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, 1997
                        COMMISSION FILE NUMBER 000-23041

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


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

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

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

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

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

     Check whether the issuer (1) has filed all reports  required to be filed by
Section 13 or 15 (d) of the  Exchange Act during the past 12 months (or for such
shorter  period that the issuer was  required to file such  reports) and (2) has
been subject to such filing requirements for the past 90 days.   Yes  X   No



     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained,  to the  best of the  issuer's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

     The  issuer's  revenues for the fiscal year ended  December 31, 1997,  were
$7,626,463.

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

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



<PAGE>

<TABLE>
<CAPTION>


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

                                      INDEX

                       Securities and Exchange Commission
                           Item Number and Description

<S>                                                                             <C>                              <C>
                                     PART I

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


                                                      PART II

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


                                                     PART III

Item 9    Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a)
          of the Exchange Act................................................................................... 21
Item 10   Executive Compensation................................................................................ 22
Item 11   Security Ownership of Certain Beneficial Owners and Management........................................ 25
Item 12   Certain Relationships and Related Transactions........................................................ 26
Item 13   Exhibits, Financial Statements and Reports on Form 8-K................................................ 29


                                SIGNATURES, FINANCIAL STATEMENTS AND EXHIBIT INDEX

Signatures...................................................................................................... 32
Financial Statements........................................................................................... F-1
Exhibit Index

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                                     PART I

ITEM 1.   BUSINESS

General

     Karts  International  Incorporated,  a Nevada  corporation (the "Company"),
through  its  wholly-owned  subsidiaries,   Brister's  Thunder  Karts,  Inc.,  a
Louisiana  corporation  ("Brister's"),  and USA  Industries,  Inc.,  an  Alabama
corporation  ("USA"),  designs,  manufactures  and distributes  recreational fun
karts ("Fun Karts"), also referred to as "go karts." Fun Karts are four-wheeled,
gas-powered vehicles typically equipped with engines of five to eight horsepower
and  purchased  by  consumers   principally  for  off-road   recreational   use.
Consolidated revenues of the Company for the fiscal year ended December 31, 1997
were approximately $7,626,463 million as compared with revenues of approximately
$8,327,316  million for the fiscal year ended  December  31,  1996.  The Company
operates  manufacturing  facilities  in  Roseland,   Louisiana  and  Prattville,
Alabama, and currently maintains its executive offices in Covington,  Louisiana.
It is  anticipated  that the  Company's  executive  offices will be moved to its
Roseland manufacturing facility during the second quarter of fiscal 1998.

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

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

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

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



                                       -3-

<PAGE>



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

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

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

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

Recent Financings

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

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

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


                                       -4-

<PAGE>



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

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

Seasonality

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

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

Operating Strategy

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

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


                                       -5-

<PAGE>



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

Growth Strategy

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

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

Acquisition Strategy

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

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



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Product Lines

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

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

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

Manufacturing Operations

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

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

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



                                       -7-

<PAGE>



Quality Control, Warranties and Service

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

Patents and Proprietary Technology

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

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

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

Sales and Marketing

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

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


                                       -8-

<PAGE>



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

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

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

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

Backlog

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

Governmental Regulations

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

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


                                       -9-

<PAGE>



Employees

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

Competition

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

Business Risk Factors

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

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



                                      -10-

<PAGE>



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

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

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

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

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


                                      -11-

<PAGE>



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

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

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


ITEM 2.           PROPERTIES

Facilities

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

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

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

</TABLE>


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




                                      -12-

<PAGE>



ITEM 3.  LEGAL PROCEEDINGS

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

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

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


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

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





                                      -13-

<PAGE>



                                     PART II

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

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

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

                                                       Common Stock                        Warrants
                                                       Bid Price(1)                        Bid Price
                                            ------------------------------------------------------------------

Calendar Year 1998                                 Low             High               Low             High
------------------
                                            ------------------------------------------------------------------

First Quarter (through March 23, 1998)           $2.75             $3.75            $0.56            $1.19

                                                       Common Stock                        Warrants
                                                       Bid Price(1)                        Bid Price
                                            ------------------------------------------------------------------

Calendar Year 1997                                 Low             High               Low             High
------------------
                                            ------------------------------------------------------------------

First Quarter                                    $4.13             $4.88              --               --
Second Quarter                                   $4.00             $4.50              --               --
Third Quarter(2)                                 $4.00             $5.38            $1.00            $1.50
Fourth Quarter                                   $3.00             $4.75            $0.69            $1.25

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

</TABLE>

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

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

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

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


                                      -14-

<PAGE>



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


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

Overview

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

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

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

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

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

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


                                      -15-

<PAGE>



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

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

Results of Operations

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

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

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

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

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

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



                                      -16-

<PAGE>



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

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

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

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

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

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

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

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


                                      -17-

<PAGE>



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

Seasonality

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

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

Liquidity and Capital Resources

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

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

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

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

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


                                      -18-

<PAGE>



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

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

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

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

Year 2000 Modifications

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

Other Matters

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

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

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


                                      -19-

<PAGE>



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


ITEM 7.  CONSOLIDATED FINANCIAL STATEMENTS

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


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

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


                                      -20-

<PAGE>



                                    PART III

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

Directors and Executive Officers

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

<TABLE>
<S>                                                                             <C>

Name                               Age    Position
Robert M. Aubrey                   52     President, Chief Executive Officer and Director
Timothy P. Halter(1)               31     Chairman of the Board, Secretary and Director
Robert W. Bell(2)                  60     Director
Charles Brister(1)                 45     Director
Gary C. Evans                      40     Director
Joseph R. Mannes(2)                38     Director
Ronald C. Morgan                   49     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.

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

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

     Robert W. Bell has been a director  of the  Company  since  July  1996.  He
served as Chairman,  President  and Chief  Executive  Officer of NewCare  Health
Corporation from 1987 to January 1997, when he retired.


                                      -21-

<PAGE>



NewCare  Health  Corporation  is a Nasdaq  SmallCap  Market-listed  nursing home
company. From 1981 to 1987, Mr. Bell was President of R.W.B. Realty, a Louisiana
corporation that sponsored public and private limited  partnerships  that owned,
built and operated  nursing  homes and medical  office  buildings.  From 1964 to
1981,  Mr. Bell was President  and Chairman of Bell Realty and Land  Company,  a
residential land development and home construction business in Mississippi.

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

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

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

     Ronald C. Morgan has been a director of the Company since July 1996.  Since
June 1993, he has served as Chief  Operating  Officer,  Executive Vice President
and Director of The Leather Factory,  Inc., an AMEX listed company ("TLF"). As a
co-founder  of The Leather  Factory,  Mr.  Morgan has served as Chief  Operating
Officer,  Executive Vice President and Director since its formation in 1980. Mr.
Morgan was employed by the Tandy  Corporation and Tandy Leather Company 10 years
prior to 1980. During this 10 year period he was promoted through various levels
of management in such a manner that he progressed from  Manager-Trainee to Vice-
President by 1997. Mr. Morgan was Vice  President of Tandy Leather  Company from
1977 to 1980,  directing  operations  for 350 retail  stores.  From 1970 through
1976, Mr. Morgan served in several positions of management for various companies
of Tandy Corporation in New York, Pennsylvania,  California, Arizona, and Texas.
Mr. Morgan attended  college at Southern  Colorado State  University and holds a
Bachelor of Science degree from West Texas State University.

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


ITEM 10.  EXECUTIVE COMPENSATION

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


                                      -22-

<PAGE>


<TABLE>

<CAPTION>
                                            Summary Compensation Table

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

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

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

Employment Agreements and Related Matters

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

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

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


                                      -23-

<PAGE>



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

Stock Options

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

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

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

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

Compensation of Directors

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



                                      -24-

<PAGE>



Meetings and Committees of the Board of Directors

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

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


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT

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

<TABLE>
<S>                                                                               <C>

                                                        Shares Beneficially        Percentage of Shares
                        Name(1)                                Owned                Beneficially Owned
-------------------------------------------------------------------------------------------------------

Robert M. Aubrey(2)....................................                  -0-                    -0-
Charles Brister(3).....................................             516,668                    10.6
Joseph R. Mannes(4)....................................              63,734                     1.3
Ronald C. Morgan(4)....................................               3,334                      *
Robert W. Bell(4)......................................              26,945                      *
Gary C. Evans(5).......................................              51,114                     1.1
Timothy P. Halter(6)...................................             470,254                     9.7
Halter Financial Group, Inc.(6)........................             470,254                     9.7
Schlinger Foundation(7)................................             730,288                    15.0
Evert I. Schlinger(8)..................................             768,066                    15.8
Officers and directors as a group (7 persons)(9).......           1,132,049                    23.2

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


                                      -25-

<PAGE>



(8)  Includes  520,000 shares of Common Stock owned by the  Foundation,  210,288
     shares of Common  Stock owned by Mr.  Schlinger  for his own  account,  and
     37,778 shares of Common Stock held by the Brian Schlinger  Trust. Mr. Evert
     I. Schlinger is the sole trustee of the Brian  Schlinger Trust and has sole
     voting and dispositive  power over the shares held by this trust.  However,
     Mr. Evert I. Schlinger does not claim any ownership  interest in any of the
     shares of Common Stock owned by the Brian Schlinger Trust.
(9)  Includes 20,001 shares of Common Stock underlying 20,001 1996 Warrants held
     by Mr. Evans.


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     On March 31, 1996, the Company concluded the private sale of 233,333 shares
of Common Stock to 13 investors for  aggregate  proceeds of $525,000 (the "March
1996 Offering"). In connection with the March 1996 Offering, the Company and HFG
have agreed to issue  additional  shares of Common Stock to  participants in the
March 1996  Offering 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") does not
equal or exceed  $4.50 per  share.  If such an  adjustment  is  required  on the
Offering  Valuation  Date,  each  participant  in the March 1996  Offering  will
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  in the March 1996  Offering  to $4.50 per share.  HFG has placed  into
escrow 233,333 shares of Common Stock (the "HFG Escrow  Shares") to be issued to
participants  in the March 1996 Offering if an  adjustment is required.  The HFG
Escrow  Shares are subject to the terms and  conditions  of that certain  Escrow
Agreement,  dated March 31, 1996 (the "HFG  Escrow  Agreement"),  by and between
HFG,  Securities Transfer  Corporation,  as escrow agent, and the Company. If on
the Offering  Valuation  Date the Stock Market Value of the Common Stock is less
than $2.25 per share,  the Company will be obligated to also issue the number of
additional  shares of Common Stock  necessary to increase the Stock Market Value
per share of the Common Stock  acquired in the March 1996  Offering to $4.50 per
share. If on the Offering  Valuation Date, the Stock Market Value is equal to or
greater than $4.50 per share,  the HFG Escrow  Agreement  will terminate and the
HFG Escrow  Shares will be  delivered to HFG.  Also,  any  remaining  HFG Escrow
Shares  after any required  distribution  to the  original  March 1996  Offering
participants  will be returned to HFG.  The  Company is under no  obligation  to
issue to HFG any additional  shares of Common Stock as reimbursement for any HFG
Escrow  Shares  that  may be  distributed  to  participants  in the  March  1996
Offering.  The obligation of the Company and HFG to deliver additional shares on
the Offering  Valuation Date applies only to original  participants in the March
1996  Offering  who own  shares  purchased  in the March  1996  Offering  on the
Offering  Valuation  Date.  At March 23, 1998 the closing bid price per share of
the Company's Common Stock as quoted on the NASDAQ Small Cap Market was $3.00.

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

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

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


                                      -26-

<PAGE>



Roseland facility is $6,025 with adjustments for increases in the Consumer Price
Index.  The Company believes these terms are comparable to existing market rates
in the region.

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

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

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

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

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

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

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



                                      -27-

<PAGE>



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

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





                                      -28-

<PAGE>



                                     PART IV

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

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

(a)(2)   Exhibits:


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

   2.1    Agreement  and Plan of Merger,  dated April 16,  1996,  by and between
          Sarah Acquisition Corporation and the Company.

   2.     2* Stock  Purchase  Agreement,  dated  January 16, 1996,  by and among
          Halter  Financial  Group,  Inc.  on behalf of the  Company,  Brister's
          Thunder Karts, Inc., and Charles Brister (Schedules have been omitted,
          but will be furnished to the Commission upon request).

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

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

   2.5*   Consulting Agreement, dated January 16, 1996, by and between Halter
          Financial Group, Inc. and Sarah Acquisition Corporation.
   3.1*   Articles of Incorporation of the Company.

   3.2*   Bylaws of the Company.

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

   4.1*   Specimen of Common Stock Certificate.

   4.2*   Form of Warrant Agreement covering the Warrants.

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

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

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

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

   4.7*   Specimen of Convertible Preferred Stock Certificate.

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

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

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

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

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



                                      -29-

<PAGE>



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



                                      -30-

<PAGE>



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

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

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

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

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

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

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

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

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

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

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

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

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

   21.1*  Subsidiaries of the Company.

   27.1   Financial Data Schedule.
----------------------
*  Previously  filed as an exhibit to the  Company's  Registration  Statement on
   Form SB-2 (SEC File No. 333-24145) and incorporated by reference herein.

(b)  Reports on Form 8-K:  No  reports  on Form 8-K were  filed  during the last
quarter of fiscal 1997.





                                      -31-

<PAGE>



                                   SIGNATURES

   Pursuant to the requirements of Section 13 or Section 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 27, 1998.


KARTS INTERNATIONAL INCORPORATED
        (Registrant)


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

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

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


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

/s/ Robert M. Aubrey                President, Chief Executive Officer and Director        March 27, 1998
-------------------------------     (Principal Executive Officer)
Robert M. Aubrey


/s/ Timothy P. Halter               Chairman of the Board, Secretary and Director          March 27, 1998
-------------------------------     (Principal Accounting Officer)
Timothy P. Halter


/s/ Charles Brister                 Director                                               March 27, 1998
-------------------------------
Charles Brister


/s/ Joseph R. Mannes                Director                                               March 27, 1998
-------------------------------
Joseph R. Mannes


 /s/ Ronald C. Morgan               Director                                               March 27, 1998
-------------------------------
Ronald C. Morgan


/s/ Robert W. Bell                  Director                                               March 27, 1998
-------------------------------
Robert W. Bell


/s/ Gary C. Evans                   Director                                               March 27, 1998
-------------------------------
Gary C. Evans


</TABLE>


                                      -32-

<PAGE>


         KARTS INTERNATIONAL
            INCORPORATED
          AND SUBSIDIARIES


            Consolidated
        Financial Statements
                 and
          Auditor's Report


     December 31, 1997 and 1996




                           S. W. HATFIELD + ASSOCIATES
                          certified public accountants

                      Use our past to assist your future sm


<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

                                    CONTENTS



                                                                           Page
                                                                           ----
Report of Independent Certified Public Accountants                          F-3

Consolidated Financial Statements

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

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

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

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

   Notes to Consolidated Financial Statements                               F-11





<PAGE>


S. W. HATFIELD + ASSOCIATES
certified public accountants

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



               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors and Shareholders
Karts International Incorporated

We  have  audited  the  accompanying   consolidated   balance  sheets  of  Karts
International  Incorporated  (a  Nevada  corporation)  and  Subsidiaries  as  of
December  31,  1997  and  1996  and  the  related  consolidated   statements  of
operations, changes in shareholders' equity and cash flows for each of the years
then ended.  These financial  statements are the responsibility of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

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




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




                      Use our past to assist your future sm

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

                                                                            F-3

<PAGE>

<TABLE>

<CAPTION>

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


                                     ASSETS

<S>                                                                             <C>
                                                                  1997            1996
                                                             ---------------------------
Current assets
   Cash on hand and in bank                                 $  2,801,746    $    630,028
   Accounts receivable
     Trade, net of allowance for doubtful accounts
       of $3,000 and $5,000, respectively                        463,045       1,795,802
     Recoverable income taxes                                    225,000            --
     Other                                                          --             1,052
   Inventory                                                     909,214         958,381
   Prepaid expenses                                              172,139           6,027
                                                            ------------    ------------

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


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

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


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

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

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


</TABLE>

                                  - Continued -



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

<PAGE>


<TABLE>

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


                      LIABILITIES AND SHAREHOLDERS' EQUITY

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

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

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


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

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


Commitments and contingencies


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


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

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

TOTAL LIABILITIES AND
   SHAREHOLDERS' EQUITY                                 $ 11,281,901    $ 10,082,092
                                                        ============    ============

</TABLE>

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

<PAGE>



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



                                                     1997           1996
                                                 --------------------------
Revenues
   Kart sales                                    $ 7,626,463    $ 8,327,316
                                                 -----------    -----------

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

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

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

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

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

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

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

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

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

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

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


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

<PAGE>

<TABLE>

<CAPTION>

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

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

                                                       Convertible                               Additional
                                                      Preferred Stock          Common Stock       paid-in     Accumulated
                                                     Shares     Amount      Shares      Amount    capital      deficit       Total
                                                    --------   -------      ------   ---------   ----------   -----------   -------
Balances at January 1, 1996                           --          --        83,246   $      83   $ 487,751    $(491,844)     (4,010)

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

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

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

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


</TABLE>

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

<PAGE>


<TABLE>
<CAPTION>

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

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

                                                 Convertible                                Additional
                                               Preferred Stock           Common Stock        paid-in    Accumulated
                                            Shares       Amount      Shares       Amount     capital     deficit          Total
                                           -------       ------      ------       ------    ----------  -----------    -------------
   July 1996 settlement of the acquisition
     of Brister's Thunder Karts, Inc.          --           --       516,667        517      3,099,483         --         3,100,000
   November 1996 acquisition of
     USA Industries, Inc.                      --           --       166,667        167        749,833         --           750,000

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

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

Sale of common stock and warrants
   under Form SB-2 Registration
   Statement, including over-allotment
   and Underwriter's warrants                  --           --     1,782,500      1,783      7,351,185         --         7,352,968
   Less costs and expenses of
     raising capital                           --           --          --         --       (1,959,302)        --        (1,959,302)

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

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

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

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


</TABLE>




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

<PAGE>

<TABLE>
<CAPTION>


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

<S>                                                                                <C>

                                                                        1997           1996
                                                                    -----------    -----------
Cash flows from operating activities
     Net loss for the year                                          $(1,051,198)   $  (959,566)
     Adjustments to reconcile net loss to net
       cash provided by operating activities
       Depreciation and amortization                                    461,234        223,142
       Reorganization and restructuring costs and related
       effect of common stock issuances at less than "fair value"          --        1,430,287
       Operating expenses paid with common stock                           --           15,000
       (Increase) Decrease in:
         Accounts receivable-trade and other                          1,333,809       (770,825)
         Recoverable income taxes                                      (225,000)          --
         Inventory                                                       49,167        154,485
         Prepaid expenses and other                                    (155,903)        82,517
       Increase (Decrease) in:
         Accounts payable                                              (474,750)      (458,548)
         Other accrued liabilities                                      (29,898)         3,944
         Income taxes payable                                          (131,507)       165,675
                                                                    -----------    -----------
Net cash used in operating activities                                  (224,046)      (113,889)
                                                                    -----------    -----------

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

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

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

</TABLE>


                                  - Continued -

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

<PAGE>

<TABLE>

<CAPTION>


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


<S>                                                                             <C>

                                                              1997          1996
                                                        --------------    ----------
Supplemental disclosure of interest
   and income taxes paid
     Interest paid for the year                         $       438,882   $  348,730
                                                        ===============   ==========

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


Supplemental disclosure of non-cash
   investing and financing activities

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

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

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

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

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

</TABLE>




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

<PAGE>

                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS

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

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

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

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

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

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

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

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


                                                                            F-11

<PAGE>

                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS - Continued

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

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

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

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


NOTE B - ACQUISITION OF SUBSIDIARIES

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

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

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




                                                                            F-12

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE B - ACQUISITION OF SUBSIDIARIES - Continued

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

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

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

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

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


NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1.   Cash and cash equivalents

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

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

2.   Accounts and advances receivable

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

                                                                            F-13

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

2.   Accounts and advances receivable - continued

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

3.   Inventory

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

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

4.   Property, plant and equipment

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

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

5.   Loan costs

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

6.   Organization costs

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




                                                                            F-14

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

7.   Goodwill

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

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

8.   Income taxes

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

9.   Income (Loss) per share

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

10.  Reclassifications

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

11.  Accounting standards to be adopted

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


                                                                            F-15

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

10.  Accounting standards to be adopted - continued

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

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


NOTE D - CONCENTRATIONS OF CREDIT RISK

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

<TABLE>
<S>                                                                             <C>

                                           Highest        Low         Number of
             Entity                       exposure      exposure    days with exposure

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

</TABLE>



                                                                            F-16

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE D - CONCENTRATIONS OF CREDIT RISK - Continued

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

NOTE E - PROPERTY AND EQUIPMENT

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

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

NOTE F - NOTES PAYABLE

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

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

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

                                                                            F-17

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE G - LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>

<S>                                                                                   <C>             <C>
                                                                                          1997            1996
                                                                                      ------------    -------------
Related parties
       $2,000,000  note  payable to a Foundation.  Interest at  14.0%.  Interest
          payable on the 15th day of each month beginning on March 15, 1996. All
          accrued but unpaid interest due on March 14, 2001.  Principal  payable
          as follows:  $399,996 on March 14,  1999;  $399,996 on March 14, 2000;
          $1,200,008  on  March  14,  2001.  Secured  by  accounts   receivable,
          inventory, property and equipment owned or acquired by the Company.            $     -         $2,000,000



       $1,000,000  payable  t  the former  shareholder  of   Brister's   Thunder
          Karts,  Inc.  Interest  payable  at 8.0% in the  first  loan  year and
          escalating  1.0% per year to a maximum  of 14.0% in the  seventh  loan
          year.  Interest only payable  quarterly,  starting June 30, 1996.  All
          unpaid but accrued interest is due at maturity.  Principal  payable in
          annual   installments   of  $250,000   starting  on  March  31,  2000.
          Collateralized by certain assets valued at $1 million owned by certain
          members of the Company's Board of Directors.                                         -         1,000,000



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


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

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


</TABLE>


                                                                            F-18

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE G - LONG-TERM DEBT - Continued

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

                                                                                  1997               1996
                                                                                --------           --------
Banks and individuals

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

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

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

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

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

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

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

     Long-term portion                                                          $230,841           $3,332,660
                                                                                ========           ==========
</TABLE>

                                                                            F-19

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE G - LONG-TERM DEBT - Continued

Future maturities of long-term debt are as follows:

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

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


NOTE H - INCOME TAXES

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

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



                                                                            F-20

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE H - INCOME TAXES - Continued

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

<TABLE>
<S>                                                                             <C>

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

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

</TABLE>

NOTE I - RELATED PARTY TRANSACTIONS

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

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

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


                                                                            F-21

<PAGE>


                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE J - CONVERTIBLE PREFERRED STOCK

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

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

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

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

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

On September  19, 1997,  concurrent  with a successful  sale of common stock and
warrants  pursuant to a  Registration  Statement on Form SB-2,  the Company paid
$625,000 to redeem the  outstanding  convertible  preferred  stock and issued an
aggregate  104,175  shares  of  restricted,  unregistered  common  stock  and an
aggregate  333,350  1996  Warrants to the holders of the  convertible  preferred
stock as a component of the redemption.
                                                                            F-22

<PAGE>

                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE K - COMMON STOCK TRANSACTIONS

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

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

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

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

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

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


                                                                            F-23

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE K - COMMON STOCK TRANSACTIONS - Continued

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

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

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

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

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


                                                                            F-24

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE K - COMMON STOCK TRANSACTIONS - Continued

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

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

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

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

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


NOTE L - COMMON STOCK WARRANTS

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

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


                                                                            F-25

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE L - COMMON STOCK WARRANTS

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

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

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

<TABLE>

<S>                                                                             <C>          <C>

                                              Warrants        Warrants        Warrants
                                              granted         exercised      outstanding     Exercise price
                                            ----------        ---------      -----------     ---------------
Class A Warrants                                66,667           3,334           63,333      $5.25 per share
1996 Warrants                                  166,668               -          166,668      $4.50 per share
                                            ----------        --------          -------

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

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

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

</TABLE>

NOTE M - STOCK OPTIONS

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

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

                                                                            F-26

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE M - STOCK OPTIONS - Continued

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

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

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

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

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

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

</TABLE>


NOTE N - COMMITMENTS AND CONTINGENCIES

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

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


                                                                            F-27

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE N - COMMITMENTS AND CONTINGENCIES - Continued

Litigation - continued

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

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

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

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

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


                                                                            F-28

<PAGE>



                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE N - COMMITMENTS AND CONTINGENCIES - Continued

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

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

Contingent stock issuances

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

                                                                            F-29

<PAGE>


                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE O - SIGNIFICANT CUSTOMERS

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

                                1997                             1996
                       ------------------------        ------------------------
                                     Percent of                      Percent of
                          Amount     sales                Amount       sales
Company A              $  713,664       9.36%          $1,316,880      15.81%
Company B                 566,480       7.43%             369,460       4.44%
                       ----------      ------          ----------      ------
                       $1,280,144      16.79%          $1,686,340      20.25%
                        =========      =====            =========      =====

Total net sales        $7,626,463      100.00%         $8,327,316      100.00%
                        =========      ======           =========      ======



NOTE P - SUBSEQUENT EVENTS

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

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


                                                                            F-30

<PAGE>


                        KARTS INTERNATIONAL INCORPORATED

                                  EXHIBIT INDEX



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

   2.1*   Agreement  and Plan of Merger,  dated April 16,  1996,  by and between
          Sarah Acquisition Corporation and the Company.
   2.2*   Stock Purchase  Agreement, dated January 16, 1996, by and among Halter
          Financial  Group,  Inc. on behalf of the  Company,  Brister's  Thunder
          Karts,  Inc., and Charles Brister  (Schedules  have been omitted,  but
          will be furnished to the Commission upon request).
   2.3*   Amendment to Stock  Purchase  Agreement,  dated March 15, 1996, by and
          among Halter Financial Group, Inc. on behalf of the Company, Brister's
          Thunder Karts, Inc., and Charles Brister (Schedules have been omitted,
          but will be furnished to the Commission upon request).
   2.4*   Stock  Purchase  Agreement,  dated  October 4, 1996,  by and among the
          Company,  USA Industries,  Inc., Jerry Michael Allen, Angela T. Allen,
          Johnny C. Tucker,  and Carol Y. Tucker  (Schedules  have been omitted,
          but will be furnished to the Commission upon request).
   2.5*   Consulting  Agreement,  dated January 16, 1996, by and between  Halter
          Financial Group, Inc. and Sarah Acquisition Corporation.
   3.1*   Articles of Incorporation of the Company.
   3.2*   Bylaws of the Company.
   3.3*   Certificate to Decrease Authorized Shares of Common Stock, dated March
          12, 1997.
   4.1*   Specimen of Common Stock Certificate.
   4.2*   Form of Warrant Agreement covering the Warrants.
   4.3*   Form of Redeemable Common Stock Purchase Warrants issued in connection
          with the sale of the Warrants.
   4.4*   Form  of  Redeemable  Common  Stock  Purchase  Warrant  issued  in the
          Company's private offering of Units,  completed November 15, 1996 (the
          "1996 Warrants").
   4.5*   Form of Common Stock Purchase Warrant issued in the Company's offering
          of Units  pursuant to Rule 504,  completed  July 2, 1996 (the "Class A
          Warrants").
   4.6*   Certificate of  Designation  Establishing  Series of Preferred  Stock,
          filed with the Secretary of State of Nevada on November 15, 1996.
   4.7*   Specimen of Convertible Preferred Stock Certificate.
  10.1*   Lease  Agreement,  dated  March 18,  1996,  by and  between  Northpark
          Properties, L.L.C. and the Company.
  10.2*   License  Agreement,  dated March 15, 1996,  by and between the Company
          and Charles Brister.
  10.3*   Addendum  "A" to  License  Agreement,  dated  March 15,  1997,  by and
          between the Company and Charles Brister.
  10.4*   Royalty  Agreement,  dated March 15, 1997,  by and between the Company
          and Charles Brister.
  10.5*   $1,000,000   Subordinated  Promissory  Note,  dated  March  15,  1996,
          payable to Charles Brister, executed by Brister's Thunder Karts, Inc.,
          as maker.
  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.





<PAGE>



Exhibit
Number                         Description of Exhibit
------    ----------------------------------------------------------------------
   10.8*  $2,000,000  Promissory  Note,  dated  March 15,  1996,  payable to The
          Schlinger  Foundation,  executed  by the  Company,  as  maker,  and by
          Brister's Thunder Karts, Inc., as pledgor.
   10.9*  Commercial Security Agreement,  by and among The Schlinger Foundation,
          as secured  party,  the Company,  as borrower,  and Brister's  Thunder
          Karts, Inc., as pledgor.
   10.10* Vendor Agreement, dated June 5, 1996, by and between Wal-Mart Stores,
          Inc. and Brister's Thunder Karts, Inc.
   10.11* Vendor  Agreement,  dated September 30, 1996, by and between Wal-Mart
          Stores, Inc. and USA Industries, Inc.
   10.12* Floor Plan Agreement,  dated September 9, 1996, by and among Deutsche
          Financial  Services  Corporation,  the Company,  and Brister's Thunder
          Karts, Inc.
   10.13* Guaranty of Vendor,  dated September 9, 1996, executed by the Company
          and  Brister's  Thunder  Karts,  Inc. in favor of  Deutsche  Financial
          Services Corporation.
   10.14* Employment  Agreement,  as  amended,  dated  March 15,  1996,  by and
          between the Company and V. Lynn Graybill.
   10.15* Consulting Engagement Letter, dated February 19, 1997, by and between
          Charles Brister, as consultant, and the Company.
   10.16* Letter  Agreement,  dated  January 21,  1997,  by and  between  Bobby
          Labonte, as national spokesman for the Company, and the Company.
   10.17* Consulting  Agreement,  dated  March 16,  1997,  by and between the
          Company and Halter Financial Group, Inc.
   10.18* Form of Private Placement Subscription  Participation Option Notice,
          dated March 6, 1997,  relating to the Company's  November 1996 private
          offering.
   10.19* $300,000  Universal Note, dated August 13, 1996,  payable to Deposit
          Guaranty National Bank,  executed by Brister's Thunder Karts, Inc., as
          borrower.
   10.20* Security  Agreement,  dated August 13, 1996, by and between Brister's
          Thunder Karts, Inc., as debtor, and Deposit Guaranty National Bank, as
          secured party,  relating to the $300,000  Universal Note referenced as
          Exhibit 10.19.
   10.21* Collateral  Pledge  Agreement,  dated August 13, 1996,  by Brister's
          Thunder Karts,  Inc., as pledgor,  relating to the $300,000  Universal
          Note referenced as Exhibit 10.19.
   10.22* Guaranty,  dated  August 13,  1996,  executed  by the  Company,  as
          guarantor,  for the  benefit of Deposit  Guaranty  National  Bank,  as
          lender,  and Brister's Thunder Karts,  Inc., as borrower,  relating to
          the $300,000 Universal Note referenced as Exhibit 10.19.
   10.23* $500,000  Loan  Agreement,  dated October 1, 1996, by and between USA
          Industries,  Inc., as debtor,  and Deposit  Guaranty  National Bank of
          Louisiana,  as secured party,  relating to the $500,000 Universal Note
          referenced as Exhibit 10.24.
   10.24* $500,000  Universal  Note,  dated October 1, 1996, by and between USA
          Industries,  Inc., as borrower, and Deposit Guaranty National Bank, as
          lender.
   10.25* Security  Agreement,  dated  October 1, 1996,  by and  between  USA
          Industries,  Inc., as debtor,  and Deposit  Guaranty  National Bank of
          Louisiana,  as secured party,  relating to the $500,000 Universal Note
          referenced as Exhibit 10.24.
   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.





<PAGE>


Exhibit
Number                         Description of Exhibit
------

  10.27*  Guaranty,  dated  October 1, 1996,  executed by Karts  International
          Incorporated,  as  guarantor,  for the  benefit  of  Deposit  Guaranty
          National  Bank,  as lender,  and USA  Industries,  Inc.,  as borrower,
          relating to the $500,000 Universal Note referenced as Exhibit 10.24.
  10.28*  Placement Agency  Agreement,  dated November 8, 1996, by and between
          the Company and Argent Securities, Inc.
  10.29*  Option  Agreement,  dated March 15,  1996,  by and  between  Charles
          Brister, as seller, and Brister's Thunder Karts, Inc., as Purchaser.
  10.30*  Lease of  Commercial  Property,  dated  September  27, 1995,  by and
          between Charles Brister, as lessor, and Brister's Thunder Karts, Inc.,
          as lessee,  as amended by that  certain  Amended  Lease of  Commercial
          Property,  dated  November 30, 1995,  as amended by that certain First
          Amendment to Lease of Commercial Property, dated March 15, 1996.
  10.31*  Non-Competition  Agreement,  dated March 15,  1996,  by and between
          Charles Brister and the Company.
  10.32*  Non-Competition Agreement (Louisiana),  dated March 15, 1996, by and
          between Charles Brister and the Company.
  10.33*  Form of Non-Qualified Stock Option Agreement between the Company and
          the participants in the July 1996 Stock Option Plan.
  10.34*  Form of Non-Qualified  Stock Option Agreement between the Company and
          the participants in the January 1997 Stock Option Plan.
  10.35*  Escrow  Agreement,  dated March 31, 1996,  between Halter  Financial
          Group, Inc., Securities Transfer Corporation and the Company.
  10.36*  Letter Agreement  between  Brister's Thunder Karts, Inc. and Deposit
          Guaranty  National  Bank  extending  the maturity date of the $300,000
          Universal Note referenced in Exhibit 10.19.
  10.37*  Letter Agreement  between The Schlinger  Foundation and the Company,
          dated August 28, 1997,  regarding the  conversion of $1 million of the
          principal  amount of the Schlinger  Note into 250,000 shares of Common
          Stock.
  10.38   Employment  Agreement,  dated  January 30, 1998,  by and between the
          Company and Robert M. Aubrey.
   21.1*  Subsidiaries of the Company.
   27.1   Financial Data Schedule.
------------
*  Previously  filed as an exhibit to the  Company's  Registration  Statement on
   Form SB-2 (SEC File No. 333-24145) and incorporated by reference herein.





<PAGE>



EXHIBIT 10.38


                              EMPLOYMENT AGREEMENT
                              --------------------

     This Employment  Agreement (the  "Agreement" or "Employment  Agreement") is
made and entered into this 30th day of January,  1998 (the "Effective Date"), by
and between Karts International Incorporated, a Nevada corporation ("Employer"),
and Robert M. Aubrey ("Employee");

                              W I T N E S S E T H:
                              -------------------
     WHEREAS,  Employee is experienced and qualified to perform duties connected
and associated with the business of Employer;

     WHEREAS,  Employer  wishes to employ  Employee,  and Employee  wishes to be
employed by Employer,  upon the terms and subject to the conditions  hereinafter
set forth;

     WHEREAS,  as a condition  of  Employee's  employment,  Employer  desires to
receive from Employee certain covenants and agreements; and

     WHEREAS, Employer and Employee desire to set forth in writing the terms and
conditions of their agreements and undertakings with respect to these covenants,
as this Agreement is a condition of Employee's employment and ancillary thereto,
but does not purport to set forth all the terms of such employment.

     NOW, THEREFORE,  IN CONSIDERATION of the herein recited  undertakings,  the
compensation  to be paid by  Employer to Employee  and the other  covenants  and
agreements  contained  herein,  the receipt and  sufficiency of which are hereby
acknowledged and confessed, the parties hereto agree as follows:

     1.   Employment.  Employer  hereby  employs  Employee  as  an  employee  of
          Employer upon the terms and subject to the conditions  hereinafter set
          forth.

     2. Term of Employment.  Employee's term of employment  under this Agreement
shall begin on the effective date of this Agreement as hereinafter  provided and
shall,  subject to early termination as hereinafter set forth in this Agreement,
continue  until  and  terminate  on the  third  (3rd)  anniversary  date  of the
Effective Date of this Agreement (the "Initial Term");  provided,  however, that
the term of employment of Employee under this Agreement  shall be  automatically
extended  for an  additional  period  of one year  after the  expiration  of the
Initial  Term,  unless  at least  thirty  (30) days  prior to such  date  either
Employer or Employee shall give written notice to the other that Employee's term
of employment  under this Agreement shall end upon the expiration of the Initial
Term.  If  Employee's  term  of  employment  is  automatically  extended  at the
expiration of the Initial Term, it shall be further automatically  extended from
year to year thereafter unless at least thirty (30) days prior to


EMPLOYMENT AGREEMENT - Page 1

<PAGE>



the anniversary  date of any such  extension,  written notice is given by either
Employer or Employee to the other that Employee's term of employment  under this
Agreement shall end on such anniversary.

     3. Employee  Warranties.  Employee represents and warrants to Employer that
Employee  (a) has the legal  power and right to enter into this  Agreement,  and
that upon execution and delivery of this Agreement by Employee to Employer, this
Agreement will constitute the legal,  valid, and binding obligation of Employee,
fully  enforceable in accordance with its terms and  provisions;  (b) is free to
enter into the terms of this  Agreement and he has no  obligations  inconsistent
herewith;  and (c) agrees to devote  his best  efforts  to  Employer's  business
interests to the exclusion of any  affiliation in  competition  with Employer or
that  might  otherwise  utilize   Employer's   know-how  or  other  confidential
information.

     4.  Duties  of  Employee.  For the term  provided  in  Paragraph  2 of this
Agreement  (subject to earlier  termination as hereinafter  provided),  Employee
shall be employed as President and Chief Executive Officer of Employer. Employee
shall have such other  duties and  responsibilities  as may from time to time be
assigned to Employee by the Board of Directors of Employer.  Employee shall also
be a voting  member of the Board of Directors  and in turn be entitled to attend
any and all meetings of the Board of Directors.

     Employee  shall  report to the Board of  Directors.  Without  limiting  the
generality  of the  foregoing,  Employee  shall  have  the  following  reporting
obligations  to  the  Board  of  Directors:   (a)  monthly  operating  financial
statements  and (b) quarterly  presentations  at mutually  agreed upon dates and
times regarding the Corporation's operations. In addition,  without limiting the
generality of the foregoing, Employee shall submit the following to the Board of
Directors for approval:  (a) an annual budget;  and (b) any proposals  regarding
capital  expenditures  exceeding  an aggregate  of $40,000,  provided  that such
expenditures  shall  not  include  those  incurred  in the  ordinary  course  of
business.

     5. Place of  Employment.  The duties to be performed  by Employee  shall be
performed  at the  offices of  Employer,  located in  Roseland,  Louisiana  (the
"Company  Headquarters"),  as well as at such other  temporary  locations as the
Board of Directors  of Employer  may from time to time  determine or require for
the  performance  of his duties as an employee of  Employer.  However,  Employee
shall be under no obligation  hereunder to permanently relocate in the event the
Board of Directors elects to move the Company  Headquarters.  Until such time as
Employee is able to  permanently  relocate to the  Company  Headquarters,  which
relocation  must  occur  within  six  (6)  months  of the  Effective  Date  (the
"Relocation Period"), Employer agrees to provide temporary living


EMPLOYMENT AGREEMENT - Page 2

<PAGE>



accommodations to Employee,  which  accommodations may be chosen by Employee and
approved by Employer.  Employer shall be solely responsible for rent and utility
payments associated with such accommodations,  with all other expenses being the
sole  responsibility of Employee.  During the Relocation Period,  Employer shall
also reimburse  Employee for airline travel expenses for up to twelve (12) round
trip coach class excursions between New Orleans, Louisiana and Orlando, Florida.

     6. Time  Requirements.  Employee shall devote his entire  productive  time,
ability  and  attention  to the  business  of  Employer  during the term of this
Employment  Agreement.  Employee shall not, directly or indirectly,  without the
prior  consent of  Employer,  render any services of a business,  commercial  or
professional  nature to any other  organization  or legal  entity,  whether  for
compensation  or  otherwise,  during the term of this  Employment  Agreement  as
provided in Paragraph 2 hereof.

     7. Conduct  Requirements.  Employee  shall, at all times during the term of
this Employment Agreement, conduct himself in such a manner as to reflect credit
to Employer  and shall not do or perform any acts in his capacity as an employee
of Employer  and/or in his personal  and/or  social life and/or in his financial
affairs which are or may be considered improper,  immoral,  illegal,  dishonest,
indiscreet  and/or  may  cause  Employee  and/or  Employer  to  suffer  loss  of
reputation and/or cause Employee and/or Employer embarrassment.

     8.  Compensation;  Benefits.  Effective  as of the  Effective  Date of this
Agreement,  Employer shall pay or provide to Employee during the Initial Term of
this  Employment  Agreement and any extension  hereof  (unless this Agreement is
earlier terminated as hereinafter provided in Paragraph 10 hereof) the following
compensation   and  benefits  set  forth  in   subparagraphs   (a)  through  (c)
(collectively  the  "Benefits"),  subject to deductions,  offsets and credits as
elsewhere set forth in this Paragraph 8:

          (a)  Compensation.

               (i) Salary.  Employee  shall receive an annual salary of $150,000
          ("Base Salary"),  subject to mandatory  deductions and withholdings as
          required by law,  payable in accordance  with  Employer's  established
          payroll  procedures,  subject to proration for any partial  employment
          period.  Employee's  Base Salary may be  increased  at any time at the
          sole discretion of the Board of Directors.

               (ii)  Stock  Options.   Employee   shall  receive   options  (the
          "Options")  to purchase an aggregate of 200,000  shares of  Employer's
          Common  Stock at an  exercise  price equal to the closing bid price of
          the  Common  Stock  on the  Effective  Date as  quoted  on the  Nasdaq
          SmallCap Market. The Options shall vest and be exercisable as follows:
          (a) options to purchase  100,000  shares of Common Stock shall vest on
          the first  anniversary  of the Effective Date of this  Agreement;  (b)
          options to purchase


EMPLOYMENT AGREEMENT - Page 3

<PAGE>



          50,000 shares of Common Stock shall vest on the second  anniversary of
          the Effective Date of this Agreement;  and (c) options to purchase the
          remaining  50,000  shares  of  Common  Stock  shall  vest on the third
          anniversary  of the  Effective  Date of this  Agreement.  All unvested
          Options  shall  vest  immediately  in  the  event  this  Agreement  is
          terminated either as the result of the death or disability of Employee
          as  contemplated  in paragraph (a) of Section 10 of this  Agreement or
          "without cause" as provided for in paragraph (c) of Section 10 of this
          Agreement.  The Options shall expire on the fifth  anniversary  of the
          Effective Date of this Agreement.

               (iii) Bonus. Employee may be eligible to receive an annual bonus,
          which  bonus  shall be in the form of (a)  options to  purchase  up to
          50,000  shares of Employer's  Common  Stock,  which options shall vest
          immediately upon issuance and shall expire five years from the date of
          grant,  and (b) cash in an amount not to exceed 15% of Employee's base
          salary as set forth in Section  (a)(i) of this  Paragraph,  subject to
          mandatory  deductions and withholdings as required by law. Such bonus,
          if any,  shall be  payable at such time as the Board of  Directors  of
          Employer, in its sole discretion, shall determine.

               (b) Employee Benefits.

               (i) Medical Benefits. Employer agrees to include Employee and his
          spouse,  if  applicable,  with no delay in coverage,  in any hospital,
          surgical,  medical  and  dental  plan or  plans  of  Employer  for its
          employees  generally  from  time  to  time  during  the  term  of this
          Employment  Agreement,  provided Employee and his spouse are eligible,
          in accordance  with the terms and conditions of such plan or plans, to
          be covered by such plan or plans.  The costs of  participating in such
          plan or plans shall be borne by Employer  provided  such cost does not
          exceed  $7,200  per year.  Any costs  associated  with  providing  the
          benefits of this  sub-paragraph  (b)(i) which  exceed  $7,200 per year
          shall be the  responsibility  of Employee.  In the event Employer does
          not subscribe to any form of medical or dental plan,  Employee and his
          spouse shall be reimbursed for medical and dental insurance contracted
          for by them on an independent  basis,  which  reimbursement  shall not
          exceed $7,200 per year.

               (ii) Other Benefit Plans. Employee may be eligible to be included
          in any profit sharing, pension, deferred compensation or other benefit
          plans of Employer, including group term life insurance, for all or any
          portion of its employees,  including its key  employees,  from time to
          time  during  the  term of this  Employment  Agreement.  The  costs of
          participating  in any of such benefit plans shall be borne as provided
          in rules and regulations adopted by Employer from time to time dealing
          with any of such plans.  It is agreed and understood  that there shall
          be  no  obligation  on  the  part  of  Employer  to  provide  for  the
          participation of Employee in, or to institute,  any such plan or plans
          or to make any contribution or contributions thereunder.

               (iii)  Vacation,  Personal Days and Holidays.  Employee  shall be
          entitled to paid vacation and personal days as follows: (a) during the
          first year of the Initial Term of this  Agreement,  Employee  shall be
          entitled to two (2) weeks vacation and five (5) personal days; and (b)
          during the second and third years of the Initial Term of this


EMPLOYMENT AGREEMENT - Page 4

<PAGE>



          Agreement, and upon any extension thereof,  Employee shall be entitled
          to three (3) weeks vacation and ten (10) personal days, which vacation
          shall be taken by Employee at  reasonable  times and on or before each
          anniversary of the Effective Date of this  Agreement.  Unused vacation
          days may not be  carried  over if not  taken  prior to an  anniversary
          date.  In  addition,  Employee  shall be entitled to such  holidays as
          Employer elects to provide for its employees generally.

               (c) Other  Benefits.  Employee may be eligible to  participate in
          any stock option plan, incentive compensation plan or bonus plan which
          may be provided by Employer or by any affiliate of Employer to its key
          employees,  the actual participants therein,  including Employee,  and
          benefits granted  thereunder,  if any, to be at the sole discretion of
          Employer  or its  affiliates.  Such  plans are  subject  to any rights
          reserved by Employer or its affiliates to modify or terminate any such
          plans.

     9.  Relocation  and Business  Expenses;  Reimbursement.  Employee  shall be
reimbursed  by  Employer  for  reasonable   expenses  incurred  by  Employee  in
contracting  with a moving company for the purpose of permanently  relocating to
the Company  Headquarters.  Employee shall be entitled to receive  reimbursement
for, or payment  directly by Employer of, all  reasonable  expenses  incurred by
Employee in the  performance of his duties under this  Agreement,  provided that
(i)  Employee  accounts  therefor  in writing  pursuant  to  Section  274 of the
Internal  Revenue Code of 1986, as amended (the "Code"),  (ii) such expenses are
ordinary  and  necessary  business  expenses of  Employer  within the meaning of
Section 162 of the Code,  and (iii)  Employer  approves such expenses in advance
prior to being incurred by Employee if such expenses  should exceed $5,000.  10.
Termination.  This Employment Agreement shall terminate earlier than provided in
Paragraph 2 hereof upon the first to occur of any of the following: (a) Death or
Disability.  In the event Employee shall die or become  disabled during the term
of this Employment Agreement,  then and in such event, this Employment Agreement
shall automatically terminate as of such date. Employer shall pay to Employee or
Employee's  legal  representatives  all Benefits,  if any, then due and owing to
Employee figured prorata up to and including the date of death or disability. As
used in this Agreement,  the term "disability" shall have the meaning given such
term in any disability  insurance  policy or policies  covering  Employee if any
such policy or policies is in force at the time a determination of disability is
to be made. If no such policy is in force at such time, the term "disability" or
"disabled" shall mean the physical or mental


EMPLOYMENT AGREEMENT - Page 5

<PAGE>



incapacity  of Employee  which has  prevented or will prevent such Employee from
substantially  performing the usual duties of his employment with Employer for a
substantially  continuous period of at least  one-hundred  twenty (120) days. If
there is any  dispute as to whether  Employee  is  disabled  (whether or not any
disability  policy is in force),  Employee  and  Employer  shall  each  select a
medical  doctor duly  licensed in the state of  Employee's  permanent  residence
within 15 days of the date the issue of disability first arises. The two doctors
so  selected  shall then  within 15 days  thereafter  mutually  agree on a third
medical doctor duly licensed in such state.  The three doctors so selected shall
then within 30 days  following the  selection of a third  medical  doctor make a
determination  as to whether  Employee is  disabled.  The  decision of the three
medical  doctors so selected shall be conclusive on all parties  concerned.  The
cost and  expense of the three  medical  doctors so  selected  shall be borne by
Employer.

     (b) Termination for Cause. This Employment Agreement may be terminated, and
Employee discharged, prior-to the expiration of the Initial Term for the reasons
set forth below.  Employer may at its option  terminate this Agreement by giving
written notice of termination to Employee without  prejudice to any other remedy
to which  Employer  may be  entitled,  either at law,  in equity,  or under this
Agreement:

          (i)  if  Employee  fails  to  permanently   relocate  to  the  Company
     Headquarters  prior to the  expiration of the Relocation  Period;  however,
     Employee  may claim his state of  permanent  residence to be other than the
     State of Louisiana for personal reporting purposes;

          (ii) if Employee fails to devote his full time,  effort and skill as a
     representative of Employer;

          (iii) if Employee fails to perform  services that are  satisfactory to
     Employer;

          (iv) upon the occurrence of  circumstances  that make it impossible or
     impractical for the business of Employer to be continued; or

          (v)  upon  the  filing  of a  petition  in a court  of  bankruptcy  by
     Employer.

     This Agreement  shall also  terminate  immediately on the occurrence of any
one of the following events:

          a) Employee  breaches  or  neglects  the duties or other terms of this
     Agreement (including making any representation in this Agreement that turns
     out to be-false);


EMPLOYMENT AGREEMENT - Page 6

<PAGE>



          b) Employee fails to follow any  requirement,  order or mandate of the
     Board of Directors of Employer;

          c) Employee commits any dishonest act towards Employer;

          d) Employee engages in any activity involving fraud, dishonesty, moral
     turpitude, addiction or dereliction of duty; or

          e) subject to the provisions of Paragraph  10(a) above,  an incapacity
     for any  reason  on the  part of  Employee  to  perform  his  duties  for a
     continuous  period of one  hundred  twenty  (120)  days,  unless  waived by
     Employer.

     ln the  event of  termination  of this  Employment  Agreement  prior to the
completion  of the Initial Term of  employment  specified in it, for any reasons
set forth above,  Employee shall be entitled to the Benefits earned prior to the
date  of  termination,  computed  pro  rata  up to and  including  the  date  of
termination.  Employee  shall be  entitled  to no further  Benefits  and will be
relieved of all duties and obligations under this Employment Agreement as of the
date  of  termination.   Notwithstanding   anything  provided  herein,  Employee
understands and agrees that  Employee's  obligations and agreements set forth in
Sections 12 and 13 shall survive the terminations of this Agreement.

          (c)  Termination   Without  Cause.   This  Employment   Agreement  and
     Employee's  employment by Employer may be  terminated  by Employer  without
     cause;  provided,  however,  Employer shall pay Employee an amount equal to
     one  year's  Base  Salary  plus any  other  accrued  but  unpaid  Benefits.
     Notwithstanding the foregoing,  Employer shall have no obligation to pay or
     provide  Employee  with any  Benefits  if  Employee  violates,  breaches or
     otherwise  fails to comply with each and every of the terms and  provisions
     of the Non- Compete.

          (d) Early  Termination by Employee.  If Employee  resigns or otherwise
     terminates his employment with Employer prior to the expiration of the term
     provided in  Paragraph 2 hereof,  Employee  shall  forfeit and shall not be
     entitled to receive any Benefits from Employer whatsoever except any salary
     and  bonus  actually  earned  by him  prior to the date of  termination  as
     provided for in this Agreement.  Any termination pursuant to this Paragraph
     10(d) shall not limit any right or remedy that  Employer  may have  against
     Employee.

          (e) Change in  Control.  If this  Agreement  is  terminated  by either
     Employer or Employee  as a result of a Change in  Control,  as  hereinafter
     defined, Employee shall be entitled


EMPLOYMENT AGREEMENT - Page 7

<PAGE>



     to a cash  payment of  $150,000  and the  immediate  vesting of the Options
     granted in Paragraph 8 as full and final  satisfaction  of all  obligations
     due and owing to Employee by  Employer  under the terms of this  Employment
     Agreement.

               A Change In Control will be deemed to have  occurred for purposes
          hereof (i) when a change of stock  ownership  of  Employer of a nature
          that would be  required  to be  reported  in  response to Item 6(e) of
          Schedule 14A promulgated under the Securities Exchange Act of 1934, as
          amended (the  "Exchange  Act"),  and any  successor  Item of a similar
          nature  has  occurred;  or (ii)  upon the  acquisition  of  beneficial
          ownership, directly or indirectly, by any person (as such term is used
          in Sections  13(d) and 14(d)(2) of the Exchange  Act) of securities of
          Employer  representing  50% or more of the  combined  voting  power of
          Employer's then outstanding  securities;  or (iii) a change during any
          period of twelve (12) consecutive  months of a majority of the members
          of the Board of  Directors  of  Employer  for any  reason,  unless the
          election,  or the nomination for election by Employer's  shareholders,
          of each director was approved by a vote of a majority of the directors
          then  still in  office  who were  directors  at the  beginning  of the
          period;  provided  that a Change In Control will not be deemed to have
          occurred  for purposes  hereof with respect to any person  meeting the
          requirements of clauses (i) and (ii) of Rule  13d-1(b)(1)  promulgated
          under the Securities Exchange Act of 1934, as amended.

     11.  Status  of  Agreement.  The  Benefits  or  payments  made  under  this
Employment  Agreement shall be independent of and in addition to those under any
other  agreement  which may be in effect between the parties hereto or any other
compensation  payable to Employee  or his  designees  or estate by Employer  and
unless specifically referred to herein or unless otherwise provided by agreement
or law,  nothing  contained  herein shall be deemed to exclude Employee from any
pension,  profit-sharing,  insurance or other benefits to which he may otherwise
be or might become entitled as an employee of Employer.

     12. Non-Compete Agreement. Employee acknowledges that the services rendered
to Employer by Employee have been and will continue to be of a special character
which have a unique  value to Employer  and Employee has had or will have access
to trade secrets and confidential information belonging to Employer, the loss of
which cannot  adequately be compensated by damages in an action of law. Employee
acknowledges  that  Employer's  customers  and the  suppliers  are not generally
known, and that the documents and information  regarding  Employer's  customers,
suppliers,


EMPLOYMENT AGREEMENT - Page 8

<PAGE>



services,   methods  of  operation,   sales,   pricing,  and  costs  are  highly
confidential and constitute trade secrets.

     During the term of Employee's  employment with Employer and for a period of
two years following the  termination of Employee's  employment with Employer for
any reason whatsoever, Employee:

          (a) will not, directly or indirectly,  own, manage, operate,  control,
     be  employed  by,  perform  services  for,  be  connected  with  ownership,
     management,  operation,  or control of any business which performs services
     similar to or competitive with those provided by Employer, in any territory
     where  Employee has ever been  employed by Employer or within a thirty-five
     mile radius of any- such territory;

          (b) will  not,  either on his own  account  or for any  person,  firm,
     partnership,  corporation  or other  entity,  solicit,  interfere  with, or
     endeavor to cause any employee of Employer to leave his or her  employment,
     or induce or  attempt  to induce  any such  employee  to breach  his or her
     Employment Agreement with Employer;

          (c) shall not solicit, induce or attempt to induce any past or current
     customer of  Employer  to cease doing  business in whole or in part with or
     through  Employer,   or  to  do  business  with  any  other  person,  firm,
     partnership, corporation or other entity.

Notwithstanding  the  foregoing,  Employee may, as a passive  investor,  without
violating  the  provisions  hereof,  own  not  more  than 5% of the  issued  and
outstanding stock of a publicly-held company which is engaged in the Business of
Employer.

         Employee acknowledges that the laws of the State of Louisiana regarding
the  enforceability  of  covenants  not to compete are unique and as such hereby
agrees to execute the form of Non-  Competition  Agreement  (State of  Louisiana
Only),  attached  hereto as Exhibit  "A",  for the purpose of setting  forth the
terms of  Employee's  covenant  not to  compete  with  Employer  in the State of
Louisiana.

          13. Confidential Information.

          (a) Employee  recognizes that Employer's  business interests require a
     confidential  relationship  between  Employer  and Employee and the fullest
     practical  protection and  confidential  treatment of Employer's  financial
     data, writings,  computer software,  sources of supply, know-how, plans and
     programs,  and other  knowledge of Employer's  Business,  including but not
     limited to the identity of its customers and  suppliers,  its  arrangements
     with


EMPLOYMENT AGREEMENT - Page 9

<PAGE>



     such  suppliers and customers and technical  data relating to its business,
     products,  and services  (all of which is  collectively  referred to as the
     "Confidential Information"),  which may in whole or in part be conceived or
     learned  of by  Employee  in  the  course  of  Employee's  employment  with
     Employer.

          (b)  Employee  agrees to keep secret and to keep  confidential  all of
     Employer's  Confidential  Information,  whether  or  not  copyrightable  or
     patentable,  both during and after the termination of Employee's employment
     with  Employer.  Employee  further  covenants  and agrees not to use or aid
     others in learning of or using any of Employer's  Confidential  Information
     except in the faithful  performance of Employee's  duties for Employer.  In
     this  regard,  during the term hereof and for two (2) years  following  the
     termination of this Agreement,  Employee  covenants and agrees that, except
     insofar as  authorized  by Employer as a  necessary  disclosure  to persons
     having a need to know  consistent  with  the  working  relationship  within
     Employer and with Employer's customers:

               (i)   Employee   will  not   directly  or   indirectly   disclose
          Confidential  Information  to  others  either  within  or  outside  of
          Employer;

               (ii) Employee will not use  Confidential  Information for his own
          account and will not aid or abet others in use of it for either  their
          account or his account or benefit;

               (iii)  Employee will not make or disclose  documents or copies of
          documents containing disclosures of Confidential Information; and

               (iv) As to documents which are delivered to Employee or which are
          made as a  necessary  part of the  working  relationships  and  duties
          within Employer and with Employer's customers and suppliers,  Employee
          will  treat  them  confidentially  and will mark  them as  proprietary
          confidential   documents   not  to  be   reproduced  or  used  without
          appropriate authority of Employer.

          (c) In the event of a breach or  threatened  breach by Employee of the
     provisions of this Paragraph 13,  Employer  shall, in addition to any other
     available remedies, be entitled to an injunction  restraining Employee from
     disclosing, in whole or in part, any such information or from rendering any
     services to any Person to whom any such information may have been disclosed
     or is  threatened to be  disclosed.

          (d) The  covenants  and  agreements  of  Employee  set  forth  in this
     Paragraph  13 are in addition  to, and not in lieu of,  similar  provisions
     contained in paragraph 12 hereof.


EMPLOYMENT AGREEMENT - Page 10

<PAGE>



     14.  Continuing  Effect.  The  provisions  of  Paragraphs 12 and 13 of this
Employment  Agreement  shall  continue to be binding upon Employee in accordance
with the terms  therein  contained,  notwithstanding  termination  of Employee's
employment hereunder for any reason whatsoever.

     15. Corporate Opportunities and Property Rights of Parties. Employee agrees
that he will  promptly  and fully  inform and  disclose to Employer all business
opportunities  to which Employee  becomes aware related to any business  venture
being undertaken by Employer,  a subsidiary of Employer or any entity affiliated
with  Employer,  during  the term of this  Agreement  and any  renewals  of this
Agreement, whether conceived by Employee alone or with others and whether or not
conceived  during regular  working hours.  All such  opportunities,  inventions,
designs, improvements and discovery shall be the exclusive property of Employer.

     16. Miscellaneous Provisions.

          (a) Notice.  All  notices,  demands,  changes of address,  requests or
     other  communications  that may be or are  required to be given,  served or
     sent by any party to any other party pursuant to this Agreement shall be in
     writing and shall be mailed by  first-class,  registered or certified mail,
     return receipt requested,  postage prepaid, or transmitted by hand delivery
     or telegram,  or by overnight  courier.

          (b) Governing Law. This Agreement shall be subject to, governed by and
     construed in accordance with federal law and the internal substantive laws,
     not the law of conflicts, of the State of Texas.

          (c)  Captions.  The captions  used herein are for  administrative  and
     convenience  purpose only and shall not be construed in  interpreting  this
     Agreement.

          (d) Gender.  Whenever the context so  requires,  the  masculine  shall
     include the feminine and neuter, and the singular shall include the plural,
     and conversely.

          (e) Legal Construction. If any portion of this Agreement shall be held
     invalid or  inoperative,  then so far as  reasonable  and  possible (i) the
     remainder of this Agreement  shall be considered  valid and operative,  and
     (ii) effect  shall be given to the intent  manifested  by the portion  held
     invalid or  inoperative  and that  portion  shall be modified to the extent
     necessary to render it enforceable.

          (f) Amendments.  This Agreement may be amended from time to time by an
     instrument in writing signed by all those who are parties to this Agreement
     at the time of such


EMPLOYMENT AGREEMENT - Page 11

<PAGE>



     amendment,  such instrument  being designated on its face as an "Amendment"
     to this Agreement.

          (g)  Waiver.  The  failure  of any  party  to  insist  in one or  more
     instances  upon the  performance  of any of the terms or conditions of this
     Agreement shall not be construed as a waiver or relinquishment of any right
     granted  hereunder  or of the  future  performance  of  any  such  term  or
     condition,  but the  obligations  of any party with respect  thereto  shall
     continue in full force and effect.

          (h)   Counterparts.   This   Agreement  may  be  executed  in  several
     counterparts,  each of which shall be deemed an original,  but all of which
     together shall constitute one instrument.

          (i) Remedies.  Each party hereto acknowledges that a remedy at law for
     any breach or attempted breach of this Agreement will be inadequate, agrees
     that each other party hereto shall be entitled to specific  performance and
     injunctive  and  other  equitable  relief  in case of any  such  breach  or
     attempted  breach and further agrees to waive any  requirement for securing
     or  posting  of any  bond in  connection  with  the  obtaining  of any such
     injunctive or other equitable  relief.  Such remedy shall be cumulative and
     not  exclusive and shall be in addition to any other rights or remedies any
     party may have against the other.

          (j) Attorneys' Fees. If any action at law or in equity,  including any
     action  for  injunctive  or  declaratory  relief,  is brought to enforce or
     interpret any of the provisions of this  Agreement,  the  prevailing  party
     shall be entitled to recover  reasonable  attorneys' fees and expenses from
     the other  party,  which fees and  expenses  may be set by the court in the
     trial of such action or may be enforced  in a separate  action  brought for
     that purpose and which fees and expenses  shall be in addition to any other
     relief which may be awarded.

          (k)  Prior  Agreements.  This  Agreement  (and  the  exhibits  hereto)
     contains the entire agreement between the parties hereto and supersedes any
     and all prior agreements, whether written or oral, between the parties with
     respect  to  the  within  subject  matter.  All  other  employment,  salary
     continuation,  bonus,  incentive  compensation and other similar agreements
     heretofore  entered into between  Employer and Employee and in effect as of
     the date hereof are hereby  cancelled  and shall be of no further  force or
     effect.

     17. Time of the Essence.  Time shall be of the essence  throughout the term
of this Employment Agreement.


EMPLOYMENT AGREEMENT - Page 12

<PAGE>


     18.  Effective  Date.  The effective  date of this Agreement is January 30,
1998.

                          EMPLOYER:

                          KARTS INTERNATIONAL INCORPORATED


                          By:  /s/ Timothy P. Halter
                               ---------------------------
                               Timothy P. Halter, Vice President

                          Address: 109 Northpark Boulevard, Suite 210
                                   Covington, Louisiana 70433


                          EMPLOYEE:


                               /s/ Robert M. Aubrey
                               ---------------------------
                               ROBERT M. AUBREY

                          Address:  2420 S.W. 7th Avenue
                                    Ocala, Florida 34474


EMPLOYMENT AGREEMENT - Page 13

<PAGE>


EXHIBIT "A"


                            NON-COMPETITION AGREEMENT
                            (State of Louisiana Only)


     This  Agreement is made  effective  as of January 30, 1998,  by and between
Karts International Incorporated, a Nevada corporation (the "Corporation"),  and
Mr. Robert M. Aubrey (the "Employee).

     WHEREAS,   the  Corporation  is  engaged  in  the  business  of  designing,
manufacturing, distributing and marketing go karts;

     WHEREAS, the Corporation and the Employee have entered into that Employment
Agreement dated the date hereof to which this Agreement is an exhibit;

     WHEREAS,  as a condition  of the  Employee's  employment,  the  Corporation
desires to receive from the Employee certain covenants and agreements; and

     WHEREAS,  the  Corporation  and the Employee desire to set forth in writing
the terms and conditions of their  agreements and  undertakings  with respect to
these covenants,  as this Agreement is a condition of the Employee's  employment
and  ancillary  thereto  and does not purport to set forth all the terms of such
employment.

     NOW,  THEREFORE,  for  and in  consideration  of the  mutual  promises  and
covenants contained herein and for good and valuable consideration,  the receipt
and  sufficiency of which are hereby  acknowledged,  the parties hereby agree as
follows:

Section 1. Covenant Not to Compete.

     (a) Covenant.  For a two-year  period after the Employee's  employment with
the Corporation  has been terminated by either party,  the Employee will not, so
long as the  Corporation  engages in or carries on any like business in the area
to be restricted, directly or indirectly:

          (i) enter into or attempt to enter into the "Restricted  Business" (as
     hereinafter  defined)  in the  Parishes  located in the State of  Louisiana
     listed on Annex A hereto;

          (ii)  induce or  attempt to  persuade  any  former,  current or future
     employee, agent, manager, consultant,  director or other participant in the
     Corporation's  business to terminate such employment or other  relationship
     in order to enter into any  relationship  with the  Employee,  any business
     organization  in  which  the  Employee  is a  participant  in any  capacity
     whatsoever,  or any other business  organization  in  competition  with the
     Corporation's business; or

          (iii)  use   contracts,   proprietary   information,   trade  secrets,
     confidential information,  customer lists, mailing lists, goodwill or other
     intangible  property  used or useful in connection  with the  Corporation's
     business.



<PAGE>



     (b) Indirect  Activity.  The term  "indirectly," as used in this Section 1,
includes acting as a paid or unpaid director,  officer,  agent,  representative,
employee of or  consultant  to any  enterprise,  or acting as a proprietor of an
enterprise, or holding any direct or indirect participation in any enterprise as
an owner, partner, limited partner, joint venturer, shareholder or creditor.

     (c) Restricted Business.  The term "Restricted  Business" means the design,
manufacture,  distribution and marketing of go karts. Nevertheless, the Employee
may own not more than five percent of the  outstanding  equity  securities  of a
corporation that is engaged in the Restricted  Business if the equity securities
are listed for trading on a national stock exchange or are registered  under the
Securities Exchange Act of 1934.

     The  parties  hereto  acknowledge  that  the  Corporation  engages  in  the
Restricted Business in all of the Parishes listed on Annex A hereto.

Section 2. Miscellaneous.

     (a)  Severability.  It is the  desire and  intent of the  parties  that the
provisions  of Section 1 shall be  enforced to the  fullest  extent  permissible
under  the  laws and  public  policies  applied  in each  jurisdiction  in which
enforcement is sought.  Accordingly,  to the extent that the covenants hereunder
shall  be  adjudicated  to  be  invalid  or   unenforceable   in  any  one  such
jurisdiction, Section 1 shall be deemed amended to deter therefrom or reform the
portion  thus  adjudicated  to be invalid or  unenforceable,  such  deletion  or
reformation  to apply  only with  respect to the  operation  of Section 1 in the
particular  jurisdiction  in which such  adjudication  is made.  Moreover,  each
provision of this  Agreement is intended to be severable;  and in the event that
any one or more of the  provisions  contained  in this  Agreement  shall for any
reason be adjudicated to be invalid or  unenforceable in any  jurisdiction,  the
same shall not affect the validity or  enforceability of any other provisions of
this Agreement in that  jurisdiction,  but this Agreement  shall be construed in
such  jurisdiction as if such invalid or unenforceable  provision had never been
contained therein.

     (b) Remedies.  The Employee  acknowledges  that  monetary  damages would be
inadequate to compensate the  Corporation  for any breach by the Employee of the
covenants set forth in Section 1 above. The Employee agrees that, in addition to
other  remedies  which may be available,  the  Corporation  shall be entitled to
obtain  injunctive relief against the threatened breach of this Agreement or the
continuation  of any breach,  or both,  without the necessity of proving  actual
damages.

     (c) Waiver. The waiver by the Corporation of the breach of any provision of
this  Agreement by the Employee shall not operate or be construed as a waiver of
any subsequent breach by the Employee.

     (d) Notices.  Any notices  permitted or required under this Agreement shall
be deemed  given upon the date of personal  delivery or  forty-eight  (48) hours
after deposit in the United States mail,  postage fully prepaid,  return receipt
requested, addressed to the Corporation at:

                    c/o Timothy P. Halter
                    4851 LBJ Freeway, Suite 201
                    Dallas, Texas 75244


                                      --2--

<PAGE>



addressed to the Employee at:

                    Robert M. Aubrey
                    2420 S.W. 7th Avenue
                    Ocala, Florida 34474

or at any other address as any party may, from time to time, designate by notice
given in compliance with this Section.

     (e) Law  Governing.  This  Agreement  shall be governed by and construed in
accordance with the laws of the State of Louisiana.

     (f) Titles and Captions.  All section titles or captions  contained in this
Agreement are for  convenience  only and shall not be deemed part of the context
nor effect the interpretation of this Agreement.

     (g) Entire  Agreement.  This  Agreement  contains the entire  understanding
between  and among the  parties  and  supersedes  any prior  understandings  and
agreements among them respecting the subject matter of this Agreement.

     (h)  Agreement  Binding.  This  Agreement  shall be binding upon the heirs,
executors, administrators, successors and assigns of the parties hereto.

     (i) Attorneys' Fees. In the event an arbitration, suit or action is brought
by any party under this Agreement to enforce any of its terms,  or in any appeal
therefrom,  it is  agreed  that  the  prevailing  party  shall  be  entitled  to
reasonable  attorneys'  fees to be fixed by the  arbitrator,  trial court and/or
appellate court.

     (j)  Computation  of Time. In computing any period of time pursuant to this
Agreement, the day of the act, event or default from which the designated period
of time begins to run shall be  included,  unless it is a Saturday,  Sunday or a
legal  holiday,  in which  event the period  shall  begin to run on the next day
which is not a  Saturday,  Sunday or legal  holiday,  in which  event the period
shall  run  until the end of the next day  thereafter  which is not a  Saturday,
Sunday or legal holiday.

     (k) Pronouns and Plurals.  All pronouns and any variations thereof shall be
deemed to refer to the masculine,  feminine,  neuter,  singular or plural as the
identity of the person or persons may require.

     (l)  Presumption.  This  Agreement  or any  section  thereof  shall  not be
construed  against any party due to the fact that said  Agreement or any section
thereof was drafted by said party.

     (m)  Further  Action.  The  parties  hereto  shall  execute and deliver all
documents,  provide all  information and take or forbear from all such action as
may be necessary or appropriate to achieve the purposes of the Agreement.



                                      --3--

<PAGE>



     (n) Parties in  Interest.  Nothing  herein  shall be construed to be to the
benefit of any third party,  nor is it intended that any provision  shall be for
the benefit of any third party.

     (o) Savings Clause. If any provision of this Agreement,  or the application
of such  provision to any person or  circumstance,  shall be held  invalid,  the
remainder of this Agreement,  or the application of such provision to persons or
circumstances  other  than  those as to which it is held  invalid,  shall not be
affected thereby.

     (p) Separate Counsel. The parties acknowledge that the Corporation has been
represented in this transaction by its own attorneys,  that the Employee has not
been represented in this  transaction by the  Corporation's  attorneys,  and the
Employee has been advised to seek separate  legal advice and  representation  in
this matter.

     IN  WITNESS  WHEREOF,  the  parties  have  executed  this  Agreement  to be
effective as of the day first above written.

                                          KARTS INTERNATIONAL INCORPORATED


                                          By: /s/ Timothy P. Halter
                                              -------------------------------
                                              Timothy P. Halter, Vice President


                                              /s/ Robert M. Aubrey
                                              ---------------------------------
                                              ROBERT M. AUBREY



                                      --4--

<PAGE>


                                          ANNEX A


Acadia                                          Madison
Allen                                           Morehouse
Ascension                                       Natchitoches
Assumption                                      Orleans
Avoyelles                                       Ouachita
Beauregard                                      Plaquemines
Bienville                                       Pointe Coupee
Bossier                                         Rapides
Caddo                                           Red River
Calcasieu                                       Richland
Caldwell                                        Sabine
Cameron                                         St. Bernard
Catahoula                                       St. Charles
Claiborne                                       St. Helena
Concordia                                       St. James
De Soto                                         St. John the Baptist
East Baton Rouge                                St. Landry
East Carroll                                    St. Martin
East Feliciana                                  St. Mary
Evangeline                                      St. Tammany
Franklin                                        Tangipahoa
Grant                                           Tensas
Iberia                                          Terrebonne
Iberville                                       Union
Jackson                                         Vermillion
Jefferson                                       Vernon
Jefferson Davis                                 Washington
Lafayette                                       Webster
Lafourche                                       West Baton Rouge
LaSalle                                         West Carroll
Lincoln                                         West Feliciana
Livingston                                      Winn




                                      --5--

<PAGE>