SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                   FORM 10-K/A

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


                    For fiscal year ended September 30, 1997

                         Commission file number 0-21630

                            -------------------------`

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

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

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

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

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

                     Common Stock, par value $.01 per share

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

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

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

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

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

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

                                  FORM 10-K/A

                               AMENDMENT No. 1 TO

                           ANNUAL REPORT ON FORM 10-K

                      FISCAL YEAR ENDED SEPTEMBER 30, 1997

                                TABLE OF CONTENTS


                                                                            Page
PART II

     ITEM 6.      SELECTED FINANCIAL DATA....................................  1
     ITEM 7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............  3
     ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 10

PART IV

     ITEM 14.     EXHIBITS,  FINANCIAL STATEMENT SCHEDULES,  AND 
                  REPORTS ON FORM 8-K ....................................... 11



SIGNATURES        ........................................................... 14

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...................................F-1
                                        i
<PAGE>
ITEM 6.           SELECTED FINANCIAL DATA

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

<TABLE>
<CAPTION>
                                                      Fiscal Year Ended September 30,
                                       -----------------------------------------------------------
                                          1993         1994         1995        1996        1997
                                          ----         ----         ----        ----        ----
                                                 (in thousands, except per share amounts)
<S>                                    <C>          <C>          <C>         <C>         <C>      
Statement of Operations Data:
Sales:
   Collectibles ....................   $  11,558    $  12,802    $  23,443   $  40,904   $  63,846
   Apparel and souvenirs ...........        --            143        1,190       1,961      60,430
   Promotional .....................        --           --           --         1,351       5,085
   Other(1)(2) .....................       3,550        3,924        1,498        --         1,019
                                       ---------    ---------    ---------   ---------   ---------
      Net sales(3) .................      15,108       16,869       26,131      44,216     130,380
Cost of sales ......................       9,730       10,488       15,882      25,296      80,995
                                       ---------    ---------    ---------   ---------   ---------
Gross profit .......................       5,378        6,381       10,249      18,920      49,385
Selling, general and administrative
   expenses ........................       6,552        5,808        6,115       9,262      24,564
Settlement costs ...................        --           --           --          --         5,400(5)
Amortization of goodwill and other
   intangibles .....................        --           --              4           4       1,286
                                       ---------    ---------    ---------   ---------   ---------
Income (loss) from operations ......      (1,174)         573        4,130       9,654      18,135
Interest income (expense) and other,
   net .............................         (66)        (164)          24         216      (1,225)
                                       ---------    ---------    ---------   ---------   ---------
Income (loss) before provision for
   (benefit from) income taxes .....      (1,240)         409        4,154       9,870      16,910
Provision for (benefit from) income
   taxes ...........................         (69)        (224)       1,384       3,917       6,764
                                       ---------    ---------    ---------   ---------   ---------
Net income (loss) ..................   $  (1,171)   $     633    $   2,770   $   5,953   $  10,146
                                       =========    =========    =========   =========   =========
Net income (loss) per common
   share, assuming full dilution(4)    $   (0.21)   $    0.08    $    0.25   $    0.46   $    0.69
                                       =========    =========    =========   =========   =========
Weighted average number of
   common shares, assuming full
   dilution(4) .....................       5,662        9,640       11,570      13,069      14,671

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

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

ITEM 7.           MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS,
                  AND RESULTS OF OPERATIONS

Overview

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

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

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

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

         Prior to the fiscal 1997 acquisitions,  the Company's revenue consisted
primarily  of sales of die-cast  collectibles,  and the revenue of the  acquired
businesses  consisted  primarily  of sales of licensed  motorsports  apparel and
souvenirs.  Promotional  revenue  consists  of sales of products  developed  for
corporate promotion programs. The Company's fiscal 1997 revenue includes royalty
income as a result of the license agreement with Hasbro.
                                        3
<PAGE>
         The Company's cost of sales consists  primarily of the cost of products
procured from  third-party  manufacturers,  royalty  payments to licensors,  and
depreciation of tooling and dies.  Significant  factors  affecting the Company's
cost of sales as a percentage of net sales include (i) the overall percentage of
net sales represented by sales of die-cast collectible products, which typically
carry  higher  gross  margins  than  the  Company's  other  products,  (ii)  the
percentage  of sales  of  die-cast  collectible  products  represented  by sales
through the  Collectors'  Club,  which typically carry higher gross margins than
sales of such products through wholesale  distributors,  and (iii) the effect of
amortizing the fixed cost components of cost of sales, primarily depreciation of
tooling and dies,  over varying levels of net sales.  The Company  believes that
the increased sales of licensed apparel and souvenirs following the acquisitions
of Sports Image and  Motorsport  Traditions  will result in lower  overall gross
margins  as a result of lower  gross  margins  generally  associated  with these
acquired product lines. The Company believes,  however, that the effect of these
lower gross margins will be mitigated at least to some extent by cost reductions
and  other  operational  efficiencies  associated  with the  combination  of the
acquired entities and by the license  agreement with Hasbro.  The agreement with
Hasbro  provides  the  Company  with  a  source  of  license  royalties  without
significant  related cost of sales. In addition,  the license agreement provides
the  Company  with  access to the  mass-merchandise  market  without  committing
capital  for   manufacturing   and  with  limited   marginal   expenditures  for
administrative and marketing activities.

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

Results of Operations

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

<TABLE>
<CAPTION>
                                                                    Year Ended September 30,
                                                       -----------------------------------------------
                                                        1993       1994       1995      1996      1997
                                                        ----       ----       ----      ----      ----
<S>                                                    <C>        <C>        <C>       <C>       <C>  
Sales
   Collectibles .................................       76.5%      75.9%      89.7%     92.5%     49.6%
   Apparel and souvenirs ........................        --         0.8        4.6       4.4      46.2
   Promotional ..................................        --         --         --        3.1       3.4
   Other ........................................       23.5       23.3        5.7       --        0.8
                                                       -----      -----      -----     -----     -----

     Net Sales ..................................      100.0      100.0      100.0     100.0     100.0
Cost of sales ...................................       64.4       62.2       60.8      57.2      62.1
                                                       -----      -----      -----     -----     -----
Gross profit ....................................       35.6       37.8       39.2      42.8      37.9
Selling, general and administrative
   expenses .....................................       43.4       34.4       23.4      21.0      18.9
Settlement costs ................................        --         --         --        --        4.1
Amortization of goodwill and other
   intangibles ..................................        --         --         --        --        1.0
                                                       -----      -----      -----     -----     -----
Income (loss) from operations ...................       (7.8)       3.4       15.8      21.8      13.9
Interest income (expense) and other, net ........       (0.4)      (1.0)       0.1       0.5      (0.9)
                                                       -----      -----      -----     -----     -----
Income (loss) before provision for
   (benefit from) income taxes ..................       (8.2)       2.4       15.9      22.3      13.0
Provision for (benefit from) income taxes .......       (0.4)      (1.4)       5.3       8.8       5.2
                                                       -----      -----      -----     -----     -----
Net income (loss) ...............................       (7.8)%      3.8%      10.6%     13.5%      7.8%
                                                       =====      =====      =====     =====     =====
</TABLE>
                                        4
<PAGE>
Fiscal Year Ended  September 30, 1997 Compared with Fiscal Year Ended  September
30, 1996

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

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

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

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

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

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

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

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

         Gross  profit  increased  to $18.9  million  in fiscal  1996 from $10.2
million in fiscal 1995, representing 42.8% and 39.2% of net sales, respectively.
The  increase in gross profit as a percentage  of net sales  resulted  primarily
from (i) the effect of higher sales volume on fixed cost  components  of cost of
sales,   primarily   depreciation  charges  related  to  the  Company's  tooling
equipment;  and  (ii)  increased  sales  through  the  Collectors'  Club,  which
typically carry higher margins.
                                        5
<PAGE>
         Selling, general, and administrative expenses increased to $9.3 million
in fiscal 1996 from $6.1 million in fiscal 1995, representing 21.0% and 23.4% of
net sales,  respectively.  The increase in such expenses resulted from increased
expenditures  for  sales  and  marketing,   particularly  increased  advertising
consistent with the Company's strategy to increase  Collectors' Club memberships
and distributor sales.

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

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

Pro Forma Results of Operations

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

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

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

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

Quarterly Results of Operations

         The following table sets forth certain  unaudited  quarterly results of
operations  for each of the eight  quarters in the period  ended  September  30,
1997. All quarterly information was obtained from unaudited financial statements
not  otherwise  contained  herein.  The  Company  believes  that  all  necessary
adjustments have been made to present fairly the quarterly information when read
in conjunction with the Consolidated Financial Statements and Notes
                                        6
<PAGE>
thereto included elsewhere in this Report. The operating results for any quarter
are not necessarily indicative of the results for any future period.

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

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

----------------------
(1)      Includes a one-time charge of approximately  $5.4 million for costs and
         legal  and other  expenses  related  to the  settlement  of a  lawsuit.
         Excluding the one-time charge, income from operations,  net income, and
         net income per  common share,  assuming dilution, for the third quarter
         of fiscal 1997 would have been approximately $7,749, $4,338, and $0.30,
         respectively.

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

Seasonality

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

Liquidity and Capital Resources

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

         Capital  expenditures  for the year ended  September  30, 1997  totaled
approximately  $11.1 million,  of which  approximately $7.0 million was utilized
for the Company's continued investment in tooling.
                                        7
<PAGE>
         On January 16, 1997, the Company sold an aggregate of 187,500 shares of
Common Stock to Hasbro at a price of $14.50 per share,  with net proceeds to the
Company of approximately $2.6 million. The Company has agreed that, in the event
that Hasbro  sells such shares at a price lower than $14.50 per share during the
one-year period ending on April 16, 1998, the Company will reimburse  Hasbro for
the amount of such loss, plus interest.

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

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

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

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

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

         On January 2, 1997,  the Company  issued an aggregate of $20.0  million
principal  amount of senior  notes to three  insurance  companies  (the  "Senior
Notes").  The Senior Notes bear interest at the rate of 8.05% per annum, provide
for semi-annual payments of accrued interest, and mature on January 2, 1999. The
Company  may not prepay 
                                        8
<PAGE>
the Senior Notes prior to maturity, but must offer to redeem the Senior Notes in
the event of a "Change  of  Control"  of the  Company,  as defined in the Senior
Notes.  The Senior Notes contain certain  provisions  that,  among other things,
require  the  Company  to comply  with  certain  financial  ratios and net worth
requirements  and limit the ability of the Company and its subsidiaries to incur
additional  indebtedness,  to sell  assets  or  engage  in  certain  mergers  or
consolidations.  The Senior Notes are  guaranteed by Sports Image and Motorsport
Traditions. The Company utilized the proceeds from the Senior Notes to repay the
remainder of the promissory  note issued in connection  with the  acquisition of
Sports Image.

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

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

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

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

         The  Company  believes  that its  current  cash  resources,  the Credit
Facility,  and expected cash flow from operations will be sufficient to fund the
Company's  capital  needs  during  the next 12  months at its  current  level of
operations,  apart from capital needs  resulting from  additional  acquisitions.
However,  the Company way be required to obtain  additional  capital to fund its
planned  growth during the next 12 months and beyond.  Potential  sources of any
such capital may include the proceeds from the exercise of outstanding  options,
bank financing,  strategic alliances,  and additional offerings of the Company's
equity or debt  securities.  There can be no assurance that such capital will be
available from these or other  potential  sources,  and the lack of such capital
could have a material adverse effect on the Company's business.
                                       9
<PAGE>
ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Reference is made to the  financial  statements,  the notes thereto and
reports  thereon,  commencing  at  page  F-1 of  this  report,  which  financial
statements, report, notes and data are incorporated herein by reference.
                                       10
<PAGE>
                                     PART IV

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


(a)      Financial Statements and Financial Statement Schedules

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

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

(b)      Reports on Form 8-K

         Not applicable.

(c)      Exhibits

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

1.0      Form of Underwriting Agreement(1)
3.1      First Amended and Restated Articles of Incorporation of Registrant(2)
3.2      Amended and Restated Bylaws of Registrant(2)
4.1      Form of Certificate of Common Stock(3)
10.4.2   1993 Stock Option Plan,  as amended and  restated  through  January 16,
         1997(4)
10.8     Form of  Indemnification  Agreement  entered into with the Directors of
         the Registrant(3)
10.21    Lease between the Company and F.W. Investments dated January 1, 1994(5)
10.24.1  Commercial Credit Agreement dated March 6, 1995 between the Company and
         the Hong Kong and Shanghai Banking Corporation Limited(6)
10.24.2  Optional  Advance Time Note (Loans Against Imports) dated March 6, 1995
         between   the  Company   and  the  Hong  Kong  and   Shanghai   Banking
         Corporation(6)
10.25    Bill of Sale and Asset  Purchase  Agreement  between the  Company,  Fan
         Fueler,  Inc.,  Peter LaMonica,  and Fred Miller,  III dated August 12,
         1994(7)
10.26    Bill of Sale and Asset Purchase  Agreement between the Company,  M-Car,
         Incorporated, and Robert Scott Tremonti dated September 29, 1994(7)
10.27    Manufacturing   Agreement   between   the   Company   and  Early  Light
         International (Holdings) Ltd. dated December 5, 1994(7)
10.29    Asset Purchase  Agreement  dated March 31, 1995 between the Company and
         Motorsports Promotion, Inc.(6)
10.30    Promissory  Note dated March 31, 1995 between  Motorsports  Promotions,
         Inc., as borrower, and the Company, as lender(6)
10.31    Security Agreement dated March 31, 1995 between Motorsports Promotions,
         Inc., as debtor, and the Company, as secured party(6)
10.32    Credit  Agreement by and between the Company and Wells Fargo HSBC Trade
         Bank, N.A.(8)
10.33    Asset  Purchase  Agreement  dated as of November 7, 1996,  among Action
         Performance Companies, Inc., SII Acquisition, Inc., Sports Image, Inc.,
         and R. Dale Earnhardt and Teresa H. Earnhardt(9)
10.34    Promissory  Note dated  November 7, 1996,  in the  principal  amount of
         $24,000,000 issued by SII Acquisition, Inc., as Maker, to Sports Image,
         Inc.,  as  Payee,   together  with  Guarantee  of  Action   Performance
         Companies, Inc.(9)
                                       11
<PAGE>
Exhibit
Number                              Exhibit
------                              -------

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

---------------------------
*        Previously filed
(1)      Incorporated by reference to the Registrant's Registration Statement on
         Form S-3 and Amendment No. 1 thereto (Registration No. 333-27485).
(2)      Incorporated  by  reference  to the  Registrant's  Form  10-QSB for the
         quarter ended March 31, 1996, as filed with the Securities and Exchange
         Commission on May 2, 1996.
(3)      Incorporated by reference to the Registrant's Registration Statement on
         Form SB-2 and amendments thereto (Registration No. 33-57414-LA).
(4)      Incorporated by reference to the Registrant's Form 10-Q for the quarter
         ended  March  31,  1997,  as filed  with the  Securities  and  Exchange
         Commission on May 15, 1997.
                                       12
<PAGE>
Exhibit
Number                              Exhibit
------                              -------

(5)      Incorporated  by  reference  to the  Registrant's  Form  10-QSB for the
         quarter ended March 31, 1994, as filed with the Securities and Exchange
         Commission on May 16, 1994.
(6)      Incorporated  by  reference  to the  Registrant's  Form  10-QSB for the
         quarter ended March 31, 1995, as filed with the Securities and Exchange
         Commission on May 15, 1995.
(7)      Incorporated by reference to the Registrant's  Form 10-KSB for the year
         ended  September  30, 1994, as filed with the  Securities  and Exchange
         Commission on December 22, 1994.
(8)      Incorporated  by  reference  to the  Registrant's  Form  10-QSB for the
         quarter ended June 30, 1996, as filed with the  Securities and Exchange
         Commission on August 14, 1996.
(9)      Incorporated by reference to the  Registrant's  Form 8-K filed with the
         Securities and Exchange  Commission on November 22, 1996, as amended by
         Form 8-K/A filed on January 13, 1997.
(10)     Incorporated by reference to the  Registrant's  Form 8-K filed with the
         Securities  and Exchange  Commission on January 23, 1997, as amended by
         Form 8-K/A filed on February 24, 1997.
(11)     Incorporated by reference to the Registrant's Registration Statement on
         Form S-3 (Registration No. 333- 22943).
                                       13
<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:  May 21, 1998                    /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              May 21, 1998
---------------------------------     Executive Officer (Principal Executive Officer)
Fred W. Wagenhals                     


/s/ Tod W. Wagenhals                  Executive Vice President, Secretary, and Director        May 21, 1998
---------------------------------
Tod J. Wagenhals


/s/ Christopher S. Besing             Vice President, Chief Financial Officer, Treasurer,      May 21, 1998
---------------------------------     and Director (Principal Financial and
Christopher S. Besing                 Accounting Officer)                  


/s/ Melodee L. Volosin                Vice President - Wholesale Division and Director         May 21, 1998
---------------------------------
Melodee L. Volosin


/s/ John S. Bickford                  Vice President - Strategic Alliances and Director        May 21, 1998
---------------------------------
John S. Bickford

                                      Director                                                 May __, 1998
---------------------------------
Jack M. Lloyd


                                      Director                                                 May __, 1998
---------------------------------
Robert H. Manschot

/s/ Edward J. Bauman                  Director                                                 May 21, 1998
---------------------------------
Edward J. Bauman         

/s/ Donald G. Hawk, Jr.               Director                                                 May 21, 1998
---------------------------------
Donald G. Hawk, Jr.
</TABLE>
                                       14
<PAGE>
                       ACTION PERFORMANCE COMPANIES, INC.
                   Index to Consolidated Financial Statements



                                                                         Page
                                                                         ----

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

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

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

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

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

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

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




To Action Performance Companies, Inc.:

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

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

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


                                        /s/ Arthur Andersen LLP



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

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

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

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

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

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

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

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

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

COMMITMENTS AND CONTINGENCIES

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

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

                      CONSOLIDATED STATEMENTS OF OPERATIONS

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

                      (in thousands, except per share data)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Common Stock issued under consulting agreement .           248           --              250

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

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

                                 (in thousands)

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

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

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

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

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


(1)      THE COMPANY

Operations

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

(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Presentation

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

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

Revenue Recognition

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

Use of Estimates

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

Fair Value of Financial Instruments

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

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

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

Property and Equipment

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

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

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

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

Goodwill and Other Intangibles

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

License Agreements

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

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

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

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

Net Income Per Common Share

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

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

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

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

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

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

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

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

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

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

Accounting Pronouncements Not Yet Required to be Adopted

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

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

(3)      ACQUISITIONS AND DISPOSALS

Disposition of Mini Vehicle Assets

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

Acquisition of Sports Image, Inc.

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

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

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

Acquisition of Robert Yates Promotions, Inc.

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

Acquisition of Image Works, Inc.

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

Acquisition of Simpson Products, Inc.

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

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

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

(4)      FINANCING ACTIVITIES

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

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

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

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

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

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

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

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

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

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

Debt Covenants

The  Company's  senior  notes and Credit  Facility  agreements  contain  certain
provisions that, among other things,  require the Company to comply with certain
financial  ratios and net worth  requirements  and will limit the ability of the
Company and its subsidiaries to incur additional  indebtedness or to sell assets
or engage in certain mergers or  consolidations.  In addition,  the terms of the
Credit Facility limit the Company's ability to pay dividends without the consent
of the Company's  lender.  At September 30, 1997,  the Company was in compliance
with all such covenants.

Future Maturities of Long-Term Debt

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

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

(5)      SHAREHOLDERS' EQUITY

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

10% Convertible Subordinated Debentures

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

Convertible Preferred Stock

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

Redemption of Warrants

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

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

1997 Public Offering

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

Stock Options

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

(6)      RELATED PARTY TRANSACTIONS

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

(7)      EMPLOYEE BENEFIT PLANS

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

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

(8)      INCOME TAXES

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

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

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

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

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

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

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

(9)      LEGAL SETTLEMENT

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

(10)     COMMITMENTS AND CONTINGENCIES

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

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

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

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

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

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

(11)     STOCK OPTION PLAN

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

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

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

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

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

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

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

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

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

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

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

(13)     EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT

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