long-term portion                                                    $230,841    $3,332,660
                                                                          ========    ==========

</TABLE>

                                                                            F-19

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE G - LONG-TERM DEBT - Continued

Future maturities of long-term debt are as follows:

                                       Year ending
                                      December 31,                 Amount
                                      ------------                ----------
                                          1998                    $  18,357
                                          1999                       15,253
                                          2000                       15,731
                                          2001                       17,335
                                          2002                       16,063
                                        2003-2007                    95,171
                                        2008-2010                    71,288
                                         Totals                      $249,198

In September 1997, the Company issued 250,000 shares of restricted, unregistered
common stock in payment of $1,000,000 in principal on the long-term debt payable
to a Foundation.


NOTE H - INCOME TAXES

The components of income tax (benefit)  expense for the years ended December 31,
1997 and 1996, respectively, are as follows:
                                                    1997               1996
                                                 ----------         --------
   Federal:
     Current                                     $(156,403)         $156,675
     Deferred                                            -                 -
                                                 ---------          --------
                                                  (156,403)           156,675
                                                 ---------          ---------
   State:
     Current                                         3,143             36,900
     Deferred                                            -                  -
                                                 ---------          ---------
                                                     3,143             36,900
                                                 ---------          ---------

     Total                                       $(153,260)         $ 193,575
                                                 =========          =========



                                                                            F-20

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE H - INCOME TAXES - Continued

The Company's income tax expense for the years ended December 31, 1997 and 1996,
respectively, differed from the statutory federal rate of 34 percent as follows:
<TABLE>

<S>                                                                               <C>     
                                                                       1997          1996
                                                                    ---------     ---------
Statutory rate applied to earnings (loss) before income taxes       $(409,516)    $(260,437)
Increase (decrease) in income taxes resulting from:
   State income taxes                                                   3,143        36,900
   Non-deductiability of adjustment for common
     stock issued at less than "fair value"                                 -       485,490
   Difference caused by use of statutory amortization
     periods for deduction of goodwill                                 79,669       (37,724)
   Utilization of pre-acquisition net operating loss
     of USA Industries, Inc.                                                -       (38,173)
   Other                                                              173,444         7,519
                                                                    ---------     ---------

     Income tax expense                                             $(153,260)    $ 193,575
                                                                    =========     =========

</TABLE>

NOTE I - RELATED PARTY TRANSACTIONS

The Company leases its  manufacturing  facilities  under an operating lease with
the former owner of Brister's,  who is also a Company  shareholder and director.
Concurrent with the closing of the acquisition of Brister's, the Company and the
former owner executed a new lease agreement for a primary two-year term expiring
in 1998 and an additional  two-year  renewal  option.  The monthly lease payment
will remain at $6,025 per month with annual adjustments for increases based upon
the Consumer Price Index. Total payments under this agreement were approximately
$72,300  and  $54,225  for  the  years  ended   December   31,  1997  and  1996,
respectively.

Concurrent with the  acquisition of Brister's,  the Company and the former owner
of Brister's entered into a Real Estate Option Right of First Refusal Agreement.
This agreement  provides that the Company may, at its sole option,  purchase the
real property and improvements in Roseland,  Louisiana currently utilized by the
Company or its  subsidiary  for an aggregate  purchase  price of  $550,000.  The
option may be exercised commencing on
January 1, 1998 and expires on December 31, 2000.

In January 1996,  concurrent with the execution of a letter of intent related to
a Stock Purchase Agreement whereby the Company acquired 100.0% of the issued and
outstanding stock of Brister's,  the Company entered into a consulting  contract
with a company  owned by an officer  and  director  of the  Company  whereby the
consulting company would provide all necessary legal,  capital and other related
professional services, exclusive of accounting and auditing services, related to
the  reorganization,  recapitalization  and  consummation  of the acquisition of
Brister's for a fee of $15,000.  The payment of the fee was contingent  upon the
successful  consummation  of the Brister's  acquisition.  The fee was ultimately
settled  with  the  differential  between  1,500,000   pre-reverse  stock  split
unregistered,  restricted  common stock  (1,000,000  post-reverse  split shares)
escrowed to close the  acquisition  of Brister's and the actual number of shares
to be  issued  to the then  owners  of  Brister's,  pursuant  to the  applicable
settlement  terms of the Stock Purchase  Agreement and the consulting  contract.
Upon  final  settlement,  the  $15,000  fee was paid  through  the  issuance  of
approximately 725,000 pre-reverse stock split shares (483,333 post-reverse stock
split shares) to the consulting company.


                                                                            F-21

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE J - CONVERTIBLE PREFERRED STOCK

The  Company  has  10,000,000  shares  of  Preferred  Stock  (Preferred  Shares)
authorized for issuance.

In October  1996,  the Company's  Board of Directors  allocated 25 shares of the
authorized  number to  facilitate  the  private  placement  of said  shares as a
component  of an  Equity  Unit  (Unit) to be sold  through  a Private  Placement
Memorandum (PPM). The PPM was fully subscribed and closed in November 1996. Each
$25,000  Unit  consisted  of one (1) share of  convertible  preferred  stock and
10,000  redeemable  common stock purchase  warrants.  The PPM raised total gross
proceeds of approximately $625,000 and net proceeds of approximately $530,250 to
the Company.

The Preferred Shares require mandatory  conversion upon either the effectiveness
of a public  offering of the Company's  common stock  pursuant to a Registration
Statement or upon the first  anniversary  date of the PPM closing  date.  In the
event that the  conversion  is triggered by a public  offering,  each  Preferred
Share will be converted,  at the holder's  option,  into either $25,000 cash and
the issuance of 6,250 shares of restricted,  unregistered common stock or 12,500
shares of restricted, unregistered common stock. In either situation, the holder
retains piggyback  registration  rights for the shares of common stock issued in
the  conversion.  In the event that the  conversion  is  triggered  by the first
anniversary  date of the PPM closing,  each Preferred Share will be converted to
12,500 shares of  restricted,  unregistered  common stock,  subject to identical
piggyback registration rights.

In January 1997, the Company began  undertaking a secondary  public  offering of
common  stock  pursuant  to  a  Form  SB-2  Registration   Statement  (secondary
offering).  In  accordance  with  guidance  and  instructions  from the National
Association of Securities  Dealers  (NASD) related to the Company's  application
for  listing  on the  "NASDAQ  Small-Cap  Market",  the NASD  requested  certain
modifications  to the terms and  conditions  underlying the sale and issuance of
the Preferred Shares and their conversion terms.

On  March 6,  1997,  the  Company  offered  to each  holder  of the  Convertible
Preferred  Stock the option of either  (i)  receiving  a refund of $25,000  (the
initial Unit price) plus simple interest at 12.0% per annum as consideration for
assigning their Convertible  Preferred Stock and 1996 Warrants to the Company or
(ii)  agreeing  to the  conversion  of the  Convertible  Preferred  Stock at the
completion  of a pending  secondary  offering upon the  previously  agreed terms
along with the issuance of an additional  13,334 1996 Warrants for each share of
Convertible Preferred Stock held as additional consideration for waiving certain
registration  rights and agreeing to certain lock-up  provisions with respect to
the Common Stock issuable upon conversion of the Convertible Preferred Stock and
the  1996  Warrants.  The  lock-up  agreement  requires  that  the  holder  must
unconditionally  agree  to a  lock-up  of all of the  holder's  securities  (the
Preferred  Shares and any securities  that the Preferred  Shares are convertible
into and all  originally  issued  redeemable  common  stock  purchase  warrants)
whereby these  designated  securities may not be sold by the holder for a period
of approximately 18 months from the closing date of the secondary offering. Upon
release  of the  lock-up  terms,  the  holder  will be  permitted  to  sell  the
aforementioned  securities  under the terms and conditions of Rule 144 of the U.
S. Securities and Exchange Commission.  Further, the holder will be deemed to be
an affiliate of the underwriter in the secondary offering and, as such, will not
be eligible to purchase any securities offered in the secondary offering.

On September  19, 1997,  concurrent  with a successful  sale of common stock and
warrants  pursuant to a  Registration  Statement on Form SB-2,  the Company paid
$625,000 to redeem the  outstanding  convertible  preferred  stock and issued an
aggregate  104,175  shares  of  restricted,  unregistered  common  stock  and an
aggregate  333,350  1996  Warrants to the holders of the  convertible  preferred
stock as a component of the redemption.


                                                                            F-22

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE K - COMMON STOCK TRANSACTIONS

On February 23, 1996, the Company was  reincorporated  in the State of Nevada by
means of a  merger  with and into  Karts  International  Incorporated,  a Nevada
corporation  incorporated  on February 21, 1996.  The Company was the  surviving
entity and changed its corporate name to Karts International  Incorporated.  The
reincorporation  merger  had the  effect of a one for 250  reverse  split of the
Company's issued and outstanding common stock.

The  reincorporation  merger also  modified the Company's  capital  structure to
authorize  the  issuance of up to  20,000,000  shares of $0.001 par value common
stock and authorized the issuance of up to 10,000,000 shares of $0.001 par value
Preferred  Stock.  The  effect of this  transaction  has been  reflected  in the
accompanying  financial  statements  as of the  beginning  of the  first  period
presented.

On February 28, 1997, to be effective on March 24, 1997, the Company's  Board of
Directors  approved  a  two  (2)  for  three  (3)  reverse  stock  split  and  a
corresponding reduction of the authorized shares of common stock in anticipation
of a proposed  underwritten public offering of the Company's common stock during
1997.  This reverse  stock split reduced the  authorized  shares of common stock
from 20,000,000 to 14,000,000. The issued and outstanding shares of common stock
shown in the accompanying  financial  statements  reflect the ultimate effect of
the March 24,  1997  reverse  stock split as if this  second  reverse  split had
occurred as of the beginning of the first period  presented in the  accompanying
consolidated financial statements.

On February  20,  1996,  the Company sold  18,750,000  restricted,  unregistered
pre-reorganization shares of common stock (75,000 equivalent post-reorganization
shares)  (50,000  post-March  24, 1997 reverse split shares) to a former Company
director for cash of  approximately  $938. The  transaction  was recorded by the
Company based on the imputed "fair value" of the  securities  issued as required
by  Statement  of  Financial  Accounting  Standards  No.  123,  "Accounting  for
Stock-Based  Compensation".  The  imputed  fair  value of this  transaction  was
calculated at a "fair value" of  approximately  $1.13 per share or approximately
$56,500.  The  differential  between the imputed  fair value and the actual cash
paid was recorded as a component of compensation expense related to common stock
issuances  at less than  "fair  value"  for  reorganization,  restructuring  and
consulting expenses in the accompanying consolidated statement of operations.

On  March  7,  1996,  the  Company  sold  1,101,317   restricted,   unregistered
post-reorganization  shares  (734,212 post- March 24, 1997 reverse split shares)
of common stock to an entity owned by an officer and director of the Company for
cash of approximately  $1,101. The transaction was recorded by the Company based
on the imputed "fair value" of the securities issued as required by Statement of
Financial   Accounting   Standards   No.  123,   "Accounting   for   Stock-Based
Compensation".  The imputed fair value of this  transaction  was calculated at a
"fair value" of  approximately  $1.13 per share or approximately  $829,660.  The
differential  between  the  imputed  fair  value  and the  actual  cash paid was
recorded  as a  component  of  compensation  expense  related  to  common  stock
issuances  at less than  "fair  value"  for  reorganization,  restructuring  and
consulting expenses in the accompanying consolidated statement of operations.

On  March  7,  1996,   the  Company   sold  350,000   restricted,   unregistered
post-reorganization  shares  (233,333 post- March 24, 1997 reverse split shares)
of common stock to an entity owned by an officer and director of the Company for
cash of  approximately  $350. These shares were placed into an escrow account to
satisfy potential future  obligations of the Company and the affiliated  company
under the private placement memorandum discussed in the following paragraph. Due
to the contingent nature of the ultimate ownership of these shares, these shares
are excluded from the respective earnings per share calculation.


                                                                            F-23

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE K - COMMON STOCK TRANSACTIONS - Continued

On  March  31,  1996,   the  Company  sold  350,000   restricted,   unregistered
post-reorganization  shares  (233,333 post- March 24, 1997 reverse split shares)
of common  stock under a Private  Placement  Memorandum  at a price of $1.50 per
share. The total gross proceeds of the offering were $525,000. Certain placement
costs  and  commissions  related  to the sale of the  Private  Placement  stock,
totaling  approximately  $163,100,  were  deducted  from the gross  proceeds and
charged against additional paid-in capital.

The terms of the March 31, 1996 private placement memorandum require the Company
and/or a company  owned by a current  officer and  director to issue  additional
shares to the original  investors  in the private  placement  memorandum  in the
event  that the  Company's  securities,  as listed on a  published  exchange  or
electronic  bulletin board,  does not equal $3.00 per share ($4.50 per share, as
adjusted  by the March 24,  1997  reverse  stock  split) on March 31,  1996 (the
second  anniversary  date of the  closing of the  private  placement  memorandum
offering).  The  issuance  of  additional  shares,  if any is  required,  to the
original investors will be done without additional  compensation to the Company.
To  facilitate   this   contingency,   the  Company  sold  350,000   restricted,
unregistered  post-reorganization  shares  (233,333  post-March 24, 1997 reverse
split  shares) of common  stock to an entity owned by an officer and director of
the Company for cash of  approximately  $350.  These  shares were placed into an
escrow account for the benefit of the original  investors.  In the event that no
additional  shares are  required  to be issued to the  original  investors,  the
shares held in escrow will be returned to the company owned by a current officer
and director of the Company.

On  March  15,  1996,  the  Company  issued  105,000  restricted,   unregistered
post-reorganization shares (70,000 post- March 24, 1997 reverse split shares) of
common stock to a Foundation  as a component  of the loan  origination  costs to
secure the $2,000,000 note payable.  The proceeds of this note payable were used
to satisfy the cash component of the Brister's acquisition cost.

On March 15, 1996, the Company acquired 100% of the issued and outstanding stock
of  Brister's  Thunder  Karts,  Inc., a Louisiana  corporation,  in exchange for
$2,000,000 in cash; a subordinated  $1,000,000  promissory  note payable bearing
variable  interest rates, as defined therein,  maturing in 2003; and restricted,
unregistered  common stock of the Company  having an  aggregate  market value of
$3,100,000,  as defined in the Stock Purchase  Agreement.  The  $2,000,000  cash
payment was funded by a promissory  note from an unrelated  third party  bearing
interest at 14.0% per annum and maturing in 2000. Final settlement was satisfied
in  July  1996  with  the   issuance   of   775,000   restricted,   unregistered
post-reorganization  shares  (516,667  post-March  24, 1997 reverse  stock split
shares)  having a market value of  $3,100,000,  as defined in the related  Stock
Purchase Agreement.

On  March  15,  1996,  the  Company  issued  725,000  restricted,   unregistered
post-reorganization  shares  (483,333  post-March  24, 1997 reverse  stock split
shares) of common stock in  settlement  of a consulting  contract with a company
owned by an officer and director of the Company. The transaction was recorded by
the  Company  based on the  imputed  "fair  value" of the  securities  issued as
required by Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based  Compensation".  The  imputed  fair  value of this  transaction  was
calculated at a "fair value" of  approximately  $1.13 per share or approximately
$546,166.  The  differential  between the imputed fair value and the actual cash
paid was recorded as component of  compensation  expense related to common stock
issuances  at less than  "fair  value"  for  reorganization,  restructuring  and
consulting expenses in the accompanying consolidated statement of operations.


                                                                            F-24

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE K - COMMON STOCK TRANSACTIONS - Continued

On March 15,  1996,  in  accordance  with a January  1996 letter of intent,  the
Company  issued  210,000  restricted,  unregistered  post-reorganization  shares
(140,000  post-March  24,  1997  reverse  split  shares) of common  stock to the
Company's   chief   executive   officer,   valued  at  $15,000,   as  additional
consideration for the execution of an employment agreement.

In July 1996,  pursuant to Rule 504 of The  Securities  Act of 1933, the Company
sold 5,000 Units, consisting of 5,000 post-reorganization shares of common stock
(3,334  post-March  24, 1997 reverse  split  shares) and 100,000  Class A common
stock warrants  (66,667  post-March  24, 1996 reverse stock split  warrants) for
approximately  $17,500 to an  unaffiliated  investor.  The Class A common  stock
warrants may be exercised to purchase one (1)  post-reorganization  share of the
Company's  common  stock at a price of $3.50 per share  ($5.25 per share,  post-
March 24, 1997 reverse  stock  split).  The Class A common stock  warrants  were
assigned no value in the  accompanying  consolidated  financial  statements.  In
August 1996,  5,000 warrants (3,334  post-March 24, 1997 reverse split warrants)
were  exercised  for  total  proceeds  of  $17,500.  The  total  effect  of this
transaction was the sale of 10,000  post-reorganization shares (6,667 post-March
24, 1997 reverse split shares) for a total price of $35,000.

On November 20, 1996,  Company acquired 100% of the issued and outstanding stock
of USA Industries, Inc. an Alabama corporation, in exchange for $250,000 in cash
and  250,000  restricted,   unregistered   post-reorganization  shares  (166,667
post-March  24, 1997 reverse split shares) of  restricted,  unregistered  common
stock of the Company having an aggregate market value of $750,000.

On  September  16,  1997,  the  Company  issued  250,000  shares of  restricted,
unregistered  common stock to a Foundation  as  settlement of $1,000,000 in then
outstanding long-term debt.

On  September  16, 1997 and  November  24,  1997,  the Company sold an aggregate
1,550,000  and  232,500  shares  of  common  stock and  warrants  pursuant  to a
Registration  Statement  filed on Form SB-2.  This  transaction  generated gross
proceeds to the Company of approximately $7,352,813.


NOTE L - COMMON STOCK WARRANTS

In July 1996,  pursuant to Rule 504 of The  Securities  Act of 1933, the Company
sold 5,000 Units which included  100,000 Class A common stock warrants  (Class A
Warrants)  (66,667  post-March  24,  1997  reverse  stock  split  warrants),  as
discussed in previous  footnotes.  Each warrant  entitles the holder to purchase
one (1) share of common  stock at an adjusted  price of $5.25 per share  through
December 31, 1997.

In November  1996, the Company  privately  sold 25 units which included  250,000
Redeemable  Common Stock Purchase Warrants (1996 Warrants)  (166,668  post-March
24, 1997 reverse  stock split  warrants),  as discussed in previous  footnotes).
Each  warrant  entitles  the holder to purchase one (1) share of common stock at
$3.00 per share ($4.50 post-March 24, 1997 reverse split), subject to adjustment
in certain circumstances, for a period of 42 months from the closing date of the
offering.  The 1996  Warrants are  redeemable by the Company at a price of $0.01
per Warrant at any time after one (1) year from the  offering  closing date when
the average of the daily closing bid price of the Company's  common stock equals
$6.00 or more per share on any 20 consecutive trading days ending within 15 days
of the date on which notice of redemption  is given to the holders.  The Company
will provide  holders of the 1996 Warrants with at least 30 days written  notice
of the Company's intent to redeem the Warrants.

                                                                            F-25

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE L - COMMON STOCK WARRANTS

In September 1996,  concurrent with the redemption of the issued and outstanding
convertible  preferred stock, the Company issued an additional aggregate 333,350
1996  Warrants  to  the  holders  of  the  convertible   preferred  stock.  This
transaction was valued at the equivalent selling price of $0.125 per warrant, or
$41,669,  and was charged as a component of cost of capital  related to the sale
of an  aggregate  1,782,500  shares  of  common  stock  and  deducted  from  the
additional paid-in capital related to the gross proceeds of the offering.

In  September  1997,  the Company  sold  155,000  Underwriter's  Warrants for an
aggregate price of $155 pursuant to a Registration Statement filed on Form SB-2.
Each  warrant  allows the  Underwriter  to purchase  one share of the  Company's
common  stock at $6.00 per share and one (1) 1997  Warrant at a price of $0.1875
per share.  The 1997  warrants are  described  in detail in the next  paragraph.
These warrants expire on September 9, 2002 if not exercised by the Underwriter.

In September and November  1997,  the Company sold,  pursuant to a  Registration
Statement  on Form SB-2,  an aggregate  1,782,500  warrants  (1997  Warrants) at
$0.125 each for gross proceeds of $222,813.  Each warrant entitles the holder to
purchase  one (1) share of the  Company's  common  stock at a price of $4.00 per
share  during the four year  period  commencing  on  September  9,  1998.  These
warrants  are  redeemable  by the  Company  at a  redemption  price of $0.01 per
warrant,  at any time after  September  9, 1998 upon  thirty  (30) days  written
notice to the  respective  warrant  holders if the average  closing price of the
Company's  common stock equals or exceeds $8.00 per share for the 20 consecutive
trading days ending three (3) days prior to the notice of redemption.


<TABLE>

                                           Warrants        Warrants        Warrants
                                           granted        exercised       outstanding     Exercise price
                                          ---------       ---------       -----------     ---------------
<S>                                                                             <C>       <C>     

Class A Warrants                             66,667            3,334          63,333      $5.25 per share
1996 Warrants                               166,668               -          166,668      $4.50 per share
                                          ---------        --------        ---------                     

     Totals at December 31, 1996            233,335               -          230,001
                                          =========        ========        ---------

1996 Warrants                               333,350               -          333,350      $4.50 per share
Underwriter's Warrants                      155,000               -          155,000      $4.00 per share
1997 Warrants                             1,782,500               -        1,782,500      $4.00 per share
                                          ---------        --------        ---------                   

     Totals at December 31, 1997          2,270,850               -        2,500,851
                                          =========        ========        =========

</TABLE>


NOTE M - STOCK OPTIONS

The Company's  Board of Directors has allocated an aggregate  188,066  shares of
the  Company's  common stock  (125,377  post-March  24, 1997 reverse stock split
shares) for  unqualified  stock option plans for the benefit of employees of the
Company and its subsidiaries.

During 1996,  the Company  granted  options to purchase  89,032  shares  (59,355
post-March 24, 1997 reverse stock split shares) of the Company's common stock to
employees of the Company and its operating  subsidiaries at an exercise price of
$3.75 per share ($5.63 post-March 24, 1997 reverse split).  These options expire
at various times during 2001.

                                                                            F-26

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE M - STOCK OPTIONS - Continued

On January 30,  1997,  the Board of  Directors  of the  Company  adopted a stock
option plan providing for the reservation of an additional  66,667  post-reverse
split  shares of common  stock for  options to be granted  to  employees  of the
Company.  Concurrent  with this action,  the Company granted options to purchase
6,667  shares of the  Company's  common stock at a price of $4.875 per shares to
the Company's then Chief  Financial  Officer and the Company's Vice President of
Marketing (VP Options). These options are exercisable after January 30, 1998 and
expire on January 30, 2002.  The options  granted to the Company's  former Chief
Financial  Officer expired  concurrent with his termination in the first quarter
of 1998.

Further,  on January  30,  1997,  the  Company  granted  options to  purchase an
aggregate  52,670  shares of the  Company's  common  stock to  employees  of the
Company  and its  operating  subsidiaries  at an  exercise  price of $4.875  per
post-split  share.  These  options are  exercisable  after  January 30, 1998 and
expire on January 30, 2002.


<TABLE>

                            Options    Options            Options          Options
                            granted    exercised          terminated       outstanding  Exercise price
                            -------    ---------          ----------       -----------  ----------------
<S>                                                                             <C>      <C>     
     1996 options            59,355           -                  -           59,355      $5.63 per share
     1997 VP options         13,334           -              6,667            6,667      $4.875 per share
     1997 options            52,670           -                  -           52,670      $4.875 per share
                            -------       -----           --------          -------                      

     Totals                 125,359           -              6,667          118,692
                            =======       =====           ========          =======

     Shares allocated       125,377
                            =======

</TABLE>

NOTE N - COMMITMENTS AND CONTINGENCIES

Litigation
----------

Brister's is named as defendant in several product liability lawsuits related to
its "fun karts". The Company has had and continues to have commercial  liability
coverage to cover these exposures with a $50,000 per claim self-insurance clause
as of December 31, 1997. The Company is vigorously  contesting  each lawsuit and
has accrued management's estimation of the Company's exposure in each situation.
Additionally, the Company maintains a reserve for future litigation equal to the
"per  claim"  self-insurance  amount  times the  four-year  rolling  average  of
lawsuits  filed  naming the Company as a  defendant.  As of December  31,  1997,
approximately   $150,000  has  been  accrued  and  charged  to  operations   for
anticipated future litigation.

On February 4, 1997,  litigation  was filed against the Company and Brister's in
an action to have Brister's product liability  insurance coverage  (discussed in
the  preceding  paragraph)  declared  null and void as a result of a payment  by
Brister's  insurance  underwriter in settlement of a product liability  lawsuit.
Legal counsel is of the opinion that this action has questionable  merit and the
determination of an outcome,  if any, is unpredictable at this time. The Company
is  vigorously  defending  the action.  Additionally,  the Company is pursuing a
counteraction  against the underwriter's agent for potential  misrepresentations
made by the agent to the underwriter  regarding Brister's during the acquisition
of the aforementioned  commercial  liability insurance coverage.  The Company is
currently  engaged in discovery and is unable to predict the ultimate outcome of
this litigation.


                                                                            F-27

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE N - COMMITMENTS AND CONTINGENCIES - Continued

Litigation - continued
----------

The Company  anticipates no material impact to either the results of operations,
its financial  condition or liquidity  based on the  uncertainty of outcome,  if
any, of existing litigation,  either collectively and/or  individually,  at this
time.

Consulting and Patent Licensing
-------------------------------
Pursuant to the acquisition of Brister's,  the Company entered into a Consulting
Agreement  with the former  owner of  Brister's.  The former  owner will provide
certain  consulting  services to the Company or any  subsidiary  thereof,  which
services will not exceed 8 eight-hour work days per month. As consideration  for
such  services,  the  former  owner  will  receive  $400 per day for  consulting
services provided at the Company's  principal place of business and $800 per day
for  consulting  services  provided while  traveling in connection  with Company
business.  The former owner is required to maintain the  confidentiality  of all
Company  information.  The Company paid the former owner  approximately  $30,000
under the terms of this agreement during the year ended December 31, 1997.

Pursuant to the  acquisition  of Brister's,  the Company and the former owner of
Brister's entered into a Non- Competition Agreement. The former owner has agreed
not to compete with the Company or any of its  subsidiaries for a period of five
years in any  jurisdiction  in  which  the  Company  or any  subsidiary  is duly
qualified to conduct  business or within any marketing area in which the Company
is doing a substantial amount of business or is engaged in a business similar to
that currently  operated by the Company.  Additionally,  the former owner agreed
that  during the same  five-year  period not to  interfere  with the  employment
relationship  between the Company and any of its other  employees by  soliciting
any of such individuals to participate in individual business ventures.

At  the  closing  of the  Brister's  acquisition,  the  Company  entered  into a
Licensing Agreement with the former owner of Brister's.  This agreement provides
that the former  owner will (1) license to the  Company all of the  Intellectual
Property (as defined)  currently owned by the former owner and being used by the
Company or any subsidiary at terms at least as favorable as the former owner has
received or could have received in arms-length  transactions  with third parties
and (2) for a period of five years from the execution of the Licensing Agreement
will license to the Company,  at the  Company's  sole option,  all  Intellectual
Property  developed or owned by the former owner at any time  subsequent  to the
Closing Date. The license  referenced in section (2) above shall be exclusive to
the Company and free of charge for the first year from the date of invention and
thereafter  at terms at least as  favorable  as the former owner has received or
could have received in arms-length transactions with third parties. Intellectual
Property is defined in the Stock Purchase  Agreement as all domestic and foreign
letters patent, patents, patent applications, patent licenses, software licenses
and  know-how  licenses,   trade  names,  trademarks,   copyrights,   unpatented
inventions,  service marks,  trademark  registrations and applications,  service
mark registrations and applications and copyright registrations and applications
owned or used by the Company or any subsidiary in the operation of its business.

On March 15,  1997,  the Company and the former  owner  amended  this  Licensing
Agreement and executed a related Royalty  Agreement,  for a three (3) year term,
which  provides  for the  payment  of a  one-time  license  fee and a "per unit"
royalty fee. Upon execution,  the Company paid an initial license fee of $10,000
and agreed to pay a royalty of $1.00 per unit on which the existing intellectual
property  is  installed.  For the second and third years of the  Agreement,  the
Company  will pay the greater of $20,000 per year or $1.00 per unit on which the
existing intellectual property is installed.  During the year ended December 31,
1997, the Company paid or accrued approximately $21,000 under this Agreement.


                                                                            F-28

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE N - COMMITMENTS AND CONTINGENCIES - Continued

Employment agreement
--------------------

In March 1996, pursuant to a January 1996 letter agreement,  the Company entered
into a long-term  employment contract (Agreement) with an individual to serve as
the Company's Chairman of the Board,  President and Chief Executive Officer. The
Agreement  is for a term of three  (3)  years and  provides  for an annual  base
salary of $150,000.  Upon  execution of the Agreement,  the individual  earned a
signing bonus of 10%, or $15,000,  paid with the issuance of 210,000 restricted,
unregistered  post-reorganization  shares  (140,000  post-March 24, 1997 reverse
split shares) of common stock. Under the terms of the Agreement, the Company may
buy-back  140,000  shares in Year 1 of the  Agreement at an  aggregate  price of
$16,800 if the individual is terminated for cause or the individual  voluntarily
terminates  his employment  prior to March 15, 1997;  70,000 shares in Year 2 of
the  Agreement at an aggregate  price of $8,400 if the  individual is terminated
for cause or the individual  voluntarily terminates his employment between March
15, 1997 and March 15, 1998;  and 35,000 shares in Year 3 of the Agreement at an
aggregate  price of  $4,200 if the  individual  is  terminated  for cause or the
individual  voluntarily  terminates  his  employment  between March 15, 1998 and
March 15, 1999. If the Agreement is terminated  for any reason than for cause or
voluntary termination by the individual, the buy-back option is terminated.

Concurrent with the resignation of this individual as the Company's  Chairman of
the Board,  President and Chief Executive  Officer,  effective January 15, 1998,
this  Agreement was  terminated  and was settled with a one-time cash payment by
the Company of  approximately  $208,100.  In anticipation of this event,  due to
ongoing negotiation, this settlement was charged to operations as a component of
"Other expense" in the accompanying consolidated financial statements.

Contingent stock issuances
--------------------------

The terms of the March 31, 1996 private placement memorandum require the Company
and/or a company  owned by a current  officer and  director to issue  additional
shares to the original  investors  in the private  placement  memorandum  in the
event  that the  Company's  securities,  as listed on a  published  exchange  or
electronic  bulletin board,  does not equal $3.00 per share ($4.50 per share, as
adjusted  by the March 24,  1997  reverse  stock  split) on March 31,  1996 (the
second  anniversary  date of the  closing of the  private  placement  memorandum
offering).  The  issuance  of  additional  shares,  if any is  required,  to the
original investors will be done without additional  compensation to the Company.
To  facilitate   this   contingency,   the  Company  sold  350,000   restricted,
unregistered  post-reorganization  shares  (233,333  post-March 24, 1997 reverse
split  shares) of common  stock to an entity owned by an officer and director of
the Company for cash of  approximately  $350.  These  shares were placed into an
escrow account for the benefit of the original  investors.  In the event that no
additional  shares are  required  to be issued to the  original  investors,  the
shares held in escrow will be returned to the company owned by a current officer
and director of the Company.  The Company is unable to predict the fair value of
these shares placed into escrow or the impact,  if any, that such valuation will
have on the Company's Statement of Income for the period ending March 31, 1998.

                                                                            F-29

<PAGE>


                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE O - SIGNIFICANT CUSTOMERS

During the year ended  December  31, 1997 and 1996,  the Company had two related
customers responsible for net sales in excess of 10.0% of total net sales.


<TABLE>

                                          1997                                1996
                               ------------------------           -------------------------
                                             Percent of                        Percent of
                                   Amount      sales               Amount        sales
                               ----------    ----------           -----------  ----------

<S>                                                                             <C>      

Company A                      $  713,664       9.41%              $1,316,880      15.81%
Company B                         566,480       7.47%                 369,460       4.44%
                               ----------      ------              ----------     ------ 
                               $1,280,144      16.88%              $1,686,340      20.25%
                               ==========      =====               ==========     ====== 

Total net sales                $7,586,476     100.00%              $8,327,316     100.00%
                               ==========     ======               ==========     ====== 

</TABLE>


NOTE P - SUBSEQUENT EVENTS

Effective  January 30, 1998,  the Company  entered into an Employment  Agreement
(Agreement)  with an individual  to serve as the  Company's  President and Chief
Executive  Officer  (President).  The Agreement is for a term of three (3) years
and  provides  the  President  with an  annual  base  salary of  $150,000.  Upon
execution of the  Agreement,  the President  received  options to purchase up to
200,000  shares of the Company's  common stock at an exercise price of $3.25 per
share.  The options  vest as  follows:  100,000  shares as of January 30,  1999;
50,000 shares as of January 31, 2000;  50,000 shares as of January 31, 2001. All
unvested  options vest  immediately  upon the  termination  of the  Agreement if
termination is for reason other than "for cause",  and all  unexercised  options
expire on January 31, 2003.  The President may also receive  annual  performance
based  stock  options to purchase up to 50,000  shares of the  Company's  common
stock at a price equal to the market value of the Company's  common stock on the
date of issuance,  as  determined by the  Company's  Board of Directors,  and an
annual cash bonus not to exceed 15.0% of the annual base salary.

In March 1998,  the Company  granted  options to  purchase an  aggregate  20,000
shares  of the  Company's  common  stock to  employees  of the  Company  and its
operating  subsidiaries at an exercise price of $3.50. These options vest on the
first  anniversary  date of their  grant and expire on the earlier of five years
from the date of their  grant or upon  termination  of the  option  holder as an
employee of the Company.


                                                                            F-30