UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   FORM 10-QSB

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


(Mark one)
      XX      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES     
- ---------     EXCHANGE  ACT OF 1934

                  For the quarterly period ended March 31, 1999

              TRANSITION  REPORT UNDER  SECTION 13 OR 15(d) OF THE EXCHANGE ACT
- ---------     OF 1934

                  For the transition period from ______________ to _____________

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

                         Commission File Number: 0-23041
                                                 -------

                        KARTS INTERNATIONAL INCORPORATED
        (Exact name of small business issuer as specified in its charter)

           Nevada                                            75-2639196         
 --------------------------                         -------------------------
  (State of incorporation)                           (IRS Employer ID Number)

           66204 Commercial Street, P. O. Box 695, Roseland, LA 70456
           ----------------------------------------------------------
                    (Address of principal executive offices)

                                 (504) 747-1111
                                 --------------
                           (Issuer's telephone number)


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


Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days.     YES X   NO
                                                                 ---    ---
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date:
         May 14, 1999:              Common Stock: 5,574,298 shares
                                    Common Stock Warrants: 1,782,500

Transitional Small Business Disclosure Format (check one):    YES      NO X 
                                                                  ---    ---






                        KARTS INTERNATIONAL INCORPORATED

                Form 10-QSB for the Quarter ended March 31, 1999

                                Table of Contents

                                                                               
                                                                           Page
                                                                           ----
Part I - Financial Information

  Item 1   Financial Statements                                              3

  Item 2   Management's Discussion and Analysis or Plan of Operation        26


Part II - Other Information

  Item 1   Legal Proceedings                                                29

  Item 2   Changes in Securities                                            29

  Item 3   Defaults Upon Senior Securities                                  29

  Item 4   Submission of Matters to a Vote of Security Holders              30

  Item 5   Other Information                                                30

  Item 6   Exhibits and Reports on Form 8-K                                 30


Signatures                                                                  30








                                                                              2




S. W. HATFIELD, CPA
certified public accountants

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




                         Independent Accountant's Report
                         -------------------------------


Board of Directors and Shareholders
Karts International Incorporated

We have reviewed the  accompanying  consolidated  balance sheets as of March 31,
1999 and 1998 of Karts  International  Incorporated (a Nevada  corporation)  and
Subsidiaries  and the  accompanying  consolidated  statement of  operations  and
comprehensive  income  and  consolidated  statement  of cash flows for the three
months  ended  March  31,  1999 and 1998.  These  financial  statements  are the
responsibility of the company's management.

We conducted our review in accordance with standards established by the American
Institute  of  Certified  Public  Accountants.  A review  of  interim  financial
information consists principally of applying analytical  procedures to financial
data and making  inquiries of persons  responsible  for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with  generally  accepted  auditing  standards,  the  objective  of which is the
expression on an opinion  regarding the financial  statements  taken as a whole.
Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material  modifications that should
be made to the accompanying  consolidated financial statements for them to be in
conformity with generally accepted accounting principles.

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




                                                S. W. HATFIELD, CPA
                             (formerly S. W. HATFIELD + ASSOCIATES)
Dallas, Texas
May 10, 1999





                      Use our past to assist your future sm

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


                                                                              3







                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             March 31, 1999 and 1998

                                   (Unaudited)

                                                                   1999            1998       
                                                              ------------    ------------           
                                     Assets
                                     ------
                                                                        
Current Assets
   Cash on hand and in banks                                  $    102,818    $  2,286,101
   Accounts receivable
     Trade, net of allowance for doubtful accounts
       of $90,500 and $3,000, respectively                         954,788         263,023
     Recoverable income taxes                                       10,750         225,000
   Inventory                                                     1,829,933         870,572
   Prepaid expenses                                                352,057         217,803
                                                              ------------    ------------

     Total current assets                                        3,250,396       3,862,499
                                                              ------------    ------------

Property and equipment
   Building and improvements                                       932,437         448,209
   Equipment                                                       974,636         671,583
   Transportation equipment                                        143,469         125,640
   Furniture and fixtures                                          137,120         130,747
                                                              ------------    ------------
                                                                 2,187,662       1,376,179
   Accumulated depreciation                                       (319,084)       (162,755)
                                                              ------------    ------------
                                                                 1,868,578       1,213,424
   Land                                                             32,800          32,800
                                                              ------------    ------------

     Net property and equipment                                  1,901,378       1,246,224
                                                              ------------    ------------

Other assets
   Note receivable                                                 387,432            --
   Option to acquire an unrelated entity                           134,075            --
   Goodwill, net of accumulated amortization of
     approximately $6,414,452 and $444,148, respectively              --         5,415,275
   Organization costs, net of accumulated amortization
     of approximately $66,303 and $44,453, respectively             42,952          64,802
   Covenant not to compete, net of accumulated amortization
     of approximately $13,889 and $ -0-, respectively               86,111            --
   Other                                                            53,432          16,283
                                                              ------------    ------------

     Total other assets                                            704,002       5,496,360
                                                              ------------    ------------

     Total Assets                                             $  5,855,776    $ 10,605,083
                                                              ============    ============


                                  - Continued -




The  financial  information  included  herein has been  prepared  by  management
without audit by independent  certified  public  accountants.  See  accompanying
accountants' review report. The accompanying notes are an integral part of these
financial statements.
                                                                              4






                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
                     CONSOLIDATED BALANCE SHEETS - CONTINUED
                             March 31, 1999 and 1998

                                   (Unaudited)

                                                                1999            1998       
                                                           ------------    ------------             
                      Liabilities and Shareholders' Equity
                      ------------------------------------
                                                                     
Current liabilities
   Cash overdraft                                          $      1,047    $       --
   Notes payable to banks and others                            838,135            --
   Notes payable to affiliates                                  333,723            --
   Current maturities of long-term debt                          40,280          26,659
   Accounts payable  - trade                                  2,837,480         124,562
   Other accrued liabilities                                    415,309         137,022
   Customer deposits                                             27,900            --
   Accrued income and franchise taxes payable                      --           139,160
                                                           ------------    ------------

     Total current liabilities                                4,493,874         427,403
                                                           ------------    ------------


Long-term liabilities
   Long-term debt, net of current maturities                    244,327         257,317
                                                           ------------    ------------

     Total liabilities                                        4,738,201         684,720
                                                           ------------    ------------


Commitments and contingencies


Shareholders' equity
 Preferred stock - $0.001 par value 
     10,000,000 shares authorized 
     None issued and outstanding                                   --              --
   Common stock - $0.001 par value 
     14,000,000 shares authorized 
     5,574,298 and 4,854,133 shares
     issued and outstanding                                       5,574           4,854
   Additional paid-in capital                                14,377,782      13,040,090
   Accumulated deficit                                      (13,265,781)     (3,124,581)
                                                           ------------    ------------

     Total shareholders' equity                               1,117,575       9,920,363
                                                           ------------    ------------

     Total Liabilities and Shareholders' Equity            $  5,855,776    $ 10,605,083
                                                           ============    ============





The  financial  information  included  herein has been  prepared  by  management
without audit by independent  certified  public  accountants.  See  accompanying
accountants' review report. The accompanying notes are an integral part of these
financial statements.
                                                                              5





                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
          CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
                   Three months ended March 31, 1999 and 1998

                                   (Unaudited)
                                                Three months   Three months
                                                   ended          ended
                                                  March 31,      March 31,
                                                    1999           1998       
                                                -----------    -----------

Net Sales                                       $ 1,203,359    $   509,205
                                                -----------    -----------

Cost of sales
   Purchases, direct labor and
     related costs                                1,355,578        694,442
   Depreciation                                      16,941         16,358
                                                -----------    -----------
     Total cost of sales                          1,372,519        710,800
                                                -----------    -----------

Gross profit                                       (169,160)      (201,595)
                                                -----------    -----------

Operating expenses
   Research and development expenses                  1,095          2,096
   Selling expenses                                  27,270         17,327
   General and administrative expenses              483,400        332,307
   Depreciation and amortization                     27,462         76,807
                                                -----------    -----------
     Total operating expenses                       539,227        428,537
                                                -----------    -----------

Income (loss) from operations                      (708,387)      (630,132)

Other income (expense)
   Interest expense                                 (61,958)       (20,369)
   Other                                             80,047         28,528
                                                -----------    -----------

Income before income taxes                         (690,298)      (621,973)

Provision for income taxes                             --             --
                                                -----------    -----------

Net loss                                           (690,298)      (621,973)

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

Comprehensive income (loss)                     $  (690,298)   $  (621,973)
                                                ===========    ===========

Income (loss) per weighted-
   average share of common
   stock outstanding, computed
   on net loss - basic and fully diluted        $     (0.12)   $     (0.13)
                                                ===========    ===========

Weighted-average number
   of shares of common stock
   outstanding - basic and fully diluted          5,574,298      4,854,133
                                                ===========    ===========



The  financial  information  included  herein has been  prepared  by  management
without audit by independent  certified  public  accountants.  See  accompanying
accountants' review report. The accompanying notes are an integral part of these
financial statements.
                                                                              6






                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                   Three months ended March 31, 1999 and 1998

                                   (Unaudited)
                                                              Three months   Three months
                                                                 ended          ended
                                                                March 31,      March 31,
                                                                  1999           1998   
                                                              -----------    -----------
                                                                        
Cash flows from operating activities
   Net income (loss) for the period                           $  (690,298)   $  (621,973)
   Adjustments to reconcile net income
     (loss) to net cash used in operating activities
       Depreciation and amortization                               44,403         93,165
       Accrued interest income on note receivable                  (9,319)          --
       (Increase) Decrease in:
         Accounts receivable                                    1,355,869        200,022
         Income taxes recoverable                                  29,645           --
         Inventory                                                300,016         38,642
         Prepaid expenses                                        (137,826)       (45,664)
         Other                                                    (32,421)        (7,432)
       Increase (Decrease) in:
         Accounts payable and other accrued liabilities          (388,860)       (91,073)
         Customer deposits                                         27,900           --
         Accrued income taxes payable                                --            1,450
                                                              -----------    -----------
Cash flows used in operating activities                           499,109       (432,863)
                                                              -----------    -----------

Cash flows from investing activities
   Cash paid to acquire option to purchase unrelated entity       (10,531)          --
   Cash paid for property and equipment                           (13,695)       (76,265)
                                                              -----------    -----------
Cash flows used in investing activities                           (24,226)       (76,265)
                                                              -----------    -----------

Cash flows from financing activities
   Decrease in cash overdraft                                      (8,106)          --
   Change in note payable to affiliates - net                     209,848           --
   Net activity on bank and other lines of credit                (726,580)          --
   Principal payments on long-term note payable                   (10,917)        (6,517)
                                                              -----------    -----------
Cash flows provided by financing activities                      (535,755)        (6,517)
                                                              -----------    -----------

Increase in cash                                                  (60,872)      (515,645)

Cash at beginning of period                                       163,690      2,801,746
                                                              -----------    -----------

Cash at end of period                                         $   102,818    $ 2,286,101
                                                              ===========    ===========


                                  - Continued -




The  financial  information  included  herein has been  prepared  by  management
without audit by independent  certified  public  accountants.  See  accompanying
accountants' review report. The accompanying notes are an integral part of these
financial statements.
                                                                              7







                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
                   Three months ended March 31, 1999 and 1998

                                   (Unaudited)
                                                          Three months Three months
                                                              ended        ended
                                                            March 31,    March 31,
                                                              1999        1998 
                                                             --------    --------  
                                                                      
Supplemental disclosure of interest
   and income taxes paid

     Interest paid for the period                            $ 65,170    $ 20,369
                                                             ========    ========

     Income taxes paid (refunded) for the period             $(29,645)   $   --
                                                             ========    ========

Supplemental disclosure of non-cash
   investing and financing activities

     Transportation equipment purchased with notes payable   $ 17,829    $ 41,295
                                                             ========    ========







                                                                              8





                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS

Karts  International  Incorporated  (Company)  was  originally  incorporated  on
February 28, 1984 as Rapholz  Silver Hunt,  Inc.  under the laws of the State of
Florida.  On February 23, 1996, the Company was  reincorporated  in the State of
Nevada by means of a merger with and into Karts  International  Incorporated,  a
Nevada  corporation  incorporated  on  February  21,  1996.  The Company was the
surviving  entity  and  changed  its  corporate  name  to  Karts   International
Incorporated.

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

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

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

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

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

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



                                                                              9





                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE B - GOING CONCERN

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

During the first quarter of 1999,  the Company  experienced  positive cash flows
from operations of approximately  $499,000 and reduced its short-term borrowings
from a non-financial institution lender by approximately $686,000. The Company's
working capital deteriorated from approximately  $(392,000) at December 31, 1998
to  approximately  $(1,243,000)  at March 31, 1999;  principally due to accounts
receivable  collections,  which were used to reduce  short-term debt and provide
seasonal liquidity.

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

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

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


                                                                             10





                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1.   Cash and cash equivalents
     -------------------------

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

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

2.   Accounts and advances receivable
     --------------------------------

     In the normal course of business,  the Company extends  unsecured credit to
     virtually  all of its  customers  which are located  throughout  the United
     States and are principally concentrated in the southeastern quadrant of the
     country.  Because of the credit risk  involved,  management has provided an
     allowance for doubtful accounts which reflects its opinion of amounts which
     will   eventually   become   uncollectible.   In  the  event  of   complete
     non-performance, the maximum exposure to the Company is the recorded amount
     of trade  accounts  receivable  shown on the  balance  sheet at the date of
     non-performance.

     The Company had no  significant  international  sales during 1999 and 1998,
     respectively.  The Company  anticipates  continuing  international sales in
     future periods and is continuing to develop credit policies related to this
     revenue source.

3.   Inventory
     ---------

     Inventory  consists of steel,  engines and other related raw materials used
     in the manufacture of "fun karts".  These items are carried at the lower of
     cost or market using the first-in,  first-out  method. As of March 31, 1999
     and 1998, inventory consisted of the following components:

                                                       1999         1998 
                                                    ----------   ----------
                       Raw materials                $1,600,442   $  772,722
                       Work in process                 137,151       49,035
                       Finished goods                   92,340       48,815
                                                    ----------   ----------
                                                    $2,129,949   $  870,572

4.   Property, plant and equipment
     -----------------------------

     Property and  equipment are recorded at  historical  cost.  These costs are
     depreciated  over the  estimated  useful  lives of the  individual  assets,
     generally 3 to 25 years, using the straight-line method.

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


                                                                             11





                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

5.   Covenant not to compete
     -----------------------

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

6.   Organization costs
     ------------------

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

7.   Goodwill
     --------

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

     In accordance  with  Statement of Financial  Accounting  Standards No. 121,
     "Accounting  for the  Impairment  of Long-Lived  Assets and for  Long-Lived
     Assets to be Disposed Of", the Company follows the policy of evaluating all
     qualifying  assets as of the end of each  reporting  quarter.  For the year
     ended December 31, 1997, no charges to operations were made for impairments
     in the recoverability of goodwill.  Current management,  effective December
     31, 1998, upon the realization  that 1998  operational  objectives were not
     met, recorded an impairment of future recoverability of goodwill equivalent
     to  100.0% of the  unamortized  goodwill  incurred  at the  acquisition  of
     Brister's  Thunder  Karts,  Inc.,  USA  Industries,  Inc. and Straight Line
     Manufacturing, Inc.

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

     The Company  utilizes  the asset and  liability  method of  accounting  for
     income  taxes.  At March 31,  1999 and  1998,  the  deferred  tax asset and
     deferred tax liability  accounts,  as recorded when material,  are entirely
     the  result  of  temporary  differences.  Temporary  differences  represent
     differences  in the  recognition  of  assets  and  liabilities  for tax and
     financial  reporting  purposes,   primarily  accumulated  depreciation  and
     amortization.  No valuation  allowance  was provided  against  deferred tax
     assets,  where applicable.  As of March 31, 1999 and 1998, the deferred tax
     asset related to the Company's net operating  loss  carryforward  was fully
     reserved.

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

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


                                                                             12





                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

10.  Income (Loss) per share
     -----------------------

     Basic  earnings  (loss) per share is computed  by  dividing  the net income
     (loss) by the weighted-average  number of shares of common stock and common
     stock  equivalents  (primarily  outstanding  options and warrants).  Common
     stock equivalents  represent the dilutive effect of the assumed exercise of
     the  outstanding  stock  options and  warrants,  using the  treasury  stock
     method.  The calculation of fully diluted earnings (loss) per share assumes
     the dilutive effect of the exercise of outstanding  options and warrants at
     either the  beginning  of the  respective  period  presented or the date of
     issuance,  whichever  is  later.  As  of  March  31,  1999  and  1998,  the
     outstanding  warrants and options are deemed to be anti-dilutive due to the
     Company's net operating loss position.


NOTE D - CONCENTRATIONS OF CREDIT RISK

The Company  maintains  its cash accounts in financial  institutions  subject to
insurance coverage issued by the Federal Deposit Insurance  Corporation  (FDIC).
Under FDIC rules,  the Company and its  subsidiaries  are  entitled to aggregate
coverage of $100,000 per account type per separate  legal entity per  individual
financial  institution.  During the quarters  ended March 31, 1999 and 1998, the
separate  operating  entities of the Company had credit risk exposures in excess
of the FDIC coverage as follows:

                                             Highest    Lowest    Number of days
                      Entity                 exposure   exposure  with exposure 
            --------------------------       --------   --------  --------------
Quarter ended March 31, 1999
- ----------------------------
         Brister's Thunder Karts, Inc.       $ 46,451   $    968         30
               USA Industries, Inc.          $ 33,253   $  1,141         19

Quarter ended March 31, 1998
- ----------------------------
         Karts International Incorporated    $ 21,278   $ 21,278          1
           Brister's Thunder Karts, Inc.     $162,063   $ 12,115         33
               USA Industries, Inc.          $ 73,714   $  3,953         73

Additionally,  the  Company  utilizes a lockbox  system for the  collection  and
deposit of receipts on trade accounts  receivable for each operating  subsidiary
and a corporate cash  concentration  sweep account whereby all excess cash funds
are  concentrated  into  one  primary   depository   account  with  a  financial
institution.  The Company and the  financial  institution  then  participate  in
uncollateralized  reverse-repurchase  agreements  which are  settled on a "next-
business day" basis for the  investment  of surplus cash funds.  The Company had
unsecured  amounts  invested in reverse  repurchase  agreements on a daily basis
from February  1997 through  March 31, 1999. As of March 31, 1999 and 1998,  the
Company  had  an  unsecured   outstanding   reverse   repurchase   agreement  of
approximately  $21,000 and  $2,215,000,  respectively.  The Company  incurred no
losses during 1999 and 1998 as a result of any of these unsecured situations.


NOTE E - PROPERTY AND EQUIPMENT

Total  depreciation  expense  charged to operations for the quarters ended March
31, 1999 and 1998 was approximately $30,343 and $25,795, respectively.


                                                                             13





                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE F - NOTE RECEIVABLE

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


NOTE G - OPTION TO ACQUIRE AN UNRELATED ENTITY

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

During the first  quarter of 1999,  the Company  paid an  additional  $10,531 in
costs related to the acquisition of this option to acquire this entity.

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

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


NOTE H - NOTES PAYABLE TO BANKS AND OTHERS

The Company has two lines of credit with an aggregate  face value of $2,000,000.
One  line of  credit  note is tied to the  Company's  aggregate  trade  accounts
receivable  balances,  not to exceed  $1,000,000  (A/R LOC).  The second line of
credit is tied to the  Company's  aggregate  inventory  balances,  not to exceed
$1,000,000  (Inventory  LOC).  The total amounts which may be outstanding at any
one  time,  and the  corresponding  note  principal  advances,  are  tied to the
respective  "Borrowing  Base"  calculations  contained  in  the  Loan  Agreement
(Agreement).  As of March 31, 1999,  an aggregate of  approximately  $773,451 is
outstanding on these lines of credit. The notes require the interest and fees on
the notes to be paid monthly and all of the Company's trade accounts  receivable
collections are deposited to the lender's benefit to a lockbox controlled by the
lender. The notes mature in September 1999.


                                                                             14





                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE I - NOTES PAYABLE TO BANKS AND OTHERS - Continued

The notes  bear a default  interest  of 15.0%  (Lender's  Base Rate of 8.0% plus
7.0%). In the event that the Company's  pending equity offering raises a minimum
of $1.5  million,  the interest  rate will be reduced to the Lender's  Base Rate
plus 3.0%.  Further,  the  Agreement  requires  the  payment of a one-time  1.0%
commitment  fee and the payment of a 1/12%  servicing  fee per month on the face
amount of each line of credit during the term of each respective line of credit.

The Agreement  contains certain  restrictive  covenants related to the Company's
business  operations and financial  ratios. As of December 31, 1998, the Company
was not in compliance  with all covenants in the Agreement.  The lender notified
the Company on February 22, 1999 of certain  defaults on the  Agreement  and the
lender granted a waiver of the notified defaults on March 8, 1999.

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

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

         A  $60,000  corporate  line  of  credit  payable  to  a  bank  with  an
         outstanding  balance of  approximately  $55,359 at March 31, 1999. This
         line of credit bears  interest at the Bank's base rate plus 1.0% (8.75%
         at March 31, 1999).  This line of credit requires  monthly  payments of
         approximately 2.0% of the outstanding  principal plus all accrued,  but
         unpaid,  interest  and fees.  This line of credit is secured by a first
         mortgage on residential  property owned by the former sole  shareholder
         of  Straight  Line  and  the  personal  guaranty  of  the  former  sole
         shareholder and matures in November 1999.

         A $10,000 personal line of credit payable to a bank with an outstanding
         balance of approximately  $9,325 at March 31, 1999. This line of credit
         bears at the Bank's  base rate plus 3.0%  (10.75%  at March 31,  1999).
         This  line  of  credit  requires   monthly  payments  of  1.8%  of  the
         outstanding  principal balance plus all accrued,  but unpaid,  interest
         and  fees.  This line of credit  is  subject  to the  collateralization
         discussed above and this line of credit matures in November 1999.

A recap of notes payable consist of the following:
                                                    1999          1998       
                                                   --------      --------
Inventory line of credit                           $526,625      $     --
Accounts receivable line of credit                  246,826            --
$60,000 corporate line of credit                     55,359            --
$10,000 personal line of credit                       9,325            --
                                                   --------      --------

   Total notes payable                             $838,135      $     --
                                                   ========      ========








                                                                             15







                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE J - NOTES PAYABLE TO AFFILIATES
                                                                   1999        1998     
                                                                  --------    --------  
                                                                                       
$225,000 note payable to the Company's President
   and Chief Executive Officer.  Interest at 8.0%.
   Accrued interest payable monthly.  Principal and
   accrued, but unpaid, interest is due at the earlier
   of the receipt of proceeds from an anticipated
   equity offering or three months from March 17,
   1999.  The loan is unsecured                                   $225,000    $     --

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

$73,875 note payable to the former sole shareholder
   of Straight Line.  Interest at 6.0%.  Principal only
   payment of $15,000 payable by January 31, 1999.
   Remaining principal and all accrued, but unpaid,
   interest is payable subject to the settlement of
   a product liability lawsuit against Straight Line
   Manufacturing, Inc. incurred prior to the Company's
   acquisition of Straight Line.  If the  lawsuit is settled
   prior to March 31, 1999; 50.0% of the principal and
   all accrued, but unpaid, interest will be due on
   October 1, 1999 and the balance will be due and payable
   on March 31, 2000. If the lawsuit is settled between
   March 31, 1999 and March 31, 2000, all principal
   and accrued, but unpaid, interest will be due and
   payable 210 days after the lawsuit settlement date
   or March 31, 2000, which ever is earlier.  If the
   lawsuit is settled after March 31, 2000, all principal
   and accrued, but unpaid, interest is due and payable
   30 days after the lawsuit settlement date                        58,723          --
                                                                  --------    --------

         Total related party long-term debt                       $333,723    $     --
                                                                  ========    ========




                                                                             16







                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE K - LONG TERM DEBT TO BANKS AND OTHERS

Long-term debt payable to banks and others consist of the following at March 31,
1999 and 1998:

                                                                             1999         1998       
                                                                           ---------    ---------
                                                                                  
$20,770 installment note payable to a bank.  Interest at 7.75%.
   Payable in monthly installments of approximately $419,
   including accrued interest.  Final maturity in May 2002.
   Collateralized by a vehicle owned by Brister's Thunder Karts, Inc.      $  14,099    $  17,876

$23,122 installment note payable to a bank.  Interest at 8.25% 
   Payable in monthly installments of approximately $726,
   including accrued interest.  Final maturity in March 2001 
   Collateralized by a vehicle owned by Brister's Thunder Karts, Inc.         16,021       23,097

$17,829 installment note payable to a bank.  Interest at 8.25% 
   Payable in monthly installments of approximately $561,
   including accrued interest.  Final maturity in January 2002 
   Collateralized by a vehicle owned by Brister's Thunder Karts, Inc.         16,496           --

$27,677 note payable to an individual.  Interest at 7.0%. Payable
   in semi-monthly installments of approximately $200, including
   interest.  Secured by equipment owned by Brister's Thunder
   Karts, Inc.                                                                    --          740

$240,020 mortgage note payable to a bank.  Interest at the Bank's
   Commercial Base Rate (9.25% at March 31, 1999).  Payable in
   monthly installments of approximately $2,626, including accrued
   interest.  Final maturity in August 2010.  Collateralized by land
   and a building owned by USA Industries, Inc.                              213,995      220,703

$9,348 installment note payable to a bank.  Interest at 10.0% 
   Payable in monthly installments of approximately $303,
   including accrued interest.  Final maturity in April 1999 
   Collateralized by transportation equipment owned by USA
   Industries, Inc.                                                              233        3,387

$18,198 installment note payable to a bank.  Interest at 8.25% 
   Payable in monthly installments of approximately $572,
   including accrued interest.  Final maturity in March 2001 
   Collateralized by transportation equipment owned by USA
   Industries, Inc.                                                           12,601       18,173

$14,000 installment note payable to an equipment finance
   company.  Payable in monthly installments of approximately
   $345, including accrued interest.  Final maturity in May 2002 
   Collateralized by equipment owned by USA Industries, Inc.                  11,162           --
                                                                           ---------    ---------
     Total long-term debt to banks and others                                284,607      283,976
         Less current maturities                                             (40,280)     (26,659)
                                                                           ---------    ---------
     Long-term portion                                                     $ 244,327    $ 257,317
                                                                           =========    =========





                                                                             17







                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



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

Future maturities of long-term debt are as follows:

                                       Year ending
                                      December 31,                   Amount    
                                     --------------              --------------
                                          1999                    $    40,280
                                          2000                         41,342
                                          2001                         33,054
                                          2002                         20,052
                                          2003                         17,249
                                       2004 - 2008                    114,603
                                       2009 - 2013                     18,027
                                                                     --------
                                         Totals                   $   284,607
                                                                     ========      


NOTE L - INCOME TAXES

The components of income tax (benefit)  expense for the quarters ended March 31,
1999 and 1998, respectively, are as follows:
                                                                       1999              1998  
                                                                 --------------    --------------
                                                                              
                                           
                      Federal:                                                                           
                           Current                                $          -      $          -     
                           Deferred                                          -                 -     
                                                                   -----------       -----------     
                                                                             -                 -     
                                                                   -----------       -----------     
                      State:                                                                             
                           Current                                           -                 -     
                           Deferred                                          -                 -     
                                                                   -----------       -----------     
                                                                             -                 -     
                                                                   -----------       -----------     
                                                                                                         
                           Total                                  $          -      $          -     
                                                                   ===========       ===========     
                                                                   
As of March 31,  1999,  the Company has a net  operating  loss  carryforward  of
approximately  $3,000,000 to offset future  taxable  income.  Subject to current
regulations, this carryforward will begin to expire in 2012.

The Company's income tax expense for the quarters ended March 31, 1999 and 1998,
respectively, differed from the statutory federal rate of 34 percent as follows:

                                                                       1999              1998       
                                                                 --------------    --------------           
Statutory rate applied to earnings (loss) before income taxes     $   (234,701)     $   (211,471)
Increase (decrease) in income taxes resulting from:
   State income taxes                                                       --                --
   Other including reserve for deferred tax asset                      234,701           211,471
                                                                   -----------       -----------

     Income tax expense                                           $         --      $         --

                                                                   ===========        ==========






                                                                             18





                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE M - RELATED PARTY TRANSACTIONS

The Company leases its  manufacturing  facilities  under an operating lease with
the former owner of  Brister's,  who is also the  Company's  President and Chief
Operating  Officer,  in addition to being a Company  shareholder  and  director.
Concurrent with the closing of the acquisition of Brister's, the Company and the
former owner executed a new lease agreement for a primary two-year term expiring
in 1998 and an additional  two-year  renewal  option.  The monthly lease payment
will remain at $6,025 per month with annual adjustments for increases based upon
the Consumer Price Index. Total payments under this agreement were approximately
$18,075 for each of the quarters ended March 31, 1999 and 1998, respectively.

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


NOTE N - COMMON STOCK TRANSACTIONS

The terms of a March 31, 1996 private placement  memorandum required the Company
and/or a company  owned by a current  officer and  director to issue  additional
shares to the original  investors  in the private  placement  memorandum  in the
event  that the  Company's  securities,  as listed on a  published  exchange  or
electronic  bulletin board,  did not equal$4.50 per share on March 31, 1998 (the
second  anniversary  date of the  closing of the  private  placement  memorandum
offering).  The  issuance  of  additional  shares,  if any is  required,  to the
original investors will be done without additional  compensation to the Company.
To  facilitate   this   contingency,   the  Company  sold  233,333   restricted,
unregistered  shares  of  common  stock to an  entity  owned by an  officer  and
director of the Company for cash of approximately $350. These shares were placed
into an escrow account for the benefit of the original  investors.  In the event
that no additional  shares are required to be issued to the original  investors,
the shares held in escrow  will be  returned  to the company  owned by a current
officer and director of the Company.

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

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

                                                                             19





                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE N - COMMON STOCK TRANSACTIONS - Continued

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

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

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


NOTE O - COMMON STOCK WARRANTS

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

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

                                 Warrants       Warrants
                                originally   outstanding at
                                  issued     March 31, 1999    Exercise price  
                                ----------   --------------    --------------

1996 Warrants                      500,018        500,018      $4.50 per share
Underwriter's Warrants             155,000        155,000      $4.00 per share
1997 Warrants                    1,782,500      1,782,500      $4.00 per share
                                 ---------      ---------

Totals at March 31, 1999         2,504,185      2,437,518
                                 =========      =========





                                                                             20





                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE O - COMMON STOCK WARRANTS - Continued

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

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

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


NOTE Q - STOCK OPTIONS

The Company's  Board of Directors has allocated an aggregate  125,377  shares of
the Company's common stock for unqualified stock option plans for the benefit of
employees of the Company and its subsidiaries.

During  1996,  the  Company  granted  options to purchase  59,355  shares of the
Company's   common  stock  to  employees  of  the  Company  and  its   operating
subsidiaries  at an exercise  price of $5.63 per share.  These options expire at
various times during 2001.

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

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

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


                                                                             21







                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE Q - STOCK OPTIONS

In January 1999, as part of the Separation Agreement between the Company and its
then President and Chief Executive  Officer,  the Company issued this individual
options to purchase 15,000 shares of Common Stock at an option exercise price of
$1.06 per share.  This option was granted to replace options to purchase 200,000
shares of common  stock which were  effectively  canceled at  separation.  These
options are vested and expire on January 20, 2004.

There were no exercise of any options  during the quarters  ended March 31, 1999
and 1998 or for  either of the  years  ended  December  31,  1998 and 1997.  The
following table summarizes all options granted from 1996 to March 31, 1999.

                     Options       Options        Options          Options       Exercise price
                     granted      exercised      terminated      outstanding        per share  
                  ------------  -------------  -------------    -------------   ----------------
                                                                  
1996 options          59,355             -              --           59,355     $          5.63
1997 VP options       13,334             -           6,667            6,667     $          4.875
1997 options          52,670             -              --           52,670     $          4.875
1998 options         265,000             -         210,000           55,000     $  1.06 - $3.50
1999 options          15,000             -              --           15,000     $          1.06
                     -------       -------         -------          -------     

Totals               405,359            --         216,667          133,692
                     =======       =======         =======          =======  
     

1998 Compensation Plan
- ----------------------

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

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

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




                                                                             22




                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE Q - STOCK OPTIONS - Continued

1998 Compensation Plan - continued
- ----------------------

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

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

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

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




                                                                             23





                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE R - COMMITMENTS AND CONTINGENCIES

Litigation
- ----------

Brister's is named as defendant in several product liability lawsuits related to
its "fun karts". The Company has had and continues to have commercial  liability
coverage to cover these exposures with a $25,000 per claim self-insurance clause
as of December 31, 1998. The Company is vigorously  contesting  each lawsuit and
has accrued management's estimation of the Company's exposure in each situation.
Additionally, the Company maintains a reserve for future litigation equal to the
"per  claim"  self-insurance  amount  times the  four-year  rolling  average  of
lawsuits filed naming the Company as a defendant.

On February 4, 1997,  litigation  was filed against the Company and Brister's in
an action to have Brister's product liability  insurance coverage  (discussed in
the  preceding  paragraph)  declared  null and void as a result of a payment  by
Brister's  insurance  underwriter in settlement of a product liability  lawsuit.
Legal counsel is of the opinion that this action has questionable  merit and the
determination of an outcome,  if any, is unpredictable at this time. The Company
is  vigorously  defending  the action.  Additionally,  the Company is pursuing a
counteraction  against the underwriter's agent for potential  misrepresentations
made by the agent to the underwriter  regarding Brister's during the acquisition
of the aforementioned  commercial  liability insurance coverage.  During 1998, a
summary  judgment was granted in favor of Brister's  dismissing  the claim.  The
plaintiff  has  appealed  the  summary  judgment  decision  and the  Company and
Brister's  are of the  opinion  that the  initial  decision of the Court will be
upheld.

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

Consulting and Patent Licensing
- -------------------------------

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

The Agreements are for a three (3) year term,  which provides for the payment of
a one-time license fee and a "per unit" royalty fee. Upon execution, the Company
was  obligated  to pay an initial  license  fee of  $10,000  and agreed to pay a
royalty  of $1.00  per unit on  which  the  existing  intellectual  property  is
installed. For the second and third years of the Agreement, the Company will pay
the  greater  of  $20,000  per year or $1.00  per  unit on  which  the  existing
intellectual property is installed. During the quarters ended March 31, 1999 and
1998,  respectively,  the Company  paid or accrued  approximately  $638 and $640
under this Agreement.




                                                                             24





                KARTS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE R - COMMITMENTS AND CONTINGENCIES - Continued

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

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

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

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

The Straight Line President may also receive, at the discretion of the Company's
Board of  Directors,  annual  performance  based stock options to purchase up to
10,000 shares of the Company's common stock at a price equal to the market value
of the  Company's  common stock on the date of issuance,  as  determined  by the
Company's  Board of  Directors,  and an annual cash bonus not to exceed 15.0% of
the annual base salary.


NOTE S - SIGNIFICANT CUSTOMERS

During the quarters  ended March 31, 1999 and 1998, the Company has no single or
group of affiliated  customers that are responsible for more than 10.0% of total
net sales.





                                                                             25





Part I - Item 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
   AND RESULTS OF OPERATIONS


Caution Regarding Forward-Looking Information
- ---------------------------------------------

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


Results of Operations
- ---------------------

Three  months  ended March 31, 1999 as compared to the three  months ended March
31, 1998
- --------------------------------------------------------------------------------

The Company  experienced net sales of  approximately  $1.2 million for the three
months ended March 31, 1999 as compared to net sales of  approximately  $509,000
for the  three  months  ended  March  31,  1998.  Sales  have  increased  due to
management  efforts to create retail  product demand and the creation of various
promotional  products and pricing for the first  quarter of 1999.  The Company's
sales demand remains highly seasonal.  Current Company management has instituted
various  sales and  marketing  strategies,  including  the pursuit of additional
distribution  channels,  including  potential mass  merchandiser or buying group
customers,  and geographic areas which management  believes are under served, to
improve  its  sales  during  the  Company's  traditional  slow  demand  periods.
Additionally,   the  Company   continues  to  explore   contract   manufacturing
opportunities  to  attempt  to  better  utilize  the  Company's  facilities  and
equipment during the first six months of the year.

Due to the increase in unit sales  during the first  quarter of 1999 as compared
to the first  quarter of 1998,  the  Company was better able to absorb its fixed
manufacturing  costs and  experienced  an improvement in its gross profit margin
from  approximately  $(202,000)  in the first  quarter  of 1998 as  compared  to
approximately $(169,000) for the first quarter of 1999. The Company has added no
significant  capital assets to its production  facilities and the charge to cost
of sales for  depreciation  remains  relatively  constant  during the respective
first  quarters  of 1999 and  1998.  Total  cost of  sales  expenses  rose  from
approximately $694,000 to approximately $1.356 million predominately as a result
of the increased material usage and direct labor related to the increase in unit
sales.

Operating  expenses  have  increased by  approximately  $111,000  from the first
quarter of 1998 to the first quarter of 1999. This change relates  predominately
to  increases  in general  and  administrative  salaries  during the  respective
quarters  of   approximately   $291,000  for  the  first  quarter  of  1999  and
approximately  $149,000  during the first  quarter  of 1998.  The  Company  also
experienced   lesser  increases  in  selling  expenses  and  other  general  and
administrative  costs.   Management  consistently  monitors  corporate  overhead
expenses at each operating subsidiary level and further anticipates that current
expenditure levels will remain relatively constant during future periods.


                                                                             26



For the three months ended March 31,  1999,  the Company  incurred a net loss of
approximately  $(690,000) as compared to approximately  $(622,000) for the three
months ended March 31, 1998. Contributing to this approximate $(68,000) increase
in the net loss is the  increase in interest  expense of  approximately  $42,000
related  to  the  Company's  continued  use  of  short-term   financing  from  a
non-financial  institution lender which began at the end of the third quarter of
1998.


Additional Operations information.
- ----------------------------------

The  Company  currently  has   approximately  ten  product  liability   lawsuits
outstanding,  none of which are expected to exceed  existing  product  liability
insurance  policy limits.  The Company has never had a claim that resulted in an
award or  settlement  in  excess of  insurance  coverage.  However,  there is no
assurance that the Company's insurance coverage of $5,000,000 per occurrence and
$6,000,000 aggregate will be sufficient to fully protect the business and assets
of the Company from all claims, nor can any assurances be given that the Company
will be able to maintain the existing coverage or obtain additional  coverage at
commercially  reasonable rates. Management believes that it has process controls
on its product  operations,  product labeling,  operator's  manuals,  and design
features  which will  assist in a  successful  defense of any  present or future
product  liability claim. To the extent product  liability losses are beyond the
limits  or  scope  of  the  Company's  insurance  coverage,  the  Company  could
experience   a  material   adverse   effect  upon  its   business,   operations,
profitability and assets.


Liquidity and Capital Resources
- -------------------------------

As of March 31, 1999,  the Company had positive  (negative)  working  capital of
approximately  $(1.243)  million as compared to approximately $ 3.435 million at
March 31,  1998.  During the first  quarter  of 1999,  the  Company  experienced
positive  cash flows from  operations of  approximately  $499,000 as compared to
using  cash in  operations  during the first  quarter  of 1998 of  approximately
$(432,000).  This  improvement  in  cash  flows  was  due to the  collection  of
approximately $1.3 million in accounts  receivable and the utilization of excess
inventories of raw materials  carried forward from the fourth quarter of 1998 of
approximately  $300,000.  However, this improvement in operating cash flows also
caused a negative  change in working  capital from  approximately  $(392,000) at
December 31, 1998 to approximately $(1,243,000) at March 31, 1999 as a result of
the  aforementioned   collection  of  accounts  receivable  and  utilization  of
inventory.

During the first quarter of 1999,  the Company  expended  cash of  approximately
$14,000 in additions to property and equipment.  Further,  the Company  incurred
long-term installment debt of approximately $18,000 for transportation equipment
which was financed  through the Company's  primary  financial  institution.  The
long-term debt is collateralized by the related transportation equipment, is for
a term of three years and bears interest at 8.25%.

The Company has identified no further significant capital requirements for 1999.
Liquidity  requirements  mandated by future business expansions or acquisitions,
if any are specifically  identified or undertaken,  are not readily determinable
at this time as no substantive plans have been formulated by management.


Three  months  ended March 31, 1998 as compared to the three  months ended March
31, 1997
- --------------------------------------------------------------------------------

The Company  experienced  net revenues of  approximately  $509,000 for the three
months  ended March 31,  1998  compared to  approximately  $1.3  million for the
comparable  period of 1997. These sales results continue to reflect weak product
demand during the first quarter of the Company's operating year due primarily to
seasonality of product demand at the consumer level. Additionally, sales to mass
merchandisers   ceased  during  the  second  quarter  of  1997  and  these  mass
merchandiser  sales  mitigated  some the  seasonality  effects  during the first
quarter of 1997.  Current  Company  management has instituted  various sales and
marketing strategies, including the pursuit of additional distribution channels,
including potential mass merchandiser or buying group customers,  and geographic
areas which  management  believes are under served,  to improve its sales during
the Company's traditional slow demand periods.
                                                                         
Due to the decline in unit sales to mass merchandisers and related effect on net
sales  dollars,   the  Company  was  unable  to  completely   absorb  its  fixed
manufacturing overhead expenses.  Accordingly, the Company experienced a decline
in gross profit from  approximately  $146,000  for the first  quarter of 1997 to
approximately $(202,000) for the comparable period of 1998.

                                                                             27


Selling,  general  and  administrative  expenses,   including  depreciation  and
amortization,  were  approximately  $428,000 during the three months ended March
31, 1998 as compared to approximately  $556,000 for the three months ended March
31, 1997. The Company  continues to experience a maturation and stabilization of
the Company's  operations  and the results of management  oversight of corporate
overhead expenses during 1998.  Management  anticipates that current expenditure
levels will remain relatively constant during future periods.

For the three month period ended March 31, 1998, the Company incurred a net loss
of approximately  $622,000 as compared to a net loss of  approximately  $489,000
for  the  comparable  three  month  period  ended  March  31,  1997.  Management
attributes  the  increase  in the net loss for the  first  three  months of 1998
compared to the comparable  period of 1997 to decreased unit sales volume levels
which did not  allow  for the  complete  absorption  of all fixed  manufacturing
overhead costs during the quarter.

Primary earnings (loss) per share were  approximately  $(0.13) per share for the
three  months ended March 31, 1998 and  approximately  $(0.18) per share for the
three months ended March 31, 1997.

Additional Operations information.
- ----------------------------------

The  Company  currently  has   approximately  six  product  liability   lawsuits
outstanding,  none of which are expected to exceed  existing  product  liability
insurance  policy limits.  The Company has never had a claim that resulted in an
award or settlement in excess of insurance coverage.

There is no assurance  that the Company's  insurance  coverage of $5,000,000 per
occurrence  and  $5,000,000  aggregate  will be  sufficient to fully protect the
business and assets of the Company from all claims,  nor can any  assurances  be
given that the Company will be able to maintain the existing  coverage or obtain
additional coverage at commercially  reasonable rates.  Management believes that
it has process controls on its product operations,  product labeling, operator's
manuals,  and design  features which will assist in a successful  defense of any
present or future  product  liability  claim.  To the extent  product  liability
losses are beyond the limits or scope of the Company's insurance  coverage,  the
Company  could   experience  a  material   adverse  effect  upon  its  business,
operations, profitability and assets.

Liquidity and Capital Resources
- -------------------------------

With respect to the  comparative  balance  sheet,  consolidated  assets of $l0.6
million  at March 31,  1998 were  approximately  $700,000  lower  than the $11.3
million at December 31, 1997.  This decrease is principally  attributable  to an
decrease in current assets related to the collection of accounts  receivable and
the  utilization  of cash  resources  for fixed asset  additions  (approximately
$76,000)  and the use of cash in  operating  activities  of  approximately  $433
thousand. Consolidated liabilities of $684,000 at March 31, 1998 were comparable
to the year end balance of  approximately  $740,000.  The decrease was primarily
due to a  reduction  in trade  accounts  payable  and  offsetting  increases  in
long-term debt arising from the purchase of transportation  equipment during the
first quarter of 1998.

Although Karts  International  Incorporated  is a seasonal  business with 50% or
more of its sales being  historically  recorded in the fourth calendar  quarter,
management  believes its cash  reserves and inventory  levels are  sufficient to
insure  adequate  manufacturing  and shipment of finished  goods.  Additionally,
management is of the opinion that the 1997 plant  additions will insure that the
Company will have sufficient capacity to meet peak product demands. Further, the
Company,   during  the  first  quarter  of  1998,   began   construction  on  an
administrative office addition adjacent to the Roseland, Louisiana manufacturing
facility. As of March 31, 1998,  approximately $63,000 had been expended on this
addition.  Management  is of the opinion that the  occupation  of this  facility
during the second quarter of 1998 will contribute to future  corporate  overhead
expense savings and allow for better corporate management oversight of the daily
operations at the Company's Roseland Louisiana facility.                    

Capital Requirements
- --------------------

During the first three months of 1998,  the Company has  expended  approximately
$76,000 for new property and equipment,  including approximately $63,000 for the
construction  of an  administrative  office  addition  adjacent to the Roseland,
Louisiana  manufacturing  facility.  Further,  the  Company  incurred  long-term
installment debt of approximately $41,000 for transportation equipment which was
financed through the Company's primary financial institution. The long-term debt
is  collateralized  by the related  transportation  equipment,  is for a term of
three years and bears interest at 8.25%.

                                                                             28


The Company has identified no further significant  capital  requirements for the
current  operating  year.  Liquidity  requirements  mandated by future  business
expansions or acquisitions,  if any are  specifically  identified or undertaken,
are not  readily  determinable  at this time as no  substantive  plans have been
formulated by management.

Year 2000 Considerations
- ------------------------

The Year 2000 (Y2K) date change is believed to affect  virtually  all  computers
and  organizations.  The Company has  undertaken a  comprehensive  review of its
information  systems,  including  personal  computers,  software and  peripheral
devices,  and its  general  communications  systems.  The  Company has no direct
electronic  links with any  customer or supplier.  In addition,  the Company has
held discussions with certain of its software  suppliers with respect to the Y2K
date  change.  While the Company has not  completed  its detailed  review,  as a
preliminary  assessment,  the Company  believes,  as of the date of this filing,
that it will not be  required to modify or replace  significant  portions of its
software and any such  modifications  or  replacements  are, or will be, readily
available.  The  Company  completed  its  detailed  review by March 31, 1999 and
anticipates  completing any modifications,  upgrades or replacements  during the
second quarter of 1999. As of March 31, 1999, the Company  anticipates  that the
total expenditures related to Y2K matters to be less than $10,000.

The Company  has no Y2K impact in any  manufacturing  equipment.  The Company is
also planning to hold  discussions  with its  significant  suppliers,  shippers,
customers and other external  business  partners  related to their readiness for
the Y2K date change.

The  Company  does not  expect  the costs  associated  with the Y2K date  change
compliance to have a material effect on its financial position or its results of
operations.  There can be no assurance until January 1, 2000, however,  that all
of the Company's systems, and the systems of its suppliers,  shippers, customers
or other external business partners will function adequately.


Part II - Other Information

Item 1  - Legal Proceedings

   See accompanying notes to the consolidated financial statements

Item 2  - Changes in Securities

   None

Item 3  - Defaults on Senior Securities

   None



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Item 4 - Submission of Matters to a Vote of Security Holders

   The Company has held no regularly  scheduled,  called or special  meetings of
   shareholders during the reporting period.

Item 5 - Other Information

   None

Item 6 - Exhibits and Reports on Form 8-K

   a)    Exhibits
         --------
         None

   b)    Reports on Form 8-K
         -------------------
         January 13, 1999         Reporting the resignation of Robert M. Aubrey,
                                  President, Chief Executive Officer and Member
                                  of the Board of Directors.



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



                                   SIGNATURES


In accordance with the  requirements of the Exchange Act, the registrant  caused
this  report to be  signed on its  behalf  by the  undersigned,  thereunto  duly
authorized.

                                         KARTS INTERNATIONAL INCORPORATED


May   14  , 1999                              /s/ Charles Brister              
    ------                       -----------------------------------------------
                                                  Charles Brister
                                 President, Chief Executive Officer and Director


May   14  , 1999                              /s/ Richard N. Jones        
    ------                       -----------------------------------------------
                                                  Richard N. Jones
                                              Chief Accounting Officer
 




                                                                             30