SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                           __________________________

                                   FORM 10-KSB

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


                    For fiscal year ended September 30, 1996

                         Commission file number 0-21630
                           __________________________

                       ACTION PERFORMANCE COMPANIES, INC.
                 (Name of Small Business Issuer 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 issuer's 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

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

Check if disclosure of delinquent  filers pursuant to item 405 of Regulation S-B
is not contained in this form, and no disclosure will be contained,  to the best
of  registrant's  knowledge,  in  definitive  proxy  or  information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [ ]

Issuer's revenues for its most recent fiscal year:  $44,215,935.

Aggregate  market value of the voting stock held by  non-affiliates  computed by
reference to the price at which the stock was sold, or the average bid and asked
prices of such  stock,  as of a specified  date  within the past 60 days:  As of
December 20, 1996 - $177,025,450.

Number of shares  outstanding of each of the issuer's  classes of common equity,
as of the latest  practicable  date: As of December 20, 1996 - 13,094,962 shares
of Common Stock, par value $.01 per share.

Documents incorporated by reference:  None.
<PAGE>
                       ACTION PERFORMANCE COMPANIES, INC.

                          ANNUAL REPORT ON FORM 10-KSB

                      FISCAL YEAR ENDED SEPTEMBER 30, 1996

                                TABLE OF CONTENTS


                                                                            Page
PART I

     ITEM 1.      BUSINESS................................................     1
     ITEM 2.      PROPERTIES..............................................    16
     ITEM 3.      LEGAL PROCEEDINGS.......................................    17
     ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....    17

PART II

     ITEM 5.      MARKET FOR THE REGISTRANT'S COMMON EQUITY
                  AND RELATED STOCKHOLDER MATTERS.........................    18
     ITEM 6.      SELECTED FINANCIAL DATA; MANAGEMENT'S DISCUSSION
                  AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                  OF OPERATIONS...........................................    19
     ITEM 7.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............    23
     ITEM 8.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE.....................    23

PART III

     ITEM 9.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
                  COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES
                  EXCHANGE ACT OF 1934....................................    24
     ITEM 10.     EXECUTIVE COMPENSATION..................................    26
     ITEM 11.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                  AND MANAGEMENT..........................................    31
     ITEM 12.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........    32

PART IV

     ITEM 13.     EXHIBITS AND REPORTS ON FORM 8-K........................    33

SIGNATURES        ........................................................    35

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................   F-1

                                        i
<PAGE>
                                     PART I

ITEM 1.   BUSINESS

Overview

          The Company designs and markets collectible and consumer products that
are  intended to  capitalize  on the  increasing  interest in  motorsports.  The
Company currently designs and markets collectible  die-cast and pewter miniature
replicas of  motorsports  vehicles  and designs  and markets  licensed  apparel,
souvenirs,  and other  motorsports  consumer items,  including  t-shirts,  hats,
jackets,  mugs,  key chains,  and drink  bottles.  The Company  also  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,  and develops
marketing and product promotional programs for corporate sponsors of motorsports
that feature the Company's die-cast replicas or other products as premium awards
intended  to  increase  brand  awareness  of the  products  or  services  of the
corporate sponsors. The Company recently entered into a licensing agreement with
Hasbro, Inc. ("Hasbro"), a multi-billion dollar toy and game manufacturer, for a
new  line of  motorsports-related  products  for  sale  in the  mass-merchandise
market.  The Company  markets its  motorsports  collectibles  and consumer items
pursuant to license  arrangements  with popular race  drivers,  car owners,  car
sponsors, and automobile  manufacturers.  The Company's motorsports collectibles
and consumer products are manufactured by third parties, generally utilizing the
Company's designs, tools, and dies.

          The Company  designs its  products  and other  programs  primarily  to
capitalize on the growing interest in motorsports. The popularity of motorsports
with consumers has resulted in significant  growth in the motorsports  industry.
In fact,  USA Today  reports  that  motorsports  racing is the  fastest  growing
spectator   sport  in  the  nation.   According  to  The  Wall  Street  Journal,
approximately 5.3 million fans attended the 31 races of the National Association
for Stock Car Auto Racing's ("Nascar") Winston Cup series in 1995.  According to
USA Today,  attendance  at Winston Cup events has more than  doubled in the past
decade, from 75,643 per event in 1985 to 180,260 in 1996. USA Today reports that
TV ratings are growing even faster,  with more than 100 million people tuning in
to Nascar's  televised  events each year.  A.C.  Nielsen  reports that, with the
exception of NFL football,  Nascar  Winston Cup telecasts  score higher  ratings
than any other  sporting event aired by cable.  USA Today  indicates that recent
surveys report that 38% of Nascar fans are women;  65% own homes; 78% use credit
cards; and 53% are professionals,  managers, or skilled workers. The Wall Street
Journal reported that sales of Nascar-licensed  goods have grown ninefold during
the 1990s to more than $500  million  per year and are  expected  to reach  $1.0
billion by 1998.  According to Nascar,  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  that primarily  feature Nascar drivers and vehicles.  In 1995, the
Company  began  expanding  its lines of die-cast  collectibles  to include other
types of motorsports  vehicles,  including National Hot Rod Association ("NHRA")
drag racing,  Nascar's new "Super Truck"  racing  series,  dirt car racing,  and
sprint car racing.  The Company  focuses on developing  long-term  relationships
with and engages in comprehensive efforts to license the most popular drivers in
each top racing category as well as car owners, car sponsors, car manufacturers,
and others in these racing  categories.  The Company has license agreements with
many of the most popular Nascar race drivers,  including  seven-time Winston Cup
champion  Dale  Earnhardt,  1996 Winston Cup champion  Terry  Labonte,  and 1995
Winston  Cup  champion  Jeff  Gordon.  The  Company  believes  that its  license
agreements with notable Nascar and other  motorsports  personalities and popular
sponsors  significantly  enhance the collectible  value and marketability of its
products. The Company also believes that drivers and other motorsports licensors
increasingly  recognize the Company's ability to design,  develop, and produce a
broad range of  high-quality  licensed  products  and to market  those  products
through well-defined,  organized, and established distribution channels designed
to  maximize  sales  and  profitability.  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  continually  seeks to develop or  acquire  exciting  and
progressive  new products and programs.  In November 1996, the Company  acquired
the business of Sports Image, Inc. ("Sports Image") from Dale Earnhardt
<PAGE>
and Teresa Earnhardt.  Sports Image markets and distributes licensed motorsports
apparel and other  souvenir  items  featuring the likeness of Dale Earnhardt and
other popular  drivers  through a network of wholesale  distributors,  trackside
events, promotional programs for corporate sponsors, and fan clubs. Sports Image
had revenue of  approximately  $32.5 million and $41.8  million  during the year
ended December 31, 1995 and the period from January 1, 1996 to November 7, 1996,
respectively. The Company believes that Sports Image represents an important new
distribution  channel  for the  Company's  die-cast  collectibles  and  provides
significant  opportunities  for  developing and marketing  licensed  apparel and
souvenirs.

          In  December  1996,  the  Company  executed  a letter of  intent  with
Motorsports   Traditions   Limited   Partnership  and  Creative   Marketing  and
Promotions, Inc. (together,  "Motorsports Traditions") providing for the Company
to acquire  the  business  and  substantially  all of the assets of  Motorsports
Traditions.  Motorsports Traditions markets and distributes licensed motorsports
apparel and souvenir  items  featuring  the  likenesses  of Jeff  Gordon,  Terry
Labonte,  Darrell  Waltrip,  Bobby Labonte,  and other popular  Nascar  drivers.
Because of the  similarities  of the  businesses  and  operations of Motorsports
Traditions  and  Sports  Image,  the  Company   anticipates  that  the  proposed
acquisition of  Motorsports  Traditions  will result in favorable  synergies and
will position the Company as a leading marketer of licensed  motorsports apparel
and souvenirs.  Motorsports Traditions has annual revenue of approximately $25.0
million  from  sales of  licensed  apparel,  souvenirs,  and  other  motorsports
consumer products.

          In  December  1996,  the  Company  and Hasbro  entered  into a license
agreement   covering   the   exclusive   sale  by   Hasbro  of  a  new  line  of
motorsports-related   products  in  the  mass-merchandise  market.  The  Company
believes that the license agreement with Hasbro will enable it 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 as a means of
expanding  the  Company's  product  offerings  without  committing   substantial
resources to manufacturing and marketing activities.

          As used  herein,  the term  "Company"  refers  to  Action  Performance
Companies,  Inc.  and its  subsidiaries  and  operating  divisions.  See Item 1,
"Business - Development of the Company."

Products and Services

Die-Cast Miniature Replica Vehicles; Pewter Replica Vehicles

          The    Company    markets    collectible    miniature    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 more than 300 active  licenses  with
stock car and other  drivers,  car  owners,  and car  sponsors  as well as under
license  agreements  with 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,  dirt car racing,  and sprint car
racing.  The Company's  die-cast  collectibles  consist of (i) 1:64th and 1:24th
scale  replicas of actual racing  vehicles;  (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  strives to enhance the demand for and
to increase the value of its collectible products by offering limited numbers of
each item. The Company offers its die-cast collectibles primarily through retail
dealers,  through  its  collectors'  club,  and  as  promotional  and  specialty
advertising items. See Item 1, "Business - Sales and Marketing."

          Historically,   the  Company  has  designed   and  marketed   die-cast
collectibles that primarily feature drivers and vehicles from the Nascar Winston
Cup series.  During fiscal 1995,  the Company began  development  of several new
lines of die-cast  collectibles  that  feature  replicas of vehicles  from other
popular  motorsports.  The Company  successfully  introduced its line of Winston
NHRA Top Fuel  Dragster  and Top Fuel Funny Car  replicas in fiscal  1995,  with
sales  of   approximately   $6.0  million  in  fiscal  1996.  The  Company  also
successfully introduced a line of die-cast collectible replicas from the popular
new Nascar "Super Truck" series in fiscal 1995, with sales of approximately $3.2
million in fiscal 1996.
                                        2
<PAGE>
          The Company  invested  approximately  $2.6  million in tooling for its
proprietary  line of die-cast  collectibles in fiscal 1996,  which increased its
total investment in die-cast tooling to approximately  $8.2 million at September
30, 1996.  The Company  believes the breadth and quality of the tooling  program
provides the Company with a competitive advantage in the motorsports collectible
market.  In  addition,  the Company has taken  various  steps,  and  continually
evaluates  additional  measures,  designed to enhance the collectible  value and
appeal  of  its  products.   These  measures  include  (i)  designing   die-cast
collectibles  that  include  features  that  are not  offered  by the  Company's
competition;  (ii)  limiting  the  quantities  of each item that it produces and
sells; (iii) specifying on the packaging  material of each die-cast  collectible
the quantity of that  limited-edition  item  actually  produced;  (iv)  offering
certain items only through the Company's collectors' club; and (v) designing and
developing  new  packaging  concepts to improve the display of each  collectible
item.

          During  1995,  the  Company  introduced  a line  of  limited  edition,
hand-crafted  1:43rd scale solid  pewter  replicas of race cars for sale through
its collectors'  club. The Company's  pewter replicas  feature crisply  detailed
wheels, chassis, and body elements, including the driver's name, car number, and
sponsors'  logos and decals.  The Company  stamps a serial number on each of its
limited-edition  pewter  collectibles in order to enhance its value and packages
each pewter replica vehicle in a display case that includes literature featuring
the driver's photograph and details of the driver's racing accomplishments.

Motorsports Consumer Products

          The Company markets various licensed  motorsports  apparel,  souvenir,
and  other  consumer  products,  including  t-shirts,  jackets,  hats,  die-cast
replicas,  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 items for its  motorsports  consumer
products.  The Company designs its motorsports  consumer products  primarily for
high-volume  distribution through retail outlets,  trackside sales, and programs
with corporate sponsors of racing teams and racing events. See Item 1, "Business
-  Sales  and  Marketing."  The  Company  sold  approximately  $2.0  million  of
motorsports  consumer  products  during  fiscal 1996.  Sports  Image,  which the
Company acquired in November 1996, had sales of  approximately  $41.8 million 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 $5.8 million).  In addition,  the Company has executed a letter of
intent  providing  for the  Company  to  acquire  the  business  and  assets  of
Motorsports Traditions,  which has annual revenue of approximately $25.0 million
from sales of apparel, souvenirs, and other motorsports consumer products.

Mass Merchandise Products

          In  December  1996,  the  Company  and Hasbro  entered  into a license
agreement   covering   the   exclusive   sale  by   Hasbro  of  a  new  line  of
motorsports-related  products  specifically  designed  for the  mass-merchandise
market.  The license agreement covers products for which the Company has or will
secure  exclusive or non-exclusive  licenses from race car drivers,  car owners,
manufacturers,  or sponsors.  Under the license  agreement,  the Company will be
responsible for acquiring and maintaining the license rights with the licensors,
and Hasbro will be responsible for all costs and other arrangements  relating to
tooling, manufacturing,  transportation,  marketing,  distribution, and sales of
licensed  products.  The licensed  products  will include two new lines  jointly
developed  by  Hasbro  and the  Company,  consisting  of  die-cast  replicas  of
motorsports vehicles and a 1/18th-scale plastic toy car. Hasbro also will market
other licensed motorsports products,  including  radio-controlled cars, slot car
sets, games (including  electronic and CD-ROM  interactive  games),  plush toys,
figurines,  play sets,  walkie  talkies,  and other products.  Hasbro  currently
markets certain of these products under the "Kenner," "Tonka," "Milton Bradley,"
and other brand names.

          Hasbro's initial focus under the license agreement will be to develop,
with the Company's  guidance,  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
                                        3
<PAGE>
name. The mass-market die-cast products manufactured and marketed by Hasbro will
be completely  distinct from the Company's current products and will not compete
directly  with  the  Company's  current  limited-edition   motorsports  die-cast
collectible products.

          The  Company  believes  that the  license  agreement  with Hasbro will
enable it 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  as a means of  expanding  the  Company's  product  offerings  without
committing substantial resources to manufacturing and marketing activities.

Action Sports Management

          During fiscal 1996,  the Company began the business of  representing 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
strives  to provide  services  that will  enable  drivers  to  maximize  revenue
opportunities   throughout  their  careers.   During  1996,  the  Company  began
representing  six-time  Winston  NHRA  Funny Car  champion  John Force and other
popular  drag  racing  drivers in  connection  with their  licensing,  corporate
sponsorship, and endorsement contracts.

Promotional Programs

          Major corporations  sponsor racing vehicles or events and advertise at
motorsports events and in  motorsports-related  media in order to increase their
brand  awareness and to encourage  consumers to purchase their  products.  These
sponsors  frequently use creative  premium and promotional  programs to increase
brand  awareness and popularity  with racing fans and other  consumers.  Many of
these corporations currently are outsourcing sales and marketing functions at an
increasing  rate  as  they   "downsize"   their  internal  sales  and  marketing
departments.  The Company  plans to target a portion of this demand by providing
complete marketing services designed to create corporate premium and promotional
programs for large corporate sponsors that advertise in motorsports. 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,  hats, or
bumper  stickers,  to create and produce  promotional  products.  The  corporate
sponsors  use these  products  as a free  premium  award with the  purchase of a
primary  product,  a low-cost premium that may be redeemed with a mail-in coupon
offer after  purchasing the sponsor's  consumer  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.  The  Company
recorded  sales of  approximately  $1.4  million as a result of one  promotional
program  in  fiscal  1996  and  intends  to  increase  its  efforts  to  develop
promotional programs in fiscal 1997.

Sales and Marketing

          The Company markets its motorsports  collectibles (i) to approximately
5,000 retail dealers through a wholesale  distributor network;  (ii) directly to
motorsports enthusiasts through its 70,000-member collectors' club; and (iii) as
promotional or specialty  advertising items. The Company markets its motorsports
consumer products primarily through (a) direct trackside sales to race fans, (b)
through an in-house sales force and independent representatives to approximately
5,000 specialty retail dealers and for mass distribution  through major discount
and department  stores,  retail  automotive  product  outlets,  and  convenience
stores,  and (c) through  corporate  promotional  programs  with major  consumer
products companies.

Wholesale Distribution

          The Company  markets its  collectibles  on a wholesale  basis  through
approximately 50 distributors  operating in the continental  United States.  The
distributors  solicit orders for the Company's products from approximately 5,000
retail dealers  throughout the United States.  The retail dealers  include hobby
shops,  stores  specializing in sports  collectible  items, and souvenir vendors
that attend various racing events. Employees of the Company 
                                       4
<PAGE>
attend  several trade shows each year in an effort to attract new retail dealers
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  retail  dealer 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  in-house   sales   force,   independent
representatives, and its die-cast collectible distribution network to market its
motorsports apparel, souvenirs, and other consumer products on a wholesale basis
to approximately  5,000 retail dealers  specializing in motorsports  merchandise
throughout the United States. 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
Walmart and K-Mart, to automotive retail stores, and to convenience  stores. The
Company   currently  is  developing  new  motorsports   consumer   products  for
high-volume sales programs.

          Under the Company's  licensing  agreement with Hasbro,  Hasbro will be
responsible  for  all  costs  and  other   arrangements   relating  to  tooling,
manufacturing,  transportation,  marketing,  distribution, and sales of licensed
products in the  mass-merchandise  market. The Company believes that the license
agreement  with Hasbro will enable it to remain  focused on its core business of
designing and marketing  motorsports  collectible and consumer  products,  while
enabling the Company to benefit from Hasbro's retail mass merchandise  marketing
expertise and resources as a means of expanding the Company's  product offerings
without  committing   substantial   resources  to  manufacturing  and  marketing
activities.

Collectors' Club

          The Company markets its die-cast and pewter  collectibles  through its
Racing Collectibles Club of America, a motorsports  collectible club that offers
the  Company's  motorsports  collectibles  exclusively  to members.  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, and not through any other  distribution  network;
(ii)  producing a limited  number of each  collectible;  and (iii)  limiting the
number of a particular  item that each member may  purchase.  As a result of its
acquisition  of  Sports  Image  in  November  1996,  the  Company  currently  is
developing a line of licensed  motorsports  apparel and  souvenirs  that will be
offered  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.  These efforts
have enabled the Company to increase  membership  in its  collectors'  club from
approximately  15,000 members in August 1993 to approximately  70,000 members as
of September 30, 1996.

          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.   The  Company  employs   customer  service
representatives  and an automated  call  distribution  telephone  system to take
membership applications, take customer orders, and handle customer inquiries. In
October 1995, the Company completed the installation of a $2.0 million telephone
and computer system that combines  telemarketing  functions,  computerized order
processing, and automated warehouse operations in order to enable the Company to
more  effectively and  efficiently  answer and process  telephone  orders to its
collectors' club. The Company installed its new telephone and computer system in
order  to  accommodate  the  significant  growth  in  club  membership  and  the
increasing  volume of  telephone  orders that it has  experienced  as well as to
provide the infrastructure that may be required to handle an increased volume of
calls resulting from its accelerated advertising efforts and new collectible and
motorsports consumer product programs. 
                                       5
<PAGE>
Trackside Sales

          According to USA Today, attendance at Nascar Winston Cup racing events
exceeded  180,000 fans per race during 1996. In connection  with the acquisition
of Sports  Image in November  1996,  the Company  acquired  five fully  equipped
mobile  trackside  souvenir  stores.  These mobile  trackside stores travel from
event to event  throughout  the racing season and sell a complete  assortment of
licensed  motorsports  apparel and souvenirs.  Sports Image  recorded  trackside
sales of approximately $9.9 million during the 1996 Nascar racing season.

Promotional Programs

          In addition to sales  through its wholesale  distribution  network and
trackside sales, Sports Image develops corporate  promotional  programs in which
it designs and sells specialty t-shirts, hats, and other apparel or souvenirs to
major corporate  sponsors of motorsports teams and events. The sponsors then use
these products as promotional giveaways at corporate hospitality tents at racing
events and other promotions.  Sports Image recorded sales of approximately  $1.1
as a result of corporate  promotional programs during the period from January 1,
1996 to November 7, 1996.

          The Company also from time to time develops  promotional programs with
major oil companies and other consumer  products  companies.  These  promotional
programs  typically  involve  decalling,  imprinting,  or otherwise  prominently
displaying the names, likenesses,  and car numbers of popular drivers as well as
the customers'  names,  logos, or messages on the Company's  die-cast  replicas,
licensed  apparel,  souvenirs,  or other consumer products as a low-cost or free
premium  award  specifically  designed  to  increase  brand  awareness  and name
recognition.  Such programs  include offering a free die-cast replica vehicle or
other product with the purchase of a primary product, a mail-in coupon offer for
a  consumer  to  receive a  die-cast  replica  vehicle  or other  product  after
purchasing a company's consumer products, and sweepstakes  promotions.  Die-cast
replica  vehicles sold as  promotional  items are not sold through the Company's
wholesale  distribution  network or through its  collectors'  club.  The Company
recorded  sales of  approximately  $1.4  million as a result of one  promotional
program in fiscal 1996. The Company plans to pursue future promotional  programs
and  currently  is in  discussions  with major stock car  drivers and  corporate
sponsors  in  its  effort  to  develop  such   programs.   

Manufacturing and Production Die-cast and Pewter Collectibles

          In December 1994, the Company entered into an exclusive  manufacturing
agreement  with a  third-party  manufacturer  in the People's  Republic of China
("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.  Since April 1993, the
Company has invested  approximately $8.2 million for tooling used to produce its
die-cast  collectibles.  The Company intends to make  additional  investments in
tooling in order to support the growth of its  business.  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.

          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 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. 
                                       6
<PAGE>
          The Company arranges for the manufacture of its pewter collectibles on
a purchase  order  basis with  third-party  manufacturers  located in the United
States. The production of these pewter collectibles does not require the Company
to make an investment in tooling,  as tooling costs are included as a portion of
the  cost of  each  unit  produced.  The  Company  designs  each  of the  pewter
collectibles  that it markets in a process  similar to the  process  required to
design its die-cast collectibles.

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  such  products  on a  purchase  order  basis  with  third-party
manufacturers,  located  primarily  in the United  States.  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.

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  $3.3  million of such
products as of September 30, 1996.

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.

Licenses

Product Licenses

          The Company focuses on developing solid 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  more  than 300 race car
drivers,  car  owners,  and car  sponsors  as well as with Ford  Motor  Company,
several divisions of General Motors Corp., and PACCAR, Inc. (the manufacturer of
Kenworth and Peterbilt trucks). The Company believes that its license agreements
with top Nascar and NHRA  drivers,  such as Dale  Earnhardt,  John  Force,  Jeff
Gordon,  Kenny  Bernstein,  Terry  Labonte,  Rusty Wallace,  Dale Jarrett,  Mark
Martin,  Bill Elliot, and Bobby Labonte,  significantly  enhance the collectible
value and marketability of its products.

          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 
                                       7
<PAGE>
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.

          During fiscal 1996, the Company incurred  royalty expenses  associated
with its various licensing agreements of approximately $6.2 million. The Company
constantly  strives to renew existing  agreements or to negotiate and 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 market lines of  collectibles  and consumer  products  that its
customers will find appealing.

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  racing   drivers,   car  owners,
manufacturers, or sponsors. 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.  The  licensed  products  will  consist of (i)  die-cast  replicas  of
motorsports  vehicles and a 1/18th-scale  plastic toy car, for which Hasbro will
pay 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
will pay a specified royalty. Hasbro currently markets certain of these products
under the "Kenner,"  "Tonka,"  "Milton  Bradley," and other brand names.  Hasbro
will pay the Company  guaranteed minimum annual royalty payments of (i) $500,000
for calendar year 1997, and (ii) for each calendar year thereafter,  the greater
of (a)  $500,000 or (b) 50 percent of the actual  royalties  earned in the prior
year, up to a maximum of $1.0 million.  Hasbro also 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,  up to a
maximum of $3.2 million in 1997 and $4.5 million in each of 1998 and 1999.

          Hasbro's  initial  focus under the Hasbro  License will be to develop,
with the Company's guidance,  a line of motorsports  die-cast products under the
brand name "Winner's Circle" 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. The
Company and Hasbro  intend to introduce  this  product  line to the  mass-market
retail industry in fiscal 1997. The mass-market  die-cast products  manufactured
and marketed by Hasbro will be completely  distinct  from the Company's  current
products   and  will  not   compete   directly   with  the   Company's   current
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.

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")
pursuant  to which the  Company  has the right to  market  licensed  motorsports
products  utilizing  the likeness of Dale  Earnhardt.  Pursuant to 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 term of the
Earnhardt License is 15 years and from year to year thereafter unless terminated
by either party.
                                        8
<PAGE>
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.  constitute  its principal
competitors in the die-cast  collectible  industry.  Emerging companies also may
increase their participation in these markets. The Company's motorsports apparel
and souvenirs compete with similar products sold or licensed by drivers, owners,
sponsors,  and other licensors that the Company currently does not have licenses
with, as well as sports  apparel  licensors and  manufacturers  in general.  The
Company's  promotional  products must compete for  advertising  dollars  against
other  specialty  advertising  programs and media,  such as  television,  radio,
newspapers, magazines, and billboards.

          The  Company  competes   principally  on  the  basis  of  the  current
popularity of motorsports and the cost,  design,  and delivery  schedules of its
products.  There is no assurance  that the Company  will  continue to be able to
compete   successfully  in  the  future.  See  Item  1  -  "Business  -  Special
Considerations."

Seasonality

          Sales of die-cast  motorsports  collectibles and motorsports  consumer
products   historically  have  been  lowest  in  the  fourth  calendar  quarter,
corresponding with the end of the racing season. The Company believes,  however,
that  holiday  sales of its  products  are  increasing,  which has the effect of
reducing seasonal fluctuations in its sales.

Nature of the Company's Markets

          The markets for the Company's products are subject to rapidly changing
customer tastes, a high level of competition,  and a constant need to create and
market new  products.  Demand for  motorsports  products  is  influenced  by the
popularity  of certain  drivers,  themes,  cultural  and  demographic  trends in
society,   marketing  and  advertising   expenditures,   and  general   economic
conditions.  Because these factors can change rapidly,  customer demand also can
shift quickly. New motorsports products frequently can be successfully  marketed
for only a limited  time.  The  Company  may not  always be able to  respond  to
changes in customer demand because of the amount of time and financial resources
that may be needed to bring new  products to market.  The  inability  to respond
quickly to market changes would have an adverse impact on the Company.  See Item
1,  "Business  -  Products  and  Services,"  "Business  - Sales and  Marketing,"
"Business - Competition," and "Business - Seasonality."

Sources and Availability of Raw Materials

          The  Company   currently  obtains  all  of  its  die-cast  and  pewter
collectibles   and   motorsports   consumer  items  pursuant  to   manufacturing
arrangements as discussed  elsewhere in this Report.  The Company  believes that
all of the  raw  materials  and  other  supplies  that  are  necessary  for  the
manufacture  and packaging of its products are readily  available  from multiple
sources.

Environmental Matters

          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.  See Item 3, "Legal  Proceedings."  The
imposition  of  damages  on the  Company  could  have a  material  effect on the
Company.
                                        9
<PAGE>
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 $7.0 million  insurance  policy to cover its molds
and dies located at its  third-party  manufacturer  in China and a $12.0 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

          At December 20, 1996, the Company employed  approximately 158 persons,
all of whom  were  employed  full-time.  Of the  total  number  employed  by the
Company, 12 were engaged in product development, 69 in sales and marketing, 4 in
licensing  activities,  44 in  warehouse  functions,  and  29 in  administrative
functions,   including  the  Company's  executive  officers.   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.

Development of the Company

          The Company was incorporated in Arizona in May 1992. The Company began
the manufacture and marketing of mini vehicles in May 1992 and began marketing a
line of die-cast  miniature  replicas of actual racing vehicles in July 1992. In
July 1993, the Company  acquired all of the  outstanding  common stock of Racing
Collectables, Inc. ("RCI"), which engaged in the wholesale marketing of die-cast
products, and Racing Collectables Club of America, Inc. ("RCCA"), which operated
a motorsports  collectors' club. RCI and RCCA were  unaffiliated  competitors of
the Company prior to their acquisition by the Company.

          In August 1994, the Company acquired certain assets and liabilities of
Fan Fueler,  Inc.  and began  marketing  product  lines of licensed  motorsports
consumer items that include drink  bottles,  key chains and air  fresheners.  No
affiliation  existed between Fan Fueler, Inc. and the Company at the time of the
acquisition.  Effective  March 31, 1995,  the Company sold certain of its assets
related to its mini vehicle product line to an unaffiliated third party.

          On  November  7,  1996,   the  Company   acquired   the  business  and
substantially all of the assets and assumed certain of the liabilities of Sports
Image from seven-time  Nascar Winston Cup Champion driver Dale Earnhardt and his
wife.  The  purchase  price paid by the  Company  for the assets of the  sellers
consisted of (i) a promissory note in the principal amount of $24.0 million (the
"Purchase Price Note"),  and (ii) 403,361 shares of the Company's  Common Stock,
valued at $14.875 per share,  which was slightly less than the closing price per
share of the Company's Common Stock on November 6, 1996. The Purchase Price Note
bears  interest at 8% per annum,  matures on January 2, 1997,  and is secured by
all of the transferred assets. The Company currently is negotiating  alternative
financing  to repay the Purchase  Price Note.  See Item 6,  "Selected  Financial
Data; Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity  and Capital  Resources."  The terms of the  acquisition,
including the valuation of the assets and  liabilities  acquired by the Company,
were  determined by  arms-length  negotiations  between  representatives  of the
sellers  and  representatives  of  the  Company.   Except  for  certain  license
agreements between the Company and Mr. Earnhardt, no affiliation existed between
the Company and the sellers at the time of the acquisition.
                                       10
<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 introduce  products that take advantage of those trends;
its ability to identify popular motorsports  personalities and to enter into and
maintain mutually satisfactory  licensing arrangements with them; its ability to
design and arrange for timely  production  and delivery of its products;  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;  the timing of
expenditures  in  anticipation  of orders;  the  cyclical  nature of the markets
served by the Company; and competition and competitive pressures on prices.

          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 are important
factors  in its  long-term  prospects.  A slowdown  in demand for the  Company's
products as a result of changing consumer tastes and spending patterns, economic
conditions,  or other  broad-based  factors could adversely affect the Company's
operating results.

          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   published  final
regulations that will  substantially  restrict  tobacco industry  sponsorship of
sporting events, including motorsports, beginning in 1998. These regulations and
any other  legislation  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 an 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 legislation  prohibiting  advertisements  of those
products takes effect.

Dependence on License Arrangements

          The Company  markets its  collectible  products  pursuant to licensing
arrangements  with race car drivers,  race car owners,  race car  sponsors,  and
automobile manufacturers.  These licensing arrangements generally are limited in
scope and  duration  and  generally  authorize  the sale of  specified  licensed
products  for a short  period of time.  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  licensees,  and the absence of their  sickness,  incapacity,  or
death. The termination, cancellation, or inability to renew any of the Company's
existing licensing arrangements,  or its inability to develop and enter into new
licensing arrangements, would have a material adverse effect on the Company. See
Item 1, "Business - Licenses."

Possible Need For Additional Capital

          The Company believes that its existing capital resources,  commitments
for  additional  financing, and cash flow from operations  will be sufficient to
satisfy the Company's capital requirements during the next 12-month period other
than those related to  acquisitions.  The Company,  however,  may be required to
seek  additional  equity or debt  financing to finance  future  acquisitions  or
development  of  new  product  lines,  to  provide   guarantees   under  license
agreements,  to  obtain  international  letters  of credit  in  connection  with
purchase orders from its offshore manufacturer of die-cast  collectibles,  or to
provide funds to take advantage of other business opportunities.  The timing and
amount of any such  capital  requirements  cannot  be  predicted  at this  time.
Although the Company has
                                       11
<PAGE>
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.

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. constitute
its  principal  competitors  in  the  die-cast  collectible  industry.  Emerging
companies also may increase their  participation in these  motorsports  markets.
The Company's  motorsports  apparel and souvenirs  compete with similar products
sold or licensed by drivers,  owners,  sponsors,  and other  licensors  that the
Company  currently  does not  have  licenses  with,  as well as  sports  apparel
licensors and manufacturers in general.

          The Company believes that its relationships  with top race car drivers
and car owners  represent  a significant  advantage over its  competitors in the
motorsports  collectible and consumer products industry.  The Company strives to
develop and strengthen these  relationships as a barrier to entry by existing or
potential  competitors.  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.  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 currently  competes  principally on the
basis of the current popularity of motorsports;  the appeal of its products; and
the cost and 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.

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 is influenced by 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 taste and demand 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 an  adverse  impact  on the  Company's
operations. See Item 1, "Business - Products and Services."
                                       12
<PAGE>
Fluctuations in Sales

          The second and third  calendar  quarters  of each year  generally  are
characterized   by  higher  sales  of  motorsports   products   because  of  the
introduction of new race car models for the racing season beginning in February.
Sales of  motorsports  products  are  lowest  in the  fourth  calendar  quarter,
corresponding  with  the end of the  racing  season.  Seasonal  fluctuations  in
quarterly  sales may require the Company to take temporary  measures,  including
increased personnel, borrowings, and other operational changes, and could result
in unfavorable quarterly earnings comparisons.

Dependence on Third Parties for Manufacturing

          The Company depends upon third parties to manufacture its die-cast and
pewter collectibles and motorsports consumer products. Although the Company owns
most of the tools,  dies, and molds utilized in the  manufacturing  processes of
its collectible 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  that  could  produce  collectible  products  for the
Company  as a  result  of its  ownership  of the  molds  and  tools  used in the
manufacturing  process,  the Company's operations would be adversely affected if
it  lost  its  relationship  with  any  of  its  current  suppliers   (including
particularly  its  China-based  manufacturer  of  die-cast  collectibles,  which
produced  products  constituting  approximately  90% of the  Company's  sales in
fiscal  1996)  or  if  its  current   suppliers'   operations   or  sea  or  air
transportation  with its  China-based  die-cast  collectible  manufacturer  were
disrupted or terminated even for a relatively  short period of time. 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  utilize  an  alternative  source  of  supply.  As a result  of its
acquisition  of Sports Image in November  1996 and its proposed  acquisition  of
Motorsports  Traditions,  the Company  anticipates that a substantial portion of
its  revenue in fiscal  1997 will be derived  from  sales of  licensed  apparel,
souvenirs,  and other  consumer  products.  Most of the  manufacturers  of these
products are located in the United States and the Company believes that a number
of alternative  sources for each of these  products is readily  available in the
event  that the  Company  is  unable  to  obtain  products  from any  particular
manufacturer.

International Trade, Exchange, and Financing

          The Company  obtains its die-cast  collectibles  under a manufacturing
arrangement with a third-party  manufacturer in China. The Company believes that
production of its die-cast  collectibles  overseas enables the Company to obtain
these items on a cost basis that enables the Company to market its  collectibles
profitably.  The Company's  reliance on the 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.
The Company has not experienced any significant  interruptions  in obtaining its
die-cast collectibles from the third-party manufacturer to date.

          All of the  Company's  purchases  from its  foreign  manufacturer  are
denominated  in United States  dollars.  As a result,  the foreign  manufacturer
bears any risks  associated  with exchange rate  fluctuations  subsequent to the
date the Company places its orders with the manufacturer.  Purchases of die-cast
collectibles  from the  foreign  manufacturer  generally  require the Company to
provide an international letter of credit in an amount equal to the
                                       13
<PAGE>
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.

          Pursuant to the terms of the Hasbro License, Hasbro's royalty payments
to the  Company  for sales by Hasbro in foreign  countries  will be 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  will bear any risks that may be
associated  with  exchange  rate  fluctuations  between the date on which Hasbro
records  overseas  sales of products  subject to the Hasbro License and the last
day of the  calendar  quarter in which the sales are made.  The Company does not
currently  believe that  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.

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  which  address   customer
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.  If the Company were unable to design,
develop, and  introduce  competitive  products  on a timely  basis,  its  future
operating results would be adversely affected.  See Item 1, "Business - Products
and Services."

Management of Growth

          Since  1993,  the  Company's   business   operations   have  undergone
significant  changes and growth,  including  emphasis  on and  expansion  of its
collectible  product lines,  acquisition of its  motorsports  consumer  products
lines, and significant  investments in tooling.  The Company's ability to manage
effectively any significant future growth,  however,  will require it to further
enhance  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,  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  operations.  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 also may increase orders for the Company's
products on short notice,  which would place an excessive  short-term  burden on
the Company's resources.

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 affect on the Company.  The Company maintains key person
insurance on the life of Mr. Wagenhals in the amount of $3,000,000.  The Company
does not maintain such insurance on any of its other officers.
                                       14
<PAGE>
Control by Management

          The directors and officers of the Company  currently own approximately
19.8% of the Company's  outstanding Common Stock. In addition, as voting trustee
under a voting  trust  agreement  with an affiliate  of the  Company's  overseas
manufacturer of die-cast  collectibles,  Fred W. Wagenhals has the right to cast
an  additional  500,000  votes on any matter to be voted  upon by the  Company's
shareholders.  As a result, the directors and officers of the Company, including
Mr. Wagenhals,  possess voting power with respect to approximately  23.6% of the
total  number  of votes  entitled  to be cast at any  meeting  of the  Company's
shareholders.

Possible Volatility of Stock Price

          The  market  price  of  the  Company's  Common  Stock  has  fluctuated
significantly  since its initial  public  offering  in April  1993.  See Item 5,
"Market for the Registrant's Common Equity and Related Stockholder Matters." 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 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  also is a defendant  in a
lawsuit  alleging  breach of  contractual  duties and  appropriation  of certain
business  opportunities  of a  dissolved  corporation.  The  Company is actively
defending  these  lawsuits.  In the event a decision  adverse to the  Company is
rendered in either of these lawsuits, the resolution of such matter could have a
material  adverse effect on the Company.  See Item 6, "Selected  Financial Data;
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations" and Item 3, "Legal Proceedings."

Rights to Acquire Shares; Potential Issuance of Additional Shares

          As of  December  20,  1996,  options to  acquire a total of  1,105,053
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  may  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

          Of the  13,094,962  shares  of  Common  Stock  currently  outstanding,
9,948,345   shares  are  eligible  for  resale  in  the  public  market  without
restriction  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
remaining 3,146,617 shares of Common Stock currently outstanding are "restricted
securities,"  as that  term is  defined  in Rule  144,  and may be sold  only in
compliance with Rule 144,  pursuant to registration under the Securities Act, or
pursuant to an exemption  therefrom.  Affiliates  also are subject to certain of
the resale  limitations  of Rule 144 as promulgated  under the  Securities  Act.
Generally,  under  Rule  144,  each  person  who  beneficially  owns  restricted
securities with respect to which at least two years have elapsed since the later
of the date the shares were acquired from the Company or an affiliate of the
                                       15
<PAGE>
Company may, every three months,  sell in ordinary brokerage  transactions or to
market  makers an amount of shares  equal to the greater of 1% of the  Company's
then-outstanding  Common Stock or the average weekly trading volume for the four
weeks prior to the  proposed  sale of such  shares.  An  aggregate  of 2,564,000
shares held by an officer and director  currently  are  available for sale under
Rule 144. In addition,  a current  registration  statement  covers the resale of
approximately  178,000 restricted shares. Sales of substantial amounts of Common
Stock by shareholders  of the Company or even the potential for such sales,  are
likely to have a  depressive  effect on the market price of the Common Stock and
could  impair the  Company's  ability to raise  capital  through the sale of its
equity securities.

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  earnings to the  expansion and
development of its business.

Change in Control Provisions

          The  Company's  Amended and Restated  Articles of  Incorporation  (the
"Restated Articles"),  Amended and Restated Bylaws (the "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 authorizes 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 Item 1, "Business - Special Considerations."

ITEM 2.   PROPERTIES

          The  Company   leases  a  facility  in  Tempe,   Arizona,   containing
approximately  46,000 square feet. The Company uses approximately  18,000 square
feet of the facility for offices and 28,000 square feet for warehouse  space and
packaging  operations.  The term of the lease expires in December 2003.  Fred W.
Wagenhals,  Chairman of the Board, President, and Chief Executive Officer of the
Company,  currently owns a one-third interest in F.W. Investments, a partnership
which owns this facility.  The Company believes that the lease payments for this
facility are comparable to an amount it would pay to an  unaffiliated  party for
comparable space.

          The Company  leases a 25,000 square foot facility in Charlotte,  North
Carolina, for its Sports Image operations.  The Company uses approximately 5,000
square feet of the facility for offices and approximately 20,000 square feet for
warehouse space and packaging operations. The term of the lease expires in April
1998.
                                       16
<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.
The parties have filed  cross-motions  for summary  judgment,  which may resolve
part or all of the Company's involvement in the lawsuit. The court had scheduled
oral  arguments on these motions for  September 30, 1996.  That hearing date has
been  vacated and will be  rescheduled  at a later date.  The Company  currently
estimates the potential range of loss to be between $400,000 and $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., a dissolved
Arizona corporation, has been instituted against the Company, Fred W. Wagenhals,
and others in the United States District Court for the District of Arizona.  The
complaint  alleges  that  the  Company,  Mr.  Wagenhals,   and  others  breached
contractual  and  other  duties  to  API  and   appropriated   certain  business
opportunities of API. The complaint  requests  damages,  including  punitive and
treble damages,  in an unspecified amount. The complaint was effectively amended
subsequent to filing.  In June 1996,  the court granted the Company's  motion to
dismiss with respect to securities law claims,  but denied the Company's  motion
to  dismiss  with  respect  to  certain  federal  RICO  claims.  The  Company is
vigorously  defending  the  lawsuit  and all parties  currently  are  conducting
discovery.  In the event that a decision adverse to the Company is rendered, and
in the event that the Company has no  insurance  coverage  with respect to these
claims,  the  resolution of such matter could have a material  adverse effect on
the Company.

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

          Not applicable.
                                       17
<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
                                                                 ----       ---
1994:
   First Quarter.......................................         $2.31      $1.63
   Second Quarter......................................          2.25       1.81
   Third Quarter.......................................          2.25       1.84
   Fourth Quarter......................................          2.97       2.19

1995:
   First Quarter.......................................         $3.63      $2.44
   Second Quarter......................................          4.56       3.25
   Third Quarter.......................................          9.19       4.25
   Fourth Quarter......................................          9.63       6.25

1996:
   First Quarter.......................................        $11.31      $6.44
   Second Quarter......................................         19.75      10.81
   Third Quarter.......................................         14.34      10.63
   Fourth Quarter (through December 20, 1996)..........         18.75      13.63

          As of  December  20,  1996,  there were  approximately  110 holders of
record of the Company's  Common Stock.  On December 20, 1996,  the closing sales
price of the Company's Common Stock on the Nasdaq National Market was $17.69 per
share.

         In March 1995,  the Company sold 500 shares of Class A 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.  Pursuant to the terms of the Class A Preferred Stock, the
holder  converted  those shares into  1,000,000  shares of the Company's  Common
Stock in May 1996.
                                       18
<PAGE>
ITEM 6.  SELECTED FINANCIAL DATA; MANAGEMENT'S DISCUSSION AND ANALYSIS OF
         FINANCIAL CONDITION AND RESULTS OF OPERATIONS


                      SELECTED CONSOLIDATED FINANCIAL DATA

         The following table summarizes certain selected consolidated  financial
data of the  Company  and is  qualified  in its  entirety  by the more  detailed
Consolidated  Financial Statements and Notes thereto appearing elsewhere herein.
The data has been derived from the financial  statements of the Company  audited
by Arthur Andersen LLP, independent public accountants.
<TABLE>
<CAPTION>
                                                                                Fiscal Year Ended September 30
                                                                                ------------------------------
Consolidated Statement of Income:                                                   1995            1996
                                                                                    ----            ----
                                                                   (in thousands, except share and per share amounts)
<S>                                                                            <C>           <C>         
Sales:
   Collectible sales, net.........................................             $     23,443  $     40,904
   Consumer product sales, net....................................                    1,190         1,961
   Promotional sales, net(1)......................................                    1,498         1,351
                                                                               ------------  ------------
Net sales.........................................................                   26,131        44,216
Cost and expenses:
   Cost of sales..................................................                   15,882        25,296
   Selling, general and administrative............................                    6,119         9,266
                                                                               ------------  ------------
Operating income..................................................                    4,130         9,654
Interest income and other, net....................................                       24           216
                                                                               ------------  ------------
Income before provision for income taxes..........................                    4,154         9,870
Provision for income taxes........................................                    1,384         3,917
                                                                               ------------  ------------
Net income........................................................             $      2,770  $      5,953
                                                                               ============  ============
Earnings per common share and
   common share equivalent........................................             $       0.25  $       0.46
                                                                               ============  ============
Weighted average number of common shares and
   common share equivalents outstanding(2)........................             11,570,046      13,069,380

                                                                                Sept. 30,       Sept. 30,
                                                                                   1995            1996
                                                                                 --------        ------
Consolidated Balance Sheet Data                                                       (in thousands)
   (at end of period):
Working capital...................................................                $11,922         $18,094
Total assets......................................................                 23,351          31,649
Notes payable to banks and long-term debt.........................                     --              --
Shareholders' equity..............................................                 18,890          26,996
</TABLE>
----------
(1)      The Company sold the assets and liabilities related to its mini vehicle
         operations and discontinued its mini vehicle  operations in March 1995.
         See Item 1, "Business - Development of the Company."
(2)      Adjusted to reflect the two-for-one  stock  split  effected  as a stock
         dividend on May 28, 1996.
                                       19
<PAGE>
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
                            AND RESULTS OF OPERATIONS

Introduction

         The  Company  designs  and  markets  collectible  die-cast  and  pewter
miniature  replicas of  motorsports  vehicles  and designs and markets  licensed
apparel,  souvenirs,  and other motorsports consumer items,  including t-shirts,
hats, jackets,  mugs, key chains, and drink bottles. The Company also 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,  and develops
marketing and product promotional programs for corporate sponsors of motorsports
that feature the Company's die-cast replicas or other products as premium awards
intended  to  increase  brand  awareness  of the  products  or  services  of the
corporate sponsors. The Company's motorsports collectibles and consumer products
are manufactured by third parties,  generally  utilizing the Company's  designs,
tools, and dies.

         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 product lines of
licensed motorsports consumer products.  During 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 the business of Sports Image,  which  markets and  distributes
licensed motorsports apparel and other souvenir items.

Results of Operations of the Company for the Years Ended  September 30, 1995 and
1996

         The Company had net income of $5,953,000,  or $0.46 per share,  for the
year ended September 30, 1996, compared with net income of $2,770,000,  or $0.25
per share,  for the year ended  September 30, 1995.  The Company  attributes the
improvement  in net income  during  fiscal 1996  primarily  to (i) growth in the
motorsports collectible market and the capture of additional market share, which
enabled the Company to produce and sell  increased  quantities of  collectibles;
(ii)  increased  sales as a result of growth in the Company's  retail  collector
club, which provides higher gross margins; and (iii) increased sales as a result
of the successful  introduction of several new and exclusive  licensing programs
for die-cast and pewter collectible product lines in fiscal 1996.

         During  the  years  ended  September  30,  1995 and  1996,  sales  were
$26,131,000 and $44,216,000,  respectively. The $18,085,000, or 69%, increase in
sales resulted from an increase of $17,461,000 in collectible sales, an increase
of $771,000 in motorsports  consumer  products sales, and a decrease of $147,000
in promotional sales.

         The  increase in  collectible  sales is primarily  attributable  to the
continued growth in the motorsports collectible market and the Company's ability
to satisfy consumer demand for high-quality collectibles.  The Company continues
to realize sales increases from recently introduced product lines, which include
pewter replica vehicles and NHRA drag racing die-cast replicas.  The decrease in
promotional  sales is  attributable  to the sale of the  Company's  mini vehicle
operations in the second quarter of fiscal 1995, which was substantially  offset
by sales of $1.4 million from the Companies new  promotional  program  featuring
the  Company's  die-cast  replicas.

         Cost of sales increased from  $15,882,000 in fiscal 1995 to $25,296,000
in fiscal  1996,  representing  61% and 57% of net  sales  during  those  years,
respectively.  The decrease in cost of sales as a percentage  of 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) higher gross margins associated with increased sales through
the Company's retail collectors' club.
                                       20
<PAGE>
         Selling, general, and administrative expenses increased from $6,119,000
in fiscal 1995 to  $9,266,000  in fiscal 1996,  representing  23% and 21% of net
sales during those years,  respectively.  The increase in such expenses resulted
from  increased  expenditures  in sales and  marketing,  particularly  increased
advertising  consistent with the Company's  strategy to increase  collector club
memberships and distributor sales.

         Interest  and other  income  increased  from  approximately  $24,000 in
fiscal 1995 to  approximately  $216,000 in fiscal 1996.  The  increase  resulted
primarily from the decrease in interest  expense from $184,000 in fiscal 1995 to
$79,000 in fiscal 1996. The decrease in interest expense resulted primarily from
the conversion of the 10% Convertible Subordinated Debentures (the "Debentures")
into shares of the Company's  Common Stock during fiscal 1995. See Note 4 to the
Consolidated Financial Statements.

         The  provision for income taxes in fiscal 1995 resulted in an effective
tax  rate  of  approximately  33.0%  compared  with  an  effective  tax  rate of
approximately  40.0% in fiscal  1996.  The  increase in the  effective  tax rate
occurred  primarily  as a  result  of  the  utilization  of net  operating  loss
carryforwards in fiscal 1995.

Seasonality

         Sales of collectibles and motorsports  consumer  products  historically
have been lowest in the fourth calendar quarter,  corresponding  with the end of
the racing  season.  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  $18,094,000 at
September  30, 1996 from  $11,922,000  at September  30,  1995.  The increase of
$6,172,000 is primarily  attributable to the Company's results of operations and
proceeds of approximately  $1,315,000 from the exercise of certain stock options
and  warrants,  partially  offset by  approximately  $3,879,000  in additions to
property and equipment.

          The Company's  operations provided net cash of approximately  $861,000
during the year ended September 30, 1996. The major elements contributing to net
operating cash flow include  earnings from  operations and uses of cash from (i)
increases  in accounts  receivable  as a result of  increased  shipments  of the
Company's  die-cast  collectible  products  during the latter part of the fourth
quarter of fiscal 1996;  (ii) continued  investments in inventory to provide for
the anticipated growth of the Company's collectors' club and inventory purchases
related to the Company's  Corvette die-cast program;  and (iii) royalty advances
paid on new and existing multi-year license agreements.

         Investment in inventories has increased in response to continued growth
in sales through the Company's retail  collectors' club and as a result of lower
than anticipated sales of the Corvette die-cast program  introduced in the third
quarter of fiscal 1996. The Company has implemented  several new plans to market
the Corvette  product  line,  including  the  distribution  of such  products to
approximately 4,500 General Motors dealerships throughout the United States. The
Company  also has reduced  purchase  commitments  for future  production  of the
Corvette products until such time as it can determine the success of its current
marketing plans.

         Capital  expenditures  for the fiscal  year ended  September  30,  1996
totalled  approximately   $3,879,000,  of  which  approximately  $2,649,000  was
utilized for the Company's continued investment in tooling.

         In May 1996,  the Company  entered into a new credit  agreement  with a
foreign bank. The credit agreement  provides the Company's  supplier of die-cast
collectible  products with security for the Company's  purchase orders,  up to a
limit of $5.0 million,  an increase of $1.5 million from the Company's  previous
agreement. The agreement also provides for an import cash line of credit of $1.0
million,  which allows the Company to finance its imports for up to 90 days from
the  date  of  shipment.  As of  September  30,  1996,  there  were  no  amounts
outstanding  on the import cash line of credit.  Total  purchase  commitments of
approximately  $3,327,000 at September 30, 1996 are secured by the assets of the
Company. The Company's credit facilities under the current credit agreement will
expire
                                       21
<PAGE>
on January 31, 1997. The Company currently is negotiating  alternative financing
to replace the existing credit  agreement as well as recent  acquisition-related
financing arrangements prior to their respective expiration dates.

          The  Company is one of  approximately  30  defendants  in a lawsuit in
which the state of Arizona is seeking  recovery of certain  clean-up costs under
federal and state environmental  laws. The Company is vigorously  defending this
lawsuit on various  bases,  including  that  neither  the Company nor any of its
predecessors  has  produced  or arranged  for the  transportation  of  hazardous
substances  as  alleged  by the  state.  The  Company  currently  estimates  the
potential  range of loss to be between  $400,000  and $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.

         In December  1995, a lawsuit was  instituted  against the Company,  the
Company's Chief  Executive  Officer,  and others alleging that the Company,  the
Company's Chief  Executive  Officer,  and others breached  contractual and other
duties and appropriated  certain business  opportunities of a dissolved  Arizona
corporation.  The Company is vigorously defending the lawsuit. The imposition of
damages in the case against the Company could have a material  adverse effect on
the Company's earnings and liquidity.

         In November 1996, the Company purchased substantially all of the assets
and certain  liabilities of Sports Image,  Inc. for  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 $14.875 per share.  Sports Image
sells and  distributes  a  variety  of  licensed  motorsports  products  through
wholesale distributor networks,  corporate sponsors, and trackside events. 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 16% of its net sales from Sports Image, a distributor
of the Company's die-cast collectible products.

          In December  1996,  the Company  reached an  agreement in principle to
acquire  substantially all of the assets and certain  liabilities of Motorsports
Traditions  Limited  Partnership  and  all  of the  capital  stock  of  Creative
Marketing &  Promotions,  Inc.  for an aggregate  of  approximately  $13,000,000
consisting of cash, a promissory note, and shares of the Company's Common Stock.
The  acquisition  is  subject  to  the  completion  of  due  diligence  and  the
preparation and execution of definitive agreements. Motorsports Traditions sells
and distributes  licensed  motorsports  products  through a network of wholesale
distributors   and   trackside   events.    Motorsports   Traditions   generates
approximately $25,000,000 in annual revenue from its design, manufacturing,  and
sales and distribution activities.

         During fiscal 1996,  the Company  issued an aggregate of 149,114 shares
of Common Stock upon exercise of various  warrants,  resulting in total proceeds
to the Company of approximately  $511,000.  During fiscal 1996, the Company also
issued  239,247  shares of Common Stock upon exercise of employee stock options,
with total proceeds to the Company of approximately $803,000.

          The  Company has  received a letter of  commitment  from an  insurance
company for $20,000,000 in debt financing in the form of senior  unsecured notes
(the "Senior  Notes").  The Senior Notes will bear interest at the rate of 8.05%
per annum,  provide for semi-annual  payments of accrued interest,  and call for
the payment of principal on January 2, 1999.  The Company  anticipates  that the
closing of the Senior  Notes will be  January 2, 1997.  The  Company  intends to
utilize the  proceeds  from the Senior  Notes to repay a portion of the Purchase
Price Note issued in connection with the acquisition of Sports Image.

          The Company also has received a letter of commitment from a bank for a
$10,000,000  unsecured revolving line of credit ("Line of Credit").  The Line of
Credit, which will mature on March 31, 1998, will bear an interest rate equal to
the LIBOR rate plus 1.9%. The Company  anticipates  that the closing of the Line
of Credit will be
                                       22
<PAGE>
January 2, 1997. The Company intends to utilize approximately  $4,000,000 of the
Line of Credit to  complete  the  Sports  Image  acquisition  and an  additional
$4,000,000 to close the MTL acquisition.

         The  Company's  current  cash  resources,  letter of  credit  facility,
commitments for additional financing, and expected cash flow from operations are
expected to 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  acquisitions.  However,  the Company may be required to obtain  additional
capital  to fund its  planned  growth  during  the next 12  months  and  beyond,
particularly to provide  guarantees  under  licensing  arrangements or to obtain
international  letters of credit in  connection  with  purchase  orders from its
off-shore manufacturer of die-cast  collectibles.  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 affect on the Company's business.

ITEM 7.  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 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

                  Not applicable.
                                       23
<PAGE>
                                    PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH
         SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

Directors and Executive Officers

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

        Name              Age                  Position Held
        ----              ---                  -------------

Fred W. Wagenhals         55         Chairman of the Board, President, and Chief
                                     Executive Officer
Tod J. Wagenhals          32         Executive Vice President, Secretary, and
                                     Director
Christopher S. Besing     36         Vice President, Chief Financial Officer,
                                     Treasurer, and Director
Joseph M. Mattes          37         Vice President and Director
Jack M. Lloyd             47         Director
Robert H. Manschot        53         Director

         Fred W. Wagenhals has been 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.  Mr.  Wagenhals  served as
President of Action Products,  Inc. ("API") from its inception in September 1986
until his  resignation  in October 1990 and as a director  from  September  1986
until his resignation in December 1992. API's principal creditor declared API in
default and installed a receiver to manage API's  operations  in November  1991.
The  creditor  took  possession  of all  operating  assets of API in May 1992 in
partial  satisfaction  of API's  debt and  thereafter  sold  such  assets to the
Company.

         Tod J. Wagenhals has been a Vice President and Secretary of the Company
since  November  1993 and a director of the Company  since  December  1993.  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 API from  January 1989 to October
1991. Mr. Wagenhals is the son of Fred W. Wagenhals.

         Christopher S. Besing has been a Vice President and the Chief Financial
Officer of the Company  since  January 1994, a director of the Company since May
1995, and has served as Treasurer of the Company since  February 1996.  Prior to
joining the Company,  Mr. Besing held several  financial  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, he was employed by Arthur Andersen and
Co.  from  January  1985 to  August  1986.  Mr.  Besing  is a  Certified  Public
Accountant.

         Joseph  M.  Mattes  has been a Vice  President  and a  director  of the
Company  since  December  1996.  Mr.  Mattes  also  serves as  President  of the
Company's  wholly owned  subsidiary,  Sports  Image,  Inc. Mr.  Mattes served as
President  of the  predecessor  of Sports  Image  from  January  1995  until the
acquisition of its business in November 1996.  From 1985 through  December 1994,
Mr. Mattes served at various times as Controller, Director of Purchasing,
                                       24
<PAGE>
Plant Manager,  and Executive Vice President of Operations of Carlisle Plastics,
Inc., a $140 million per year injection molding company.

         Jack M. Lloyd has been a director of the Company  since July 1995.  Mr.
Lloyd has served as the  President  and Chief  Executive  Officer of  DenAmerica
Corp., a publicly held  corporation  which is the largest  franchisee of Denny's
restaurants in the United States,  since March 1996 and as Chairman of the Board
of  DenAmerica  Corp.  since July 1996.  Mr. Lloyd served as the Chairman of the
Board and Chief Executive Officer of Denwest Restaurant Corp.  ("Denwest"),  the
second largest franchisee of Denny's restaurants in the United States, from 1987
until its merger with  DenAmerica  Corp. in March 1996. Mr. Lloyd also served as
President  of Denwest  from 1987  until  November  1994.  Mr.  Lloyd  engaged in
commercial and residential  real estate  development and property  management as
president  of First  Federated  Investment  Corporation  during  the  early  and
mid-1980s.  Mr.  Lloyd  currently  serves as a  director  of  Masterview  Window
Company, a privately held company.

         Robert H.  Manschot has been a director of the Company since July 1995.
Mr. Manschot  currently  serves as President and Chief Executive  Officer of the
United  Kingdom  division of Seceurop  Group and engages in business  consulting
services and venture  capital  activities.  Mr. Manschot served as President and
Chief Executive Officer of Rural/Metro Corporation  ("Rural/Metro"),  a publicly
held provider of ambulance and fire protection services, from October 1988 until
March 1995. Mr.  Manschot  joined  Rural/Metro in October 1987 as Executive Vice
President,  Chief Operating Officer and a member of its Board of Directors.  Mr.
Manschot was with the Hay Group,  an  international  consulting  firm, from 1978
until October 1987,  serving as Vice President and a partner from 1984, where he
led strategic  consulting  practices in Brussels,  Asia,  and the western United
States. Prior to joining the Hay Group, Mr. Manschot spent 10 years with several
leading  international hotel chains in senior operating positions in Europe, the
Middle East, Africa, and the United States.

Section 16(a) Beneficial Ownership Reporting Compliance

         Section 16(a) of the  Securities  Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors, officers, and persons who own
more than 10% of a registered class of the Company's  equity  securities to file
reports of ownership and changes in ownership  with the  Securities and Exchange
Commission  (the  "Commission").   Directors,  officers  and  greater  than  10%
shareholders  are required by the Commission  regulations to furnish the Company
with copies of all Section  16(a) forms they file.  Based  solely on a review of
the copies of such forms  received by the  Company  during the fiscal year ended
September  30,  1996 and  written  representations  that no other  reports  were
required,  the  Company  believes  that each  person who at any time during such
fiscal year was a director, officer, or beneficial owner of more than 10% of the
Company's  Common Stock  complied  with all Section  16(a)  filing  requirements
during such fiscal  year,  except that (i)  Christopher  S. Besing  filed a late
report on Form 4 covering  two  transactions  and filed a late  report on Form 5
covering  the grant of stock  options that are exempt under Rule 16b-3 under the
Exchange Act; (ii) Tod J.  Wagenhals  filed a late report on Form 5 covering the
grant of stock  options that are exempt under Rule 16b-3 under the Exchange Act;
and (iii) Russell W. Leicht,  Jr., a former officer and director of the Company,
filed a late report on Form 4 covering two transactions.
                                       25
<PAGE>
ITEM 10.          EXECUTIVE COMPENSATION

         The  following  table sets forth  certain  information  concerning  the
compensation  for the fiscal  years ended  September  30, 1994,  1995,  and 1996
earned by the  Company's  Chief  Executive  Officer and by the  Company's  other
executive  officers whose cash salary and bonus exceeded  $100,000 during fiscal
1996  (the  "Named  Officers").   No  other  officer  of  the  Company  received
compensation of $100,000 or more during fiscal 1996.

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                                                 
                                                                                         Long Term                     
                                                                                       Compensation                    
                                                                                      --------------                   
                                                                                          Awards                       
                                                                                      --------------                   
                                                           Annual Compensation          Securities           All Other 
                                                        ------------------------        Underlying         Compensation
Name and Principal Position                 Year        Salary($)(1)    Bonus($)       Options(#)(2)          ($)(3)
---------------------------                -----        ------------    --------      --------------       -------------
<S>                                         <C>             <C>           <C>             <C>                <C>   
Fred W. Wagenhals                           1996            $250,000      $75,000             --             $4,854
  Chairman of the Board, President,         1995             164,423       23,000         50,000              3,173
  and Chief Executive Officer               1994             150,000           --         40,000                 --
                                                                                                                   
Tod J. Wagenhals                            1996            $75,000       $26,000         20,000             $1,832
  Executive Vice President,                 1995             59,596         8,000         50,000              1,247
  Secretary, and Director                   1994             43,345            --         40,000                 --
                                                                                                                   
Christopher S. Besing                       1996            $75,000       $26,000         20,000             $1,572
  Vice President, Chief Financial           1995             71,250        10,000         50,000              1,425
  Officer, Treasurer, and Director          1994             45,000            --         80,000                 --
</TABLE>

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

(1)      Messrs.   Wagenhals,   Wagenhals,  and  Besing  also  received  certain
         perquisites,  the value of which did not exceed 10% of their salary and
         bonus during fiscal 1996.
(2)      The exercise price of all stock options  granted were equal to the fair
         market value of the Company's Common Stock on the date of grant.
(3)      Amounts shown for fiscal 1996 represent matching contributions  made by
         the Company to the Company's 401(k) Plan.
                                       26
<PAGE>
         The following  table provides  information on stock options  granted to
the Company's Named Officers during the fiscal year ended September 30, 1996.

                        OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
                                                       Individual Grants
-------------------------------------------------------------------------------------------------------------------------
                                                 Number of
                                                Securities           % of Total
                                                Underlying             Options          Exercise
                                                  Options            Granted in           Price
Name                                          Granted (#)(1)         Fiscal Year         ($/Sh)      Expiration Date
----                                          --------------         -----------         ------      ---------------
<S>                                               <C>                   <C>              <C>             <C>    

Fred W. Wagenhals                                   --                   --                --               --
  Chairman of the Board, President,
  and Chief Executive Officer

Tod J. Wagenhals                                  20,000                8.5%             $10.63          9/4/02
  Executive Vice President,
  Secretary, and Director

Christopher S. Besing                             20,000                8.5%             $10.63          9/4/02
  Vice President, Chief Financial
  Officer, and Director
</TABLE>
------------------

(1)      The options were granted at the fair value of the shares on the date of
         grant,  have a six-year term, and 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.

         The following  table provides  information on options  exercised in the
last  fiscal year by the  Company's  Named  Officers  and the value of each such
officer's unexercised options at September 30, 1996.

               AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
                      OPTION VALUE AS OF SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
                                                                  Number of Securities                   Value of Unexercised
                                                                 Underlying Unexercised                  In-the Money Options
                                                              Options at Fiscal Year-End (#)           at Fiscal Year-End ($)(1)
                              Shares Acquired      Value      ------------------------------           -------------------------
Name                          on Exercise (#)  Realized ($)    Exercisable     Unexercisable       Exercisable         Unexercisable
----------------------------  ---------------  ------------    -----------     -------------       -----------         -------------
<S>                               <C>            <C>             <C>              <C>               <C>                  <C>    
Fred W. Wagenhals                   -0-             -0-          290,000            -0-             $3,125,250              -0-
  Chairman of the Board, 
  President, and Chief
  Executive Officer

Tod J. Wagenhals                    -0-             -0-          170,000          20,000            $1,784,380           $45,000
  Executive Vice President,
  Secretary, and Director

Christopher s. Besing             40,000         $210,000         50,000          20,000            $  431,250           $45,000
  Vice President, Chief
  Financial Officer,
  and Director
</TABLE>
------------------

(1)      Calculated  based  upon  the  closing price as  reported on  the Nasdaq
         National Market on September 30, 1996 of $12.875 per share. 
                                       27
<PAGE>
401(k) Profit Sharing Plan

         In October 1994, the Company  established a defined  contribution  plan
(the "401(k)  Plan") that  qualifies as a cash or deferred  profit  sharing plan
under  Sections  401(a)  and 401(k) of the  Internal  Revenue  Code of 1986,  as
amended (the  "Internal  Revenue  Code").  Under the 401(k) Plan,  participating
employees may defer from 1% to 15% of their pre-tax compensation, subject to the
maximum  allowed under the Internal  Revenue Code.  The Company will  contribute
$.50 for each dollar contributed by the employee,  up to a maximum  contribution
of 2% of the  employee's  defined  compensation.  In  addition,  the 401(k) Plan
provides that the Company may make an employer  profit sharing  contribution  in
such amounts as may be determined  by the Board of  Directors.  The Company does
not have a long-term  incentive plan or a defined  benefit or actuarial plan and
has never issued any stock appreciation rights.

1993 Stock Option Plan

         The  Company's  1993 Stock  Option  Plan,  as amended (the "1993 Plan")
provides  for the  granting  of options to acquire  Common  Stock of the Company
("Options"),  the direct granting of Common Stock ("Stock Awards"), the granting
of stock  appreciation  rights  ("SARs"),  and the granting of other cash awards
("Cash Awards") (Stock Awards,  SARs, and Cash Awards are collectively  referred
to herein as  "Awards").  The 1993 Plan is intended to comply with Rule 16b-3 as
promulgated under the Exchange Act with respect to persons subject to Section 16
of the  Exchange  Act. The Company  believes  that the 1993 Plan is important in
attracting and retaining  executives  and other key employees and  constitutes a
significant part of the compensation  program for key personnel,  providing them
with an opportunity to acquire a proprietary  interest in the Company and giving
them an additional incentive to use their best efforts for the long-term success
of the Company. The 1993 Plan will remain in effect until September 24, 2001.

         On  September  4,  1996,  the  Company's  Board  of  Directors  adopted
amendments to the 1993 Plan that,  among other  things,  increased the number of
shares of Common  Stock  issuable  pursuant to the 1993 Plan from  2,000,000  to
2,500,000   shares.   Those   amendments  must  be  approved  by  the  Company's
shareholders prior to September 4, 1997. In the event the Company's shareholders
do not  approve the  amendments  prior to that date,  Options or Awards  granted
subsequent  to  September  4, 1996 will remain in effect only to the extent that
they could have been  granted  prior to the  adoption of the  amendments  by the
Board of Directors.  As of September 30, 1996, an aggregate of 1,024,247  shares
of the Company's  Common Stock has been issued upon exercise of Options  granted
pursuant  to the 1993  Plan,  and there were  outstanding  Options to acquire an
additional 1,105,053 shares of the Company's Common Stock.

         If  any  Option  or SAR  terminates  or  expires  without  having  been
exercised  in full,  stock not  issued  under  such  Option or SAR will again be
available  for the purposes of the 1993 Plan. If any change is made in the stock
subject to the 1993 Plan, or subject to any Option or SAR granted under the 1993
Plan (through merger,  consolidation,  reorganization,  recapitalization,  stock
dividend,  split-up,  combination  of  shares,  exchange  of  shares,  change in
corporate  structure,  or  otherwise),  the 1993 Plan provides that  appropriate
adjustments  will be made as to the maximum number of shares subject to the 1993
Plan and the number of shares and exercise  price per share of stock  subject to
outstanding Options.

         Options and Awards may be granted only to persons ("Eligible  Persons")
who at the time of grant are either (i) key  personnel,  including  officers and
directors  of  the  Company  or  its  subsidiaries,   or  (ii)  consultants  and
independent  contractors who provide valuable  services to the Company or to its
subsidiaries.  Options that are  incentive  stock options may only be granted to
employees  of the Company  (or its  subsidiaries).  To the extent  that  granted
Options are incentive  stock options,  the terms and conditions of those Options
must be consistent with the qualification requirements set forth in the Internal
Revenue  Code.  Employees  of the Company  may not receive  grants of Options or
Awards  representing more than 50 percent of the shares of Common Stock issuable
under the 1993 Plan.
                                       28
<PAGE>
         To exercise an Option,  the optionholder will be required to deliver to
the Company full  payment of the  exercise  price for the shares as to which the
option is being  exercised.  Generally,  options can be exercised by delivery of
cash, bank cashier's check or shares of Common Stock of the Company.

         Unless  otherwise  authorized  by the  Board of  Directors  in its sole
discretion,  Options granted under the 1993 Plan are nontransferable  other than
by will or by the  laws of  descent  and  distribution  upon  the  death  of the
optionholder and, during the lifetime of the optionholder,  are exercisable only
by such optionholder.  Unless the terms of the stock option agreement  otherwise
provide,  in the event of the death or termination of the employment or services
of the  participant  (but  never  later than the  expiration  of the term of the
Option) Options may be exercised within a one-month period. If termination is by
reason of disability,  however,  Options may be exercised by the optionholder or
the  optionholder's  estate or  successor by bequest or  inheritance  during the
period ending one year after the  optionholder's  retirement (but not later than
the expiration of the term of the option). Termination of employment at any time
for cause immediately terminates all Options held by the terminated employee.

         The 1993 Plan  includes an  Automatic  Program  that  provides  for the
automatic  grant  of  stock  options   ("Automatic   Options")  to  non-employee
directors.  Each non-employee  director serving on the Board of Directors on the
date the  amendments to the 1993 Plan  providing for the Automatic  Program were
approved by the Company's  shareholders  received  Automatic  Options to acquire
10,000 shares of Common Stock on that date, and each subsequently  newly elected
non-employee  member of the Board of Directors will receive Automatic Options to
acquire  10,000  shares  of  Common  Stock  on the  date  of  his  or her  first
appointment  or  election  to the Board of  Directors.  In  addition,  Automatic
Options to acquire 8,000 shares of Common Stock will be automatically granted to
each  non-employee  director  at the  meeting  of the  Board of  Directors  held
immediately  after each annual meeting of  shareholders.  All Automatic  Options
vest and become exercisable immediately upon grant. A non-employee member of the
Board of Directors is not eligible to receive the 8,000-share  Automatic  Option
grant if that option  grant date is within 30 days of such  non-employee  member
receiving the 10,000-share  Automatic Option grant. The exercise price per share
of Common Stock subject to Automatic Options granted under the 1993 Plan will be
equal to 100% of the fair market value of the Company's Common Stock (as defined
in the 1993 Plan) on the date such  options are  granted.  The Company  believes
that the automatic grant of stock options to non-employee directors is necessary
to attract,  retain and motivate independent  directors.  The  non-discretionary
feature is intended  to satisfy  the  requirements  of rules  adopted  under the
Exchange Act.

         The Company  also may grant Awards to Eligible  Persons  under the 1993
Plan. SARs entitle the recipient to receive a payment equal to the  appreciation
in market  value of a stated  number of  shares of Common  Stock  from the price
stated in the award  agreement  to the market  value of the Common  Stock on the
date first  exercised  or  surrendered.  Stock Awards  entitle the  recipient to
directly  receive  Common  Stock.  Cash Awards  entitle the recipient to receive
direct payments of cash depending on the market value or the appreciation of the
Common Stock or other securities of the Company.

Employment Agreements

          In connection with the acquisition of the assets of Sports Image,  the
Company  entered into a three-year  employment  agreement with Joseph M. Mattes.
Pursuant to the terms of his employment  agreement,  Mr. Mattes serves as a Vice
President of the Company and as the President of its Sports Image  subsidiary at
a salary of  $225,000  per year.  In  addition,  Mr.  Mattes will be eligible to
receive an annual bonus of up to $67,500,  as determined by the Company's  Board
of Directors  based upon factors that it deems  relevant,  including Mr. Mattes'
performance. The Company also granted to Mr. Mattes five-year options to acquire
50,000 shares of the Company's  Common Stock at an exercise price of $14.875 per
share. Of the options  granted,  options to acquire 30,000 shares were vested at
the date of grant,  options to acquire  10,000  shares  will vest on November 7,
1997,  and options to acquire the remaining  10,000 shares will vest on November
7, 1998. 
                                       29
<PAGE>
         The Company offers its employees  medical and life insurance  benefits.
The  executive  officers  and  other key  employees  of the  Company,  including
directors who also are  employees of the Company,  are eligible to receive stock
options under the Company's stock option plan.

Directors' Compensation

         Employees  of the  Company do not receive  compensation  for serving as
members of the  Company's  Board of  Directors.  Independent  directors  receive
$2,500 for each meeting  attended in person.  All directors are  reimbursed  for
their  expenses in attending  meetings of the Board of Directors.  Directors who
are employees of the Company are eligible to receive  stock options  pursuant to
the  Company's  1993  Stock  Option  Plan.  Pursuant  to  the  1993  Plan,  each
non-employee  director of the Company  receives an automatic grant of options to
acquire  10,000 shares of the Common Stock on the date of his or her election or
appointment  as a director.  Non-employee  directors  also  receive an automatic
grant of options to  purchase  8,000  shares of Common  Stock on the date of the
meeting of the Board of Directors held immediately  after each subsequent annual
meeting of the shareholders of the Company.

Limitation  of Directors'  Liability;  Indemnification  of Directors,  Officers,
Employees, and Agents

         The Company's Restated Articles eliminate the personal liability of any
director of the Company to the Company or its shareholders for money damages for
any action taken or failure to take any action as a director of the Company,  to
the  fullest  extent  allowed  by the  Arizona  Business  Corporation  Act  (the
"Business  Corporation Act").  Under the Business  Corporation Act, directors of
the Company will be liable to the Company or its  shareholders  only for (a) the
amount of a financial  benefit received by the director to which the director is
not  entitled;  (b) an  intentional  infliction  of harm on the  Company  or its
shareholders;  (c) certain unlawful  distributions  to shareholders;  and (d) an
intentional  violation of criminal  law. The effect of these  provisions  in the
Restated Articles is to eliminate the rights of the Company and its shareholders
(through  shareholders'  derivative  suits on behalf of the  Company) to recover
money  damages  from a  director  for all  actions  or  omissions  as a director
(including  breaches  resulting  from negligent or grossly  negligent  behavior)
except in the  situations  described  in clauses (a)  through  (d) above.  These
provisions  do  not  limit  or  eliminate  the  rights  of  the  Company  or any
shareholder to seek  non-monetary  relief such as an injunction or rescission in
the event of a breach of a director's duty of care.

         The Company's  Restated  Articles  require the Company to indemnify and
advance expenses to any person who incurs liability or expense by reason of such
person acting as a director of the Corporation, to the fullest extent allowed by
the Business  Corporation Act. This indemnification is mandatory with respect to
directors  in all  circumstances  in which  indemnification  is permitted by the
Business   Corporation   Act,  subject  to  the  requirements  of  the  Business
Corporation Act. In addition, the Company may, in its sole discretion, indemnify
and advance expenses,  to the fullest extent allowed by the Business Corporation
Act,  to any  person who incurs  liability  or expense by reason of such  person
acting  as  an  officer,   employee  or  agent  of  the  Company,  except  where
indemnification is mandatory pursuant to the Business  Corporation Act, in which
case the Company is required to indemnify to the fullest extent  required by the
Business Corporation Act.
                                       30
<PAGE>
ITEM 11.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information regarding the shares
of the Company's  outstanding Common Stock beneficially owned as of December 20,
1996 (i) by each of the Company's directors and executive officers;  (ii) by all
directors  and executive  officers of the Company as a group;  and (iii) by each
person who is known by the Company to own  beneficially  or  exercise  voting or
dispositive control over more than 5% of the Company's Common Stock.
<TABLE>
<CAPTION>
                                                                                      Shares Beneficially
                                                                                          Owned (1)(2)
                                                                                       ------------------
Name and Address of Beneficial Owner                                                   Number     Percent
------------------------------------                                                   ------     -------

Directors and Executive Officers
--------------------------------
<S>                                                                                 <C>               <C>  
Fred W. Wagenhals                                                                   3,354,000(3)      25.1%
Tod J. Wagenhals                                                                      171,456(4)       1.3%
Christopher S. Besing                                                                  65,000(5)          *
Joseph M. Mattes                                                                       45,000(6)          *
Jack M. Lloyd                                                                          18,000(7)          *
Robert H. Manschot                                                                     24,000(8)
All directors and executive officers as a group (six persons)                       3,662,456         26.8%

Non-Management 5% Shareholder
-----------------------------

CMC Enterprises Limited                                                             1,000,000(9)       7.6%
</TABLE>

----------
* Less than 1% of outstanding shares of Common Stock.

(1)    Except as  otherwise  indicated,  each person named in the table has sole
       voting and investment power with respect to all Common Stock beneficially
       owned by him,  subject to applicable  community  property law.  Except as
       otherwise  indicated,  each of such  persons  may be reached  through the
       Company at 2401 West First Street, Tempe, Arizona 85251.

(2)    The  numbers and  percentages  shown  include the shares of Common  Stock
       actually  owned as of December  20,  1996 and the shares of Common  Stock
       that the person or group had the right to acquire  within 60 days of such
       date. In calculating  the  percentage of ownership,  all shares of Common
       Stock that the identified person or group had the right to acquire within
       60 days of December  20, 1996 upon the  exercise of options are deemed to
       be outstanding  for the purpose of computing the percentage of the shares
       of Common  Stock owned by such person or group,  but are not deemed to be
       outstanding  for the purpose of computing the percentage of the shares of
       Common Stock owned by any other person.

(3)    Represents  2,564,000 shares of Common Stock,  options to acquire 290,000
       shares of Common Stock,  and 500,000 shares over which Mr.  Wagenhals has
       sole voting power as voting  trustee under a voting trust  agreement with
       the  beneficial  owner of such  shares.  See  footnote  9. Mr.  Wagenhals
       disclaims  beneficial ownership with respect to the shares subject to the
       voting  trust  except to the  extent  of his  right to vote  such  shares
       pursuant to the voting trust agreement.

(4)    Represents 1,456 shares of Common  Stock  and options  to acquire 170,000
       shares of Common Stock.

(5)    Represents 15,000 shares of Common  Stock and  options to acquire  50,000
       shares of Common Stock.

(6)    Represents 15,000 shares of Common  Stock and options  to acquire  30,000
       shares of Common Stock.
                                       31
<PAGE>
(7)    Represents options to acquire 18,000 shares of Common Stock.

(8)    Represents 6,000 shares of Common  Stock and  options to  acquire  18,000
       shares of Common Stock.

(9)    Represents  1,000,000  shares of  Common  Stock  held by CMC  Enterprises
       Limited ("CMC").  CMC is owned by Choi Lim Shuk, Linda Lee, and Flora To,
       each of whom is a  director  of CMC and each of whom may be  deemed to be
       the  beneficial  owner of shares  held by CMC.  An  aggregate  of 500,000
       shares of Common  Stock  held by CMC  currently  are  subject to a voting
       trust  agreement  pursuant  to which  Fred W.  Wagenhals,  the  Company's
       Chairman of the Board,  President,  and Chief Executive Officer, has sole
       voting power with respect to such shares.  See footnote 3. The address of
       CMC Enterprises  Limited is 23/F, Block E, Phase 2, Superluck  Industrial
       Centre, 57 Sha Tsui Road, Tsuen Wan, New Territories, Hong Kong.

ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

       In December 1994, Fred W. Wagenhals  advanced  $300,000 to the Company in
order to enable the Company to make certain advance royalty  payments related to
license  agreements  entered  into by the  Company for  die-cast  products to be
marketed by the Company  beginning  in the second  quarter of fiscal  1995.  The
Company  issued a promissory  note to Mr.  Wagenhals  for the  advance,  bearing
interest, at 9% per annum, providing for monthly payment of accrued interest and
calling  for the  payment of the  principal  no later than March 31,  1995.  The
Company  repaid the note in full on  February  9, 1995.  The  Company's  prepaid
expenses and other assets at September  30, 1995  included an advance of $50,000
to Mr. Wagenhals, which was repaid in fiscal 1996.

       The Company  currently  leases a building in Tempe,  Arizona,  containing
approximately  46,000 square feet, for its corporate,  administrative  and sales
offices and warehouse  facilities.  Fred W. Wagenhals 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  $177,000 during each of the
fiscal years ended September 30, 1995 and September 30, 1996.
                                       32
<PAGE>
                                     PART IV

ITEM 13.          EXHIBITS AND REPORTS ON FORM 8-K

(a)    Exhibits
<TABLE>
<CAPTION>
Exhibit
Number                              Exhibit
------                              -------
<S>        <C>   
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(1)
9.1        Voting Trust Agreement dated as of February 13, 1995, as amended (3)
10.4.1     1993 Stock Option Plan, as amended and restated through July 3, 1995(4)
10.4.2     Non-Statutory Stock Option Agreement between the Company and Fred W. Wagenhals dated
           January 15, 1993(1)
10.8       Form of Indemnification Agreement entered into with the Directors of the Registrant(1)
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(3)
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(3)
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(6)
10.26      Bill of Sale and Asset Purchase Agreement between the Company, M-Car, Incorporated, and
           Robert Scott Tremonti dated September 29, 1994(6)
10.27      Manufacturing Agreement between the Company and Early Light International (Holdings) Ltd.
           dated December 5, 1994(6)
10.29      Asset Purchase Agreement dated March 31, 1995 between the Company and Motorsports
           Promotion, Inc.(3)
10.30      Promissory Note dated March 31, 1995 between Motorsports Promotions, Inc., as borrower,
           and the Company, as lender(3)
10.31      Security Agreement dated March 31, 1995 between Motorsports Promotions, Inc., as debtor,
           and the Company, as secured party(3)
</TABLE>
                                       33
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number                                       Exhibit
------                                       -------
<S>        <C>                                                                     
10.32      Credit Agreement by and between the Company and Wells Fargo HSBC Trade Bank, N.A.(7)
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(8)
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.(8)
10.35      Security Agreement dated November 7, 1996, between Sports Image, Inc. and SII Acquisition, Inc.(8)
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(8)
10.37      License Agreement dated as of November 7, 1996, among SII Acquisition, Inc., Dale Earnhardt, and
           Action Performance Companies, Inc.(8)
10.38      Employment Agreement dated as of November 7, 1996, between Action Performance Companies, Inc. and
           Joe Mattes(8)
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 SB-2 (Registration No. 33-
           57414-LA).
(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 Form 10-QSB for the quarter ended March 31, 1995, as filed
           with the Securities and Exchange Commission on May 15, 1995.
(4)        Incorporated by reference to Post-Effective Amendment No. 3 to Registration Statement on Form S-8
           (Registration No. 33-66980) filed with the Securities and Exchange Commission on February 29, 1996.
(5)        Incorporated by reference to the Registrant's Form 10-QSB for the quarter ended March 31, 1994 filed
           with the Securities and Exchange Commission on May 16, 1994.
(6)        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.
(7)        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.
(8)        Incorporated by reference to the Registrant's Form 8-K filed with the Securities and Exchange
           Commission on November 22, 1996.

(c)        Reports on Form 8-K.

           None
</TABLE>
                                       34
<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 27, 1996               /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 27, 1996
---------------------------------     Executive Officer (Principal Executive Officer)
Fred W. Wagenhals                     


/s/ Tod J. Wagenhals                  Executive Vice President, Secretary, and Director           December 27, 1996
---------------------------------
Tod J. Wagenhals


/s/ Christopher S. Besing             Vice President, Chief Financial Officer, Treasurer,         December 27, 1996
---------------------------------     and Director (Principal Financial and
Christopher S. Besing                 Accounting Officer)                  
                                      


/s/ Joseph M. Mattes                  Vice President and Director                                 December 27, 1996
---------------------------------
Joseph M. Mattes


/s/ Jack M. Lloyd                     Director                                                    December 27, 1996
-----------------------------------
Jack M. Lloyd


/s/ Robert H. Manschot                Director                                                    December 27, 1996
---------------------------------
Robert H. Manschot
</TABLE>
                                       35
<PAGE>
                       ACTION PERFORMANCE COMPANIES, INC.
                   Index to Consolidated Financial Statements



                                                                      Page
                                                                      ----

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

Consolidated Balance Sheet as of September 30, 1996................    F-3

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

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

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

Notes to Consolidated Financial Statements.........................    F-7

                                      F-1
<PAGE>
                              ARTHUR ANDERSEN LLP


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors and Shareholders of 
Action Performance Companies, Inc.:

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

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Action Performance  Companies,
Inc.  and  subsidiaries  as of  September  30,  1996,  and the  results of their
operations  and their cash  flows for each of the two years in the period  ended
September 30, 1996, in conformity with generally accepted accounting principles.


                                              Arthur Andersen LLP

Phoenix, Arizona,
 November 25, 1996, except with respect to matters discussed 
   in Note 11 as to which the date is December 27, 1996.
                                      F-2
<PAGE>

                       ACTION PERFORMANCE COMPANIES, INC.

                           CONSOLIDATED BALANCE SHEET

                               September 30, 1996

                                     ASSETS
                                     ------
CURRENT ASSETS:
  Cash..................................................      $ 4,983,382
  Accounts receivable, net of allowance for doubtful
    accounts of $256,324................................        7,496,988
  Inventories...........................................        5,833,812
  Deferred income taxes.................................        1,031,619
  Prepaid royalties.....................................        2,295,505
  Prepaid expenses and other assets.....................          739,723
                                                              -----------

    Total current assets................................       22,381,029

PROPERTY AND EQUIPMENT, at cost less
  accumulated depreciation of $3,362,939................        8,188,441

NOTES RECEIVABLE, net of current portion................          902,412

DEPOSITS AND OTHER ASSETS...............................          176,752
                                                              -----------

                                                              $31,648,634
                                                              ===========

                      LIABILITIES AND SHAREHOLDERS' EQUITY
                      ------------------------------------
CURRENT LIABILITIES:
  Accounts payable......................................      $ 2,188,343
  Accrued royalties and other accrued expenses..........        1,577,567
  Income taxes payable..................................          521,547
                                                              -----------

    Total current liabilities...........................      $ 4,287,457

CAPITAL LEASE OBLIGATIONS...............................          364,725

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:

  Preferred stock, no par value, 5,000,000 shares
  authorized; 0 shares issued and outstanding...........             --
  Common stock, $.01 par value, 25,000,000 shares
  authorized; 12,609,769 shares issued and outstanding..          126,098
  Additional paid-in capital............................       18,991,296
  Retained earnings.....................................        7,879,058
                                                              -----------

    Total shareholders' equity..........................       26,996,452
                                                              -----------

                                                              $31,648,634
                                                              ===========

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

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                 For the Years Ended September 30, 1996 and 1995

                                                     1996               1995
                                                  -----------       -----------
Collectible sales...........................      $40,903,590       $23,443,413
Consumer product sales......................        1,961,345         1,190,068
Promotional sales...........................        1,351,000         1,497,734
                                                  -----------       -----------

   Net sales................................       44,215,935        26,131,215

Cost of sales...............................       25,295,966        15,882,000
                                                  -----------       -----------
Gross profit................................       18,919,969        10,249,215

Selling, general and
  administrative expenses...................        9,266,397         6,118,978
                                                  -----------       -----------

Income from operations......................        9,653,572         4,130,237

Interest income and other, net..............          216,919            24,112
                                                  -----------       -----------

Income before provision for
  income taxes..............................        9,870,491         4,154,349

Provision for income taxes..................        3,917,196         1,384,500
                                                  -----------       -----------

NET INCOME..................................      $ 5,953,295       $ 2,769,849
                                                  ===========       ===========

NET INCOME PER COMMON SHARE:
  Primary...................................      $      0.46       $      0.27
                                                  ===========       ===========
  Fully Diluted ............................      $      0.46       $      0.25
                                                  ===========       ===========

WEIGHTED AVERAGE SHARES OUTSTANDING:
  Primary...................................       13,027,746        10,115,582
                                                  ===========       ===========
  Fully Diluted ............................       13,069,380        11,570,046
                                                  ===========       ===========

                   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, 1996 and 1995
<TABLE>
<CAPTION>
                                                                  CONVERTIBLE        
                                             COMMON STOCK       PREFERRED STOCK                            (Accumulated  
                                          ------------------   ----------------    Common        Additional  Deficit)   
                                           Shares              Shares               Stock         Paid-in    Retained
                                           Issued     Amount   Issued    Amount   Subscribed      Capital    Earnings        Total
                                          --------   -------   ------    ------   ----------    ----------- -----------    --------
<S>                                      <C>          <C>      <C>      <C>        <C>        <C>          <C>         <C>         
BALANCE, September 30, 1994 ...........   7,873,846   $ 78,738    --    $    --    $ 125,000  $ 7,549,012  $ (844,086) $  6,908,664

Issuance of Convertible Preferred Stock        --         --     500          5         --      1,999,995        --       2,000,000

Common Stock issued upon conversion
  of debentures .......................   1,485,676     14,858    --         --         --      2,433,610        --       2,448,468

Common Stock issued under consulting
  agreement ...........................     200,000      2,000    --         --         --        248,000        --         250,000

Common Stock issued for common stock
  subscribed ..........................     100,000      1,000    --         --    $(125,000)     124,000        --            --

Common stock issued upon exercise of
  employee options ....................     541,000      5,410    --         --         --      1,274,915        --       1,280,325

Tax benefit from employee stock options        --         --      --         --         --        715,844        --         715,844

Redemption of warrants ................        --         --      --         --         --       (403,683)       --        (403,683)

Common stock issued upon exercise
  of warrants .........................   1,020,886     10,208    --         --         --      2,910,615        --       2,920,823

Net Income ............................        --         --      --         --         --           --    $2,769,849     2,769,849
                                         ----------  --------- -------  ---------  ---------  -----------  ----------  ------------

BALANCE, September 30, 1995 ...........  11,221,408   $112,214   500    $     5    $    --    $16,852,308  $1,925,763  $ 18,890,290
                                         ----------  --------- -------  ---------  ---------  -----------  ----------  ------------

Common Stock issued upon exercise of
  warrants ............................     149,114      1,491    --         --         --        509,837        --         511,328

Common Stock issued upon exercise of
 employee options .....................     239,247      2,393    --         --         --        800,901        --         803,294

Common Stock issued upon conversion of
  Class A Convertible Preferred Stock .   1,000,000     10,000  (500)        (5)        --         (9,995)       --            --

Tax benefit from employee stock options        --         --      --         --         --        838,245        --         838,245

Net Income ............................        --         --      --         --         --           --    $5,953,295     5,953,295
                                         ----------  --------- -------  ---------  ---------  -----------  ----------  ------------

BALANCE, September 30, 1996 ...........  12,609,769   $126,098    --    $    --    $    --    $18,991,296  $7,879,058  $ 26,996,452
                                         ==========  ========= =======  =========  =========  ===========  ==========  ============
</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, 1996 and 1995


                                                         1996          1995
                                                     -----------    -----------
Cash Flows from Operating Activities:
Net Income .......................................   $ 5,953,295    $ 2,769,849
  Adjustments to reconcile net income to
   net cash provided by (used in) operating
   activities:
   Depreciation and amortization .................     1,691,837        905,605
   Change in assets and liabilities:
     Accounts receivable .........................    (3,439,864)    (1,400,060)
     Inventories .................................    (3,142,777)      (700,870)
     Deferred income taxes .......................       716,752         29,756
     Prepaid royalties ...........................    (1,185,858)      (471,225)
     Prepaid expense and other assets ............       204,929       (471,162)
     Accounts payable ............................       565,124        859,039
     Income taxes payable ........................      (795,796)     1,317,343
     Accrued royalties and other
      accrued expenses ...........................       292,862        137,756
                                                     -----------    -----------
      Net cash provided by
       operating activities ......................       860,504      2,976,031

Cash Flows used in Investing Activities:
  Acquisition of property and equipment ..........    (3,879,033)    (3,024,359)
  Proceeds from the sale of mini vehicle
    assets .......................................          --          150,000
                                                     -----------    -----------
    Net cash used in investing activities ........    (3,879,033)    (2,874,359)

Cash Flows from Financing Activities:
  Borrowings on line of credit ...................     5,221,898      2,894,725
  Payments on line of credit .....................    (5,221,898)    (2,894,725)
  Proceeds from issuance of common stock .........     1,314,622      4,170,993
  Issuance of Class A Preferred Stock ............          --        2,000,000
  Payments for redemption of warrants ............          --         (403,683)
  Payments on notes payable ......................          --         (265,859)
  Collections on notes receivable ................        31,979         69,012
  Principal payments on capital lease
   obligation and other ..........................      (104,674)       (46,314)
                                                     -----------    -----------

    Net cash provided by financing activities ....     1,241,927      5,524,149
                                                     -----------    -----------

  Increase (Decrease) in Cash ....................    (1,776,602)     5,625,821
  Cash, Beginning of Period ......................     6,759,984      1,134,163
                                                     -----------    -----------
  Cash, End of Period ............................   $ 4,983,382    $ 6,759,984
                                                     ===========    ===========

                   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, 1996


(1)      THE COMPANY

Operations

Action  Performance   Companies,   Inc.  (the  "Company")  designs  and  markets
collectible  and  consumer  products  that are  designed  to  capitalize  on the
increasing  interest in motorsports.  The Company  currently designs and markets
collectible  die-cast and pewter miniature replicas of motorsports  vehicles and
designs and markets licensed apparel,  souvenirs, and other motorsports consumer
items,  including t-shirts,  hats, jackets, mugs, key chains, and drink bottles.
The  Company  also  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,  and
develops  marketing and product  promotional  programs for corporate sponsors of
motorsports  that feature the Company's  die-cast  replicas or other products as
premium awards  intended to increase brand awareness of the products or services
of the corporate sponsors. The Company's  motorsports  collectibles and consumer
products are  manufactured  by third parties  utilizing  the Company's  designs,
tools, dies and equipment.

(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.

Uses 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. 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.

Inventories

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

         Raw materials.............................. $  262,116
         Finished goods.............................  5,571,696
                                                     ----------
                                                     $5,833,812
                                                     ==========
                                      F-7
<PAGE>
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, 1996:

         Tooling and molds.......................... $ 8,189,730
         Furniture, fixtures and equipment..........   2,501,580
         Autos and trucks...........................     342,142
         Leasehold improvements.....................     517,928
                                                     -----------
                                                      11,551,380
         Less - accumulated depreciation............  (3,362,939)
                                                     -----------
                                                     $ 8,188,441
                                                     ===========

Maintenance and repairs of approximately $64,000 and $55,000 for the years ended
September 30, 1996 and 1995,  respectively,  are 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.

License Agreements

Royalties paid under various licensing agreements are recorded as expense at the
time the related sales are made.

Reclassifications

Certain  prior  year  amounts  have been  reclassified  to  conform  to the 1996
presentation.

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, as follows:
                                                             Years Ended
                                                             September 30,
                                                      --------------------------
                                                          1996           1995
                                                      -----------    -----------
Shares

Weighted average number of common shares
  outstanding                                          11,789,362      9,086,976
Additional shares assuming conversion of:
  Stock Options                                           573,618        600,866
  Warrants                                                 39,733        598,562
  Convertible Debentures                                     --          783,642
  Preferred Stock                                         666,667        500,000
                                                      -----------    -----------

Weighted average shares outstanding                    13,069,380     11,570,046
                                                      ===========    ===========

Net Income                                            $ 5,953,295    $ 2,769,849

Add:
  Interest Expense on Convertible Debentures
  (Assuming Conversion)                                      --          100,670
                                                      -----------    -----------
Net income attributable to fully diluted
  weighted average shares outstanding                 $ 5,953,295    $ 2,870,519
                                                      ===========    ===========

Fully Diluted Earnings Per Share                      $      0.46    $      0.25
                                                      ===========    ===========
                                       F-8
<PAGE>
Accounting Pronouncements Not Yet Required to be Adopted

In fiscal  1997,  the  Company  is  required  to adopt  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",  issued by the
Financial  Accounting  Standards  Board.  SFAS No. 121 requires that  long-lived
assets be reviewed for impairment whenever events or circumstances indicate that
the  carrying  amount  of the asset  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. The Company does not believe that
the  adoption  of SFAS No.  121 will have a  material  effect  on the  Company's
financial position or results of operations.

In fiscal 1997, the Company also is required to adopt SFAS No. 123,  "Accounting
for Stock Based  Compensation".  As  permitted by SFAS No. 123, the Company will
continue to account for transactions  with its directors and employees  pursuant
to Accounting  Principles Board Opinion No. 25,  "Accounting for Stock Issued to
Employees".  SFAS No. 123 requires  companies  that do not choose to account for
the effects of stock based compensation in the financial  statements to disclose
the pro forma  effects on earnings  and  earnings per share as if the fair value
based method of  accounting  encouraged  by SFAS No. 123 has been  applied.  The
Company has not yet calculated the impact of these pro forma adjustments,  since
it is not required to do so.

(3)      CREDIT AGREEMENT

In May 1996,  the Company  entered  into a new credit  agreement  with a foreign
bank. The credit agreement  provides the Company's overseas supplier of die-cast
collectible  products with security for the Company's  purchase orders,  up to a
limit of $5.0 million,  an increase of $1.5 million from the Company's  previous
agreement. The agreement also provides for an import cash line of credit of $1.0
million,  which allows the Company to finance its imports for up to 90 days from
the  date  of  shipment.  As of  September  30,  1996,  there  were  no  amounts
outstanding  on the import cash line of credit.  Total  purchase  commitments of
approximately $3,327,000 at September 30, 1996, are secured by the assets of the
Company. The credit facilities under the credit agreement will expire on January
31, 1997. See Note 11.

(4)      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.
                                       F-9
<PAGE>
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.

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  2,000,000  shares of Common  Stock may be issued  pursuant  to the Plan.  On
September 4, 1996,  the  Company's  Board of Directors  approved an amendment to
increase the number of shares  authorized for issuance pursuant to the Plan from
2,000,000 to 2,500,000 shares,  subject to shareholder  approval by September 4,
1997. The Plan expires in 2001.

The following summarizes the activity for the Plan at September 30, 1996:

                                                              Option
                                          Number             Price Per
                                        of Shares              Share
                                        ---------         ---------------

Options outstanding at beginning
  of year                               1,111,200         $1.25 - $ 5.25

Granted..............................     234,700         $6.50 - $10.625
Cancelled............................      (1,600)        $5.25 - $ 5.25
Exercised............................    (239,247)        $2.50 - $ 5.25
                                          -------

Options outstanding at end of year...   1,105,053         $1.25 - $10.63

Options available for grant..........     370,700

Options exerciseable at year end.....     867,274         $1.25 - $ 8.75

                                      F-10
<PAGE>
(5)      SUPPLEMENTAL CASH FLOW INFORMATION

Cash  payments  during the years  ended  September  30,  1996 and 1995  included
interest of $79,358 and $267,540,  respectively,  and income taxes of $3,991,740
and $41,901, respectively.

During the fiscal years ended 1996 and 1995,  non-cash  financing  and investing
activities   included  assets   acquired  under  capital  lease   agreements  of
approximately $233,000 and $338,000, respectively.

Non-cash  financing and operative  activities  for the year ended  September 30,
1996,  include an increase  to  deferred  income  taxes and  additional  paid-in
capital of  approximately  $838,000  related to tax  benefits on various  common
stock options.

Non-cash financing activities for the year ended September 30, 1996, include the
issuance of 1,000,000  shares of the Company's  common stock upon the conversion
of all outstanding shares of Class A Convertible Preferred Stock.

During the year ended  September  30, 1995,  financing  activities  included the
conversion of an aggregate of $2,600,000 of principal  amount of the  Debentures
into 1,485,676 shares of the Company's common stock.

During the year ended  September  30, 1995,  financing  activities  included the
issuance of $125,000 of common stock in exchange for common stock subscribed.

(6)     RELATED PARTY TRANSACTIONS

The  Company  currently  leases  a  building  in  Tempe,   Arizona,   containing
approximately  46,000 square feet, for its corporate,  administrative  and sales
offices and warehouse facilities.  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.  Prior to  February  1994,  the  Company
occupied a separate leased facility in Tempe,  Arizona,  totaling  approximately
47,000 square feet,  which was utilized as offices and for  manufacturing.  F.W.
Investments also owns this building facility.  The Company paid F.W. Investments
rent of  approximately  $177,000 in each of the fiscal years ended September 30,
1995, and September 30, 1996.

In December 1994, Fred W. Wagenhals advanced $300,000 to the Company in order to
enable the Company to make certain advance royalty  payments  related to license
agreements  entered into by the Company for die-cast  products to be marketed by
the Company beginning in the second quarter of fiscal 1995. The Company issued a
promissory  note to Mr.  Wagenhals for the advance,  bearing  interest at 9% per
annum,  providing for monthly payment of accrued  interest,  and calling for the
payment of the  principal no later than March 31, 1995.  The Company  repaid the
note in full on February  9, 1995.  The  Company's  prepaid  expenses  and other
assets at September  30, 1995  included an advance of $50,000 to Mr.  Wagenhals,
which was repaid in fiscal 1996.

(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 Company expensed approximately $27,000 and $26,000 under the
plan for the years ended September 30, 1996 and 1995, respectively.

The  Company  has no other  programs  that  require  payment  by the  Company of
post-employment benefits to current or retired employees.
                                      F-11
<PAGE>
(8)      INCOME TAXES

The Company  provides for income taxes under  Statement of Financial  Accounting
Standard No. 109 (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
methods for federal income tax reporting  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, 1996.

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:

                                                      1996              1995
                                                   ----------       -----------
Current, net of operating loss carryover:
    Federal                                        $ 3,258,060      $ 1,050,311
    State                                              753,359          274,631
                                                   -----------      -----------
                                                   $ 4,011,419      $ 1,324,942

Deferred income taxes                                  (94,223)          13,206
Utilization of net operating loss
  carryforward                                            --            339,985
Change in valuation allowance                             --           (293,633)
                                                   -----------      -----------

Provision for income taxes                         $ 3,917,196      $ 1,384,500
                                                   ===========      ===========

Reconciliation  of the federal  income tax rate to the Company's  effective rate
for the years ended September 30 is as follows:

                                                         1996     1995
                                                        ------   ------

Statutory federal rate                                  34.00%   34.00%
State taxes, net of federal benefit                      5.03%    5.53%
Non-deductible expense                                    .66%    0.86%
Change in valuation reserve                               -  %   (7.06%)
                                                        -----    -----
                                                        39.69%   33.33%
                                                        =====    =====

The components of deferred taxes are as follows at September 30, 1996:

Deferred tax liabilities:
Accelerated tax depreciation                $(215,909)
                                            ========= 

Deferred tax assets:
  Inventory cost capitalization             $ 155,965
  Vacation accrual                             13,048
  Valuation reserves                          196,637
  Deferred compensation                       881,878
                                           ----------
    Net deferred tax asset                 $1,031,619
                                           ==========
                                      F-12
<PAGE>
(9)      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.  The parties have
filed  cross-motions for summary judgment,  which may resolve part or all of the
Company's  involvement in the lawsuit. The court had scheduled oral arguments on
these  motions for  September  30, 1996.  That hearing date has been vacated and
will  be  rescheduled  at a later  date.  Should  the  Company's  defense  prove
unsuccessful,  the Company  estimates the potential  range of loss to be between
$400,000 and $800,000. No provision with respect to this matter has been made in
the financial statements.

A lawsuit,  purportedly on behalf of Action Products,  Inc. ("API"), a dissolved
Arizona  corporation,  has been  instituted  against the Company,  the Company's
Chief Executive Officer,  and others in the United States District Court for the
District of Arizona. The complaint alleges that the Company, the Company's Chief
Executive Officer,  and others breached  contractual and other duties to API and
appropriated  certain  business  opportunities  of API. The  complaint  requests
damages,  including punitive and treble damages,  in an unspecified  amount. The
complaint was effectively  amended subsequent to filing. In June 1996, the court
granted the Company's  motion to dismiss with respect to securities  law claims,
but denied the Company's  motion to dismiss with respect to certain federal RICO
claims.  The  Company  is  vigorously  defending  the  lawsuit  and all  parties
currently are conducting discovery.  In the event that a decision adverse to the
Company is rendered, and in the event that the Company has no insurance coverage
with  respect  to these  claims,  the  resolution  of such  matter  could have a
material adverse effect on the Company.

The Company  leases  certain  equipment  and office  space under  noncancellable
operating  leases.  Rent  expense  related  to these  lease  agreements  totaled
approximately  $437,000 and $352,000  for the fiscal years ended  September  30,
1996 and 1995, respectively.
                                      F-13
<PAGE>
Future lease  payments  under the  noncancellable  leases are  approximately  as
follows:

         Year Ending
         September 30,
         -------------
         1997                                           412,000
         1998                                           386,000
         1999                                           320,000
         2000                                           309,000
         2001                                           206,000
         Thereafter                                     486,000
                                                     ----------
           Total                                     $2,119,000
                                                     ==========

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.

(10)      SUBSEQUENT EVENT

Business Combinations

In November  1996,  the Company  purchased  substantially  all of the assets and
certain  liabilities of Sports Image,  Inc.  ("Sports Image") for  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 $14.875 per share. Sports
Image sells and distributes a variety of licensed  motorsports  products through
wholesale distributor networks,  corporate sponsors, and trackside events. 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 16% of its net 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 will
be accounted for as a purchase.

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")  pursuant to
which  the  Company  has the  right  to  market  licensed  motorsports  products
utilizing the likeness of Dale Earnhardt. Pursuant to 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 term of the Earnhardt
License is 15 years and from year to year thereafter unless terminated by either
party.

(11)      EVENTS SUBSEQUENT TO DATE OF AUDITORS REPORT

In December  1996,  the Company  reached an  agreement  in  principle to acquire
substantially all of the assets and certain liabilities of Motorsport Traditions
Limited Partnership ("MTL") and all of the capital stock of Creative Marketing &
Promotions,   Inc.  ("CMP"),  for  an  aggregate  of  approximately  $13,000,000
consisting of cash, a promissory note, and shares of the Company's Common Stock.
The  acquisition is subject to the  completion of due diligence and  preparation
and execution of definitive agreements. MTL and CMP sell and distribute licensed
motorsports products through a network of wholesale distributors,  and trackside
events.  MTL and CMP  together  generate  approximately  $25,000,000  in  annual
revenues  from  their  design,   manufacturing,   and  sales  and   distribution
activities. This transaction will be accounted for as a purchase.

The Company has received a letter of  commitment  from an insurance  company for
$20,000,000 in debt financing in the form of senior unsecured notes (the "Senior
Notes"). The Senior Notes will bear
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interest  at the rate of 8.05% per annum,  provide for  semi-annual  payments of
accrued interest,  and call for the payment of principal on January 2, 1999. The
Company  anticipates  that the  closing of the  Senior  Notes will be January 2,
1997. The Company intends to utilize the proceeds from the Senior Notes to repay
a portion of the promissory  note issued in connection  with the  acquisition of
Sports Image.  The Company also has received a letter of commitment  from a bank
for a $10,000,000 unsecured revolving line of credit (the "Line of Credit"). The
Line of Credit,  which will mature on March 31, 1998, will bear an interest rate
equal to the LIBOR rate plus 1.90%. The Company  anticipates that the closing of
the Line of Credit  will be  January  2, 1997.  The  Company  intends to utilize
approximately  $4,000,000  of the Line of Credit to  complete  the Sports  Image
acquisition and an additional $4,000,000 to close the MTL acquisition.

Hasbro License Agreement

In December 1996, the Company and Hasbro, Inc. ("Hasbro") entered into a license
agreement (the "Hasbro  License").  The Hasbro License covers the exclusive sale
by Hasbro in the  mass-merchandise  market of  motorsports-related  products for
which the Company has or will secure  exclusive or  non-exclusive  licenses from
racing  drivers,  car  owners,  manufacturers,  or  sponsors.  Under the  Hasbro
License,  the Company will be  responsible  for  acquiring and  maintaining  the
license rights with the licensors,  and Hasbro will be responsible for all costs
and other  arrangements  relating  to  tooling,  manufacturing,  transportation,
marketing,  distribution,  and sales of licensed products. The licensed products
will  consist  of  (i)  die-cast  replicas  of  motorsports   vehicles  and  the
1/18th-scale  plastic  toy car  developed  by the  Company,  and (ii) all  other
products  that Hasbro may market as  licensed  motorsports  products,  including
radio controlled  cars, slot car sets,  games  (including  electronic and CD-ROM
interactive games), plush toys, figurines,  play sets, walkie talkies, and other
products. Hasbro will pay the Company guaranteed minimum annual royalty payments
of (i)  $500,000  for  calendar  year  1997,  and (ii) for  each  calendar  year
thereafter,  the  greater  of  (a)  $500,000  or (b) 50  percent  of the  actual
royalties earned in the prior year, up to a maximum of $1.0 million. Hasbro also
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,  up to a maximum of $3.2 million in 1997 and $4.5 million in
each of 1998 and 1999. 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. 
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