SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-K

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934


                    For fiscal year ended September 30, 1997

                         Commission file number 0-21630

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

                       ACTION PERFORMANCE COMPANIES, INC.
             (Exact Name of Registrant as Specified in Its Charter)

        ARIZONA                                          86-0704792
(State of Incorporation)                    (I.R.S. Employer Identification No.)

                             2401 West First Street
                              Tempe, Arizona 85281
                                 (602) 894-0100
    (Address, including zip code, and telephone number, including area code,
                        of principal executive offices)

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

      Securities registered pursuant to Section 12(g) of the Exchange Act:

                     Common Stock, par value $.01 per share

Indicate by check mark whether the registrant (1) filed all reports  required to
be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes  X  No
                                       ---    ---

Check if disclosure of delinquent  filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained,  to the best of registrant's
knowledge,  in  definitive  proxy  or  information  statements  incorporated  by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

Issuer's revenues for its most recent fiscal year:  $130,380,000.

The  aggregate  market  value  of  Common  Stock  held by  nonaffiliates  of the
registrant  (13,868,740  shares) based on the closing price of the  registrant's
Common Stock as reported on the Nasdaq National Market on December 15, 1997, was
$458,535,216.  For purposes of this computation, all officers, directors and 10%
beneficial  owners  of  the  registrant  are  deemed  to  be  affiliates.   Such
determination should not be deemed an admission that such officers, directors or
10% beneficial owners are, in fact, affiliates of the registrant.

As  of  December  15,  1997,  there  were  outstanding   16,012,471   shares  of
registrant's Common Stock, par value $.01 per share.

Documents  incorporated by reference:  Portions of the  registrant's  definitive
Proxy Statement for the 1998 Annual Meeting of Shareholders  are incorporated by
reference into Part III of this Report.
<PAGE>
                       ACTION PERFORMANCE COMPANIES, INC.

                           ANNUAL REPORT ON FORM 10-K

                      FISCAL YEAR ENDED SEPTEMBER 30, 1997

                                TABLE OF CONTENTS


                                                                            Page
PART I

     ITEM 1.      BUSINESS.................................................... 1
     ITEM 2.      PROPERTIES..................................................18
     ITEM 3.      LEGAL PROCEEDINGS...........................................19
     ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........20

PART II

     ITEM 5.      MARKET FOR THE REGISTRANT'S COMMON EQUITY
                  AND RELATED STOCKHOLDER MATTERS.............................21
     ITEM 6.      SELECTED FINANCIAL DATA.....................................22
     ITEM 7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............23
     ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES
                  ABOUT MARKET RISK...........................................29
     ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................30
     ITEM 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE.........................30

PART III

     ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........30
     ITEM 11.     EXECUTIVE COMPENSATION......................................30
     ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                  AND MANAGEMENT..............................................30
     ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............30

PART IV

     ITEM 14.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
                  REPORTS ON FORM 8-K.........................................31

SIGNATURES        ............................................................34

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...................................F-1
                                        i
<PAGE>
                                     PART I

ITEM 1.           BUSINESS

Overview

          The  Company  is the  leader  in  the  design  and  sale  of  licensed
motorsports  collectible  and  consumer  products  in  the  United  States.  The
Company's  products  include  die-cast scaled replicas of motorsports  vehicles,
apparel  (including  t-shirts,  hats, and jackets),  and souvenirs.  The Company
markets its  products  pursuant to license  arrangements  with  popular race car
drivers  (including  exclusive license  arrangements with seven-time Winston Cup
champion Dale  Earnhardt,  1995 and 1997 Winston Cup champion  Jeff Gordon,  and
seven-time National Hot Rod Association ("NHRA") Funny Car champion John Force),
car owners, car sponsors, automobile manufacturers, and the National Association
for Stock Car Auto Racing ("NASCAR"). The Company's motorsports collectibles and
most of the Company's  apparel and souvenirs are  manufactured by third parties,
generally  utilizing the Company's designs,  tools, and dies. The Company screen
prints and  embroiders  a portion of the  licensed  motorsports  apparel that it
sells.

          The Company  markets its  products to  approximately  5,000  specialty
retailers  either  directly or through its  wholesale  distributor  network;  to
motorsports enthusiasts directly through its Racing Collectibles Club of America
(the "Collectors' Club"), which currently has approximately 107,000 members; and
through mobile  trackside  souvenir stores,  promotional  programs for corporate
sponsors,  and fan clubs.  In December 1996, the Company  entered into a license
agreement with Hasbro,  Inc.  ("Hasbro"),  a  multi-billion  dollar toy and game
manufacturer,   covering  the  exclusive  sale  by  Hasbro  of  a  new  line  of
motorsports-related products in the mass-merchandise market.

          The Company's  products and other  programs  capitalize on the rapidly
growing popularity of motorsports.  USA Today reports that motorsports racing is
the fastest  growing  spectator  sport in the United  States with  attendance at
NASCAR  Winston Cup events more than doubling in the past decade from 75,643 per
event in 1985 to approximately  180,000 in 1996.  Approximately 5.6 million fans
attended the 31 races of the Winston Cup series in 1996.  USA Today also reports
that TV ratings are growing  even  faster  than  attendance,  with more than 100
million people tuning in to NASCAR's  televised  events each year.  According to
NASCAR,   more  than  70  of  the  Fortune  500  companies  utilize  motorsports
sponsorship or advertising as part of their marketing strategies.

          Historically,   the  Company  has  designed   and  marketed   die-cast
collectibles  featuring NASCAR drivers and vehicles.  In 1995, the Company began
expanding  its  lines  of  die-cast  collectibles  to  include  other  types  of
motorsports  vehicles,  including  NHRA drag racing,  NASCAR's new "Super Truck"
racing series,  United States Auto Club ("USAC") racing,  and "World of Outlaws"
sprint car  racing.  During  fiscal  1997,  the  Company  expanded  its  product
offerings  by  acquiring  Sports  Image,  Inc.   ("Sports  Image"),   Motorsport
Traditions  Limited  Partnership  and Creative  Marketing and  Promotions,  Inc.
(together,  "Motorsport Traditions"), and Robert Yates Promotions, Inc. ("RYP"),
which market and distribute licensed  motorsports products including apparel and
souvenirs;   Image  Works,   Inc.,  which   manufactures  and  markets  licensed
motorsports apparel through the  mass-merchandise  markets ("Image Works");  and
the  motorsports   collectibles-related   assets  of  Simpson   Products,   Inc.
("Simpson").  As a result of these  acquisitions,  the  Company  now markets and
distributes  licensed motorsports apparel and other souvenir items featuring the
likeness of Dale Earnhardt,  Jeff Gordon,  Darrell Waltrip,  Bobby Labonte,  and
other  popular  drivers.  During  fiscal  1997,  the Company  also  expanded its
development of promotional programs for corporate sponsors of motorsports, which
feature the  Company's  products  and which are  intended to increase  the brand
awareness of the products and services of the  corporate  sponsors.  The Company
also has begun to  represent  a number of  popular  race car  drivers in a broad
range of licensing and other revenue-producing opportunities,  including product
licenses,   corporate   sponsorships,   endorsement   contracts,   and  speaking
engagements.

          The Company has continued to take significant  steps that are intended
to add new product lines and distribution  channels to capitalize on the growing
demand for licensed  motorsports products but will not compete with sales of the
Company's existing products.  As part of these ongoing efforts,  in October 1997
the Company  announced  that it has agreed to acquire the assets  related to the
motorsports die-cast collectible product lines of
<PAGE>
Revell-Monogram,  Inc.  ("Revell")  and to enter into a strategic  alliance with
Revell involving extensive product licensing and distribution  arrangements.  In
October 1997,  the Company also entered into a ten-year  license  agreement with
Richard  Childress  Racing  Enterprises,  Inc.  ("RCR")  with respect to various
rights used in connection with Dale Earnhardt licensed products.  On December 9,
1997,  the  Company  acquired  certain  assets and assumed  certain  liabilities
related to sales of  motorsports  merchandise  licensed  by NASCAR  Winston  Cup
driver Rusty  Wallace and entered into a seven-year  license  agreement  for the
name and likeness of Mr. Wallace (the "Rusty Wallace Acquisition").

          The Company  focuses on developing  long-term  relationships  with the
most popular drivers, car owners, car sponsors, car manufacturers, and others in
the various top racing categories. The Company continually strives to strengthen
its  relationships  with  licensors  and  to  develop  opportunities  to  market
innovative licensed collectible and consumer products that appeal to motorsports
enthusiasts.  The Company  believes  that its license  agreements  with  popular
NASCAR and other motorsports  personalities and sponsors  significantly  enhance
the collectible  value and  marketability of its products.  The Company believes
that it will be able to leverage its relationships to attract additional drivers
in order to generate  increased  revenue  for the  Company as well as  increased
earnings for the drivers.

          The Company  pursues a strategy  designed  to enhance  its  leadership
position in the motorsports  collectible  and consumer  products  industry.  Key
aspects of this strategy include (i) continuing to enhance its existing products
and introduce new products that appeal to racing enthusiasts, (ii) expanding and
strengthening its licensing arrangements,  (iii) pursuing strategic acquisitions
and  alliances,   (iv)  expanding  existing  and  identifying  new  distribution
channels, and (v) developing promotional programs for corporate sponsors.

          The  Company  was  incorporated  in  Arizona  in 1992.  The  Company's
principal  executive  offices are located at 4707 East Baseline  Road,  Phoenix,
Arizona 85040, and its telephone number is (602) 337-3700.  As used herein,  the
term "Company" refers to Action Performance Companies, Inc. and its subsidiaries
and operating  divisions.  See Item 7, "Management's  Discussion and Analysis of
Financial Condition and Results of Operations - Overview."

Industry Overview

          Motorsports  racing in the United States consists of several  distinct
segments,  each with its own organizing bodies and events.  The largest segment,
in terms of  attendance  and  media  exposure,  is stock  car  racing,  which is
dominated by NASCAR. The other principal segments are drag racing, with NHRA the
most  important  organizing  body,  and Indy car racing,  controlled by the Indy
Racing League and Championship Auto Racing Teams.

          According  to USA Today,  motorsports  racing is the  fastest  growing
spectator sport in the United States. Approximately 15.4 million people attended
motorsports'  premier  events in 1996,  almost three times the 1981  attendance.
Approximately  5.6 million fans attended the 31 races in the NASCAR  Winston Cup
series in 1996, representing attendance of approximately 180,000 per event, more
than  double the 75,643  attendance  per  Winston  Cup event in 1985.  Published
reports  estimate that  attendance at NASCAR Winston Cup events in 1997 exceeded
6.0 million fans. NHRA attendance also has grown  significantly in recent years,
reaching total attendance of almost 1.9 million in 1996. Motorsports events also
have achieved  significant  success on  television,  with coverage of NASCAR and
NHRA races  provided by broadcast and cable  television  networks,  such as ABC,
CBS,  ESPN,  TBS,  and TNN, in addition to  regional  sports  networks.  Several
leading cable  companies have joined forces  recently to launch  Speedvision,  a
motorsports  cable  network.  USA Today reports that TV ratings are growing even
faster than  attendance,  with more than 100 million people tuning into NASCAR's
televised events in 1996. The Company  believes that the recent  construction of
new  superspeedways  in Los Angeles,  California,  Ft. Worth,  Texas, Las Vegas,
Nevada,  and  other  major  cities  will  stimulate   continued  growth  in  the
motorsports  industry through increased  exposure to new racing  enthusiasts and
markets.

          The growing popularity of motorsports has been recognized by corporate
America.  According to NASCAR, more than 70 of the Fortune 500 companies utilize
motorsports   sponsorship  or  other  activities  as  part  of  their  marketing
strategies.
                                        2
<PAGE>
Products and Services

Die-Cast Scaled Replica Vehicles

          The Company designs and markets scaled replicas of motorsports-related
vehicles  that are  constructed  using  die-cast  bodies and  chassis  with free
wheeling  deluxe  wheels and tires.  The  Company  markets its  die-cast  racing
collectibles  pursuant  to  approximately  300  active  licenses  with  race car
drivers,  owners,  and sponsors as well as under license agreements with NASCAR,
Ford Motor Company,  and several  divisions of General Motors Corp. The die-cast
collectibles  offered  by the  Company  relate to stock car,  NHRA drag  racing,
"Super Truck" racing, USAC racing, and "World of Outlaws" sprint car racing. The
Company's die-cast  collectibles consist of (i) 1:64th and 1:24th scale replicas
of actual racing vehicles, which are approximately three inches and eight inches
long,  respectively;  (ii) 1:96th and 1:64th scale racing vehicle  transporters;
(iii) a 1:16th  scale pit  wagon;  and (iv)  1:24th  scale  dually  trucks  with
trailers.  The Company's  die-cast  replicas  typically range in price at retail
from approximately $9.00 to $75.00 per item, depending on size, type of vehicle,
and  level of  detail.  A 1:24th  scale  replica  of an  actual  racing  vehicle
typically  retails for  $35.00.  The Company  offers its  die-cast  collectibles
primarily  through its  wholesale  distributor  network to specialty  retailers,
through its  Collectors'  Club,  through mobile  trackside  stores,  and through
corporate promotional programs. See Item 1, "Business - Sales and Distribution."

          Historically,   the  Company  has  designed   and  marketed   die-cast
collectibles  featuring drivers and vehicles from the NASCAR Winston Cup series.
During fiscal 1995,  the Company began the  development  of several new lines of
die-cast  collectibles   featuring  replicas  of  vehicles  from  other  popular
motorsports.  The Company  successfully  introduced its line of Winston NHRA Top
Fuel Dragsters and a line of die-cast  collectible replicas from the popular new
NASCAR "Super Truck" series in fiscal 1995 and  introduced  its line of Top Fuel
Funny Car replicas in fiscal 1996. In addition, during the second half of fiscal
1997 the Company  introduced the "Elite"  series of die-cast  replicas of NASCAR
racing  vehicles,  which feature  highly  detailed  equipment such as spark plug
wires,  braided hoses, and realistic  suspension systems.  The Company sells the
Elite  series of  collectibles  exclusively  through  the  Collectors'  Club for
approximately $75.00 per replica.

          The Company enhances the collectible  value and appeal of its products
through  various  measures.   These  measures  include  (i)  designing  die-cast
collectibles  that  include  features  that  are not  offered  by the  Company's
competitors;  (ii)  limiting  the  quantities  of each item that it produces and
sells;   (iii)  specifying  on  the  packaging   material  of  certain  die-cast
collectibles the quantity of that limited-edition  item actually produced;  (iv)
offering certain items only through its Collectors'  Club; and (v) designing and
developing  new  packaging  concepts to improve the display of each  collectible
item.

Motorsports Consumer Products

          The Company markets various licensed  motorsports  apparel,  souvenir,
and other consumer products,  including t-shirts,  jackets,  hats, license plate
brackets,  mugs, pins, and key chains. Each of the motorsports consumer products
generally  features  the name,  likeness,  and car number of a popular  race car
driver.  The Company intends to acquire licenses with additional  drivers and to
develop new motorsports consumer products,  including items bearing the "NASCAR"
name and logo in connection  with the Company's  license  agreement with NASCAR.
The Company's  licensed  motorsports  apparel items utilize  unique and creative
designs that are printed or applied to high-quality  shirts,  hats, jackets, and
other products.  The Company designs and sells its motorsports  apparel products
in sizes  ranging  from infant to youth to men's and women's  adult  sizes.  The
Company  designs its  motorsports  consumer  products  primarily for high-volume
distribution  through retail outlets,  mobile trackside stores,  and promotional
programs with corporate  sponsors of racing teams and racing events. See Item 1,
"Business - Sales and Distribution."
                                        3
<PAGE>
Mass-Merchandise License

          The   Company   licenses   Hasbro   to   produce   a   new   line   of
motorsports-related  products  specifically  designed  for the  mass-merchandise
market. Under this license, Hasbro currently markets a line of die-cast replicas
of racing vehicles, which was jointly developed by the Company and Hasbro, under
the "Winner's Circle" brand name. The mass-market die-cast products manufactured
and  marketed  by Hasbro are  completely  distinct  from the  Company's  current
products  and  do  not  compete  directly  with  the  Company's  limited-edition
motorsports die-cast collectible products. Under the agreement, Hasbro also will
market other licensed motorsports  products,  including  radio-controlled  cars,
slot car sets, games (such as electronic and CD-ROM  interactive  games),  plush
toys, figurines,  play sets, walkie talkies, and other items similar to products
that Hasbro currently markets under the "Kenner,"  "Tonka," and "Milton Bradley"
brand names.

          The Company believes that the license agreement with Hasbro allows the
Company to capitalize  on  opportunities  in the  mass-merchandise  market.  The
agreement  will  enable the  Company to remain  focused on its core  business of
designing and marketing motorsports collectibles, apparel, and souvenir products
while  enabling the Company to benefit  from  Hasbro's  retail  mass-merchandise
marketing  expertise  and  resources.  The  agreement  also  provides a means of
expanding  the  Company's  product  offerings  without  committing   substantial
resources to  manufacturing  and  marketing  activities  or subjecting it to the
risks inherent in the mass-merchandise market.

Corporate Promotional Programs

          The Company  provides  comprehensive  marketing  services  designed to
create  corporate   promotional  programs  for  large  corporate  sponsors  that
advertise in motorsports.  Many  corporations  sponsor racing vehicles or events
and advertise at motorsports events and in motorsports-related media in order to
increase awareness of their brands among consumers and to encourage consumers to
purchase their products. The Company provides design services,  graphic artists,
and the  capacity  to  deliver a wide  array of  promotional  products,  such as
die-cast replicas, t-shirts, and hats. The corporate sponsors use these products
either as free or low-cost  awards with the purchase of their own products or in
sweepstakes or other promotions.  The Company also provides  in-house  marketing
and distribution support for its promotional programs,  including in-bound order
processing, order fulfillment,  sweepstakes processing, and redemption programs.
Die-cast  replica  vehicles sold as  promotional  items are not sold through the
Company's wholesale distribution network or through its Collectors' Club.

Action Sports Management

          The  Company  represents  a number of top race car  drivers in a broad
range of licensing and other revenue-producing opportunities,  including product
licenses,   corporate   sponsorships,   endorsement   contracts,   and  speaking
engagements.  The  Company  provides  a number of  services  designed  to enable
drivers to maximize revenue  opportunities  throughout their careers.  Since the
commencement of its sports  management  business in fiscal 1996, the Company has
entered into exclusive  agreements to represent  six-time Winston NHRA Funny Car
champion John Force and other  popular drag racing  drivers,  including  Darrell
Alderman,  Mike Dunn,  Scott  Geoffrion,  and Darrell Gwynn.  As a result of the
Company's  ability to  represent  drivers  effectively  in  obtaining  favorable
licensing  arrangements  and other revenue  opportunities,  the Company believes
that it is well-positioned to attract and retain top race car drivers.

Sales and Distribution

          The Company markets its die-cast  collectibles to approximately  5,000
specialty  retailers  through its  wholesale  distributor  network,  through its
Collectors'  Club,  through  mobile  trackside  stores,  and  through  corporate
promotional  programs.  The Company  markets its motorsports  consumer  products
primarily through direct trackside sales to race fans; through an in-house sales
force and independent representatives to approximately 5,000 specialty retailers
and to major discount and department stores,  retail automotive product outlets,
and  convenience  stores;  and  through  promotional   programs  with  corporate
sponsors.
                                        4
<PAGE>
Wholesale Distribution

          The Company  markets its die-cast  collectibles  on a wholesale  basis
through  approximately  40  distributors  operating  in the United  States.  The
distributors   solicit   orders  for  the  Company's   die-cast   products  from
approximately  5,000  specialty  retailers  throughout  the United  States.  The
retailers  include stores  specializing in motorsports  collectibles and apparel
and stores  specializing  in other sports  collectible  items.  Employees of the
Company  attend  trade  shows in an  effort  to  attract  new  distributors  and
retailers to its network.  The Company  advertises its die-cast  collectibles in
newspapers and magazines  covering  motorsports  and the  collectibles  markets.
These  advertisements  encourage  consumers to contact the nearest  retailers to
purchase the Company's die-cast collectibles. The Company also takes measures to
increase  consumer  awareness  of its  products  through  radio  and  television
advertising,   including  promotion  of  its  collectibles  on  "home  shopping"
television  programs  and  advertising  during  popular  television  programs of
interest to motorsports enthusiasts.

          The Company  utilizes its  distributor  network as well as an in-house
sales force and independent  representatives to market its motorsports  apparel,
souvenirs,  and  other  consumer  products  on a  wholesale  basis  to the  same
specialty retailers that sell its die-cast collectibles.  The Company's in-house
sales force and  independent  representatives  also market  certain  motorsports
consumer products on a wholesale basis to automobile  sections in major discount
and department  stores such as Wal-Mart and K-Mart, to automotive retail stores,
and to convenience stores.

Collectors' Club

          The Company markets certain of its die-cast  collectibles  exclusively
through its Collectors'  Club.  Members of the Company's  Collectors' Club pay a
lifetime  membership fee that entitles them to receive  membership  premiums,  a
quarterly magazine, catalogs, and other special sales materials highlighting the
Company's  collectibles  and other products.  Membership in the Collectors' Club
increased from  approximately  22,000 members in September 1994 to approximately
100,000  members as of  September  30,  1997.  The  Company  strives to increase
collector  interest  in its  products  and to  enhance  its  products'  value as
collectibles by (i) offering certain items  exclusively  through its Collectors'
Club;  (ii) producing a limited number of each  collectible;  and (iii) limiting
the number of a particular  item that each member may  purchase.  Following  the
acquisitions  of Sports  Image and  Motorsport  Traditions,  the  Company  began
developing  a line of  licensed  motorsports  apparel  and  souvenirs  to  offer
exclusively through its Collectors' Club. The Company advertises its Collectors'
Club in publications that focus on motorsports or the collectibles  industry and
through  limited radio and television  advertisements.  During 1996, the Company
increased its  advertising  on cable  television  during  televised  motorsports
events and related  programming  in order to enhance its exposure to motorsports
enthusiasts.

          The Company employs customer service  representatives and an automated
call  distribution  telephone  system  to  take  membership  applications,  take
customer orders, and handle customer inquiries. The Company utilizes an advanced
telephone   and  computer   system  that   combines   telemarketing   functions,
computerized order processing,  and automated warehouse operations to answer and
process   telephone   orders  to  its  Collectors'  Club  more  effectively  and
efficiently  and to accommodate  the  significant  growth in club  membership in
recent years. The system also enables the Company to track the  effectiveness of
each  advertisement  and  to  target  its  marketing  and  advertising  programs
accurately for enhanced impact.

Trackside Sales

          Average  attendance  at  NASCAR  Winston  Cup  racing  events  grew to
approximately  180,000 fans per race during 1996.  Following  the Rusty  Wallace
Acquisition,  the Company owns and operates 25 fully equipped  mobile  trackside
stores to capitalize on this large base of potential  customers.  Some or all of
the Company's mobile trackside stores travel to each NASCAR Winston Cup race (34
events  in  1997)  as well as to  other  selected  racing  events.  Each  mobile
trackside  store is  decorated  with the logos and color  scheme of a particular
racing team and driver and sells a complete  assortment of licensed  motorsports
apparel, souvenirs, and die-cast collectibles dedicated
                                        5
<PAGE>
to that team and  driver.  These  mobile  stores  represent  the only  trackside
opportunities for racing enthusiasts to purchase  motorsports products using the
name and likeness of the driver and racing team featured in each store.

Corporate Promotional Programs

          The Company creates promotional  programs for large corporate sponsors
of  motorsports.  The Company  plans to pursue future  promotional  programs and
currently is in discussions  with major race car drivers and corporate  sponsors
in its effort to develop  such  programs.  See Item 1,  "Business - Products and
Services - Corporate Promotional Programs."

Design and Production

Die-cast Scaled Replica Vehicles

          The Company  designs each die-cast  collectible  that it markets.  The
Company's  design  artists take numerous  photographs of the actual racing cars,
trucks,  and other  vehicles to be produced as die-cast  replicas.  Working from
these photographs,  the Company's artists and engineers use computer software to
create  detailed  scale  renderings  of  the  vehicles.  After  approval  of the
rendering by the vehicle  owner,  driver,  or racing team  sponsor,  the Company
supplies computerized renderings to its manufacturer in the Peoples' Republic of
China ("China").  The manufacturer produces a sample or model, which the Company
then inspects for quality and detail.  After final  approval,  the  manufacturer
produces the die-cast  replicas,  packages them, and ships the finished products
to the Company or, in certain instances, directly to the Company's customers.

          The  Company's   die-cast   collectibles  are  manufactured  under  an
exclusive  agreement with a third-party  manufacturer in China.  The term of the
agreement  currently extends through December 31, 1997 and automatically  renews
for  successive  one-year  terms  unless  terminated  by either  party by giving
written  notice  to the  other  party at  least 90 days  prior to the end of the
then-current  term.  The Company owns a significant  portion of the tooling that
the  third-party  manufacturer  uses to produce  die-cast  collectibles  for the
Company and has partial control over the production of its die-cast collectibles
under the  manufacturing  agreement.  The Company  invested  approximately  $2.6
million  and $7.0  million  in  tooling  for its  proprietary  line of  die-cast
collectibles in fiscal 1996 and fiscal 1997, respectively.  The Company believes
the  breadth  and quality of the tooling  program  provides  the Company  with a
competitive advantage in the motorsports collectible market. The Company intends
to make additional  investments in tooling in order to support the growth of its
business.  The Company also devotes a  significant  amount of time and effort to
the  production  of its  die-cast  collectibles  to  ensure  that the  resulting
products  display a level of quality and detail  that is  superior to  competing
products,   including  opening  hoods  and  trunks,  detailed  engines,  working
suspensions,  and pad  printing  instead  of  stickers  or decals.  The  Company
believes that its overseas manufacturer of die-cast collectibles is dedicated to
high quality and productivity as well as support for new product development. An
affiliate of the Company's  China-based  die-cast  manufacturer  currently  owns
450,000  shares of the Company's  Common Stock.  The Company  believes that this
ownership  interest further aligns the interests of the manufacturer  with those
of the Company.

Motorsports Consumer Products

          The  Company  currently  designs  substantially  all of  its  licensed
motorsports apparel, souvenirs, and other consumer products and arranges for the
manufacture of most of such products on a purchase order basis with  third-party
manufacturers  located primarily in the United States. As a result of its recent
acquisition  of Image  Works,  the Company now screen  prints and  embroiders  a
portion of the licensed motorsports apparel that it sells. The Company's graphic
artists and product  designers  seek to develop  unique  products  and  artistic
designs  that  will  appeal  to  motorsports  enthusiasts  and  distinguish  the
Company's  apparel and  souvenir  products  from those of its  competitors.  The
Company's   artists  and  designers  also  work  closely  with  the  third-party
manufacturers   in  order  to  ensure  that  the  products   conform  to  design
specifications  and meet or exceed quality  requirements.  The Company  believes
that a number of alternative manufacturers for each of these products is readily
available in the event that
                                        6
<PAGE>
the Company is unable to obtain products from any particular  manufacturer.  The
Company owns the tooling and dies used to manufacture certain of its motorsports
consumer  products.  As the Company develops new motorsports  consumer  products
that require specialized  tooling,  the Company intends to build or purchase the
new tooling  that will be required to permit the  third-party  manufacturers  to
produce those items.

Licenses

Product Licenses

          The Company  focuses on developing  long-term  relationships  with and
engages in  comprehensive  efforts to license the most  popular  drivers and car
owners  in  each  top  racing  category,  their  sponsors,  and  others  in  the
motorsports industry.  The Company currently has licenses with approximately 300
race car drivers,  car owners,  and car  sponsors as well as with  NASCAR,  Ford
Motor Company,  several divisions of General Motors Corp., and PACCAR, Inc. (the
manufacturer of Kenworth and Peterbilt trucks).  The Company continually strives
to strengthen its relationships  with licensors and to develop  opportunities to
market  innovative  collectible and consumer products that appeal to motorsports
enthusiasts.  The Company believes that its license agreements with top race car
drivers,  such as seven-time Winston Cup champion Dale Earnhardt,  1995 and 1997
Winston Cup champion  Jeff Gordon,  six-time NHRA Funny Car champion John Force,
Kenny Bernstein,  Rusty Wallace,  Dale Jarrett,  Mark Martin,  Bill Elliot,  and
Bobby Labonte,  significantly enhance the collectible value and marketability of
its products.  By aligning itself with top racing  personalities and providing a
broad range of revenue opportunities,  the Company believes that it will be able
to  leverage  those  relationships  to  attract  additional  drivers in order to
generate increased revenue for the Company as well as increased earnings for the
drivers.

          Except  for its  licenses  with Dale  Earnhardt,  Jeff  Gordon,  Rusty
Wallace, and certain race car team owners, as described below, the licenses with
race car drivers generally provide for a term of one year and permit the Company
to use the driver's name,  photograph or likeness,  and autograph;  the licenses
with race car  owners  generally  provide  for a term of one year and permit the
Company  to use the car number  and  colors;  the  licenses  with  manufacturers
provide for terms of two or more years and permit the Company to  reproduce  the
cars or trucks  themselves;  and the license  agreements  with various  sponsors
generally  provide  for terms of one to three  years and permit  the  Company to
reproduce the  sponsors'  decals and logos as they appear on the cars or trucks.
Depending upon the particular  agreement,  the individual  licenses either renew
automatically,  may be renewed or extended upon written  request by the Company,
or expire at the end of the specified term. The agreements with the drivers, car
owners,  car and truck  manufacturers,  and car sponsors provide for payments by
the Company to the  licensors  of either (i) a fixed  dollar  amount,  which may
include a substantial advance to the licensor; (ii) a fixed amount per item sold
by the Company pursuant to the license;  (iii) a percentage of the net sales for
a program or a percentage of the Company's  wholesale price per item sold by the
Company  pursuant to the license;  or (iv) a combination  of the above.  License
agreements with certain  sponsors do not require  payments by the Company to the
licensors  because of the advertising value provided to the licensor as a result
of having its decals and logos displayed on the Company's products.  The Company
continually  strives to renew  existing  agreements or to enter into new license
agreements  with  existing or new drivers,  car owners,  and car sponsors and to
develop new product programs pursuant to its license agreements in its effort to
maintain its leadership position in the motorsports licensed products industry.

Dale Earnhardt License Agreement

          In  connection  with the  acquisition  of Sports  Image,  the  Company
entered into a license  agreement with Dale Earnhardt (the "Earnhardt  License")
under which the Company has the right to market  licensed  motorsports  products
utilizing  the  likeness of Mr.  Earnhardt.  Under the  Earnhardt  License,  Mr.
Earnhardt  also  granted the Company  the right of first  refusal to make,  have
made,  use, sell, or otherwise  distribute any new licensable  products that Mr.
Earnhardt  becomes aware of and approves for  marketing.  The Earnhardt  License
also provides that Mr. Earnhardt will not personally  market and will not permit
others to market, through the same channels of distribution used by the Company,
any products  bearing his  likeness  that are the same as or similar to products
marketed by the Company
                                        7
<PAGE>
under the  Earnhardt  License.  The term of the  Earnhardt  License  extends  to
November  2011 and from  year to year  thereafter  unless  terminated  by either
party.

Jeff Gordon License and Endorsement Agreements

          In  connection  with the  acquisition  of Motorsport  Traditions,  the
Company  acquired the exclusive rights to manufacture and market various apparel
and souvenir products bearing the name,  likeness,  and signature of Jeff Gordon
and the likeness of his race car under a license  agreement with an affiliate of
Mr. Gordon (the "Gordon Apparel and Souvenir  License").  The Gordon Apparel and
Souvenir  License expires on December 31, 2000,  subject to renewal by agreement
between the  parties.  The Gordon  Apparel and  Souvenir  License  requires  the
Company to pay the licensor  royalties  based on a percentage  of the  wholesale
price of licensed  products sold by the Company,  with minimum royalty  payments
each year during the term of the agreement.

          In  connection  with the  acquisition  of Motorsport  Traditions,  the
Company also entered into a license  agreement (the "Gordon  Die-Cast  License")
with an affiliate of Jeff Gordon.  Pursuant to the Gordon Die-Cast License,  the
Company has the exclusive right to manufacture  and market die-cast  replicas of
Mr. Gordon's race car and related vehicles.  The Gordon Die-Cast License expires
on December 31, 2000. The Gordon  Die-Cast  License  requires the Company to pay
the licensor  royalties based on a percentage of the wholesale price of licensed
products sold by the Company, with minimum royalty payments each year during the
term of the agreement.

          In connection  with the Gordon Die-Cast  License,  the Company entered
into a  personal  service  and  endorsement  agreement  with Jeff  Gordon and an
affiliate of Mr. Gordon (the  "Endorsement  Agreement").  During the term of the
Endorsement Agreement, which expires on December 31, 2000, the Company will have
the right to use Mr.  Gordon's name,  likeness,  signature,  and  endorsement in
connection  with  the  advertisement,   promotion,  and  sale  of  the  die-cast
collectibles to be produced under the Gordon Die-Cast License.

Rusty Wallace License Agreement

          In connection with the Rusty Wallace Acquisition in December 1997, the
Company  entered  into a  license  agreement  (the  "Wallace  License")  with an
affiliate of Rusty Wallace.  Pursuant to the Wallace License,  the Company has a
right of first refusal to make,  have made,  use, sell, or otherwise  distribute
any new licensable  products that bear the name or likeness of Mr. Wallace.  The
Wallace  License also provides that Mr. Wallace will not  personally  market and
will not permit others to market, through the same channels of distribution used
by the  Company,  any  products  bearing  his  likeness  that are the same as or
similar to  products  marketed by the Company  under the  Wallace  License.  The
Wallace  License  requires the Company to pay the licensor  royalties based on a
percentage of the wholesale price of licensed products sold by the Company, with
minimum  royalty  payments each year during the term of the agreement if certain
minimum sales  requirements are met. The Wallace License expires on December 31,
2004, subject to two five-year renewal options by agreement between the parties.

Significant Team Owner Licenses

          During fiscal 1997, the Company  entered into license  agreements with
several of the most popular NASCAR race car team owners,  including Robert Yates
Racing,   Inc.   ("Yates"),   Richard   Childress   Racing   Enterprises,   Inc.
("Childress"),  Joe Gibbs  Racing,  Inc.  ("Gibbs"),  and Dale  Earnhardt,  Inc.
("DEI").  These  licenses  provide the Company with a right of first  refusal to
market products bearing the likeness of Yates' "#28" and "#88" Winston Cup cars;
Childress'  "#3" and "#31" Winston Cup and other racing  vehicles;  Gibbs' "#18"
Winston Cup car and a second car beginning in 1998;  and DEI's "#14" Winston Cup
car and other  racing  vehicles.  To the extent that the Company  exercises  its
right of first refusal,  the license  agreements  also provide that the licensor
will not directly market and will not permit others to market,  through the same
distribution  channels used by the Company,  any of the licensed  products.  The
license  agreements with Yates,  Childress,  Gibbs, and DEI provide for terms of
15, 10, 5, and 3 years,  respectively.  Each of the license  agreements with the
team owners requires the Company to pay the licensor royalties
                                        8
<PAGE>
based on a percentage  of the wholesale  price of licensed  products sold by the
Company.  Certain of the license  agreements  also  provide for minimum  royalty
payments to the licensors.

Hasbro License Agreement

          The license  agreement  between  the  Company and Hasbro (the  "Hasbro
License") covers the exclusive sale by Hasbro in the mass-merchandise  market of
specific  motorsports-related  products for which the Company has or will secure
exclusive   or   non-exclusive   licenses   from  race  car   drivers,   owners,
manufacturers,  and  sponsors.  The  Company  believes  that the Hasbro  License
provides the Company with a source of revenue from the  mass-merchandise  market
without  committing   substantial   resources  to  manufacturing  and  marketing
activities   or   subjecting   the   Company  to  the  risks   inherent  in  the
mass-merchandise  market.  Under the Hasbro License,  the Company is responsible
for acquiring and maintaining the license rights with the licensors,  and Hasbro
is  responsible  for all costs  and  other  arrangements  relating  to  tooling,
manufacturing,  transportation,  marketing,  distribution, and sales of licensed
products.  Hasbro will be responsible  for and will pay or reimburse the Company
for all license fees and royalties,  including advances and guarantees,  paid to
licensors for licensed  products.  The licensed products consist of (i) die-cast
replicas of motorsports  vehicles and a 1:18th-scale  plastic toy car, for which
Hasbro pays a specified  royalty,  and (ii) all other  products  that Hasbro may
market   as   licensed   motorsports   products,    including,    for   example,
radio-controlled  cars, slot car sets,  games  (including  electronic and CD-ROM
interactive games), plush toys, figurines,  play sets, walkie talkies, and other
products,  for which Hasbro pays a specified  royalty.  Hasbro currently markets
similar products under the "Kenner,"  "Tonka," "Milton Bradley," and other brand
names. Hasbro will pay the Company guaranteed minimum annual royalty payments of
$500,000 to $1.0 million, depending on certain circumstances.

          Hasbro's  initial focus under the Hasbro  License has been to develop,
with the Company's  assistance,  a line of motorsports die-cast products for the
retail  mass-merchandise  market.  Hasbro will fund all capital requirements for
this  product  line and will  manufacture,  distribute,  and market the products
under the  "Winner's  Circle"  brand name.  This product line has been  recently
introduced  to  mass-market   retailers.   The  mass-market   die-cast  products
manufactured and marketed under the Hasbro License are completely  distinct from
the Company's  current  products and do not compete  directly with the Company's
limited-edition motorsports die-cast collectible products.

          The Hasbro  License  provides  for a term ending on December 31, 2001.
Hasbro may extend the Hasbro License for an additional three-year term, provided
that total wholesale  revenue of licensed  products  exceeds a specified  amount
during the initial term.

NASCAR License Agreement

          In April 1997,  the Company  entered  into a licensing  agreement  and
marketing alliance with NASCAR that gives the Company the non-exclusive right to
use the "NASCAR"  name and logo on all of its products and product  packaging as
well as on related sales,  marketing,  and promotional materials.  The licensing
arrangement became effective immediately for all of the Company's products other
than die-cast products. Beginning on January 1, 1998, the Company also will have
the  right  to  include  the  NASCAR  name and  logo on its  die-cast  products,
packaging, and related materials.  Under the NASCAR license, the Company will be
an official  licensee of the "NASCAR  50th  Anniversary"  program and intends to
develop several  product lines in connection  with that promotion.  In addition,
the  Company  and  NASCAR  currently  are  working  together  to  develop  other
promotional programs targeted at many of NASCAR's corporate sponsors.

Competition

          The motorsports collectible and consumer product industry is extremely
competitive.   The  Company  competes  with  major  domestic  and  international
companies,  some of which have  greater  market  recognition  and  substantially
greater financial, technical, marketing,  distribution, and other resources than
the  Company  possesses.  The Company  believes  that  Racing  Champions,  Inc.,
Revell-Monogram, Inc., and The ERTL Company, Inc.
                                        9
<PAGE>
currently  constitute  its  principal  competitors  in the die-cast  collectible
industry.  The Company's  motorsports apparel and souvenirs compete with similar
products sold or licensed by drivers, owners, sponsors, and other licensors with
which  the  Company  currently  does not have  licenses  as well as with  sports
apparel  licensors and  manufacturers  in general.  Emerging  companies also may
increase  their  participation  in  these  markets.  The  Company's  promotional
products  compete for advertising  dollars  against other specialty  advertising
programs  and media,  such as  television,  radio,  newspapers,  magazines,  and
billboards.

          The Company believes that its relationships and licenses with top race
car drivers,  car owners,  and other popular  licensors  represent a significant
advantage  over its  competitors  in the  motorsports  collectible  and consumer
products   industry.   The  Company  strives  to  expand  and  strengthen  these
relationships  and  to  develop  opportunities  to  market  innovative  licensed
collectible and consumer  products that appeal to motorsports  enthusiasts.  The
ability of the  Company to compete  successfully  depends on a number of factors
both within and outside its control, including the quality,  features,  pricing,
and diversity of its products; the quality of its customer services; its ability
to recognize  industry  trends and anticipate  shifts in consumer  demands;  its
success in designing and marketing new products;  the  availability  of adequate
sources  of   manufacturing   capacity  and  the  ability  of  its   third-party
manufacturers  to meet delivery  schedules;  its efficiency in filling  customer
orders; the continued popularity of the motorsports  personalities with whom the
Company has  licensing  arrangements;  its ability to renew  existing  licensing
arrangements and enter into new licensing  arrangements;  its ability to develop
and maintain effective marketing programs that enable it to sell its products to
motorsports enthusiasts; product introductions by the Company's competitors; the
number,  nature,  and success of its competitors in a given market;  and general
market and economic conditions.

Backlog

          The Company  accepts  orders from members of its  Collectors'  Club in
advance of the arrival of certain  collectible  products from the manufacturers.
The  Company  had  outstanding  orders for  approximately  $5.0  million of such
products as of September 30, 1997.

Trademarks and Patent Rights

          Although  the  Company's  business  historically  has not  depended on
trademark or patent  protection,  the Company recognizes the increasing value of
its various  trade  names and marks.  The  Company is taking  steps  designed to
protect,  maintain,  and  increase  the value of its trade names and marks.  The
Company does,  however,  license valuable trademarks and other rights from third
parties. See Item 1, "Business - Licenses."

Insurance

          The  Company  maintains a $2.0  million  product  liability  insurance
policy  to cover  the sale of its  die-cast  and  other  products.  The  Company
maintains an additional $5.0 million in commercial  umbrella liability coverage.
The Company also  maintains a $6.0 million  insurance  policy to cover its molds
and dies  located at its  third-party  manufacturer  in China and a $5.0 million
insurance policy to cover lost revenue in the event of certain  interruptions of
business with its overseas  manufacturer of die-cast  collectibles.  The Company
believes its insurance coverage is adequate.

Employees

          As of December 15, 1997, the Company had 418 full-time employees.  The
Company has  experienced  no work  stoppages  and is not a party to a collective
bargaining agreement. The Company believes that it maintains good relations with
its employees.
                                       10
<PAGE>
Executive Officers

          The following table sets forth certain  information  regarding each of
the executive officers of the Company.

<TABLE>
<CAPTION>
                         Name                        Age                    Position Held
                         ----                        ---                    -------------

<S>                                                  <C>      <C>
         Fred W. Wagenhals......................     56       Chairman of the Board, President, and
                                                              Chief Executive Officer
         Tod J. Wagenhals.......................     33       Executive Vice President, Secretary, and Director
         Charles C. Blossom, Jr.................     47       Vice President Chief Operating Officer, and Director
         Christopher S. Besing..................     37       Vice President, Chief Financial Officer,
                                                              Treasurer, and Director
</TABLE>


          Fred W. Wagenhals has served as Chairman of the Board, President,  and
Chief  Executive  Officer  of the  Company  since  November  1993 and  served as
Chairman of the Board and Chief Executive  Officer from May 1992 until September
1993 and as  President  from July  1993  until  September  1993.  Mr.  Wagenhals
co-founded Racing Champions, Inc. in April 1989 and served as a director of that
company until April 1993. From October 1990 until May 1992, Mr. Wagenhals served
as Chairman of the Board and Chief Executive  Officer of Race Z, Inc. and Action
Performance  Sales,  Inc.  ("APS"),  which were engaged in sales of  promotional
products and collectible items related to the racing industry.

          Tod J. Wagenhals has served as Executive Vice President of the Company
since July 1995,  as a director  of the  Company  since  December  1993,  and as
Secretary of the Company since  November 1993.  Mr.  Wagenhals  served as a Vice
President of the Company from September 1993 to July 1995. Mr.  Wagenhals served
in various  marketing  capacities with the Company from May 1992 until September
1993 and with APS from October 1991 until May 1992.  Mr.  Wagenhals was National
Accounts Manager of Action Products, Inc. from January 1989 to October 1991. Mr.
Wagenhals is the son of Fred W. Wagenhals.

          Charles C. Blossom, Jr. has served as Vice President,  Chief Operating
Officer,  and as a director of the Company  since  November  1997.  Mr.  Blossom
served as Senior Vice  President -- Sales and Marketing of the Company from July
1997 to November  1997.  From January 1996 to July 1997, Mr. Blossom was engaged
in providing  professional  business consulting  services.  From October 1992 to
January  1996,  Mr.  Blossom  served as President  of Mac Tools,  a $300 million
subsidiary of The Stanley Works,  which  manufactures and distributes  tools and
equipment to the automotive aftermarket. Mr. Blossom served as Vice President --
Sales and  Marketing  of Mac Tools  from May 1992 to October  1992,  and as Vice
President -- Air Tool  Operations from September 1989 to May 1992. From December
1983 to  September  1989,  Mr.  Blossom  owned and operated  American  Pneumatic
Technologies, Inc. before selling that business to Mac Tools.

          Christopher  S.  Besing has served as a Vice  President  and the Chief
Financial Officer of the Company since joining the Company in January 1994, as a
director of the Company  since May 1995,  and as Treasurer of the Company  since
February 1996. Prior to joining the Company,  Mr. Besing held several  financial
and  accounting   positions  with  Orbital  Sciences  Corporation  ("OSC")  from
September  1986 to December  1993,  most recently as Director of Accounting  and
Controller of OSC's Launch Systems Group in Chandler,  Arizona. Prior to joining
OSC, Mr.  Besing was employed as an accountant  with Arthur  Andersen & Co. from
January 1985 to August 1986. Mr. Besing is a Certified Public Accountant.
                                       11
<PAGE>
                             SPECIAL CONSIDERATIONS

          The following  factors,  in addition to those  discussed  elsewhere in
this Report,  should be carefully  considered in evaluating  the Company and its
business.

Certain Factors That Could Adversely Affect Operating Results

          The  Company's  operating  results are  affected by a wide  variety of
factors that could adversely impact its net sales and operating  results.  These
factors,  many of which are  beyond  the  control of the  Company,  include  the
Company's  ability  to  identify  trends  in the  motorsports  collectibles  and
consumer  markets and to create and  introduce  products on a timely  basis that
take  advantage  of those trends and that  compete  effectively  on the basis of
price and  consumer  tastes and  preferences;  its ability to  identify  popular
motorsports  personalities and to enter into and maintain mutually  satisfactory
licensing  arrangements  with them;  the racing  success of the key  motorsports
personalities  with whom the  Company has license  arrangements;  the  Company's
ability to design and  arrange  for the timely  production  and  delivery of its
products,  the market acceptance of the Company's products; the level and timing
of orders placed by customers;  seasonality;  the  popularity and life cycles of
and customer  satisfaction  with products  designed and marketed by the Company;
and competition and competitive pressures on prices.

          New motorsports  collectible and consumer  products  frequently can be
successfully marketed for only a limited time. The Company's ability to increase
its sales and marketing efforts to stimulate  customer demand and its ability to
monitor third-party manufacturing arrangements in order to maintain satisfactory
delivery  schedules and product  quality are important  factors in its long-term
prospects.  A  slowdown  in demand  for the  Company's  products  as a result of
ineffective marketing efforts, manufacturing difficulties, changing cultural and
demographic   trends  or  consumer  tastes  and  spending   patterns,   economic
conditions,  or other  broad-based  factors could adversely affect the Company's
operating results.

Dependence on License Arrangements

          The Company  markets its products  pursuant to licensing  arrangements
with  race  car  drivers,  race  car  owners,  race  car  sponsors,   automobile
manufacturers, and NASCAR. The licensing arrangements vary in scope and duration
and  generally  authorize  the sale of  specified  licensed  products  for short
periods of time. In some cases, the license  agreements  provide for the payment
of minimum  royalties  or other  fixed  amounts,  so that the  Company  may have
significant  payment   obligations  with  respect  to  a  particular   agreement
regardless of the level of sales of products  licensed  under that  agreement or
the profitability of those sales. The success of licensing  arrangements depends
on many factors, including the reasonableness of license fees in relationship to
revenue  generated by sales of licensed  products,  the continued  popularity of
licensors,  and the  absence  of  their  sickness,  incapacity,  or  death.  The
termination,   cancellation,   or   inability   to  renew   material   licensing
arrangements,  or  the  inability  to  develop  and  enter  into  new  licensing
arrangements,  would have a material adverse effect on the Company.  See Item 1,
"Business Licenses."

Dependence on Third Parties for Manufacturing

          The  Company  depends  upon third  parties to  manufacture  all of its
motorsports collectibles and most of its consumer products. Although the Company
owns most of the tools, dies, and molds utilized in the manufacturing  processes
of its  collectible  products and owns the tooling and dies used to  manufacture
certain of its  consumer  products,  the Company has  limited  control  over the
manufacturing processes themselves. As a result, any difficulties encountered by
the third-party manufacturers that result in product defects, production delays,
cost overruns, or the inability to fulfill orders on a timely basis could have a
material adverse effect on the Company.

          The Company does not have  long-term  contracts  with its  third-party
manufacturers.  Although  the Company  believes it would be able to secure other
third-party  manufacturers  to produce its products as a result of its ownership
of the  molds  and  tools  used  in the  manufacturing  process,  the  Company's
operations would be adversely affected
                                       12
<PAGE>
if it  lost  its  relationship  with  any of its  current  suppliers  (including
particularly its manufacturer of die-cast products, which currently utilizes one
facility in China to produce all of the Company's  die-cast  products) or if its
current suppliers'  operations or sea or air transportation with its China-based
die-cast  manufacturer  were disrupted or terminated even for a relatively short
period  of time.  The  Company's  tools,  dies,  and molds  are  located  at the
facilities  of its  third-party  manufacturers,  and,  accordingly,  significant
damage  to such  facilities  (particularly  the  facility  used by its  die-cast
product  manufacturer  in  China)  could  result  in the loss of or  damage to a
material  portion of its key tools,  dies,  and molds in addition to  production
delays while new facilities were being arranged and replacement tools, dies, and
molds were being  produced.  The  Company  does not  maintain  an  inventory  of
sufficient  size to provide  protection  for any  significant  period against an
interruption of supply,  particularly if it were required to obtain  alternative
sources of supply.

          Although the Company does not itself  purchase the raw materials  used
to  manufacture  its products,  it is  potentially  subject to variations in the
prices it pays its third-party manufacturers for products depending on what they
pay for the raw  materials.  In this regard,  the Company  understands  that the
price of zinc, a principal raw material in its die-cast replicas,  has increased
substantially  over  the  last  several  years,  although  to date  these  price
increases  have not been  reflected  in increases in the prices the Company pays
for its die-cast replicas.

Integration of Business Operations

          The  Company  has  completed  a  number  of  acquisitions  during  and
subsequent  to fiscal  1997.  Following  these  acquisitions,  the  Company  has
substantially  consolidated  the  operations of the various  acquired  entities,
several  of  which  were  based  in the same  city  and  marketed  substantially
identical  types  of  products  through  substantially   identical  channels  of
distribution,  into  Company's  existing  operations in Phoenix,  Arizona or the
operations of Sports Image in Concord, North Carolina. There can be no assurance
that the Company will be able to complete  effectively  the  integration  of the
operations of the acquired  companies with the Company's  operations,  to manage
effectively the combined operations of the acquired  businesses,  to achieve the
Company's  operating and growth strategies with respect to these businesses,  to
obtain increased revenue  opportunities as a result of the anticipated synergies
created by expanded product offerings and additional  distribution  channels, or
to reduce the overall selling,  general, and administrative  expenses associated
with the acquired operations. The integration of the management, operations, and
facilities of the acquired  companies and any other  businesses  the Company may
acquire in the future could involve unforeseen difficulties,  which could have a
material  adverse effect on the Company's  business,  financial  condition,  and
operating results.

          The  Company  has  conducted  due  diligence  reviews  of  each of the
acquired businesses and has received  representations  and warranties  regarding
each of the  acquired  businesses.  There  can be no  assurance,  however,  that
unforeseen  liabilities  will not arise in connection  with the operation of the
acquired  businesses or future  acquired  businesses or that any  contractual or
other  remedies  available to the Company will be sufficient  to compensate  the
Company in the event  unforeseen  liabilities  arise.  For example,  the Company
recently  was named as a defendant in a lawsuit  based upon  actions  alleged to
have  been  taken by  several  of the  newly  acquired  businesses  prior to the
Company's  acquisitions  of those entities.  The Company  currently is unable to
quantify the amount of  liability,  if any, that it may incur as a result of the
lawsuit. See Item 3, "Legal Proceedings."

          The  Company  anticipates  using  the  opportunities  created  by  the
combination of its acquired  operations to effect what the Company believes will
be substantial  cost savings,  including a reduction in operating  expenses as a
result of the  elimination  of  duplicative  sales,  marketing,  administrative,
warehouse,  and distribution facilities,  functions, and personnel.  Significant
uncertainties,  however, accompany any business combination, and there can be no
assurance that the Company will be able to achieve its  anticipated  integration
of  facilities,   functions,   and  personnel  in  order  to  achieve  operating
efficiencies  or  otherwise  realize  cost  savings  as a result  of the  recent
acquisitions  or future  acquisitions.  The inability to achieve the anticipated
cost savings could have a material  adverse  effect on the  Company's  business,
financial condition, and operating results.
                                       13
<PAGE>
Management of Growth

          Since  1993,  the  Company's   business   operations   have  undergone
significant  changes and growth,  including its emphasis on and the expansion of
its collectible product lines,  acquisition of its motorsports consumer products
lines, and significant  investments in tooling and licensing  arrangements.  The
Company's ability to manage effectively any significant future growth,  however,
will  require  it to  integrate  successfully  the  operations  of any  acquired
businesses with the Company's operations and to enhance further its operational,
financial,  and management systems;  to expand its facilities and equipment;  to
receive  products  from  third-party  manufacturers  on a timely  basis;  and to
successfully hire, train, retain, and motivate additional employees. The failure
of the Company to manage its growth on an effective  basis could have a material
adverse effect on the Company's  business,  financial  condition,  and operating
results.  In August 1997, the Company relocated its corporate  headquarters to a
new, 140,000 square foot facility in Phoenix, Arizona. The Company also recently
entered into a lease for a new 121,000  square foot  facility in Concord,  North
Carolina,  for its operations based in that area. The Company may be required to
increase  staffing and other  expenses as well as make  expenditures  on capital
equipment and manufacturing  sources in order to meet the anticipated  demand of
its  customers.  Sales of the Company's  collectible  and consumer  products are
subject to changing consumer tastes, and customers for the Company's promotional
items  generally  do not  commit to firm  orders  for more than a short  time in
advance. The Company's  profitability would be adversely affected if the Company
increases  its  expenditures  in  anticipation  of  future  orders  that  do not
materialize. Certain customers may increase orders for the Company's products on
short notice,  which would place an excessive short-term burden on the Company's
resources.

Rapid Market Changes

          The markets for the Company's products are subject to rapidly changing
customer tastes, a high level of competition,  seasonality,  and a constant need
to create and market  new  products.  Demand  for  motorsports  collectible  and
consumer  products  depends  upon the  popularity  of certain  drivers and other
personalities,   themes,   cultural  and  demographic   trends,   marketing  and
advertising expenditures, and general economic conditions. Because these factors
can change  rapidly,  customer  demand also can shift quickly.  New  motorsports
collectible and consumer  products  frequently can be successfully  marketed for
only a limited time. The Company may not always be able to respond to changes in
customer  tastes  and  demands  because  of the  amount  of time  and  financial
resources that may be required to bring new products to market. The inability to
respond  quickly to market  changes could have a material  adverse effect on the
Company's  business,  financial  condition,  and operating results.  See Item 1,
"Business Products and Services."

Dependence on New Products

          The Company's  operating results depend to a significant extent on its
ability to continue to develop and introduce new products on a timely basis that
compete  effectively  on the basis of price and that  address  customer  tastes,
preferences, and requirements.  The success of new product introductions depends
on various factors, including proper new product selection, successful sales and
marketing efforts,  timely production and delivery of new products, and consumer
acceptance of new products. There can be no assurance that any new products will
receive or maintain substantial market acceptance. The failure of the Company to
design,  develop,  and  introduce  popular  products  on a  timely  basis  would
adversely affect its future operating results.  See Item 1, "Business - Products
and Services."

Competition

          The  motorsports   collectible  and  consumer   products  markets  are
extremely   competitive.   The  Company   competes   with  major   domestic  and
international  companies,  some of which have  greater  market  recognition  and
substantially greater financial, technical,  marketing,  distribution, and other
resources  than  the  Company  possesses.   The  Company  believes  that  Racing
Champions,  Inc.,  Revell-Monogram,  Inc., and The ERTL Company,  Inc. currently
constitute  its  principal  competitors  in  the  motorsports  die-cast  replica
industry.  The Company's  motorsports apparel and souvenirs compete with similar
products sold or licensed by drivers, owners, sponsors, and other licensors with
                                       14
<PAGE>
which  the  Company  currently  does not have  licenses  as well as with  sports
apparel  licensors and  manufacturers  in general.  Emerging  companies also may
increase  their  participation  in  these  motorsports  markets.  The  Company's
promotional   programs  must  compete  for  advertising  dollars  against  other
specialty advertising programs and media, such as television, radio, newspapers,
magazines,  and billboards.  The Company competes  primarily on the basis of the
current  popularity of the race car drivers and others with whom it has licenses
and its ability to obtain favorable  licensing  arrangements  with other popular
licensors;  the  appeal of its  products;  and the cost,  design,  and  delivery
schedules  of its  products.  There can be no  assurance  that the Company  will
continue to be able to compete successfully in the future. See Item 1, "Business
- Competition."

Potential Regulation of Corporate Sponsorship

          Tobacco  and  alcohol  companies  provide  a  significant   amount  of
advertising and promotional support of racing events,  drivers,  and car owners.
In August 1996,  the U.S.  Food and Drug  Administration  (the "FDA")  published
final regulations that will substantially  restrict tobacco industry sponsorship
of sporting events,  including motorsports,  beginning in 1998. In April 1997, a
federal district judge ruled that the FDA did not have the authority to regulate
tobacco  marketing.  That ruling, if upheld on appeal,  would have the effect of
overturning the FDA regulations.  In addition to the FDA  regulations,  however,
certain  major  manufacturers  of  tobacco  products  have  reached  a  proposed
settlement with attorneys general of a number of states that have filed lawsuits
against  such  tobacco  product  manufacturers.  The terms of those  settlements
include potential voluntary restrictions on advertising by the tobacco industry.
The final terms of some or all of those  settlements will be subject to approval
by  the United  States Congress and the President of the United States.  The FDA
regulations, if ultimately approved, and any other legislation,  regulations, or
other initiatives,  including the pending settlement negotiations, that limit or
prohibit  advertisements  of tobacco  and alcohol  products at sporting  events,
including racing events,  could ultimately affect the popularity of motorsports,
which could have a material adverse effect on the Company. The Company believes,
however,  that other major consumer  products  companies  would quickly  replace
tobacco and alcohol  companies  as  sponsors  of  motorsports  in the event that
advertisement of those products declines.

Seasonal Fluctuations in Sales

          Because the auto racing season is  concentrated  between the months of
February and November,  the second and third calendar quarters of each year (the
Company's  third and fourth  fiscal  quarters)  generally are  characterized  by
higher sales of motorsports  products.  Seasonal fluctuations in quarterly sales
may require the Company to take  temporary  measures,  including  changes in its
personnel levels,  borrowing amounts,  and production and marketing  activities,
and could result in  unfavorable  quarterly  earnings  comparisons.  The Company
believes, however, that holiday sales of its products are increasing,  which has
the effect of reducing seasonal fluctuations in its sales.

International Trade, Exchange, and Financing

          The Company obtains its die-cast collectibles and other replicas under
a  manufacturing  arrangement  with a  third-party  manufacturer  in China.  The
Company believes that production of its die-cast  products  overseas enables the
Company to obtain these items on a cost basis that enables the Company to market
them  profitably.  The Company's  reliance on its  third-party  manufacturer  to
provide  personnel and  facilities in China,  and the Company's  maintenance  of
equipment and inventories  abroad,  expose it to certain  economic and political
risks,  including  the  business  and  financial  condition  of the  third-party
manufacturer,  political and economic  conditions abroad, and the possibility of
expropriation,  supply disruption,  currency controls, and exchange fluctuations
as well as changes in tax laws, tariffs, and freight rates.  Protectionist trade
legislation in either the United States or foreign  countries,  such as a change
in the  current  tariff  structures,  export  compliance  laws,  or other  trade
policies,  could adversely affect the Company's ability to purchase its products
from  foreign  suppliers  or the price at which the  Company  can  obtain  those
products.
                                       15
<PAGE>
          All of the  Company's  purchases  from its foreign  manufacturers  are
denominated in United States  dollars.  As a result,  the foreign  manufacturers
bear any risks associated with exchange rate fluctuations subsequent to the date
the Company  places its orders with those  manufacturers.  Although  the October
1997 financial  crisis in Asia did not result in any  short-term  changes in the
prices that the Company pays for its die-cast  products,  an extended  period of
financial  pressure on overseas markets or a devaluation of the Chinese currency
that results in a financial setback to the Company's overseas manufacturer could
have an  adverse  impact on the  Company's  operations.  Purchases  of  die-cast
products from the China-based  manufacturer of those products  generally require
the Company to provide an  international  letter of credit in an amount equal to
the  purchase  order.  Although  the Company  currently  has in place  financing
arrangements in an amount that it considers  adequate for  anticipated  purchase
levels,  the inability to fund any letter of credit required by a supplier would
have an adverse impact on the Company's operations.

          Under the terms of its license agreement with Hasbro,  Hasbros royalty
payments to the Company  for sales by Hasbro in foreign  countries  are based on
the exchange  rates in effect on the last day of the calendar  quarter for which
such  royalties are owed.  As a result,  the Company bears any risks that may be
associated  with  exchange  rate  fluctuations  between the date on which Hasbro
records overseas sales of products subject to the license agreement and the last
day of the  calendar  quarter in which the sales are made.  The Company does not
currently  believe that royalties from overseas sales of products by Hasbro will
represent a material percentage of the Company's total revenue. As a result, the
Company  does  not  currently   anticipate   that  it  will  engage  in  hedging
transactions  intended to offset potential adverse consequences of exchange rate
fluctuations  with  respect to  royalty  payments  due from  Hasbro for sales in
foreign countries.

Possible Need for Additional Capital to Support Growth

          The Company's  business  operations have grown  considerably in recent
years as a result of an increase in the number of  licensing  arrangements  with
race car drivers, car owners, sponsors,  automobile  manufacturers,  and others;
expansion of the Company's  product  offerings,  including  additional  lines of
die-cast replicas that have required substantial investments in new tooling; and
significant acquisitions of complementary  businesses.  The Company has financed
this growth through cash generated by operations, by debt and equity financings,
and by issuing  additional  shares of Common Stock for  acquisitions.  Continued
rapid growth,  whether externally through additional  acquisitions or internally
through new  licensing  arrangements  or new product  offerings,  could  require
substantial  additional  capital  in excess of funds  available  to the  Company
through its existing  credit  facility,  cash generated by  operations,  and the
proceeds of the public offering completed in July 1997. The timing and amount of
any such capital  requirements  cannot be  predicted at this time.  Although the
Company has been able to obtain  adequate  financing on acceptable  terms in the
past,  there  can be no  assurance  that  such  financing  will  continue  to be
available  on  acceptable   terms.   If  such  financing  is  not  available  on
satisfactory terms, the Company may be unable to expand its business at the rate
desired and its  operating  results may be adversely  affected.  Debt  financing
increases  expenses and must be repaid regardless of operating  results.  Equity
financing could result in additional dilution to existing shareholders.

Dependence on Key Personnel

          The Company's  development  and  operations to date have been, and its
proposed  operations  will be,  substantially  dependent  upon the  efforts  and
abilities of its senior management,  including Fred W. Wagenhals,  the Company's
Chairman  of the Board,  President,  and Chief  Executive  Officer.  The loss of
services of one or more of its key employees,  particularly Mr. Wagenhals, could
have a material adverse effect on the Company.  The Company maintains key person
insurance  on the life of Mr.  Wagenhals  in the  amount  of $3.0  million.  The
Company does not maintain such insurance on any of its other officers.

Possible Volatility of Stock Price

          The  market  price  of  the  Company's   Common  Stock  has  increased
dramatically  during  the  last  three  years.  See  Item  5,  "Market  for  the
Registrants'  Common  Equity and Related  Stockholder  Matters."  The period was
marked
                                       16
<PAGE>
by generally rising stock prices,  extremely favorable industry conditions,  and
substantially  improved  operating  results  by  the  Company.  There  can be no
assurance that these favorable  conditions  will continue.  The trading price of
the Company's  Common Stock in the future could be subject to wide  fluctuations
in response to quarterly variations in operating results of the Company,  actual
or anticipated  announcements of new products by the Company or its competitors,
changes in analysts' estimates of the Company's financial  performance,  general
conditions in the markets in which the Company competes,  worldwide economic and
financial  conditions,  and other  events or factors.  The stock market also has
experienced  extreme  price  and  volume  fluctuations  that  have  particularly
affected the market prices for many rapidly  expanding  companies and that often
have been unrelated to the operating performance of such companies.  These broad
market  fluctuations  and other factors may adversely affect the market price of
the Company's Common Stock.

Litigation

          The  Company is one of  approximately  30  defendants  in a lawsuit in
which the state of Arizona  seeks  recovery  of  certain  clean-up  costs  under
federal  and state  environmental  laws.  The Company  was  recently  named as a
defendant in a class action  lawsuit  alleging  that the  defendants  engaged in
certain  price  fixing and other  anti-competitive  activities  in  violation of
federal  antitrust  laws. The Company also is a defendant in a lawsuit  alleging
breach of contract, fraud, trademark infringement, and other claims with respect
to  licenses  for  certain of its  die-cast  products.  The  Company is actively
defending  these  lawsuits.  In the event a decision  adverse to the  Company is
rendered in any of these  lawsuits,  the  resolution of such matter could have a
material  adverse effect on the Company's  business,  financial  condition,  and
operation  results.  The Company's  financial  statements  currently  reflect no
provision for any of these lawsuits. See Item 3, "Legal Proceedings" and Item 7,
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."

Rights to Acquire Shares; Potential Issuance of Additional Shares

          As of  December  15,  1997,  options to  acquire a total of  1,137,710
shares were  outstanding  under the Company's  1993 Stock Option Plan (the "1993
Plan").  During the terms of such  options,  the holders  thereof  will have the
opportunity to profit from an increase in the market price of Common Stock, with
resulting dilution in the interests of holders of Common Stock. The existence of
such stock  options  could  adversely  affect the terms on which the Company can
obtain additional financing,  and the holders of such options can be expected to
exercise such options at a time when the Company,  in all  likelihood,  would be
able to obtain  additional  capital by  offering  shares of its Common  Stock on
terms more  favorable to the Company than those provided by the exercise of such
options.

Shares Eligible for Future Sale; Potential Depressive Effect on Stock Price

          Sales of substantial  amounts of Common Stock by  shareholders  of the
Company,  or even the potential for such sales, may have a depressive  effect on
the market price of the Common Stock.  Of the 16,012,471  shares of Common Stock
outstanding,  approximately  13,356,750 shares currently are eligible for resale
in the public market without restriction or further  registration unless held by
an "affiliate" of the Company,  as that term is defined under the Securities Act
of  1933,  as  amended  (the  "Securities  Act").  The  approximately  2,655,700
remaining  shares of Common Stock  outstanding are  "restricted  securities," as
that term is defined in Rule 144 under the Securities  Act, and may be sold only
in compliance with Rule 144, pursuant to registration  under the Securities Act,
or pursuant to an exemption  therefrom.  An aggregate of  approximately  492,200
shares of such "restricted  securities" have been registered for resale pursuant
to  a  registration  statement.  In  addition,  an  aggregate  of  approximately
2,100,500 shares held by certain officers and directors  currently are available
for sale under Rule 144.

Lack of Dividends

          The Company has never paid any cash  dividends on its Common Stock and
does not  currently  anticipate  that it will pay  dividends in the  foreseeable
future.  Instead, the Company intends to apply its earnings to the expansion and
development of its business.
                                       17
<PAGE>
Change in Control Provisions

          The  Company's  Amended and Restated  Articles of  Incorporation  (the
"Restated  Articles"),  Amended  and  Restated  Bylaws,  and Arizona law contain
provisions  that may have the  effect  of  making  more  difficult  or  delaying
attempts by others to obtain  control of the Company,  even when those  attempts
may be in the  best  interests  of  shareholders.  The  Restated  Articles  also
authorize the Board of Directors,  without shareholder approval, to issue one or
more series of preferred stock, which could have voting, liquidation,  dividend,
conversion,  or other rights that adversely affect or dilute the voting power of
the holders of Common Stock.

Cautionary Statement Regarding Forward-Looking Statements

          Certain statements and information  contained in this Report under the
headings "Business," "Special  Considerations," and "Management's Discussion and
Analysis of Financial  Condition and Results of Operations,"  concerning future,
proposed, and anticipated activities of the Company, certain trends with respect
to the Company's revenue, operating results, capital resources, and liquidity or
with  respect to the  markets in which the Company  competes or the  motorsports
industry in general,  and other  statements  contained in this Report  regarding
matters that are not historical facts are  forward-looking  statements,  as such
term is defined in the Securities Act. Forward-looking statements, by their very
nature, include risks and uncertainties,  many of which are beyond the Company's
control. Accordingly,  actual results may differ, perhaps materially, from those
expressed in or implied by such forward-looking  statements.  Factors that could
cause actual  results to differ  materially  include those  discussed  elsewhere
under this Item 1, "Business - Special Considerations."

ITEM 2.           PROPERTIES

          The Company leases a newly constructed,  approximately  140,000 square
foot building in Phoenix,  Arizona. The Company uses approximately 38,000 square
feet of this facility for its corporate  headquarters and approximately  102,000
square feet for warehouse  space and packaging  operations.  The initial term of
the lease  expires in August  2007,  with two  five-year  renewal  options.  The
Company  has two  options to extend the term for five years  each.  The  Company
currently is seeking to sublease its previous Tempe  facility,  but there can be
no assurance that it will be able to do so on favorable terms or at all.

          The Company also leases a 25,000  square foot  facility in  Charlotte,
North  Carolina.  The  Company  uses  approximately  5,000  square  feet  of the
Charlotte  facility  for  offices  and  approximately  20,000  square  feet  for
warehouse  space  and  packaging  operations.  The  term  of the  lease  for the
Charlotte facility expires in April 1998. The Company also leases  approximately
10,000 square feet of off-site storage space in Concord, North Carolina.

          The  Company  has  entered  into  a  lease  for a  newly  constructed,
approximately  121,000  square foot facility in Concord,  North Carolina for its
operations in that area.  The Company will utilize  approximately  42,000 square
feet of the new facility for offices and  approximately  79,000  square feet for
warehouse space and distribution operations. The initial term of the lease is 20
years, with four five-year renewal options. The Company anticipates that it will
occupy the new facility in April 1998.

          The Company currently leases two facilities in Atlanta,  Georgia,  for
its Image Works operations. One facility consists of approximately 77,400 square
feet, of which the Company utilizes approximately 14,000 square feet for offices
and approximately 63,400 square feet for manufacturing and warehouse operations.
The lease on this facility expires in January 1999. The second facility consists
of approximately 21,900 square feet, of which the Company utilizes approximately
19,400 square feet for warehouse and distribution  operations and  approximately
2,500 square feet for offices.  The lease on this  facility  expires in February
1999.
                                       18
<PAGE>
ITEM 3.           LEGAL PROCEEDINGS

          On May 17,  1993,  the state of Arizona  (the  "State")  instituted  a
lawsuit  against  the  Company  and 29 other  defendants  in the  United  States
District Court for the District of Arizona.  The State seeks recovery of certain
clean-up costs under federal and state  environmental  laws.  Specifically,  the
State  seeks  recovery  of  expenses  that  it  has  incurred  to  date  for  an
environmental investigation and clean-up of property formerly used as a site for
recycling  hazardous  wastes.  The  State  alleges  that the  property  has been
contaminated  with  hazardous  substances.   In  addition,  the  State  seeks  a
declaratory  judgment that the Company and the other  defendants are jointly and
severally  liable for all future costs  incurred by the State for  investigative
and remedial  activities,  and seeks a mandatory permanent  injunction requiring
the Company to  undertake  appropriate  assessment  and  remedial  action at the
property.  The State has not  specified the amounts it seeks to collect from the
Company.  The State alleges that F.W.  Leisure  Industries,  Inc.  and/or F.W. &
Associates, Inc. were predecessors of the Company that produced and arranged for
the  transportation  of hazardous  substances  to the  property  involved in the
lawsuit.  The Company is defending this lawsuit on various bases  including that
F.W.  Leisure  Industries,   Inc.  and/or  F.W.  &  Associates,  Inc.  were  not
predecessors  of the Company and that neither the Company nor any predecessor of
the Company has ever produced or transported  hazardous substances as alleged by
the State. The State has settled a portion of its claims with respect to a large
number of the other  defendants  to the  lawsuit.  The Company is not a party to
that settlement.  On February 1, 1995, a number of the defendants that agreed to
the settlement with the State were granted leave to file, and  subsequently  did
file a cross-claim  against the Company seeking indemnity from the Company based
on the same predecessor liability theory asserted by the State. The parties have
conducted  discovery  limited  to the  issue  of  any  defendant's  status  as a
responsible party and regarding the Company's status as a successor corporation.
On March 25,  1997,  the Court ruled that under  federal  environmental  law the
Company  would be treated as the successor to F.W. &  Associates,  Inc.,  and/or
F.W.  Leisure  Industries,  Inc.  The  Company  may  appeal  this  ruling at the
appropriate  time.  Discovery  is now  ongoing  with regard to the merits of the
underlying  environmental  claims and the amount of those  claims.  The  Company
currently estimates the potential loss to be approximately $800,000 in the event
that its defense proves  unsuccessful.  The Company has made no provision in its
financial statements with respect to this matter.

          A lawsuit,  purportedly on behalf of Action Products,  Inc. ("API"), a
dissolved Arizona  corporation,  was instituted on December 22, 1995 against the
Company,  Fred W. Wagenhals,  and others in the United States District Court for
the District of Arizona. The complaint requested damages, including punitive and
treble damages in an unspecified amount. The complaint alleged that the Company,
Mr.  Wagenhals,  and others  breached  contractual  and other  duties to API and
appropriated  certain  business  opportunities  of API and further  claimed that
these  activities were part of a fraudulent  scheme.  In July 1997, the Company,
Mr. Wagenhals, the other defendants, and the plaintiff settled the lawsuit for a
$4.9 millon  payment by the Company to the plaintiff and the execution of mutual
releases.  In connection with the proposed settlement,  Mr. Wagenhals waived any
claims  that he may have to the  settlement  proceeds  as an  approximately  20%
shareholder of APl.

          On March 4, 1997,  two class action  lawsuits  were filed  against the
Company and  approximately  28 other  defendants in the United  States  District
Court for the  Northern  District  of  Georgia.  The  lawsuits  allege  that the
defendants  engaged in price  fixing and other  anti-competitive  activities  in
violation of federal anti-trust laws. The Company was named as a defendant based
upon actions alleged to have been taken by Sports Image,  Inc., a North Carolina
corporation  ("Sports  Image N.C.") and Creative  Marketing &  Promotions,  Inc.
("CMP") prior to the  Company's  acquisitions  of the assets and capital  stock,
respectively,  of those entities. The actions were subsequently  consolidated by
order of the court. The caption of the consolidated action is "In re Motorsports
Merchandise Antitrust Litigation" and the files are maintained under Master File
No.  1-97-CV-0569-CC.  On May 30, 1997, a  consolidated  amended  complaint  was
filed,  which  deleted the Company as a defendant  with  respect to claims based
upon  actions  alleged  to have been taken by Sports  Image  N.C.  and named the
Company's wholly owned subsidiary,  Sports Image,  Inc., an Arizona  corporation
("Sports  Image AZ"), as a defendant  with respect to those claims.  The Company
remains a defendant  with respect to claims  based upon actions  alleged to have
been taken by CMP. On July 31, 1997, the Company acquired all of the outstanding
capital stock of RYP,  which is another  defendant in this matter.  Accordingly,
the Company has assumed the defense of this matter with  respect to claims based
upon actions
                                       19
<PAGE>
alleged to have been taken by RYP and has  agreed to be  responsible  for and to
pay  any  costs,  fees,  expenses,  damages,  payments,  credits,  rebates,  and
penalties  arising out of this matter with respect to RYP, up to an aggregate of
$400,000 (the  "$400,000  Cap").  The $400,000 Cap excludes  attorneys  fees and
certain  other costs and  expenses  that the Company may incur in  defending  or
settling  this matter.  The  plaintiffs  have  requested  injunctive  relief and
monetary  damages  of three  times an  unspecified  amount of  damages  that the
plaintiffs  claim to have  actually  suffered.  On August 1, 1997,  answers were
filed on behalf of the Company and Sports  Image AZ denying the  allegations  of
the complaint.  Pursuant to an agreement between the plaintiffs and Sports Image
AZ to toll the running of the statute of limitations  with respect to any claims
against Sports Image AZ, on November 17, 1997 the  plaintiffs  filed a motion to
dismiss Sports Image AZ from the case without  prejudice.  The parties currently
are conducting  class  discovery.  The Company intends to vigorously  defend the
claims asserted in the amended and consolidated complaint.

          On June 4, 1997, Petty  Enterprises,  Inc.  Licensing Division filed a
lawsuit  against  the  Company and Fred W.  Wagenhals  in the  General  Court of
Justice for Randolph  County,  North  Carolina.  The complaint  alleges that the
Company   engaged  in   activities   that   resulted  in  common  law  trademark
infringement,  fraud,  unfair  competition,  "palming off" unauthorized goods as
authorized products, marketing unlicensed products, misappropriation of business
opportunities, breach of contract, unjust enrichment, conversion, and violations
of the North Carolina  Unfair and Deceptive  Trade  Practices Act and the Lanham
Act. In particular, the plaintiff alleges that the Company manufactured and sold
products in quantities  greater than the amounts permitted under certain license
agreements,  manufactured  and sold  certain  products for which it did not have
licenses,  misrepresented the number of licensed products actually  manufactured
and sold, and underpaid  royalties to the licensors.  The complaint also alleges
that these  acts  constitute  a pattern  of  improper  activity.  The  complaint
requests  an  unspecified  amount of actual  damages  plus  treble and  punitive
damages,  as well as  injunctive  relief.  On July 3, 1997,  the Company and Mr.
Wagenhals  were  successful in removing the case to the United  States  District
Court for the Middle District of North  Carolina.  On July 11, 1997, each of the
Company and Mr.  Wagenhals filed an answer denying the  plaintiff's  allegations
and each filed  counterclaims  against  the  plaintiff  for breach of  contract,
breach of a prior  settlement  agreement  between the plaintiff and the Company,
violations of the North  Carolina  Unfair and  Deceptive  Trade  Practices  Act,
defamation and damage to reputation,  and tortious interference with prospective
business  relationships.  On July  18,  1997,  the  Company  and  Mr.  Wagenhals
collectively filed a third-party complaint against Brett Nelson, an affiliate of
the plaintiff,  alleging  violations of the North Carolina  Unfair and Deceptive
Trade  Practices  Act,  defamation  and  damage  to  reputation,   and  tortious
interference with actual and prospective  business  relationships.  On August 8,
1997, Mr. Nelson filed an answer denying the allegations  against him. After the
Court denied motions to dismiss by all parties,  the plaintiff filed its amended
complaint  and the Company and Mr.  Wagenhals  filed  their  respective  amended
answer and  counterclaims.  The amended  complaint  and the  amended  answer and
counterclaims  contain  essentially  the same  allegations  and  defenses as the
original pleadings.  The parties currently are in the early stages of discovery.
The Company and Mr.  Wagenhals intend to vigorously  pursue their  counterclaims
and the third-party complaint and to vigorously defend this lawsuit.

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

          Not applicable.
                                       20
<PAGE>
                                     PART II

ITEM 5.           MARKET  FOR  THE   REGISTRANT'S   COMMON  EQUITY  AND  RELATED
                  STOCKHOLDER MATTERS

         The  Company's  common  stock,  par value $.01 per share  (the  "Common
Stock") has been quoted on the Nasdaq  National  Market under the symbol  "ACTN"
since April 27, 1993. The following  table sets forth the quarterly high and low
closing  sale prices of the  Company's  Common  Stock for the  calendar  periods
indicated on the Nasdaq National Market,  as adjusted for the two-for-one  stock
split effected as a stock dividend on May 28, 1996.

                                                               Common Stock
                                                               ------------
                                                              High      Low
                                                              ----      ---
          1995:
             First Quarter ............................      $ 3.69   $ 2.38
             Second Quarter ...........................        4.63     3.19
             Third Quarter ............................        9.25     4.25
             Fourth Quarter ...........................        9.81     6.13

          1996:
             First Quarter ............................      $11.63   $ 6.38
             Second Quarter ...........................       20.50    10.75
             Third Quarter ............................       14.75     9.75
             Fourth Quarter ...........................       19.50    12.50

          1997:
             First Quarter ............................      $24.25   $16.50
             Second Quarter ...........................       29.00    18.00
             Third Quarter ............................       36.13    25.38
             Fourth Quarter (through December 15, 1997)       33.84    23.00


         As of December 15, 1997, there were approximately 200 holders of record
and  approximately  5,000  beneficial  owners of the Company's  Common Stock. On
December 15, 1997, the closing sales price of the Company's  Common Stock on the
Nasdaq National Market was $33.06 per share.

         On August 1, 1997,  the Company  issued  8,180  shares of Common  Stock
valued at  $23.02  per  share to Dale  Jarrett  in  connection  with a  personal
services  contract entered into by the Company and Mr. Jarrett on that date. The
Company  issued the shares  without  registration  under the  Securities  Act in
reliance on Section 4(2) of the Securities Act.

         On August 8, 1997,  the Company issued an aggregate of 19,324 shares of
Common  Stock  valued at $22.59  per share to E. J.  Simpson as a portion of the
license fee pursuant to a license  agreement entered into by the Company and Mr.
Simpson on that date. The Company issued the shares without  registration  under
the Securities Act in reliance on Section 4(2) of the Securities Act. 
                                       21
<PAGE>
ITEM 6.           SELECTED FINANCIAL DATA

         The selected  historical  financial data presented  below as of and for
the five  years  ended  September  30,  1997  are  derived  from  the  Company's
consolidated  financial  statements,  which have been audited by Arthur Andersen
LLP, independent public accountants.  The selected financial data should be read
in conjunction with Item 7,  "Management's  Discussion and Analysis of Financial
Condition and Results of Operations"  and the Company's  Consolidated  Financial
Statements and the Notes thereto included elsewhere in this Report.

<TABLE>
<CAPTION>
                                                      Fiscal Year Ended September 30,
                                       -----------------------------------------------------------
                                          1993         1994         1995        1996        1997
                                          ----         ----         ----        ----        ----
                                                 (in thousands, except per share amounts)
<S>                                    <C>          <C>          <C>         <C>         <C>      
Statement of Operations Data:
Sales:
   Collectibles ....................   $  11,558    $  12,802    $  23,443   $  40,904   $  63,846
   Apparel and souvenirs ...........        --            143        1,190       1,961      60,430
   Promotional .....................        --           --           --         1,351       5,085
   Other(1)(2) .....................       3,550        3,924        1,498        --         1,019
                                       ---------    ---------    ---------   ---------   ---------
      Net sales(3) .................      15,108       16,869       26,131      44,216     130,380
Cost of sales ......................       9,730       10,488       15,882      25,296      80,995
                                       ---------    ---------    ---------   ---------   ---------
Gross profit .......................       5,378        6,381       10,249      18,920      49,385
Selling, general and administrative
   expenses ........................       6,552        5,808        6,115       9,262      31,250
Settlement costs ...................        --           --           --          --         5,400(5)
Amortization of goodwill and other
   intangibles .....................        --           --              4           4       1,286
                                       ---------    ---------    ---------   ---------   ---------
Income (loss) from operations ......      (1,174)         573        4,130       9,654      18,135
Interest income (expense) and other,
   net .............................         (66)        (164)          24         216      (1,225)
                                       ---------    ---------    ---------   ---------   ---------
Income (loss) before provision for
   (benefit from) income taxes .....      (1,240)         409        4,154       9,870      16,910
Provision for (benefit from) income
   taxes ...........................         (69)        (224)       1,384       3,917       6,764
                                       ---------    ---------    ---------   ---------   ---------
Net income (loss) ..................   $  (1,171)   $     633    $   2,770   $   5,953   $  10,146
                                       =========    =========    =========   =========   =========
Net income (loss) per common
   share, assuming full dilution(4)    $   (0.21)   $    0.08    $    0.25   $    0.46   $    0.69
                                       =========    =========    =========   =========   =========
Weighted average number of
   common shares, assuming full
   dilution(4) .....................       5,662        9,640       11,570      13,069      14,671

Consolidated Balance Sheet Data
   (at end of period):
Working capital ....................   $   3,186    $   5,699    $  11,922   $  18,094   $  56,975
Total assets .......................       8,565       11,656       23,351      31,649     141,325
Total debt .........................         452          266          288         365      22,586
Shareholders' equity ...............       5,744        6,909       18,890      26,996     103,168
</TABLE>

---------------------
(1)      Includes the revenue of the Company's  M-CarTM  operations  through the
         discontinuation  of those  operations in September 1994 and the revenue
         of the Company's mini vehicle operations through the discontinuation of
         those operations in March 1995.
(2)      Includes royalty and license fees beginning in fiscal 1997.
(3)      Fiscal 1997 results  include the results of operations of Sports Image,
         Motorsports Traditions,  RYP, Image Works, and Simpson, beginning as of
         their  respective  dates  of  acquisition.  See  Item 7,  "Management's
         Discussion   and  Analysis  of  Financial   Condition  and  Results  of
         Operations - Overview."
(4)      Adjusted to reflect  the  two-for-one  stock split  effected as a stock
         dividend on May 28, 1996.
(5)      Represents  a  one-time  charge  of  approximately   $5.4  million  for
         settlement  costs and  related  legal and other  expenses.  See Item 3,
         "Legal Proceedings."
                                       22
<PAGE>
ITEM 7.           MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS,
                  AND RESULTS OF OPERATIONS

Overview

         The  Company  designs  and  markets  licensed   motorsports   products,
including  die-cast  scaled  replicas  of  motorsports  vehicles,  apparel,  and
souvenirs.  The Company  also  develops  promotional  programs  for  sponsors of
motorsports that feature the Company's  die-cast  replicas or other products and
are  intended to increase  brand  awareness  of the  products or services of the
corporate sponsors. In addition, the Company represents popular race car drivers
in a  broad  range  of  licensing  and  other  revenue-producing  opportunities,
including product licenses,  corporate sponsorships,  endorsement contracts, and
speaking  engagements.  The Company's  motorsports  collectibles and most of the
Company's  apparel and souvenirs are  manufactured  by third parties,  generally
utilizing the Company's designs,  tools, and dies. The Company screen prints and
embroiders a portion of the licensed motorsports apparel that it sells.

         The Company was incorporated in Arizona in May 1992 and began marketing
die-cast collectibles in July 1992. In August 1994, the Company acquired certain
assets  and  liabilities  of Fan  Fueler,  Inc.  and  began  marketing  licensed
motorsports  consumer  products.  During fiscal 1994, the Company also conducted
the  business  of staging  M-CarTM  Grand Prix  Races for  charitable  and other
organizations,   in   which   participating   sponsors   purchased   specialized
gas-powered,  one-third  scale racing  vehicles  from the Company.  In September
1994,  the  Company  sold the assets  and  liabilities  related  to its  M-CarTM
operations  and  discontinued  its M-CarTM  Grand Prix Race  operations.  During
fiscal 1994 and the first two quarters of fiscal 1995, the Company  designed and
marketed pedal, electric, and gas-powered mini vehicles,  primarily as specialty
promotional  items.  The  Company  sold the assets  related to its mini  vehicle
operations in March 1995.

         In November 1996, the Company acquired Sports Image and in January 1997
the  Company  acquired  Motorsport  Traditions,   both  of  which  marketed  and
distributed  licensed  motorsports  apparel,  die-cast  collectibles  and  other
souvenir  items.  In July 1997,  the Company  acquired RYP, which had operations
similar to those of Sports  Image and  Motorsport  Traditions,  and Image Works,
which  manufacturers  and  markets  licensed  motorsports  apparel  through  the
mass-merchandising  markets.  The Company  acquired  certain  assets and assumed
certain liabilities related to the mini-helmet  collectible  business of Simpson
in August  1997.  Following  these  acquisitions,  the Company  took a number of
actions intended to integrate the operations of the acquired  companies with the
Company's  existing  operations  and to reduce  overall  selling,  general,  and
administrative  expenses  associated with the acquired  entities.  These actions
included  consolidating  the operations  and warehouse  facilities of Motorsport
Traditions  and RYP with Sports  Image's  existing  operations  and  facility in
Charlotte,  North  Carolina;  consolidating  the  operations of Simpson into the
Company's headquarters in Phoenix,  Arizona;  eliminating  duplicative personnel
functions;  and integrating the management  information  systems of the acquired
companies.  These efforts had a meaningful  impact on the  Company's  results of
operations beginning in the second half of fiscal 1997.

         In addition to the cost savings  described  above, the Company believes
that the fiscal 1997  acquisitions  provide the potential  for enhanced  revenue
opportunities as a result of the synergies created by expanded product offerings
and additional  distribution  channels.  For example, in fiscal 1997 the Company
began  developing  new lines of licensed  motorsports  apparel and souvenirs for
exclusive  sales through its  Collectors'  Club.  The Company also believes that
these acquisitions will provide opportunities for additional sales growth of the
Company's die-cast products through trackside sales,  promotional programs,  and
fan clubs.

         Prior to the fiscal 1997 acquisitions,  the Company's revenue consisted
primarily  of sales of die-cast  collectibles,  and the revenue of the  acquired
businesses  consisted  primarily  of sales of licensed  motorsports  apparel and
souvenirs.  Promotional  revenue  consists  of sales of products  developed  for
corporate promotion programs. The Company's fiscal 1997 revenue includes royalty
income as a result of the license agreement with Hasbro.
                                       23
<PAGE>
         The Company's cost of sales consists  primarily of the cost of products
procured from  third-party  manufacturers,  royalty  payments to licensors,  and
depreciation of tooling and dies.  Significant  factors  affecting the Company's
cost of sales as a percentage of net sales include (i) the overall percentage of
net sales represented by sales of die-cast collectible products, which typically
carry  higher  gross  margins  than  the  Company's  other  products,  (ii)  the
percentage  of sales  of  die-cast  collectible  products  represented  by sales
through the  Collectors'  Club,  which typically carry higher gross margins than
sales of such products through wholesale  distributors,  and (iii) the effect of
amortizing the fixed cost components of cost of sales, primarily depreciation of
tooling and dies,  over varying levels of net sales.  The Company  believes that
the increased sales of licensed apparel and souvenirs following the acquisitions
of Sports Image and  Motorsport  Traditions  will result in lower  overall gross
margins  as a result of lower  gross  margins  generally  associated  with these
acquired product lines. The Company believes,  however, that the effect of these
lower gross margins will be mitigated at least to some extent by cost reductions
and  other  operational  efficiencies  associated  with the  combination  of the
acquired entities and by the license  agreement with Hasbro.  The agreement with
Hasbro  provides  the  Company  with  a  source  of  license  royalties  without
significant  related cost of sales. In addition,  the license agreement provides
the  Company  with  access to the  mass-merchandise  market  without  committing
capital  for   manufacturing   and  with  limited   marginal   expenditures  for
administrative and marketing activities.

         Selling, general, and administrative expenses include general corporate
expenses as well as goodwill  amortization.  The  Company  recorded  goodwill of
approximately $47.7 million in connection with the fiscal 1997 acquisitions. The
goodwill is being  amortized at the rate of $1.9 million per year over 25 years.
The Company anticipates that it will continue to achieve a reduction in selling,
general,  and  administrative  expenses as a percentage  of sales as a result of
consolidation and the cost-reduction efforts described above.

Results of Operations

         The  following  table  sets  forth,  for  the  periods  indicated,  the
percentage of total revenue represented by certain expense and revenue items.

<TABLE>
<CAPTION>
                                                                    Year Ended September 30,
                                                       -----------------------------------------------
                                                        1993       1994       1995      1996      1997
                                                        ----       ----       ----      ----      ----
<S>                                                    <C>        <C>        <C>       <C>       <C>  
Sales
   Collectibles .................................       76.5%      75.9%      89.7%     92.5%     49.6%
   Apparel and souvenirs ........................        --         0.8        4.6       4.4      46.2
   Promotional ..................................        --         --         --        3.1       3.4
   Other ........................................       15.7       23.3        5.7       --        0.8
                                                       -----      -----      -----     -----     -----

     Net Sales ..................................      100.0      100.0      100.0     100.0     100.0
Cost of sales ...................................       64.4       62.2       60.8      57.2      62.1
                                                       -----      -----      -----     -----     -----
Gross profit ....................................       35.6       37.8       39.2      42.8      37.9
Selling, general and administrative
   expenses .....................................       43.4       34.4       23.4      21.0      18.9
Settlement costs ................................        --         --         --        --        4.1
Amortization of goodwill and other
   intangibles ..................................        --         --         --        --        1.0
                                                       -----      -----      -----     -----     -----
Income (loss) from operations ...................       (7.8)       3.4       15.8      21.8      13.9
Interest income (expense) and other, net ........       (0.4)      (1.0)       0.1       0.5      (0.9)
                                                       -----      -----      -----     -----     -----
Income (loss) before provision for
   (benefit from) income taxes ..................       (8.2)       2.4       15.9      22.3      13.0
Provision for (benefit from) income taxes .......       (0.4)      (1.4)       5.3       8.8       5.2
                                                       -----      -----      -----     -----     -----
Net income (loss) ...............................       (7.8)%      3.8%      10.6%     13.5%      7.8%
                                                       =====      =====      =====     =====     =====
</TABLE>
                                       24
<PAGE>
Fiscal Year Ended  September 30, 1997 Compared with Fiscal Year Ended  September
30, 1996

         Net sales increased 195% to $130.4 million for the year ended September
30, 1997 from $44.2 million for the year ended  September 30, 1996.  The Company
attributes the  improvement in sales during fiscal 1997 primarily to (i) revenue
from Sports Image and Motorsport Traditions,  which were acquired by the Company
during the first and second  quarters  of fiscal  1997,  respectively,  (ii) the
Company's  ability to capitalize  on the continued  strong growth in the base of
motorsports  enthusiasts  and  to  produce  and  sell  increased  quantities  of
souvenirs,  apparel,  and die-cast  collectible  goods; and (iii) an increase in
Collectors'  Club  membership.  The number of members  in the  Collectors'  Club
increased to approximately  100,000 members from approximately 72,000 members at
September 30, 1997 and September 30, 1996, respectively.

         Gross  profit  increased  to $49.4  million  in fiscal  1997 from $18.9
million in fiscal 1996, representing 37.9% and 42.8% of net sales, respectively.
The  decrease  in gross  profit  as a  percentage  of net  sales  resulted  from
increased sales of apparel and souvenirs,  which typically provide lower margins
than sales of the Company's collectible products.

         Selling, general and administrative expenses increased to $24.6 million
in fiscal 1997 from $9.3 million in fiscal 1996, representing 18.9% and 21.0% of
net sales, respectively.  The decrease in such expenses as a percentage of sales
resulted   primarily  from  cost  savings  achieved  with  the  integration  and
consolidation  of  operations  for the  acquired  entities  of Sports  Image and
Motorsport Traditions. The integration and consolidation included the relocation
of  Motorsport  Traditions  into Sport  Image's  facility,  the  integration  of
management information systems, and a reduction in excess labor.

         Settlement  costs of $5.4 million for the year ended September 30, 1997
resulted  from a  one-time  charge  for the API  settlement  and  related  legal
charges.  This  settlement  represents  4.1% of net  sales.  See Item 3,  "Legal
Proceedings."

         Amortization  of  goodwill  and  other  intangibles  increased  to $1.3
million  for the year ended  September  30,  1997 from $4,000 for the year ended
September  30,  1996.  The  increase  in  amortization  of  goodwill  and  other
intangibles  is  related  to  the  acquisitions  of  Sports  Image,   Motorsport
Traditions,  and  other  entities.  The  Company  recorded  goodwill  and  other
intangible   assets  of  $47.7  million  in  connection  with  the  fiscal  1997
acquisitions. The Company is amortizing the goodwill and other intangible assets
over a period of 15 to 25 years.

         The change in interest income  (expense) and other,  net, was primarily
attributable to an increase in interest  expense of  approximately  $2.0 million
related to debt incurred in connection with the acquisitions of Sports Image and
Motorsport Traditions.

Fiscal Year Ended  September 30, 1996 Compared with Fiscal Year Ended  September
30, 1995

         Net sales increased 69.2% to $44.2 million for the year ended September
30, 1996 from $26.1  million for the year ended  September  30, 1995.  The $18.1
million  increase  in net sales  resulted  primarily  from an  increase of $17.5
million in collectible  sales.  The increase in  collectible  sales is primarily
attributable to (i) the continued  expansion of the  collectible  market and the
Company's ability to produce and sell increased quantities of collectibles; (ii)
an increase in the number of members in the Collectors' Club (which increased to
approximately  72,000 members from approximately 40,000 members at September 30,
1996 and  September  30,  1995,  respectively);  and (iii)  sales from  recently
introduced product lines.

         Gross  profit  increased  to $18.9  million  in fiscal  1996 from $10.2
million in fiscal 1995, representing 42.8% and 39.2% of net sales, respectively.
The  increase in gross profit as a percentage  of net sales  resulted  primarily
from (i) the effect of higher sales volume on fixed cost  components  of cost of
sales,   primarily   depreciation  charges  related  to  the  Company's  tooling
equipment;  and  (ii)  increased  sales  through  the  Collectors'  Club,  which
typically carry higher margins.
                                       25
<PAGE>
         Selling, general, and administrative expenses increased to $9.3 million
in fiscal 1996 from $6.1 million in fiscal 1995, representing 21.0% and 23.4% of
net sales,  respectively.  The increase in such expenses resulted from increased
expenditures  for  sales  and  marketing,   particularly  increased  advertising
consistent with the Company's strategy to increase  Collectors' Club memberships
and distributor sales.

         Interest income  (expense) and other,  net,  increased to approximately
$216,000 in fiscal 1996 from  approximately  $24,000 in fiscal 1995. This change
resulted  primarily  from the  conversion  of the 10%  Convertible  Subordinated
Debentures (the  "Debentures")  into shares of the Company's Common Stock during
fiscal 1995.

         The  provision for income taxes in fiscal 1996 resulted in an effective
tax  rate  of  approximately  39.7%  compared  with  an  effective  tax  rate of
approximately  33.3% in fiscal  1995.  The  increase in the  effective  tax rate
occurred  primarily  as a  result  of  the  utilization  of net  operating  loss
carryforwards in fiscal 1995.

Pro Forma Results of Operations

         The following table sets forth the unaudited pro forma income statement
data of the  Company  for the years ended  September  30, 1996 and 1997,  giving
effect to the acquisitions of Sports Image,  Motorsport  Traditions,  RYP, Image
Works,  and  Simpson as if they had  occurred  on  October  1,  1995,  using the
purchase method of accounting for business combinations. The unaudited pro forma
income  statement data  presented  herein does not purport to represent what the
Company's  actual results of operations  would have been had those  acquisitions
occurred on that date or to project the Company's  results of operations for any
future period.

                                           (in thousands, except per share data)
                                               Year Ended         Year Ended
                                              September 30,      September 30,
                                                  1996               1997
                                              -------------      -------------
                                               (Unaudited)        (Unaudited)
   Net sales ..........................         $137,930           $158,977
   Net income(1) ......................            8,419              9,338
   Net income per common share(1) .....         $   0.61           $   0.63

----------------------
(1)      Pro forma  amounts  for fiscal  1997  reflect  the  one-time  charge of
         approximately  $5.4  million  for legal  settlement  costs and  related
         expenses.

         The pro forma  results  shown  above do not  account  for  efficiencies
gained upon the  consolidation  of  operations,  including  the  elimination  of
duplicative functions and reduction of salaries expense and other related costs.
The  difference  in  earnings  per share on a pro forma basis for fiscal 1997 is
primarily  attributable  to lower gross margins as a result of the write-down of
inventory by Motorsport Traditions immediately prior to the date of acquisition.
The  Company  has  implemented  improvements  to the  management  and control of
inventories of the acquired  companies  intended to reduce the need for seasonal
adjustments  to inventory.  The pro forma  results of  operations  for the years
ended September 30, 1997 and 1996 reflect the amortization of goodwill and other
intangibles  arising from the fiscal 1997  acquisitions  and include  additional
interest  expense  associated  with the financing of the  acquisitions of Sports
Image and Motorsport Traditions.

Quarterly Results of Operations

         The following table sets forth certain  unaudited  quarterly results of
operations  for each of the eight  quarters in the period  ended  September  30,
1997. All quarterly information was obtained from unaudited financial statements
not  otherwise  contained  herein.  The  Company  believes  that  all  necessary
adjustments have been made to present fairly the quarterly information when read
in conjunction with the Consolidated Financial Statements and Notes
                                       26
<PAGE>
thereto included elsewhere in this Report. The operating results for any quarter
are not necessarily indicative of the results for any future period.

<TABLE>
<CAPTION>
                                                       (in thousands, except per share amounts)
                                                                     Fiscal 1996
                                             ----------------------------------------------------------
                                              1st Quarter    2nd Quarter    3rd Quarter    4th Quarter
                                              -----------    -----------    -----------    -----------
<S>                                             <C>            <C>            <C>            <C>    
   Net sales ...........................        $ 8,006        $ 9,766        $12,283        $14,161
   Gross profit ........................          3,241          3,947          5,424          6,308
   Income from operations ..............          1,370          1,852          2,938          3,494
   Net income ..........................        $   878        $ 1,140        $ 1,777        $ 2,158
   Net income per common share, assuming
      full dilution ....................        $  0.07        $  0.09        $  0.14        $  0.16
   Weighted average number of common
      shares, assuming full dilution ...         12,840         12,984         13,150         13,128
</TABLE>

<TABLE>
<CAPTION>
                                                                     Fiscal 1997
                                             ----------------------------------------------------------
                                              1st Quarter    2nd Quarter    3rd Quarter    4th Quarter
                                              -----------    -----------    -----------    -----------
<S>                                             <C>            <C>            <C>            <C>    
   Net sales ...........................        $15,175        $28,302        $39,632        $47,270
   Gross profit ........................          6,395         10,781         14,684         17,525
   Income from operations ..............          2,843          4,583          2,349          8,361
   Net income ..........................        $ 1,568        $ 2,437        $ 1,098        $ 5,043
   Net income per common share, assuming
      full dilution ....................        $  0.12        $  0.17        $  0.08        $  0.31
   Weighted average number of common
      shares, assuming full dilution ...         13,476         14,129         14,430         16,450
</TABLE>

         The Company's revenue and operating results may be subject to quarterly
and other  fluctuations as a result of a variety of factors.  As a result of the
fiscal  1997   acquisitions,   the  Company  believes  that   quarter-to-quarter
comparisons of its past financial  results may not necessarily be meaningful and
should not be relied upon as an indication of future performance.

Seasonality

         Because the auto racing  season is  concentrated  between the months of
February and November,  the second and third calendar quarters of each year (the
Company's  third and fourth  fiscal  quarters)  generally are  characterized  by
higher  sales of  motorsports  products.  The Company  believes,  however,  that
holiday sales of its products are  increasing,  which has the effect of reducing
seasonal fluctuations in its sales.

Liquidity and Capital Resources

         The Company's  working capital  position  increased to $57.0 million at
September  30, 1997 from $18.1  million at September  30, 1996.  The increase of
$38.9 million is primarily  attributable  to the Company's 1997 public  offering
described  below,  the working capital  acquired from the Company's  fiscal 1997
acquisitions   (primarily   the   purchases  of  Sports  Image  and   Motorsport
Traditions), and results from operations.

         Capital  expenditures  for the year ended  September  30, 1997  totaled
approximately  $11.1 million,  of which  approximately $7.0 million was utilized
for the Company's continued investment in tooling.

         On January 16, 1997, the Company sold an aggregate of 187,500 shares of
Common Stock to Hasbro at a price of $14.50 per share,  with net proceeds to the
Company of approximately $2.6 million. The Company has
                                       27
<PAGE>
agreed  that,  in the event that Hasbro  sells such shares at a price lower than
$14.50 per share  during  the  one-year  period  ending on April 16,  1998,  the
Company will reimburse Hasbro for the amount of such loss, plus interest.

         On June 24, 1997, the Company sold 1,770,000  shares of Common Stock in
connection with an underwritten public offering.  The Company sold an additional
315,000  shares of its common stock on July 17, 1997 pursuant to the exercise of
the underwriters'  over-allotment  option.  The net proceeds to the Company from
this  offering were  approximately  $49.8  million,  after  deducting  estimated
offering expenses and underwriting discounts and commissions.

         During the year ended  September 30, 1997,  the Company  issued 296,092
shares of Common  Stock upon the exercise of stock  options,  resulting in total
proceeds to the Company of approximately $1.7 million.

         In November 1996, the Company purchased substantially all of the assets
and  assumed  certain  liabilities  of  Sports  Image.  The  purchase  price was
approximately  $30.0 million,  consisting of a $24.0 million promissory note due
January 2, 1997 and 403,361 shares of the Company's  Common Stock. On January 2,
1997, the Company repaid the promissory note with the proceeds from the issuance
of senior  notes and a  portion  of the  borrowings  under the  credit  facility
described  below.  The terms of this  acquisition were determined by arms-length
negotiations between  representatives of Sports Image and representatives of the
Company. In fiscal 1996, the Company derived  approximately 16% of its net sales
from Sports Image, a distributor of the Company's die-cast collectible products.

         In January 1997, the Company acquired  substantially  all of the assets
and assumed certain liabilities of Motorsport Traditions Limited Partnership and
acquired all of the capital stock of Creative  Marketing & Promotions,  Inc. for
approximately $13.0 million, consisting of cash in the amount of $5.4 million, a
promissory  note in the principal  amount of $1.6  million,  and an aggregate of
342,857 shares of the Company's Common Stock. The terms of the acquisitions were
determined by arms-length  negotiations  between  representatives of the sellers
and representatives of the Company.

         On January 2, 1997,  the Company  entered into a $16.0  million  credit
facility  (the  "Credit  Facility"),  with First  Union  National  Bank of North
Carolina.  The Credit Facility consists of a revolving line of credit (the "Line
of Credit") for up to $10.0  million  through  September 30, 1997 and up to $6.0
million from  September 30, 1997 to March 31, 1998 and a $6.0 million  letter of
credit/bankers'  acceptances facility (the "Letter of Credit/BA Facility").  The
Line of Credit  bears  interest,  at the  Company's  option,  at a rate equal to
either (i) the greater of (a) the bank's publicly  announced prime rate or (b) a
weighted average Federal Funds rate plus 0.5%, or (ii) LIBOR plus 1.9%. The Line
of Credit is guaranteed by Sports Image and Motorsport  Traditions.  The Company
utilized  $4.0 million of the Line of Credit to provide part of the cash portion
of the purchase price for Motorsport  Traditions and an additional  $4.0 million
of the Line of Credit to repay a portion of the $24.0  million  promissory  note
issued in connection with the acquisition of Sports Image.  The Company utilized
a portion of the proceeds of the June 1997 public  offering  described  below to
repay its outstanding  indebtedness under the Line of Credit. The Company had no
outstanding  borrowings  under the Line of Credit as of September  30,1997.  The
Letter of  Credit/BA  Facility,  as  amended in April  1997,  is  available  for
issuances of letters of credit and eligible bankers' acceptances in an aggregate
amount up to $10.0  million  to enable  the  Company  to  finance  purchases  of
products  from its  overseas  vendors.  The  Company  had  outstanding  purchase
commitments of approximately $3.5 million under the Letter of Credit/BA Facility
as of September 30, 1997. The Credit Facility will mature on March 31, 1998. The
Credit Facility  contains certain  provisions that, among other things,  require
the Company to comply with certain  financial ratios and net worth  requirements
and limit the ability of the Company and its  subsidiaries  to incur  additional
indebtedness, to sell assets, or to engage in certain mergers or consolidations.

         On January 2, 1997,  the Company  issued an aggregate of $20.0  million
principal  amount of senior  notes to three  insurance  companies  (the  "Senior
Notes").  The Senior Notes bear interest at the rate of 8.05% per annum, provide
for semi-annual payments of accrued interest, and mature on January 2, 1999. The
Company  may not prepay the Senior  Notes prior to  maturity,  but must offer to
redeem the Senior Notes in the event of a "Change of Control" of the Company, as
defined in the Senior Notes.  The Senior Notes contain certain  provisions that,
among other
                                       28
<PAGE>
things,  require  the Company to comply with  certain  financial  ratios and net
worth  requirements and limit the ability of the Company and its subsidiaries to
incur  additional  indebtedness,  to sell assets or engage in certain mergers or
consolidations.  The Senior Notes are  guaranteed by Sports Image and Motorsport
Traditions. The Company utilized the proceeds from the Senior Notes to repay the
remainder of the promissory  note issued in connection  with the  acquisition of
Sports Image.

         On July 22, 1997, the Company acquired  substantially all of the assets
and assumed certain  liabilities of Image Works. The  consideration  paid by the
Company for the  purchased  assets  consisted of (i) $4.25  million in cash plus
(ii) a three-year  promissory note that provides for a minimum  principal amount
of $750,000,  with additional  contingent payments of up to an aggregate of $1.4
million  based  upon  the  attainment  of  certain  revenue  objectives  through
September 30, 2000.  Image Works  designs and  manufactures  screen  printed and
embroidered  motorsports  apparel items for distribution  through mass retailers
and corporate  accounts.  Image Works generated  approximately  $20.0 million in
revenue during calendar 1996. The terms of this  acquisition  were determined by
arms-length   negotiations   between   representatives   of  Image   Works   and
representatives of the Company.

         On July 31, 1997, the Company  acquired all of the  outstanding  common
stock of RYP for cash of $5.7 million.  RYP sells licensed  motorsports products
through  mobile  trackside  stores and generated  approximately  $5.0 million in
revenue  during  calendar 1996. In connection  with the  acquisition of RYP, the
Company entered into a 15-year license agreement with Robert Yates Racing,  Inc.
See  Item  1,  "Business  --  Licenses."  The  terms  of this  acquisition  were
determined  by  arms-length  negotiations  between  representatives  of RYP  and
representatives of the Company.

         On August 8, 1997,  the  Company  acquired  certain  assets and assumed
certain liabilities related to the licensed mini-helmet  collectible business of
Simpson.  The  consideration  paid  by the  Company  for  the  purchased  assets
consisted of approximately $653,000 in cash, with additional contingent payments
of up to an  aggregate  of $1.5  million  based upon the  attainment  of certain
revenue objectives. In connection with the purchase of the assets and assumption
of  liabilities  of Simpson,  the Company also  entered  into a 25-year  license
agreement with respect to certain  rights used in connection  with the purchased
assets.  Pursuant to the license  agreement,  the Company  paid the  licensor an
initial  license  fee  consisting  of cash plus 19,324  shares of the  Company's
Common Stock.  The terms of this  acquisition  were  determined  by  arms-length
negotiations  between  representatives of the seller and  representatives of the
Company.

         The  Company is a  defendant  in various  lawsuits.  See Item 3, "Legal
Proceedings." The Company has made no provision in its financial statements with
respect to these matters.  The imposition of damages in one or more of the cases
against  the  Company  could have a  material  adverse  effect on the  Company's
results of operation and financial position.

         The  Company  believes  that its  current  cash  resources,  the Credit
Facility,  and expected cash flow from operations will be sufficient to fund the
Company's  capital  needs  during  the next 12  months at its  current  level of
operations,  apart from capital needs  resulting from  additional  acquisitions.
However,  the Company way be required to obtain  additional  capital to fund its
planned  growth during the next 12 months and beyond.  Potential  sources of any
such capital may include the proceeds from the exercise of outstanding  options,
bank financing,  strategic alliances,  and additional offerings of the Company's
equity or debt  securities.  There can be no assurance that such capital will be
available from these or other  potential  sources,  and the lack of such capital
could have a material adverse effect on the Company's business.

ITEM 7A.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Not applicable.
                                       29
<PAGE>
ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Reference is made to the  financial  statements,  the notes thereto and
reports  thereon,  commencing  at  page  F-1 of  this  report,  which  financial
statements, report, notes and data are incorporated herein by reference.

ITEM 9.           CHANGES IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS ON ACCOUNTING
                  AND FINANCIAL DISCLOSURE

         Not applicable.


                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The  information  required by this Item  relating to  directors  of the
Company is incorporated herein by reference to the definitive Proxy Statement to
be filed pursuant to Regulation  14A of the Securities  Exchange Act of 1934, as
amended  (the  "Exchange   Act")  for  the  Company's  1998  Annual  Meeting  of
Shareholders.  The  information  required  by this Item  relating  to  executive
officers of the Company is included in Item 1, "Business Executive Officers."

ITEM 11.          EXECUTIVE COMPENSATION

         The  information  required  by this  Item  is  incorporated  herein  by
reference to the definitive  Proxy  Statement to be filed pursuant to Regulation
14A of the Exchange Act for the Company's 1998 Annual Meeting of Shareholders.

ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  information  required  by this  Item  is  incorporated  herein  by
reference to the definitive  Proxy  Statement to be filed pursuant to Regulation
14A of the Exchange Act for the Company's 1998 Annual Meeting of Shareholders.

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The  information  required  by this  Item  is  incorporated  herein  by
reference to the definitive  Proxy  Statement to be filed pursuant to Regulation
14A of the Exchange Act for the Company's 1998 Annual Meeting of Shareholders.
                                       30
<PAGE>
                                     PART IV

ITEM 14.          EXHIBITS,  FINANCIAL STATEMENT SCHEDULES,  AND REPORTS ON FORM
                  8-K


(a)      Financial Statements and Financial Statement Schedules

         (1)      Financial  Statements are listed in the Index to  Consolidated
                  Financial Statements on page F-1 of this Report.

         (2)      No Financial  Statement  Schedules  are included  because such
                  schedules are not  applicable,  are not  required,  or because
                  required information is included in the Consolidated Financial
                  Statements or Notes thereto.

(b)      Reports on Form 8-K

         Not applicable.

(c)      Exhibits

Exhibit
Number                              Exhibit
------                              -------

1.0      Form of Underwriting Agreement(1)
3.1      First Amended and Restated Articles of Incorporation of Registrant(2)
3.2      Amended and Restated Bylaws of Registrant(2)
4.1      Form of Certificate of Common Stock(3)
10.4.2   1993 Stock Option Plan,  as amended and  restated  through  January 16,
         1997(4)
10.8     Form of  Indemnification  Agreement  entered into with the Directors of
         the Registrant(3)
10.21    Lease between the Company and F.W. Investments dated January 1, 1994(5)
10.24.1  Commercial Credit Agreement dated March 6, 1995 between the Company and
         the Hong Kong and Shanghai Banking Corporation Limited(6)
10.24.2  Optional  Advance Time Note (Loans Against Imports) dated March 6, 1995
         between   the  Company   and  the  Hong  Kong  and   Shanghai   Banking
         Corporation(6)
10.25    Bill of Sale and Asset  Purchase  Agreement  between the  Company,  Fan
         Fueler,  Inc.,  Peter LaMonica,  and Fred Miller,  III dated August 12,
         1994(7)
10.26    Bill of Sale and Asset Purchase  Agreement between the Company,  M-Car,
         Incorporated, and Robert Scott Tremonti dated September 29, 1994(7)
10.27    Manufacturing   Agreement   between   the   Company   and  Early  Light
         International (Holdings) Ltd. dated December 5, 1994(7)
10.29    Asset Purchase  Agreement  dated March 31, 1995 between the Company and
         Motorsports Promotion, Inc.(6)
10.30    Promissory  Note dated March 31, 1995 between  Motorsports  Promotions,
         Inc., as borrower, and the Company, as lender(6)
10.31    Security Agreement dated March 31, 1995 between Motorsports Promotions,
         Inc., as debtor, and the Company, as secured party(6)
10.32    Credit  Agreement by and between the Company and Wells Fargo HSBC Trade
         Bank, N.A.(8)
10.33    Asset  Purchase  Agreement  dated as of November 7, 1996,  among Action
         Performance Companies, Inc., SII Acquisition, Inc., Sports Image, Inc.,
         and R. Dale Earnhardt and Teresa H. Earnhardt(9)
10.34    Promissory  Note dated  November 7, 1996,  in the  principal  amount of
         $24,000,000 issued by SII Acquisition, Inc., as Maker, to Sports Image,
         Inc.,  as  Payee,   together  with  Guarantee  of  Action   Performance
         Companies, Inc.(9)
                                       31
<PAGE>
Exhibit
Number                              Exhibit
------                              -------

10.35    Security  Agreement dated November 7, 1996,  between Sports Image, Inc.
         and SII Acquisition, Inc.(9)
10.36    Registration  Agreement  dated as of  November  7, 1996,  among  Action
         Performance Companies,  Inc., Sports Image, Inc., and R. Dale Earnhardt
         and Teresa H. Earnhardt(9)
10.37    License  Agreement dated as of November 7, 1996, among SII Acquisition,
         Inc., Dale Earnhardt, and Action Performance Companies, Inc.(9)
10.38    Employment  Agreement  dated as of  November  7, 1996,  between  Action
         Performance Companies, Inc. and Joe Mattes(9)
10.39    Asset  Purchase  Agreement  dated as of January 1, 1997,  among  Action
         Performance   Companies,   Inc.,  MTL  Acquisition,   Inc.,  Motorsport
         Traditions Limited Partnership,  Midland Leasing, Inc., and Motorsports
         By Mail, Inc.(10)
10.40    Exchange   Agreement  dated  as  of  January  1,  1997,   among  Action
         Performance  Companies,   Inc.,  Kenneth  R.  Barbee,  and  Jeffery  M.
         Gordon(10)
10.41    Promissory  Note  dated  January 1, 1997,  in the  principal  amount of
         $1,600,000  issued by MTL  Acquisition,  Inc., as Maker,  to Motorsport
         Traditions Limited  Partnership,  as Payee,  together with Guarantee of
         Action Performance Companies, Inc.(10)
10.42    Note  Purchase  Agreement  dated as of January 2,  1997,  among  Action
         Performance  Companies,  Inc.,  Jefferson-Pilot Life Insurance Company,
         Alexander  Hamilton  Life  Insurance  Company  of  America,  and  First
         Alexander Hamilton Life Insurance Company,  together with form of Note,
         form of Subsidiary Guaranty, and form of Subsidiary Joinder(10)
10.43    Credit Agreement dated as of January 2, 1997, among Action  Performance
         Companies,  Inc., Sports Image, Inc., MTL Acquisition,  Inc., and First
         Union National Bank of North Carolina(10)
10.44    Registration  Agreement  dated as of  January  1,  1997,  among  Action
         Performance Companies, Inc., Motorsport Traditions Limited Partnership,
         Midland Leasing, Inc., and Motorsports By Mail, Inc.(10)
10.45    Registration  Agreement  dated as of  January  1,  1997,  among  Action
         Performance  Companies,   Inc.,  Kenneth  R.  Barbee,  and  Jeffery  M.
         Gordon(10)
10.46    Employment  Agreement  dated as of  January  1,  1997,  between  Action
         Performance Companies, Inc. and Kenneth R. Barbee(10)
10.47    Consulting  Agreement  dated as of  January  1,  1997,  between  Action
         Performance Companies, Inc. and John Bickford(10)
10.48    Common Stock Purchase Agreement dated January 16, 1997, between Hasbro,
         Inc. and Action Performance Companies, Inc.(11)
10.49    Standard   Form   Industrial   Lease  dated  April  8,  1997,   between
         Hewson/Breckner-Baseline, L.L.C. and Action Performance Companies, Inc.
10.50    Lease  Agreement  dated July 9, 1997, by and between  Performance  Park
         Partners, LLC and Sports Image, Inc.
11.1     Computation of Primary Earnings Per Share
11.2     Computation of Fully Diluted Earnings Per Share
23.1     Consent of Arthur Andersen LLP
27.1     Financial Data Schedule

---------------------------
(1)      Incorporated by reference to the Registrant's Registration Statement on
         Form S-3 and Amendment No. 1 thereto (Registration No. 333-27485).
(2)      Incorporated  by  reference  to the  Registrant's  Form  10-QSB for the
         quarter ended March 31, 1996, as filed with the Securities and Exchange
         Commission on May 2, 1996.
(3)      Incorporated by reference to the Registrant's Registration Statement on
         Form SB-2 and amendments thereto (Registration No. 33-57414-LA).
(4)      Incorporated by reference to the Registrant's Form 10-Q for the quarter
         ended  March  31,  1997,  as filed  with the  Securities  and  Exchange
         Commission on May 15, 1997.
                                       32
<PAGE>
Exhibit
Number                              Exhibit
------                              -------

(5)      Incorporated  by  reference  to the  Registrant's  Form  10-QSB for the
         quarter ended March 31, 1994, as filed with the Securities and Exchange
         Commission on May 16, 1994.
(6)      Incorporated  by  reference  to the  Registrant's  Form  10-QSB for the
         quarter ended March 31, 1995, as filed with the Securities and Exchange
         Commission on May 15, 1995.
(7)      Incorporated by reference to the Registrant's  Form 10-KSB for the year
         ended  September  30, 1994, as filed with the  Securities  and Exchange
         Commission on December 22, 1994.
(8)      Incorporated  by  reference  to the  Registrant's  Form  10-QSB for the
         quarter ended June 30, 1996, as filed with the  Securities and Exchange
         Commission on August 14, 1996.
(9)      Incorporated by reference to the  Registrant's  Form 8-K filed with the
         Securities and Exchange  Commission on November 22, 1996, as amended by
         Form 8-K/A filed on January 13, 1997.
(10)     Incorporated by reference to the  Registrant's  Form 8-K filed with the
         Securities  and Exchange  Commission on January 23, 1997, as amended by
         Form 8-K/A filed on February 24, 1997.
(11)     Incorporated by reference to the Registrant's Registration Statement on
         Form S-3 (Registration No. 333- 22943).
                                       33
<PAGE>
                                   SIGNATURES


         In accordance  with Section 13 or 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.

                                       ACTION PERFORMANCE COMPANIES, INC.



Date:  December 17, 1997               /s/ Fred W. Wagenhals
                                       -----------------------------------------
                                       Fred W. Wagenhals, Chairman of the Board,
                                       President, and Chief Executive Officer


         In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following  persons on behalf of the  registrant  and in
the capacities and on the date indicated.

<TABLE>
<CAPTION>
Signature                                         Capacity                                            Date
---------                                         --------                                            ----

<S>                                   <C>                                                      <C> 
/s/ Fred W. Wagenhals                 Chairman of the Board, President, and Chief              December 17, 1997
---------------------------------     Executive Officer (Principal Executive Officer)
Fred W. Wagenhals                     


/s/ Tod J. Wagenhals                  Executive Vice President, Secretary, and Director        December 17, 1997
---------------------------------
Tod J. Wagenhals


/s/ Christopher S. Besing             Vice President, Chief Financial Officer, Treasurer,      December 17, 1997
---------------------------------     and Director (Principal Financial and
Christopher S. Besing                 Accounting Officer)                  


/s/ Melodee L. Volosin                Director - Wholesale Division and Director               December 17, 1997
---------------------------------
Melodee L. Volosin


                                      Vice President - Strategic Alliances and Director        December __, 1997
---------------------------------
John S. Bickford

/s/ Jack M. Lloyd                     Director                                                 December 17, 1997
---------------------------------
Jack M. Lloyd


/s/ Robert H. Manschot                Director                                                 December 17, 1997
---------------------------------
Robert H. Manschot

                                      Chief Operating Officer and Director                     December __, 1997
---------------------------------
Charles C. Blossom, Jr.
</TABLE>
                                       34
<PAGE>
                       ACTION PERFORMANCE COMPANIES, INC.
                   Index to Consolidated Financial Statements



                                                                         Page
                                                                         ----

Report of Independent Public Accountants...........................      F-2

Consolidated Balance Sheets as of September 30, 1997 and 1996......      F-3

Consolidated Statements of Operations for the Years
       Ended September 30, 1997, 1996, and 1995....................      F-4

Consolidated Statements of Shareholders' Equity for the Years
       Ended September 30, 1997, 1996, and 1995....................      F-5

Consolidated Statements of Cash Flows for the Years
       Ended September 30, 1997, 1996, and 1995....................      F-6

Notes to Consolidated Financial Statements.........................      F-7
                                      F-1
<PAGE>
                              ARTHUR ANDERSEN LLP

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




To Action Performance Companies, Inc.:

We  have  audited  the  accompanying   consolidated  balance  sheets  of  ACTION
PERFORMANCE  COMPANIES,  INC. (an Arizona  corporation)  and  subsidiaries as of
September  30,  1997  and  1996,  and the  related  consolidated  statements  of
operations,  shareholders'  equity and cash flows for each of the three years in
the  period  ended  September  30,  1997.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Action Performance  Companies,
Inc.  and  subsidiaries  as of  September  30,  1997,  and the  results of their
operations  and their cash flows for each of the three years in the period ended
September 30, 1997, in conformity with generally accepted accounting principles.


                                        /s/ Arthur Andersen LLP



Phoenix, Arizona,
     November 18, 1997, except with respect 
     to matters discussed in Note 13 as to 
     which the date is December 10, 1997.
                                       F-2
<PAGE>
                       ACTION PERFORMANCE COMPANIES, INC.
                           CONSOLIDATED BALANCE SHEETS
                           September 30, 1997 and 1996
                        (in thousands, except share data)

ASSETS                                                       1997         1996 
------                                                     --------     --------

CURRENT ASSETS:
  Cash and cash equivalents ..........................     $ 29,318     $  4,983
  Accounts receivable, net of allowance for
   doubtful accounts of $837 and $256,
   respectively ......................................       17,802        7,497
  Inventories, net ...................................       17,855        5,834
  Prepaid royalties ..................................        4,967        2,295
  Prepaid expenses and other assets ..................        2,603        1,772
                                                           --------     --------
    Total current assets .............................       72,545       22,381

PROPERTY AND EQUIPMENT, net ..........................       20,017        8,188

GOODWILL AND OTHER INTANGIBLES, net ..................       46,409           56

NOTES RECEIVABLE AND OTHER ASSETS ....................        2,354        1,024
                                                           --------     --------
                                                           $141,325     $ 31,649
                                                           ========     ========

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------

CURRENT LIABILITIES:
  Accounts payable ...................................     $  6,680     $  2,188
  Accrued royalties ..................................        5,098        1,180
  Accrued expenses and other .........................        3,792          920
                                                           --------     --------
    Total current liabilities ........................       15,570        4,288

LONG-TERM DEBT:
  Notes payable ......................................       20,602         --  
  Other long-term debt ...............................        1,984          365
                                                           --------     --------
    Total long-term debt .............................       22,586          365

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
  Preferred stock, no par value, 5,000,000 shares
   authorized, no shares issued and outstanding ......         --           --  
  Common stock, $.01 par value, 25,000,000 shares
   authorized; 15,952,083 and 12,609,769 shares
   issued and outstanding, respectively ..............          160          126
  Additional paid-in capital .........................       84,984       18,991
  Retained earnings ..................................       18,025        7,879
                                                           --------     --------
    Total shareholders' equity .......................      103,169       26,996
                                                           --------     --------
                                                           $141,325     $ 31,649
                                                           ========     ========

       The accompanying notes are an integral part of these consolidated
                                 balance sheets
                                      F-3
<PAGE>
                       ACTION PERFORMANCE COMPANIES, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

             For the Years Ended September 30, 1997, 1996, and 1995

                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                           1997        1996        1995
                                                         --------    --------    --------
<S>                                                      <C>         <C>         <C>     
Sales:
  Collectibles.......................................    $ 63,846    $ 40,904    $ 23,443
  Apparel and souvenirs ..............................     60,430       1,961       1,190
  Promotional ........................................      5,085       1,351        --   
  Other ..............................................      1,019        --         1,498
                                                         --------    --------    --------
    Net sales ........................................    130,380      44,216      26,131

Cost of sales ........................................     80,995      25,296      15,882
                                                         --------    --------    --------
Gross profit .........................................     49,385      18,920      10,249

Operating expenses:
  Selling, general and
    administrative expenses ..........................     24,564       9,262       6,115
  Settlement costs ...................................      5,400        --          --   
  Amortization of goodwill and
    other intangibles ................................      1,286           4           4
                                                         --------    --------    --------
    Total operating expenses .........................     31,250       9,266       6,119
                                                         --------    --------    --------
Income from operations ...............................     18,135       9,654       4,130

Other income (expense):
  Interest income and other, net .....................        796         296         208
  Interest expense ...................................     (2,021)        (80)       (184)
                                                         --------    --------    --------
    Total other income (expense) .....................     (1,225)        216          24
                                                         --------    --------    --------
Income before provision for
  income taxes .......................................     16,910       9,870       4,154

Provision for income taxes ...........................      6,764       3,917       1,384
                                                         --------    --------    --------

NET INCOME...........................................    $ 10,146    $  5,953    $  2,770
                                                         ========    ========    ========
NET INCOME PER COMMON SHARE:
  Primary ............................................   $   0.69    $   0.46    $   0.27
                                                         ========    ========    ========
  Fully diluted ......................................   $   0.69    $   0.46    $   0.25
                                                         ========    ========    ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
  Primary ............................................     14,624      13,028      10,116
                                                         ========    ========    ========
  Fully diluted ......................................     14,671      13,069      11,570
                                                         ========    ========    ========
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.
                                      F-4
<PAGE>
                       ACTION PERFORMANCE COMPANIES, INC.
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
             For the Years Ended September 30, 1997, 1996, and 1995
                        (in thousands, except share data)

                                              
<TABLE>
<CAPTION>
                                                                                         Convertible                 
                                                            Common Stock               Preferred Stock       Common  
                                                     -------------------------     ---------------------     Stock   
                                                       Shares         Amount         Shares       Amount   Subscribed
                                                     ----------     ----------     ----------     ------   ----------

<S>                                                  <C>            <C>                  <C>       <C>      <C>
BALANCE, September 30, 1994 ....................      7,873,846     $       79           --        $--      $   125

Common stock issued upon
  conversion of debentures .....................      1,485,676             15           --         --         --   

Issuance of convertible preferred stock ........           --             --              500       --         --   

Common Stock issued under consulting agreement .        200,000              2           --         --         --   

Common stock issued for common stock subscribed         100,000              1           --         --         (125)

Common stock issued upon exercise
  of options ...................................        541,000              5           --         --         --   

Tax benefit from stock options .................           --             --             --         --         --   

Redemption of warrants .........................           --             --             --         --         --   

Common stock issued upon exercise of warrants ..      1,020,886             10           --         --         --   

Net income .....................................           --             --             --         --         --   
                                                     ----------     ----------     ----------      ----     -------

BALANCE, September 30, 1995 ....................     11,221,408     $      112            500      $--        $--
                                                     ----------     ----------     ----------      ----     -------

Common stock issued upon conversion
  of convertible preferred stock ...............      1,000,000             10           (500)      --         --   

Common stock issued upon exercise
  of options ...................................        239,247              2           --         --         --   

Tax benefit from stock options .................           --             --             --         --         --   

Common stock issued upon exercise of warrants ..        149,114              2           --         --         --   

Net income .....................................           --             --             --         --         --   
                                                     ----------     ----------     ----------      ----     -------

BALANCE, September 30, 1996 ....................     12,609,769     $      126           --        $--        $--
                                                     ----------     ----------     ----------      ----     -------

Common stock issued in conjunction with
  purchase of businesses .......................        765,542              8           --         --         --   

Common stock issued upon exercise
  of options ...................................        296,092              3           --         --         --   

Common stock issued in public offering .........      2,085,000             21           --         --         --   

Tax benefit from stock options .................           --             --             --         --         --   

Issuance of common stock in private placements .        195,680              2           --         --         --   

Net income .....................................           --             --             --         --         --   
                                                     ----------     ----------     ----------      ----     -------

BALANCE, September 30, 1997 ....................     15,952,083     $      160           --        $--        $--
                                                     ==========     ==========     ==========      ====     =======

<CAPTION>
                                                                   (Accumulated
                                                     Additional      Deficit)
                                                      Paid-In        Retained
                                                      Capital        Earnings        Total
                                                     ----------     ---------      ---------
                                                          
<S>                                                  <C>            <C>            <C>      
BALANCE, September 30, 1994 ....................     $   7,549      $    (844)     $   6,909

Common stock issued upon
  conversion of debentures .....................         2,433           --            2,448

Issuance of convertible preferred stock ........         2,000           --            2,000

Common Stock issued under consulting agreement .           248           --              250

Common stock issued for common stock subscribed            124           --             --   

Common stock issued upon exercise
  of options ...................................         1,275           --            1,280

Tax benefit from stock options .................           716           --              716

Redemption of warrants .........................          (404)          --             (404)

Common stock issued upon exercise of warrants ..         2,911           --            2,921

Net income .....................................          --            2,770          2,770
                                                     ---------      ---------      ---------

BALANCE, September 30, 1995 ....................     $  16,852      $   1,926      $  18,890
                                                     ---------      ---------      ---------

Common stock issued upon conversion
  of convertible preferred stock ...............           (10)          --             --   

Common stock issued upon exercise
  of options ...................................           801           --              803

Tax benefit from stock options .................           838           --              838

Common stock issued upon exercise of warrants ..           510           --              512

Net income .....................................          --            5,953          5,953
                                                     ---------      ---------      ---------

BALANCE, September 30, 1996 ....................     $  18,991      $   7,879      $  26,996
                                                     ---------      ---------      ---------

Common stock issued in conjunction with
  purchase of businesses .......................        10,041           --           10,049

Common stock issued upon exercise
  of options ...................................         1,708           --            1,711

Common stock issued in public offering .........        49,822           --           49,843

Tax benefit from stock options .................         1,651           --            1,651

Issuance of common stock in private placements .         2,771           --            2,773

Net income .....................................          --           10,146         10,146
                                                     ---------      ---------      ---------

BALANCE, September 30, 1997 ....................     $  84,984      $  18,025      $ 103,169
                                                     =========      =========      =========
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.
                                      F-5
<PAGE>
                       ACTION PERFORMANCE COMPANIES, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

              For the Years Ended September 30, 1997, 1996 and 1995

                                 (in thousands)

<TABLE>
<CAPTION>
                                                   1997        1996        1995
                                                 --------    --------    --------
<S>                                              <C>         <C>         <C>     
Cash Flows from Operating Activities:
Net income ...................................   $ 10,146    $  5,953    $  2,770
  Adjustments to reconcile net income to
   net cash provided by operating activities:
  Depreciation and amortization ..............      4,477       1,692         906
  Change in assets and liabilities, net of
   businesses acquired:
    Accounts receivable ......................     (3,623)     (3,440)     (1,400)
    Inventories ..............................     (5,009)     (3,143)       (701)
    Prepaid royalties ........................     (2,672)     (1,186)       (471)
    Prepaid expenses and other assets ........       (665)        922        (441)
    Accounts payable .........................     (1,633)        565         859
    Accrued royalties ........................      2,395         320         (81)
    Accrued expenses and other ...............        917        (823)      1,535
                                                 --------    --------    --------
     Net cash provided by operating activities      4,333         860       2,976

Cash Flows from Investing Activities:
  Purchase of property and equipment .........    (11,192)     (3,879)     (3,024)
  Proceeds from sale of equipment ............        321        --           150
  Acquisition of businesses, less
   cash acquired .............................    (11,082)       --          --
                                                 --------    --------    --------
    Net cash used in investing activities ....    (21,953)     (3,879)     (2,874)

Cash Flows from Financing Activities:
  Borrowings on line of credit ...............      4,879       5,222       2,895
  Payments on line of credit .................    (10,279)     (5,222)     (2,895)
  Net proceeds from issuance of common stock,
   stock options, and warrants ...............     54,327       1,315       3,767
  Issuance of convertible preferred stock ....       --          --         2,000
  Payments on long-term debt .................     (6,972)       (105)       (312)
  Collections on notes receivable ............       --            32          69
                                                 --------    --------    --------
   Net cash provided by financing activities .     41,955       1,242       5,524
                                                 --------    --------    --------

  Net change in cash and cash equivalents ....     24,335      (1,777)      5,626
  Cash and cash equivalents,
   beginning of year .........................      4,983       6,760       1,134
                                                 --------    --------    --------
  Cash and cash equivalents, end of year .....   $ 29,318    $  4,983    $  6,760
                                                 ========    ========    ========
</TABLE>

                 The accompanying notes are an integral part of
                    these consolidated financial statements.
                                      F-6
<PAGE>
                       ACTION PERFORMANCE COMPANIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       SEPTEMBER 30, 1997, 1996, and 1995


(1)      THE COMPANY

Operations

Action Performance Companies,  Inc. (the "Company") designs and markets licensed
motorsports   products,   including  die-cast  scaled  replicas  of  motorsports
vehicles, apparel, and souvenirs. The Company also develops promotional programs
for sponsors of  motorsports  that feature the  Company's  die-cast  replicas or
other products and are intended to increase  brand  awareness of the products or
services of the corporate sponsors. In addition,  the Company represents popular
race car  drivers  in a broad  range of  licensing  and other  revenue-producing
opportunities,  including product licenses, corporate sponsorships,  endorsement
contracts, and speaking engagements.  The Company's motorsports collectibles and
most of the Company's  apparel and souvenirs are  manufactured by third parties,
generally  utilizing the Company's designs,  tools, and dies. The Company screen
prints and  embroiders  a portion of the  licensed  motorsports  apparel that it
sells.

(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Presentation

The consolidated  financial  statements  include the accounts of the Company and
its subsidiaries.  All significant  intercompany  accounts and transactions have
been eliminated in consolidation.

Certain reclassifications have been made in prior period financial statements to
conform to the current presentation.

Revenue Recognition

The Company  recognizes  revenue upon shipment.  Customer  deposits  received in
advance of delivery  are  deferred and  recognized  when the related  product is
shipped.

Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets  and  liabilities  at the date of the  financial  statements.
Estimates  also affect the reported  amounts of revenue and expenses  during the
reporting  period.  Actual  results  could  differ  from  those  estimates.   In
management's opinion, methodologies used to determine estimates are adequate and
consistent with prior periods.

Fair Value of Financial Instruments

The  carrying  amounts  of  cash,  accounts  receivable,  and  accounts  payable
approximate  fair  value  because  of the  short  maturity  of  these  financial
instruments.  The  carrying  amounts of long-term  debt and amounts  outstanding
under the  Company's  line of credit  approximate  fair  value  based on current
market prices for similar debt instruments and bank lines of credit.  Fair value
estimates  are  made at a  specific  point in time,  based  on  relevant  market
information  about the financial  instrument.  These estimates are subjective in
nature and  involve  uncertainties  and  matters  of  significant  judgment  and
therefore  cannot be determined  with  precision.  Changes in assumptions  could
significantly affect these estimates.
                                      F-7
<PAGE>
Inventories

Inventories  are  stated at the lower of cost  (first-in,  first-out  method) or
market,  and  consist  of the  following  at  September  30,  1997  and 1996 (in
thousands):

                                                          1997            1996
                                                        -------         -------
         Purchased components .................         $ 2,418         $   262
         Finished goods .......................          15,437           5,572
                                                        -------         -------
                                                        $17,855         $ 5,834
                                                        =======         =======

Property and Equipment

Property  and  equipment  are  recorded  at  cost  and  depreciated   using  the
straight-line  method over the estimated useful lives of the respective  assets,
which range from three to ten years.

Property and  equipment  consist of the following at September 30, 1997 and 1996
(in thousands):

                                                          1997          1996
                                                        --------      --------
         Tooling and molds ........................     $ 15,237      $  8,190
         Furniture, fixtures and equipment ........        6,667         2,501
         Autos and trucks .........................        2,578           342
         Leasehold improvements ...................        2,066           518
                                                        --------      --------
                                                          26,548        11,551
         Less - accumulated depreciation ..........       (6,531)       (3,363)
                                                        --------      --------
                                                        $ 20,017      $  8,188
                                                        ========      ========
    
Property  and  equipment  includes  assets  acquired  under  capital  leases  of
approximately  $1.9  million  and  $300,000  at  September  30,  1997 and  1996,
respectively.

Maintenance and repairs of approximately  $277,000,  $64,000 and $55,000 for the
years ended  September 30, 1997,  1996 and 1995,  respectively,  were charged to
expense as incurred. The cost of renewals and betterments that materially extend
the useful lives of assets or increase their productivity are capitalized.

Goodwill and Other Intangibles

Goodwill  represents the cost in excess of the fair value of net assets acquired
in business  combinations  and is  amortized  on the  straight-line  method over
twenty-five years.  Other intangibles are amortized on the straight-line  method
over their  estimated  useful  lives,  which ranges from fifteen to  twenty-five
years. The Company continually  evaluates whether later events and circumstances
have occurred,  subsequent to acquisition, that indicate the remaining estimated
useful lives of  intangible  assets may warrant  revision or that the  remaining
balance may not be  recoverable.  If the sum of the  expected  future cash flows
(undiscounted and without interest charges) from an asset to be held and used in
operations is less than the carrying value of the asset, an impairment loss must
be recognized in the amount of the difference between the carrying value and the
fair value. Amortization expense of $1.3 million, $4,000, and $4,000 is included
in selling,  general and  administrative  expenses for the years ended September
30, 1997, 1996 and 1995, respectively.  Accumulated amortization of goodwill and
other intangibles was approximately $1.3 million and $10,000 as of September 30,
1997 and 1996, respectively.

License Agreements

Royalties paid under various licensing agreements are recorded as expense at the
time the related sales are made.
                                      F-8
<PAGE>
Supplemental Cash Flow Information

The supplemental  cash flow disclosures and non-cash  transactions for the years
ended September 30, 1997, 1996, and 1995 are as follows (in thousands):

                                                     1997       1996       1995
                                                   -------    -------    -------
Supplemental disclosures:
  Interest paid ...............................    $ 1,505    $    79    $   268
  Income taxes paid ...........................      5,396      3,992         42

Non-cash transactions:
  Common stock issued in acquisitions .........    $10,049    $  --      $  --
  Debt and liabilities incurred or
    assumed in acquisitions ...................     44,446       --         --
  Acquisition of property and equipment
    under capital leases ......................      1,402        233        338
  Tax benefits on various common
    stock options .............................      1,651        838       --
  Conversion of debentures ....................       --         --        2,600
  Common stock issued for common
    stock subscribed ..........................       --         --          125
  Sale of equipment for note receivable .......        446       --         --

Net Income Per Common Share

Net income per common share is computed based on the weighted  average number of
common shares and common share equivalents  outstanding using the treasury stock
method,  except when common share equivalents have an antidilutive  effect.  All
share amounts and per share data have been  restated to reflect the  two-for-one
stock split  effected as a stock  dividend on May 28, 1996.  The  calculation of
fully  diluted net income per common  share  includes  adjustments  for interest
expense  and  equivalent  shares  related  to the 10%  Convertible  Subordinated
Debentures,  if dilutive. The calculation of fully diluted net income per common
share for the years ended September 30, 1997,  1996, and 1995 are as follows (in
thousands, except per share data):

                                                     1997       1996       1995
                                                   -------    -------    -------
Shares:
Weighted average number of common
  shares outstanding ..........................     14,047     11,789      9,087

Additional shares assuming conversion of:
  Stock options ...............................        624        573        601
  Warrants ....................................       --           40        598
  Convertible debentures ......................       --         --          784
  Preferred stock .............................       --          667        500
                                                   -------    -------    -------

Weighted average shares outstanding ...........     14,671     13,069     11,570
                                                   =======    =======    =======

Net income ....................................    $10,146    $ 5,953    $ 2,770

Add:
  Interest expense on convertible
    debentures (assuming conversion) ..........       --         --          101
                                                   -------    -------    -------

Net income attributable to fully diluted
  weighted average shares outstanding .........    $10,146    $ 5,953    $ 2,871
                                                   =======    =======    =======

Fully diluted earnings per share ..............    $  0.69    $  0.46    $  0.25
                                                   =======    =======    =======
                                      F-9
<PAGE>
Recently Issued Financial Accounting Standards

Statement of Financial  Accounting  Standards ("SFAS") No. 121,  "Accounting for
the  Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be Disposed
of," was issued by the Financial  Accounting  Standards Board in March 1995, and
adopted by the Company during the year ended September 30, 1997. The adoption of
SFAS No. 121 did not  impact  the  Company's  financial  position  or results of
operations.

Effective October 1, 1996, the Company adopted the disclosure option of SFAS No.
123,  "Accounting for Stock-based  Compensation."  As permitted by SFAS No. 123,
the  Company  has not  changed  to the  fair  value  method  of  accounting  for
stock-based  compensation  and will continue to use Accounting  Principles Board
Opinion No. 25 for measurement and recognition of stock-based transactions. SFAS
No.  123  requires  companies  that do not  choose to  account  for  stock-based
compensation as prescribed by the statement to disclose the pro forma effects on
earnings and earnings  per share as if SFAS No. 123 had been  adopted.  See Note
11.

Accounting Pronouncements Not Yet Required to be Adopted

In fiscal 1998,  the Company  will be required to adopt SFAS No. 128,  "Earnings
per Share," issued by the Financial Accounting Standards Board. Upon adoption of
SFAS No. 128,  the Company  will  present  basic  earnings per share and diluted
earnings  per share.  Basic  earnings  per share will be  computed  based on the
weighted  average  number of  shares  outstanding  during  the  period.  Diluted
earnings  per share will be computed  based on the  weighted  average  number of
shares outstanding during the period,  increased by the effect of stock options,
warrants,  and other dilutive  securities  using the treasury stock method.  The
adoption  of SFAS No.  128 is not  expected  to have a  material  effect  on the
Company's financial statements.

In fiscal 1998,  the Company will be required to adopt SFAS No. 130,  "Reporting
Comprehensive  Income," issued by the Financial Accounting Standards Board. SFAS
No. 130, establishes standards for reporting and display of comprehensive income
and its components in an entity's  financial  statements.  The objective of SFAS
No. 130 is to give the effect of all changes in the equity of an enterprise that
result from transactions and other economic events of the period.  Comprehensive
income is the total of net  income  and all other  non-owner  changes in equity.
SFAS No.  130  does  not  address  issues  of  recognition  or  measurement  for
comprehensive income and its components. As a result, SFAS No. 130 will not have
an impact on the financial condition or results of operation of the Company upon
adoption.

(3)      ACQUISITIONS AND DISPOSALS

Disposition of Mini Vehicle Assets

In March  1995,  the  Company  sold  certain of its  assets  related to its mini
vehicle  product line to  Motorsports  Promotions,  Inc.  ("MPI"),  an unrelated
company. The assets sold consisted primarily of accounts receivable,  inventory,
tooling, and equipment.  The purchase agreement provided for total consideration
of $1,324,712,  consisting of $237,567 in cash, assumed  liabilities of $52,891,
and a promissory note of $1,034,254,  subject to certain adjustments.  Effective
November 1995, the Company and MPI agreed to adjust the total  consideration  to
be paid by MPI to  $1,051,646.  The  Company  recorded a  non-operating  gain of
approximately $290,000 on this transaction in the second quarter of fiscal 1995.
As a result of the  purchase  price  adjustment  described  above,  the  Company
reduced the gain such that no gain or loss was recorded on this  transaction for
fiscal 1995.  During 1997,  the Company  exchanged  its  promissory  note for an
equity position in MPI. No gain or loss was recorded on the transaction.

Acquisition of Sports Image, Inc.

In November  1996,  the Company  purchased  substantially  all of the assets and
assumed certain liabilities of Sports Image,  Inc.("Sports Image"). The purchase
price was approximately $30,000,000, consisting of a $24,000,000 promissory note
due January 2, 1997 and 403,361  shares of the Company's  Common Stock valued at
$12.10  per  share.  On January 2,  1997,  the  Company  repaid the  $24,000,000
promissory  note with the  proceeds  from the  issuance  of  senior  notes and a
portion of the borrowings under the Company's new credit  facility.  See Note 4.
Sports Image sells and  distributes a variety of licensed  motorsports  products
through wholesale distributor networks, corporate sponsors, and mobile trackside
stores. In fiscal 1996, the Company derived 16% of its net
                                      F-10
<PAGE>
sales from Sports Image,  a distributor  of the Company's  die-cast  collectible
products.  Sports  Image  had sales of  approximately  $41,800,000  of  apparel,
die-cast replicas, souvenirs, and other motorsports consumer products during the
period  from  January  1, 1996 to  November  7, 1996  (which  includes  sales of
die-cast  collectibles  purchased  from  the  Company  at an  aggregate  cost of
approximately $5,800,000). This transaction was accounted for as a purchase.

Acquisitions of Motorsport Traditions Limited Partnership and Creative Marketing
& Promotions, Inc.

On January 8, 1997, the Company acquired the business and  substantially  all of
the assets and assumed certain  liabilities of Creative  Marketing & Promotions,
Inc. and Motorsport  Traditions Limited  Partnership  (collectively  "Motorsport
Traditions")  from 1995 Nascar Winston Cup Champion driver Jeff Gordon,  Kenneth
R. Barbee, certain entities controlled by Mr. Barbee, and certain other persons.
The effective date of the  acquisition  of Motorsport  Traditions was January 1,
1997. The purchase price paid by the Company for Motorsport Traditions consisted
of (i) cash in the amount of $5,400,000; (ii) a promissory note in the principal
amount of $1,600,000  issued by a wholly owned  subsidiary  of the Company;  and
(iii) an aggregate  of 342,857  shares of the  Company's  Common Stock valued at
$13.80 per share. The promissory note bears interest at 4% per annum, matures on
December 31, 1998, and has been guaranteed by the Company. Motorsport Traditions
sells and  distributes  licensed  motorsports  products  through  a  network  of
wholesale  distributors and mobile trackside stores.  Prior to the acquisitions,
Motorsport Traditions generated approximately $33,000,000 in annual revenue from
its  design,   manufacturing,   and  sales  and  distribution  activities.  This
transaction was accounted for as a purchase.

Acquisition of Robert Yates Promotions, Inc.

In July 1997, the Company acquired all of the outstanding common stock of Robert
Yates  Promotions,  Inc.  ("RYP") for $5.7 million in cash.  RYP sells  licensed
motorsports  products through trackside  trailers,  and generated  approximately
$5.0  million  in  revenue  during  calendar  year  1996.  Concurrent  with  the
acquisition of RYP, the Company  entered into a 15-year  license  agreement with
Robert Yates Racing,  Inc. ("Yates Racing").  Pursuant to the license agreement,
the  Company  will  pay  royalties  for  the  use of  certain  trademark  rights
associated  with Yates Racing Nascar  Winston Cup teams.  This  transaction  was
accounted  for as a purchase.  RYP is a  defendant  in certain  litigation.  The
purchase price is preliminary with respect to such litigation. See Note 10.

Acquisition of Image Works, Inc.

In July 1997, the Company acquired  substantially  all of the assets and assumed
certain liabilities of Image Works, Inc. ("Image Works"). The Company paid $4.25
million in cash and issued a three-year  promissory note for a minimum principal
amount of $750,000, with additional contingent payments of up to an aggregate of
$1.4 million based upon the  attainment of certain  revenue  objectives  through
September 30, 2000.  Image Works  designs and  manufactures  screen  printed and
embroidered  motorsports  apparel items for distribution  through mass retailers
and corporate  accounts.  Image Works generated  approximately  $22.0 million in
revenue  during  calendar  year 1996.  This  transaction  was accounted for as a
purchase.

Acquisition of Simpson Products, Inc.

In August  1997,  the  Company  acquired  certain  assets  and  assumed  certain
liabilities related to the licensed mini-helmet  collectible business of Simpson
Products,  Inc.  ("Simpson").  The  consideration  paid by the  Company  for the
purchased assets  consisted of  approximately  $653,000 in cash, with additional
contingent  payments  of up to an  aggregate  of $1.5  million  based  upon  the
attainment of certain revenue objectives. In connection with the purchase of the
assets and assumption of liabilities of Simpson, the Company also entered into a
25-year license agreement with respect to certain rights used in connection with
the purchased assets. This transaction was accounted for as a purchase.
                                      F-11
<PAGE>
Unaudited Pro Forma Statements of Operations

The following unaudited pro forma combined statements of operations data for the
years ended September 30, 1997 and 1996 present the results of operations of the
Company as if the acquisitions of the businesses acquired during fiscal 1997 had
occurred as of October 1, 1995.  Pro forma results are as follows (in thousands,
except per share data):

                                                         1997            1996
                                                       --------        --------
         Revenues ..............................       $158,977        $137,930
         Net income ............................          9,338           8,419
         Net income per common share ...........       $   0.63*       $   0.61
     
         * Includes a one time charge of $5.4 million,  or $0.22 per share,  for
         legal settlement costs.

(4)      FINANCING ACTIVITIES

Long-term  debt at September  30, 1997 and 1996  consists of the  following  (in
thousands):

                                                              1997       1996
                                                            --------   --------
Senior notes, interest at 8.05% payable semi-
annually, principal payable January 1999, secured
by assets of certain subsidiaries .......................   $ 20,000   $   --

Note payable to an  individual,  principal  and  interest
at 4% payable  monthly through December 31, 1998,
unsecured ...............................................        988       --

Note payable to an individual, interest imputed at
8%, payable annually through November 2000,
unsecured ...............................................        644       --

Note payable to an individual, interest imputed at
8%, payable in equal installments through 2011,
unsecured ...............................................        565       --

Obligations under capital leases of vehicles and
equipment, interest from 8.0% to 9.5%, payable monthly ..      1,863        482
                                                            --------   --------

Total ...................................................     24,060        482

Less:  current portion ..................................     (1,474)      (117)
                                                            --------   --------

                                                            $ 22,586   $    365
                                                            ========   ========
Credit Facility

On January 2, 1997,  the Company  entered into a $16.0 million  credit  facility
(the "Credit  Facility") with First Union National Bank of North  Carolina.  The
Credit  Facility  consists of a revolving line of credit for up to $10.0 million
through  September 30, 1997,  and up to $6.0 million from  September 30, 1997 to
March  31,  1998  (the  "Line  of  Credit")  and  a  $6.0   million   letter  of
credit/bankers'  acceptances facility (the "Letter of Credit/BA Facility").  The
Line of Credit  bears  interest,  at the  Company's  option,  at a rate equal to
either (i) the greater of (a) the bank's publicly  announced prime rate or (b) a
weighted average Federal Funds rate plus 0.5%, or (ii) LIBOR plus 1.9%. The Line
of Credit is guaranteed by Sports Image and Motorsport  Traditions.  The Company
utilized  $4.0 million of the Line of Credit to provide part of the cash portion
of the purchase price for Motorsport  Traditions and an additional  $4.0 million
of the Line of Credit to repay a portion of the $24.0  million  promissory  note
issued in connection with the acquisition of Sports Image.  The Company utilized
a portion of the proceeds of the June 1997 public  offering  described in Note 5
to repay its outstanding  indebtedness under the Line of Credit. The Company had
no outstanding borrowings under the Line of Credit as of September 30, 1997. The
Letter of Credit/BA Facility, as amended in April
                                      F-12
<PAGE>
1997,  is available  for  issuances  of letters of credit and eligible  bankers'
acceptances in an aggregate  amount up to $10.0 million to enable the Company to
finance  purchases  of  products  from its  overseas  vendors.  The  Company had
outstanding  purchase commitments of approximately $3.5 million under the Letter
of Credit/BA Facility as of September 30, 1997.

Debt Covenants

The  Company's  senior  notes and Credit  Facility  agreements  contain  certain
provisions that, among other things,  require the Company to comply with certain
financial  ratios and net worth  requirements  and will limit the ability of the
Company and its subsidiaries to incur additional  indebtedness or to sell assets
or engage in certain  mergers or  consolidations.  At September  30,  1997,  the
Company was in compliance with all such covenants.

Future Maturities of Long-Term Debt

Aggregate future maturities of long-term debt are as follows (in thousands):

                           Year Ended
                          September 30,
                          -------------
                              1998               $ 1,474
                              1999                20,843
                              2000                   666
                              2001                   347
                              2002                   310
                           Thereafter                420
                                                 -------
                              Total              $24,060
                                                 =======

(5)      SHAREHOLDERS' EQUITY

All  share  amounts  and per  share  data  have been  restated  to  reflect  the
two-for-one stock split effected as a stock dividend on May 28, 1996.

10% Convertible Subordinated Debentures

During the year ended September 30, 1995, the Company issued 1,485,676 shares of
Common Stock upon conversion of an aggregate of $2.6 million of principal amount
of 10% Convertible  Subordinated Debentures (the "Debentures"),  at a conversion
price of $1.75 per share,  including  1,014,272 shares issued upon conversion of
an  aggregate of  $1,775,000  of principal  amount of the  Debentures  that were
outstanding in April 1995 when the Company announced that it would redeem all of
the Debentures that remained  outstanding on May 31, 1995, pursuant to the terms
of the Debentures.

Convertible Preferred Stock

In  March  1995,  the  Company  completed  the  sale of 500  shares  of  Class A
Convertible  Preferred  Stock (the  "Preferred  Stock") to an  affiliate  of its
principal  manufacturer of die-cast  collectibles,  for a purchase price of $2.0
million.  The sale was effected primarily as a long-term  strategic  transaction
intended to align the interests of the  manufacturer  with those of the Company.
The shares were converted into an aggregate of 1,000,000  shares of Common Stock
during May 1996.

Redemption of Warrants

On May 31,  1995,  the Company  redeemed  warrants to purchase an  aggregate  of
1,614,731 shares of its Common Stock. The redemption price was $.25 per warrant,
or an  aggregate  payment of $403,683,  pursuant to the terms of such  warrants.
Prior to the redemption, each warrant entitled the holder to purchase two shares
of the Company's  Common Stock at an exercise price of $3.75 per share.  Certain
holders of such warrants  exercised warrants to purchase an aggregate of 163,670
shares of Common Stock prior to the  redemption,  resulting in total proceeds to
the Company of approximately $613,000.
                                      F-13
<PAGE>
Issuance of Stock in Private Placements

In January 1997, the Company sold 187,500 shares of Common Stock to Hasbro, Inc.
at  a  price  of  $14.50  per  share,  with  net  proceeds  to  the  Company  of
approximately $2.6 million.  In August 1997, the Company issued (i) 8,180 shares
of Common Stock valued at $23.02 per share to Dale Jarrett in connection  with a
three-year  personal services  contract,  and (ii) 19,324 shares of Common Stock
valued at $22.59 to E.J.  Simpson as a portion of the license fee  pursuant to a
license agreement.

1997 Public Offering

On June 24,  1997,  the Company  sold  1,770,000  shares of its Common  Stock in
connection with an underwritten  public offering.  On July 17, 1997, the Company
sold an additional  315,000  shares of its Common Stock pursuant to the exercise
of the underwriters' over-allotment option. The net proceeds to the Company from
this  offering were  approximately  $49.8  million,  after  deducting  estimated
offering expenses and underwriting discounts and commissions.

Stock Options

Under the Company's 1993 Stock Option Plan (the "Plan"),  the Board of Directors
may from  time to time  grant to key  employees,  consultants,  and  independent
contractors  who provide  valuable  services to the Company (i) incentive  stock
options and  non-statutory  stock  options to purchase  shares of the  Company's
Common  Stock,  (ii) stock  appreciation  rights,  (iii) shares of the Company's
Common Stock, or (iv) cash awards.  The Plan also includes an automatic  program
providing for automatic grants of stock options to non-employee directors of the
Company.  The exercise price for all incentive  stock options  granted under the
Plan may not be less than the fair market value of the Company's Common Stock on
the date of the grant, except that the option price may not be less than 110% of
the fair market value of the Company's  Common Stock on the date of the grant in
the case of incentive stock options  granted to any person  possessing more than
10% of the combined voting power of the Company's  Common Stock or any parent or
subsidiary corporation. In the case of non-statutory stock options, the exercise
price may not be less than 85% of the fair market value of the Company's  Common
Stock on the date of the grant.  Options granted under the Plan generally have a
six-year term. Options that were granted prior to July 1995 are fully vested and
exercisable.  The option  agreements for options granted  beginning in July 1995
generally  provide that one-third of the options vest and become  exercisable on
each of the first, second, and third anniversaries of the date of grant. A total
of 2,750,000 shares of Common Stock may be issued pursuant to the Plan. The Plan
expires in 2001.

(6)      RELATED PARTY TRANSACTIONS

The  Company  currently  leases  a  building  in  Tempe,   Arizona,   containing
approximately  46,000 square feet, which the Company utilized for its corporate,
administrative, sales offices, and warehouse facilities prior to September 1997.
Fred W. Wagenhals,  a shareholder  and officer of the Company,  currently owns a
one-third interest in F.W.  Investments,  a partnership that owns this facility.
The Company paid F.W. Investments rent of approximately $183,000,  $177,000, and
$177,000 for the years ended  September 30, 1997,  1996, and 1995  respectively.
The Company is currently marketing the property for a sub-lease arrangement with
unaffiliated third parties.

(7)      EMPLOYEE BENEFIT PLANS

In October  1994,  the  Company  established  a defined  contribution  plan that
qualifies as a cash or deferred  profit sharing plan under  Sections  401(a) and
401(k) of the Internal Revenue Code. The plan is available to substantially  all
domestic employees. Under the plan, participating employees may defer from 1% to
15% of their pre-tax compensation.  The Company contributes fifty cents for each
dollar  contributed by the employee,  with a maximum  contribution  of 2% of the
employee's defined  compensation.  In addition,  the plan provides for an annual
employer  profit sharing  contribution in such amounts as the Board of Directors
may determine. The 
                                      F-14
<PAGE>
Company  expensed  approximately  $41,000  under  the plan  for the  year  ended
September 30, 1997 and $26,000 in each of the years ended September 30, 1996 and
1995.

The  Company  has no other  programs  that  require  payment  by the  Company of
post-employment benefits to current or retired employees.

(8)      INCOME TAXES

The Company provides for income taxes under SFAS No. 109, "Accounting for Income
Taxes."  SFAS No. 109  requires  the use of an asset and  liability  approach in
accounting for income taxes.  Deferred tax assets and  liabilities  are recorded
based on the differences between the financial statement and tax bases of assets
and liabilities and the tax rates in effect when these  differences are expected
to  reverse.  The  principal  differences  arise  as a  result  of  the  use  of
accelerated  depreciation  and  amortization  methods  for  federal  income  tax
reporting  purposes,  certain inventory costs required to be capitalized for tax
purposes,  certain reserves expensed currently for financial reporting purposes,
and compensation not yet deductible for tax purposes.

SFAS No. 109  requires  the  reduction  of  deferred  tax assets by a  valuation
allowance if, based on the weight of available evidence,  it is more likely than
not that  some or all of the  deferred  tax  assets  will not be  realized.  The
ultimate realization of this deferred tax asset depends on the Company's ability
to generate  sufficient taxable income in the future. A valuation  allowance has
not been recorded as of September 30, 1997.

Net operating loss  carryovers for federal income tax purposes of  approximately
$856,000 at September 30, 1994,  were fully utilized in the year ended September
30, 1995.

The  provision  for income taxes  consists of the  following for the years ended
September 30 (in thousands):

                                                 1997        1996         1995
                                               -------     -------      -------
Current, net of operating loss carryover:    
    Federal ...............................    $ 5,828     $ 3,258      $ 1,050
    State .................................        822         753          275
                                               -------     -------      -------
                                                 6,650       4,011        1,325
                                             
Deferred income taxes .....................        114         (94)          13
Utilization of net operating loss            
  carryforward ............................       --          --            340
Change in valuation allowance .............       --          --           (294)
                                               -------     -------      -------
                                             
Provision for income taxes ................    $ 6,764     $ 3,917      $ 1,384
                                               =======     =======      =======
                                           
Reconciliation  of the federal  income tax rate to the Company's  effective rate
for the years ended September 30 are as follows:

                                                 1997        1996         1995
                                                ------      ------       ------
                                                                      
Statutory federal rate ....................     35.00%      34.00%       34.00%
State taxes, net of federal benefit .......      4.65%       5.03%        5.53%
Non-deductible expense ....................       .35%        .66%        0.86%
Change in valuation reserve ...............       --          --         (7.06%)
                                                ------      ------       ------
                                                40.00%      39.69%       33.33%
                                                ======      ======       ======
                                      F-15                           
<PAGE>
The components of deferred taxes are as follows at September 30 (in thousands):

                                                            1997         1996
                                                          -------      -------
         Deferred tax assets (liabilities):
           Accelerated tax depreciation .............     $  (391)     $  (216)
           Accelerated tax amortization .............        (306)        --
           Inventory cost capitalization ............         547          156
           Vacation accrual .........................          27           13
           Valuation reserves .......................         794          197
           Deferred compensation ....................         247          882
                                                          -------      -------
             Net deferred tax asset .................     $   918      $ 1,032
                                                          =======      =======

(9)      LEGAL SETTLEMENT

In June 1997, the Company agreed to settle a breach of contract suit with Action
Products,  Inc.  for $4.9 million  (the "API  Settlement").  Pursuant to the API
Settlement,  in July 1997 the  Company  made a payment  of $4.9  million  to the
plaintiff,  and all parties executed mutual releases. The accompanying financial
statements  include a charge of $5.4 million for the API  Settlement and related
legal fees.

(10)     COMMITMENTS AND CONTINGENCIES

On May 17, 1993, the State of Arizona (the "State") instituted a lawsuit against
the Company and 29 other  defendants in the United States District Court for the
District of Arizona.  The State seeks  recovery of certain  clean-up costs under
federal and state environmental laws. Specifically,  the State seeks recovery of
expenses  that it has incurred to date for an  environmental  investigation  and
clean-up of property formerly used as a site for recycling hazardous wastes. The
State alleges that the property has been contaminated with hazardous substances.
In addition,  the State seeks a  declaratory  judgment  that the Company and the
other  defendants are jointly and severally liable for all future costs incurred
by the State for  investigative and remedial  activities,  and seeks a mandatory
permanent injunction requiring the Company to undertake  appropriate  assessment
and remedial action at the property.  The State has not specified the amounts it
seeks  to  collect  from the  Company.  The  State  alleges  that F. W.  Leisure
Industries,  Inc.  and/or F. W. &  Associates,  Inc.  were  predecessors  of the
Company  that  produced  and  arranged  for  the   transportation  of  hazardous
substances  to the property  involved in the  lawsuit.  The Company is defending
this lawsuit on various  bases  including  that F. W. Leisure  Industries,  Inc.
and/or F. W. & Associates,  Inc. were not  predecessors  of the Company and that
neither  the  Company nor any  predecessor  of the Company has ever  produced or
transported  hazardous substances as alleged by the State. The State has settled
a portion of its claims with respect to a large  number of the other  defendants
to the lawsuit.  The Company is not a party to that  settlement.  On February 1,
1995, a number of the defendants  that agreed to the  settlement  with the State
were granted leave to file, and subsequently did file, a cross-claim against the
Company  seeking  indemnity  from the  Company  based  on the  same  predecessor
liability  theory  asserted by the State.  The parties have conducted  discovery
limited  to the  issue of any  defendant's  status  as a  responsible  party and
regarding the Company's  status as a successor  corporation.  On March 25, 1997,
the Court  ruled that  under  federal  environmental  law the  Company  would be
treated as the  successor  to F.W.  &  Associates,  Inc.,  and/or  F.W.  Leisure
Industries,  Inc.  The Company may appeal this ruling at the  appropriate  time.
Discovery  is  now  ongoing  with  regard  to  the  merits  of  the   underlying
environmental  claims  and the  amount of those  claims.  Should  the  Company's
defense prove  unsuccessful,  the Company currently estimates the potential loss
to be approximately  $800,000. No provision with respect to this matter has been
made in the financial statements.

On March 4, 1997,  two class action  lawsuits were filed against the Company and
approximately  28 other  defendants in the United States  District Court for the
Northern District of Georgia. The lawsuits allege that the defendants engaged in
price  fixing and other  anti-competitive  activities  in  violation  of federal
anti-trust laws. The Company was named as a defendant based upon actions alleged
to have been taken by Sports Image, Inc., a North Carolina  corporation ("Sports
Image N.C.") and Creative  Marketing &  Promotions,  Inc.  ("CMP")  prior to the
Company's acquisitions of the assets and capital stock,  respectively,  of those
entities. The actions were subsequently  consolidated by order of the court. The
caption of the
                                      F-16
<PAGE>
consolidated action is "In re Motorsports  Merchandise Antitrust Litigation" and
the files are maintained under Master File No. 1-97-CV-0569-CC. On May 30, 1997,
a  consolidated  amended  complaint  was filed,  which  deleted the Company as a
defendant  with respect to claims based upon actions  alleged to have been taken
by Sports Image N.C. and named the  Company's  wholly owned  subsidiary,  Sports
Image,  Inc., an Arizona  corporation  ("Sports  Image AZ"), as a defendant with
respect to those claims.  The Company remains a defendant with respect to claims
based upon  actions  alleged to have been taken by CMP.  On July 31,  1997,  the
Company  acquired all of the outstanding  capital stock of RYP, which is another
defendant  in this matter.  Accordingly,  the Company has assumed the defense of
this matter with respect to claims based upon actions alleged to have been taken
by RYP  and has  agreed  to be  responsible  for  and to pay  any  costs,  fees,
expenses, damages, payments, credits, rebates, and penalties arising out of this
matter with respect to RYP, up to an aggregate of $400,000 (the "$400,000 Cap").
The $400,000 Cap excludes  attorneys  fees and certain  other costs and expenses
that the Company may incur in defending or settling this matter.  The plaintiffs
have  requested  injunctive  relief  and  monetary  damages  of  three  times an
unspecified  amount  of  damages  that the  plaintiffs  claim  to have  actually
suffered.  On August 1, 1997,  answers  were filed on behalf of the  Company and
Sports  Image AZ  denying  the  allegations  of the  complaint.  Pursuant  to an
agreement  between the plaintiffs and Sports Image AZ to toll the running of the
statute of  limitations  with respect to any claims  against Sports Image AZ, on
November 17, 1997 the plaintiffs  filed a motion to dismiss Sports Image AZ from
the  case  without  prejudice.   The  parties  currently  are  conducting  class
discovery.  The Company intends to vigorously  defend the claims asserted in the
amended and consolidated complaint.

On June 4, 1997,  Petty  Enterprises,  Inc.  Licensing  Division filed a lawsuit
against the Company and Fred W.  Wagenhals  in the General  Court of Justice for
Randolph County, North Carolina.  The complaint alleges that the Company engaged
in activities that resulted in common law trademark infringement,  fraud, unfair
competition,  "palming off" unauthorized goods as authorized products, marketing
unlicensed  products,  misappropriation  of  business  opportunities,  breach of
contract,  unjust enrichment,  conversion,  and violations of the North Carolina
Unfair and Deceptive Trade Practices Act and the Lanham Act. In particular,  the
plaintiff alleges that the Company  manufactured and sold products in quantities
greater  than  the  amounts   permitted   under  certain   license   agreements,
manufactured  and sold  certain  products  for  which it did not have  licenses,
misrepresented  the number of licensed products actually  manufactured and sold,
and underpaid royalties to the licensors.  The complaint also alleges that these
acts constitute a pattern of improper  activity.  The complaint requests that an
unspecified  amount of actual damages plus treble and punitive damages,  as well
as  injunctive  relief.  On July 3, 1997,  the  Company and Mr.  Wagenhals  were
successful  in removing  the case to the United  States  District  Court for the
Middle District of North Carolina. On July 11, 1997, each of the Company and Mr.
Wagenhals  filed an answer denying the  plaintiff's  allegations  and each filed
counterclaims  against the plaintiff  for breach of contract,  breach of a prior
settlement  agreement  between the plaintiff and the Company,  violations of the
North Carolina Unfair and Deceptive  Trade Practices Act,  defamation and damage
to   reputation,   and   tortious   interference   with   prospective   business
relationships.  On July 18,  1997,  the Company and Mr.  Wagenhals  collectively
filed  a  third-party  complaint  against  Brett  Nelson,  an  affiliate  of the
plaintiff,  alleging violations of the North Carolina Unfair and Deceptive Trade
Practices Act,  defamation and damage to reputation,  and tortious  interference
with  actual and  prospective  business  relationships.  On August 8, 1997,  Mr.
Nelson filed an answer  denying the  allegations  against  him.  After the Court
denied  motions to dismiss  by all  parties,  the  plaintiff  filed its  amended
complaint  and the Company and Mr.  Wagenhals  filed  their  respective  amended
answer and  counterclaims.  The amended  complaint  and the  amended  answer and
counterclaims  contain  essentially  the same  allegations  and  defenses as the
original pleadings.  The parties currently are in the early stages of discovery.
The Company and Mr.  Wagenhals intend to vigorously  pursue their  counterclaims
and the third-party complaint and to vigorously defend this lawsuit.

The Company  leases  certain  equipment  and office  space under  noncancellable
operating  leases.  Rent  expense  related  to these  lease  agreements  totaled
approximately  $935,000,  $437,000  and  $352,000  for the  fiscal  years  ended
September 30, 1997, 1996, and 1995 respectively.
                                      F-17
<PAGE>
Future lease  payments  under the  noncancellable  leases are  approximately  as
follows (in thousands):

                           Year Ending
                          September 30,
                          -------------
                              1998              $ 2,286
                              1999                1,813
                              2000                1,483
                              2001                1,124
                              2002                1,078
                           Thereafter             4,765
                                                -------
                              Total             $12,549
                                                =======

The  Company  is  subject  to  certain  other  asserted  and  unasserted  claims
encountered in the normal course of business. In the opinion of management,  the
resolution  of these  matters  will not have a  material  adverse  effect on the
Company's financial position or results of operations.

(11)     STOCK OPTION PLAN

The Company  accounts for its stock-based  compensation  plans under APB No. 25,
under which no  compensation  expense has been  recognized,  as all options have
been  granted  with an exercise  price equal to the fair value of the  Company's
Common  Stock on the date of grant (See Note 5 for a general  discussion  of the
Company's  Stock Option Plan).  The Company  adopted SFAS No. 123 for disclosure
purposes  in fiscal  1997.  For SFAS No.  123  purposes,  the fair value of each
option grant has been estimated as of the date of grant using the  Black-Scholes
option pricing model with the following  assumptions:  risk-free  interest rates
ranging between 5.29% and 6.34%;  expected life of three years; dividend rate of
0.0%; and expected volatility of 51.88%. Using these assumptions, the fair value
of the stock  options  granted is  $1,614,623  and  $908,153 for the years ended
September 30, 1997 and 1996,  respectively.  These amounts would be amortized as
compensation  expense over the vesting period of the options.  Options generally
vest equally over three years. Had compensation costs been determined consistent
with SFAS No. 123,  utilizing the assumptions  detailed above, the Company's net
income and earnings per share would have been reduced to the following pro forma
amounts:

                                                  1997               1996
                                               ----------          ---------
  Net Income:
    As Reported .......................        $   10,146          $   5,953
    Pro Forma .........................        $    9,305          $   5,650
  Primary EPS:
    As Reported .......................        $     0.69          $    0.46
    Pro Forma .........................        $     0.64          $    0.43
  Fully Diluted EPS:
    As Reported .......................        $     0.69          $    0.46
    Pro Forma .........................        $     0.63          $    0.43

Because the SFAS No. 123 method of  accounting  has not been  applied to options
granted prior to October 1, 1995, the resulting pro forma  compensation cost may
not be representative of that expected in future years.
                                      F-18
<PAGE>
A summary of the status of the Company's stock option plan at September 30, 1997
and 1996 and for the years then ended is presented in the table below:

<TABLE>
<CAPTION>
                                     1997                         1996                        1995
                          -------------------------    ------------------------    ------------------------
                                             Wtd                         Wtd                         Wtd
                            Number           Avg         Number          Avg         Number          Avg
                              of           Exercise        of          Exercise        of          Exercise
                            Shares          Price        Shares         Price        Shares         Price
                          -------------------------    ------------------------    ------------------------
<S>                       <C>             <C>          <C>             <C>         <C>             <C>     
Outstanding at
 beginning of year        1,110,053       $    4.16    1,111,200       $   2.90    1,252,000       $   2.07
Granted ...........         220,250           17.76      240,700           9.28      400,200       $   4.78
Exercised .........        (296,092)           5.80     (239,247)          3.45     (541,000)      $   2.37
Canceled ..........          (1,501)           9.43       (2,600)          5.25         --
                          ---------       ---------    ---------       --------    ---------       --------
Outstanding at
 end of year ......       1,032,710            6.58    1,110,053           4.16    1,111,200       $   2.90

Options exercisable
 at end of year ...         714,950            3.09      881,774           2.91    1,051,000       $   2.79

 Options available
  for grant.........        396,951                      365,700                     103,800

 Weighted average
  fair value of
  options granted...         $ 7.33                       $ 3.77
</TABLE>

Options  outstanding and exercisable by price range as of September 30, 1997 are
as follows:

                           Options Outstanding              Options Exercisable
                    ---------------------------------     ----------------------
                                 Weighted              
                                  Average    Weighted                   Weighted
                                 Remaining    Average                    Average
   Range of           Options   Contractual  Exercise       Options     Exercise
Exercise Prices     Outstanding    Life        Price      Exercisable     Price
---------------     ---------------------------------     ----------------------
$ 1.25 - $ 5.25       655,010      2.17       $ 2.38        597,723      $ 2.16
$ 6.50 - $10.63       194,950      4.75         9.76         79,483        9.34
$14.88 - $19.50       182,750      5.42        18.25         37,744       15.33
                    ---------      ----       ------      ---------      -------
$ 1.25 - $19.50     1,032,710      3.23       $ 6.58        714,950      $ 3.09
                    =========      ====       ======      =========      =======
                                                      
(12)     SUBSEQUENT EVENTS

On October 3, 1997, the Company entered into a ten-year  license  agreement with
Richard  Childress  Racing  Enterprises,  Inc.  ("RCR")  with respect to various
rights used in connection with Dale Earnhardt licensed  products.  In connection
with this agreement,  the Company paid RCR a license fee consisting of cash plus
34,940 shares of the Company's Common Stock. The license agreement also requires
the Company to pay to RCR certain  minimum annual  royalties  during the term of
the agreement,  plus royalties based on sales of licensed  products in each year
during the term of the agreement.

In November  1997, the Company agreed in principle to purchase the assets and to
assume certain  liabilities of the motorsport die-cast  collectible  business of
Revell Monogram,  Inc.  ("Revell") for approximately  $15.0 million in cash. The
proposed  transaction will include a ten-year license agreement that will enable
the Company to use  certain  "Revell"  trademarks  in  connection  with sales of
certain  die-cast  products,  as well as  other  arrangements  with  respect  to
licensing,  manufacturing, and distributing various products by both the Company
and Revell.  The agreement also includes a minimum  contingent  payment of $10.0
million over a ten-year  period,  based upon the  attainment  of certain  future
financial  objectives.  The  acquisition  is  subject to the  completion  of due
diligence and the preparation and execution of definitive  agreements.  Revell's
design  and  manufacturing   activities  for  motorsport  die-cast  collectibles
generated approximately $16.2 
                                      F-19
<PAGE>
million in revenue during calendar year 1996. This transaction will be accounted
for as a purchase.

(13)     EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT

On December 9, 1997, the Company  acquired  certain  assets and assumed  certain
liabilities  related  to sales of  motorsports  merchandise  licensed  by NASCAR
Winston Cup driver Rusty Wallace from an affiliate of Mr. Wallace.  The purchase
price paid by the  Company  for the  acquired  assets  consists  of cash of $6.0
million,  of which $2.5 million was paid at the closing and the  remaining  $3.5
million will be paid during fiscal 1998. In connection  with the  acquisition of
the assets  and  assumption  of the  liabilities,  the  Company  entered  into a
seven-year  license agreement with another affiliate of Mr. Wallace for the name
and likeness of Mr.  Wallace and acquired a five-year  sublicense  with a wholly
owned  subsidiary  of  Penske  Motorsports,   Inc.  The  license  agreement  and
sublicense  agreement both contain  options that permit the Company to renew for
two five-year  terms.  The license  agreement  with the affiliate of Mr. Wallace
requires  the Company to pay  royalties  on sales of licensed  products,  plus a
license fee if sales of licensed  products  exceed a specified  amount each year
during  the  initial  term of the  license.  The terms of the  transaction  were
determined by arms-length negotiations between the respective representatives of
the seller,  the sublicensor and its parent,  and the Company.  This transaction
will be accounted for as a purchase.
                                      F-20