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

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
                        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.)

  62204 Commercial Street                                                      
      P.O. Box 695                                       
Roseland, Louisiana 70456                              70456
(Address of Principal Executive Offices)              (Zip Code)
--------------------------------------------------------------------------------

                                 (504) 747-1111
                (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, 1998,
were $8,219,646.

         The  issuer  had  5,574,298  shares  of  common  stock  and   1,782,500
public warrants outstanding as of March 23, 1999.

         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, 1999, was $2,433,703.


================================================================================
<PAGE>


<TABLE>

<CAPTION>
                     1998 ANNUAL REPORT (S.E.C. FORM 10-KSB)

                                      INDEX

                       Securities and Exchange Commission
                           Item Number and Description


<S>                                                                             <C>                              <C>

                                     PART I

Item 1.           Business........................................................................................3
Item 2.           Properties.....................................................................................17
Item 3.           Legal Proceedings..............................................................................17
Item 4.           Submission of Matters to a Vote of Security Holders............................................18

                                     PART II

Item 5.           Market for the Company's Common Stock and Related Stockholder Matters..........................19
Item 6.           Management's Discussion and Analysis or Plan of Operation......................................20
Item 7.           Consolidated Financial Statements..............................................................27
Item 8.           Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........27

                                    PART III

Item 9.           Directors, Executive Officers, Promoters and Control Persons; Compliance With
                  Section 16(a) of The Exchange Act..............................................................28
Item 10.          Executive Compensation.........................................................................30
Item 11.          Security Ownership of Certain Beneficial Owners and Management.................................34
Item 12.          Certain Relationships and Related Transactions.................................................34

                                     PART IV

Item 13.          Exhibits, Financial Statements and Reports on Form 8-K.........................................36

                  SIGNATURES, FINANCIAL STATEMENTS AND EXHIBIT INDEX

Signatures...................................................................................................... 40
Financial Statements........................................................................................... F-1
Exhibit Index

</TABLE>


                                      -2-

<PAGE>


                                     PART I

         Management believes that this Annual Report on Form 10-KSB for the year
ended  December  31,  1998  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 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"),   USA  Industries,   Inc.,  an  Alabama
corporation  ("USA"),  Straight Line  Manufacturing,  Inc.  ("Straight Line"), a
Michigan   corporation,   and  KINT,  L.L.C.,  a  limited  liability   Louisiana
corporation  ("KINT"),  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 5 to 13 horsepower and
purchased by consumers  principally for off-road  recreational  use. The Company
shipped  approximately  12,000 Fun Karts to dealers  and mass  merchandisers  in
1998,  which  the  Company  believes  represents  approximately  9% of the total
domestic  Fun Kart market.  Consolidated  revenues of the Company for the fiscal
year ended  December 31, 1998 were  approximately  $8.3 million as compared with
combined  revenues  of  approximately  $7.6  million  for the fiscal  year ended
December 31, 1997. The Company  operates  manufacturing  facilities in Roseland,
Louisiana, Prattville, Alabama and Milford, Michigan and maintains its executive
offices in Roseland, Louisiana.

         The kart 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.  Management  estimates that
in 1998  approximately  156,000  karts were sold in the  United  States of which
approximately  135,000 were Fun Karts,  12,000 racing karts and 9,000 concession
karts. Historically, the Company, through its subsidiaries, has concentrated its
efforts in the Fun Karts market.

         The Company offers a product line of  approximately 35 Fun Kart models,
differentiated by frame size, drive train, seating capacity, tire size and tread
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
brush 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
Tecumseh Products Company, Briggs & Stratton and Honda engines. The end-users of
the Company's Fun Karts are primarily 7- 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, mass merchandisers and manufacturing representatives to sell its
products.  In 1998,  the Company sold 79% of its  products  through its 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

                                      -3-

<PAGE>


Company's Fun Karts are in the  Southeast  and  Southwest  regions of the United
States.  In  1998,  the  Company  sold  approximately  30% of its Fun  Karts  to
approximately 250 dealers 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.  For eligible
dealers,  the Company  offers a dealer floor plan financing  program  through an
unaffiliated financial services company.

         In 1997 the Company  sold  approximately  2,300 of its Fun Karts to two
retail  chain  merchandisers  which  accounted  for  approximately  15%  of  the
Company's 1997 revenues. During 1998, the Company sold approximately 1,400 units
to 10 mass  merchandisers,  which  represented  approximately  12% of its  total
revenue.

         In  1998,  the  Company   entered  into  contracts  with  a  number  of
manufacturer  representative  organizations  ("MRO") that were selected based on
the territories served,  customer base and product lines being represented.  The
relationship  established  with  these  organizations  not  only  provided  over
eighty-five  additional  salesmen  promoting  the Company's  products,  but also
provided access to a number of mass merchandisers.

         During 1998, the Company also  manufactured  approximately  2,450 karts
for a  competitor,  which  generated  approximately  $1.1  million  of  revenues
representing approximately 13% of the Company's total 1998 revenues. The Company
does not  intend  to  produce  any  karts in 1999  for this  competitor,  but is
planning to  manufacture  concession  karts for Daytona  SuperKarts,  Inc. d/b/a
Andretti SuperKarts  ("Andretti") located in Daytona Beach, Florida.  While, the
total  number of karts that will be produced  for Andretti is not expected to be
significant in 1999, the revenues are expected to be  approximately  the same as
the  revenues  generated by sales to a  competitor  of the Company in 1998.  The
Company also has an option to acquire Andretti. See "Andretti Agreements" below.

         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, and
through  potential  acquisitions  of other  manufacturers  of karts and  related
products.

         On a selective basis, the Company  continues to seek  acquisitions that
will expand its existing product lines, market share and distribution  channels.
However, other than an option to purchase 100% of the capital stock of Andretti,
the Company  currently has no agreements or  understandings  with respect to any
such acquisitions and there can be no assurance that the Company will be able to
identify and acquire such businesses or obtain necessary  financing on favorable
terms.

         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, USA, Straight
Line and KINT. The Brister's and USA  acquisitions in 1996 and the Straight Line
acquisition in 1998 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 was  recorded as goodwill.  At
December 31, 1998, due to the Company's operating history, management recognized
an  impairment  to  the  future  recoverability  of  goodwill  and  charged  all
unamortized  goodwill  at that  date to  operations.  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,
USA, Straight Line and KINT for the respective periods owned.

         The  address  of the  Company's  principal  executive  office  is 62204
Commercial Street,  P.O. Box 695,  Roseland,  Louisiana 70456, and its telephone

                                      -4-

<PAGE>

number is (504) 747-1111. The Company maintains manufacturing  facilities at 202
Challenge  Avenue,  Prattville,  Alabama  36067,  Highway  51  South,  Roseland,
Louisiana 70456 and 335 S. Houghton Street, Suite 2, Milford, Michigan 48381.

Recent Developments

         Straight Line Acquisition. In October 1998, the Company acquired all of
the  issued  and  outstanding  capital  stock  of  Straight  Line,  a  Fun  Kart
manufacturer located in Milford, Michigan.  Management of the Company intends to
consolidate the operations,  manufacturing, sales and marketing of Straight Line
products into the manufacturing and  administrative  facilities of the Company's
other operating subsidiaries.  As consideration for the purchase of the Straight
Line shares of capital stock  ("Straight  Line Shares"),  the Company issued and
delivered  to  Daniel D.  Smock,  the sole  shareholder  of  Straight  Line (the
"Shareholder"),  182,648 shares of the Company's Common Stock which had a market
value of $400,000,  or $2.19 per share,  based on the closing price per share of
the Company's  Common Stock as reported on the Nasdaq  SmallCap Market system on
September 15, 1998.

         As further  consideration for the purchase of the Straight Line Shares,
the  Company  and the  Shareholder  entered  into a  three-year  Employment  and
Noncompete  Agreement at an annual salary of $80,000.  The  Shareholder was also
granted options to purchase 10,000 shares of the Company's Common Stock at $1.19
per share.  As  consideration  for the  covenants  and other  agreements  of the
Shareholder in the Employment  and  Noncompete  Agreement,  the Company paid the
Shareholder  $50,000 and issued and  delivered to the  Shareholder  a Promissory
Note in the amount of $50,000 with  interest at 6% per annum with the  principal
and  accrued  interest  payable to the  Shareholder  on March 31,  1999  ("Smock
Note").

         Straight Line also issued to the  Shareholder  a $73,874.74  Promissory
Note  with  interest  at 6%  per  annum  to  evidence  the  amount  owed  to the
Shareholder   by  Straight   Line  on  the  closing  date  of  the   transaction
("Shareholder Note"). A principal payment of approximately $15,000 has been paid
to the Shareholder.  Payment of the remaining  principal and accrued interest of
this Note is subject to the  settlement of a pending  lawsuit  against  Straight
Line or entry of a final  non-appealable  judgment.  Any amount owed by Straight
Line as a result of the litigation will be offset against the remaining  balance
of the  principal  and accrued  interest of the Note.  Any  expenses,  including
payment of any judgment or settlement,  for the pending  lawsuit that exceed the
principal  balance  and  accrued  interest  of the Note will be paid by Straight
Line. The Company does not believe that the liability,  if any, of Straight Line
in connection with the pending  litigation  will exceed the remaining  principal
and accrued interest balance of the Note.

         The payment of the Smock and Shareholder Notes is secured by a security
interest granted to Shareholder in the Straight Line Shares.

         Andretti  Agreements.  Effective December 1, 1998, the Company acquired
from  Andretti  certain  assets  for  $56,000.  Andretti  is a  concession  kart
manufacturer  located in Daytona Beach,  Florida.  The  shareholders of Andretti
(the "Andretti  Shareholders") also granted the Company an option (the "Option")
to acquire the issued and outstanding shares of Andretti's common stock based on
a  financial  formula  defined  in the  Option.  The  Option  expires  upon  the
expiration of the 30-day period following Andretti's fiscal year ending December
31, 2000. The Company issued to the Andretti Shareholders an aggregate of 90,090
shares  of Common  Stock  having a market  value of  approximately  $100,000  as
payment for the Option.  The Option also  provides that Andretti can require the
Company to exercise  the Option if Andretti  achieves  certain  financial  goals
during the Option  term.  The Company also has the right during the Option term,
subject to certain  conditions,  to acquire  for $100.00  intellectual  property
rights related to the business of Andretti.

         The Company and Andretti  also entered into a  manufacturing  agreement
(the   "Manufacturing   Agreement")   which   provides  that  the  Company  will
manufacture,   on  an  exclusive  basis,   Andretti's   concession  karts  at  a


                                      -5-

<PAGE>

predetermined per unit price. The Manufacturing  Agreement will terminate on the
later of March 31, 2001 or the date that the Option is terminated or exercised.

         The Company  also  purchased  from an  affiliate of Andretti a $375,000
note owed to such person by Andretti (the "Andretti  Note").  The Company issued
337,838  shares  of  Common  Stock to the  affiliate  as  consideration  for the
Andretti  Note.  Interest is due on  December 1 of each year until the  Andretti
Note is paid, with the principal  balance and accrued  interest due on the tenth
business following the expiration of the Option.

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. By  standardizing  the base
frame  and  components  on each of the major  lines of Fun  Karts,  the  Company
expects to reduce  volume  purchase  prices and  decrease  assembly  costs.  The
Company believes that modernization of its manufacturing facilities is essential
to  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 1998, the Company made capital expenditures of approximately  $750,000
for renovation of manufacturing  facilities,  leasehold improvements,  equipment
purchases  and expansion  and  relocation of the corporate  offices to Roseland,
Louisiana.

         Diversification  of  Domestic  Distribution  Channels.  The  historical
marketing  strategy  of the  Company  has  been to  build a  broad  and  diverse
independent dealer base, primarily in Louisiana,  Texas, Mississippi and Florida
by offering  safe,  high quality and  reliable Fun Karts that are  competitively
priced and timely  delivered.  In 1998, the Company entered into agreements with
several MROs that were selected based on the territories  served,  customer base
and product lines being  represented.  The  relationship  established with these
organizations not only provided over eighty-five  additional  salesmen promoting
the  Company's  products,   but  also  provided  access  to  a  number  of  mass
merchandisers.  The Company's future marketing  efforts are designed to maintain
and expand its  independent  dealer network in the South and West regions of the
United States through direct  communications  with dealers,  engaging additional
MROs and attendance at industry trade shows such as the  International  Lawn and
Garden  Show.  The Company also plans to assist  dealers with their  selling and
marketing efforts with Company-sponsored  seminars,  discount or rebate programs
and  advertising,  including  product videos and brochures,  leaflets,  posters,
signs and other miscellaneous  promotional items for use by dealers. The Company
will also seek to increase sales to mass merchandisers with direct communication
and the engagement of additional MROs.  Although the Company believes that sales
to mass merchandisers offers a significant growth opportunity,  the Company will
seek to obtain a  reasonable  balance  between its dealer and mass  merchandiser
distribution networks and will attempt to avoid a high concentration of sales to
any one or group of dealers or mass merchandisers.


                                      -6-



<PAGE>


Growth Strategy

         Increasing Product Recognition By Innovative Marketing to Target Users.
In 1998, the Fun Kart industry's sales were made to only  approximately  0.7% of
the  estimated  20 million 7- to  17-year-old  males in the United  States,  the
Company's target users. The Company believes that if it is to further  penetrate
its target market, 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  advertises its
products in national youth-oriented  magazines and periodicals,  on the Internet
and to a lesser  extent,  on  billboards,  radio  and  television.  The  Company
maintains  a home page on the  Internet  (thunderkarts.com,  sportskart.com  and
usafunkarts.com)  and has  sponsored  local events such as a Babe Ruth  Baseball
Tournament, Arbor Day festival and parades.

         Improve Product Design and Development. The Company believes that it is
a leader in the development of safety features for its Fun Karts,  due primarily
to its emphasis on continuous  research and development of safety related items.
The Company, primarily through the efforts of Charles Brister, the President and
Chief  Executive  Officer,  has  developed a number of  technological  advances,
including  the automatic  throttle  override and  automatic  clutch  lubrication
systems, which have significantly  improved its products.  Recently, Mr. Brister
has  designed  for the benefit of the Company and has applied for a patent for a
safety  fuel tank and  filler  cap  which is a new  product  to  prevent a small
internal combustion engine from operating unless the fuel cap is firmly in place
on the tank.  This apparatus will minimize the  opportunity  for a flash fire to
start and injure the  operator of  equipment  which uses a small  engine with an
integrated  fuel  tank such as a lawn  mower,  go kart or  string  trimmer.  The
Company in 1998 employed additional  engineering personnel primarily to continue
the  development  of  innovative  safety  and  technological  features  for  the
Company's  Fun Karts and to develop new  products,  including  the Company's new
off-road 3-2 h.p. Fun Bike.  The Company will continue to develop and distribute
optional  Fun Kart  parts  and  accessories  to  dealers  for  sales to Fun Kart
purchasers.  The Company may also develop a line of helmets,  jackets, boots and
other related items for its dealers and mass  merchandisers  to complement sales
of Fun Karts.

         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.  During 1998,  the Company had its first  shipment of Fun Karts
into the Canadian  market,  and believes that  international  sales to countries
such as Canada offer a potential market for the Company's products.

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.  Future acquisition  candidates are anticipated to be (i) companies
having  three or more years  operating  history  and annual  revenues  up 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.  Except  for  the  Option  to  purchase
Andretti, the Company is not a party to any agreements,  commitments, letters of
intent or understandings with any acquisition candidate.

         Management  believes  that it will be  necessary  to obtain  additional
financing  prior  to a major  acquisition.  The  Company  anticipates  that  the

                                      -7-

<PAGE>

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.

Product Lines

         The Company produces a full line of Fun Karts,  currently consisting of
35 models which are variations on 15 different  frames available in a variety of
colors  which are sold at prices  ranging  from $500 to  $4,000.  The models are
differentiated   by  drive  train  (single  wheel  pull,  live  axle  or  torque
converter),  engine size (5 h.p. to 13 h.p.), seating (single or double),  tires
(turf,  ATV,  kleat),  tires  (4" to  8"),  frame  size  and  suspension  (shock
absorbers).  The Company  markets its Fun Karts under the brand names of Thunder
Karts, USA Fun Karts and Sport Karts.

         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 or
disc brakes, automatic throttle override system, rack and pinion steering, shock
absorbers,  electric  start,  5 to 13  horsepower  engines,  clutch lube system,
powder paint, high speed bearings, safety flag and full brush cages.

         The Company  believes that it is a leader in the  development of safety
features for its Fun Karts, due primarily to its emphasis on continuous research
and  development of safety related items.  The Company has developed a number of
technological advances,  including the automatic throttle override and automatic
clutch lubrication systems,  which have significantly improved its products, and
the new safety  fuel tank and filler cap which the Company  anticipates  will be
installed on its Fun Karts beginning in the third quarter of 1999.

         The Company's  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 are enhancement of safety
for  inexperienced  drivers;  stopping of  simultaneous  braking and throttling;
easier braking; and extended brake life.

         Charles Brister,  the Company's  President and Chief Executive Officer,
has  designed  for the benefit of the Company and has applied for a patent for a
safety  fuel tank and  filler  cap  which is a new  product  to  prevent a small
internal combustion engine from operating unless the fuel cap is firmly in place
on the tank.  This apparatus will minimize the  opportunity  for a flash fire to
start and injure the  operator of  equipment  which uses a small  engine with an
integrated fuel tank such as a lawn mower, go kart or string trimmer.

         The  safety  fuel tank and  filler  cap has been  designed  in  several
different configurations to accommodate the variety of integrated fuel tanks now
being produced.  It has been developed both as a product to be incorporated into
the design and  manufacture  of new fuel  tanks and as a  retrofit  for  engines
already in use. Utilizing either a magnetic,  photoelectric or mechanical switch
that is interfaced between the fuel tank and filler cap, the device disables the
engine's  ignition  system  when the filler  cap is moved from its fully  closed
position.  Disabling the ignition system on a small internal  combustion  engine
immediately  stops a running engine and then prevents it from  restarting  until
the fuel cap is replaced and the integrated switch sensors close the circuit.

         The Company  will be the  exclusive  licensee  of this  product for the
go-kart market and it is anticipated that the Company will issue sub-licenses to
several  fuel  tank,  fuel  cap or  small  engine  manufacturers  to  facilitate
application of this technology to non go-kart related industries.

                                      -8-

<PAGE>

Manufacturing Operations

         The Company operates manufacturing  facilities in Roseland,  Louisiana,
Prattville,  Alabama and Milford,  Michigan.  Fun Kart production  levels at the
Company's  manufacturing plants varies depending on the season.  Between January
and May, the Company generally  utilizes a ten-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.  From June  through  December,  daily  output from all  facilities  is
approximately   100-125  Fun  Karts.   Management  believes  that  with  limited
renovation of its current facilities, the Company will be able to meet projected
increased customer demand for the Company's products for the foreseeable future.
Additional labor at reasonable costs is readily available in the vicinity of the
Company's manufacturing facilities.

         The Fun Karts  manufacturing  process is  primarily  one of welding and
assembly at various work  stations.  The Company buys  directly  from mills both
pre-cut and uncut tubular steel used in the  manufacturing of the frames.  Since
the price  differential  between  pre-cut and uncut  tubular steel is relatively
small, it is more  cost-effective,  particularly for pieces that are certain not
to change,  to purchase  pre-cut tubular steel. The steel is cut and bent during
the manufacturing  process to the frame specifications for the Company's various
Fun Kart models. Most of the other Fun Karts component parts, including engines,
wheels,  tires,  seats,  steering  wheels,  steering tie rods and  miscellaneous
parts,  are purchased  from various  domestic  vendors.  The Company  depends on
Tecumseh,  Briggs & Stratton and Honda for its  engines,  and the loss of all of
these  vendors may cause the  Company to  experience  a  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.

Quality Control, Warranties and Service

         The  Company  adheres  to strict  quality  standards  and  continuously
refines its production  procedures to increase  productivity and reduce warranty
claims.  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.  The Company has not
historically  incurred  any  significant  warranty  claims  and have never had a
recall of any of its products.

Patents and Proprietary Technology

         The Company  does not own any  patents,  trademarks  or service  marks.
However, Charles Brister,  President,  Chief Executive Officer and 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.

         In 1997,  the Company and Mr. Brister  entered into an agreement  which
provided for an initial  $10,000  license fee and a royalty payment 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 a royalty  payment of
$1.00 for each  Company  Fun Kart on which  the ATOS was  installed  or  $20,000
annually whichever is greater. In 1998, the Company paid Mr. Brister $10,000 for
the initial  license fee and owes Mr. Brister  $20,000 for 1998 royalties  under
the agreement.

         The Company, in October 1998, entered into a license agreement with Mr.
Daniel  Smock,  former  owner  of  Straight  Line,  for the  exclusive  right to
manufacture the "SportKarts"  product line. The term of the licensing  agreement

                                      -9-

<PAGE>

is for the life of the patents applied for by Mr. Smock which are anticipated to
expire in the year  2013.  Mr.  Smock is to be paid a royalty of $10.00 for each
Fun Kart which is  manufactured,  after  October 31,  1998,  with the design and
processes developed by Mr. Smock.

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. The Company in 1998
sold  approximately  30% of its  Fun  Karts  to  approximately  250  dealers  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  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.  Credit terms are typically 2% net 10 days, net 30 days. 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  arrangements  require
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.

         During  1998,  the Company  sold  approximately  1,400 units to 10 mass
merchandisers,  which  represented  approximately  12% of unit  sales.  Sales to
dealers,  including lawn and garden stores,  motorcycle  shops,  karts specialty
stores,  automobile parts dealers and hardware stores,  accounted for 79% of the
Company's 1998 unit sales.  The Company  estimates that sales of its products to
independent  dealers and mass  merchandisers  will be approximately 60% and 40%,
respectively,  in  1999.  Although  the  Company  believes  that  sales  to mass
merchandisers offers a significant growth opportunity,  the Company will seek to
obtain  a  reasonable   balance  between  its  dealer  and  mass   merchandisers
distribution networks and will attempt to avoid a high concentration of sales to
any one or group of dealers or mass merchandisers.

         In January  1998,  the  Company  formed a Louisiana  limited  liability
corporation, KINT, L.L.C., as a wholly-owned subsidiary. KINT, doing business as
Bird Promotions,  was activated during July 1998 for the purpose of organizing a
sales and marketing company,  focusing on the sale of customized promotional Fun
Karts  to  various  national  companies.  In  March  1999,  the  Company  ceased
operations  within this  subsidiary  and  consolidated  the sales and  marketing
efforts within other operating subsidiaries of the Company.

         The Company has two main modes of delivery to its dealers.  The Company
delivers  directly  to  Louisiana,   Alabama  and  Mississippi  dealers,   using
Company-owned  trucks  with  trailers  that can  carry up to 27 Fun  Karts.  All
Louisiana,  Alabama and Mississippi delivery routes are designed to be completed

                                      -10-

<PAGE>

during a single day. All other dealers and mass merchandisers  receive their Fun
Karts by common carrier, freight collect F.O.B. dealer. The Company is committed
to achieving a turnaround  from order date to shipment of one to two days in the
off  season,  and three to seven days in peak  season.  Fun Karts are  delivered
completely  assembled,  except for the installation of the  accompanying  safety
cages.

         Marketing. The historical marketing strategy of the Company has been to
build a broad and diverse  independent  dealer base,  primarily in the Southeast
and  Southwest  regions of the United  States,  the Company's  core markets,  by
offering safe, high-quality and reliable Fun Karts that are competitively priced
and  timely  delivered.  In  1998  the  Company  added  38  new  dealers,  three
distributors,   over  100  independent   sales   representatives   and  10  mass
merchandisers  to its  existing  distribution  channels.  The  Company's  future
marketing  efforts are  designed to maintain and expand its  independent  dealer
network  in the South and West  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 and items for use by
dealers. The Company will also seek to increase sales to mass merchandisers with
direct communication,  engaging additional independent sales representatives and
attendance  by Company  representatives  at Fun Kart and industry  related trade
shows.  The Company  believes  that  attendance  at trade shows will allow it to
promote its products to a  diversified  group of dealers and mass  merchandisers
currently targeted by the Company.

         The  Company's  advertising  and  promotional  materials  emphasize the
safety-related  features  built into the  Company's  Fun Karts.  The Company has
adopted this advertising strategy in order to promote the concept that it is fun
and safe for  children  to own and operate  Fun Karts.  The  Company  intends to
increase  potential  customers'  awareness  of its  products by  advertising  in
youth-oriented  magazines;  motorcycle,  lawn and garden,  hardware  and outdoor
power equipment trade magazines; displaying and promoting the Company's products
at NASCAR races and related events; and traditional  print,  billboard and, to a
lesser extent, on television and radio media. The Company believes that if it is
to further  penetrate  its target  market,  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.

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. Management
believes  that if its  business  strategies  are  successful  in 1999 and future
years, there will be some mitigation of the historically  seasonal nature of the
Company's Fun Karts sales.

Customers

         In  1998,  approximately  79%  of  the  Company's  sales  were  to  its
independent dealers and the Company projects that it will sell approximately 60%
of its Fun Karts to independent  dealers in 1999. No customer  accounted for 10%
or more of the Company's  1998 sales.  The Company does not believe that any one
mass merchandiser or any dealer or group of affiliated  dealers will account for
10% or more of the Company's 1999 revenues.





                                      -11-

<PAGE>

Backlog

         The Company typically fills and ships  customer  orders  within 3  to 7
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.

Employees

         As of March 15, 1999, the Company employed  approximately 120 employees
which are employed on a full-time or part-time  basis.  Eighteen  employees  are
administration  and sales personnel,  eight 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.

         Labor  costs  for  the  Company  at  its  manufacturing  facilities  is
comparable to labor costs in its respective markets. The Company's employees are
not  represented by a union or subject to a collectively  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.





                                      -12

<PAGE>

Business Risk Factors

         Uncertainty of Company's  Ability to Continue As a Going  Concern.  The
Company's  financial  statements  (contained  elsewhere  herein)  were  prepared
assuming  that the Company  will  continue  as a going  concern.  The  Company's
independent auditor, in its report regarding the Company's financial statements,
expressed  the  fact  that  the  Company  has  suffered  recurring  losses  from
operations and experienced seasonality of product demand which is focused in the
last four months of the calendar  year which  impacts cash flow during the first
eight  months of the  year.  These  factors  raise  substantial  doubt as to the
Company's ability to continue as a going concern.  See "Management's  Discussion
and  Analysis or Plan of  Operation"  and Note B to the  Consolidated  Financial
Statements.

         Operating  Losses;  Recent Senior  Management  Turnover.  For the years
ended December 31, 1998, 1997 and 1996, the Company  experienced net losses from
operations of approximately $3,930,000, $580,000 and $402,000, respectively, and
has utilized cash in operating activities of approximately $3,260,000,  $220,000
and $110,000,  respectively.  Additionally,  the Company has experienced  senior
management  turnover  in both  January  1998  and  1999.  The  Company's  former
management was unable to operate the Company's facilities in a manner that would
allow the  Company  to meet  demand  for  product  production  during the fourth
quarter  of  1998  and,  accordingly,   incurred  short-term  financing  from  a
non-financial   institution  lender  to  provide  liquidity.   Further,   former
management spent considerable time and financial resources in exploring possible
merger or  acquisition  candidates and the results of these efforts were for the
most part unsuccessful and diverted  management time and resources from customer
demands for product during the Company's  heaviest demand period.  The Company's
continued  existence is dependent upon its ability to generate  sufficient  cash
flows  from  operations  to  support  its daily  operations  as well as  provide
sufficient resources to retire existing liabilities on a timely basis.

         No  Assurance  of Funding  for  Additional  Capital  Requirements.  The
Company will require  additional  financing to satisfy  working capital and cash
flow  requirements for its business  operations.  There can be no assurance that
additional  financing  will be available,  or if available,  that such financing
will be on favorable terms. Any such failure to secure  additional  financing or
otherwise  maintain adequate liquidity could have a material adverse effect upon
the financial condition and results of operations of the Company.

         Substantial  Indebtedness;  Debt Service Capability.  The Company has a
substantial  amount of long-term and short-term debt under its credit facilities
and accounts  payable.  There can be no  assurance  that the  operations  of the
Company will generate  sufficient cash flows to service such debt. The Company's
leverage poses  substantial risk in that it could limit the Company's ability to
respond to  industry  changes or economic  downturns,  as well as its ability to
satisfy its funding needs for operations or to raise debt or equity capital.

         Consequences  of Default under Credit  Facilities.  The Company has two
lines of credit with a non-financial  institution lender for up to $2 million of
which approximately $1.5 million was outstanding at December 31, 1998. The lines
of credit are secured with the Company's  accounts  receivable and inventory and
are  subject  to  standard   affirmative  and  negative   covenants,   including
maintaining  certain levels of working  capital and minimum  tangible net worth.
The credit  lines were  restructured  in March 1999 to further  provide that the
Company  must obtain a minimum of $1.5  million of new equity  capital by May 6,
1999. If a violation by the Company of any of the loan  covenants  occurs or any
other  default by the Company on its  obligations  relating to the credit lines,
including  failure to raise at least $1.5 million of additional  equity capital,
the lender could declare the then outstanding indebtedness to be immediately due
and  payable  and could  foreclose  on a  significant  portion of the  Company's
assets.  Any default under its credit  facilities  would have a material adverse
effect upon the Company's  financial  condition  and results of  operation.  See
"Management's Discussion and Analysis or Plan of Operation."

         Dependence on Key  Personnel.  The  Company's  success will depend to a
large degree on its ability to retain the  services of its  existing  management

                                      -13-

<PAGE>

and to attract qualified  personnel in the future. On January 19, 1999,  Charles
Brister  resumed  the office of  President  and Chief  Executive  Officer of the
Company. The loss of the services of Mr. Brister or any key management personnel
or the inability to recruit and retain  qualified  personnel in the future could
have a  material  adverse  effect  on the  Company's  business  and  results  of
operations.  The Company may obtain key man life insurance policies on the lives
of key management personnel,  with the proceeds of the policies to be payable to
the  Company.  While  management  of the Company  believes  that any such policy
proceeds  would help the Company  recruit and compensate  replacements  for such
individuals,  there can be no assurance  that any such proceeds would offset any
resulting financial impact of the death of any key management personnel.

         Dependence  on  Product   Development  and   Modification   and  Market
Acceptance.  The Company's continued growth is dependent upon increased consumer
awareness  and  acceptance  of the  Company's  existing  and  new  products.  No
assurances  can be given that the Company will be able to  successfully  develop
new products, modify existing products or that any new or modified products will
meet with consumer  acceptance in the marketplace or that the Company's  current
products will receive continued or increased consumer  acceptance.  No assurance
can be given that the  Company's  existing  products will continue to be sold at
acceptable  margin  levels  or  that  the  Company  will  be  able  to  develop,
manufacture and distribute new products at acceptable margin levels.

         Dependence on License  Agreement  with Executive  Officer.  Mr. Charles
Brister, President, Chief Executive, a director and principal stockholder of the
Company,  owns certain patents,  technology and trademarks which are licensed to
the Company, which allows the Company to use certain brand names and utilize the
automatic  throttle  override  system  on its Fun  Karts.  The  Brister  license
agreement  expires March 15, 2000. 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.

         Dependence upon Company's  Ability to Manage Growth and Expansion.  The
Company's  ability to manage its growth,  if any, will require it to continue to
improve  and  expand its  management,  operational  and  financial  systems  and
controls.  Any  measurable  growth  in the  Company's  business  will  result in
additional demands on its management,  administrative,  operation, financial and
technical resources.  There can be no assurance that the Company will be able to
successfully  address these additional  demands.  There also can be no assurance
that the Company's  operating and financial  control systems will be adequate to
support its future  operations  and  anticipated  growth.  Failure to manage the
Company's  growth  properly  could  have a  material  adverse  effect  upon  the
Company's business,  financial condition and results of operations.  The Company
may  also  seek  additional   acquisitions  of  related  businesses  that  could
complement  or expand the Company's  business.  In the event the Company were to
identify an appropriate  acquisition  candidate,  there is no assurance that the
Company  would be able to  successfully  negotiate,  finance or  integrate  such
acquired properties or businesses into current operations.  Furthermore, such an
acquisition  could cause a diversion of management's  time and resources.  There
can be no  assurance  that a given  acquisition,  when  consummated,  would  not
materially adversely effect the Company's business and results of operations.

         The Year 2000  Issue.  The year 2000  issue is the  result of  computer
programs  using two  digits  rather  than four to define  the  applicable  year.
Date-sensitive  software may recognize a date using "00" as the year 1900 rather
than the year 2000.  This could  result in system  failures or  miscalculations,
causing  disruptions  of  operations,   including,  among  others,  a  temporary
inability to process  transactions,  send  invoices or engage in similar  normal
business activities.  The Company does not believe that the year 2000 issue will

                                      -14-

<PAGE>

have a material effect on its network, computer systems or operations;  however,
it will  continue to assess the  potential  impact of the year 2000  issue.  Any
failure of the Company to become  year 2000  compliant  on a timely  basis could
have a material adverse effect on the Company's  business,  financial  condition
and results of operations,  including, without limitation, a complete failure or
degradation of the performance of the Company's network or other systems. To the
extent that the Company  relies on external  vendors and network  providers with
year 2000  exposure,  any failure by such  third-party  providers to resolve any
year 2000 issues on a timely  basis or in a manner that is  compatible  with the
Company's  systems  could have a material  adverse  effect on the  Company.  The
Company is  evaluating  such  providers in relation to the year 2000 issue,  and
furthermore,  the Company has no control over whether its third-party  providers
are,  or  will  be,  year  2000  compliant.  Any  failure  on the  part  of such
third-party  providers  to become year 2000  compliant on a timely basis or in a
manner  that is  compatible  with the  Company's  systems  could have a material
adverse  effect on the Company.  In the event the Company  encounters  year 2000
problems,  it would  expect  to take all  necessary  measures  to  address  such
problems.

         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.

         Potential  Product  Liability and Insurance  Limits.  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  a  $25,000  self-insured
retention and $6 million  maximum per  occurrence  coverage.  The Company has 10
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
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.

         Pending  Litigation.  In  addition  to product  liability  claims,  the
Company,  from time to time,  is involved in lawsuits in the ordinary  course of
business.  On February 4, 1997 a lawsuit was filed in a Mississippi  state court
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.  A summary  judgement  was recently  granted in
favor of the Company dismissing the insurance underwriter's claim. The insurance
underwriter  has appealed the matter to the U.S.  Fifth Circuit Court of Appeals
and if the  appeal is  successful  and the  insurance  underwriter  is awarded a
judgement for damages  against the Company,  such judgment could have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations. See "Legal Proceedings."


                                      -15-

<PAGE>

         Possible  Delisting of Securities from Nasdaq SmallCap Market and Risks
of Common Stock  Trading  Below $5.00 Per Share.  On February  17, 1999,  Nasdaq
advised the Company that its shares of Common Stock failed to maintain a closing
bid price per share of at least $1.00.  To be eligible for continued  listing on
the Nasdaq SmallCap Market, the Company's shares of Common Stock must maintain a
minimum  price of $1.00 per share.  The Company has until May 17, 1999 to regain
compliance  with the minimum bid price  requirement.  If at any time during such
period the closing bid price of the Common Stock is at least $1.00 per share for
a minimum of ten  consecutive  trading days, the Company will have complied with
the  minimum  bid  price  requirement.  However,  if the  Company  is  unable to
demonstrate compliance,  with the minimum $1.00 per share bid price on or before
May 17, 1999, the Company's securities will be subject to delisting. To stay the
delisting, the Company may request a hearing by the close of business on May 17,
1999. At such hearing,  the Company will be given an  opportunity to present its
plans for achieving compliance with the minimum bid price requirement. Such plan
may  include a reverse  split of its Common  Stock.  The Company may be delisted
during such period for failure to  maintain  compliance  with any other  listing
requirement  for which it is  currently  on notice or which  occurs  during  the
period.

         If the Company is unable in the future to satisfy the  requirements for
continued  quotation on Nasdaq SmallCap Market,  trading in the Company's Common
Stock and Warrants would be conducted in the over-the-counter market in what are
commonly  referred to as the "pink  sheets" or on the NASD  Electronic  Bulletin
Board.  As a result,  an investor  may find it more  difficult  to dispose of or
obtain  accurate  quotations as to the price of the  Company's  Common Stock and
Warrants.  In  addition,  if the Common  Stock and  Warrants  are  suspended  or
terminated  from Nasdaq  SmallCap Market and at such time the Common Stock has a
market  price of less than  $5.00 per  share,  then the sale of such  securities
would become  subject to certain  regulations  adopted by the  Commission  which
imposes   sales   practice   requirements   on   broker-dealers.   For  example,
broker-dealers selling such securities must, prior to effecting the transaction,
provide their  customers with a document which  discloses the risks of investing
in  the  Company's  Common  Stock  and  Warrants.  Furthermore,  if  the  person
purchasing  the  securities is someone  other than an accredited  investor or an
established  customer of the broker-dealer,  the broker-dealer must also approve
the  potential  customer's  account  by  obtaining  information  concerning  the
customer's financial situation, investment experience and investment objectives.
The  broker-dealer  must also make a  determination  whether the  transaction is
suitable for the customer and whether the customer has sufficient  knowledge and
experience  in  financial  matters to be  reasonably  expected  to be capable of
evaluating  the  risk  of  transactions  in the  security.  Accordingly,  if the
Company's  Common  Stock and Warrants are  suspended or  terminated  from Nasdaq
SmallCap  Market and the Common  Stock is trading for less than $5.00 per share,
the  Commission's  rules may limit the  number of  potential  purchasers  of the
securities.


ITEM 2.     PROPERTIES

Facilities

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

                            Date Leased                                   Expiration of       Approximate
          Location          or Acquired             Description            Lease Term       Square Footage
-----------------------   --------------   ----------------------------  ----------------  ----------------
<S>                                                                           <C>               <C>

Roseland, Louisiana            1998        Corporate Offices(1)               2000               2,400
Roseland Louisiana             1996        Manufacturing facility(1)          2000              48,000
Prattville, Alabama            1996        Manufacturing facility              (2)              20,000
Milford, Michigan               (3)        Manufacturing facility              (3)              17,500

</TABLE>



                                      -16-

<PAGE>

-----------------
(1)  The Company and Charles Brister,  President,  Chief Executive Officer and a
     director of the Company,  have  entered into a Real Estate  Option Right of
     First Refusal  Agreement  which  provides that the Company may, at its sole
     option,  purchase the Roseland facility from Mr. Brister for $550,000.  The
     option  expires on December  31,  2000.  The Company and Mr.  Brister  have
     entered into a lease  agreement,  which expires in 2000, for this facility,
     which includes the corporate  offices.  The monthly lease payment is $6,025
     with certain  adjustments.  The Company believes these terms are comparable
     to  existing  market  rates  in the  region.  The  Company  in  1998  spent
     approximately   $293,000  for  leasehold   improvements   at  the  Roseland
     manufacturing  facility  and  added  approximately  2,400  square  feet  of
     additional executive office space at a cost of approximately  $145,000. See
     "Certain Relationships and Related Transactions."
(2)  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  $217,000 at December
     31, 1998 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 Company in 1998 spent approximately  $104,000 for
     building improvements at the Prattville facility.
(3)  The Milford facility is currently on a month-to-month basis at 
     approximately $5,600 per month.


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 a $25,000
self-insured  retention  and $6 million  maximum per  occurrence  coverage.  The
Company has 10 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 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.  A summary judgment was recently
granted in favor of the Company  dismissing the insurance  underwriter's  claim.
The  insurance  underwriter  has appealed the matter to the U.S.  Fifth  Circuit
Court of Appeals. If the insurance underwriter is successful in this appeal, 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.




                                      -17-

<PAGE>


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 1998 or the first quarter of fiscal 1999.

















                                      -18-


<PAGE>


                                     PART II

ITEM 5.     MARKET FOR THE COMPANY'S COMMON STOCK AND 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>             <C>
                                              
                                              Common Stock                       Warrants
                                              Bid Price(1)                       Bid Price
                                              ------------      ---------       -----------      -------
Calendar Year 1999                                 Low             High             Low            High
------------------
First Quarter (through March 18, 1999)           $0.44            $0.88           $0.16           $0.31

                                              Common Stock                       Warrants
                                              Bid Price(1)                       Bid Price
                                              ------------      ---------       -----------      -------
Calendar Year 1998                                 Low             High             Low            High
------------------
First Quarter                                    $2.75            $3.75           $0.56           $1.19
Second Quarter                                   $1.94            $3.63           $0.50           $0.88
Third Quarter                                    $1.38            $3.38           $0.25           $0.69
Fourth Quarter                                   $0.28            $1.88           $0.06           $0.25

                                              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, 1999,  the closing bid and ask prices for the Common Stock
were $.50 and $.63,  respectively,  per share and the closing bid and ask prices


                                      -19-

<PAGE>

for the  Warrants  were each $.06 per Warrant.  As of March 23, 1999,  5,574,298
shares of Common Stock were issued and outstanding  and 1,782,500  Warrants were
outstanding.

         Holders.  As of March 23, 1999, there were approximately 550 record and
beneficial  holders of the Company's Common Stock and  approximately  300 record
and beneficial holders of the Warrants.

         Dividends.  The  Company has not paid or declared  any  dividends  with
respect to its Common 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,  until
September 1999, without the consent of the representative of the underwriters of
its 1997 public offering of securities,  it shall not redeem or issue any of its
securities or pay any dividends, or make any other cash distributions in respect
of its securities,  in excess of the amount of the Company's current or retained
earnings.  The Company may issue shares of  preferred  stock in the future which
may contain restrictions on the payment of dividends.


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

Caution Regarding Forward-Looking Information

         This annual report  contains  certain  forward-looking  statements  and
information relating to the Company that are based on the beliefs of the Company
or management as well as assumptions made by and information currently available
to  the  Company  or  management.   When  used  in  this  document,   the  words
"anticipate,"   "believe,"   "estimate,"   "expect"  and  "intend"  and  similar
expressions,  as they relate to the Company or its  management,  are intended to
identify forward-looking statements. Such statements reflect the current view of
the  Company   regarding  future  events  and  are  subject  to  certain  risks,
uncertainties  and  assumptions,  including the risks and  uncertainties  noted.
Should  one or more of  these  risks or  uncertainties  materialize,  or  should
underlying assumptions prove incorrect,  actual results may vary materially from
those  described  herein  as  anticipated,   believed,  estimated,  expected  or
intended. In each instance,  forward-looking information should be considered in
light of the accompanying meaningful cautionary statements herein.

Overview

         The Company is in the business of manufacturing and marketing Fun Karts
for the consumer market.  In March 1996, the Company acquired  Brister's,  a Fun
Kart  manufacturer,  from Charles Brister,  President,  Chief Executive Officer,
director and principal stockholder of the Company, for $6.3 million. In November
1996, the Company acquired USA, a Fun Kart manufacturer located in Alabama, from
four USA stockholders for $1,000,000.

         In September 1997, the Company  consummated a 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  ("1997  Public
Offering").  Each Warrant  entitles the holder  thereof to purchase one share of
Common  Stock at an exercise  price of $4.00 per share until  September 9, 2002.
The Warrants are  redeemable  by the Company at a redemption  price of $0.01 per
Warrant,  at any time 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

                                      -20-

<PAGE>


1997 Public  Offering were used as follows:  (i) $2,250,000 for the repayment of
indebtedness,  including  payment to Mr.  Brister for a portion of the  purchase
price for  Brister's;  (ii) $625,000 for the  redemption  of the Company's  then
outstanding  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
discounts and commissions.  Net proceeds from the exercise of the over-allotment
option was used for working capital purposes.

         On October 27,  1998,  the Company  purchased  100.0% of the issued and
outstanding stock of Straight Line Manufacturing,  Inc. (a Michigan corporation)
(Straight  Line)  for a total  purchase  price of  approximately  $400,000.  The
acquisition  was  effective  at the close of business on October 31,  1998.  The
purchase price was paid with 182,648 shares of restricted,  unregistered  Common
Stock of the Company.  Straight Line was incorporated as a Michigan  corporation
on August 1, 1997 as the successor to a sole proprietorship. Straight Line is in
the business of manufacturing  and marketing large,  full suspension "fun karts"
for the consumer market.

         The  financial   information  discussed  herein  is  derived  from  the
historical  consolidated  financial statements of the Company for the respective
years ended December 31, 1998 and 1997. The Company  consummated the acquisition
of Straight  Line  effective  as of the close of  business on October 31,  1998.
Accordingly, the Company's consolidated results of operations for the year ended
December  31, 1998  includes  the  operating  results of Straight  Line from the
effective acquisition date through the end of the year.

         The following  discussion  reflects historical  consolidated  financial
data for the periods as indicated below.

Results of Operations

         Year Ended  December  31, 1998 as compared to Year Ended  December  31,
1997. The Company reported  revenues of approximately  $8.2 million for the year
ended  December 31, 1998  compared to $7.6  million for year ended  December 31,
1997, a 7.9%  increase.  These results  continue to reflect weak product  demand
during the first half of the each fiscal year due  primarily to  seasonality  of
sales. The Company manufactured  approximately 2,500 go-karts, mainly during the
second and third  quarters,  for a competitor  in an attempt to mitigate some of
the  seasonality of the Company's  manufacturing  operations.  While the Company
does not anticipate  manufacturing go-karts for competitor(s) in future periods,
other  contract  manufacturing  is  anticipated  in future periods to attempt to
better utilize the Company's  facilities and equipment  during the first half of
the year.  Additionally,  the Company is  continuing to expand its sales to mass
merchandisers  whose  demand is less  seasonal in an effort to improve its sales
during traditional slow demand periods.

         The Company  incurred cost of sales of $8.8 million and $6.0 million in
1998  and  1997,   respectively.   This  resulted  in  gross   profit/(loss)  of
approximately  ($0.6  million)  for the year ended  December  31,  1998 and $1.6
million for the year ended  December 31,  1997.  Gross profit for the year ended
December 31, 1998 was  adversely  affected by  underpricing  the  Company's  new
product lines, extending additional pricing discount terms in order to establish
the Company's products with new mass  merchandisers,  inefficient  purchasing of
materials  and the  write-off of obsolete  inventory  which was caused by design
changes  to the  Company's  product  lines.  Cost  of  sales  in 1998  was  also


                                      -21-

<PAGE>

negatively effected by unfavorable labor variances of approximately $650,000 due
to the labor  inefficiencies  associated  with the  introduction  of several new
products  at  Brister's  and  USA  Industries,  employee  turnover,  ineffective
scheduling of the workforce and overtime payments.  Other direct costs increased
approximately  $1.0  million to $2.0  million for year ended  December  31, 1998
compared  to $1.0  million  in 1997.  Freight  expense,  one of the  significant
components  of other  direct  costs,  increased  approximately  $200,000 in 1998
verses 1997.  The  increase  was due to design  changes in the product line that
reduced  the  number  of units  that  comprised  a  truckload  quantity  and the
Company's  inability to ship  complete  orders which were prepaid by  customers.
These  changes  and  operating   inefficiencies  caused  the  Company  to  incur
additional  freight expense when units to complete a customer's  order had to be
shipped separately.  Other direct costs increased by approximately  $135,000 due
to the inclusion of the operating results of Straight Line and KINT LLC.

         Selling, general and administrative expenses totaled approximately $3.4
million for the year ended  December  31, 1998  compared to  approximately  $2.1
million for the year ended  December 31, 1997.  Selling  expenses  accounted for
approximately  $160,000 of the  increase  over the prior year largely due to the
additional commission expense paid to independent  manufacturers  representative
organizations  which were added to the Company's sales force during 1998 and the
addition  of a  sales/marketing  executive  at  the  Company's  USA  subsidiary.
Professional  fees and travel  expenses  increased  approximately  $120,000  and
$160,000, respectively, over the prior year as a result of increased acquisition
activity  subsequently  abandoned,  increased travel resulting from expansion of
the Company's sales  territory and the relocation and temporary  living expenses
of several  non-Louisiana  based  executives  and management  personnel.  Salary
expense  increased  approximately  $285,000  due to the  Company's  addition  of
several  administrative  and  operational  professionals  and the  inclusion  of
salaries  at the  Straight  Line  and  KINT LLC  subsidiaries.  Included  in the
Company's operating expenses for the year ended December 31, 1998 was a one-time
non-cash charge of approximately  $413,000 related to the release of shares that
had been held in escrow to settle a  contingency  associated  with the Company's
1996 private offering of securities.

         Other income  (expense)  totaled  approximately  $(6.1 million) for the
year ended December 31, 1998, a $5.5 million change from the 1997 total of $(0.6
million).  The increase in expense is largely  attributable to a one-time charge
to  operations  of  approximately  $5.8 million to recognize  the  impairment of
future  recoverability of goodwill. As a result of this action, the Company will
not incur any  charges to  operations  for  amortization  of  goodwill in future
periods.  Additionally, the Company charged to operations approximately $289,000
to  establish  a  reserve  for an  anticipated  1999  relocation  of some of its
subsidiary operations and reorganizing its management team during the year ended
December 31, 1998.  This increase in expenses was slightly  offset by a decrease
in interest expense from approximately  $508,000 for the year ended December 31,
1997 to  approximately  $92,000 for the same period in 1998.  The  reduction  in
interest expense is due to the retirement of approximately  $2.2 million of debt
in late 1997 using the proceeds from the Company's 1997 public stock offering.

         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


                                      -22-

<PAGE>

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,  Inc.  ("HFG").  Timothy P. Halter, an officer
and director of the Company,  is the President and sole  shareholder of HFG. 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.

         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.

         Additional Operations Information. The Company currently has 10 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  $6,000,000  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.

Seasonality

         The Company  experiences  significant  seasonality in its sales pattern
with only  approximately 21% of its revenue  recognized in the first half of the
year.  Sales of Fun Karts are  generally  the lowest during the first quarter of
each  calendar  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 its current  on-going  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.


                                      -23-

<PAGE>

         Traditionally,  many of the Company's  dealers have sold Fun Karts only
during the Christmas  holiday season.  Recent market growth can be attributed to
some of these  dealers  beginning to sell Fun Karts on a year round basis and to
an  increasing  number  of  mass   merchandisers  who  sell  karts.  Since  mass
merchandisers are not typically constrained by the limited floor space that tend
to force the dealers into seasonal  purchasing of karts,  the Company intends to
increase mass merchandiser  sales to mitigate the highly seasonal buying pattern
of its traditional dealer base.  Additionally,  the Company expects its contract
manufacturing  of concession  karts,  typically  ordered in the first and second
quarters, to further help utilize excess capacity in the first half of the year.
The Company also intends to offset the seasonal  aspects of its current business
operations  through  acquisition of manufacturers or introduction of new product
lines that are  compatible  with the  Company's  business  objectives  and offer
product   diversity   which  have   either   year  round   demand  or  that  are
counter-seasonal to its existing product lines.

Liquidity and Capital Resources

         At December  31,  1998,  the Company had  negative  working  capital of
approximately   $(392,000)   as  compared  to   positive   working   capital  of
approximately  $4.06  million at December  31,  1997.  The  Company  experienced
negative cash flow from operations of approximately  $3,213,000 and $224,000 for
calendar  1998  and  1997,   respectively.   This  deficiency  during  1998  was
principally  caused by significant  increases in trade  accounts  receivable and
excess  inventory  purchases for anticipated  sales to mass  merchandisers.  The
change in accounts  receivable  balances was attributable to a condition imposed
on the Company by its  non-financial  institution  lender  whereby all  accounts
receivable  were  maintained by the Company as collateral on the related line of
credit  instead of being  liquidated  by  Company  sponsored  dealer  floor plan
financing provided through  Transamerica  Business Finance Co. In prior periods,
approved dealers had purchases of Company products financed through Transamerica
with the Company  participating  in the related finance charges as a sales tool.
The use of  Transamerica  caused approved dealer floor plan purchases to be paid
within 15 business days of shipment by the Company.  Further,  the  Transamerica
situation   effectively   transferred  all  credit  risk  from  the  Company  to
Transamerica  whereby the Company was only conditionally and contingently liable
for  qualified  sales to dealers in the event of default or late  payment by the
dealer.  Effective  March 9, 1999, the Company's  primary lender agreed to allow
the  Company to utilize the  Transamerica  program  for its  qualified  sales to
dealers in future periods.

         During the year ended December 31, 1998,  the Company  expended cash of
approximately  $747,000 on capital  improvements  consisting  of  renovation  of
manufacturing  facilities,  leasehold improvements,  equipment and the expansion
and relocation of its corporate offices to Roseland, Louisiana.  Additional cash
expenditures,  aggregating  approximately  $156,000,  were made for (i) expenses
related to the acquisition of the Company's  Straight Line subsidiary,  (ii) the
initial  payment  on a  covenant  not to compete  executed  by the  former  sole
shareholder of Straight Line and (iii) to partially fund the  acquisition of the
Option to acquire Andretti.

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

         Additionally, the Company used, in 1997, the net proceeds from the 1997
Public  Offering to repay $2.2 million in long-term  indebtedness,  the $300,000
Brister's  credit  facility  with a  financial  institution  and to support  the
Company's fixed asset programs and research and development efforts.

         The 1998 cash  consumption  by operating and investing  activities  was
funded from available cash reserves  carried  forward from prior periods and the
infusion of  approximately  $1.5 million in cash from  advances on the Company's
two lines of  credit,  aggregating  $2  million in  available  credit,  from KBK
Financial,  Inc., a non-financial  institution lender ("KBK"). In February 1999,
KBK notified the Company of certain defaults on the various covenants  contained


                                      -24-

<PAGE>

in the  Company's  loan  agreement  with KBK. On March 8, 1999,  KBK granted the
Company a written waiver of the notified defaults. On March 9, 1999, the Company
and KBK executed an amendment to the Company's  loan  agreement,  which provided
among other  conditions,  that the Company must obtain a minimum of $1.5 million
of new equity  capital by May 6, 1999.  If a violation  by the Company of any of
the loan covenants occurs or any other default by the Company on its obligations
under these  credit  lines,  including  failure to raise the $1.5 million in new
equity  capital,  the lender  could,  at its sole  discretion,  declare the then
outstanding  indebtedness  to be immediately  due and payable.  The lender could
then  foreclose on a significant  portion of the Company's  assets,  which would
have  a  material  adverse  effect  on the  Company's  financial  condition  and
operations.

         The  Company's  continued  existence is  dependent  upon its ability to
generate  sufficient cash flows from operations to support its daily  operations
as well as provide  sufficient  resources  to retire  existing  liabilities  and
obligations on a timely basis.

         To  mitigate  the  Company's   negative  cash  flow  from   operations,
management has taken the following actions to stabilize the Company's  financial
position for future  periods:  (i) initiated  plans to consolidate the sales and
marketing   operations  of  KINT,  which  focused  on  the  sale  of  customized
promotional "fun karts" to various national  companies,  into existing functions
within the Company; (ii) initiated plans to relocate and/or consolidate Straight
Line  manufacturing or sales activities within other existing  facilities of the
Company;  (iii)  initiated  cost control  measures  related to the use of direct
labor and  material  purchasing  to  maximize  the  utilization  of  overstocked
inventory  positions that existed at December 31, 1998; (iv)  terminated  excess
management and  supervisory  personnel and  reorganized  Company  management and
operational  teams along  consolidated  Company  lines  rather  than  individual
operating  subsidiary lines and (v) is reevaluating its product lines,  costs of
manufacture,  selling  prices and customer  relations to maximize unit sales and
gross  profitability  during the Company's  slower sales seasons of the calendar
year.  Management has also initiated plans to raise  additional  capital through
the sale of equity  securities  to provide  additional  working  capital  and to
improve liquidity.

         Management  believes  that  its  efforts  to raise  additional  capital
through the sale of equity  securities  and/or new debt  financing  will provide
additional cash flows. However,  there can be no assurance that the Company will
be able to obtain additional funding or, that such funding,  if available,  will
be obtained on terms favorable to or affordable by the Company.

         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.

         The Company's  acquisition  strategy is subject to the  availability of
financial  resources.  The Company is currently 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 year 2000 date change is believed to affect virtually all computers
and  organizations.  The Company has  undertaken a  comprehensive  review of its
information  systems  including  its main computer  hardware and  software,  its
personal computers= hardware and software and associated  peripheral devices and
general telecommunication systems. In addition, the Company has held discussions
with its  software  supplier  with  respect  to the year 2000 date  change.  The
Company  believes that it will not be required to modify or replace  significant
portions of its software and any such modifications or replacements are, or will
be,  readily  available.  The Company  anticipates  it will have all remedies in
place by the end of the third quarter of 1999.


                                      -25-

<PAGE>

         The  Company  does not expect the costs  associated  with the Year 2000
compliance to have a material effect on its financial position or its results of
operations.  There can be no assurance until the year 2000, however, that all of
the  Company's  systems,  and the systems of its  suppliers,  shippers and other
business partners will function adequately.

Other Matters

         In February  1997,  the  Financial  Accounting  Standards  Board issued
Statement of Financial  Accounting  Standards No. 128, Earnings Per Share (ASFAS
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 (AAPB 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 (ASFAS 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 (ASFAS
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 did not  experience a
material  impact to its  consolidated  financial  statements  presentation  upon
adoption of this standard.

         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 (ASFAS 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 did not experience a material impact to its
consolidated financial statements presentation upon adoption of this standard.

                                      -26-

<PAGE>


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.





















                                      -27-

<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:

<TABLE>
         
         Name                           Age        Position
         ----                           ---        --------
<S>                                     <C>        <C>                          <C>

         Timothy P. Halter              32         Chairman, Secretary and Director
         
         Charles Brister(1)(2)          46         President, Chief Executive Officer and Director
         
         Richard N. Jones               46         Vice President, Administration and Chief
                                                   Financial Officer
         
         Lawrence E. Schwall, III       36         Vice President, Sales and Marketing
         
         Joseph R. Mannes(2)            40         Director
         
         Ronald C. Morgan(1)(2)         51         Director
         
         Gary C. Evans(1)               42         Director
</TABLE>

-----------------
(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.

         Timothy P.  Halter has been  Secretary  and a director  of the  Company
since February  1996,  and Chairman  since  February  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 President and Chief Executive Officer of the Company
and has served in this capacity  since  January  1999.  He previously  served as
President and Chief  Executive  Officer of Brister's from 1986 to April 1996. He
has been a Director of the Company since March 1996.

         Richard  N.  Jones  is Vice  President,  Administration  and the  Chief
Financial  Officer of the Company.  Mr. Jones joined the Company in October 1998
and was elected to his current  positions  in March 1999.  From  January 1996 to
October 1998, Mr. Jones served as Vice President B  Manufacturing  and Treasurer
for Andretti, a manufacturer of concession  go-karts.  From June 1991 to January


                                      -28-

<PAGE>

1996, Mr. Jones was the Chief Financial Officer for Apogee Plastic Technologies,
Inc., a vertically  integrated  plastic  manufacturer that supplied computer and
communication   enclosures  for  IBM,  Motorola,  Texas  Instruments  and  other
customers. From February 1978 to April 1991, Mr. Jones worked for Hughes Supply,
Inc.,  a NYSE listed  manufacturer  and  wholesale  distributor  of  electrical,
plumbing  and HVAC  equipment  and  supplies.  During  his  tenure as  Corporate
Controller,  he  was  involved  in  both  a  secondary  public  offering  and  a
convertible  debenture  offering,  as well as numerous  acquisitions.  Mr. Jones
graduated with a BSBA from the University of Central Florida in 1978.

         Lawrence E. Schwall, III, is the Vice President, Sales and Marketing of
the Company and has served in this capacity  since January 1997.  Mr.  Schwall's
responsibilities  include  overseeing the development of the Company's sales and
marketing strategies,  market forecasting,  and the development and presentation
of product knowledge seminars for the Company's dealers and mass  merchandisers.
From December 1995 to January 1997, Mr.  Schwall  served as Territory  Manager C
Commercial  Lawn and Garden Dealers for Homelite,  Inc., a subsidiary of Deere &
Co. Homelite, Inc. is a manufacturer of hand-held products. While with Homelite,
Inc.,  Mr.  Schwall was  responsible  for  producing  training  seminars for the
company's  customers.  From August 1987 to December  1995,  Mr.  Schwall was OEM
Engine Sales Manager for Delta Power,  Inc. and was responsible for the sale and
marketing of engines to existing customers and prospective  accounts  throughout
the  southern  region of the United  States.  Mr.  Schwall  also served with the
industrial  division  of Briggs & Stratton as  communications  liaison for Delta
Power, Inc.

         Joseph R. Mannes has been a director  of the  Company  since July 1996,
and since  October  1998 has been  Chief  Financial  Officer  and  Secretary  of
Clearwire  Technologies,  Inc., a company offering  broadband  wireless Internet
connectivity.  From  February  1996 until  October 1998 was the Chief  Financial
Officer,  Secretary and Treasurer of Interactive Creations Incorporated ("ICI"),
and subsequently was General Manager of I-Magic Online (its successor company) a
corporation offering real-time internet gaming services. 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 1980,  Mr. Morgan has served as Chief  Operating  Officer,  Executive
Vice President and Director of The Leather Factory, Inc., an AMEX listed company
("TLF").  Mr.  Morgan was a co-founder  of TLF.  Mr.  Morgan was employed by the
Tandy  Leather  Company for ten years prior to 1980,  eventually  attaining  the
position of Vice-President C Eastern Division. Mr. Morgan received a B.S. degree
from West Texas State University.

         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.  

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

                                      -29-

<PAGE>


Section 16(a) Beneficial Ownership Report Compliance

         The  Company  is not  aware  of  any  transactions  in its  outstanding
securities by or on behalf of any director,  executive  officer or 10% holder of
the Common  Stock  which  would  require  the filing of any report  pursuant  to
Section 16(a) that was not filed by the Company.


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,  by 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.  Certain  compensation related
tables   required  to  be  reported   have  been  omitted  since  no  applicable
compensation was awarded to, earned by or paid to any of the Company's executive
officers in any fiscal year to be covered by such tables.
<TABLE>

<CAPTION>

                           Summary Compensation Table


                                                    Annual Compensation             Long-Term Compensation
                                        ---------------------------------------- --------------------------------
                                                                                         Awards
                                                                                        --------
<S>                                       <C>       <C>             <C>              <C>             <C>   

                                                                                                      Securities
                                                                    Other Annual      Restricted      Underlying
Name/Title                                 Year     Salary/Bonus    Compensation     Stock Awards    Options/SARs
----------                                 ----     ------------    ------------     ------------    ------------
Robert M. Aubrey, former President                                                                  
  and Chief Executive Officer(1)           1998       $140,625       $22,825(2)          -0-            200,000

V. Lynn Graybill, former Chairman of                                                                
  the Board, Chief Executive Officer       1997       $131,250          $ -0-            -0-              -0-
  and President(3)                         1996       $ 121,731      $15,000(4)          -0-              -0-

</TABLE>

-----------------------
(1)  Effective January 13, 1999,  Robert M. Aubrey resigned as President,  Chief
     Executive  Officer and a member of the Board of  Directors  of the Company.
     See "C Employment Agreements and Related Matters."
(2)  Principally housing and transportation allowance.
(3)  Effective  January 15, 1998, V. Lynn  Graybill  resigned as Chairman of the
     Board,  Chief  Executive  Officer  and  President  of the  Company.  See "C
     Employment Agreements and Related Matters."
(4)  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.

Employment Agreements and Related Matters

         In January  1999,  Charles  Brister  was  elected  President  and Chief
Executive  Officer of the Company.  He will receive an annual salary of $150,000
to be paid at the end of the year in shares of the Company's  Common Stock based
on a formula to be determined by the Board of Directors.  Mr. Timothy P. Halter,
Chairman of the Board, has agreed to defer his $5,000 monthly compensation until
year end. He may accept payment of his  compensation  in shares of the Company's
Common Stock, subject to the approval of the Board of Directors.

         Effective  January  30,  1998,  the  Company  entered  into  three-year
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 provided Mr. Aubrey with an annual base salary
of  $150,000  and  options  to  purchase  200,000  shares of Common  Stock at an
exercise price of $3.25 per share. See "C Stock Options."

         Effective  January 13, 1999,  Robert M. Aubrey  resigned as  President,
Chief Executive  Officer and as a director of the Company.  On January 20, 1999,


                                      -30-

<PAGE>

the Company and Mr.  Aubrey  entered  into a Settlement  Agreement  and Full and
Final  Release  of All  Claims  (the  "Aubrey  Agreement")  for the  purpose  of
satisfying and  discharging  all  obligations of the Company to Mr. Aubrey under
the Employment  Agreement.  The Aubrey Agreement provides that the Company shall
forgive up to $19,000 of  non-reimbursable  expenses  incurred by Mr. Aubrey and
pay to Mr.  Aubrey  one  week  of  earned  vacation.  In  consideration  for the
foregoing,   Mr.   Aubrey   agreed  to  adhere   to  the   non-competition   and
non-solicitation  covenants set forth in the Employment  Agreement until January
13, 2001. As part of his separation from the Company,  the Company issued to Mr.
Aubrey options to purchase  15,000 shares of Common Stock at an option  exercise
price of $1.06 per share which  options  were  granted to replace the options to
purchase  200,000 shares of Common Stock that were canceled at  separation.  The
options are vested and expire on January 20, 2004.

         In January 1998,  V. Lynn  Graybill  resigned 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  AGraybill  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 Graybill  Agreement,  the Company paid 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 until January
15, 2001.

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

Stock Options

         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
options are currently exercisable and expire at various times during 2001.

         In January  1997,  the  Company  issued to an  officer  of the  Company
options to purchase  6,667 shares of Common Stock at an exercise price of $4.875
per share,  which options are  exercisable  and expire on January 30, 2002.  The
Company also issued to 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  options  are also  exercisable  and
expire on January 30, 2002.

         During the fiscal year ended December 31, 1998, the Company  granted to
certain of its employees  options to purchase an aggregate of 265,000  shares of
Common Stock at exercise  prices  ranging  from $1.06 to $3.50 per share,  which
options expire  periodically  from January 31 to December 31, 2003. Of the total
number of options issued during fiscal 1998,  options to purchase 200,000 shares
of Common Stock were issued to Robert M.  Aubrey,  which  options were  canceled
upon Mr.  Aubrey's  resignation  as an officer  and  director  of the Company in
January 1999,  and an aggregate of 35,000  options were granted  pursuant to the
Company's 1998 Stock Compensation Plan.
See "C 1998 Stock Compensation Plan."

<TABLE>

                        Option/Grants in Last Fiscal Year

<S>                                         <C>                     <C>                         <C>              <C>
------------------------------------        ---------------------   ------------------------    --------------   ---------------
                                            Number of Securities    Percent of Total Options    Exercise Price    
         Name/Title                         Underlying Options       Granted to Employees in       ($/sh)        Expiration Date
                                                 Granted                 Fiscal 1998             
                                                             
Robert M.  Aubrey, former               
  President and Chief Executive Officer...    200,000                         75.5                  $3.25        See footnote(1)
</TABLE>
  
---------------------
(1)  The  options to  purchase  200,000  shares of Common  Stock  granted to Mr.
     Aubrey were canceled  immediately  upon his  resignation  as an officer and
     director of the Company in January 1999.


                                      -31-

<PAGE>

<TABLE>

<CAPTION>

                     Aggregate Fiscal Year-End Option Values

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

                                               Number of Securities Underlying   
                                            Unexercised Options at Fiscal Year-End         Value of Unexercised No Market
                                                                                           Value Options at Fiscal Year End
------------------------------------        --------------------------------------         --------------------------------
                 Name/Title                   Exercisable       Unexercisable              Exercisable      Unexercisable

Robert M.  Aubrey, former President and      
  Chief Executive Officer.................       -0-              200,000                     -0-             $212,000

</TABLE>

         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.

1998 Compensation Plan

         On May 27,  1998,  the  stockholders  of the Company  approved the 1998
Stock  Compensation Plan of Karts  International  Incorporated (the "1998 Plan")
and reserved  1,000,000  shares of Common Stock for issuance under the plan. The
1998 Plan terminates on April 1, 2008 unless previously  terminated by the Board
of Directors.  The 1998 Plan is administered by the Compensation  Committee (the
"Committee")  or the entire  Board of Directors  as  determined  by the Board of
Directors.

         Eligible  participants  in the 1998 Plan include  full time  employees,
directors  and  advisors of the Company and its  subsidiaries.  Options  granted
under the 1998  Plan are  intended  to  qualify  as  "incentive  stock  options"
pursuant to the provisions of Section 422 of the Internal  Revenue Code of 1986,
as amended (the "Code"),  or options  which do not  constitute  incentive  stock
options ("nonqualified options") as determined by the Committee.

         Under the 1998  Plan the  Company  may also  grant  "Restricted  Stock"
awards.  "Restricted Stock" represents shares of Common Stock issued to eligible
participants under the 1998 Plan subject to the satisfaction by the recipient of
certain  conditions  and  enumerated  in the  specific  Restricted  Stock grant.
Conditions  which may be imposed  include,  but are not  limited  to,  specified
periods of  employment,  attainment  of personal  performance  standards  or the
overall performance of the Company.  The granting of Restricted Stock represents
an additional incentive for eligible participants under the 1998 Plan to promote
the development of the Company,  and may be used by the Company as another means
of attracting and retaining  qualified  individuals to serve as employees of the
Company or its subsidiaries.

         Incentive stock options may be granted only to employees of the Company
or a subsidiary  who, in the judgment of the Committee,  are responsible for the
management or success of the Company or a subsidiary and who, at the time of the
granting of the incentive stock option, are either an employee of the Company or
a  subsidiary.  No incentive  stock option may be granted under the 1998 Plan to
any individual who would,  immediately  before the grant of such incentive stock
option,  directly or  indirectly,  own more than ten percent  (10%) of the total
combined  voting  power of all classes of stock of the  Company  unless (i) such
incentive  stock  option is granted at an option price not less than one hundred
ten  percent  (110%)  of the fair  market  value of the  shares  on the date the
incentive  stock option is granted and (ii) such incentive  stock option expires
on a date not later than five years from the date the incentive  stock option is
granted.

         The purchase  price of the shares of the Common Stock offered under the
1998 Plan must be one hundred  percent  (100%) of the fair  market  value of the
Common Stock at the time the option is granted or such higher  purchase price as
may be determined by the Committee at the time of grant;  provided,  however, if
an incentive  stock option is granted to an  individual  who would,  immediately
before the grant,  directly or indirectly own more than ten percent (10%) of the


                                      -32-

<PAGE>

total combined voting power of all classes of stock of the Company, the purchase
price of the shares of the Common Stock covered by such  incentive  stock option
may not be less than one hundred ten percent  (110%) of the fair market value of
such shares on the day the  incentive  stock  option is  granted.  If the Common
Stock is listed upon an established stock exchange or exchanges, the fair market
value of the Common Stock shall be the highest closing price of the Common Stock
on the day the option is granted  or, if no sale of the Common  Stock is made on
an  established  stock  exchange on such day, on the next preceding day on which
there  was a sale of such  stock.  If there is no market  price  for the  Common
Stock,  then the Board of  Directors  and the  Committee  may,  after taking all
relevant facts into consideration, determine the fair market value of the Common
Stock.

         Options are exercisable in whole or in part as provided under the terms
of the  grant,  but in no  event  shall  an  option  be  exercisable  after  the
expiration of ten years from the date of grant.  Except in case of disability or
death, no option shall be exercisable after an optionee ceases to be an employee
of the Company,  provided that the Committee  shall have the right to extend the
right to exercise for a period not longer than three months  following  the date
of  termination  of an optionee's  employment.  If an  optionee's  employment is
terminated by reason of disability, the Committee may extend the exercise period
for a period not in excess of one year  following the date of termination of the
optionee's  employment.  If an optionee  dies while in the employ of the Company
and shall not have fully exercised his options,  the options may be exercised in
whole or in part at any time within one year after the  optionee's  death by the
executors or administrators of the optionee's estate or by any person or persons
who acquired the option directly from the optionee by bequest or inheritance.

         Under the 1998 Plan, an individual  may be granted one or more options,
provided that the aggregate fair market value (determined at the time the option
is granted) of the shares covered by incentive  options which may be exercisable
for the first time during any  calendar  year shall not exceed  $100,000.  There
presently are  outstanding  options to purchase 35,000 shares of Common Stock at
prices ranging from $1.06 to $2.98 per share.

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.

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 three occasions during calendar 1998
and acted by unanimous  consent in lieu of meeting on six 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 four occasions  during  calendar  1998. 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 1998.




                                      -33-

<PAGE>


<TABLE>

<CAPTION>

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 23, 1999 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.

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

                                                              Shares Beneficially       Percentage of Shares
                        Name(1)                                    Owned                Beneficially Owned
<S>                                                               <C>                           <C>    
                                                             
     Charles Brister(2)....................................         516,668                      9.3
     Richard N. Jones(3)...................................           9,459                       *
     Lawrence E.  Schwall, III(4)..........................           6,667                       0
     Joseph R. Mannes(5)...................................          63,734                      1.3
     Ronald C. Morgan(5)...................................           3,334                       *
     Gary C. Evans(6)......................................          51,114                       *
     Timothy P. Halter(7)..................................         574,630                     10.3
     Halter Financial Group, Inc.(7).......................         574,630                     10.3
     Schlinger Foundation(8)...............................         520,000                      9.3
     Linda S. Neubauer(9)..................................         337,838                      6.1
     Officers and directors as a group (7 persons)(10).....       1,225,607                     22.0
</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,  62204 Commercial Street,
     P.O. Box 695, Roseland, Louisiana 70456.
(2)  Mr. Brister is the President, Chief Executive Officer and a director of the
     Company. See "Certain Relationships and Related Transactions."
(3)  Mr. Jones is the Vice President, Administration and Chief Financial Officer
     of the Company.
(4)  Includes  options to purchase  6,667  shares of Common Stock at an exercise
     price of $4.875 per share  exercisable  until January 30, 2002. Mr. Schwall
     is Vice President, Sales and Marketing of the Company.
(5)  Messrs. Mannes and Morgan are directors of the Company.
(6)  Mr. Evans is a director of the Company.  Includes  20,001  shares of Common
     Stock underlying warrants owned by Mr. Evans.
(7)  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. HFG and Mr.  Halter's
     address is 14160  Dallas  Parkway,  Suite 950,  Dallas,  Texas  75240.  See
     "Certain Relationships and Related Transactions."
(8)  The Schlinger  Foundation's address is c/o Evert Schlinger,  Trustee,  1944
     Edison Street, Santa Ynez, California 93460.
(9)  Ms. Neubauer's  address is 487 John Anderson Drive,  Ormond Beach,  Florida
     32174.
(10) Includes  20,001 shares of Common Stock  underlying  warrants  owned by Mr.
     Evans and options to purchase  6,667 shares of the  Company's  Common Stock
     granted to Mr. Schwall.





                                      -34-



<PAGE>


  ITEM 12.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


         In March 1996,  the Company in a private  sale sold  233,333  shares of
Common Stock to 13 investors  (the  "Investors")  for $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,  Investors
received an aggregate of 95,624 HFG Escrow  Shares.  The  remaining  137,709 HFG
Escrow Shares were released from escrow and delivered to HFG.

         The Company and Charles  Brister,  the  President  and Chief  Executive
Officer of the Company,  have  entered into a Real Estate  Option Right of First
Refusal Agreement for the Roseland facility.  Under the terms of this agreement,
the Company may, at its sole option, purchase the real property and improvements
for  $550,000.  The option  expires on December  31,  2000.  The Company and Mr.
Brister have also entered into a lease agreement for the Roseland  manufacturing
facility,  including the corporate  offices,  which expires in 2000. The monthly
lease payment for the Roseland facility is $6,025 with certain adjustments.  The
Company  believes  these terms are  comparable  to existing  market rates in the
region.

         On March 17,  1999,  the  Company  executed  a  promissory  note in the
principal amount of $200,000 payable to Charles Brister, the Company's President
and Chief  Executive  Officer,  to  reflect a loan  made to the  Company  by Mr.
Brister.  Interest at 8% per annum is payable  monthly with principal due at the
earlier  of receipt by the  Company  of at least $1.5  million  from the sale of
equity  securities or June 17, 1999.  Proceeds from the loan were used to reduce
Company indebtedness and to provide working capital.

         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.


















                                      -35-


<PAGE>


                                     PART IV

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

(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.

     4.8       Form of Stock Warrant  issued on March 8, 1999 to KBK  Financial,
               Inc.

    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.



                                      -36-

<PAGE>


Exhibit                                                             
Number                           Description of Exhibit                      
------------   -----------------------------------------------------------------

     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.

     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.

                                      -37-

<PAGE>


Exhibit                                                                      
Number                             Description of Exhibit                      
------------   -----------------------------------------------------------------

     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.

     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.

     10.39     Loan  Agreement  dated  September  28,  1998 by and  between  the
               Company and KBK Financial, Inc.


                                      -38-

<PAGE>

Exhibit                                                              
Number                          Description of Exhibit                      
------------   -----------------------------------------------------------------

     10.40     First  Amendment  to Loan  Agreement  dated  March 8, 1999 by and
               between  the  Company,   USA  Industries,   Inc.,  KINT,  L.L.C.,
               Brister's Thunder Karts, Inc. and KBK Financial, Inc.

     10.41     Revolving Credit  Promissory Note (Inventory) dated March 8, 1999
               executed in favor of KBK Financial, Inc. by the Company.

     10.42     Revolving  Credit  Promissory  Note (Accounts  Receivable)  dated
               March 8, 1999  executed  in favor of KBK  Financial,  Inc. by the
               Company.

      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 by the  Company
         during the last quarter of 1998. On January 20, 1999, the Company filed
         a current  report on Form 8-K  reporting the  resignation  of Robert M.
         Aubrey as President, Chief Executive Officer and member of the Board of
         Directors of the Company effective January 13, 1999.



















                                      -39-


<PAGE>

<TABLE>

<CAPTION>

                                   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 March
26, 1999.

<S>                                                                             <C>             <C>

KARTS INTERNATIONAL INCORPORATED
                     (Registrant)


By:  /s/ Charles Brister                            By:  /s/ Richard N. Jones
     -------------------------------------------         -----------------------------------
     Charles Brister, President, Chief Executive             Richard N. Jones
     Officer and Director                                    Vice President, Administration 
                                                             and Chief Financial 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:


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

            /s/ Charles Brister             President, Chief Executive Officer and Director     March 26, 1999
------------------------------------------
Charles Brister

           /s/ Timothy P. Halter            Chairman of the Board, Secretary and Director       March 26, 1999
------------------------------------------
Timothy P. Halter

           /s/ Richard N. Jones             Vice President, Administration and Chief Financial  March 26, 1999
------------------------------------------
Richard N. Jones                            Officer

           /s/ Joseph R. Mannes             Director                                            March 26, 1999
------------------------------------------
Joseph R. Mannes

           /s/ Ronald C. Morgan             Director                                            March 26, 1999
------------------------------------------
Ronald C. Morgan

             /s/ Gary C. Evans              Director                                            March 26, 1999
------------------------------------------
Gary C. Evans



</TABLE>



                                      -40-



<PAGE>


                                                        KARTS INTERNATIONAL     
                                                           INCORPORATED         
                                                         AND SUBSIDIARIES       
                                                                                
                                                                                
                                                           Consolidated         
                                                       Financial Statements     
                                                                and             
                                                          Auditor's Report


                                                      December 31, 1998 and 1997













                               S. W. HATFIELD, CPA
                          certified public accountants

                      Use our past to assist your future sm

                                                                             F-1

<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, 1998 and 1997                                       F-4

   Consolidated Statements of Operations and Comprehensive Income
     for the years ended December 31, 1998 and 1997                         F-6

   Consolidated Statement of Changes in Shareholders' Equity
     for the years ended December 31, 1998 and 1997                         F-7

   Consolidated Statements of Cash Flows
     for the years ended December 31, 1998 and 1997                         F-9

   Notes to Consolidated Financial Statements                               F-11









                                                                             F-2

<PAGE>


S. W. HATFIELD, CPA
certified public accountant

Member:    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, 1998 and 1997 and the related consolidated statements of operations
and  comprehensive  income,  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,  1998  and  1997,  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.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note B to the
financial statements,  the Company has suffered recurring losses from operations
and has  experiences  seasonality of product demand which is focused in the last
four (4) months of the  calendar  year which  impacts cash flow during the first
eight (8) months of the calendar  year.  These factors raise  substantial  doubt
about its ability to continue as a going concern.  Management's  plans in regard
to these matters are also  described in Note B. The financial  statements do not
include any adjustments that might result from the outcome of this uncertainty.



                               S. W. HATFIELD, CPA
                               (formerly S. W. HATFIELD + ASSOCIATES)
Dallas, Texas
March 18, 1999




                      Use our past to assist your future sm

P. O. Box 820395                               9002 Green Oaks Circle, 2nd Floor
Dallas, Texas  75382-0395                               Dallas, Texas 75243-7212
214-342-9635 (voice)                                          (fax) 214-342-9601
800-244-0639                                                      SWHCPA@aol.com



                                                                             F-3

<PAGE>

<TABLE>

<CAPTION>


                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 1998 and 1997


                                     ASSETS

                                                                1998            1997       
                                                           ------------    ------------ 
<S>                                                        <C>             <C>
       
Current assets
   Cash on hand and in bank                                $    163,690    $  2,801,746
   Accounts receivable
     Trade, net of allowance for doubtful accounts
       of $90,500 and $3,000, respectively                    2,310,707         463,045
     Recoverable income taxes and other                          40,395         225,000
   Inventory                                                  2,129,949         909,214
   Prepaid expenses                                             214,231         172,139
                                                           ------------    ------------

     Total current assets                                     4,858,972       4,571,144
                                                           ------------    ------------


Property and equipment - at cost                              2,156,138       1,262,772
   Accumulated depreciation                                    (288,741)       (137,746)
                                                           ------------    ------------
                                                              1,867,397       1,125,026
   Land                                                          32,800          32,800
                                                           ------------    ------------

     Net property and equipment                               1,900,197       1,157,826
                                                           ------------    ------------


Other assets
   Deposits and other                                            21,276           8,851
   Note receivable                                              378,113            --
   Option to acquire an unrelated entity                        123,544            --
   Covenant not to compete, net of accumulated
     amortization of approximately $5,556 and $-0-,
     respectively                                                94,444            --
   Organization costs, net of accumulated
     amortization of approximately $60,841 and
     $38,990, respectively                                       48,414          70,265
   Goodwill, net of accumulated amortization and
     impairment of future recoverability of
     approximately $6,414,452 and $385,608, respectively           --         5,473,815
                                                           ------------    ------------

     Total other assets                                         665,791       5,552,931
                                                           ------------    ------------

     TOTAL ASSETS                                          $  7,424,960    $ 11,281,901
                                                           ============    ============

</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 SHEETS - CONTINUED
                           December 31, 1998 and 1997


                      LIABILITIES AND SHAREHOLDERS' EQUITY

                                                             1998            1997       
                                                        ------------    ------------
<S>                                                     <C>             <C>

Current liabilities
   Cash overdraft                                       $      9,153    $       --
   Notes payable to banks and others                       1,564,715            --
   Current maturities of long-term debt                       35,289          18,357
   Accounts payable - trade                                2,963,279         292,083
   Other accrued liabilities
     Payroll and sales taxes payable                         131,610          40,568
     Accrued reorganization and relocation expenses          288,848            --
     Other                                                   257,912          20,006
   Federal and State income taxes payable                       --           137,710
                                                        ------------    ------------

     Total current liabilities                             5,250,806         508,724
                                                        ------------    ------------


Long-term liabilities
   Notes payable, net of current maturities
     Related parties                                         123,875            --
     Banks and individuals                                   242,406         230,841
                                                        ------------    ------------

     Total liabilities                                     5,617,087         739,565
                                                        ------------    ------------


Commitments and contingencies


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; 5,574,298 and 4,854,133
     shares issued and outstanding, respectively               5,574           4,854
   Additional paid-in capital                             14,377,782      13,040,090
   Accumulated deficit                                   (12,575,483)     (2,502,608)
                                                        ------------    ------------

     Total shareholders' equity                            1,807,873      10,542,336
                                                        ------------    ------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY              $  7,424,960    $ 11,281,901
                                                        ============    ============

</TABLE>

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

<PAGE>

<TABLE>

<CAPTION>

                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
          CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
                     Years ended December 31, 1998 and 1997


                                                                1998            1997       
                                                           -------------   ------------
<S>                                                        <C>             <C>

Revenues
   Kart sales - net                                        $  8,219,646    $  7,586,476
                                                           ------------    ------------

Cost of sales
   Purchases                                                  5,401,509       4,249,409
   Direct labor                                               1,413,175         765,360
   Other direct costs                                         2,030,320       1,005,202
                                                           ------------    ------------
     Total cost of sales                                      8,845,004       6,019,971
                                                           ------------    ------------

Gross profit                                                   (625,358)      1,566,505
                                                           ------------    ------------

Operating expenses
   Research and development expenses                             29,770          33,968
   Selling expenses                                             393,555         231,132
   General and administrative expenses
     Salaries and related costs                                 977,397         691,857
     Other operating expenses                                 1,224,194         832,491
   Compensation  expense  related to common
    stock  issuances at less than "fair value"
     for reorganization, restructuring and
     consulting costs                                           413,412            --
   Depreciation and amortization                                321,309         359,321
                                                           ------------    ------------
     Total operating expenses                                 3,359,637       2,148,769
                                                           ------------    ------------

Loss from operations                                         (3,984,995)       (582,264)

Other income (expense)
   Interest expense                                             (92,416)       (507,696)
   Employment termination settlement                               --          (208,100)
   Relocation and reorganization expenses                      (288,848)           --
   Impairment of future recoverability of goodwill           (5,793,184)           --
   Interest and other income                                     71,808          93,602
                                                           ------------    ------------

Loss before income taxes                                    (10,087,635)     (1,204,458)

Income taxes                                                     14,760         153,260
                                                           ------------    ------------

Net loss                                                    (10,072,875)     (1,051,198)

Other comprehensive income                                         --              --
                                                           ------------    ------------

Comprehensive income                                       $(10,072,875)   $ (1,051,198)
                                                           ============    ============

Loss per weighted-average share of
   common stock outstanding, computed
   on net loss - basic and fully diluted                         $(2.05)         $(0.32)
                                                                   ====            ====
Weighted-average number of shares
   of common stock outstanding - basic and fully diluted      4,920,702       3,319,620
                                                           ============    ============
</TABLE>


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, 1998 and 1997


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

Balances at January 1, 1997                        25    $    625,000       2,717,458   $      2,718   $  6,190,192   

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   
   Less costs and expenses of
     raising capital                             --              --              --             --       (1,959,302)  

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

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

Net loss for the year                            --              --              --             --             --     
                                         ------------    ------------    ------------   ------------   ------------   

Balances at December 31, 1997                    --              --         4,854,133          4,854     13,040,090   

"Fair value"  adjustment  related to
  sale of common  stock to related
  party for escrow agreement
  related to March 1996 private
  placement agreement                            --              --              --             --          641,315   
     Less amounts related to costs
     and expenses of raising capital             --              --              --             --         (227,903)  



                                          Accumulated                                                                
                                             deficit          Total      
                                          ------------    ------------   
Balances at January 1, 1997               $ (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                     --         7,352,967   
   Less costs and expenses of                                            
     raising capital                              --        (1,959,302)  
                                                                         
Redemption of convertible                                                
   preferred stock and issuance                                          
   of common stock upon                                                  
   conversion                                     --           458,369   
                                                                         
Common stock issued upon                                                 
   conversion of long-term debt                   --         1,000,000   
                                                                         
Net loss for the year                       (1,051,198)     (1,051,198)  
                                          ------------    ------------   
                                                                         
Balances at December 31, 1997               (2,502,608)     10,542,336   
                                                                         
"Fair value"  adjustment  related to                                     
  sale of common  stock to related                                       
  party for escrow agreement                                             
  related to March 1996 private                                          
  placement agreement                             --           641,315   
     Less amounts related to costs                                       
     and expenses of raising capital              --          (227,903)  
                                                                         

</TABLE>
                                         
                                  - Continued -

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, 1998 and 1997


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

Issuance of common stock for
   October 1998 acquisition of
     Straight Line Manufacturing, Inc.   --         --         182,648       183        399,817           --           400,000
   December 1998 payment of
     consulting fees                     --         --         109,589       109         49,891           --            50,000
   December 1998 acquisition of a
     note receivable from Daytona
     Superkarts, Inc.                    --         --         337,838       338        374,662           --           375,000
   December 1998 acquisition of an
     option to acquire 100.0% of the
     issued and outstanding stock of
     Daytona Superkarts, Inc.            --         --          90,090        90         99,910           --           100,000

Net loss for the year                    --         --            --        --             --      (10,072,875)    (10,072,875)
                                         --       ----    ------------   -------   ------------   ------------    ------------

Balances at December 31, 1998            --       $ --       5,574,298   $ 5,574   $ 14,377,782   $(12,575,483)   $  1,807,873
                                        ===       ====    ============   =======   ============   ============    ============

</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, 1998 and 1997


                                                                            1998            1997       
                                                                       -------------   ------------
<S>                                                                    <C>             <C>

Cash flows from operating activities
   Net loss for the year                                               $(10,072,875)   $ (1,051,198)
   Adjustments to reconcile net loss to net
     cash provided by operating activities
     Depreciation and amortization                                          414,369         461,234
     Reorganization and restructuring costs and related
       effect of common stock issuances at less than "fair value"           413,412            --
     Bad debt expense                                                        87,500            --
     Loss on abandonment of leasehold improvements                              717            --
     Impairment of future recoverability of goodwill                      5,793,184            --
     Payment of consulting fees with common stock                            50,000            --
     (Increase) Decrease in:
       Accounts receivable-trade and other                               (1,937,205)      1,333,809
       Recoverable income taxes                                             184,605        (225,000)
       Inventory                                                         (1,080,102)         49,167
       Prepaid expenses and other                                           (54,268)       (155,903)
     Increase (Decrease) in:
       Accounts payable                                                   2,520,118        (474,750)
       Other accrued liabilities                                            605,626         (29,898)
       Income taxes payable                                                (137,710)       (131,507)
                                                                       ------------    ------------
Net cash used in operating activities                                    (3,212,629)       (224,046)
                                                                       ------------    ------------

Cash flows from investing activities
   Cash received for sale of equipment                                         --             6,666
   Cash paid for property and equipment                                    (747,466)       (477,294)
   Cash acquired in acquisition of Straight Line Manufacturing, Inc.            746            --
   Cash paid for acquisition of Straight Line Manufacturing, Inc.           (82,280)           --
   Cash paid for covenant not to compete with former
     owner of Straight Line Manufacturing, Inc.                             (50,000)           --
   Cash paid to acquire option to purchase Daytona Superkarts, Inc.         (23,544)           --
                                                                       ------------    ------------
Net cash used in investing activities                                      (902,544)       (470,628)
                                                                       ------------    ------------

Cash flows from financing activities
   Increase in cash overdraft                                                 9,153            --
   Net activity on bank and other lines of credit                         1,494,762        (140,020)
   Principal payments on long-term debt                                     (26,798)     (2,220,622)
   Cash received from sale of common stock and warrants                        --         7,352,968
   Cash paid for brokerage and placement fees related
     to sale of common stock                                                   --        (1,500,934)
   Cash paid for redemption of convertible preferred stock                     --          (625,000)
                                                                       ------------    ------------
Net cash provided by financing activities                                 1,477,117       2,866,392
                                                                       ------------    ------------

Increase (decrease) in cash                                              (2,638,056)      2,171,718
   Cash at beginning of year                                              2,801,746         630,028
                                                                       ------------    ------------

Cash at end of year                                                    $    163,690    $  2,801,746
                                                                       ============    ============
</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, 1998 and 1997


                                                              1998         1997       
                                                            ---------   ----------
<S>                                                         <C>         <C>

Supplemental disclosure of interest
   and income taxes paid
     Interest paid for the year                             $  87,881   $  438,882
                                                            =========   ==========

     Income taxes paid (refunded) for the year - net        $(199,365)  $  203,247
                                                            =========   ==========


Supplemental disclosure of non-cash
   investing and financing activities

   Vehicles and equipment purchased with notes payable      $  55,295   $       --
                                                            =========   ==========

   Acquisition price of Straight Line Manufacturing, Inc. 
     settled with issuance of common stock                  $ 400,000   $       --
                                                            =========   ==========

   Acquisition of a note receivable from Daytona
     Superkarts, Inc. with issuance of common stock         $ 375,000   $       --
                                                            =========   ==========

   Acquisition of an option to acquire 100.0% of the
     issued and outstanding stock of Daytona Superkarts,
     Inc. with issuance of common stock                     $ 100,000   $       --
                                                            =========   ==========

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

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

</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  (Company)  was  originally  incorporated  on
February 28, 1984 as Rapholz  Silver Hunt,  Inc.  under the laws of the State of
Florida.  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.

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  reverse  split  had  occurred  as of the
beginning  of  the  first  period  presented  in the  accompanying  consolidated
financial statements.

The Company's  two principal  wholly-owned  subsidiaries  are Brister's  Thunder
Karts, Inc. (a Louisiana  corporation),  located in Roseland,  Louisiana and USA
Industries, Inc. (an Alabama corporation), located in Prattville, Alabama. These
two entities manufacture and sell "fun karts" through dealers,  distributors and
mass merchandisers.

On January 5, 1998,  the  Company  formed a new limited  liability  corporation,
KINT,  L.L.C.  (KINT) as a  wholly-owned  subsidiary.  This entity was activated
during  July 1998 for the  purpose  of  creating a sales and  marketing  company
focusing on the sale of customized  promotional  "fun karts" to various national
companies. This subsidiary conducted business operations under the trade name of
"Bird  Promotions".  In March 1999,  Company  management  ceased all  operations
within this subsidiary and consolidated these sales and marketing efforts within
other operating subsidiaries of the Company.

On October 27, 1998, effective at the close of business on October 31, 1998, the
Company  acquired  100.0% of the issued and  outstanding  stock of Straight Line
Manufacturing,  Inc. (a Michigan corporation) (Straight Line), a manufacturer of
large,  full  suspension  "fun karts"  located in Milford,  Michigan,  for total
consideration of approximately $400,000. This acquisition was accounted for as a
purchase.  In addition to the purchase  transaction,  the Company entered into a
covenant not to compete with the former  owner of Straight  Line  Manufacturing,
Inc.  for a period  of at least  three (3)  years  for  total  consideration  of
$100,000, consisting of $50,000 cash and a note payable for $50,000.

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.




                                                                            F-11

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS - Continued

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

For  segment  reporting  purposes,  the Company  operates  in only one  industry
segment and makes all operating  decisions and allocates  resources based on the
best benefit to the Company as a whole.


NOTE B - GOING CONCERN

For the years ended December 31, 1998,  1997, and 1996, the Company  experienced
net losses from operations of approximately $3,930,000,  $580,000, and $402,000,
respectively  and has utilized  cash in operating  activities  of  approximately
$3,260,000, $220,000 and $110,000,  respectively.  Additionally, the Company has
experienced  senior  management team turnover in both January 1997 and 1998. The
Company's former management was unable to operate the Company's  facilities in a
manner that would allow the Company meet its order demand for product production
during  the  fourth  quarter  of  1998  and,  accordingly,  incurred  short-term
financing from a non-financial institution lender to provide liquidity. Further,
former management spent  considerable time and financial  resources in exploring
possible merger or acquisition  candidates and the results of these efforts were
for the most part  unsuccessful and diverted  management time and resources from
customer demands for product during the Company's heaviest demand period.

The  Company's  continued  existence is  dependent  upon its ability to generate
sufficient cash flows from operations to support its daily operations as well as
provide sufficient resources to retire existing liabilities and obligations on a
timely basis.

Management has taken the following actions to stabilize the Company's  financial
position for future  periods:  1) initiated plans to dissolve its separate sales
and  marketing  company  subsidiary  which  focused  on the  sale of  customized
promotional  "fun karts" to various  national  companies and  consolidated  this
sales effort into existing  functions within the Company;  2) initiated plans to
consider  the  relocation   and/or   consolidation  of  manufacturing  or  sales
activities  within other existing  facilities of the Company;  3) initiated cost
control measures  related to the use of direct labor and material  purchasing to
maximize the  utilization of overstocked  positions that existed at December 31,
1998; 4) terminated excess management and supervisory  personnel hired by former
management  and  reorganized  Company  management  and  operational  teams along
consolidated  Company lines rather than individual operating subsidiary lines as
implemented by former management and 5) is reevaluating its product lines, costs
of manufacture, selling prices and customer relations to maximize unit sales and
gross  profitability  during the Company's  slower sales seasons of the calendar
year.  Management has also initiated plans to raise  additional  capital through
the sale of equity securities to provide  additional working capital and improve
liquidity.

Management  believes that its efforts to raise  additional  capital  through the
sale of equity securities and/or new debt financing will provide additional cash
flows.  However,  there can be no  assurance  that the  Company  will be able to
obtain additional funding or, that such funding, if available,  will be obtained
on terms favorable to or affordable by the Company.


                                                                            F-12

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE C - ACQUISITION OF SUBSIDIARIES

On October 27, 1998, the Company  purchased 100.0% of the issued and outstanding
stock of Straight Line Manufacturing,  Inc. (a Michigan  corporation)  (Straight
Line) for a total purchase price of approximately  $400,000. The acquisition was
effective at the close of business on October 31, 1998.  The purchase  price was
paid  with  182,648  shares  of  restricted,  unregistered  common  stock of the
Company.  Straight  Line was  incorporated  as the  successor to a Michigan sole
proprietorship  on August 1, 1997 under the laws of the State of Michigan and in
the business of manufacturing  and marketing large,  full suspension "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                                                 $400,000
       Costs incurred to complete the acquisition                     34,506
       Assets acquired                                              (234,328)
       Liabilities assumed                                           354,851
                                                                    --------
         Goodwill related to Straight Line                          $555,029
                                                                    ========

Management of the Company intends to consolidate the operations,  manufacturing,
sales and  marketing of Straight  Line's  products  into the  manufacturing  and
administrative   facilities  of  the  Company's  other  operating  subsidiaries.
Accordingly,  the Company  charged all goodwill  incurred in the  acquisition of
Straight  Line  to   operations   at  the  closing  date  of  the   acquisition.
Additionally,  the Company has accrued, and charged to operations as of December
31, 1998,  approximately  $160,000 in anticipated  costs and expenses related to
the closure of this facility and relocation of its manufacturing  lines to other
production facilities of the Company.

Pro forma  unaudited  results  of  operations  relating  to the  acquisition  of
Straight Line, as though the acquisition had occurred as of the beginning of the
first period presented, is as follows:

                                                    1998           1997      
                                               ------------    -----------
                Revenues                       $  8,379,695    $ 7,672,265
                                               ============    ===========
                Net income (loss)              $(10,280,600)   $(1,065,736)
                                               ============    ===========
                Earnings per share - basic           $(2.09)        $(0.32)
                                                       ====           ====


NOTE D - 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.


                                                                            F-13

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE D - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

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  throughout  the United
     States and are principally concentrated in the southeastern quadrant of the
     country.  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.

     The Company had no  significant  international  sales during 1998 and 1997.
     The Company  anticipates  continuing  international sales in future periods
     and is  continuing  to develop  credit  policies  related  to this  revenue
     source.

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,
     1998 and 1997, inventory consisted of the following components:

                                                     1998         1997    
                                                  ----------     --------
                            Raw materials         $1,909,822     $765,674
                            Work in process           92,330      127,780
                            Finished goods           127,797       15,760
                                                  ----------     --------
                                                  $2,129,949     $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.   Covenant not to compete
     -----------------------

     In conjunction with the acquisition of Straight Line  Manufacturing,  Inc.,
     the Company paid $100,000 to the former sole  shareholder  of Straight Line
     for a covenant not to compete for a period of at least three (3) years. The
     consideration  given was $50,000 cash and a note  payable for $50,000.  The
     covenant  is being  amortized  to  operations  over a period of three years
     using the straight line method.

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 using the
     straight-line method.




                                                                            F-14


<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE D - 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 year
     ended December 31, 1997, no charges to operations were made for impairments
     in the recoverability of goodwill. Subsequent to December 31, 1998, current
     management, upon realization that 1998 operational objectives were not met,
     recorded an impairment of future  recoverability of goodwill  equivalent to
     100.0% of the unamortized goodwill incurred at the acquisition of Brister's
     Thunder Karts, Inc., USA Industries,  Inc. and Straight Line Manufacturing,
     Inc.

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

     The Company  utilizes  the asset and  liability  method of  accounting  for
     income  taxes.  At December  31, 1998 and 1997,  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.  As of December 31, 1998 and 1997, the deferred
     tax asset  related to the Company's net  operating  loss  carryforward  was
     fully reserved.

9.   Advertising
     -----------

     The Company does not conduct any direct  response  advertising  activities.
     For non-direct response advertising, the Company charges the costs of these
     efforts  to  operations  at the  first  time  the  related  advertising  is
     published. For various sales publications, catalogs and other sales related
     items, the Company  capitalizes the development and direct production costs
     and  amortizes  these costs over the  estimated  useful life of the related
     materials,  not to  exceed an  eighteen  (18)  month  period  from  initial
     publication of the materials.

10.  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,  1998 and  1997,  the
     outstanding  warrants and options are deemed to be anti-dilutive due to the
     Company's net operating loss position.



                                                                            F-15

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE E - 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, 1998 and 1997,  the
Company and its  subsidiaries  had credit risk  exposures  in excess of the FDIC
coverage as follows:

<TABLE>

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

Year ended December 31, 1998
           Karts International Incorporated         $823,842         $1,806          135
             Brister's Thunder Karts, Inc.          $464,252           $601          163
                 USA Industries, Inc.               $157,606           $236          198

Year ended December 31, 1997
           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>


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 1998 and
1998,  the  Company  had  unsecured  amounts  invested  in  reverse   repurchase
agreements on a daily basis from February 1997 through  December 31, 1998. As of
December  31, 1998 and 1997,  the Company had an unsecured  outstanding  reverse
repurchase agreement of approximately $83,000 and $2,395,000,  respectively. The
Company  incurred  no  losses  during  1998 and 1997 as a result of any of these
unsecured situations.


NOTE F - PROPERTY AND EQUIPMENT

Property and equipment consist of the following components:
                                                                   Estimated
                                          1998           1997      useful life  
                                       ----------    ----------    -------------
      Building and improvements        $  925,713    $  384,296    5 to 25 years
      Equipment                           947,015       670,705    5 to 10 years
      Transportation equipment            130,740        77,820    3 to 5 years
      Furniture and fixtures              152,670       129,951    5 years
                                        ---------     ---------
                                        2,156,138     1,262,772
      Accumulated depreciation           (288,741)     (137,746)
                                        ---------    ---------
                                        1,867,397     1,125,026
      Land                                 32,800        32,800
                                        ---------    ----------
      Net property and equipment       $1,900,197    $1,157,826
                                        =========    ==========

Total  depreciation  expense  charged to operations for the years ended December
31, 1998 and 1997 was approximately $151,303 and $103,148, respectively.


                                                                            F-16

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE G - NOTE RECEIVABLE

In  December  1998,  the Company  acquired a $375,000  note  receivable  from an
unrelated individual payable by an unrelated corporation in exchange for 337,838
shares of  unregistered,  restricted  common stock.  The note  receivable  bears
interest  at 10.0% and is due and  payable  10 days after the  expiration  of an
option  which  the  Company  executed  to  acquire  100.0%  of  the  issued  and
outstanding  stock of the unrelated  corporation  making the note.  This note is
unsecured.


NOTE H - OPTION TO ACQUIRE AN UNRELATED ENTITY

Effective  December  1, 1998,  the Company  acquired  from an  unrelated  entity
certain assets for cash of $56,000.  The unrelated  entity is a concession  kart
manufacturer  located  in  Daytona  Beach,  Florida.  The  shareholders  of  the
unrelated entity ( Shareholders)  also granted the Company an option (Option) to
acquire 100.0% of the issued and  outstanding  shares of the unrelated  entity's
common stock based on a financial formula defined in the Option.

The Option  expires  upon the  expiration  of the 30-day  period  following  the
unrelated  entity's  fiscal year ending December 31, 2000. The Company issued to
the  Shareholders  an aggregate of 90,090 shares of Common Stock having a market
value of  approximately  $100,000  as payment  for the  Option.  The Option also
provides that unrelated entity can require the Company to exercise the Option if
unrelated  entity achieves  certain  financial goals during the Option term. The
Company  also  has  the  right  during  the  Option  term,  subject  to  certain
conditions,  to acquire for $100 certain intellectual property rights related to
the business of the unrelated entity.

The Company and  unrelated  entity also entered into a  manufacturing  agreement
(Manufacturing  Agreement) which provides that the Company will manufacture,  on
an exclusive basis, the unrelated  entity's  concession karts at a predetermined
per unit price. The Manufacturing Agreement will terminate on the later of March
31, 2001 or the date that the Option is terminated or exercised.


NOTE I - NOTES PAYABLE TO BANKS AND OTHERS

The Company has two lines of credit with an aggregate  face value of $2,000,000.
One  line of  credit  note is tied to the  Company's  aggregate  trade  accounts
receivable  balances,  not to exceed  $1,000,000  (A/R LOC).  The second line of
credit is tied to the  Company's  aggregate  inventory  balances,  not to exceed
$1,000,000  (Inventory  LOC).  The total amounts which may be outstanding at any
one  time,  and the  corresponding  note  principal  advances,  are  tied to the
respective  "Borrowing  Base"  calculations  contained  in  the  Loan  Agreement
(Agreement).  As of December 31, 1998, an aggregate of approximately  $1,550,924
is outstanding on these lines of credit. The notes require the interest and fees
on the  notes  to be  paid  monthly  and  all of the  Company's  trade  accounts
receivable  collections  are  deposited  to the  lender's  benefit  to a lockbox
controlled by the lender. The notes mature in September 1999.

The notes bear interest at an initial Contract Rate of 10.25%. In the event that
the Company  achieves and maintains a annual  audited Net Profit,  as defined in
the Agreement,  of at least  $200,000,  the Company may apply for a reduction in
the note's  interest rate to the Lender's Base Rate plus 1.5% (9.75% at December
31, 1998). In the event that the lower interest rate is granted and the $200,000
Net Profit or the  Company's  audited  financial  statements  are not  delivered
within 120 days of the Company's  year end, the interest  rate will  immediately
revert to the initial Contract Rate. Further, the Agreement requires the payment
of a one-time 1.0%  commitment fee and the payment of a 1/12%  servicing fee per
month  on the  face  amount  of each  line of  credit  during  the  term of each
respective line of credit.

             


                                                                            F-17

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE I - NOTES PAYABLE TO BANKS AND OTHERS - Continued

The  Inventory  LOC  contains a clause  that this line of credit must be paid in
full and held at a $-0-  balance  between  January 1, 1999 and February 28, 1999
for a period  of at least  30  consecutive  days.  Additionally,  the  Agreement
contains  certain  restrictive  covenants  related  to  the  Company's  business
operations and financial ratios. As of December 31, 1998, the Company was not in
compliance with all covenants in the Agreement.  The lender notified the Company
on February 22, 1999 of certain defaults on the Agreement and the lender granted
a waiver of the notified defaults on March 8, 1999.

On March 9, 1999,  the  Company  and the lender  executed  an  amendment  to the
Company's  loan  agreement  with the lender  whereby the  Company  must obtain a
minimum of $1.5 million of new equity  capital by May 6, 1999. If a violation by
the  Company  of any of the loan  covenants  occurs or any other  default by the
Company on its obligations under these credit lines,  including failure to raise
the  $1.5  million  in new  equity  capital,  the  lender  could,  at  its  sole
discretion,  could declare the then  outstanding  indebtedness to be immediately
due and payable. The lender could then foreclose on a significant portion of the
Company's  assets,  which could have a material  adverse effect on the Company's
financial condition and operations.

The Company's Straight Line subsidiary has two separate term lines of credit:

         A  $60,000  corporate  line  of  credit  payable  to  a  bank  with  an
         outstanding balance of approximately $56,732 at December 31, 1998. This
         line of credit  bears  interest at the Bank's base rate plus 1.0% (9.0%
         at December 31, 1998). This line of credit requires monthly payments of
         approximately 2.0% of the outstanding  principal plus all accrued,  but
         unpaid,  interest  and fees.  This line of credit is secured by a first
         mortgage on residential  property owned by the former sole  shareholder
         of  Straight  Line  and  the  personal  guaranty  of  the  former  sole
         shareholder and matures in November 1999.

         A $10,000 personal line of credit payable to a bank with an outstanding
         balance of  approximately  $9,495 at December  31,  1998.  This line of
         credit  bears at the Bank's base rate plus 3.0% (11.00% at December 31,
         1998).  This line of credit  requires  monthly  payments of 1.8% of the
         outstanding  principal balance plus all accrued,  but unpaid,  interest
         and  fees.  This line of credit  is  subject  to the  collateralization
         discussed above and this line of credit matures in November 1999.

A recap of notes payable consist of the following:
                                                          1998          1997  
                                                      -----------     ---------
Inventory line of credit                              $   800,000        $  -
Accounts receivable line of credit                        698,486           -
$60,000 corporate line of credit                           56,734           -
$10,000 personal line of credit                             9,495           -
                                                      -----------        -----
   Total notes payable                                $ 1,564,715           -
                                                      ===========        =====








                                                                            F-18

<PAGE>

<TABLE>

<CAPTION>

                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE J - LONG-TERM DEBT TO RELATED PARTIES

Long-term debt consists of the following:
                                                                                     1998              1997     
                                                                                  ---------         ---------
<S>                                                                               <C>               <C>

$50,000 note payable to the former sole shareholder
   of Straight Line.  Interest at 6.0%.  Principal and
   all accrued, but unpaid, interest is due at maturity
   in March 1999.  Secured by the Company's
   interest in the issued and outstanding stock
   of Straight Line Manufacturing, Inc.  Management
   anticipates restructuring this note on or before
   its scheduled maturity date.                                                   $50,000            $       -

$73,875 note payable to the former sole  shareholder
  of Straight Line.  Interest at 6.0%.  Principal only
  payment of $15,000  payable by January  31,  1999.
  Remaining principal and all accrued, but unpaid,
  interest is payable subject to the  settlement of
  a product liability lawsuit against Straight Line
  Manufacturing,  Inc. incurred prior to the Company's
  acquisition of Straight Line.  If the lawsuit is settled 
  prior to March 31, 1999; 50.0% of the principal and 
  all accrued,  but unpaid,  interest  will be due on 
  October 1, 1999 and the balance will be due and payable
  on March 31, 2000.  If the lawsuit is settled between 
  March 31, 1999 and March 31, 2000, all principal
  and accrued, but unpaid, interest will be due and 
  payable 210 days after the lawsuit settlement date
  or March 31,  2000,  which ever is earlier.  If the
  lawsuit is settled after March 31, 2000, all principal
  and accrued, but unpaid, interest is due and payable
  30 days after the lawsuit settlement date.                                       73,875                    -
                                                                                  -------            ---------

         Total related party long-term debt                                      $123,875            $       -
                                                                                  =======            =========


NOTE K - LONG TERM DEBT TO BANKS AND OTHERS

Long-term  debt payable to banks and others consist of the following at December
31, 1998 and 1997:

                                                                                     1998              1997       
                                                                                  ---------         ----------
$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 owned by Brister's Thunder Karts, Inc.                                15,075               18,781



                                                                            F-19

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE K - LONG-TERM DEBT TO BANKS AND OTHERS - Continued

                                                                                     1998              1997       
                                                                                  ---------         ---------
$23,122 installment note payable to a bank.  Interest
   at 8.25%.  Payable in monthly installments of
   approximately $726, including accrued interest.
   Final maturity in March 2001.  Collateralized by
   a vehicle owned by Brister's Thunder Karts, Inc.                               17,849                     -

$240,020 mortgage note payable to a bank.  Interest
   at the Bank's Commercial Base Rate (9.25% at
   December 31, 1998).  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.                              217,371              224,295

$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.                                                                 1,411                4,208

$18,198 installment note payable to a bank.  Interest
   at 8.25%.  Payable in monthly installments of
   approximately $572, including accrued interest.
   Final maturity in March 2001.  Collateralized by
   transportation equipment owned by USA
   Industries, Inc.                                                                14,042                    -

$14,000 installment note payable to an equipment
   finance company. Payable in monthly installments
   of approximately $345, including accrued interest.
   Final maturity in May 2002.  Collateralized by
   equipment owned by USA Industries, Inc.                                         11,947                    -
                                                                                  -------            ---------

     Total long-term debt to banks and individuals                                277,695              249,198

         Less current maturities                                                  (35,289)             (18,357)
                                                                                  --------           ---------

     Long-term portion                                                            $242,406           $ 230,841
                                                                                  =======-           =========

</TABLE>

                                                                            F-20

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE K - LONG-TERM DEBT TO BANKS AND OTHERS - Continued

Future maturities of long-term debt are as follows:
                                       Year ending
                                      December 31,               Amount    
                                      ------------           --------------
                                          1999                  $   35,289
                                          2000                      35,456
                                          2001                      26,661
                                          2002                      19,493
                                          2003                      17,249
                                       2004 - 2008                 114,603
                                       2009 - 2013                  28,944
                                                                ----------
                                         Totals                 $  277,695

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 L - INCOME TAXES

The components of income tax (benefit)  expense for the years ended December 31,
1998 and 1997, respectively, are as follows:
                                                     1998            1997     
                                                  ---------      ----------
                 Federal:
                      Current                     $ (3,388)      $(156,403)
                      Deferred                           -               -
                                                  ---------      ----------
                                                    (3,388)       (156,403)
                 State:
                      Current                      (11,372)          3,143
                      Deferred                           -               -
                                                  ---------      ----------
                                                   (11,372)          3,143
                                                  ---------      ----------

                      Total                       $(14,760)      $(153,260)
                                                  =========      ==========

As of December 31, 1998,  the Company has a net operating loss  carryforward  of
approximately  $3,000,000 to offset future  taxable  income.  Subject to current
regulations, this carryforward will begin to expire in 2012.

The Company's income tax expense for the years ended December 31, 1998 and 1997,
respectively, differed from the statutory federal rate of 34 percent as follows:
<TABLE>

                                                                     1998           1997     
                                                                 -----------      ----------
<S>                                                              <C>              <C>

Statutory rate applied to earnings (loss) before income taxes    $(3,412,796)     $(409,516)
Increase (decrease) in income taxes resulting from:
   State income taxes                                                (11,372)         3,143
   Non-deductiability of adjustment for common
     stock issued at less than "fair value"                          140,560              -
   Difference caused by use of statutory amortization
     periods for deduction of goodwill                             1,969,683         79,669
   Other, including reserve for deferred tax asset                 1,310,537        173,444
                                                                   ---------      ---------

     Income tax expense                                          $    (3,388)     $(153,260)
                                                                 ===========      =========
</TABLE>

                                                                            F-21

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE M - RELATED PARTY TRANSACTIONS

The Company leases its  manufacturing  facilities  under an operating lease with
the former owner of  Brister's,  who is also the  Company's  President and Chief
Operating  Officer,  in addition to being 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 for each of the years ended December 31, 1998 and 1997, 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.


NOTE N - 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 required 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.


                                                                            F-22

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE N - CONVERTIBLE PREFERRED STOCK - Continued

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.


NOTE O - COMMON STOCK TRANSACTIONS

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  reverse  stock  split  as if this  reverse  split  had  occurred  as of the
beginning  of  the  first  period  presented  in the  accompanying  consolidated
financial statements.

The terms of a March 31, 1996 private placement  memorandum required 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,  1998 (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.



                                                                            F-23

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE O - COMMON STOCK TRANSACTIONS - Continued

At the close of business on March 31,  1998,  the  Company's  common  stock,  as
quoted on the NASDAQ Small-Cap Market, closed below the required strike price of
$4.50 per share. Accordingly, during the second quarter of 1998, effective April
1, 1998,  the entity  owned by an officer and  director of the Company  released
approximately  95,624  of the  233,333  shares  being  held  in  escrow  for the
settlement of the  contingency  related to the March 31, 1996 private  placement
memorandum.  The  remaining  approximate  137,709  shares were released from the
escrow  agreement and returned to the entity owned by an officer and director of
the Company.

The April 1, 1998 transactions were recorded by the Company based on the imputed
"fair value" of the securities released from escrow upon the ultimate settlement
of the March 31, 1996 contingent  issuance as required by Statement of Financial
Accounting  Standards No. 123,  "Accounting for Stock-Based  Compensation".  The
imputed  "fair  value" of the 95,624  shares  was  calculated  as  approximately
$227,904  based upon the Company's  closing stock price on March 31, 1998.  This
imputed  charge  was offset  against  the  imputed  additional  paid-in  capital
generated as a result of this  accounting  transaction  as a cost of raising the
initial  capital in the original March 31, 1996  transaction.  The imputed "fair
value" of the residual 137,709 shares was calculated as approximately  $413,412,
net of the initial cash paid of $350,  based upon the  Company's  closing  stock
price on March 31, 1998. This difference  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   statement  of
operations.

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.

In December 1998, the Company issued an aggregate 90,090 shares of unregistered,
restricted common stock, valued at approximately  $100,000, to acquire an option
to acquire  100.0% of the issued and  outstanding  stock of an unrelated  entity
engaged in the manufacture of concession karts.

In December 1998, the Company issued 337,838 shares of unregistered,  restricted
common stock valued at approximately  $375,000 to acquire a note receivable from
the  unrelated  entity  discussed  above with a face amount of $375,000  from an
unrelated individual.

On  December  14,  1998,  the Company  issued  109,589  shares of  unregistered,
restricted  common  stock valued at  approximately  $50,000 in  settlement  of a
contract  for  consulting  services of equal value  related to various  business
acquisition  activities.  The  $50,000  has been  charged to  operations  in the
accompanying financial statements.


NOTE P - COMMON STOCK WARRANTS

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.


                                                                            F-24

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE P - COMMON STOCK WARRANTS - Continued

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      outstanding                     outstanding
                                 originally    at December 31,    Warrants      at December 31,
                                   issued            1997          expired          1998        Exercise price  
                               ------------    ---------------   -----------     -------------  ---------------
<S>                                                                             <C>             <C>

Class A Warrants                     66,667         63,333          (63,333)             -      $5.25 per share
1996 Warrants                       500,018        500,018                -        500,018      $4.50 per share
Underwriter's Warrants              155,000        155,000                -        155,000      $4.00 per share
1997 Warrants                     1,782,500      1,782,500                -      1,782,500      $4.00 per share
                                  ---------      ---------       ----------      ---------

Totals at December 31, 1998       2,504,185      2,500,851         (63,333)      2,437,518
                                  =========      =========       ==========      =========

</TABLE>

On March 9, 1999, the Company,  as  compensation  for waiving  certain events of
default and the amendment to the Company's loan  agreement with a  non-financial
institution  lender,  granted  the lender a stock  warrant to  purchase  100,000
shares of the  Company's  restricted,  unregistered  common  stock at a price of
$0.54 per share. If the Company fully repays the outstanding indebtedness to the
lender within ninety (90) days of the warrant date, the number of shares subject
to the warrant reduces to 50,000. If and only if there is no total retirement of
the  indebtedness  to the  lender,  the number of shares  subject to the warrant
reduces based upon the Company's net income  achieved  during Calendar 1999. The
number of shares  subject to the warrant  based upon the Company's net income in
the event of a non-retirement of the indebtedness is as follows:

                                        Net income        # of shares
                                        ----------        -----------
                                         $975,000            50,000
                                         $877,500            60,000
                                         $780,000            75,000

This warrant is  exercisable at any time after its issuance and expires four (4)
years from its issuance.

                                                                            F-25

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE Q - 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.

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.

During 1998,  the Company  granted an aggregate  265,000  options to purchase an
equivalent number of shares of restricted, unregistered common stock to officers
and employees in conjunction with the employment of such officers and employees.
These options are  exercisable  at prices  ranging from $1.06 per share to $3.50
per share. Concurrent with the termination of a Company officer,  210,000 of the
granted 1998 options  terminated.  The remaining options are exercisable between
March 1999 and December 1999 and expire between March 2003 and December 2003.

There were no exercise of any options  during the years ended  December 31, 1998
and 1997.  The  following  table  summarizes  all options  granted  from 1996 to
December 31, 1998.

<TABLE>

                            Options       Options          Options            Options           Exercise price
                            granted       exercised        terminated        outstanding            per share      
                           --------       ---------        ----------        -----------        --------------
<S>                         <C>           <C>              <C>                <C>               <C>    

     1996 options            59,355            -                 -              59,355               $5.63
     1997 VP options         13,334            -              6,667              6,667               $4.875
     1997 options            52,670            -                 -              52,670               $4.875
     1998 options           265,000            -            210,000             55,000        $1.06 - $3.50
                            -------         ----            -------             ------

     Totals                 390,359            -            216,667            118,692
                            =======         ====            =======            =======
</TABLE>

1998 Compensation Plan

On May 27,  1998,  the  stockholders  of the  Company  approved  the 1998  Stock
Compensation Plan of Karts  International  Incorporated (1998 Plan) and reserved
1,000,000  shares of Common  Stock for  issuance  under the plan.  The 1998 Plan
terminates  on  April 1,  2008  unless  previously  terminated  by the  Board of
Directors.   The  1998  Plan  is  administered  by  the  Compensation  Committee
(Committee)  or the entire  Board of  Directors  as  determined  by the Board of
Directors.

                                                                            F-26

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE Q - STOCK OPTIONS - Continued

Eligible  participants in the 1998 Plan include full time  employees,  directors
and advisors of the Company and its subsidiaries. Options granted under the 1998
Plan are  intended  to qualify as  "incentive  stock  options"  pursuant  to the
provisions  of Section  422 of the  Internal  Revenue  Code of 1986,  as amended
(Code), or options which do not constitute incentive stock options (nonqualified
options) as determined by the Committee.

Under  the 1998 Plan the  Company  may also  grant  "Restricted  Stock"  awards.
"Restricted  Stock"  represents  shares  of  Common  Stock  issued  to  eligible
participants under the 1998 Plan subject to the satisfaction by the recipient of
certain  conditions  and  enumerated  in the  specific  Restricted  Stock grant.
Conditions  which may be imposed  include,  but are not  limited  to,  specified
periods of  employment,  attainment  of personal  performance  standards  or the
overall performance of the Company.  The granting of Restricted Stock represents
an additional incentive for eligible participants under the 1998 Plan to promote
the development of the Company,  and may be used by the Company as another means
of attracting and retaining  qualified  individuals to serve as employees of the
Company or its subsidiaries.

Incentive  stock  options may be granted  only to  employees of the Company or a
subsidiary  who,  in the  judgment of the  Committee,  are  responsible  for the
management or success of the Company or a subsidiary and who, at the time of the
granting of the incentive stock option, are either an employee of the Company or
a  subsidiary.  No incentive  stock option may be granted under the 1998 Plan to
any individual who would,  immediately  before the grant of such incentive stock
option,  directly or  indirectly,  own more than ten percent  (10%) of the total
combined  voting  power of all classes of stock of the  Company  unless (i) such
incentive  stock  option is granted at an option price not less than one hundred
ten  percent  (110%)  of the fair  market  value of the  shares  on the date the
incentive  stock option is granted and (ii) such incentive  stock option expires
on a date not later than five years from the date the incentive  stock option is
granted.

The purchase price of the shares of the Common Stock offered under the 1998 Plan
must be one hundred  percent (100%) of the fair market value of the Common Stock
at the time the  option  is  granted  or such  higher  purchase  price as may be
determined  by the  Committee  at the time of grant;  provided,  however,  if an
incentive stock option is granted to an individual who would, immediately before
the grant,  directly or indirectly  own more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company, the purchase price
of the shares of the Common Stock covered by such incentive stock option may not
be less than one  hundred ten  percent  (110%) of the fair market  value of such
shares on the day the incentive stock option is granted.  If the Common Stock is
listed upon an established stock exchange or exchanges, the fair market value of
the Common Stock shall be the highest  closing  price of the Common Stock on the
day the  option  is  granted  or, if no sale of the  Common  Stock is made on an
established stock exchange on such day, on the next preceding day on which there
was a sale of such stock. If there is no market price for the Common Stock, then
the Board of Directors and the Committee  may,  after taking all relevant  facts
into consideration, determine the fair market value of the Common Stock.




                                                                            F-27

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE Q - STOCK OPTIONS - Continued

Options are  exercisable  in whole or in part as provided under the terms of the
grant,  but in no event shall an option be  exercisable  after the expiration of
ten years  from the date of grant.  Except in case of  disability  or death,  no
option shall be  exercisable  after an optionee  ceases to be an employee of the
Company, provided that the Committee shall have the right to extend the right to
exercise  for a period  not  longer  than  three  months  following  the date of
termination  of  an  optionee's  employment.  If  an  optionee's  employment  is
terminated by reason of disability, the Committee may extend the exercise period
for a period not in excess of one year  following the date of termination of the
optionee's  employment.  If an optionee  dies while in the employ of the Company
and shall not have fully exercised his options,  the options may be exercised in
whole or in part at any time within one year after the  optionee's  death by the
executors or administrators of the optionee's estate or by any person or persons
who acquired the option directly from the optionee by bequest or inheritance.

Under the 1998 Plan, an individual may be granted one or more options,  provided
that the  aggregate  fair  market  value  (determined  at the time the option is
granted) of the shares covered by incentive options which may be exercisable for
the first  time  during any  calendar  year  shall not  exceed  $100,000.  There
presently are  outstanding  options to purchase 35,000 shares of Common Stock at
prices ranging from $1.06 to $2.98 per share.


NOTE R - 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 $25,000 per claim self-insurance clause
as of December 31, 1998. 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, 1998 and
1997,  respectively,  approximately  $176,000  and $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.  During 1998, a
summary  judgment was granted in favor of Brister's  dismissing  the claim.  The
plaintiff  has  appealed  the  summary  judgment  decision  and the  Company and
Brister's  are of the  opinion  that the  initial  decision of the Court will be
upheld.

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.


                                                                            F-28

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE R - COMMITMENTS AND CONTINGENCIES - Continued

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, who became the Company's President
during January 1999. 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  $40,000 and $30,000 under the terms
of  this  agreement   during  the  years  ended  December  31,  1998  and  1997,
respectively.

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 was obligated to pay 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 years
ended  December  31, 1998 and 1997,  respectively,  the Company  paid or accrued
approximately $20,000 and $21,000 under this Agreement.



                                                                            F-29

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE R - COMMITMENTS AND CONTINGENCIES - Continued

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

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 January 1999, this individual resigned as President,  Chief Executive Officer
and as a director of the Company and the Company and the individual entered into
a Settlement  Agreement and Full and Final Release of All Claims (Agreement) for
the purpose of satisfying and  discharging all obligations of the Company to the
individual  under the Agreement.  The Agreement  provides that the Company shall
forgive up to $19,000 of  non-reimbursable  expenses  incurred by the individual
and pay to for one week of earned vacation.  In consideration for the foregoing,
the   former   President   agreed   to  adhere   to  the   non-competition   and
non-solicitation  covenants set forth in the Employment  Agreement until January
13, 2001. As part of his separation from the Company,  the Company issued to the
individual  options  to  purchase  15,000  shares of  Common  Stock at an option
exercise  price of $1.06 per share which were  granted to replace the options to
purchase  200,000  shares of common  stock  which were  effectively  canceled at
separation. These options are vested and expire on January 20, 2004.

On  October  27,  1998,  the  Company  entered  into  an  Employment   Agreement
(Agreement) with the former sole shareholder of Straight Line for the individual
to serve  as the  President  of the  Straight  Line  subsidiary  (Straight  Line
President). The Agreement is for a term of three (3) years with an automatic one
year extension unless either the Company or the Straight Line President provides
a thirty (30) day written notice not to continue the  Agreement.  This Agreement
provides the Straight Line President with an annual base salary of $80,000. Upon
execution of this  Agreement,  the Straight Line President  received  options to
purchase up to 10,000 shares of the Company's  common stock at an exercise price
equal to the closing bid price of the  Company's  common  stock as quoted on the
NASDAQ SmallCap market.

The Straight Line President may also receive, at the discretion of the Company's
Board of  Directors,  annual  performance  based stock options to purchase up to
10,000 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.



                                                                            F-30

<PAGE>


                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE S - SIGNIFICANT CUSTOMERS

During the year ended December 31, 1998, the Company was an OEM  manufacturer of
"fun  karts" for one of its  competitors.  Total  sales to this  entity  totaled
approximately $864,000, or approximately 10.51% of total net sales. During 1998,
the Company had no other single or related groups of customers  that  aggregated
more than 10.0% of total net sales.

During 1997, the Company had two related customers  responsible for net sales in
excess of 10.0% of total net sales. The sales to these two related customers are
summarized below:

                                                           1997      
                                                ---------------------------
                                                                 Percent of
                                                   Amount          sales   
                                                ----------       --------- 
Company A                                       $  713,664         9.41%
Company B                                          566,480         7.47%
                                                ----------       ------
                                                $1,280,144        16.88%
                                                ==========       ======

Total net sales                                 $7,586,476       100.00%
                                                 =========       ======


NOTE T - SUBSEQUENT EVENT

On March 17, 1999, the Company executed a promissory note with its President and
Chief Executive Officer. The note bears interest at 8.0% and accrued interest is
payable monthly. All principal and accrued,  but unpaid,  interest is due at the
earlier of the receipt of proceeds from an anticipated  equity offering or three
months from the date of the note. The loan is unsecured.




                                                                            F-31