RACING CHAMPIONS CORP, S-1/A, 1997-06-09

RACING CHAMPIONS CORP
S-1/A, 1997-06-09
MISC DURABLE GOODS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 9, 1997.

REGISTRATION STATEMENT NO. 333-22493
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

PRE-EFFECTIVE AMENDMENT NO. 3

TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

RACING CHAMPIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------

<TABLE>
<S> <C> <C>
DELAWARE 5090 36-4088307
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

800 ROOSEVELT ROAD
BUILDING C, SUITE 320
GLEN ELLYN, ILLINOIS 60137
(630) 790-3507
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

ROBERT E. DODS
PRESIDENT
RACING CHAMPIONS CORPORATION
800 ROOSEVELT ROAD
BUILDING C, SUITE 320
GLEN ELLYN, ILLINOIS 60137
(630) 790-3507
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

COPIES OF COMMUNICATIONS TO:

<TABLE>
<S> <C>
MICHAEL T. PEPKE, ESQ. THOMAS J. MURPHY, ESQ.
JAMES M. BEDORE, ESQ. TIMOTHY R.M. BRYANT, ESQ.
REINHART, BOERNER, VAN DEUREN, MCDERMOTT, WILL & EMERY
NORRIS & RIESELBACH, S.C. 227 WEST MONROE STREET
1000 NORTH WATER STREET, SUITE
2100 CHICAGO, IL 60606-5096
MILWAUKEE, WI 53202 (312) 372-2000
(414) 298-1000
</TABLE>

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:

As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED JUNE 9, 1997

PROSPECTUS

5,000,000 SHARES

[RACING CHAMPIONS LOGO]

COMMON STOCK
------------------------

All of the 5,000,000 shares of Common Stock offered hereby are being sold
by Racing Champions Corporation. Certain of the net proceeds to the Company will
be used to redeem all of the Company's outstanding shares of preferred stock and
to repay indebtedness to the Company's current stockholders. See "Use of
Proceeds."

Prior to the Offering, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price for the
Common Stock will be between $12.00 and $14.00 per share. See "Underwriting" for
information relating to the determination of the initial public offering price.

The Common Stock has been approved for listing on the Nasdaq National
Market under the symbol "RACN."

PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION DISCUSSED
UNDER THE CAPTION "RISK FACTORS" AT PAGE 8.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<S> <C> <C> <C>
==================================================================================================================
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------------------
Per Share............................. $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3).............................. $ $ $
==================================================================================================================
</TABLE>

(1) The Company and certain stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."

(2) Before deducting expenses, estimated to be $750,000, payable by the Company.

(3) The Company has granted the Underwriters a 30-day option to purchase up to
357,142 additional shares of Common Stock and certain stockholders of the
Company have granted the Underwriters a 30-day option to purchase up to
392,858 additional shares of Common Stock on the same terms and conditions
as set forth above to cover over-allotments, if any. The Company will not
receive any proceeds from the sale of any additional shares by these
stockholders. See "Principal Stockholders." If the Underwriters exercise the
over-allotment option in full, the total Price to Public will be $ ,
the total Underwriting Discounts and Commissions will be $ , the
total Proceeds to Company will be $ and the total proceeds to these
stockholders will be $ . See "Underwriting."
------------------------

The shares of Common Stock offered hereby are offered by the several
Underwriters, subject to prior sale, when, as and if delivered to and accepted
by the Underwriters, and subject to their right to reject orders in whole or in
part. It is expected that delivery of the certificates representing shares of
Common Stock will be made on or about , 1997 through The
Depository Trust Company or at the offices of Robert W. Baird & Co.
Incorporated, Milwaukee, Wisconsin.

ROBERTW. BAIRD & CO.
INCORPORATED

WILLIAM BLAIR & COMPANY

J.C. BRADFORD & CO.

THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE> 3

[PICTURES OF PRODUCTS]

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING
TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."

2
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in the Prospectus. Unless indicated otherwise, the information
contained in this Prospectus (i) gives effect to the recapitalization
consummated on April 30, 1996 in which the Company was formed as a holding
company to acquire the RCI Group and the RCL Group (see "The Recapitalization"),
(ii) assumes that the Underwriters' over-allotment option is not exercised,
(iii) has been restated to give retroactive effect to a stock split of 7.885261
shares for each share of Common Stock and an amendment and restatement of the
Company's Certificate of Incorporation and By-Laws effected or to be effected
prior to consummation of the Offering, and (iv) gives effect to the conversion
of all of the outstanding shares of the Company's Nonvoting Common Stock, par
value $.01 per share, into an aggregate of 937,084 shares of Common Stock upon
the completion of the Offering. Unless indicated otherwise, references to the
"Company" or "Racing Champions" are to Racing Champions Corporation and its
subsidiaries, including the operations of the RCI Group and the RCL Group prior
to April 30, 1996.

THE COMPANY

Racing Champions is a leading producer and marketer of collectible scaled
die cast vehicle replicas(1). The Company is best known for its extensive line
of officially licensed, high quality collectible replicas of actual race cars
and related vehicles from the five most popular U.S. professional racing series,
including NASCAR. Since its inception in 1989, the Company has capitalized on
the growing popularity of motor sports by offering an expanding line of high
quality, affordable racing replicas targeted toward racing fans and adult
collectors. The Company believes that it had the largest domestic market share
in 1996 in the die cast racing replica category(1). Beginning in 1996, the
Company successfully expanded into non-racing collectibles by introducing the
Racing Champions Mint(TM) line of high quality die cast replicas of classic and
late-model vehicles. The Company is continuing this expansion in 1997 by
introducing an additional line of non-racing vehicle replicas and two new lines
of collectible pewter figures. From 1990, the Company's first full year of
operations, through 1996, the Company's net sales grew from approximately $5
million to $66 million. The Company intends to further its growth by (i)
continuing to capitalize on the growing popularity of motor sports to expand its
racing replica business, and (ii) leveraging its brand name, reputation with
collectors, and established distribution and manufacturing relationships by
developing new collectible products.

The Company's strategy is to develop affordable, collectible replicas
centered around themes for which significant enthusiast, hobbyist and collector
interest exists. In order to produce authentic products and create interest and
credibility with collectors and enthusiasts, the Company obtains official
licenses which allow for the reproduction of distinguishing characteristics,
trade names and trademarks. The Company enhances the collectibility of its
products by carefully managing product quantities and staggering product release
dates, continuously freshening its product offerings, producing special
editions, utilizing distinctive packaging and adding other special features. In
order to broaden the potential collector base for its products, the Company's
replicas are affordably priced, typically under $30 at retail. Although the
Company employs traditional collectible distribution channels such as collector
and hobby shops, the Company principally distributes its products through mass
merchants. The Company believes that its established shelf space at these mass
merchants enables it to (i) reach more customers with greater frequency given
the regular shopping patterns of its target market at mass merchants, and (ii)
sell a higher volume of products resulting in substantial economies of scale.
The resulting cost reductions make the Company's products more affordable to
consumers and more profitable for itself as well as retailers. In addition,
because of electronic links in place with its mass merchant customers, the
Company is better able to monitor retail inventories and point of sale
information and adjust production accordingly.

Racing Replicas. The racing replica category is well suited to the
Company's strategy because of (i) the popularity of major racing series such as
NASCAR, one of the fastest growing spectator sports in the United States, (ii)
the significant interest in collecting racing replicas among racing fans and
adult die cast collectors and (iii) the wide variety of frequently changing
vehicles to replicate. Racing Champions' largest product line is a comprehensive
collection of scaled stock cars, trucks and team transporters replicating most
of the
3
<PAGE> 5

vehicles competing in the current year's NASCAR Winston Cup Series, Busch Grand
National Series and Truck Series by Craftsman. The Company also produces
replicas from other popular racing series including National Hot Rod Association
drag racing ("NHRA"), Championship Auto Racing Teams ("CART") and Indy Racing
League ("IRL") Indy style racing, and World of Outlaws sprint car racing ("World
of Outlaws"), as well as Honda and Kawasaki racing motorcycles. Racing Champions
produced over 900 different styles of racing replicas in 1996. The Company's
racing replicas range in size from 1:144 scale to 1:9 scale and retail at prices
ranging from $1 to $30.

In order to produce its wide variety of racing replicas, the Company has
entered into over 450 different licensing agreements with racing teams, drivers
and sponsors, vehicle manufacturers and major racing series sanctioning bodies.
Because several aspects of a racing vehicle's outward appearance change
frequently due to changes in sponsors, vehicle styling, graphics and drivers,
many of the Company's replicas also change frequently, thereby enhancing their
collectibility. The Company further enhances collectibility by releasing
different monthly assortments of the various racing replicas, producing annual
and special editions and adding special features such as serial numbers, vehicle
display stands, die cast emblems and trading cards featuring the driver.
Established secondary markets exist for many of the Company's products and the
market values of the Company's products are regularly reported in a variety of
die cast collector magazines. In many cases, the value of a Racing Champions
product in the secondary markets exceeds the product's original retail price.

Non-racing Vehicle Replicas. In addition to racing replicas, the Company
has identified significant market opportunities for collectible non-racing die
cast vehicles. During 1996, the Company introduced Racing Champions Mint, a line
of high quality, collectible die cast vehicles replicating classic and
late-model cars and trucks from the 1930's to the present. The Racing Champions
Mint line features a series of limited production, serial numbered, highly
detailed replicas produced in color schemes matching those used on the actual
vehicle. This product line is sold through mass merchants at a retail price of
approximately $5 for each 1:64 scale vehicle and in its first year of production
generated sales for the Company of approximately $9.7 million. In early 1997,
the Company complemented the Racing Champions Mint series with the Racing
Champions Hot Rod Collection(TM), a new line of collectible die cast hot rod
replicas which is supported by licensing and marketing arrangements with
Petersen Publishing Company's Hot Rod Magazine.

Collectible Pewter Figures. The Company is targeting comic book and sports
enthusiasts and figure collectors with two new lines of collectible pewter
figures which it began shipping in 1997. The first line is a series of pewter
replicas of various comic book characters in action poses. Each figure is
mounted on a die cast stand in front of an encased miniature reproduction of a
comic book cover on which the character appeared ("Comic Book Champions"(TM)).
The Company has obtained licenses from Marvel Characters, Inc. and DC Comics (a
division of the Time Warner Entertainment Company L.P.), two of the leading
publishers of comic books in the United States, which will allow the Company to
replicate characters such as Superman(R), Batman(R) and Spiderman(R). The second
line consists of pewter replicas of popular athletes. Each athlete is mounted on
a die cast stand in front of an encased miniature reproduction of a Sports
Illustrated magazine cover on which the athlete appeared ("Sports
Champions"(TM)). In addition to a licensing arrangement with Sports Illustrated,
the Company is negotiating licenses from the major sports leagues (including the
National Football League, Major League Baseball, the National Hockey League and
the National Basketball Association) and popular athletes (including Muhammad
Ali, Frank Thomas, Ken Griffey, Jr., Joe Montana and Arnold Palmer). The Company
has received commitments from its major customers to purchase both the Comic
Book Champions and Sports Champions product lines.

Product Distribution and Supply. Approximately 76% of the Company's 1996
net sales were made through mass merchants, including K-Mart, Target, Toys 'R'
Us and Wal-Mart. Due to the success of its product offerings, the Company has
been able to increase shelf space for its products at each of its major
customers. The Company believes that its current shelf space and relationships
with its mass merchant customers provide it with a significant competitive
advantage in introducing new products and maintaining its leading share of the
racing replica market. The Company has maintained its profit margins while
selling through mass merchants by realizing economies of scale, diligently
controlling its costs and offering its mass market customers the opportunity to
earn an attractive mark-up on its products. Racing Champions also sells through
wholesalers who, in turn, distribute to hobby and collector shops (approximately
15% of 1996 net
4
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sales). The Company's remaining 9% of 1996 net sales were made through companies
which offered customized products for premium/promotional purposes.

Virtually all of the Company's products are manufactured by six
independently owned factories located in China. All but two of these factories
are exclusively dedicated to manufacturing the Company's products and all are
privately owned by independent Chinese entrepreneurs. The Company, through
Racing Champions Limited, its Hong Kong subsidiary, manages all key aspects of
its product manufacturing in China, including sourcing raw materials and
packaging, performing engineering and graphic art functions, executing
production schedules, providing on site quality control and safety testing and
delivering shipments for export from Hong Kong to the United States. The Company
believes its dedicated Chinese supplier base together with the local oversight
and coordination provided by its Hong Kong subsidiary provide it with certain
competitive advantages including a rapid product development capability as well
as a flexible, reliable and high quality supply source.

Formation. Racing Champions Corporation is a holding company which was
formed in April 1996 by an investor group led by Willis Stein & Partners, L.P.,
a private investment fund, for the purpose of acquiring both Racing Champions,
Inc., a privately held Illinois corporation formed in 1989 (together with an
affiliated company, the "RCI Group"), and Racing Champions Limited, a privately
held Hong Kong corporation formed simultaneously in 1989 (together with certain
affiliated companies, the "RCL Group"). See "The Recapitalization." The RCI
Group and the RCL Group, while under different ownership, effectively operated
as one entity with the RCI Group managing the licensing, product development and
sales operations, and the RCL Group managing the overseas manufacturing and
shipping operations. The RCI Group was owned equally by Robert E. Dods and Boyd
L. Meyer. The RCL Group was owned by Peter K.K. Chung. Messrs. Dods, Meyer and
Chung continue to serve as senior executives of the Company and collectively
will own approximately 30.3% of the outstanding Common Stock following the
Offering.

The Company's principal executive offices are located at 800 Roosevelt
Road, Building C, Suite 320, Glen Ellyn, Illinois 60137 and its telephone number
is (630) 790-3507. The Company maintains World Wide Web sites at
www.collectchamps.com and www.racingchamps.com.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company........... 5,000,000 shares
Common Stock to be outstanding after the
Offering....................................
12,885,240 shares(2)
Use of Proceeds...............................
To repay subordinated debt owed to stockholders of
the Company and bank borrowings, and to redeem all of
the outstanding shares of the Company's Series A
Preferred Stock and Series B Preferred Stock. See
"Use of Proceeds."
Nasdaq National Market symbol.................
RACN
</TABLE>

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

(1) Information about the market for scaled die cast vehicle replicas and the
die cast racing replica category has been derived from information published
by the NPD Group, Inc., an independent research firm which compiles data for
its subscribers, together with the Company's internal research regarding the
market.

(2) Does not include 332,033 shares issuable upon exercise of options granted
pursuant to the Company's 1996 Key Employees Stock Option Plan. In addition,
it is anticipated that options to purchase up to 148,752 shares of Common
Stock will be granted at the initial public offering price on or before the
closing of the Offering under the Company's 1997 Stock Incentive Plan,
including options to purchase up to 78,852 shares of Common Stock that will
be accompanied by reload options. See "Management -- Executive
Compensation -- 1996 Key Employees Stock Option Plan and "--Stock Incentive
Plan."
5
<PAGE> 7

SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
PRO FORMA
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- ---------------------
1993(1) 1994(1) 1995(1) 1996 PRO FORMA(2)(3) 1996 1997(2)
-------- -------- -------- -------------------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
NET SALES:
Company................... $ -- $ -- $ -- $ 49,385 $ -- $15,187
RCI Group................. 31,047 43,268 48,592 16,614 12,260 --
RCL Group................. 15,658 23,672 32,301 13,027 5,595 --
Intercompany and redundant
sales.................. (15,658) (23,672) (32,301) (13,027) (5,595) --
-------- ------- -------
$ 65,999 $12,260 $15,187
======== ======= =======
GROSS PROFIT:
Company................... $ -- $ -- $ -- $ 27,839 $ -- $ 8,694
RCI Group................. 14,151 18,056 23,036 7,210 5,248 --
RCL Group................. 4,147 5,770 6,216 2,483 1,741 --
-------- ------- -------
$ 37,532 $ 6,989 $ 8,694
======== ======= =======
OPERATING INCOME:
Company................... $ -- $ -- $ -- $ 10,864 $ -- $ 2,969
RCI Group................. 6,141 8,565 9,724 108 1,767 --
RCL Group................. 1,544 2,321 2,751 506 (37) --
-------- ------- -------
$ 11,478 $ 1,730 $ 2,969
======== ======= =======
NET INCOME(4):
Company................... $ -- $ -- $ -- $ 4,373 $ -- $ 1,225
RCI Group................. 5,722 8,224 9,392 72 511 --
RCL Group................. 1,216 2,339 2,790 299 (44) --
-------- ------- -------
$ 4,744 $ 467 $ 1,225
======== ======= =======
Net income per share...... $ 0.36 $ 0.03 $ 0.09
Weighted average shares
outstanding............ 13,214 13,214 13,214

<CAPTION>
MARCH 31, 1997
----------------------
AS
ACTUAL ADJUSTED(5)
-------- -----------
<C> <C>
BALANCE SHEET DATA:
Working capital..................... $ (8,069) $ (269)
Total assets........................ 102,595 102,595
Total debt.......................... 81,035 30,107
Total stockholders' equity.......... 11,741 62,669
</TABLE>

- ---------------
(1) The 1993, 1994 and 1995 amounts represent certain historical financial data
of the RCI Group and RCL Group (converted from fiscal year end March 31 to
December 31).

(2) The pro forma financial data for the year ended December 31, 1996 gives
effect to the Recapitalization, the Offering and the application of the
estimated net proceeds from the Offering as if each had occurred on January
1, 1996. The pro forma financial data for the three months ended March 31,
1997 gives effect
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to the Offering and the application of the estimated net proceeds from the
Offering as if it had occurred on January 1, 1997.

(3) Pro forma statement of income data for the year ended December 31, 1996
include a nonrecurring incentive bonus expense of $2,389,000 incurred in
connection with the Recapitalization and a purchase accounting inventory
write-up adjustment of $1,367,000 as a result of the Recapitalization.
Excluding the effects of the nonrecurring incentive bonus expense and the
inventory write-up adjustment, the Company's pro forma gross profit,
operating income, net income and net income per share for the year ended
December 31, 1996 would have been:

<TABLE>
<CAPTION>
PERCENT OF
AMOUNT NET SALES
------ ----------
<S> <C> <C>
Net sales................................................... $65,999 100.0%
Gross profit................................................ 38,899 58.9
Operating income............................................ 15,234 23.1
Net income.................................................. 6,997 10.6
Net income per share........................................ $ 0.53
</TABLE>

(4) Net income for the years ended 1993, 1994 and 1995 includes a provision for
Hong Kong income taxes at an effective rate of 16.5% for certain entities,
no provision for other entities structured as tax-free British Virgin
Islands entities and no federal income tax provision for certain entities
structured as S corporations.

(5) The "As Adjusted" amounts give pro forma effect to (i) the issuance of
5,000,000 shares of Common Stock in the Offering at an assumed price of
$13.00 per share, net of estimated underwriting discounts and commissions of
$4,550,000 and estimated offering expenses of $750,000 and (ii) the
repayment of $50,928,000 of indebtedness and the redemption of $8,772,000 of
preferred stock, including accrued dividends.

7
<PAGE> 9

RISK FACTORS

Prospective investors should carefully consider the following risk factors,
in addition to the other information contained in this Prospectus, in evaluating
the Company and its business before purchasing shares of the Common Stock
offered hereby. This Prospectus contains certain forward-looking statements that
involve risks and uncertainties. Future events and the Company's actual results
could differ materially from the results reflected in these forward-looking
statements.

CONSUMER ACCEPTANCE OF PRODUCTS

The markets for the Company's products are subject to rapidly changing
consumer preferences. The Company's historical growth has been based in part on
the growing interest in racing and motor sports and the evolution of the
preferences of racing enthusiasts and collectors toward the Company's products.
A decline in the popularity of racing and motor sports or a change in consumer
preferences could have a material adverse effect on the Company. The Company's
future growth will depend in large part upon its ability to continue to
conceive, design, source and market new products and upon continuing market
acceptance of its existing and future products. Significant delays in the
introduction of, or the failure to introduce, new products or additions to its
existing product lines or the failure of the Company's existing or future
products to maintain or receive substantial market acceptance could also have a
material adverse effect on the Company. In 1997, the Company introduced a
collection of pewter figures, its first significant non-vehicle product. There
can be no assurance that such products will achieve consumer acceptance. See
"Business -- Products."

COMPETITION

The Company operates in a highly competitive market. The Company competes
with several larger domestic and foreign companies, such as Mattel, Inc.
("Mattel") and Hasbro, Inc. ("Hasbro") which have recently entered the racing
replica market, and with other smaller producers of racing replicas. The smaller
producers of racing replicas, such as Action Performance Companies, Inc.,
generally distribute their products through direct marketing, collector clubs
and wholesalers who in turn distribute through hobby and collector shops. In
contrast, the Company distributes products primarily through national retailers
and mass merchants including K-Mart, Target, Toys 'R' Us and Wal-Mart. Mattel
and Hasbro also intend to distribute their racing replicas through national
retailers. The Company also competes with domestic and foreign producers of
scaled die cast toy vehicles. Many of the Company's competitors have greater
financial, technical, marketing and other resources than the Company. There can
be no assurance that the Company will continue to be able to compete
successfully in the future. See "Business -- Competition."

RELIANCE ON KEY SUPPLIERS

The Company depends upon six independently owned factories located in China
to manufacture its racing replicas and certain other products. As a result, any
difficulties encountered by the independent manufacturers which result in
product defects, production delays, cost overruns or the inability to fulfill
orders on a timely basis could have a material adverse effect on the Company.
Any significant accident, labor dispute or other disruption at one or more of
these factories also could adversely affect the Company's business. See
"Business -- Manufacturing" and "-- Risks of Foreign Manufacturing."

RISKS OF FOREIGN MANUFACTURING

The Company is subject to numerous risks inherent in foreign manufacturing,
including the following: fluctuations in currency exchange rates; economic and
political instability; restrictive actions by foreign governments; the laws and
policies of the United States affecting the importation of goods (including
duties, quotas and taxes); and trade and foreign tax laws.

Substantially all of the Company's products are subject to United States
duties and regulations pertaining to the importation of goods. Currently, the
Company's products are imported duty free. The United States may, from time to
time, impose new duties, tariffs, quotas or other charges or restrictions, or
adjust presently prevailing quotas, duties or tariff levies, which could
adversely affect the Company's business, financial condition or results of
operations or its ability to continue to import products at current or increased
levels.

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<PAGE> 10

From time to time, the Company may also be involved in disputes with the United
States Customs Service regarding the amount of duty to be paid, the value of
merchandise to be reported or other customs regulations with respect to certain
of the Company's imports, which may result in the payment of additional duties
and/or penalties. The Company cannot predict what regulatory changes may occur
or the type or amount of any financial impact on the Company which those changes
may have in the future.

TRADING STATUS OF CHINA

China, where all of the Company's products are manufactured, is currently
afforded "Most Favored Nation" status and generally is not subject to United
States retaliatory duties. The "Most Favored Nation" status of China was last
renewed in June of 1996 and is reviewed on an annual basis. Various commercial
and legal practices widespread in China, including the handling of intellectual
properties, are under review by the United States government and, accordingly,
the duty treatment of goods imported from China is subject to political
uncertainties. To the extent China ceases to have "Most Favored Nation" status
or its exports become subject to political retaliation, the cost of importing
products from China could increase significantly. The Company could also be
subject to the imposition of retaliatory tariffs or other import restrictions
such as quotas as a result of a trade dispute between China and the United
States. These increased tariffs or other restrictions could be imposed whether
or not the trade dispute itself involves products of the type imported by the
Company. Such increased tariffs or other trade restrictions could also have a
material adverse effect on the Company.

RISKS RELATING TO HONG KONG

The Company conducts operations in Hong Kong through its Hong Kong
Subsidiary. On July 1, 1997, sovereignty over Hong Kong will be transferred from
the United Kingdom to China, and Hong Kong will become a Special Administrative
Region of China. At the present time, the Company is unable to predict the
effect, if any, that such change will have on the Company's or the Hong Kong
Subsidiary's business, financial condition or results of operations.

FOREIGN CURRENCY RISK

The Company's sales are denominated in U.S. dollars. The Company's
purchases of finished goods from the Chinese manufacturers are denominated in
Hong Kong dollars. Expenses for these manufacturers are often denominated in
Chinese Renminbi. The Company is subject to a variety of risks associated with
changes among the relative values of the U.S. dollar, the Hong Kong dollar and
Renminbi. Any material increase in the value of the Hong Kong dollar or Renminbi
relative to the U.S. dollar would increase the Company's expenses and therefore
could have a material adverse effect on the Company. Since 1983, the Hong Kong
government has maintained a policy of linking the U.S. dollar and the Hong Kong
dollar. There can be no assurance that this link will be continued, although the
Company is not aware of any intention of the Hong Kong government or China to
abandon the link. There has been significant volatility in the exchange rates of
Renminbi to U.S. dollars in recent years. Over the last five years, the Renminbi
has experienced significant devaluation against most major currencies. The
Company does not hedge foreign currency risk.

DEPENDENCE ON SIGNIFICANT CUSTOMERS; CONCENTRATION OF ACCOUNTS RECEIVABLE

The Company's success is, in part, dependent upon the continuing
willingness of leading retailers to purchase and provide shelf space for the
Company's products. For example, during 1996, approximately 17%, 15%, 6% and 16%
of the Company's net sales were made to K-Mart, Target, Toys 'R' Us and
Wal-Mart, respectively. The Company does not have long-term contracts with its
customers. An adverse change in the Company's relationship with or the financial
viability of one or more of these customers could have a material adverse effect
on the Company. In addition, certain of these retailers generally purchase large
quantities of the Company's products on credit, which may cause a concentration
of accounts receivable among some of the Company's largest customers. Any
inability or unwillingness to pay these accounts receivable when due by one or
more of the Company's largest customers could adversely affect the Company's
financial condition. Although the Company maintains credit insurance to reduce
the risk associated with the accounts receivable from 14 of its major customers,
the amount of this insurance generally does not cover the total amount of the
accounts receivable from any particular customer. See "Business -- Sales and
Distribution."

9
<PAGE> 11

DEPENDENCE ON LICENSING ARRANGEMENTS

The Company markets virtually all of its products under licenses from other
parties. For example, the Company markets its racing replicas pursuant to
licensing arrangements with race team owners, drivers, sponsors, agents, vehicle
manufacturers and major racing series sanctioning bodies. The Company markets
its collectible figures pursuant to licensing arrangements with popular sports
figures and creators of certain comic book characters. These licensing
arrangements are generally limited in scope and duration and generally authorize
the sale of specific licensed products on a nonexclusive basis for a limited
period of time. The termination, cancellation or inability to renew certain of
the Company's existing licensing arrangements, or the inability to develop and
enter into new licensing arrangements, could have a material adverse effect on
the Company.

As a result of increased competition among manufacturers for licenses, the
Company may, in the future, be required to pay licensors higher royalties and
higher minimum guaranteed payments in order to obtain or retain attractive
properties for development of existing and new product lines. This increased
competition could have an adverse effect on the profitability of these licenses.
In addition, exclusive or other licensing arrangements granted to competitors or
other parties could limit the Company's future ability to produce replicas of
certain characters, athletes, vehicles, drivers and sponsors, including replicas
of vehicles or entities currently being produced. For example, a competitor
currently has licenses with Dale Earnhardt and Jeff Gordon which restrict the
Company's ability to produce replicas of these drivers' racing vehicles.

The Company generally does not pursue exclusive licenses. However, the
Company has held the exclusive license to use the NASCAR trademark on die cast
racing replicas and related packaging since 1992. The Company has agreed to
terms for the renewal of its license agreement with NASCAR on a nonexclusive
basis for three years commencing on January 1, 1998. The Company anticipates
that certain of its competitors will also license the NASCAR trademark on a
nonexclusive basis for use on racing replicas beginning in 1998. This could
result in increased competition for the Company's NASCAR racing replicas. See
"Business -- Licenses."

RELIANCE ON KEY PERSONNEL

The Company relies heavily on its senior managers, including Robert E.
Dods, Boyd L. Meyer and Peter K.K. Chung (the "Founding Managers"). Although the
Company has entered into employment agreements with the Founding Managers that
extend through April 30, 1999, there can be no assurance that the Company will
be able to retain them or its other key employees in the future. The loss of the
services of any of the Founding Managers could have a material adverse effect on
the Company. The Company maintains a $2,000,000 key man life insurance policy on
each of the Founding Managers. See "Management."

SEASONAL PRODUCT DEVELOPMENT AND SALES

The Company generally must adjust the styles of its racing replicas each
year to accurately replicate the various vehicles competing in major racing
series. Generally in the fourth quarter, the Company commences this process of
product development for the coming year by obtaining information about new race
cars. From that point until the release date of the particular replica during
the racing season, the Company, along with its Hong Kong subsidiary and the
foreign manufacturers, must complete the production process, including the
design of prototypes for the new racing replicas, the production of new tooling,
if any, and the manufacture of the racing replicas, and deliver the racing
replicas to retailers. Any inability by the Company to deliver the new racing
replicas to retailers by the start of the racing season could have a material
adverse effect on the Company. The Company's sales of racing replicas are also
seasonal, with 63.3% of the Company's net sales and 79.0% of its net income on
average over the last three fiscal years occurring during the second and third
quarters. See "Business -- Manufacturing."

PRODUCT LIABILITY AND OTHER CLAIMS

The Company faces product liability risks relating to the use of the
Company's products. Although the Company has not experienced any material
product liability costs or claims, the Company carries a policy of product
liability insurance against such contingencies. The Company may also be subject
to other legal claims,

10
<PAGE> 12

such as unfair competition or trademark infringement. Any legal claims, if
brought, could materially adversely affect the business or financial condition
of the Company.

CONTROL BY PRINCIPAL STOCKHOLDERS

Upon the closing of the Offering, the existing management and stockholders
of the Company will collectively own approximately 61.2% of the outstanding
Common Stock (56.6% if the Underwriters' over-allotment option is exercised in
full). This share ownership would permit these stockholders, if they chose to
act together, to elect all of the Company's directors and to control other
actions requiring stockholder approval. See "Principal Stockholders."

ABSENCE OF PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE

There has been no public market for the Common Stock prior to the Offering,
and there can be no assurance that an active public market will develop or, if
developed, will be sustained following the Offering. The stock market has in the
past experienced price and volume fluctuations that have at times been unrelated
to corporate operating performance. Such market volatility may adversely affect
the market price of the Common Stock. Other factors, such as fluctuations in
quarterly operating results, changes in trade policy between China and the
United States and evolving business prospects of the Company's customers and
competitors, also could cause the market price of the Common Stock to fluctuate
substantially.

IMMEDIATE AND SUBSTANTIAL DILUTION

Assuming an initial offering price of $13.00 per share, purchasers in the
Offering will experience dilution in the net tangible book value per share of
the Common Stock of $14.87. The existing stockholders will receive an increase
per share in pro forma net tangible book value per share of $8.76. Additional
dilution will occur upon the exercise of outstanding stock options. Existing
stockholders will have paid an average price per share of Common Stock of $0.13
and new stockholders will have paid 98.5% of the total consideration received
for shares of Common Stock but will own only 38.8% of the Common Stock. See
"Dilution."

DIVIDEND POLICY

The Company currently anticipates that, after completion of the Offering,
all of its earnings will be retained for development and expansion of the
Company's business and does not anticipate paying any cash dividends on the
Common Stock in the foreseeable future. See "Dividend Policy."

GOVERNMENT REGULATION

The Company is subject to numerous federal and state health, safety, tax
and other regulations. No assurance can by given that current government
regulations or future regulatory changes will not adversely affect the Company.
In addition, certain of the Company's tax positions could be subject to
examination and challenge by the Internal Revenue Service.

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of Common Stock in the public market following
the Offering could adversely affect the market price of the Common Stock. Upon
completion of the Offering, the Company will have 12,885,240 shares of Common
Stock outstanding. Of these shares, 5,000,000 shares of Common Stock sold in the
Offering will be freely tradable in the market, except for shares purchased by
"affiliates" of the Company which will be subject to the resale limitations
(excluding the holding period requirement) of Rule 144 under the Securities Act
of 1933. Certain officers, directors and stockholders of the Company, who hold
in aggregate 7,885,240 shares of Common Stock, and the Company have agreed not
to sell any of their shares for a period of 180 days after the date of the
Prospectus without the prior written consent of Robert W. Baird & Co.
Incorporated. The Company believes that, following the expiration of such
180-day period, 7,885,240 of these shares will be eligible for immediate sale in
the public market, subject to Rule 144 resale limitations. Further, the exercise
of registration rights by certain of the Company's significant stockholders,
affiliates and executive officers would permit such persons to sell shares of
Common Stock upon registration

11
<PAGE> 13

without regard to the limitations of Rule 144. The Company has granted
registration rights covering a total of 7,885,240 shares of Common Stock. See
"Shares Eligible for Future Sale" and "Certain Transactions -- The
Recapitalization -- Registration Agreement."

HOLDING COMPANY STRUCTURE

Because the Company is a holding company that conducts its business
operations through its subsidiaries, the Company depends on its subsidiaries for
dividends and other cash distributions to pay the Company's expenses and to pay
dividends to holders of the Common Stock. The Company's credit agreement
("Credit Agreement") with the First National Bank of Boston, as agent, and
certain other lenders, specifies the conditions under which dividends, loans and
cash distributions may be made from the Company's subsidiaries to the Company so
that profits generated by such operating entities may not be available to the
Company while the loans under the Credit Agreement are outstanding.

CERTAIN ANTI-TAKEOVER PROVISIONS

Certain provisions of the Company's Certificate of Incorporation and
By-Laws and of the Delaware General Corporation Law could discourage potential
acquisition proposals and delay or prevent a change of control of the Company.
Such provisions could diminish the opportunities for a stockholder to
participate in potential premiums associated with tender offers or other
acquisitions of the Company or its Common Stock. These provisions include
certain advance notice procedures for nominations of candidates for election as
directors and for stockholder proposals to be considered at stockholders'
meetings. In addition, section 203 of the Delaware General Corporation Law could
delay or prevent consummation of an acquisition transaction between the Company
and certain significant stockholders if the Board of Directors does not approve
such acquisition transaction in advance. See "Description of Capital
Stock -- Certain Statutory and Other Provisions."

BENEFITS TO CERTAIN STOCKHOLDERS AND EXECUTIVE OFFICERS

Out of the proceeds of the Offering, the Company plans to pay approximately
$27.7 million to members of the Investor Group and approximately $23.2 million
to management to repay indebtedness and redeem shares of preferred stock. See
"Use of Proceeds" and "Certain Transactions -- The Recapitalization."

THE RECAPITALIZATION

On April 30, 1996, an investor group led by Willis Stein & Partners, L.P.
("Willis Stein") consummated a recapitalization (the "Recapitalization") which
involved the following: (i) the Company's purchase of all of the outstanding
stock of Racing Champions, Inc. ("RCI") and substantially all of the assets of
Dods-Meyer, Ltd. ("DML" and together with RCI, the "RCI Group"), (ii) the
acquisition by Banerjan Company Limited (subsequently renamed Racing Champions
Limited), a Hong Kong subsidiary of the Company (the "Hong Kong Subsidiary"), of
substantially all of the assets of Racing Champions Limited, Garnett Services,
Inc. and Hosten Investment Limited (collectively, the "RCL Group") and (iii) the
contribution by the Company of all of the outstanding stock of the Hong Kong
Subsidiary to RCI. Prior to the Recapitalization, the RCI Group was owned by
Robert E. Dods and Boyd L. Meyer and managed the Company's domestic operations,
and the RCL Group was owned by Peter K.K. Chung and managed the Company's
foreign operations. The members of the Investor Group did not have any interests
in or business relationships with the RCI Group, the RCL Group or any of their
respective affiliates prior to the Recapitalization. The amount of the purchase
price paid by the Company in each of these acquisitions was determined through
arms-length negotiations between members of the Investor Group, the Founding
Managers and their respective advisors. The management of the Company owns
approximately 45.6% of the Common Stock with each of the Founding Managers
owning 14.5% and other senior management owning 2.0% collectively. The remaining
54.4% is held by an investor group consisting of Willis Stein (37.8%), Baird
Capital Partners II Limited Partnership (8.0%), BCP II Affiliates Fund Limited
Partnership (2.4%), Nassau Capital Partners L.P. (6.2%) and NAS Partners I
L.L.C. (0.5%) (the "Investor Group"). Baird Capital Partners II Limited
Partnership and BCP II Affiliates Fund Limited Partnership are affiliates of
Robert W. Baird & Co. Incorporated, one of the co-managing

12
<PAGE> 14

Underwriters of the Offering. In addition, the Investor Group acquired an
aggregate of approximately $20.8 million principal amount of Series A Junior
Subordinated Promissory Notes ("Series A Junior Notes") and approximately $4.8
million of Series A Preferred Stock pursuant to the Recapitalization. The
Investor Group also received the right to elect four members of the Company's
Board of Directors and other rights pursuant to a stockholders agreement and a
registration rights agreement. For additional information regarding the terms of
the Recapitalization, see "Certain Transactions -- The Recapitalization."

Pursuant to the Recapitalization, the Company paid $58.3 million of cash
and securities for the RCI Group and paid $30.4 million of cash and securities
for the RCL Group. For a description of the terms of the Recapitalization, see
"Certain Transactions -- The Recapitalization." RCI paid bonuses aggregating
approximately $2.4 million to employees holding stock options surrendered in
connection with the Recapitalization, including $1.1 million to Curtis W.
Stoelting and $570,000 to each of John F. Olsen and M. Kevin Camp. Mr. Stoelting
had held options exercisable for 37.8 shares of RCI's common stock, or
approximately 3.6% of the shares outstanding, at an exercise price of $3,960 per
share, while each of Messrs. Olsen and Camp had held options exercisable for
18.69 shares of RCI's common stock, or approximately 1.8% of the shares
outstanding, at an exercise price of $3,960 per share. These options had been
granted in December 1994 under RCI's 1994 Stock Option Plan which was terminated
in connection with the Recapitalization.

The Recapitalization was financed with $40.0 million of bank borrowings and
the issuance to the three Founding Managers, other senior management and the
Investor Group of $8.0 million of Senior Subordinated Promissory Notes ("Senior
Notes"), approximately $38.2 million of Series A Junior Subordinated Promissory
Notes ("Series A Junior Notes"), approximately $1.2 million of Series B Junior
Subordinated Promissory Notes ("Series B Junior Notes"), approximately $6.7
million of the Company's Series A Preferred Stock, approximately $1.2 million of
the Company's Series B Preferred Stock, approximately $119,000 of the Company's
Nonvoting Common Stock (the "Nonvoting Common Stock"), and approximately
$881,000 of Common Stock. See "Certain Transactions -- The Recapitalization."

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 5,000,000 shares of
Common Stock offered hereby are expected to be approximately $59.7 million
($64.0 million if the Underwriters' over-allotment option is exercised in full),
based upon an assumed initial public offering price of $13.00 per share, after
deducting the estimated underwriting discounts and commissions and offering
expenses payable by the Company. The Company will apply approximately $8.8
million of the net proceeds to repay indebtedness under the Credit Agreement,
consisting of indebtedness under Term Loan A which currently accrues interest at
a rate of 8.25% per year, $40.9 million to repay all of the Series A Junior
Notes which accrue interest at a rate of 12.00% per year, $1.2 million to repay
all of the Series B Junior Notes which accrue interest at a rate of 12.00% per
year and approximately $8.8 million to redeem all outstanding shares of Series A
Preferred Stock and Series B Preferred Stock. For additional information
regarding the terms of the indebtedness and preferred stock proposed to be
repaid or redeemed with the proceeds of the Offering, see "Certain
Transactions -- The Recapitalization -- Certain Indebtedness," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Description of Capital Stock -- Preferred Stock."

Pending the use for the foregoing purposes, the Company may invest the
proceeds in whole or in part in short-term, interest-bearing obligations. Any
funds received by the Company upon exercise of the Underwriters' over-allotment
option will be used to repay indebtedness under the Credit Agreement.

DIVIDEND POLICY

Following the Offering, the Company intends to retain any earnings for use
in the operation and expansion of its business and therefore does not anticipate
declaring any cash dividends in the foreseeable future. The payment of future
dividends, if any, will be made at the discretion of the Company's Board of
Directors and will depend upon, among other things, future earnings, operations,
capital requirements, the general financial condition of the Company, general
business conditions and other factors. In addition, the Credit Agreement
contains a provision limiting the Company's ability to pay dividends.

13
<PAGE> 15

DILUTION

The net tangible book value of the Common Stock as of March 31, 1997 was a
deficit of $83.8 million or $10.63 per share. Net tangible book value per share
represents the amount of the Company's total tangible assets less total
liabilities, divided by 7,885,240 shares of Common Stock outstanding as of March
31, 1997. Net tangible book value dilution per share represents the difference
between the amount per share paid by purchasers of Common Stock in the Offering
and the pro forma net tangible book value per share of Common Stock immediately
after completion of the Offering.

After giving effect to the sale of 5,000,000 shares of Common Stock in the
Offering at an assumed initial offering price of $13.00 per share and after
deducting estimated underwriting discounts and commissions and offering
expenses, the pro forma net tangible book value as of March 31, 1997 would have
been a deficit of $24.1 million or $1.87 per share. This represents an immediate
increase in net tangible book value of $8.76 per share to the existing
stockholders and immediate dilution of net tangible book value of $14.87 per
share to purchasers of Common Stock in the Offering, as illustrated by the
following table:

<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $13.00
Deficit in net tangible book value at March 31, 1997...... $(10.63)
Increase attributable to new investors.................... 8.76
-------
Pro forma deficit in net tangible book value after the
Offering.................................................. (1.87)
------
Net tangible book value dilution to new investors........... $14.87
======
</TABLE>

The following table sets forth, as of March 31, 1997, the number of shares
of Common Stock purchased from the Company, the total consideration paid and the
average price per share of Common Stock paid by existing stockholders and new
stockholders purchasing shares of Common Stock in the Offering, at an assumed
initial public offering price of $13.00 per share.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 7,885,240 61.2% $ 1,000,000 1.5% $ 0.13
New stockholders................ 5,000,000 38.8 65,000,000 98.5 13.00
---------- ----- ----------- -----
Total................. 12,885,240 100.0% $66,000,000 100.0%
========== ===== =========== =====
</TABLE>

The foregoing discussion and tables assume no exercise of any outstanding
stock options. As of the date of the Prospectus, options to purchase 332,033
shares of Common Stock are outstanding. To the extent any options with an
exercise price of less than the public offering price are exercised, there will
be further dilution to new stockholders. See "Management -- Executive
Compensation -- 1996 Key Employees Stock Option Plan."

14
<PAGE> 16

CAPITALIZATION

The following table sets forth (i) short-term debt and capitalization of
the Company as of March 31, 1997, and (ii) the adjusted short-term debt and
capitalization to give effect to the issuance by the Company of 5,000,000 shares
of Common Stock in the Offering (assuming an initial public offering price of
$13.00 per share and after deducting estimated underwriting discounts and
commissions and offering expenses payable by the Company) and the application of
the estimated net proceeds therefrom. See "Use of Proceeds." The following table
should be read in conjunction with the Financial Statements and Notes thereto
appearing elsewhere in the Prospectus, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Selected Financial Data."

<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------------------------
ACTUAL ADJUSTMENTS(1) AS ADJUSTED
-------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
SHORT-TERM DEBT:
Current maturities of long-term bank notes........... $ 7,800 $ (7,800) $ --
======== ======== ========
LONG-TERM DEBT:
Bank term notes, less current maturities............. $ 31,117 $ (1,010) $ 30,107
Junior subordinated debt due to stockholders......... 42,118 (42,118) --
-------- -------- --------
Total long-term debt......................... 73,235 (43,128) 30,107
-------- -------- --------
STOCKHOLDERS' EQUITY:
Series A Preferred Stock:
100,000 shares authorized, 66,668 shares issued
and outstanding(2).............................. 773 (773) --
Series B Preferred Stock:
20,000 shares authorized, 11,952 shares issued and
outstanding(2).................................. 139 (139) --
Voting Common Stock:
20,000,000 shares authorized, 6,948,156 shares
issued and outstanding; 12,885,240 shares issued
and outstanding, as adjusted.................... 69 60 129
Nonvoting Common Stock:
1,000,000 shares authorized, 937,084 shares issued
and outstanding(2).............................. 9 (9) --
Additional paid-in capital........................... 8,783 51,789 60,572
Retained earnings.................................... 1,968 -- 1,968
-------- -------- --------
Total stockholders' equity........................ 11,741 50,928 62,669
-------- -------- --------
Total capitalization............................ $ 84,976 $ 7,800 $ 92,776
======== ======== ========
</TABLE>

- ---------------
(1) Adjustments give pro forma effect to (i) the conversion of each share of the
Company's Nonvoting Common Stock into one share of Common Stock upon the
completion of the Offering, (ii) the issuance of 5,000,000 shares of Common
Stock in the Offering at an estimated price of $13.00 per share, net of
estimated underwriting discounts and commissions of $4,550,000 and estimated
offering expenses of $750,000 and (iii) the repayment of $50,928,000 of
indebtedness and the redemption of $8,772,000 of Series A Preferred Stock
and Series B Preferred Stock.

(2) Following the Offering, all of the outstanding shares of Series A Preferred
Stock and Series B Preferred Stock will be redeemed, each share of Nonvoting
Common Stock will be converted into one share of Common Stock and the
Certificate of Incorporation of the Company will be amended to eliminate the
classes of Series A Preferred Stock, Series B Preferred Stock and Nonvoting
Common Stock.

15
<PAGE> 17

SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The following table sets forth selected financial data with respect to the
Company for each of the periods indicated. The selected financial data for the
year ended December 31, 1992 for the Predecessor - RCI Group and for the fiscal
years ended March 31, 1993 and 1994 for the Predecessor - RCL Group are derived
from unaudited combined financial statements, which are not included herein. The
unaudited selected financial data have been prepared on the same basis as the
audited financial statements and, in the opinion of management, include all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the Company's consolidated financial position and results of operations
for the periods presented. The data for the years ended December 31, 1993, 1994
and 1995 and for the four months ended April 30, 1996 are derived from the
combined financial statements of the Predecessor - RCI Group, which have been
audited by Arthur Andersen LLP, independent public accountants. The data for the
fiscal years ended March 31, 1995 and 1996 and for the one month ended April 30,
1996 for the Predecessor - RCL Group are derived from combined financial
statements which have been audited by Ernst & Young, independent auditors. The
statement of income data for the eight months ended December 31, 1996 are
derived from the Company's consolidated financial statements which have been
audited by Arthur Andersen LLP, independent public accountants. The statement of
income and balance sheet data for and as of the three months ended March 31,
1997 have been derived from the unaudited consolidated financial statements of
the Company and, in the opinion of management, include all adjustments,
consisting only of normal and recurring adjustments, necessary to present fairly
the consolidated financial position and results of operations of the Company for
the three months then ended.

The pro forma financial data for the year ended December 31, 1996, which
give effect to the Recapitalization, the Offering and the application of the
estimated net proceeds from the Offering as if each had occurred on January 1,
1996, are presented for informational purposes only and are not necessarily
indicative of the results of the future operations of the Company or the actual
results that would have been achieved had the Recapitalization, the Offering and
the application of the estimated net proceeds from the Offering occurred on such
date. The pro forma financial data for the three months ended March 31, 1997,
which give effect to the Offering and the application of the estimated net
proceeds from the Offering as if it had occurred on January 1, 1997, are also
presented for informational purposes only and are not necessarily indicative of
the results of the future operations of the Company or the actual results that
would have been achieved had the Offering and the application of the estimated
net proceeds from the Offering occurred on such date. All of the data set forth
below are qualified by reference to, and should be read in conjunction with, the
Financial Statements and Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Prospectus.

(See page 17 for chart)

16
<PAGE> 18
<TABLE>
<CAPTION>
PREDECESSOR - RCI GROUP(1)(7) THE COMPANY PRO FORMA
--------------------------------------------------- --------------------------- ------------
FOUR MONTHS EIGHT MONTHS THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED ENDED ENDED YEAR ENDED
------------------------------------- APRIL 30, DECEMBER 31, MARCH 31, DECEMBER 31,
1992 1993 1994 1995 1996(2) 1996(2) 1997 1996(2)
------- ------- ------- ------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Net sales........... $45,845 $31,047 $43,268 $48,592 $16,614 $49,385 $15,187 $65,999
Gross profit........ 16,170 14,151 18,056 23,036 7,210 28,019 8,694 37,532
Operating income.... 4,943 6,141 8,565 9,724 108 11,236 2,969 11,478
Net income(3)....... $ 5,458 $ 5,722 $ 8,224 $ 9,392 $ 72 $ 2,551 $ 328 $ 4,744
Net income available
to common
stockholders...... $ 1,895 $ 73 $ 4,744
Net income per
share............. $ 0.23 $ 0.01 $ 0.36
Weighted average
shares
outstanding(4).... 8,214 8,214 13,214

<CAPTION>
PRO FORMA
----------------------
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1997
-------- -----------
<S> <C> <C>
STATEMENT OF INCOME
DATA:
Net sales........... $12,260 $15,187
Gross profit........ 6,989 8,694
Operating income.... 1,730 2,969
Net income(3)....... $ 467 $ 1,225
Net income available
to common
stockholders...... $ 467 $ 1,225
Net income per
share............. $ 0.03 $ 0.09
Weighted average
shares
outstanding(4).... 13,214 13,214
</TABLE>

<TABLE>
<CAPTION>
PREDECESSOR - RCL GROUP(1)(7)
---------------------------------------------------
ONE MONTH
FISCAL YEARS ENDED MARCH 31, ENDED
------------------------------------- APRIL 30,
1993 1994 1995 1996 1996
------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Net sales........... $28,067 $18,399 $22,331 $37,322 $ 3,852
Gross profit........ 6,105 4,801 5,288 7,085 752
Operating income.... 3,072 1,949 2,066 2,725 507
Net income(5)....... $ 2,693 $ 1,690 $ 2,079 $ 2,603 $ 488
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------
AS
ACTUAL ADJUSTED(6)
-------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital..... $ (8,069) $ (269)
Total assets........ 102,595 102,595
Total debt.......... 81,035 30,107
Total stockholders'
equity............ 11,741 62,669
</TABLE>

- ---------------
(1) On April 30, 1996 the Company acquired the RCI Group and the RCL Group in
the Recapitalization (see "The Recapitalization"). Accordingly, certain
information provided for the predecessor groups is not comparable to the
data of the Company due to the effects of certain purchase accounting
adjustments and the financing related to the Recapitalization. Also, the
data from the predecessor groups is derived from different fiscal year ends
and is not comparable. Prior to the Recapitalization, the RCL Group included
Bergen Services Inc. ("Bergen"), an entity that did not have any tangible
assets or conduct any operations. The Company did not acquire Bergen
pursuant to the Recapitalization.
(2) Data for the four months ended April 30, 1996 and pro forma statement of
income data for the year ended December 31, 1996 include a nonrecurring
incentive bonus expense of $2,389,000 incurred in connection with the
Recapitalization, and data for the eight months ended December 31, 1996 and
pro forma statement of income data for the year ended December 31, 1996
include a purchase accounting inventory write-up adjustment of $1,367,000 as
a result of the Recapitalization. Excluding the effects of the nonrecurring
incentive bonus expense and the inventory write-up adjustment, the Company's
pro forma gross profit, operating income, net income and net income per
share for the year ended December 31, 1996 would have been:

<TABLE>
<CAPTION>
PERCENT OF
AMOUNT NET SALES
------- ----------
<S> <C> <C>
Net sales................................................... $65,999 100.0%
Gross profit................................................ 38,899 58.9
Operating income............................................ 15,234 23.1
Net income.................................................. 6,997 10.6
Net income per share........................................ $ 0.53
</TABLE>

17
<PAGE> 19

(3) Net income of the RCI Group does not include a provision for federal income
taxes as a result of the S corporation status for certain entities in this
group during the periods from January 1, 1992 to April 30, 1996.

(4) Weighted average shares outstanding has been computed using the treasury
stock method which includes dilutive Common Stock equivalents as if
outstanding during the respective periods.

(5) Net income of the RCL Group includes a provision for Hong Kong income taxes
at an effective rate of 16.5% for certain entities and no provisions for
other entities which were structured as tax-free British Virgin Islands
entities.

(6) The "As Adjusted" amounts give pro forma effect to (i) the issuance of
5,000,000 shares of Common Stock in the Offering at an assumed price of
$13.00 per share, net of estimated underwriting discounts and commissions of
$4,550,000 and estimated offering expenses of $750,000 and (ii) the
repayment of $50,928,000 of indebtedness and the redemption of $8,772,000 of
Series A Preferred Stock and Series B Preferred Stock, including accrued
dividends.

(7) The following supplemental data represent for 1993, 1994 and 1995 certain
historical financial data of the RCI Group and the RCL Group (converted from
fiscal year end March 31 to December 31) for each year ended December 31.
The year ended December 31, 1996 is presented based upon the Pro Forma
Combined Statements of Income data (see "Pro Forma Combined Statements of
Income").

SUPPLEMENTAL FINANCIAL DATA

<TABLE>
<CAPTION>
PRO FORMA
-------------------
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -------------------
1993 1994 1995 1996 PRO FORMA(2) 1996 1997
-------- -------- -------- ----------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
NET SALES:
Company............... $ -- $ -- $ -- $ 49,385 $ -- $15,187
RCI Group............. 31,047 43,268 48,592 16,614 12,260 --
RCL Group............. 15,658 23,672 32,301 13,027 5,595 --
Intercompany and
redundant sales.... (15,658) (23,672) (32,301) (13,027) (5,595) --
-------- ------- -------
$ 65,999 $12,260 $15,187
======== ======= =======
GROSS PROFIT:
Company............... $ -- $ -- $ -- $ 27,839 $ -- $ 8,694
RCI Group............. 14,151 18,056 23,036 7,210 5,248 --
RCL Group............. 4,147 5,770 6,216 2,483 1,741 --
-------- ------- -------
$ 37,532 $ 6,989 $ 8,694
======== ======= =======
OPERATING INCOME:
Company............... $ -- $ -- $ -- $ 10,864 $ -- $ 2,969
RCI Group............. 6,141 8,565 9,724 108 1,767 --
RCL Group............. 1,544 2,321 2,751 506 (37) --
-------- ------- -------
$ 11,478 $ 1,730 $ 2,969
======== ======= =======
NET INCOME*:
Company............... $ -- $ -- $ -- $ 4,373 $ -- $ 1,225
RCI Group............. 5,722 8,224 9,392 72 511 --
RCL Group............. 1,216 2,339 2,790 299 (44) --
-------- ------- -------
$ 4,744 $ 467 $ 1,225
======== ======= =======
</TABLE>

- ---------------
* RCI Group net income does not include a provision for federal income taxes as
a result of the S corporation status. RCL Group net income includes a
provision for Hong Kong income taxes at an effective rate of 16.5% for certain
entities in the RCL Group and no provisions for other entities in the RCL
Group which were structured as tax-free British Virgin Islands entities.

18
<PAGE> 20

PRO FORMA STATEMENTS OF INCOME

The following unaudited Pro Forma Combined Statement of Income for the year
ended December 31, 1996 was prepared to illustrate the estimated effects of the
Recapitalization, the Offering and the application of the estimated net proceeds
of the Offering as if each had occurred on January 1, 1996. The unaudited Pro
Forma Consolidated Statement of Income for the three months ended March 31, 1997
was prepared to illustrate the estimated effects of the Offering and the
application of the estimated net proceeds of the Offering as if it had occurred
on January 1, 1997. The Pro Forma Statements of Income do not purport to
represent what the Company's results of operations would actually have been if
the Recapitalization, the Offering and the application of the estimated net
proceeds of the Offering had occurred on the dates indicated or to predict the
Company's results of operations for any future period. The following financial
information should be read in conjunction with "Capitalization," "Selected
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the audited Financial Statements and the related
Notes thereto included elsewhere in the Prospectus.

19
<PAGE> 21

PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------
RCI RCL PRO FORMA PRO FORMA OFFERING PRO FORMA
GROUP(1) GROUP(2) COMPANY(3) ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
--------- --------- ----------- ------------ ---------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales...................... $16,614 $13,027 $49,385 $(13,027)(4) $65,999 $ -- $65,999
Cost of sales.................. 9,404 10,544 19,999 (13,027)(4) 27,100 -- 27,100
180(5)
Inventory adjustments(6)....... -- -- 1,367 -- 1,367 -- 1,367
------- ------- ------- -------- ------- ------ -------
Gross profit................... 7,210 2,483 28,019 (180) 37,532 -- 37,532
Selling, general &
administrative expense....... 4,713 1,977 15,244 18(5) 21,426 -- 21,426
(526)(7)
Nonrecurring bonus expense..... 2,389 -- -- -- 2,389 -- 2,389
Amortization of intangible
assets....................... -- -- 1,539 700(5) 2,239 -- 2,239
------- ------- ------- -------- ------- ------ -------
Operating income............... 108 506 11,236 (372) 11,478 -- 11,478
Interest expense (income)...... 20 49 6,738 2,862(8) 9,669 (6,198)(9) 3,471
Other expense (income)......... (23) (29) 153 -- 101 -- 101
------- ------- ------- -------- ------- ------ -------
Income before income taxes..... 111 486 4,345 (3,234) 1,708 6,198 7,906
Income tax expense............. 39 187 1,794 (1,335)(10) 685 2,477(10) 3,162
------- ------- ------- -------- ------- ------ -------
Net income..................... $ 72 $ 299 $ 2,551 $ (1,899) $ 1,023 $3,721 $ 4,744
======= ======= ======= ======== ======= ====== =======
Net income per share........... $ 0.12 $ 0.36
======= =======
Weighted average shares
outstanding.................. 8,214 5,000(11) 13,214
</TABLE>

- ---------------
(1) Data for the RCI Group is for the four months ended April 30, 1996.

(2) Data for the RCL Group is for the four months ended April 30, 1996.

(3) Data for the Company is for the eight months ended December 31, 1996.

(4) Eliminates intercompany sales and fees between the RCL Group and the RCI
Group during the period January 1, 1996 to April 30, 1996.

(5) Provides for the pro forma increase from January 1, 1996 through April 30,
1996 in depreciation expense based upon depreciating the purchase price
allocated to fixed assets of $3,517,000 over four years and in amortization
expense based upon amortizing the excess purchase price over net assets
acquired of $88,664,000 over 40 years. The pro forma depreciation expense
for the year ended December 31, 1996 is $1,636,000.

(6) Data for the RCI Group include a nonrecurring incentive bonus expense of
$2,389,000 in connection with the Recapitalization and data for the Company
include a purchase accounting inventory write-up adjustment of $1,367,000
as a result of the Recapitalization. Excluding the effects of the
nonrecurring incentive bonus expense and the inventory write-up adjustment,
the Company's pro forma gross profit, operating income, net income and net
income per share for the year ended December 31, 1996 would have been:

(7) Eliminates for the four months ended April 30, 1996 RCL Group non-business
expenses of $179,000 and depreciation expense of $347,000 related to assets
not acquired by the Company pursuant to the Recapitalization.

20
<PAGE> 22

(8) Represents the incremental interest expense from January 1, 1996 through
April 30, 1996, under borrowings incurred as part of the Recapitalization
including bank term loans of $40.0 million with a combined average rate of
8.38%, senior subordinated notes of $8.0 million with an interest rate of
8.25%, and $39.4 million of junior subordinated notes with an interest rate
of 12.00%.

(9) Reflects the effect on interest expense, net of income taxes at 40.0%, of
the receipt of the estimated Offering proceeds of $59.7 million. The
application of those proceeds reduces outstanding borrowings under term
loans by approximately $8.8 million with an interest rate of 8.38%, reduces
junior subordinated debt by approximately $41.1 million with an interest
rate of 12.00% and reflects the expected lower interest rate of 7.00% on
the remaining outstanding borrowings of approximately $30.0 million. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

(10) Increases the provision for income taxes to 40.0% for the income that was
taxed at lower rates or not subject to income taxes as a result of S
corporation or tax free British Virgin Islands status after giving effect
to the adjustments to depreciation, amortization and selling, general and
administrative expenses and the incremental interest expense, all as
discussed in Notes 5 and 8 above.

(11) Reflects the sale by the Company of 5,000,000 shares of Common Stock in the
Offering.

(12) The following unaudited Pro Forma Combined Statements of Income for each of
the quarters in the year ended December 31, 1996 is presented based upon
the Pro Forma Combined Statement of Income for the year ended December 31,
1996.

PRO FORMA COMBINED STATEMENT OF INCOME
FOR EACH OF THE QUARTERS IN THE YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
------------------------------------------------ DECEMBER 31,
MARCH 31 JUNE 30* SEPTEMBER 30 DECEMBER 31 1996
-------- -------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales.................................. $12,260 $18,018 $23,034 $12,687 $65,999
Cost of sales.............................. 5,271 7,196 9,376 5,257 27,100
Inventory adjustments...................... -- 1,367 -- -- 1,367
------- ------- ------- ------- -------
Gross profit............................... 6,989 9,455 13,658 7,430 37,532
Selling, general and administrative
expense.................................. 4,699 5,476 6,705 4,546 21,426
Nonrecurring bonus expense................. -- 2,389 -- -- 2,389
Amortization of intangible assets.......... 560 559 560 560 2,239
------- ------- ------- ------- -------
Operating income........................... 1,730 1,031 6,393 2,324 11,478
Interest expense (income).................. 977 792 900 802 3,471
Other expense (income)..................... (25) 15 51 60 101
------- ------- ------- ------- -------
Income before income taxes................. 778 224 5,442 1,462 7,906
Income tax expense......................... 311 90 2,176 585 3,162
------- ------- ------- ------- -------
Net income................................. $ 467 $ 134 $ 3,266 $ 877 $ 4,744
======= ======= ======= ======= =======
Net income per share....................... $ 0.03 $ 0.01 $ 0.25 $ 0.07 $ 0.36
======= ======= ======= ======= =======
Weighted average shares outstanding........ 13,214 13,214 13,214 13,214 13,214
</TABLE>

-------------------
* Excluding the effect of the nonrecurring incentive bonus and the inventory
write-up adjustment, the Company's pro forma gross profit, operating
income, net income and net income per share for the three months ended
June 30, 1996 would have been:

<TABLE>
<CAPTION>
PERCENT OF
AMOUNT NET SALES
------ ----------
<S> <C> <C>
Net sales................................. $18,018 100.0%
Gross profit.............................. 10,822 60.1
Operating income.......................... 4,787 26.6
Net income................................ 2,388 13.3
Net income per share...................... $ 0.18
</TABLE>

21
<PAGE> 23

PRO FORMA CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 1997

<TABLE>
<CAPTION>
OFFERING PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- ----------- -----------
<S> <C> <C> <C>
Net sales................................................... $15,187 $ -- $15,187
Cost of sales............................................... 6,493 -- 6,493
------- ------- -------
Gross profit................................................ 8,694 -- 8,694
Selling, general & administrative expense................... 5,171 -- 5,171
Amortization of intangible assets........................... 554 -- 554
------- ------- -------
Operating income............................................ 2,969 -- 2,969
Interest expense (income)................................... 2,423 (1,495)(1) 928
------- ------- -------
Income before income taxes.................................. 546 1,495 2,041
Income tax expense.......................................... 218 598(1) 816
------- ------- -------
Net income.................................................. $ 328 $ 897 $ 1,225
======= ======= =======
Net income per share........................................ $0.09
======
Weighted average shares outstanding......................... 13,214
</TABLE>

- ---------------
(1) Reflects the effect on interest expense, net of income taxes at 40.0%, of
the receipt of the estimated Offering proceeds of $59.7 million. The
application of those proceeds reduces outstanding borrowings under term
loans by approximately $8.8 million with an interest rate of 8.38%, reduces
junior subordinated debt by approximately $42.1 million with an interest
rate of 12.00% and reflects the expected lower interest rate of 7.25% on the
remaining outstanding borrowings of approximately $28.1 million. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

22
<PAGE> 24

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

The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
consolidated Financial Statements and Notes thereto included elsewhere in the
Prospectus. The matters discussed in this section that are not historical or
current facts deal with potential future circumstances and developments. Such
forward-looking statements include, but are not limited to, the development and
market acceptance for new products, trends in the results of the Company's
operations and the Company's anticipated capital requirements and capital
resources. The Company's actual results could differ materially from the results
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below as well as those
discussed under the caption "Risk Factors" and elsewhere in the Prospectus.

OVERVIEW

Racing Champions is a leading producer and marketer of collectible scaled
die cast replicas. The Company is best known for its extensive line of
officially licensed collectible scaled replicas of actual race cars and related
vehicles from popular professional racing series, including NASCAR, NHRA, CART,
IRL and World of Outlaws. The majority of its products are sold through mass
merchants, such as K-Mart, Target, Toys 'R' Us and Wal-Mart. The Company has
maintained strong profit margins while selling through the mass merchant channel
by offering high quality, collectible products, managing product availability,
continuously updating its products, diligently controlling costs and realizing
economies of scale.

The Company's predecessors, the RCI Group and the RCL Group, each began
operations in 1989 with an initial product line of die cast vehicles, which
included racing car replicas. The RCI Group was owned by Robert E. Dods and Boyd
L. Meyer and operated the Company's domestic operations and the RCL Group was
owned by Peter K.K. Chung and operated the Company's foreign operations. In
1990, the Company shifted its focus to collectible stock car replicas and in
1991 obtained the license to use the NASCAR trademark and logo on its products
and packaging. The Company's initial racing replicas proved to be popular with
racing fans and adult collectors with net sales growing from $5.4 million in
1990 to $32.3 million in 1991. By 1992, many of the Company's retail customers
had overestimated short-term consumer demand for racing replicas and placed
significant orders for the Company's products as well as for competitive
products of varying quality and authenticity introduced by new entrants to the
racing replica market. While the Company's net sales grew dramatically to $45.8
million in 1992, significant excess inventories of racing replicas had built up
at many of the Company's major customers. As a result of these excess
inventories, the Company anticipated reduced sales in 1993 and, in response,
limited its production level. In order to preserve the collector base it had
already established and to further differentiate itself from lower quality new
market entrants, the Company took several steps to enhance the collectibility of
Racing Champions products in 1993. These steps included introducing annual
editions, limiting the number of units produced, staggering release dates,
adding serial numbers to certain production runs and generally improving
quality. Despite a net sales decline to $31.0 million in 1993, combined
operating income as a percentage of net sales increased.

Over the next three years, the Company experienced considerable growth in
its NASCAR product line and through its introduction of collectible racing
replicas from other major professional racing series. The Company believes that
the measures it undertook from 1993 through 1996 have significantly enhanced the
Racing Champions brand name, thereby increasing demand for the Company's
products. In turn, the Company's mass merchant customers have responded by
providing increased shelf space for the Company's product lines. The Company
believes that its significantly broader product lines, enhanced brand name
recognition among collectors and retailers and increased shelf space have
positioned it to compete favorably in its principal channel of distribution.

Beginning in 1996, the Company successfully expanded into non-racing
collectibles by introducing the Racing Champions Mint(TM) line of high quality
classic and late model die cast vehicle replicas. The Company is continuing this
expansion in 1997 by introducing the Racing Champions Hot Rod Collection(TM), a
new line of collectible die cast hot rod car replicas which is supported by
licensing and marketing arrangements with

23
<PAGE> 25

Petersen Publishing Company's Hot Rod Magazine. Also, beginning in 1997, the
Company is targeting comic book and sports enthusiasts and figure collectors
with two new lines of collectible pewter figures, to be marketed under the names
Comic Book Champions and Sports Champions, which are supported by licensing
agreements with Marvel Characters, Inc., DC Comics (a division of Time Warner
Entertainment Company L.P.) and Sports Illustrated.

On April 30, 1996, the Investor Group consummated the Recapitalization in
which a new holding company, Racing Champions Corporation, acquired the domestic
operations of the RCI Group and the foreign operations of the RCL Group. This
acquisition was accounted for using the purchase method. The acquisition costs
in excess of the fair value of net assets of the acquired businesses (goodwill)
is being amortized on a straight-line basis over a 40-year period and for income
tax purposes is deducted over a 15-year period. After the consummation of the
Recapitalization, management owned approximately 45.6% of the Common Stock,
while members of the Investor Group owned approximately 54.4%.

Racing Champions' sales are recognized as products are shipped. The Company
does not sell its products on consignment and ordinarily accepts returns only
for defective merchandise. Returns have historically not been significant. In
certain instances, where retailers are unable to resell the quantity of products
which they have purchased from the Company, the Company may, in accordance with
industry practice, assist retailers in selling such excess inventory by offering
credits and other price concessions. These credits and other price concessions,
typically evaluated and issued annually, have not had a material effect on the
Company's historical financial statements. Mass merchant retailers purchase the
Company's product either in the United States with credit terms ranging from 30
to 120 days or directly in Hong Kong with payment made by irrevocable letter of
credit or wire transfer. By acquiring the products in Hong Kong, many of the
Company's retail customers are able to realize efficiencies with respect to cost
and logistics. Because the Company incurs significantly lower distribution and
administrative costs with respect to direct shipments to customers from Hong
Kong, a price discount of approximately 15% to 25% is granted. As a result, Hong
Kong shipments have lower gross profit margins than domestic shipments.
Therefore, the annual fluctuations in the mix of United States versus Hong Kong
shipments will affect year-to-year comparability of net sales and gross profit
margins. However, the Company believes that the operating income margin is
comparable for Hong Kong shipments due to the saved distribution and
administrative costs. For the years ended December 31, 1994, 1995 and 1996, Hong
Kong shipments constituted 28.7%, 44.9% and 52.8%, respectively, of net sales.

The Company's three largest expense categories are cost of sales, royalties
and sales commissions. Cost of sales consists primarily of purchases of finished
products from the Company's manufacturing suppliers. Royalties vary by product
category and are paid on a quarterly basis. Multiple royalties may be paid on a
product to various licensors. In 1996, aggregate royalties by product ranged
from approximately 3% to 19% of the Company's selling price, and averaged
approximately 15.7%. Sales commissions ranging from 3% to 5% of net sales are
paid quarterly to the Company's external sales representative organizations. In
1996, sales subject to commissions represented 61.0% of total net sales and
sales commissions were 3.0% of total net sales.

RESULTS OF OPERATIONS

The following tables set forth for the periods indicated certain items
reflected in the Statements of Income of the Company and its predecessors and
the percentage of net sales represented by these items.

24
<PAGE> 26

RACING CHAMPIONS CORPORATION

<TABLE>
<CAPTION>
EIGHT MONTHS THREE MONTHS PRO FORMA THREE MONTHS ENDED
ENDED ENDED MARCH 31, -------------------------------------
DECEMBER 31, 1996 1997 MARCH 31, 1996 MARCH 31, 1997
----------------- ----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales....................... $49,385 100.0% $15,187 100.0% $12,260 100.0% $15,187 100.0%
Cost of sales................... 19,999 40.5 6,493 42.8 5,271 43.0 6,493 42.8
Inventory adjustment............ 1,367 2.8 -- -- -- -- -- --
------- ----- ------- ----- ------- ----- ------- -----
Gross profit.................. 28,019 56.7 8,694 57.2 6,989 57.0 8,694 57.2
Selling, general and
administrative expense........ 15,244 30.9 5,171 34.0 4,699 38.3 5,171 34.0
Amortization of intangible
assets........................ 1,539 3.1 554 3.6 560 4.6 554 3.6
------- ----- ------- ----- ------- ----- ------- -----
Operating income.............. 11,236 22.8 2,969 19.5 1,730 14.1 2,969 19.5
Interest expense (income)....... 6,738 13.6 2,380 15.7 977 8.0 885 5.8
Other expense................... 153 0.3 43 0.3 (25) (0.2) 43 0.3
------- ----- ------- ----- ------- ----- ------- -----
Income before income taxes.... 4,345 8.8 546 3.6 778 6.3 2,041 13.4
Income tax expense.............. 1,794 3.6 218 1.4 311 2.5 816 5.4
------- ----- ------- ----- ------- ----- ------- -----
Net income.................... $ 2,551 5.2% $ 328 2.2% $ 467 3.8% $ 1,225 8.1%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>

RCI GROUP

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, FOUR MONTHS ENDED
------------------------------------- -----------------
1994 1995 APRIL 30, 1996
----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales.................................. $43,268 100.0% $48,592 100.0% $16,614 100.0%
Cost of sales.............................. 25,212 58.3 25,556 52.6 9,404 56.6
------- ----- ------- ----- ------- -----
Gross profit............................. 18,056 41.7 23,036 47.4 7,210 43.4
Selling, general and administrative
expense.................................. 9,491 21.9 13,312 27.4 4,713 28.4
Nonrecurring bonus expense................. -- -- -- -- 2,389 14.4
------- ----- ------- ----- ------- -----
Operating income......................... 8,565 19.8 9,724 20.0 108 0.6
Interest expense........................... 211 0.5 133 0.3 20 0.1
Other expense (income)..................... (219) (0.5) 5 -- (23) (0.1)
------- ----- ------- ----- ------- -----
Income before income taxes............... 8,573 19.8 9,586 19.7 111 0.6
Income tax expense......................... 349 0.8 194 0.4 39 0.2
------- ----- ------- ----- ------- -----
Net income............................... $ 8,224 19.0% $ 9,392 19.3% $ 72 0.4%
======= ===== ======= ===== ======= =====
</TABLE>

RCL GROUP

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31, ONE MONTH ENDED
------------------------------------- -----------------
1995 1996 APRIL 30, 1996
----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales.................................. $22,331 100.0% $37,322 100.0% $ 3,852 100.0%
Cost of sales.............................. 17,043 76.3 30,237 81.0 3,100 80.5
------- ----- ------- ----- ------- -----
Gross profit............................. 5,288 23.7 7,085 19.0 752 19.5
Selling, general and administrative
expense.................................. 3,222 14.4 4,360 11.7 245 6.4
------- ----- ------- ----- ------- -----
Operating income......................... 2,066 9.3 2,725 7.3 507 13.1
Interest expense........................... 55 0.3 130 0.3 13 0.3
Other expense (income)..................... (113) (0.5) (179) (0.5) (28) (0.7)
------- ----- ------- ----- ------- -----
Income before income taxes............... 2,124 9.5 2,774 7.5 522 13.5
Income tax expense......................... 45 0.2 171 0.5 34 0.9
------- ----- ------- ----- ------- -----
Net income............................... $ 2,079 9.3% $ 2,603 7.0% $ 488 12.6%
======= ===== ======= ===== ======= =====
</TABLE>

25
<PAGE> 27

RACING CHAMPIONS CORPORATION

PRO FORMA THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO PRO FORMA THREE MONTHS
ENDED MARCH 31, 1996

Net sales. Net sales increased $2.9 million, or 23.9%, to $15.2 million for
the three months ended March 31, 1997 from $12.3 million for the three months
ended March 31, 1996. The sales growth in 1997 was aided by a slight increase in
prices but was primarily due to 16.5% growth in the racing replica category with
the remainder of the growth attributable to the initial shipments of new
products -- principally, the Racing Champions Hot Rod Collection of non-racing
vehicle replicas and Comic Book Champions collectible pewter figures. These new
products generated net sales of $1.1 million in the first quarter of 1997.

Gross profit. Gross profit increased $1.7 million, or 24.3%, to $8.7
million for the three months ended March 31, 1997 from $7.0 million for the
three months ended March 31, 1996. The gross profit margin (as a percentage of
net sales) remained relatively consistent at 57.2% in 1997 compared to 57.0% in
1996. There were no major changes in the components of cost of sales.

Selling, general and administrative expenses. Selling, general and
administrative expenses increased $472,000, or 10.0%, to $5.2 million for the
three months ended March 31, 1997 from $4.7 million for the three months ended
March 31, 1996. As a percentage of net sales, selling, general and
administrative expenses decreased to 34.0% for the three months ended March 31,
1997 from 38.3% for the three months ended March 31, 1996. The decrease in
selling, general and administrative expenses as a percentage of net sales was a
result of spreading administrative expenses over higher sales volume.
Amortization expense of $554,000 and $560,000 for the three months ended March
31, 1997 and 1996, respectively, related to intangible assets created in
connection with the Recapitalization.

Operating income. Operating income increased $1.3 million, or 76.5%, to
$3.0 million for the first quarter of 1997 from $1.7 million for the first
quarter of 1996. As a percentage of net sales, operating income increased to
19.5% for the first three months of 1997 from 14.1% for the first three months
of 1996.

Interest expense. Interest expense of $885,000 and $977,000 for the three
months ended March 31, 1997 and March 31, 1996, respectively, related primarily
to bank term loans.

Income tax. Income tax expense for the three months ended March 31, 1997
and March 31, 1996 include provisions for federal, state and Hong Kong income
taxes at an effective rate of 40.0%.

THREE MONTHS ENDED MARCH 31, 1997

Net sales. Net sales were $15.2 million for the first quarter of 1997. This
quarter has historically been a lower volume quarter. Net sales for the RCI
Group and the RCL Group for the three months ended March 31, 1996 were $12.3
million. Net sales for the three months ended March 31, 1997 included racing
vehicle replicas and Racing Champions Mint non-racing vehicle replicas as well
as the initial shipments of the Racing Champions Hot Rod Collection and Comic
Book Champions collectible pewter figures.

Gross profit. Gross profit was $8.7 million for the first quarter of 1997.
The gross profit margin (as a percentage of net sales) was 57.2%. Net sales from
Hong Kong shipments, which generate lower gross profit due to price discounts,
were 62.5% of total net sales.

Selling, general and administrative expenses. Selling, general and
administrative expenses were $5.2 million in the three months ended March 31,
1997. As a percentage of net sales, selling, general and administrative expenses
were 34.0%. Amortization expense of $554,000 or 3.6% of net sales in the first
quarter of 1997 relates to intangible assets created in connection with the
Recapitalization.

Operating income. Operating income for the first quarter of 1997 was $3.0
million or 19.5% of net sales. Excluding the amortization of intangible assets,
operating income was $3.5 million or 23.2% of net sales.

Interest expense. Interest expense was $2.4 million in the first quarter of
1997. Interest expense related primarily to bank term loans and subordinated
debt incurred in connection with the Recapitalization.

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<PAGE> 28

Income tax. Income tax expense for the three months ended March 31, 1997
includes provisions for federal, state and Hong Kong income taxes at an
effective rate of 40.0%.

EIGHT MONTHS ENDED DECEMBER 31, 1996

Net sales. Net sales were $49.4 million for the eight months ended December
31, 1996. Net sales for the RCI Group and the RCL Group for the eight months
ended December 31, 1995 were $39.4 million. Net sales for the eight months ended
December 31, 1996 included shipments of racing vehicle replicas and Racing
Champions Mint products.

Gross profit. Gross profit was $28.0 million for the eight months ended
December 31, 1996. The gross profit margin was 56.7%. Included as a reduction to
gross profit was a purchase accounting inventory write-up adjustment which
resulted in an additional $1.4 million of cost of sales. Excluding the impact on
the inventory write-up adjustment, gross profit for the eight months ended
December 31, 1996 was $29.4 million or 59.5% of net sales.

Selling, general and administrative expenses. Selling, general and
administrative expenses were $15.2 million in the eight months ended December
31, 1996. As a percentage of net sales, selling, general and administrative
expenses were 30.9%. Amortization expense of $1.5 million or 3.1% of net sales
in the eight months ended December 31, 1996 relates to intangible assets created
in connection with the Recapitalization.

Operating income. Operating income for the eight months ended December 31,
1996 was $11.2 million or 22.8% net sales. Excluding the impact of the inventory
write-up adjustment and the amortization of intangible assets, operating income
was $14.1 million or 28.6% of net sales.

Interest expense. Interest expense was $6.7 million in the eight months
ended December 31, 1996. Interest expense related primarily to bank term loans
and subordinated debt incurred in connection with the Recapitalization.

Income tax. Income tax expense for the eight months ended December 31, 1996
includes provisions for federal, state and Hong Kong income taxes at an
effective rate of 41.3%.

RCI GROUP

FOUR MONTHS ENDED APRIL 30, 1996

Net sales. Net sales were $16.6 million for the four months ended April 30,
1996. This period includes the first quarter of the year which has historically
been a lower volume quarter. Net sales for the RCI Group and the RCL Group for
the four months ended April 30, 1995 were $9.2 million. Net sales for the four
months ended April 30, 1996 included racing vehicle replicas and the initial
shipments of Racing Champions Mint products.

Gross profit. Gross profit was $7.2 million for the four months ended April
30, 1996. The gross profit margin was 43.4%.

Selling, general and administrative expenses. Selling, general and
administrative expenses were $4.7 million in the four months ended April 30,
1996. As a percentage of net sales, selling, general and administrative expenses
were 28.4%. Non-recurring bonus expense of $2.4 million or 14.4% of net sales in
the four months ended April 30, 1996 related to a one time payment of incentive
compensation in connection with the Recapitalization.

Operating income. Operating income for the four months ended April 30, 1996
was $108,000 or 0.6% of net sales. Excluding the impact of the non-recurring
bonus expense, operating income was $2.5 million or 15.0% of net sales.

Interest expense. Interest expense was $20,000 in the four months ended
April 30, 1996. Interest expense related primarily to short-term working capital
bank loans.

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<PAGE> 29

Income tax. Income tax expense for the four months ended April 30, 1996
includes only a provision for state replacement taxes as the entities in the RCI
Group were S corporations and therefore not subject to federal income taxes.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

Net sales. Net sales increased $5.3 million, or 12.2%, to $48.6 million for
1995 from $43.3 million for 1994. The sales growth for 1995 was attributable to
(i) strong growth in the NASCAR racing replica category ($6.5 million), as the
Company expanded its NASCAR stock car product offerings and introduced NASCAR
racing trucks, and (ii) increases from other racing replica product lines ($1.7
million) including the introduction in late 1995 of NHRA top fuel dragster
replicas. These increases were partially offset by a decrease in a line of
vintage automobile and airplane die cast coin banks ($2.9 million) produced by
another company and resold to wholesalers by the Company. The sales increase in
1995 was accomplished despite the negative impact on first quarter sales due to
delays by the vehicle manufacturers in finalizing stock car designs that in turn
delayed the Company's ability to complete tooling on new models.

Gross profit. Gross profit increased $4.9 million, or 27.1%, to $23.0
million for 1995 from $18.1 million for 1994. The gross margin increased to
47.4% in 1995 from 41.7% in 1994. The increase in gross margin was due to a 2.5%
price increase in 1995 coupled with stable product costs and a benefit of 1.7%
from decorating and design efficiencies. In addition, gross profit benefited by
approximately 1.5% as a percent of net sales when the Company's products were
classified as import duty free beginning January 1, 1995, a reduction from 7.0%
of product cost in 1994.

Selling, general and administrative expense. Selling, general and
administrative expenses increased $3.8 million, or 40.0%, to $13.3 million for
1995 from $9.5 million for 1994. As a percentage of net sales, selling, general
and administrative expenses increased to 27.4% in 1995 from 21.9% in 1994. The
increase in selling, general and administrative expenses was a result of higher
royalty expenses which increased 4.8% (as a percentage of net sales) due to
increased rates on new product categories and specialty promotional programs.
The remainder of the increase was attributable to commissions expense which
increased as a result of a higher percentage of total sales being made to
customers assisted by outside sales representatives.

Operating income. Operating income increased $1.2 million, or 14.1%, to
$9.7 million for 1995 from $8.5 million for 1994. As a percentage of net sales,
operating income increased to 20.0% for 1995 from 19.8% for 1994.

Income tax. Income tax expense for 1995 and 1994 includes provisions for
state replacement taxes for the RCI Group as these entities were S corporations
and therefore not subject to federal income taxes.

RCL GROUP

ONE MONTH ENDED APRIL 30, 1996

Net sales. Net sales were $3.9 million for the one month ended April 30,
1996. Net sales consisted of related party sales to the RCI Group of $1.3
million. The remaining net sales (non-RCI Group sales) are redundant with the
net sales from Hong Kong shipments recorded by the RCI Group for April of 1996.

Gross profit. Gross profit was $752,000 for the one month ended April 30,
1996. The gross profit margin was 19.5%.

Selling, general and administrative expenses. Selling, general and
administrative expenses were $245,000 in the one month ended April 30, 1996. As
a percentage of net sales, selling, general and administrative expenses was
6.4%.

Operating income. Operating income for the one month ended April 30, 1996
was $507,000 or 13.1% of net sales.

Interest expense. Interest expense was $13,000 in the one month ended April
30, 1996. Interest expense related primarily to short-term working capital bank
loans.

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<PAGE> 30

Income tax. Income tax expense for the one month ended April 30, 1995
includes a provision for Hong Kong income taxes on certain entities in the RCL
Group while certain entities were tax free British Virgin Islands entities.

YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995

Net sales. Net sales increased $15.0 million, or 67.3%, to $37.3 million
for 1996 from $22.3 million for 1995. The sales growth for 1996 was attributable
to growth in NASCAR racing replica sales. Net sales consisted of related party
sales to the RCI Group of $11.3 million and $10.3 million in 1996 and 1995,
respectively. The remaining net sales (non-RCI Group sales) are redundant with
the net sales from Hong Kong shipments recorded by the RCI Group.

Gross profit. Gross profit increased $1.8 million, or 34.0%, to $7.1
million for 1996 from $5.3 million for 1995. The gross profit margin decreased
to 19.0% in 1996 from 23.7% in 1995. The decrease was due to an increase from
53.8% of 1995 net sales to 69.7% of 1996 net sales in non-RCI Group sales which
generate lower gross profit margins than sales to the RCI Group.

Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.2 million, or 35.5%, to $4.4 million for
1996 from $3.2 million for 1995. As a percentage of net sales, selling general
and administrative expenses decreased to 11.7% in 1996 from 14.4% in 1995. The
decrease in selling, general and administrative expenses as a percentage of net
sales was a result of an increase in the percentage of net sales represented by
non-RCI Group sales, which has the effect of spreading administrative expenses
over higher sales volumes.

Operating income. Operating income increased $659,000 or 31.9%, to $2.7
million in 1996 from $2.1 million for 1995. As a percentage of net sales,
operating income decreased to 7.3% for 1996 from 9.3% for 1995.

Interest expense. Interest expense increased to $130,000 for 1996 from
$55,000 for 1995. The increase was due to the bank working capital loans and
capital lease obligations.

Income tax. Income tax expense for 1996 and 1995 includes provisions for
Hong Kong income taxes on certain RCL Group entities while certain entities were
tax free British Virgin Islands entities.

LIQUIDITY AND CAPITAL RESOURCES

In connection with the Recapitalization, the Company and RCI entered into
the Credit Agreement with the First National Bank of Boston ("Bank of Boston"),
as agent, and certain other lenders. The Credit Agreement provides for a
Revolving Loan, Term Loan A, Term Loan B, a Deferred Term Loan and the issuance
of letters of credit. The Revolving Loan allows the Company to borrow up to $5.0
million at any time prior to April 30, 2001, based upon the levels of the
Company's accounts receivable, inventory and cash flows and the amount of letter
of credit exposure. The Company has not borrowed under the Revolving Loan as of
the date of the Prospectus. Term Loan A in the principal amount of $30.0 million
is due on April 30, 2001 and Term Loan B in the principal amount of $10.0
million is due on April 30, 2002. The proceeds of Term Loan A and Term Loan B
were used to finance the Recapitalization. The Credit Agreement also provided
the Company with the ability to borrow up to $8.0 million under a Deferred Term
Loan at any time between March 31, 1997 and April 30, 1997, to refinance the
$8.0 million Senior Notes. The Company repaid the Senior Notes on March 31, 1997
using proceeds from the Deferred Term Loan. The Deferred Term Loan matures on
April 30, 2001. All borrowings under the Credit Agreement are secured by
substantially all of the assets of the Company.

Term Loan A, the Revolving Loan and the Deferred Term Loan bear interest,
at the Company's option, at Bank of Boston's base rate plus a margin that varies
between 0.50% and 1.25% or at a reserve adjusted Eurodollar rate plus a margin
that varies between 2.00% and 3.25%. The applicable margin is based on the
Company's financial performance, and for Term Loan A, the Revolving Loan and the
Deferred Term Loan, the margin is currently 1.25% for base rate loans and 2.75%
for Eurodollar loans. Term Loan B bears interest at a reserve adjusted
Eurodollar rate plus 3.25%. The Credit Agreement requires the Company to pay a

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<PAGE> 31

commitment fee of one-half of one percent per annum on the average daily unused
portion of the Revolving Loan and the Deferred Term Loan.

At the completion of the Offering, the Company intends to replace the
Credit Agreement with a revised agreement permitting the Company to use the
proceeds of the Offering to repay certain indebtedness and redeem the Series A
Preferred Stock and Series B Preferred Stock and providing the Company with term
and revolving loan availability of approximately $40.0 million at lower interest
rates than currently provided by the Credit Agreement. These lower rates are
expected to range from a reserve Eurodollar rate plus 1.50% to 2.00%.

Bank of Boston's Hong Kong branch has made available to the Hong Kong
Subsidiary a line of credit of up to $5.0 million. Amounts borrowed under this
line of credit bear interest at the bank's cost of funds plus 2% and are
cross-guaranteed by RCI and the Hong Kong Subsidiary. As of January 31, 1997,
the Hong Kong Subsidiary had not borrowed under this line of credit.

The Company's anticipated debt service obligations in 1997 for scheduled
interest and principal payments are approximately $10.8 million for amounts
outstanding under the Credit Agreement and approximately $10.6 million for
indebtedness incurred pursuant to the Recapitalization. Assuming that the
Company does not incur additional indebtedness and after giving effect to the
Offering and the application of the net proceeds from the Offering as described
in "Use of Proceeds," the Company anticipates that its annual debt service
obligations will be $7.8 million through December 31, 1999.

The Company has met its working capital needs through funds generated from
operations and available borrowings under the Credit Agreement. The Company's
working capital requirements fluctuate during the year based on the timing of
the racing season. Due to seasonal increases in demand for the Company's racing
replicas, working capital financing requirements are usually highest during the
third quarter and early in the fourth quarter. Capital expenditures for the
eight month period ended December 31, 1996 were $2.3 million ($3.3 million for
the full year combined). The Company expects that capital expenditures during
1997, principally for molds and tooling, will be approximately $5.0 million.
During 1996, the Company borrowed $40.0 million in connection with the
Recapitalization and repaid $3.1 million of principal related to the bank term
loans. The Company believes that its cash flow from operations, cash on hand and
borrowings under the Credit Agreement will be sufficient to meet its working
capital and capital expenditure requirements and provide the Company with
adequate liquidity to meet its anticipated operating needs for the foreseeable
future. However, any significant future product or property acquisitions
(including up-front licensing payments) may require additional debt or equity
financing.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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<PAGE> 32

BUSINESS

GENERAL

Racing Champions is a leading producer and marketer of collectible scaled
die cast vehicle replicas. The Company is best known for its extensive line of
officially licensed, high quality collectible replicas of actual race cars and
related vehicles from the five most popular U.S. professional racing series,
including NASCAR. Since its inception in 1989, the Company has capitalized on
the growing popularity of motor sports by offering an expanding line of high
quality, affordable racing replicas targeted toward racing fans and adult
collectors. The Company believes that it has the largest domestic market share
in the die cast racing replica category. Beginning in 1996, the Company
successfully expanded into non-racing collectibles by introducing the Racing
Champions Mint line of die cast replicas of classic and late-model vehicles. The
Company is continuing this expansion in 1997 by introducing an additional line
of non-racing vehicle replicas and two new lines of collectible pewter figures.
From 1990, the Company's first full year of operations, through 1996, the
Company's net sales grew from approximately $5 million to $66 million.

COLLECTIBLES INDUSTRY

The collectibles industry is composed of numerous niche markets served by a
wide variety of producers and distributors. Collectible products include
figurines, dolls, ceramic buildings, prints, plates, glass, ornaments, steins,
music boxes, trading cards and die cast items, including vehicles. Collectible
products are generally of high quality, produced in limited quantities and
targeted to adults. According to the Collectibles Industry Report for 1996 by
Unity Marketing, an independent market research firm, the collectibles industry
generated customer sales of approximately $8.0 billion in the United States in
1995. This represented a 13.0% increase from 1994 and a 23.0% increase from
1993. Demographic trends are expected to positively impact the industry, as the
baby boom generation ages and has higher discretionary income that can be spent
on leisure goods such as collectibles. The Company is currently focused on the
following two segments of the collectibles market.

DIE CAST VEHICLE REPLICAS

The die cast vehicle industry generated consumer sales of approximately $1
billion in the United States in 1996. Die cast vehicles include airplanes,
trains, tractors, and most significantly, automobiles and trucks and have been
produced for many years by a wide variety of companies. While a significant
percentage of die cast products have historically been sold as toys, an active
base of adult die cast collectors has developed over time. Various secondary
markets for die cast vehicles have subsequently developed with a number of
periodicals regularly reporting the secondary market value of a wide variety of
die cast vehicles.

Non-racing Vehicle Replicas. The non-racing die cast vehicle replicas
primary market is comprised of boys ages five and over and adults. Collectible
periodicals have for many years included die cast vehicles such as 1:64 scale
cars originally produced by Matchbox(R). While collector interest in die cast
cars continues, the Company believes that the quality of new 1:64 scale vehicles
has declined over the years as other manufacturers reduced features and costs in
order to compete on a price basis with toys. The Company has targeted its Racing
Champions Mint and Hot Rod Collection to adult collectors who make multiple
purchases of die cast vehicles because of their affinity for automobiles and
trucks, the authenticity of the replicas and the fun of collecting.

Racing Replicas. Due to the popularity of motor sports, racing replicas
emerged as a significant and growing category of the die cast vehicle industry.
The racing replica industry's primary market is racing fans and adult
collectors. The Company believes that its customers are predominately male with
approximately 80% age 24 and older. These fans are attracted to racing replicas
due to the highly detailed, precise nature of the replicas and the popularity of
racing and the teams, drivers and sponsors represented by the replicas.
Established secondary markets exist for racing replica products, including the
Company's, with market values reported in collector magazines such as Becketts,
Die Cast Digest and Tuff Stuff's RPM.

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The Company believes that demand for racing replicas will continue to
increase as the interest in motor sports grows. The North American motor sports
industry currently enjoys a large and growing spectator base with total
attendance in 1996 exceeding 15.4 million at 215 sanctioned events. By
comparison, approximately 14.6 million people attended the 240 NFL regular
season games. The most popular of the motor sports circuits is the NASCAR
Winston Cup Series. From 1990 to 1996, attendance at Winston Cup events
increased from approximately 3.3 million to 5.5 million, an increase of
approximately 67%. During the same period, sales of NASCAR licensed merchandise
have increased from $60 million to $770 million, a compound annual growth rate
of approximately 53%. Racing Champions has contributed to this growth and has
been NASCAR's leading licensee since 1992. Overall Nielsen ratings for Winston
Cup telecasts increased approximately 20% from 1994 to 1996 and household
viewership increased approximately 27% for the same period. The growth in motor
sports in general, and NASCAR in particular, is expected to continue for a
number of reasons, including: (i) the opening of new superspeedways in the
Dallas/Ft. Worth and Los Angeles markets and the inclusion of these markets in
the 1997 Winston Cup Series; (ii) the expansion and upgrade of many existing
motor sports facilities throughout the U.S.; (iii) the conducting of IRL and
other non-NASCAR events at traditional NASCAR venues; and (iv) increased
television exposure in response to favorable ratings increases.

COLLECTIBLE FIGURES AND FIGURINES

Collectible figures and figurines are the largest category within the
collectibles industry with over $3 billion in consumer sales in 1996. These
figures and figurines are produced in various mediums including acrylic,
plastic, porcelain, crystal and pewter and depict characters from a wide variety
of themes including nostalgia, entertainment, sports and wildlife. The majority
of this market includes higher quality figures and figurines which are generally
intended for display. These items are often offered in limited edition sets,
which enhances their collectibility. A portion of this market includes
collectible "action" figures, which typically are plastic, and represent
characters from comics, movies, television shows or professional sports.
Established secondary markets exist for collectible action figures, with market
values reported in collector magazines such as White's Collecting Figures and
Action Figure Digest.

Comic Book Characters. Comic books have been an entertainment medium since
their inception in the late 1930's. Many of today's favorite mythical characters
were created in the pages of comic books, including such popular superheroes as
Batman, Superman and Spiderman. Related entertainment products such as movies
and television programs increase the reach of comic book characters to a wide
spectrum of consumers and collectors. Comic books and comic book characters have
grown into a significant adult collectibles category as a result of comic books'
60 year history, unique and imaginative characters and thousands of published
titles. The comic book character market primarily attracts adult males and is
supported through national and regional collector shows, auctions and dedicated
publications such as Overstreets Price Guides, Wizard Magazine and Fan Magazine.

Sports Collectibles. The sports collectible and memorabilia business has
grown over the last decade from primarily trading cards to encompass a large
variety of products including autographed equipment, pictures and replica
figures. The collector base consists of both children and adults, the majority
of whom are male. Sports memorabilia and collectible products are in high demand
due to the increase in media exposure and the celebrity status afforded past and
present athletes. Collector shows, auctions and dedicated publications such as
Becketts and Sports Collectors Digest help support the growth in secondary
market trading of sports collectibles and memorabilia which has further enhanced
collector interest in the category.

BUSINESS STRATEGY

The Company's objectives are to (i) expand its racing replica business by
capitalizing on the growing popularity of motor sports and (ii) leverage its
brand name, reputation with collectors and established distribution and
manufacturing relationships by developing new collectible products. The
Company's primary strategies for achieving these objectives are as follows:

Produce Highly Detailed, Authentic Replicas. A significant component of the
Company's success is its expertise in producing highly detailed, scaled replicas
known for their quality workmanship and authenticity.

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Producing authentic collectibles generally requires the Company to secure
licensing agreements with the groups or individuals representing the item or
person to be replicated. As an example, the Company's racing replicas require
licensing agreements with racing teams, drivers and sponsors, vehicle
manufacturers and major racing series sanctioning bodies. The Company has
committed substantial resources toward the support of its licensing activities
which currently includes over 450 licenses and believes its licensing experience
and relationships with licensors provide it with a competitive advantage.

Develop New Collectible Products. The Company is continuously developing
new collectible products both within its current product categories and in new
areas. Management has developed specific criteria for evaluating and developing
new collectible products. These criteria include (i) the long-term viability and
market appeal of the person or object being replicated, (ii) the consumer's
desire to collect the product, (iii) the ability to produce ongoing series of
the product in a variety of styles, (iv) the suitability of the product for
distribution through mass merchant retailers and (v) an identifiable group of
targeted collectors for the product. These and other factors when taken together
allow Racing Champions to create innovative products designed to stimulate and
maintain collector interest. Since 1994, the Company has developed eight new
product lines, including Racing Champions Mint which generated $9.7 million in
net sales in its first year.

Foster Collectibility. To foster the collectibility of its product lines,
the Company carefully manages product quantities, staggers product release
dates, continuously freshens its product offerings, produces special editions,
utilizes distinctive packaging and adds additional features such as serial
numbers, display stands, emblems, trading cards and certificates of
authenticity. The Company has also enhanced collectibility by offering product
lines in a large variety of styles. As an example, the Company's racing replica
product category has over 900 different styles that are released in managed
quantities and require frequent updates due to changes in sponsors, vehicle
styling, graphics and drivers. The Company believes it has established
considerable brand loyalty among its collector base, many of whom purchase a
substantial number of the Company's products each year.

Offer Affordable Collectibles Through Mass Market Distribution. The Company
believes its distribution through mass merchants such as K-Mart, Target, Toys
'R' Us and Wal-Mart provides a strong demographic fit with its targeted
customers. By focusing on this high volume channel of distribution rather than
traditional collectible channels such as giftware, hobby and collector shops,
direct response and direct mail collector clubs, the Company also realizes
substantial economies of scale which lower its product and selling costs and in
turn allow the Company to sell at reduced prices without adversely affecting
quality. In order to broaden the potential collector base for its products, the
Company's replicas are affordably priced, typically under $30 at retail.

Maintain Dedicated External Manufacturing Relationships. The Company
believes that its dedicated supplier base together with the local oversight and
coordination provided by the Hong Kong Subsidiary provide it with certain
competitive advantages including a rapid product development capability and a
highly flexible, reliable and high quality supply source. All but two of its six
manufacturers are exclusively dedicated to the production of the Company's
products and all are privately owned by independent Chinese entrepreneurs. The
Company is not bound to specific order levels and consequently can quickly
adjust output levels in response to increased or decreased product demand. In
addition, the Company generally produces only enough product to satisfy current
outstanding orders which allows Racing Champions to maintain relatively low
inventory levels.

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PRODUCTS

The Company produces products in the die cast racing replica, non-racing
vehicle replica and collectible figure categories. Since 1989, the Company has
continually introduced new products and expanded its product lines. The
Company's current products were introduced in the following years:

<TABLE>
<CAPTION>
YEAR OF INTRODUCTION PRODUCTS
- -------------------- --------
<S> <C>
1989 1:64 stock car

1990 1:87 team transporter

1991 1:64 team transporter; 1:24 stock car

1993 1:24 pit stop display; 1:64 and 1:24 Premier Edition stock
cars

1994 1:64 Indy style race car; 1:24 Indy style race car; 1:64
sprint car; 1:24 sprint car

1995 1:64 racing truck; 1:24 stock car with opening hood; 1:24
racing truck; 1:18 stock car with opening hood; 1:9 racing
motorcycle; 1:24 top fuel dragster

1996 1:64 stock car with opening hood; 1:144 stock car; 1:64
top fuel dragster; 1:64 funny car; 1:64 pro stock drag
racer; 1:24 funny car; 1:24 pro stock drag racer; 1:64
Racing Champions Mint

1997 1:144 racing truck; 1:144 team transporter; 1:144 top fuel
dragster; 1:144 funny car; 1:144 pro stock drag racer;
1:24 Hot Rod Collection; 1:64 Hot Rod Collection; Comic
Book Champions pewter figures; Sports Champions pewter
figures; 1:144 Racing Champions Mint
</TABLE>

RACING REPLICAS

The Company's racing replicas include a comprehensive line of scaled stock
cars, trucks and team transporters representing most of the vehicles competing
in the current year's NASCAR Winston Cup Series, Busch Grand National Series and
Truck Series by Craftsman. The Company also produces replicas from other popular
racing series including NHRA drag racing, CART and IRL Indy style racing and
World of Outlaws sprint car racing, as well as Honda and Kawasaki racing
motorcycles. In 1996, Racing Champions produced over 900 different styles of
racing replicas, including various sizes such as 1:9, 1:18, 1:24, 1:64, 1:87 and
1:144 scale. A 1:24 scale stock car replica is approximately eight inches long
whereas a 1:64 scale stock car replica is approximately three inches long. The
Company's racing replicas generally retail at prices ranging from $1 to $30.

NASCAR Vehicles: The NASCAR product line covers stock cars in the Winston
Cup and Busch Grand National Series and racing trucks in the NASCAR Truck Series
by Craftsman. NASCAR stock cars were the Company's initial offering in the
collectible racing replica category. NASCAR products include race cars and
trucks, team transporters and pit stop displays which are produced in various
sizes including 1:18, 1:24, 1:64, 1:87 and 1:144 scale. The NASCAR product line
is produced in an annual Regular Edition as well as special Premier and Preview
Editions. The Premier Edition is differentiated by more detailed painting,
special packaging and limited edition, serial numbered production runs. The
Preview Edition is released during the fourth quarter of a calendar year in
color schemes and sponsors anticipated for the upcoming year of racing. The
Company has entered into licenses with various NASCAR stock car and truck teams,
drivers, agents and sponsors, which allow the Company to replicate race cars and
race trucks and team transporters for over 100 teams.

Indy Style Cars: The Company began production of Indy style cars in 1994.
Indy style car products are produced in 1:24 and 1:64 scale sizes. The Company
has entered into licenses which allow the Company to replicate over 30 cars. The
Company also holds a license from the Indianapolis Motor Speedway to produce
special event related vehicles.

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<PAGE> 36

World of Outlaws Sprint Cars. The Company began production of the World of
Outlaws sprint car racing product line in 1994. Sprint car products are produced
in 1:24 and 1:64 scale sizes. The Company has entered into licenses which allow
the Company to replicate over 30 cars.

National Hot Rod Association Drag Racers. The Company introduced its NHRA
product line in 1995. NHRA products are currently produced in 1:24, 1:64 and
1:144 scale sizes. This product line includes licenses for the top fuel, funny
car and pro stock drag racing divisions which allow the Company to replicate
over 55 vehicles.

Honda/Kawasaki Motorcycles. The Company also introduced its Honda/Kawasaki
racing motorcycle product line in 1995. These products are produced in the 1:9
scale size. The Company has licensing agreements with Honda and Kawasaki to use
their team logos on the Company's products and packaging.

NON-RACING VEHICLE REPLICAS

Racing Champions Mint. In early 1996, the Company introduced the Racing
Champions Mint product line. The Racing Champions Mint is a new concept building
on the Company's racing replica success but still focusing on the collectible
die cast vehicle market. Each month the Company issues an assortment of six
serial numbered, highly detailed 1:64 scale replicas of classic and late model
cars and trucks in color schemes matching those used on the actual vehicle. Each
new issue is sequentially numbered and includes releases of new models and new
paint schemes. The replicas are selected from actual vehicles manufactured over
the past five decades. The limited production of these replicas enhances their
collectibility. In addition, the package contains a collector quality die cast
emblem of the vehicle's hood ornament or other insignia.

In 1997, the Company plans to introduce a 1:144 scale version of the Racing
Champions Mint. Also in 1997, the Company has entered into an agreement with
Petersen Publishing Company which allows for the use of the Motor Trend Magazine
trade name and trademarks on the Racing Champions Mint product line. The Company
believes that the Motor Trend name increases the authenticity of this product
line and creates additional interest with collectors and automobile enthusiasts.
In addition, the Company plans to promote this product line in Motor Trend
Magazine and on Motor Trend's cable television show.

Hot Rod Collection. Due to the success of Racing Champions Mint and
consumer feedback, the Company launched in early 1997 a new line of collectible
die cast hot rod car replicas. The Racing Champions Hot Rod Collection is based
on an exclusive license with Petersen Publishing Company's Hot Rod Magazine and
includes custom designed hot rod cars in 1:24 and 1:64 scale sizes. In addition
to the license, the Company will promote this product line in Hot Rod Magazine
and on Hot Rod Magazine's cable television show and Power Tour of various U.S.
cities. Like Racing Champions Mint, new Hot Rod Collection models and styles
will be released in monthly assortments. Each vehicle in the Racing Champions
Hot Rod Collection is produced in limited quantity and includes a serial number
to enhance collectibility.

COLLECTIBLE PEWTER FIGURES

In 1997, the Company introduced a new product category, collectible pewter
figures. High quality pewter figures had not previously been widely available
through mass merchants. The Company's initial focus related to this product
category is two proven and highly recognizable licensed properties -- comic book
characters and popular athletes. Products in this category will be released in
continuing series. Replicas of individual comic book characters and popular
athletes will be produced in limited production runs and will not be repeated.
In order to further collectibility, all products will be hand numbered and sold
with a certificate of authenticity. The initial two collectible pewter figure
product lines include:

Comic Book Champions. The Company recently began producing the Comic Book
Champions line of collectible pewter replicas, and shipped the first Comic Book
Champions replicas in March 1997. Comic Book Champions is a series of pewter
replicas of comic book characters in action poses. Each figure is mounted on a
die cast stand in front of an encased miniature reproduction of a comic book
cover on which the character appeared. Comic Book Champions will be produced in
Gold, Silver and Modern Age series, representing different eras of comic book
publishing. The Company has separate, nonexclusive licensing agreements with

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<PAGE> 37

Marvel Characters, Inc. and DC Comics to use the likenesses of certain comic
book characters and the reproductions of the comic book covers for this product.
Figures in the initial releases will include Superman(R), Batman(R),
Spiderman(R), Captain America(R), the Incredible Hulk(R) and the Joker(R).

Sports Champions. The Company recently began producing the Sports Champions
line of collectible pewter replicas, and shipped the first Sports Champions
replicas in May 1997. Sports Champions is a series of pewter replicas of popular
athletes. Each replica is mounted on a die cast stand in front of an encased
miniature reproduction of a Sports Illustrated magazine cover on which the
athlete appeared. The Company has a licensing agreement with Sports Illustrated
to use its trade name and the reproductions of its magazine covers. The Company
is also negotiating licensing agreements with several major sports leagues
(including the National Football League, Major League Baseball, the National
Hockey League and the National Basketball Association) and has entered into
licenses with several professional athletes to use their likenesses on the
Sports Champions replicas. The Company anticipates entering into licensing
agreements with additional sports figures as the Sports Champions product line
is developed. The initial releases of the Sports Champions line will include
Muhammad Ali, Frank Thomas, Ken Griffey, Jr., Joe Montana and Arnold Palmer,
among others.

LICENSES

The Company markets virtually all of its products under licenses from other
parties. These licenses are generally limited in scope and duration and
authorize the sale of specific licensed products on a nonexclusive basis for a
limited period of time. The Company has over 450 licenses with various race team
owners, drivers, sponsors and agents, generally for terms of 1 to 3 years. The
Company's racing replicas are also officially licensed by major race sanctioning
bodies including NASCAR, CART, IRL, NHRA and World of Outlaws. Although the
Company generally does not pursue exclusive licenses, the Company's licensing
arrangements with NASCAR and World of Outlaws are exclusive through December 31,
1997. The Company has agreed to terms for the renewal of its license agreement
with NASCAR on a nonexclusive basis for three years commencing on January 1,
1998. The Company anticipates that certain of its competitors will also license
the NASCAR trademark on a nonexclusive basis for use on racing replicas in 1998,
which could result in increased competition for the Company's NASCAR racing
replicas. The Company has also obtained licenses to produce replicas of Honda
and Kawasaki racing motorcycles through January 31, 1998. The Company also has
license agreements with the major automobile and truck manufacturers, including
Chevrolet, Ford, Oldsmobile, Pontiac, Buick, Cadillac, Dodge, Chrysler and
Kenworth. The Company operates an office in Charlotte, North Carolina to
maintain its licenses for racing replicas for vehicles competing in the various
NASCAR and World of Outlaws series.

The Company has entered into additional licensing arrangements in
connection with the development of its Comic Book Champions and Sports Champions
product lines. The Company has separate licensing agreements with Marvel
Characters, Inc. and DC Comics (a division of Time Warner Entertainment Company
L.P.) to use the likenesses of certain comic book characters and the
reproductions of comic book covers on which they have appeared. The license
agreement with Marvel Characters, Inc. expires on December 31, 1999, while the
license agreement with DC Comics expires on December 31, 1998. The Company also
has a licensing agreement with Sports Illustrated to use its trade name and the
reproductions of magazine covers which expires on June 30, 1999. The Company is
negotiating licenses with the National Football League, Major League Baseball,
the National Hockey League and the National Basketball Association to produce
its Sports Champions replicas. The Company has entered into licensing agreements
with several professional athletes to use their likenesses on the Sports
Champions replicas, and anticipates entering into licensing agreements with
additional professional athletes as the Sports Champions product line is
developed.

Royalty rates for racing replicas vary by racing category but generally
range in aggregate for all licensors from 12% to 19% of the Company's sales
price. Certain special or limited edition products may carry higher royalty
rates. Royalty rates related to non-racing vehicle replicas range in aggregate
from 3% to 10% of the Company's sales price. For collectible pewter figures the
Company expects to pay royalty rates in aggregate

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from 10% to 23% of the Company's sales price depending on the number of parties
involved and the market value of the property or athlete. Royalties are
generally paid on a quarterly basis.

PATENTS AND TRADEMARKS

The Company has registered several trademarks with the U.S. Patent and
Trademark Office, including the mark "Racing Champions." Other trademark
registrations are currently pending, including Racing Champions Mint(TM), Comic
Book Champions(TM), Sports Champions(TM) and Collectible Champions(TM). The
Company holds a U.S. patent for its trading card, display stand and model
vehicle, and has a patent application pending for its unique packaging system
which includes a die cast vehicle, emblem and display stand. The Company
believes that there is significant value in its Racing Champions trade name and
trademark and plans to build additional value through increased customer
awareness of many of the Company's trade names and trademarks.

SALES AND DISTRIBUTION

In 1996, approximately 76% of the Company's net sales were distributed
through national and regional retail chains including K-Mart, Target, Toys 'R'
Us, Wal-Mart, Hills, Meijers and ShopKo. The Company's products are sold at more
than 20,000 retail outlets throughout North America. The Company utilizes
electronic data interchange with its major retail customers to monitor retail
inventories and point of sale information and receive and process customer
orders.

In addition, the Company sells to a limited number of wholesale customers
which as a group represented approximately 15% of net sales for 1996. The
wholesale channel distributes Racing Champions' products to hobby and collector
shops throughout North America. The Company's sales to this channel on a
percentage basis have been declining as its distribution through major national
and regional retailers has increased.

The Company also distributes products through the premium/promotional
distribution channel. In total, this channel represented approximately 9% of net
sales for 1996. Premium/promotional customers include Texaco, John Deere, Citgo,
NAPA, Kellogg's, Procter & Gamble, Mac Tools and Snap-On Tools. The Company's
premium/promotional customers offer the Company's customized products to their
customers through their own distribution outlets (e.g., Texaco, John Deere and
Citgo), through special promotions (e.g., Kellogg's and Procter & Gamble) or
with the purchase of their product (e.g., Snap-On Tools).

In total, the Company sells to approximately 300 customers. The Company's
internal sales force provides direct customer contact with virtually all of the
Company's retail and wholesale accounts. This sales force is supplemented by
five external sales representative organizations which are divided
geographically. These external sales representative organizations provide more
frequent and wider customer service and solicitation of the national and
regional retailers and support approximately 61% of the Company's 1996 net
sales. The Company's internal sales force complements the external sales force
by providing a more limited direct relationship between the Company and the
accounts assigned to the external sales force. In addition, certain large
accounts are designated as "house accounts" and are handled exclusively by the
Company's internal sales staff. Sales representatives generally earn commissions
of 3% to 5% of the net sales price from their accounts, and their commissions
are not affected by the involvement of the Company's internal sales force with a
customer or sale.

MARKETING

The Company is introducing marketing programs which are directed toward
collectors and potential new customers that fit the demographic profile of the
Company's target market. The focus of the Company's marketing plan is to
increase awareness of the Company's product offerings and brand name. The
Company utilizes the following media in its marketing plan.

Print Advertising. The Company places advertisements in collector's
publications with high, specific market penetration such as die cast collector
publications and figure collector publications. The Company also

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advertises in national publications read by its targeted collectors and
enthusiasts, such as NASCAR Magazine, Die Cast Digest, Hot Rod Magazine, Motor
Trend, DC and Marvel comic books, and Sports Illustrated.

Public Relations. The Company has developed a sustained public relations
effort to build relationships with editors at collector publications. Ongoing
product notices keep editors abreast of changing products, increase the
Company's credibility and market acceptance, and encourage the editorial staffs
of these publications to give adequate coverage to the Company's products.

Co-op Advertising. The Company works closely with retail chains to plan and
execute ongoing retailer driven promotions and advertising. The programs usually
involve promotion of the Company's products in retail customers' print
circulars, mailings and catalogs.

Direct Consumer. The Internet is an increasingly important part of the
Company's marketing plan as collectors have quickly adopted the Internet as a
preferred way to communicate with other enthusiasts about their hobby. The
Company has established a proprietary World Wide Web site (www.racingchamps.com)
on the Internet which highlights its products, lists product release dates and
collects information directly from consumers. The Company also gathers customer
information through customer letters, e-mail, telephone calls and product
surveys. The Company uses this customer information for market research and
dissemination of new product information.

COMPETITION

The Company believes that it had the largest domestic share in 1996 of the
collectible scaled die cast racing replica category. The Company competes with
the other producers of collectible scaled die cast racing replicas, such as
Action Performance Companies, Inc., which generally distribute their products
through direct marketing, collector clubs and wholesalers who, in turn,
distribute through hobby and collector shops. In contrast, most of the Company's
products are distributed through the mass merchant channel of distribution.
Mattel and Hasbro have also recently entered the racing replica market and are
expected to distribute competing die cast racing replicas in the mass merchant
channel of distribution.

The Company also competes with the producers of miniature die cast toy
vehicles such as Matchbox(R) and Hot Wheels(R) who, like the Company,
principally distribute through the mass merchant channel. In this market, the
Company competes with Tyco Toys, Inc. (Matchbox), Mattel, Inc. (Hot Wheels),
Lewis Galoob Toys, Inc. (Micro Machines(R)), Playing Mantis (Johnny
Lightning(R)) and Road Champs, Inc. as well as other domestic and foreign
producers of miniature die cast toy vehicles. Many of the Company's competitors
have greater financial, technical, marketing and other resources than the
Company.

The Company believes that its competitive position is enhanced by a number
of factors, including product quality, features, pricing and diversity, its
ability to recognize trends in its product markets and anticipate shifts in
consumer preferences, its success in designing and marketing new products, the
availability of adequate sources of manufacturing capacity and the ability of
its third party manufacturers to meet delivery schedules, and its ability to
renew existing licenses and to enter into new licenses. In addition, the Company
has sought to develop brand loyalty, to produce products with a proven track
record of collectibility, and to capture shelf space at leading mass merchants
and other retailers.

MANUFACTURING

Hong Kong Office. The Hong Kong Subsidiary is located in Kowloon, Hong Kong
and employs 28 people who oversee all aspects of the Company's product
manufacturing activities. The Hong Kong Subsidiary sources raw materials and
packaging, performs engineering and graphic art functions, executes the
production schedule, provides on-site quality control, facilitates third-party
safety testing and coordinates the delivery of shipments for export from Hong
Kong to the United States.

Die Cast Vehicle Manufacturing. Virtually all of the Company's die cast
vehicle products are manufactured by four independently owned factories located
in the Shenzhen region of China, approximately 30 to 40 miles from Hong Kong.
All of these factories (the "Dedicated Manufacturers") are exclusively dedicated
to manufacturing the Company's products and all are privately owned by
independent Chinese entrepreneurs. All

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products are manufactured to the Company's specifications using molds and
tooling that are owned by the Company. The Dedicated Manufacturers own the
manufacturing equipment and machinery, and purchase raw materials, hire workers
and plan production which includes subassemblies, final assemblies and
packaging. The Company purchases fully assembled and packaged finished goods in
master cartons for distribution to its customers. Most of the Dedicated
Manufacturers have been supplying the Company for more than five years. The
Company's purchases in 1996 from the Dedicated Manufacturers, Win Yield, Sharp
Success, Sunrise and Shun Fung, were 31.3%, 29.9%, 22.9% and 15.8%,
respectively, of the Company's total purchases of die cast vehicle replicas. See
"Certain Transactions."

Over the next 24 months, the Dedicated Manufacturers are planning to
upgrade their factory facilities. With oversight from the Company, the Dedicated
Manufacturers have located a site in Dongguan (approximately 50 miles from Hong
Kong) named the Racing Industrial Zone (the "RIZ Complex") which, when fully
developed, will serve as a complex in which each independent Dedicated
Manufacturer will operate a free standing factory facility. The factory
facilities at the RIZ Complex are being developed by a third party who will
lease the factory facilities to the Dedicated Manufacturers. The construction of
the first free standing facility is currently underway and is expected to be
completed and occupied by one of the Dedicated Manufacturers in mid-1997. The
Company intends to establish an office in the RIZ Complex. This office would
house many of the functions that are currently performed in the Company's
Kowloon, Hong Kong office as well as provide more direct oversight and
coordination of the production activities.

Pewter Figures Manufacturing. The Company has entered into a development
and supply agreement with M-B Sales, L.P. ("M-B") headquartered in Westmont,
Illinois. Under the direction of the Company, M-B is arranging for the sculpting
and manufacturing of the Company's new pewter figure product lines. M-B is best
known as a developer of figures and other creative promotional ideas for select
clients such as McDonald's Corporation and Nestle's. M-B has relationships with
over 20 independent manufacturing suppliers in the Far East and is employing two
of its primary manufacturing suppliers to produce the Comic Book Champions and
Sports Champions product lines to specifications set by the Company. M-B intends
to develop other manufacturing suppliers who will be capable of producing the
Company's pewter products.

Product Development. New product development is constantly occurring as the
Company seeks to improve quality, update styles and add product lines. New
product design and updates are generally initiated domestically. The designing
process can take several days or a number of months depending upon whether the
process involves an enhancement to an existing product or a new product design.
The Company has been able to develop new products and make design changes
quickly due to its rapid approval process, integrated Hong Kong Subsidiary and
dedicated manufacturing.

Tooling. The Company is continuously developing new tooling and molds to
produce its die cast and pewter products. The Company's engineering staff works
closely with outside tool makers to design and create new tooling. Depending on
the size and complexity of the model, tools can cost from $20,000 to $120,000.
The Company often produces back-up tools for high volume models. The Company
owns all of its tools and provides them to the manufacturers during production.
Tools are returned to the Company when a product is no longer in production and
are stored for future use or destroyed.

Graphics. Existing product enhancements typically include graphics changes
to the vehicles for new color schemes, sponsor changes and/or driver changes and
revisions to product packaging. Graphics changes are photographed and forwarded
to the Hong Kong Subsidiary for incorporation into the Company's product line.
The Company's graphic arts personnel will redesign the car decorating process in
order to reflect the graphics changes. All changes are reviewed domestically by
Company personnel and samples are sent to racing teams and sponsors prior to
production for their approval.

Product Safety. The Company's products are designed, manufactured, packaged
and labeled to conform with the safety requirements of the American Society for
Testing and Materials and the Consumer Product Safety Commission and are
periodically reviewed and approved by independent safety testing laboratories.
The Company carries product liability insurance coverage with a limit of $5.0
million per occurrence. As of the date of the Prospectus, the Company has never
received a product liability claim.

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EMPLOYEES

As of March 31, 1997, the Company had 78 employees, 76 of which were
employed full-time. The Company emphasizes the recruiting and training of high
quality personnel and, to the extent possible, promotes people from within the
Company. The Company's employees are not covered by collective bargaining
agreements, and the Company considers its employee relations to be good. The
Company's continued success will depend in part on its ability to attract, train
and retain qualified personnel at all of its locations.

FACILITIES

The Company's facilities are as follows:

<TABLE>
<CAPTION>
DESCRIPTION SQUARE FEET LOCATION LEASE EXPIRATION
----------- ----------- -------- ----------------
<S> <C> <C> <C>
Corporate Headquarters.... 9,269 Glen Ellyn, Illinois January 2000
Foreign Headquarters...... 7,900 Kowloon, Hong Kong July 1998
Warehouse................. 19,183 Chicago, Illinois December 1998
Licensing Office.......... 600 Charlotte, North Carolina Month-to-Month
</TABLE>

REGULATION AND LEGAL MATTERS

On June 5, 1997, Petty Enterprises, Inc. filed a civil action in North
Carolina state court naming RCI as a defendant. The complaint relates to the
Company's production and sale of racing replicas bearing trademarks and trade
names owned by the plaintiff under a license agreement and makes a number of
allegations regarding unauthorized production, advertisement, use and sale by
the Company of such trademarks and trade names. The plaintiff seeks an
unspecified amount of compensatory and punitive damages and also seeks a court
order that the Company cease production, sale or promotion of products bearing
the plaintiff's trademarks or trade names and deliver all such products to the
plaintiff for destruction. The Company intends to vigorously defend the claims,
although no assurances can be given as to the outcome of this matter.

In the normal course of business the Company also may be involved in
various legal proceedings from time to time. The Company does not believe it is
currently involved in any claim or action the ultimate disposition of which
would have a material adverse effect on the Company.

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MANAGEMENT

DIRECTORS AND OFFICERS

The directors and officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert E. Dods........... 48 President and Director
Boyd L. Meyer............ 55 Executive Vice President and Director
Peter K.K. Chung......... 43 President of Racing Champions Limited and Director
Curtis W. Stoelting...... 37 Vice President - Finance and Operations and Secretary
John F. Olsen............ 43 Vice President - Sales
Peter J. Henseler........ 38 Vice President - Marketing
M. Kevin Camp............ 39 Vice President - Licensing and Assistant Secretary
Howard A. Schacter....... 31 Vice President - Communications
Helena Lo................ 37 Finance and Administration Manager
Kelvin Ng................ 36 Engineering Manager
Rose Lam................. 34 Marketing and Customer Service Manager
Jody L. Taylor........... 28 Controller
Michael A. Midtgaard..... 31 Information Systems Manager
Patrick A. Meyer......... 28 National Sales Manager
Avy H. Stein............. 42 Director
Samuel B. Guren.......... 50 Director
Daniel M. Gill........... 33 Director
</TABLE>

The Company's executive officers include the President, the President of
Racing Champions Limited and all Vice Presidents.

Robert E. Dods has served as a director and as President of Racing
Champions since April 1996. Mr. Dods co-founded RCI in 1989, and has served as
President of RCI since inception. Prior to founding RCI in 1989 Mr. Dods and
Boyd L. Meyer owned and operated Dods-Meyer, Ltd., a manufacturers'
representative agency which focused on selling products to mass merchants.

Boyd L. Meyer has served as a director and as Executive Vice President of
Racing Champions since April 1996. Mr. Meyer co-founded RCI in 1989, and has
served as Executive Vice President of RCI since inception. Prior to founding RCI
in 1989 Mr. Meyer and Robert E. Dods owned and operated Dods-Meyer, Ltd., a
manufacturers' representative agency which focused on selling products to mass
merchants.

Peter K.K. Chung has served as a director of Racing Champions and as
President of Racing Champions Limited since April 1996. Mr. Chung formed the RCL
Group in 1989 to handle the overseas operating activities of RCI and has served
as President of Racing Champions Limited since inception. Prior to 1989 Mr.
Chung was a contract manufacturer for various products for export from China to
the United States and Europe.

Curtis W. Stoelting has served as Vice President - Finance and Operations
and Secretary of Racing Champions since April 1996. Mr. Stoelting has also
served as Vice President - Finance and Operations of RCI since 1994. Prior to
joining RCI, Mr. Stoelting was employed for 12 years by Arthur Andersen LLP in
Chicago, most recently as a Senior Manager. Mr. Stoelting is a Certified Public
Accountant.

John F. Olsen has served as Vice President - Sales of Racing Champions
since April 1996. Mr. Olsen has also served as Vice President - Sales of RCI
since 1993. Prior to joining RCI, Mr. Olsen worked for a sales representative
organization located in New York and in this capacity represented the Racing
Champions line since 1989.

Peter J. Henseler has served as Vice President - Marketing of Racing
Champions since April 1996. Mr. Henseler has also served as Vice
President - Marketing of RCI since March 1996. Prior to joining RCI,

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Mr. Henseler was a director of marketing for McDonald's Corporation since 1988,
and was most recently responsible for in-store merchandising and worldwide
trademark licensing.

M. Kevin Camp has served as Vice President - Licensing and Assistant
Secretary of Racing Champions since April 1996. Mr. Camp has also served as Vice
President - Licensing of RCI since 1994. Prior to joining RCI, Mr. Camp held
various positions over a 10 year period while employed by NASCAR, most recently
serving as director of licensing and marketing.

Howard A. Schacter has served as Vice President - Communications of Racing
Champions since June 1997. Prior to joining Racing Champions, Mr. Schacter
worked for 10 years at Kemper Lesnik and Golin/Harris, international marketing
and communications agencies, and supported communications for such brands as
McDonald's, Sony, NutraSweet and Campbell Soup.

Helena Lo has served as Finance and Administration Manager of Racing
Champions Limited since 1989. Ms. Lo received a bachelor's degree in Business
Administration and prior to joining Racing Champions Limited, Ms. Lo was
employed by a chartered accounting firm.

Kelvin Ng has served as Engineering Manager of Racing Champions Limited
since 1989. Mr. Ng is a degreed mechanical engineer with extensive experience in
replicating vehicles.

Rose Lam has served as Marketing and Customer Service Manager of Racing
Champions Limited since 1989. Prior to joining RCL, Ms. Lam pursued various
studies and received a bachelor's degree in economics.

Jody L. Taylor has served as Controller since June 1996. Prior to joining
the Company, Ms. Taylor was employed for five years by Arthur Andersen LLP in
Chicago, most recently as a manager. Ms. Taylor is a Certified Public
Accountant.

Michael A. Midtgaard has served as Information Systems Manager of Racing
Champions, Inc. since 1994. Prior to 1994, Mr. Midtgaard served RCI for over
three years in various operations and systems areas.

Patrick A. Meyer has served as National Sales Manager of Racing Champions
since July 1996. Prior to joining Racing Champions, Mr. Meyer was employed as a
sales representative by a seller of computer hardware from 1993 to 1996 and as a
sales representative by Adolph Coors Company from 1991 to 1993. Patrick A. Meyer
is the son of Boyd L. Meyer.

Avy H. Stein has served as a director since April 1996. Mr. Stein is a
founder and Managing Director of Willis Stein. Along with Mr. Willis, Mr. Stein
is responsible for managing Willis Stein. Prior to founding Willis Stein, Mr.
Stein served as a Managing Director of Continental Illinois Venture Corporation
from 1989 through 1994, where Mr. Stein, along with Mr. Willis, was responsible
for managing Continental's private equity investment activities. Mr. Stein is a
director of Tremont Corporation and Petersen Publishing Company.

Samuel B. Guren has served as a director since April 1996. Mr. Guren is a
Managing Director of Baird Capital Partners, an affiliate of Robert W. Baird &
Co. Incorporated. Prior to joining Baird Capital Partners in February 1996, Mr.
Guren was a co-founder and managing partner of venture funds affiliated with
William Blair & Company. Mr. Guren is a director of Four M Corporation.

Daniel M. Gill has served as a director since April 1996. Mr. Gill is a
founder and Managing Director of Willis Stein. Prior to founding Willis Stein,
Mr. Gill served as a Managing Director of Continental Illinois Venture
Corporation from 1989 through 1994, where Mr. Gill was responsible for
initiating and structuring acquisitions, working with portfolio company
management teams on an on-going basis and arranging for the disposition of
portfolio investments.

The Company's Board of Directors (the "Board of Directors"), in accordance
with the Amended and Restated By-Laws of the Company (the "By-Laws"), has fixed
the size of the Board of Directors at eight directors. Within 90 days after the
completion of the Offering, the Company intends to identify and appoint two
individuals who are not currently affiliated with the Company as the remaining
members of the Board of Directors. All directors are elected to serve until the
next annual meeting of stockholders and until their successors are elected and
qualified.

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The Board of Directors intends to establish a Compensation Committee and an
Audit Committee upon or shortly after completion of the Offering. The Audit
Committee will be responsible for recommending to the Board of Directors the
appointment of independent auditors, reviewing the scope of annual audit
activities of the auditors, approving the audit fee payable to the auditors and
reviewing audit results. The Compensation Committee will review and recommend to
the Board of Directors the compensation structure for the Company's officers and
other managerial personnel, including salary rates, participation in incentive
compensation and benefit plans, fringe benefits, noncash perquisites and other
forms of compensation. The Compensation Committee will also administer the
Company's 1996 Key Employees Stock Option Plan and the Racing Champions
Corporation 1997 Stock Incentive Plan.

Executive officers will be elected each year at the annual meeting of
directors and will hold office until their resignation, death or removal, or
until the Board of Directors appoints a different person to the office.

Directors who are employees of the Company or are affiliates of members of
the Investor Group receive no compensation for services as members of either the
Board of Directors or committees thereof. Other directors will receive an annual
retainer of $7,500, payable in cash, and will receive a fee of $1,000 for each
Board of Directors meeting attended and $1,000 for each committee meeting
attended. Such fees for attendance at Board of Directors meetings and committee
meetings may not exceed $1,000 per day.

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION INFORMATION. The following table sets forth certain
information concerning compensation paid to, earned by or awarded to the
Company's Chief Executive Officer and each of the Company's four other most
highly compensated executive officers for the eight month period ended December
31, 1996. The persons named in the table are sometimes referred to herein as the
"named executive officers."

SUMMARY COMPENSATION TABLE(1)

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY(2) BONUS(3) OPTIONS (#) COMPENSATION(4)
--------------------------- --------- -------- ------------ ---------------
<S> <C> <C> <C> <C>
Robert E. Dods, President...................... $333,333 $ -- -- $ --
Boyd L. Meyer, Executive Vice President........ 333,333 -- -- --
Peter K.K. Chung, President of Racing Champions
Limited...................................... 333,333 -- -- --
Curtis W. Stoelting, Vice President - Finance
and Operations and Secretary................. 100,178 139,072 83,008 1,381
John F. Olsen, Vice President - Sales.......... 83,511 80,350 41,304 2,024
</TABLE>

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

(1) All amounts are limited to compensation paid or earned after the
Recapitalization on April 30, 1996.

(2) Messrs. Dods, Meyer, Chung, Stoelting and Olsen receive annual base salaries
of $500,000, $500,000, $500,000, $150,000 and $125,000, respectively. See
"-- Employment Agreements."

(3) Consists of amounts paid pursuant to the Company's 1996 Key Employees
Performance Compensation Plan. See "-- 1996 Key Employees Performance
Compensation Plan."

(4) Consists of premiums paid by the Company for term life insurance under which
the named executive officer is the beneficiary.

43
<PAGE> 45

OPTIONS GRANTED DURING 1996. The following table provides certain
information regarding stock options granted to the named executive officers of
the Company during the year ended December 31, 1996.

OPTION/SAR GRANTS IN LAST YEAR

<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
INDIVIDUAL GRANTS AT ASSUMED ANNUAL
-------------------------------------------------------------------- RATES OF STOCK PRICE
PERCENT OF TOTAL APPRECIATION
NUMBER OF SECURITIES OPTIONS GRANTED FOR OPTION TERM
UNDERLYING OPTIONS TO EMPLOYEES IN EXERCISE ---------------------
NAME GRANTED(1) FISCAL YEAR PRICE EXPIRATION DATE 5% 10%
---- -------------------- ---------------- -------- --------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Curtis W. Stoelting.... 83,008 25.0% $0.13 April 30, 2006 $6,786 $17,199
John F. Olsen.......... 41,504 12.5 0.13 April 30, 2006 3,393 8,600
</TABLE>

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

(1) Options become exercisable for 20% of the shares underlying the options on
April 30 of each year from 1997 to 2001.

FISCAL YEAR-END OPTION VALUES. The following table provides certain
information regarding the value of unexercised options held by the named
executive officers at December 31, 1996. No named executive officer exercised
any options during the year ended December 31, 1996.

AGGREGATED FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS
UNEXERCISED OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
---- -------------------------------------- -----------------------------------------
<S> <C> <C>
Curtis W. Stoelting........ 0/83,008 $0/1,068,313
John F. Olsen.............. 0/41,504 0/534,156
</TABLE>

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

(1) Calculated based on an assumed initial public offering price of $13.00 per
share.

1996 KEY EMPLOYEES STOCK OPTION PLAN. On April 30, 1996 in connection with
the Recapitalization, the Board of Directors adopted, and the Company's
stockholders subsequently approved, the 1996 Key Employees Stock Option Plan
(the "Stock Option Plan"). Under the Stock Option Plan, the Board of Directors,
or the Compensation Committee of the Board of Directors if so designated by the
Board of Directors, may grant options to purchase up to 415,041 shares of Common
Stock to executives or other key employees of the Company. Options granted under
the Stock Option Plan may be either "incentive stock options," which qualify for
special tax treatment under the Internal Revenue Code, or nonqualified stock
options. Options will expire at such time as the Board of Directors or
Compensation Committee determines, provided that no stock option may be
exercised later than the tenth anniversary (the fifth anniversary in certain
cases) of the date of its grant. Options cannot be exercised until the vesting
period, if any, specified by the Board of Directors or Compensation Committee
has expired. Options are not transferable other than by will or the laws of
descent and distribution, and may be exercised during the life of the employee
only by him or her. No options may be granted under the Stock Option Plan after
December 31, 2005, which is the date the Stock Option Plan terminates. However,
any options outstanding on December 31, 2005 will remain in effect in accordance
with their terms. The Company does not intend to grant additional options under
the Stock Option Plan.

The option price per share is determined by the Board of Directors or the
Compensation Committee, but for incentive stock options cannot be less than 100%
(110% for certain stockholders) of the fair market value of the Common Stock on
the date such option is granted. Payment of the exercise price may be made in
cash or by the surrender of shares of Common Stock having a fair market value on
the date of exercise equal to the exercise price.

Prior to the date hereof, options to purchase 332,033 shares were granted
to certain employees of the Company. Each of these options become exercisable
20% each year over five years commencing on the first anniversary of the date of
grant.

44
<PAGE> 46

STOCK INCENTIVE PLAN. On April 8, 1997, the Board of Directors of the
Company adopted, and the Company's stockholders approved, the Racing Champions
Corporation Stock Incentive Plan (the "Incentive Plan"). Under the Incentive
Plan, the Board of Directors, or the Compensation Committee of the Board of
Directors if so designated by the Board of Directors, may grant options to
purchase up to 311,852 shares of Common Stock to executives or other key
employees of the Company. Options granted under the Stock Option Plan may be
either "incentive stock options," which qualify for special tax treatment under
the Internal Revenue Code, or nonqualified stock options. Options will expire at
such time as the Board of Directors or Compensation Committee determines,
provided that no stock option may be exercised later than the tenth anniversary
(the fifth anniversary for certain stockholders) of the date of its grant.
Options cannot be exercised until the vesting period, if any, specified by the
Board of Directors or Compensation Committee has expired. Options are not
transferable other than by will or the laws of descent and distribution, and may
be exercised during the life of the employee only by him or her. No options may
be granted under the Stock Option Plan after April 8, 2007, which is the date
the Stock Option Plan terminates. However, any options outstanding on April 8,
2007 will remain in effect in accordance with their terms.

The option price per share is determined by the Board of Directors or the
Compensation Committee, but for incentive stock options cannot be less than 100%
(110% for certain shareholders) of the fair market value of the Common Stock on
the date such option is granted. Payment of the exercise price may be made in
cash or by the surrender of shares of Common Stock having a fair market value on
the date of exercise equal to the exercise price.

In the discretion of the Board of Directors or the Compensation Committee,
any option granted under the Incentive Plan may be accompanied by a reload
option. A reload option may be granted to an optionee who pays for the exercise
of all or part of an option with shares of Common Stock. The reload options
represent an additional option to acquire the same number of shares of Common
Stock as is used by the optionee to pay for the exercise of his underlying
option. A reload option is subject to all of the terms and conditions of the
underlying option, except that the exercise price for a reload option will be at
least equal to 100% of the fair market value of the Common Stock covered thereby
on the date the reload option is granted (i.e., the date the underlying option
is exercised). The reload option may only be exercised if the option period of
the underlying option to which the reload option relates has not expired.

The Company anticipates granting options to purchase up to 148,752 shares
of Common Stock with an exercise price equal to the initial public offering
price to officers and key employees of the Company on or before the closing of
the Offering, including options to purchase up to 78,852 shares of Common Stock
that will be accompanied by reload options.

EMPLOYEE STOCK PURCHASE PLAN. Effective upon the closing of the Offering,
the Company will implement the Racing Champions Corporation Employee Stock
Purchase Plan (the "Stock Purchase Plan"). The Stock Purchase Plan is designed
to comply with section 423 of the Internal Revenue Code and will provide
employees of the Company and its subsidiaries with the right to purchase shares
of Common Stock directly from the Company through payroll deductions at a
purchase price of at least 95% of fair market value of the Common Stock. Up to
200,000 shares of Common Stock may be offered under the Stock Purchase Plan in a
series of quarterly offerings beginning on July 1, 1997 and terminating on
December 31, 2001. Each participant may elect to have up to 10% of his base
salary invested in Common Stock pursuant to the Stock Purchase Plan, subject to
a limit of $25,000 per year based upon the fair market value of stock on the
date of grant.

1996 KEY EMPLOYEES PERFORMANCE COMPENSATION PLAN. On April 30, 1996 the
Board of Directors adopted the 1996 Key Employees Performance Compensation Plan
(the "Performance Compensation Plan"). Under the Performance Compensation Plan,
certain executive officers and other key employees of the Company will be
entitled to receive a cash bonus in the first quarter of 1997 based upon the
Company's consolidated earnings before income taxes, depreciation and
amortization from April 30, 1996 to December 31, 1996. On April 8, 1997, the
Board of Directors amended the Performance Compensation Plan to provide an
additional cash bonus to participants in the first quarter of 1998 based upon
the Company's

45
<PAGE> 47

consolidated earnings before income taxes, depreciation and amortization from
January 1, 1997 to December 31, 1997.

EMPLOYMENT AGREEMENTS. On April 30, 1996 the Company entered into separate
employment agreements with Messrs. Dods, Meyer, Stoelting and Olsen, and the
Hong Kong Subsidiary entered into an employment agreement with Mr. Chung
(collectively, the "Employment Agreements"). The Employment Agreements with
Messrs. Dods, Meyer and Chung each has a term of three years, and the Employment
Agreements with Messrs. Stoelting and Olsen each has a term of two years.
Pursuant to the Employment Agreements, Messrs. Dods, Meyer, Chung, Stoelting and
Olsen will receive base salaries of $500,000, $500,000, $500,000, $150,000 and
$125,000, respectively, and are entitled to participate in the Performance
Compensation Plan and the Stock Option Plan. The Employment Agreements with
Messrs. Dods, Meyer and Chung also provide that the executive officer is
eligible to participate in any medical, health, dental, disability and life
insurance policy as are in effect for the other two most senior executives of
the Company, while the Employment Agreements with Messrs. Stoelting and Olsen
provide that the executive officer is eligible to participate in any medical,
health, dental, disability and life insurance policy as are in effect for other
senior management of the Company excluding Messrs. Dods, Meyer and Chung.
Pursuant to the Employment Agreements, each executive officer has agreed not to
compete with the Company during employment and for a period of two years
following termination of employment and has agreed to maintain the
confidentiality of the Company's proprietary information and trade secrets.

Under the Employment Agreements, the Company may terminate the executive
officer's employment upon the executive officer's death or disability or if the
Board of Directors determines that termination is in the Company's best
interests. The executive officer may resign and terminate the Employment
Agreement at any time. If the executive officer's employment is terminated for
disability or death, the Company is required to continue to pay the executive
officer, his designated beneficiary or estate, whichever is applicable, the base
salary for a period of six months after his termination of employment. If
employment is terminated by the Company without cause or by the executive
officer with good reason, the executive officer is entitled to receive payment
of his base salary until the later of the first anniversary of the date of
termination or the end of his employment term under the Employment Agreement. In
addition, in the event of termination for death, disability, by the Company
without cause or by the executive officer with good reason, the executive
officer is entitled to receive all fringe benefits under his Employment
Agreement accrued prior to the termination date. If employment is terminated by
the Company for cause or by the executive officer without good reason, the
executive officer is not entitled to receive any base salary or fringe benefits
for periods after the termination date.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company did not have a Compensation Committee of the Board of Directors
prior to the completion of the Offering. As a result, the entire Board of
Directors was responsible for fixing the compensation to be paid to the
executive officers of the Company. Robert E. Dods and Boyd L. Meyer, the
Company's President and Executive Vice President, respectively, and Peter K.K.
Chung, President of Racing Champions Limited, participated in such deliberations
in their capacities as members of the Board of Directors.

46
<PAGE> 48

CERTAIN TRANSACTIONS

THE RECAPITALIZATION

On April 30, 1996, the Investor Group and the Company consummated the
Recapitalization which involved the following: (i) the Company's purchase of all
of the outstanding stock of RCI in exchange for the issuance by the Company of
three day notes in the principal amount of approximately $5.3 million (which the
Company has repaid in full), approximately $659,000 principal amount of Senior
Notes, approximately $1.4 million principal amount of Series A Junior Notes and
approximately $148,000 principal amount of Series B Junior Notes to each of
Robert E. Dods, the President and a director of the Company, and Boyd L. Meyer,
the Executive Vice President and a director of the Company, (ii) the Company's
purchase of substantially all of the assets of DML, a corporation 50% owned by
Robert E. Dods and 50% owned by Boyd L. Meyer, in exchange for a cash payment by
the Company of approximately $1.7 million and the issuance by the Company of
three day notes in the principal amount of approximately $28.3 million (which
the Company has repaid in full), approximately $4.0 million principal amount of
Senior Notes, approximately $8.4 million principal amount of Series A Junior
Notes and approximately $900,000 principal amount of Series B Junior Notes,
(iii) the acquisition by the Hong Kong Subsidiary of substantially all of the
assets of the RCL Group, foreign corporations owned by Peter K.K. Chung, a
director of the Company and the President of the Hong Kong Subsidiary, in
exchange for a cash payment of approximately $19.5 million and the issuance by
the Company of approximately $2.7 million principal amount of Senior Notes,
approximately $5.6 million principal amount of Series A Junior Notes, 13,163.36
shares of Series A Preferred Stock at a price of $100 per share and 1,145,996
shares of Common Stock at a price of $0.13 per share, and (iv) the contribution
by the Company of all of the outstanding stock of the Hong Kong Subsidiary to
RCI. DML was liquidated after the consummation of the Recapitalization, dividing
its assets equally between Robert E. Dods and Boyd L. Meyer. The amount of the
purchase price paid by the Company in each of these acquisitions was determined
through arms-length negotiations between representatives of the Investor Group
and Messrs. Dods, Meyer and Chung.

Pursuant to the Recapitalization, the Company also issued to the members of
the Investor Group, Curtis W. Stoelting, John F. Olsen, Peter J. Henseler and M.
Kevin Camp an aggregate of 4,447,252 shares of Common Stock at $0.13 per share,
51,082.48 shares of Series A Preferred Stock at $100 per share, and
approximately $21.6 million principal amount of Series A Junior Notes. The
foregoing purchasers acquired these securities in proportion to their current
ownership of Common Stock (Messrs. Henseler and Camp each currently own 19,713
shares of Common Stock). See "Principal Stockholders" and "--Other
Transactions."

Pursuant to the Recapitalization, the Company also issued to DML 2,422.06
shares of Series A Preferred Stock at a price of $100 per share, 11,952.33
shares of Series B Preferred Stock at a price of $100 per share, 1,354,908
shares of Common Stock at a price of $0.13 per share and 937,084 shares of
Nonvoting Common Stock at a price of $0.13 per share. These securities were
divided equally between Robert E. Dods and Boyd L. Meyer upon the liquidation of
DML.

Stockholders Agreement. In connection with the Recapitalization, the
Company entered into a Stockholders Agreement, dated as of April 30, 1996 (the
"Stockholders Agreement"), with the Investor Group, the RCL Group, DML, Robert
E. Dods, Boyd L. Meyer, Peter K.K. Chung, and certain other executive officers
of the Company. The Stockholders Agreement contains provisions with respect to
the election of directors of the Company and its subsidiaries, restrictions on
the transfer of shares of the Company's capital stock, preemptive rights and
cooperation among the parties in the event of a sale of the Company or an
initial public offering of shares of Common Stock. Each of the foregoing
provisions of the Stockholders Agreement will automatically terminate upon the
completion of the Offering.

Executive Securities Agreement. Pursuant to an Executive Securities
Agreement, dated as of April 30, 1996 (the "Executive Securities Agreement"), in
the event that Curtis W. Stoelting, John F. Olsen, Peter J. Henseler or M. Kevin
Camp cease to be employed by the Company or its subsidiaries for any reason,
first the Company and then the members of the Investor Group and Messrs. Dods,
Meyer and Chung (in proportion to the percentage of such securities held by each
such stockholder) have an option to purchase any or all of the Company's
securities held by such executive officer at its fair market value. The
provisions of the Executive Securities Agreement will automatically terminate
upon the completion of the Offering.

47
<PAGE> 49

Registration Agreement. Pursuant to a Registration Agreement, dated as of
April 30, 1996 (the "Registration Agreement"), the Company granted certain
registration rights. The Registration Agreement provides that the holders of a
majority of the shares of Common Stock held by the Investor Group may demand an
unlimited number of registrations, subject to certain limitations with respect
to timing and procedure. The holders of a majority of the shares of Common Stock
held by Robert E. Dods, Boyd L. Meyer, Peter K.K. Chung, DML and the RCL Group
may collectively demand one registration at any time after the first anniversary
of the completion of the Offering. Each of the foregoing parties, as well as
Curtis W. Stoelting, John F. Olsen, Peter J. Henseler and Kevin Camp, also have
the right to sell shares of Common Stock pursuant to any other registration,
subject to certain limitations.

CERTAIN INDEBTEDNESS

Senior Notes. The Company issued $8.0 million aggregate principal amount of
Senior Notes in connection with the Recapitalization. The Senior Notes were
scheduled to mature on April 30, 1997 and accrue interest at the Bank of
Boston's prime rate. The Senior Notes are unsecured obligations of the Company,
and all payments under the Senior Notes are subordinated to indebtedness under
the Credit Agreement and are senior to all existing and future subordinated
indebtedness of the Company, including amounts due under the Series A Junior
Notes and the Series B Junior Notes. Subject to the subordination provisions,
the Company may prepay amounts outstanding under the Senior Notes without
penalty at any time, in whole or in part. The Company repaid the Senior Notes on
March 31, 1997 using the proceeds from the Deferred Term Loan under the Credit
Agreement. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."

Series A Junior Notes. The Company issued approximately $38.2 million
aggregate principal amount of Series A Junior Notes in connection with the
Recapitalization. Principal amounts outstanding under the Series A Junior Notes
are due on April 30, 2004, 2005 and 2006. The Series A Junior Notes accrue
interest at 12.00% per year. The Series A Junior Notes are unsecured obligations
of the Company and all payments under the Series A Junior Notes are subordinated
to indebtedness under the Credit Agreement and to amounts outstanding under the
Senior Notes. The Series A Junior Notes rank senior in right of payment to
amounts outstanding under the Series B Junior Notes. Subject to the
subordination provisions, the Company may prepay amounts outstanding under the
Series A Junior Notes without penalty at any time, in whole or in part. The
Company anticipates using part of the proceeds of the Offering to repay amounts
outstanding under the Series A Junior Notes. See " Use of Proceeds."

Series B Junior Notes. The Company issued approximately $1.2 million
aggregate principal amount of Series B Junior Notes in connection with the
Recapitalization. Principal amounts outstanding under the Series B Junior Notes
are due on April 30, 2004, 2005 and 2006. The Series B Junior Notes accrue
interest at 12.00% per year. The Series B Junior Notes are unsecured obligations
of the Company, and all payments under the Series B Junior Notes are
subordinated to indebtedness under the Credit Agreement and to amounts
outstanding under the Senior Notes and the Series A Junior Notes. Subject to the
subordination provisions, the Company may prepay amounts outstanding under the
Series B Junior Notes without penalty at any time, in whole or in part. The
Company anticipates using part of the proceeds of the Offering to repay amounts
outstanding under the Series B Junior Notes. See " Use of Proceeds."

OTHER TRANSACTIONS

The Company leases warehouse space from D. W. Realty, Inc., a corporation
wholly owned by William L. Dods, brother of Robert E. Dods, President and a
director of the Company. The amount of the lease payments for the eight months
ended December 31, 1996 was $41,440 and the Company currently pays rent of
$5,490 per month. The Company believes that the terms of this lease are no less
favorable to the Company than could have been obtained from an unaffiliated
third party.

Eric Meyer, son of Boyd L. Meyer, Executive Vice President and a director
of the Company, is a principal of Reicher-Goerdt-Meyer Sales and Marketing, Inc.
("Reicher Goerdt"), one of the Company's external sales representative
organizations. For the eight months ended December 31, 1996, Eric Meyer was

48
<PAGE> 50

allocated approximately $85,000 of the sales commissions paid by the Company to
Reicher Goerdt. The Company expects that Reicher Goerdt will receive more than
50% of the Company's total sales commissions to external sales representative
organizations in 1997. The Company pays sales commissions to Reicher Goerdt at
the same rate and on no more favorable terms than for the Company's other sales
representative organizations.

Kwong Fai, a Hong Kong corporation controlled by Peter K.K. Chung,
President of the Hong Kong Subsidiary and a director of the Company, leases
office space to the Hong Kong Subsidiary for use as the Company's Hong Kong
headquarters. The amount of lease payments for the eight months ended December
31, 1996 was $241,036 and the Hong Kong Subsidiary currently pays rent of
$25,180 per month. The Company believes that the terms of this lease are no less
favorable to the Company than could have been obtained from an unaffiliated
party.

James Chung, Peter K.K. Chung's brother, owns 70% of Sunrise, one of the
Dedicated Manufacturers. For the eight months ended December 31, 1996, the
Company paid $4.0 million to Sunrise for the purchase of die cast vehicle
replicas. The Company expects to continue to make purchases from Sunrise during
1997. The Company believes that the terms for the purchase of products from
Sunrise are no less favorable to the Company than could have been obtained from
an unaffiliated party.

Peter K.K. Chung had previously provided personal loans to two of the
Company's Dedicated Manufacturers, Sharp Success and Win Yield, of $129,366 and
$62,096, respectively. In order to secure these loans, Mr. Chung became the 50%
and 20% owner of Sharp Success and Win Yield, respectively. Prior to January 1,
1997, Mr. Chung disposed of his ownership interests in Sharp Success and Win
Yield for consideration equal to his outstanding personal loans. In the future,
Mr. Chung does not intend to make loans or own interests in the Dedicated
Manufacturers or other manufacturing suppliers to the Company. For the eight
months ended December 31, 1996, the Company paid $5.6 million to Win Yield and
$5.7 million to Sharp Success for the purchase of die cast vehicle replicas. The
Company believes that the terms for the purchase of products from Win Yield and
Sharp Success during 1996 were no less favorable to the Company than could have
been obtained from an unaffiliated party.

The Company loaned $120,758 to Peter J. Henseler, Vice
President -- Marketing of the Company, on April 30, 1996, evidenced by a
promissory note that bears interest at 8% per year. Mr. Henseler used the
proceeds of this loan to purchase 19,713 shares of Common Stock, 220.43 shares
of Series A Preferred Stock and $95,615 principal amount of Series A Junior
Notes, and these securities have been pledged as collateral for the note. Mr.
Henseler is required to use 25% of all bonus compensation received from the
Company to repay principal and interest outstanding under the note. The note is
due on the earlier of (i) April 30, 2001 or (ii) the date of termination of Mr.
Henseler's employment by the Company for any reason. As of March 31, 1997,
$98,599 of principal and interest was outstanding under this note. On April 8,
1997, Mr. Henseler repaid all outstanding amounts under this note.

Willis Stein, a stockholder of the Company, owns approximately 28% of the
equity securities of Petersen Holdings, L.L.C. ("Holdings") and 47% of the
common stock of Brightview Communications Group, Inc. ("Brightview"). Holdings
and Brightview in turn own all of the equity securities of Petersen Publishing
Company, L.L.C. ("Petersen"). In addition, Willis Stein has the contractual
ability to control the policies and operations of Petersen. The Company has
entered into licensing and marketing arrangements with Petersen in connection
with the Racing Champions Mint and Racing Champions Hot Rod Collection and
anticipates making payments of approximately $400,000 in 1997 to Petersen in
connection with these licenses.

The Audit Committee of the Board of Directors will be responsible for
reviewing all future transactions between the Company and any officer or
director of the Company or any entity in which an officer or director has a
material interest. Any such transaction must be on terms no less favorable than
those that could be obtained on an arms-length basis from independent parties.

49
<PAGE> 51

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of March 31, 1997, and after the consummation of
the Offering by: (i) each of the Company's directors and named executive
officers; (ii) all directors and executive officers of the Company as a group;
(iii) stockholders (the "Selling Stockholders") potentially selling pursuant to
the Underwriters' over-allotment option and (iv) each person or other entity
known by the Company to own beneficially more than 5% of the outstanding Common
Stock. Except as otherwise indicated in the footnotes, each of the holders
listed below has sole voting and investment power over the shares beneficially
owned.

<TABLE>
<CAPTION>
PERCENT OF
COMMON STOCK
BENEFICIALLY OWNED
SHARES OF SHARES --------------------------------------------
COMMON STOCK SUBJECT TO BEFORE AFTER AFTER EXERCISE OF
BENEFICIALLY OVER-ALLOTMENT THE THE OVER-ALLOTMENT
NAME OWNED OPTION OFFERING OFFERING(1) OPTION(1)
---- ------------ -------------- -------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Robert E. Dods.............. 1,145,996 -- 14.5% 10.1% 9.8%
Boyd L. Meyer(2)............ 1,145,996 -- 14.5 10.1 9.8
Daniel M. Gill(3)........... 2,983,601 273,253 37.8 20.6 18.0
Peter K. K. Chung(4)........ 1,145,996 -- 14.5 10.1 9.8
Samuel B. Guren(5).......... 816,218 74,753 10.4 5.6 4.9
Avy H. Stein(6)............. 2,983,601 273,253 37.8 20.6 18.0
Curtis W. Stoelting(7)...... 115,167 -- 1.2 * *
John F. Olsen(8)............ 28,014 -- * * *
Willis Stein & Partners,
L.P.(9)................... 2,983,601 273,253 37.8 20.6 18.0
Baird Capital Partners II
Limited Partnership(10)... 629,306 57,635 8.0 4.3 3.8
Nassau Capital Partners
L.P.(11).................. 485,866 44,498 6.2 3.4 2.9
BCP II Affiliates Fund
Limited Partnership....... 186,912 17,118 2.4 1.3 1.1
NAS Partners I L.L.C........ 3,863 354 * * *
All directors and executive
officers as a group (10
persons)(12).............. 7,437,016 348,006 93.8 57.9 53.8
</TABLE>

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

* Denotes less than 1%.

(1) Gives effect to an agreement by the members of the Investor Group to
transfer upon the closing of the Offering a total of 157,705 shares of
Common Stock to each of Messrs. Dods, Meyer and Chung, with the amount
transferred to be divided pro rata among the Investor Group based upon the
current ownership of Common Stock by each member of the Investor Group.

(2) Includes 343,798 shares of Common Stock held by the Meyer Family Limited
Partnership, for which Mr. Meyer serves as a general partner and shares
voting and investment power with members of his immediate family who are
the other general partners.

(3) Represents shares of Common Stock held by Willis Stein, for which Mr. Gill
serves as a Managing Director and shares voting and investment power with
the other Managing Directors. Mr. Gill disclaims beneficial ownership in
all shares of Common Stock held by Willis Stein.

(4) Represents shares of Common Stock held by a corporation controlled by Mr.
Chung.

(5) Represents shares of Common Stock held by Baird Capital Partners II Limited
Partnership and BCP II Affiliates Fund Limited Partnership, entities for
which Mr. Guren serves as a Managing Director and shares voting and
investment power with the other Managing Directors. Mr. Guren disclaims
beneficial ownership in all shares of Common Stock held by Baird Capital
Partners II Limited Partnership or BCP II Affiliates Fund Limited
Partnership.

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<PAGE> 52

(6) Represents shares of Common Stock held by Willis Stein, for which Mr. Stein
serves as a Managing Director and shares voting and investment power with
the other Managing Directors. Mr. Stein disclaims beneficial ownership in
all shares of Common Stock held by Willis Stein.

(7) Includes 16,602 shares of Common Stock subject to stock options which
became exercisable on April 30, 1997.

(8) Includes 8,301 shares of Common Stock subject to stock options which became
exercisable on April 30, 1997.

(9) The address of Willis Stein is 227 West Monroe Street, Suite 4300, Chicago,
Illinois 60606.

(10) The address of Baird Capital Partners II Limited Partnership is 777 East
Wisconsin Avenue, Milwaukee, Wisconsin 53202.

(11) The address of Nassau Capital Partners L.P. is 22 Chambers Street,
Princeton, New Jersey 08542.

(12) Includes (i) 1,145,996 shares of Common Stock held by a corporation
controlled by Mr. Chung, (ii) 343,798 shares of Common Stock held by the
Meyer Family Limited Partnership, for which Mr. Meyer serves as a general
partner and shares voting and investment power with members of his
immediate family who are the other general partners, (iii) 2,983,601 shares
of Common Stock for which Messrs. Gill and Stein share voting and
investment power and 816,218 shares of Common Stock for which Mr. Guren
shares voting and investment power (Messrs. Gill, Stein and Guren disclaim
beneficial ownership in such shares of Common Stock) and (iv) 41,505 shares
of Common Stock subject to stock options which became exercisable on April
30, 1997.

DESCRIPTION OF CAPITAL STOCK

AUTHORIZED CAPITAL STOCK

Under the Company's Amended and Restated Certificate of Incorporation
("Certificate of Incorporation"), the authorized capital stock of the Company
consists of 20,000,000 shares of Common Stock, par value $.01 per share ("Common
Stock"), 1,000,000 shares of Nonvoting Common Stock, par value $.01 per share
("Nonvoting Common Stock"), 100,000 shares of Series A Preferred Stock, par
value $.01 per share ("Series A Preferred Stock"), and 20,000 shares of Series B
Preferred Stock, par value $.01 per share ("Series B Preferred Stock").

COMMON STOCK

As of March 31, 1997, there are 6,948,156 shares of Common Stock
outstanding owned by 12 holders of record. Following the Offering, there will be
12,885,240 shares of Common Stock outstanding. Holders of Common Stock are
entitled to one vote for each share on all matters voted on by stockholders.
Holders of Common Stock do not have cumulative voting rights in the election of
directors, which means that the holders of shares entitled to more than 50% of
the voting power are able to elect all of the directors to be elected. The first
annual meeting of stockholders following the Offering is expected to be held
during April 1998.

Holders of Common Stock do not have preemptive rights, or any subscription,
redemption or conversion privileges. Subject to the rights of any holders of
Series A Preferred Stock or Series B Preferred Stock, all of which the Company
intends to redeem with part of the proceeds of the Offering, holders of Common
Stock are entitled to participate ratably in dividends on the Common Stock, if
any, as declared by the Board of Directors, and are entitled to share ratably in
all assets available for distribution to stockholders in the event of
liquidation or dissolution of the Company. The outstanding shares of Common
Stock are, and the Common Stock to be issued in the Offering will be, legally
issued, fully paid and nonassessable.

NONVOTING COMMON STOCK

As of March 31, 1997, 937,084 shares of Nonvoting Common Stock were
outstanding and held by three holders of record. The Nonvoting Common Stock
shares ratably with the Common Stock in dividends and distributions upon any
liquidation, dissolution or winding up of the Corporation. Holders of shares of

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<PAGE> 53

Nonvoting Common Stock do not have voting rights, except as required by law.
Each outstanding share of Nonvoting Common Stock will be converted into one
share of Common Stock upon the closing of the Offering and thereafter the
Certificate of Incorporation will be amended to eliminate the class of Nonvoting
Common Stock.

PREFERRED STOCK

As of March 31, 1997, 66,668.5 shares of Series A Preferred Stock were
outstanding and held by 12 holders of record and 11,952.33 shares of Series B
Preferred Stock were outstanding and held by three holders of record. The Series
A Preferred Stock and the Series B Preferred Stock each have a liquidation
preference, subject to adjustment, of $100 per share and accrue annual
cumulative dividends at 12% of the liquidation preference. The Series A
Preferred Stock and the Series B Preferred Stock share ratably in dividends in
priority to any dividends on the Common Stock or the Nonvoting Common Stock.
Upon the liquidation, dissolution or winding up of the Company, holders of the
Series A Preferred Stock are entitled to receive the liquidation value plus all
accrued and unpaid dividends prior to any payment with respect to the Series B
Preferred Stock, the Common Stock or the Nonvoting Common Stock, and the holders
of the Series B Preferred Stock are entitled to receive the liquidation
preference plus all accrued and unpaid dividends prior to any payment with
respect to the Common Stock or the Nonvoting Common Stock. The holders of Series
A Preferred Stock and Series B Preferred Stock are entitled to one vote per
share, voting as a single class with the holders of the Common Stock. Upon the
closing of the Offering, the Company intends to redeem all of the outstanding
shares of Series A Preferred Stock and Series B Preferred Stock, using $8.5
million of the proceeds of the Offering, and thereafter to amend the Certificate
of Incorporation to eliminate the classes of Series A Preferred Stock and Series
B Preferred Stock. See "Use of Proceeds."

TRANSFER AGENT

The First National Bank of Boston, Boston, Massachusetts, will be the
transfer agent for the Common Stock.

CERTAIN STATUTORY AND OTHER PROVISIONS

The provisions of the Certificate of Incorporation, the By-Laws and
Delaware statutory law described in this section may delay or make more
difficult acquisitions or changes of control of the Company not approved by the
Board of Directors. Such provisions have been implemented to enable the Company,
particularly (but not exclusively) in the initial years of its existence as a
publicly-traded company, to develop its business in a manner which will foster
its long-term growth without disruption caused by the threat of a takeover not
deemed by the Board of Directors to be in the best interests of the Company and
its stockholders. Such provisions could have the effect of discouraging
proposals involving an acquisition or change of control of the Company, although
such proposals, if made, might be considered desirable by a majority of the
Company's stockholders. Such provisions may also have the effect of making it
more difficult to cause the replacement of the current management of the Company
without the concurrence of the Board of Directors.

Number of Directors; Vacancies. The By-Laws provide that the number of
directors shall be determined from time to time exclusively by vote of a
majority of the then authorized number of directors. The Certificate of
Incorporation provides that the Board of Directors has the exclusive right to
fill vacancies in the Board of Directors, including vacancies created by
expansion of the Board or the removal of a director, and that any director
elected to fill a vacancy shall serve until the next election of the class for
which such director shall have been chosen.

Advance Notice for Raising Business or Making Nominations at Annual
Meetings. The By-Laws establish an advance notice procedure for stockholder
proposals to be brought before an annual meeting of stockholders of the Company
and for nominations by stockholders of candidates for election as directors at
an annual meeting or a special meeting at which directors are to be elected.
Subject to any other applicable requirements, including, without limitation,
Rule 14a-8 under the Securities Exchange Act of 1934, or any successor
provision, only such business may be conducted at an annual meeting of
stockholders as has been

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<PAGE> 54

brought before the meeting by, or at the direction of, the Board of Directors,
or by a stockholder who has provided the Secretary of the Company timely written
notice of the stockholder's intention to bring such business before the meeting.
Only persons who are nominated by, or at the direction of, the Board of
Directors, or who are nominated at the meeting by a stockholder who has given
timely written notice to the Secretary prior to the meeting at which directors
are to be elected, will be eligible for election as directors of the Company.

All such notices shall include: (i) a representation that the person
sending the notice is a stockholder of record and will remain such through the
record date for the meeting; (ii) the name and address, as they appear on the
Company's books, of such stockholder; (iii) the class and number of the
Company's shares which are owned beneficially and of record by such stockholder;
and (iv) a representation that such stockholder intends to appear in person or
by proxy at such meeting to make the nomination or move for the consideration of
other business set forth in the notice. Notice as to proposals with respect to
any business to be brought before the meeting other than the election of
directors shall also set forth the text of the proposal and may set forth any
statement in support thereof that the stockholder wishes to bring to the
attention of the Company, and shall specify any material interest of such
stockholder in such business. Notice as to nominations of a director shall
identify the nominee and include the written consent of each nominee to serve as
a director if so elected.

Amendments to By-Laws. The By-Laws provide that the holders of at least a
majority of all shares of Common Stock then outstanding and entitled to vote
thereon shall have the power to adopt, amend, alter, change or repeal the
By-Laws. The Certificate of Incorporation and the By-Laws provide that the Board
of Directors may amend or repeal the By-Laws by a majority vote, provided that:
(i) no By-Law adopted by stockholders shall be amended, repealed or readopted by
the Board of Directors if the By-Law so adopted so provides; and (ii) a By-Law
adopted or amended by the stockholders that fixes a greater or lower quorum
requirement or a greater voting requirement for the Board of Directors than
otherwise provided in the General Corporation Law of the State of Delaware may
not be amended or repealed by the Board of Directors unless the By-Law expressly
provides that it may be amended or repealed by a specified vote of the Board of
Directors. Action by the Board of Directors to adopt or amend a By-Law that
changes the quorum or voting requirement for the Board of Directors must meet
the same quorum requirement and be adopted by the same vote required to take
action under the quorum and voting requirement then in effect, unless a
different voting requirement is specified as provided by the preceding sentence.

Additional Common Stock. The Board of Directors has the authority to issue
additional Common Stock subject to the limitations on the number of shares
authorized for issuance under the Certificate of Incorporation. The Company
believes that the Board of Directors' ability to issue additional Common Stock
could facilitate certain financings and acquisitions and provide a means for
meeting other corporate needs that might arise. The authorized but unissued
shares of Common Stock will be available for issuance without further action by
the Company's stockholders, unless stockholder action is required by applicable
law or the rules of any stock exchange or system on which the Common Stock may
then be listed. The Board of Directors' ability to issue additional Common Stock
could, under certain circumstances, either impede or facilitate the completion
of a merger, tender offer or other takeover attempt.

Delaware Antitakeover Statute. Under Section 203 of the Delaware General
Corporation Law, certain "business combinations" between a Delaware corporation,
whose stock generally is publicly traded or held of record by more than 2,000
stockholders, and an "interested stockholder" are prohibited for a three-year
period following the date that such stockholder became an interested
stockholder, unless (i) the business combination was approved by the board of
directors of the corporation before the other party to the transaction became an
interested stockholder, (ii) upon consummation of the transaction that made it
an interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the commencement of the
transaction (excluding voting stock owned by directors who are also officers or
held in employee benefit plans in which the employees do not have a confidential
right to tender or vote stock held by the plan), or (iii) the business
combination was approved by the board of directors of the corporation and
ratified by holders of 66 2/3% of the voting stock which the interested
stockholder did not own. The three-year prohibition also does not apply to
certain business combinations proposed by an interested stockholder

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<PAGE> 55

following the announcement or notification of certain extraordinary transactions
involving the corporation and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of a majority of the corporation's directors.

The term "business combination" is defined generally to include mergers or
consolidations between a Delaware corporation and an "interested stockholder,"
transactions with an "interested stockholder" involving the assets or stock of
the corporation or its majority-owned subsidiaries and transactions which
increase an interested stockholder's percentage ownership of stock. The term
"interested stockholder" is defined generally as any stockholder who becomes the
beneficial owner of 15% or more of a Delaware corporation's voting stock.
Because Willis Stein became an "interested stockholder" before the amendment and
restatement of the Certificate of Incorporation and the Offering, Willis Stein
is exempted from the operation of Section 203 of the Delaware General
Corporation Law.

It is possible that these provisions and the ability of the Board of
Directors to issue additional shares of Common Stock will discourage other
persons from making a tender offer for or acquisitions of substantial amounts of
the Common Stock, or may delay changes in control or management of the Company.

The foregoing description of certain provisions of the Certificate of
Incorporation and the By-Laws does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, the Certificate of
Incorporation and the By-Laws, including definitions of certain terms in each
respective document.

DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY

The Certificate of Incorporation and the By-Laws contain provisions
indemnifying directors and officers of the Company to the fullest extent
permitted by law. In addition, the Certificate of Incorporation contains
provisions limiting the personal liability of directors to the Company or
stockholders to the fullest extent permitted by law.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have 12,885,240 shares of
Common Stock outstanding. Of these shares, the 5,000,000 shares of Common Stock
sold in the Offering will be freely tradable without restrictions under the
Securities Act of 1933 (the "Act"), except for shares purchased by an
"affiliate" of the Company which will be subject to the resale limitations (but
not holding period requirements) of Rule 144 thereunder. The remaining 7,885,240
shares of Common Stock were issued and sold by the Company in private
transactions in reliance upon various exemptions under the Act. Such shares will
be eligible for public sale if registered under the Act or sold in accordance
with Rule 144 thereunder. In general, under Rule 144 a person (or persons whose
shares are aggregated) including a person who may be deemed an "affiliate" of
the Company, who has beneficially owned his shares for at least one year is
entitled to sell within any three-month period that number of shares which does
not exceed the greater of 1% of the outstanding shares of Common Stock or the
average weekly trading volume during the four calendar weeks preceding each such
sale. Sales under Rule 144 also are subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. A person (or persons whose shares are aggregated)
who is not and has not been deemed an "affiliate" of the Company for at least
three months and who has beneficially owned his shares for at least two years is
entitled to sell such shares under Rule 144(k) without regard to the limitations
discussed above. Based upon available information, the Company believes that,
following April 30, 1997, 7,885,240 of these shares, which are all held by
"affiliates" of the Company, will be immediately eligible for public sale,
subject to the resale limitations of Rule 144. However, the officers and
directors of the Company, certain stockholders and the Company have agreed not
to sell any of their shares of Common Stock to the public for a period of 180
days after the date of the Prospectus without the prior written consent of
Robert W. Baird & Co. Incorporated. The exercise of registration rights by
certain of the Company's significant stockholders, affiliates and executive
officers would permit such persons to sell shares of Common Stock upon
registration without regard to the limitations of Rule 144. The Company has
granted registration rights covering a total of 7,885,240 shares of Common
Stock. See "Certain Transactions -- The Recapitalization -- Registration
Agreement."

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<PAGE> 56

The preceding description does not give effect to the shares of Common
Stock which may be offered and sold pursuant to the Stock Option Plan or the
Incentive Plan. See "Management -- Executive Compensation -- 1996 Key Employees
Stock Option Plan" and "-- Stock Incentive Plan." The Company intends to file a
registration statement on Form S-8 under the Act not earlier than 90 days after
the date of this Prospectus to register the shares of Common Stock issuable
under the Stock Option Plan and the Incentive Plan, which shares, after
registration, will be immediately available for sale in the public market,
subject to the volume and other limitations of Rule 144 for shares held by
affiliates. As of the date of this Prospectus, options to purchase 332,033
shares of Common Stock have been granted under the Stock Option Plan, 66,407 of
which are currently exercisable. The Company anticipates granting options under
the Incentive Plan to purchase up to 148,752 shares of Common Stock with an
exercise price equal to the initial public offering price on or before the
closing of the Offering, including options to purchase up to 78,852 shares of
Common Stock that will be accompanied by reload options.

Since there has been no public market for the Common Stock prior to the
Offering, no predictions can be made as to the effect, if any, that market sales
or the availability of shares for sale will have on the market price prevailing
from time to time. Nevertheless, sales of substantial amounts of the Common
Stock, or the perception that such sales could occur, could adversely affect the
prevailing market price of the Common Stock.

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<PAGE> 57

UNDERWRITING

Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the Underwriters listed
below, and the Underwriters, for whom Robert W. Baird & Co. Incorporated,
William Blair & Company, L.L.C. and J.C. Bradford & Co. are acting as
representatives (the "Representatives"), have severally agreed to purchase from
the Company, the respective number of shares of Common Stock set forth opposite
their names below.

<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS OF COMMON STOCK
------------ -----------------
<S> <C>
Robert W. Baird & Co. Incorporated..........................
William Blair & Company, L.L.C..............................
J.C. Bradford & Co..........................................

---------
Total............................................. 5,000,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
their counsel and to various other conditions. The Underwriters are obligated to
purchase all the shares of Common Stock offered hereby, excluding shares covered
by the over-allotment option granted to the Underwriters, if any are purchased.

The Company has been advised by the Representatives that the Underwriters
propose to offer the Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus and may offer the Common
Stock to certain dealers at such prices less a concession of not in excess of
$ per share and that the Underwriters and such dealers may reallow a
concession of not in excess of $ per share to certain brokers or other
dealers. The public offering price and concessions and reallowances to dealers
may be changed by the Representatives after the commencement of the Offering.

As a result of the ownership of capital stock of the Company by Baird
Capital Partners II Limited Partnership and BCP II Affiliates Fund Limited
Partnership, the Company may be deemed an affiliate of Robert W. Baird & Co.
Incorporated within the meaning of Section 2720 of the Conduct Rules of the
National Association of Securities Dealers, Inc. and accordingly, the Offering
is being made in conformity with such Conduct Rules regarding the underwriting
of securities of an affiliate. In that regard, J.C. Bradford & Co. will assume
the responsibilities of acting as a qualified independent underwriter in pricing
the Offering and conducting due diligence. The initial public offering price
will not be higher than the price recommended by the qualified independent
underwriter. See "The Recapitalization" and "Certain Transactions" for a
description of transactions between the Company and Baird Capital Partners II
Limited Partnership and BCP II Affiliates Fund Limited Partnership.

The Company has granted to the Underwriters an option, exercisable within
30 days after the date of the Offering, to purchase up to an additional 357,142
shares of Common Stock and the Selling Stockholders have granted to the
Underwriters an option, exercisable within 30 days after the date of the
Offering, to purchase up to 392,858 shares of Common Stock to cover
over-allotments, at the same price per share to be paid by the Underwriters for
the other shares offered hereby. If the Underwriters purchase any such
additional shares pursuant to this option, each of the Underwriters will be
committed to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments, if any, in connection with the Offering.

The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify, or to contribute to payments made by, each other with respect to
certain civil liabilities, including certain civil liabilities under the Act.

Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock was determined by
negotiation among the Company and the Representatives.

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<PAGE> 58

The factors considered in determining the initial public offering price include
the history of and prospects for the business in which the Company operates,
past and present operations, revenues and earnings of the Company and the trend
of such earnings, the prospects for such earnings, the Company's capital
requirements, percentage of ownership to be held by investors following the
Offering, the general condition of the securities markets at the time of the
Offering and the demand for similar securities of reasonably comparable
companies. The estimated initial public offering price range set forth on the
cover page of the Prospectus is subject to change as a result of market
conditions and other factors.

The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934 (the "Exchange Act"). Over-allotment
involves syndicate sales in excess of the offering size, which creates a
syndicate short position. Stabilizing transactions permit bids to purchase the
underlying security so long as the stabilizing bids do not exceed a specified
maximum. Syndicate covering transactions involve purchases of the securities in
the open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the Underwriters to reclaim a
selling concession from a syndicate member when the securities originally sold
by such syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions. Such stabilizing transactions, syndicate
covering transactions and penalty bids may cause the price of the securities to
be higher than it would otherwise be in the absence of such transactions.

The Representatives have informed the Company that the Underwriters do not
intend to make sales to any accounts over which they exercise discretionary
authority.

The Company and its directors, officers and certain other stockholders have
agreed not to sell, contract to sell or otherwise dispose of any shares of
Common Stock for a period of 180 days after the date of the Prospectus without
the prior written consent of Robert W. Baird & Co. Incorporated.

The foregoing is a brief summary of the material provisions of the
Underwriting Agreement and does not purport to be a complete statement of its
terms and conditions. A copy of the Underwriting Agreement is on file with the
Commission as an exhibit to the Registration Statement of which this Prospectus
forms a part. See "Additional Information."

LEGAL MATTERS

The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Reinhart, Boerner, Van Deuren, Norris &
Rieselbach, s.c., Milwaukee, Wisconsin. Certain legal matters will be passed
upon for the Underwriters by McDermott, Will & Emery, Chicago, Illinois.

EXPERTS

The financial statements and schedule of the Company at December 31 1996,
and for the eight months ended December 31, 1996 and the financial statements of
the RCI Group at December 31, 1995 and April 30, 1996 and for each of the two
years in the period ended December 31, 1995 and the four months ended April 30,
1996, appearing in the Prospectus and in the Registration Statement, have been
audited by Arthur Andersen LLP, independent public accountants, as set forth in
their reports thereon appearing elsewhere herein and in the Registration
Statement, and are included herein in reliance upon such reports given upon the
authority of such firm as experts in giving said reports.

The financial statements of the RCL Group at March 31, 1996 and April 30,
1996, and for each of the two years in the period ended March 31, 1996 and the
one month period ended April 30, 1996, appearing in the Prospectus and in the
Registration Statement have been audited by Ernst & Young, independent auditors,
as set forth in their report thereon appearing elsewhere herein and in the
Registration Statement, and are included herein in reliance upon such report
given upon the authority of such firm as experts in giving said report.

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<PAGE> 59

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus is a part)
under the Act with respect to the Common Stock offered hereby. This Prospectus
does not contain all the information set forth in the Registration Statement,
certain portions of which have been omitted as permitted by the rules and
regulations of the Commission. Statements contained in the Prospectus as to the
contents of any contract or other document are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference and the exhibits and schedules
thereto. For further information regarding the Company and the Common Stock
offered hereby, reference is hereby made to the Registration Statement and such
exhibits and schedules. The Registration Statement and the exhibits and
schedules thereto may be inspected, without charge, at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the Commission's regional offices located at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661, and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such documents may be
obtained from the Commission at the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Commission also maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of such site is
http://www.sec.gov.

The Company intends to furnish its stockholders with annual reports
containing audited financial statements certified by an independent public
accounting firm and quarterly reports containing unaudited financial statements
for the first three quarters of each year.

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<PAGE> 60

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RACING CHAMPIONS CORPORATION AND SUBSIDIARIES
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheet as of December 31, 1996 and March
31, 1997 (Unaudited)...................................... F-3
Consolidated Statement of Income for the eight months ended
December 31, 1996 and three months ended March 31, 1997
(Unaudited)............................................... F-4
Consolidated Statement of Stockholders' Equity for the eight
months ended December 31, 1996 and three months ended
March 31, 1997 (Unaudited)................................ F-5
Consolidated Statement of Cash Flows for the eight months
ended December 31, 1996 and three months ended March 31,
1997 (Unaudited).......................................... F-6
Notes to Consolidated Financial Statements for the eight
months ended December 31, 1996 and three months ended
March 31, 1997 (Unaudited)................................ F-7

RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.
Report of Independent Public Accountants.................... F-15
Combined Balance Sheets as of December 31, 1995 and April
30, 1996.................................................. F-16
Combined Statements of Income for the years ended December
31, 1994 and 1995, and for the four months ended April 30,
1996...................................................... F-17
Combined Statements of Shareholders' Investment for the
years ended December 31, 1994 and 1995, and for the four
months ended April 30, 1996............................... F-18
Combined Statements of Cash Flows for the years ended
December 31, 1994 and 1995 and for the four months ended
April 30, 1996............................................ F-19
Notes to Combined Financial Statements for the years ended
December 31, 1994 and 1995 and for the four months ended
April 30, 1996............................................ F-20

RACING CHAMPIONS LIMITED, HOSTEN INVESTMENT LIMITED, GARNETT
SERVICES INC., BERGEN SERVICES INC.
Report of Independent Auditors.............................. F-23
Combined Balance Sheets as of March 31, 1995 and 1996 and
April 30, 1996............................................ F-24
Combined Statements of Income for the years ended March 31,
1995 and 1996 and for the one month ended April 30,
1996...................................................... F-25
Combined Statements of Changes in Shareholders' Equity for
the years ended March 31, 1995 and 1996 and for the one
month ended April 30, 1996................................ F-26
Combined Statements of Cash Flows for the years ended March
31, 1995 and 1996 and for the one month ended April 30,
1996...................................................... F-27
Notes to Combined Financial Statements...................... F-28
</TABLE>

F-1
<PAGE> 61

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of
Racing Champions Corporation and Subsidiaries:

We have audited the accompanying consolidated balance sheet of RACING
CHAMPIONS CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of December
31, 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for the eight months ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Racing
Champions Corporation and Subsidiaries as of December 31, 1996, and the results
of its operations and its cash flows for the eight months ended December 31,
1996, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Chicago, Illinois
February 15, 1997
(except with respect to matters discussed
in Note 11 as to which the date
is April 9, 1997)

F-2
<PAGE> 62

RACING CHAMPIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, MARCH 31, MARCH 31,
1996 1997 1997
------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,897,911 $ 831,052
Accounts receivable, net of allowance for doubtful
accounts of $300,000.................................... 5,359,473 4,539,851
Note receivable, officer.................................. 120,758 98,599
Inventory................................................. 1,264,317 1,358,720
Deferred and prepaid taxes................................ 1,255,131 932,819
Prepaid expenses.......................................... 343,210 794,383
------------ ------------
Total current assets.................................... 14,240,800 8,555,424
------------ ------------
Property and equipment:
Tooling................................................... 6,717,375 7,175,215
Other equipment........................................... 1,349,973 1,453,736
------------ ------------
8,067,348 8,628,951
Less -- accumulated depreciation.......................... (839,282) (1,366,652)
------------ ------------
7,228,066 7,262,299
Excess purchase price over net assets acquired, net......... 87,139,838 86,591,447
Other assets................................................ 471,334 185,974
------------ ------------
Total assets....................................... $109,080,038 $102,595,144
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,777,690 $ 539,906
Accrued expenses.......................................... 5,757,175 5,560,911
Accrued royalties......................................... 1,890,857 2,723,231
Due to stockholders....................................... 945,373 --
Current maturities of bank term notes..................... 6,200,000 7,800,000
Senior subordinated debt to stockholders.................. 8,020,000 --
------------ ------------
Total current liabilities............................... 24,591,095 16,624,048
Bank term notes, less current maturities.................... 30,700,000 31,117,000
Junior subordinated debt to stockholders.................... 39,441,054 39,441,054
Deferred interest on junior subordinated debt............... 1,938,083 2,677,213
Deferred income taxes....................................... 996,575 994,949
------------ ------------
Total liabilities.................................. 97,666,807 90.854,264
------------ ------------
Stockholders' equity:
Preferred stock, Series A, $.01 par value, 100,000 shares
authorized, 66,668 issued and outstanding and
liquidation value of $7,223,107 at December 31, 1996,
and $7,438,945 at March 31, 1997 and no shares issued or
outstanding pro forma................................... $ 556,974 $ 772,812 $ --
Preferred stock, Series B, $.01 par value, 20,000 shares
authorized, 11,952 issued and outstanding and
liquidation value of $1,294,333 at December 31, 1996 and
$1,333,088 at March 31, 1997 and no shares issued or
outstanding pro forma................................... 99,853 138,548 --
Common stock, voting, $.01 par value, 20,000,000 shares
authorized, 6,948,156 shares issued and outstanding at
December 31, 1996, and March 31, 1997 and 7,885,240
shares issued and outstanding pro forma................. 69,482 69,482 78,853
Common stock, nonvoting, $.01 par value, 1,000,000 shares
authorized, 937,084 shares issued and outstanding at
December 31, 1996 and March 31, 1997 and no shares
issued or outstanding pro forma......................... 9,371 9,371 --
Additional paid-in capital................................ 8,782,383 8,782,383 921,710
Retained earnings......................................... 1,895,168 1,968,284 1,968,284
------------ ------------ ------------
Total stockholders' equity.............................. 11,413,231 11,740,880 $ 2,968,847
------------ ------------ ============
Total liabilities and stockholders' equity......... $109,080,038 $102,595,144
============ ============
</TABLE>

The accompanying notes are an integral part of this balance sheet.

F-3
<PAGE> 63

RACING CHAMPIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

<TABLE>
<CAPTION>
EIGHT MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Net sales................................................... $49,384,893 $15,187,478

Cost of sales, related party................................ 3,990,651 1,407,098

Cost of sales, other........................................ 17,374,793 5,086,159
----------- -----------
Gross profit.............................................. 28,019,449 8,694,221

Selling, general and administrative expense................. 15,244,449 5,170,768

Amortization of intangible assets........................... 1,539,101 554,069
----------- -----------
Operating income.......................................... 11,235,899 2,969,384

Interest expense............................................ 6,737,725 2,380,513

Other expense............................................... 153,471 42,930
----------- -----------
Income before income taxes................................ 4,344,703 545,941

Income tax expense.......................................... 1,793,495 218,292
----------- -----------
Net income................................................ 2,551,208 327,649

Dividends accrued on preferred stock........................ 656,040 254,533
----------- -----------
Net income available to common stockholders............... $ 1,895,168 $ 73,116
=========== ===========
Net income per common share................................. $0.23 $0.01
=========== ===========
Average number of common shares outstanding................. 8,214,273 8,214,273
=========== ===========
</TABLE>

The accompanying notes are an integral part of this statement.

F-4
<PAGE> 64

RACING CHAMPIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
ADDITIONAL
COMMON PREFERRED PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS EQUITY
------- --------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance, May 1, 1996.................. $78,853 $ 787 $8,782,383 $ -- $ 8,862,023
Net income.......................... -- -- -- 2,551,208 2,551,208
Accrued dividends................... -- 656,040 -- (656,040) --
------- -------- ---------- ---------- -----------
Balance, December 31, 1996............ $78,853 $656,827 $8,782,383 $1,895,168 $11,413,231
======= ======== ========== ========== ===========
Net income (unaudited).............. -- -- -- 327,649 327,649
Accrued dividends (unaudited)....... -- 254,533 -- (254,533) --
------- -------- ---------- ---------- -----------
Balance, March 31, 1997 (unaudited)... $78,853 $911,360 $8,782,383 $1,968,284 $11,740,880
======= ======== ========== ========== ===========
</TABLE>

The accompanying notes are an integral part of this statement.

F-5
<PAGE> 65

RACING CHAMPIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
EIGHT MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 2,551,208 $ 327,649
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 826,052 527,369
Amortization on intangible assets...................... 1,539,099 554,069
Amortization of deferred financing costs............... 745,820 279,682
Deferred income taxes.................................. 884,190 (1,626)
Deferred interest on junior subordinated debt.......... 1,938,083 739,130
Changes in operating assets and liabilities:
Accounts receivable.................................. (654,921) 819,622
Inventory............................................ 1,647,699 (94,403)
Prepaid expenses..................................... (220,591) (128,861)
Accounts payable and accrued expenses................ 1,572,971 (625,389)
------------ -----------
Net cash provided by operating activities......... 10,829,610 2,397,242
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (2,348,107) (561,604)
Cash used for acquisitions, net........................... (27,781,355) --
------------ -----------
Net cash used by investing activities............. (30,129,462) (561,604)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock issued for cash..................................... $ 5,661,309 $ --
Proceeds from bank term loans............................. 40,000,000 8,000,000
Payment on bank term loans................................ (3,100,000) (5,983,000)
Proceeds from issuance of Junior Subordinated notes....... 21,570,570 --
Payment of three day notes................................ (38,934,116) --
Decrease in due to stockholders........................... -- (8,941,656)
Decrease in notes receivable from officer................. -- 22,159
------------ -----------
Net cash provided (used) by financing
activities...................................... 25,197,763 (6,902,497)
------------ -----------
Net increase (decrease) in cash and cash
equivalents..................................... 5,897,911 (5,066,859)
Cash and cash equivalents, beginning of period.............. -- 5,897,911
------------ -----------
Cash and cash equivalents, end of period.................... $ 5,897,911 $ 831,052
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest during the period.................. $ 5,422,846 $ 1,649,046
Cash paid for taxes during the period..................... 4,339,689 30,685
============ ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Issuance of stock for acquisitions........................ $ 3,200,713 $ --
Issuance of Junior Subordinated notes for acquisitions.... 17,870,484 --
Issuance of Senior Subordinated notes for acquisitions.... 8,020,000 --
Issuance of three day notes for acquisitions.............. 38,934,116 --
Issuance of stock and Junior Subordinated note to officer
for note receivable.................................... 120,758 --
============ ===========
</TABLE>

The accompanying notes are an integral part of this statement.

F-6
<PAGE> 66

RACING CHAMPIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE EIGHT MONTHS ENDED DECEMBER 31, 1996
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE
THREE MONTHS THEN ENDED IS UNAUDITED)

1. DESCRIPTION OF BUSINESS

Racing Champions Corporation ("RCC") and Subsidiaries (collectively "the
Company") is a producer and marketer of collectible scaled die cast vehicle
replicas. The Company is known for its extensive line of officially licensed,
high quality collectible replicas of actual race cars and related vehicles from
the most popular U.S. professional racing series, including NASCAR stock car
racing, National Hot Rod Association drag racing, Championship Auto Racing Teams
and Indy Racing League Indy-style racing, World of Outlaws sprint car racing, as
well as Honda and Kawasaki racing motorcycles. Products are manufactured in
numerous styles for the following customer bases: national and regional retail
chains; collector and hobby shops and premium sales to corporations. Racing
Champions, Inc., a wholly owned subsidiary of Racing Champions Corporation, has
license agreements with the major U.S. automotive manufacturers and most of the
major motor sport sponsors, team owners and their drivers. The Company sells its
products primarily in North America. Racing Champions Limited ("RCL"), a wholly
owned Hong Kong subsidiary of RCI, oversees the production of the Company's
products.

2. RECAPITALIZATION

On April 30, 1996, an investor group consummated a recapitalization (the
"Recapitalization") which involved the following: (a) the Company's purchase of
all of the outstanding stock of Racing Champions, Inc. ("RCI") and substantially
all of the assets of Dods-Meyer, Ltd. ("DML") (collectively the "RCI Group");
(b) the acquisition by Banerjan Company Limited (subsequently renamed Racing
Champions Limited), of substantially all of the assets of Racing Champions
Limited, Garnett Services, Inc. and Hosten Investment Limited (collectively the
"RCL Group"); and (c) the contribution by the Company of all the outstanding
stock of the Hong Kong subsidiary to RCI.

The Recapitalization was financed with $40,000,000 of bank borrowings and
the issuance to management and the investor group of $8,020,000 of Senior
Subordinated Notes, $38,245,820 of Series A Junior Subordinated Notes,
$1,195,234 of Series B Junior Subordinated Notes, $6,666,790 of the Company's
Series A Preferred Stock, $1,195,233 of the Company's Series B Preferred Stock,
$118,840 of the Company's Nonvoting Common Stock and $881,160 of the Company's
Common Stock.

The acquisitions were accounted for using the purchase method of
accounting. The acquisitions involved the following: (i) the Company's purchase
of all the outstanding stock of RCI in exchange for the issuance by the Company
of three day notes for $10,630,014, Senior Subordinated Notes of $1,327,808,
Series A Junior Subordinated Notes of $2,746,848 and Series B Junior
Subordinated Notes of $295,330, (ii) the Company's purchase of substantially all
of the assets DML for a cash payment of $1,728,107, and the issuance by the
Company of three day notes for $28,304,102, Senior Subordinated Notes of
$4,025,525, Series A Junior Subordinated Notes of $8,369,985, Series B Junior
Subordinated Notes of $899,904, 2,422.06 shares of Series A Preferred Stock at a
price of $100 per share, 11,952.33 shares of Series B Preferred Stock at a price
of $100 per share, 1,354,908 shares of Common Stock at a price of $0.13 per
share and 937,084 shares of Nonvoting Common Stock at a price of $0.13 per
share, (iii) the Company's purchase of substantially all of the assets of Racing
Champions Limited for a cash payment of $1,500,000, (iv) the Company's purchase
of substantially all of the assets of Hosten Investment Limited for a cash
payment of $50,000, and (v) the Company's purchase of substantially all of the
assets of Garnett Services, Inc. for a cash payment of $17,976,667, and the
issuance by the Company of Senior Subordinated Notes of $2,666,667, Series A
Junior Subordinated Notes of $5,558,417, 13,163.36 shares of Series A Preferred
Stock at a price of $100 per share, and 1,145,996 shares of Common Stock at a
price of $0.13 per share.

F-7
<PAGE> 67

RACING CHAMPIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The excess purchase price over the book value of the net assets acquired
was $93,547,442. Of this excess $88,663,805 has been recorded as an intangible
asset and is being amortized on a straight-line basis over forty years and
$4,883,637 was recorded as inventory and property and equipment.

3. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION AND FOREIGN CURRENCY TRANSLATION/TRANSACTIONS

The financial statements consolidate the accounts of RCC and its wholly
owned subsidiaries. All intercompany items and transactions have been
eliminated.

Foreign subsidiary assets and liabilities are translated at the rates of
exchange at the balance sheet date while income statement accounts are
translated at the average exchange rates in effect during the period.
Accordingly, exchange gains and losses resulting from translations for the eight
months ended December 31, 1996 and the three months ended March 31, 1997 were
insignificant, however, if they were significant, the Company would have
recorded such gains and losses in stockholders' equity in a cumulative
adjustment account.

Transactions in foreign currencies are translated into the local currency
at the rates which prevailed at the time of the transactions. Gains and losses
on foreign currency transactions are included in income. For the eight months
ended December 31, 1996 and the three months ended March 31, 1997, gains and
losses of such transactions were insignificant.

REVENUE RECOGNITION

The Company recognizes revenue based upon shipment of product to customers.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with original
maturities of 90 days or less to be cash equivalents. Such investments are
valued at market prices.

USE OF ESTIMATES

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

INVENTORY

Inventory consists of finished goods and is stated at the lower of cost or
market. Cost is determined by the first-in, first-out method, and market
represents the lower of replacement cost or estimated net realizable value.

PROPERTY AND EQUIPMENT

Property and equipment have been recorded at their fair value as of the
date of the Recapitalization and for items purchased after the Recapitalization
were recorded at cost. Depreciation is computed using the straight-line method
for financial statement purposes with estimated useful lives for tooling of four
years and for other equipment of two to ten years. Accelerated methods are used
for income tax purposes.

F-8
<PAGE> 68

RACING CHAMPIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

EXCESS PURCHASE PRICE OVER NET ASSETS ACQUIRED

Excess of purchase price over net assets acquired is amortized over 40
years on a straight-line basis and is tax deductible over 15 years. The Company
periodically evaluates the carrying value of goodwill for possible impairment
based upon expected future undiscounted operating cash flows.

NET INCOME PER SHARE

Net income per share is based on the weighted average number of shares of
common stock and common equivalent shares outstanding using the treasury stock
method.

CONCENTRATION OF CREDIT RISK

Concentration of credit risk is limited to trade accounts receivable and is
subject to the financial conditions of certain major customers in which there
were three customers accounting for approximately 19%, 17% and 15% of net sales
for the eight months ended December 31, 1996. Additionally, at December 31,
1996, three customers accounted for approximately 27%, 14% and 13% of accounts
receivable. The Company does not require collateral or other security to support
customers' receivables. The Company conducts periodic reviews of its customers'
financial conditions and vendor payment practices to minimize collection risks
on trade accounts receivable. The Company has purchased insurance which covers a
portion of its receivables from major customers.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash, receivables, accounts payables, accrued
expenses and notes payable approximate fair value because of the short-term
nature of the items. The carrying value of the debt resulting from the
recapitalization approximates its fair value based on current interest rates,
coupled with the expected near term payoff of the debt with the proceeds from
the proposed initial public offering.

ACCOUNTING FOR STOCK-BASED COMPENSATION

In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock Based Compensation." With respect to stock options
granted to employees, SFAS No. 123 permits companies to continue using the
accounting method promulgated by the Accounting Principles Board Opinion No. 25
("APB No. 25") "Accounting for Stock Issued to Employees," to measure
compensation or to adopt the fair value based method prescribed by SFAS No. 123.
The Company has elected to continue to measure compensation cost under APB No.
25. If the APB No. 25 method is continued, pro forma disclosures are required as
if SFAS No. 123 accounting provisions were followed. For the eight months ended
December 31, 1996 and for the three months ended March 31, 1997 net income and
net income per share were $1,895,168 and $.23, and $73,116 and $.01,
respectively. Under SFAS No. 123, pro forma net income and pro forma net income
per share for the eight months ended December 31, 1996 and for the three months
ended March 31, 1997 would have been $1,893,493 and $.23, and $72,483 and $.01,
respectively.

F-9
<PAGE> 69

RACING CHAMPIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. INCOME TAXES:

For financial reporting purposes, income before income taxes includes the
following components:

<TABLE>
<CAPTION>
EIGHT MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
<S> <C> <C>
Pretax income:
United States............................ $4,247,843 $509,110
Foreign.................................. 96,860 36,831
---------- --------
$4,344,703 $545,941
========== ========
</TABLE>

The significant components of income tax expense are as follows:

<TABLE>
<CAPTION>
EIGHT MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
<S> <C> <C>
Current
Federal.................................. $ 749,095 $(564,631)
State.................................... 160,210 (99,641)
Foreign.................................. -- --
---------- ---------
909,305 (664,272)
---------- ---------
Deferred
Federal.................................. 730,005 750,179
State.................................... 137,626 132,385
Foreign.................................. 16,559 --
---------- ---------
884,190 882,564
---------- ---------
$1,793,495 $ 218,292
========== =========
</TABLE>

A reconciliation of statutory Federal tax rate and actual effective income
tax rate is as follows:

<TABLE>
<CAPTION>
EIGHT MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
<S> <C> <C>
Statutory rate.............................. 34.0% 34.0%
State taxes, net of federal benefit......... 4.8 4.8
Other....................................... 2.5 1.2
---- ----
Effective rate.............................. 41.3% 40.0%
==== ====
</TABLE>

F-10
<PAGE> 70

RACING CHAMPIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The significant components of deferred tax assets and liabilities are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ---------
<S> <C> <C>
Deferred income tax assets
Valuation allowances...................... $112,385 $112,385
-------- --------
Deferred income tax liabilities
Intangible assets......................... 732,416 741,715
Property and equipment.................... 264,159 253,234
-------- --------
Total deferred income tax
liabilities..................... 996,575 994,949
-------- --------
$884,190 $882,564
======== ========
</TABLE>

5. DEBT

The Company entered into a Credit Agreement with a group of banks that
provides for a revolving loan, Term Loan A, Term Loan B and a Deferred Term
Loan. The revolving loan allows the Company to borrow up to $5 million prior to
April 30, 2001, based upon levels of the Company's accounts receivable,
inventory and cash flows. As of December 31, 1996, the Company had not borrowed
under the revolving loan. The Credit Agreement also provides the Company with
the ability to borrow up to $8 million under the Deferred Term Loan at any time
between March 31, 1997, and April 30, 1997, to refinance the $8 million Senior
Subordinated Notes. Eight million dollars was borrowed under the Deferred Term
Loan on March 31, 1997.

Borrowings under the Credit Agreement bear interest, at the Company's
option, at the banks' designated base rate plus a margin that varies between .5%
and 1.25% or at a reserve adjusted Eurodollar rate plus a margin that varies
between 2% and 3.25%. All amounts outstanding under the Credit Agreement are
secured by substantially all assets of the Company and are subject to certain
financial and other covenants. At December 31, 1996, and March 31, 1997 the
Company was in compliance with these covenants.

The Senior Subordinated Notes are unsecured obligations of the Company and
all payments under these notes are subordinated to indebtedness under the Credit
Agreement and are senior to all existing and future subordinated indebtedness of
the Company including amounts due under the Series A and Series B Junior
Subordinated Notes.

The Series A Junior Subordinated Notes are unsecured obligations of the
Company and all payments under these notes are subordinated to indebtedness
under the Credit Agreement and to amounts outstanding under the Senior
Subordinated Notes, and rank senior in right of payment to amounts outstanding
under the Series B Junior Subordinated Notes.

The Series B Junior Subordinated Notes are unsecured obligations of the
Company, and all payments under these notes are subordinated to indebtedness
under the Credit Agreement and to amounts outstanding under the Senior
Subordinated Notes and the Series A Junior Subordinated Notes.

The Company's Hong Kong subsidiary entered into a credit agreement with a
bank that provides for a line of credit of up to $5 million. Amounts borrowed
under this line of credit bear interest at the bank's cost of funds plus 2% and
are cross-guaranteed by RCI and RCL. As of December 31, 1996, and March 31, 1997
there were no outstanding borrowings under this line of credit.

F-11
<PAGE> 71

RACING CHAMPIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

LONG-TERM DEBT CONSISTS OF THE FOLLOWING:

<TABLE>
<CAPTION>
DECEMBER 31, 1996 MARCH 31, 1997
----------------- --------------
<S> <C> <C>
Term Loan A payable to the bank, bearing interest at 8.25%
as of December 31, 1996, interest payable every quarter;
principal of $1,500,000 due every quarter from September,
1996, through April, 2001................................. $27,000,000 $21,117,000
Term Loan B payable to the bank, bearing interest at 8.75%
as of December 31, 1996, interest payable every quarter;
principal of $50,000 due every quarter from September,
1996, through December, 2000, and $1,000,000 due every
quarter from March, 2001 to March, 2002, with a final
payment of $4,100,000 in April, 2002...................... 9,900,000 9,800,000
Deferred Term Notes payable to bank, bearing interest at
8.41% as of March 31, 1997, interest payable every
quarter; principal of $400,000 due every quarter from
June, 1997 through December, 2000, and $500,000 due every
quarter from March, 2001 to December, 2001................ -- 8,000,000
Senior Subordinated Notes payable to stockholders, interest
at a designated bank's base rate (8.25% at December 31,
1996), principal payable of $20,000, January 1, 1997; and
$8,000,000 with all accrued and unpaid interest due April
30, 1997.................................................. 8,020,000 --
Series A Junior Subordinated Notes payable to stockholders;
interest at 12%; 40% of interest earned is payable each
March 1, June 1, September 1 and December 1; principal
amounts of $9,042,995 due each April 30 beginning 2004
with all accrued and unpaid interest due April 30, 2006... 38,245,820 38,245,820
Series B Junior Subordinated Notes payable to stockholders;
interest at 12%; 40% of interest earned is payable each
March 1, June 1, September 1 and December 1; principal
payments of $398,411 due each April 30 beginning 2004,
with all accrued and unpaid interest due April 30, 2006... 1,195,234 1,195,234
----------- -----------
84,361,054 78,358,054
Less -- Current maturities.................................. 14,220,000 7,800,000
----------- -----------
$70,141,054 $70,558,054
=========== ===========
</TABLE>

PRINCIPAL MATURITIES OF LONG-TERM DEBT ARE AS FOLLOWS:

<TABLE>
<CAPTION>
DECEMBER 31, 1996 MARCH 31, 1997
----------------- --------------
<S> <C> <C>
1998........................................................ $ 6,200,000 $ 7,800,000
1999........................................................ 6,200,000 7,800,000
2000........................................................ 6,200,000 5,967,000
2001........................................................ 7,000,000 5,500,000
2002........................................................ 5,100,000 4,050,000
Thereafter.................................................. 39,441,054 39,441,054
----------- -----------
Total long-term debt.............................. $70,141,054 $70,558,054
=========== ===========
</TABLE>

F-12
<PAGE> 72

RACING CHAMPIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. PREFERRED STOCK:

The preferred stock accrues dividends at 12% per year and dividends are
cumulative and accrue from day to day, whether or not earned or declared,
commencing with the date of issue of such share. No dividends have been paid to
date.

In the event of any liquidation, holders of the Series A Preferred Stock
are entitled to receive the liquidation value plus all accrued and unpaid
dividends prior to any payment with respect to the Series B Preferred Stock, the
Common Stock or the Nonvoting Common Stock. The holders of the Series B
Preferred Stock are entitled to receive the liquidation preference plus all
accrued and unpaid dividends prior to any payment with respect to the Common
Stock or the Nonvoting Common Stock.

7. STOCK OPTION PLAN:

The Company has adopted a 1996 Employee Stock Option Plan for its key
employees. The Employee Stock Option Plan is administered by the Board of
Directors. The Company has reserved 415,041 shares of common stock for issuance
under the plan. On April 30, 1996 and June 1, 1996, the Company granted 311,281
and 20,752 options, respectively, to purchase shares of common stock at an
exercise price equal to fair market value as determined by the Board of
Directors in connection with the Recapitalization. These options vest equally
over a five year period. The options will expire on the earlier of the tenth
anniversary of the date of grant or 30 days after the date of termination of the
employees' employment with the Company.

Stock option activity for the employees' stock option plan for the eight
months ended December 31, 1996, is as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE PRICE
------- ----- --------
<S> <C> <C> <C>
Granted................................. 332,033 $0.13 $0.13
Exercised............................... -- -- --
Canceled................................ -- -- --
-------
Outstanding as of December 31, 1996..... 332,033 $0.13 $0.13
======= ===== =====
Stock options exercisable at
December 31, 1996..................... --
=======
Shares available for future grants...... 83,008
=======
</TABLE>

There was no stock option activity during the three months ending March 31,
1997.

The fair value of each option is estimated on the date of grant based on
the Black-Scholes option pricing model assuming, among other things, no dividend
yield, a risk free rate of 6.87% to 7.03%, and expected life of 10 years. The
weighted average fair value of options granted under the Company's stock plan
for the eight months ended December 31, 1996 was $.06 per share. As of December
31, 1996, the remaining contracted life of all options was approximately ten
years.

8. RELATED PARTY TRANSACTION

The Company purchased $3,990,651 and $1,407,098 of product during the eight
months ended December 31, 1996 and the three months ended March 31, 1997,
respectively from a company controlled by a relative of one of the Company's
stockholders.

During the eight months ended December 31, 1996, an officer of the Company
held ownership interests in two of the Company's suppliers. These interests were
disposed of by December 31, 1996. For the eight months ended December 31, 1996,
the Company paid $5.6 million and $5.7 million to these suppliers, respectively,
for purchases of die cast vehicle replicas.

F-13
<PAGE> 73

RACING CHAMPIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company leases warehouse and office space from parties related to
officers/directors of the Company. Rent expense for the eight months ended
December 31, 1996 and the three months ended March 31, 1997 was $282,476 and
$109,042, respectively.

The Company pays sales commissions to an external sales representative
organization, of which one of the principals of this organization is a relative
of an officer/director of the Company. For the eight months ended December 31,
1996 and the three months ended March 31, 1997, commissions of $85,393 and
$40,066, respectively were allocated to the related principal.

9. EMPLOYEE BENEFIT PLAN

The Company adopted a 401(k) savings plan as of December, 1996, which
became effective on January 1, 1997. Employees meeting certain eligibility
requirements, as defined, may contribute up to 15% of pretax gross wages,
subject to certain restrictions. The Company will make matching contributions of
50% of the employees' contributions' up to 5% of employee wages.

10. PRO FORMA DATA (UNAUDITED)

The pro forma balance sheet amounts give effect to the redemption of
preferred stock and the conversion of the nonvoting common stock to voting
common stock at March 31, 1997. The amounts do not assume the receipt of
offering proceeds.

11. SUBSEQUENT EVENT

PROPOSED INITIAL PUBLIC OFFERING

On February 27, 1997, the Company filed a Registration Statement with
regard to an initial public offering of its common stock. Under the proposed
offering, the Company intends to sell to the public 5,000,000 shares of common
stock. The Company proposes to use approximately $59,700,000 of the net proceeds
to repay subordinated debt owed to certain stockholders of the Company and bank
borrowings, and to redeem all of the outstanding shares of preferred stock.

STOCK SPLIT

On April 9, 1997, the Company issued a 7.885261-for-one stock split of
common stock and increased in the number of authorized shares to 20,000,000
shares of voting common stock and 1,000,000 shares of nonvoting common stock.
The accompanying financial statements have been retroactively adjusted to
reflect the stock split.

F-14
<PAGE> 74

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of
Racing Champions, Inc. and Dods-Meyer, Ltd.:

We have audited the accompanying combined balance sheets of RACING
CHAMPIONS, INC. (an Illinois corporation) and DODS-MEYER, LTD. (an Illinois
corporation) as of December 31, 1995 and April 30, 1996, and the related
combined statements of income, shareholders' investment and cash flows for the
years ended December 31, 1994 and 1995 and for the four months ended April 30,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Racing Champions,
Inc. and Dods-Meyer, Ltd. as of December 31, 1995 and April 30, 1996, and the
results of their operations and their cash flows for the years ended December
31, 1994 and 1995 and for the four months ended April 30, 1996, in conformity
with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Chicago, Illinois
February 15, 1997

F-15
<PAGE> 75

RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.

COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, APRIL 30,
1995 1996
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $2,461,234 $ 255,466
Accounts receivable, net of allowance for doubtful
accounts of $200,000 and $257,000 in 1995 and 1996,
respectively........................................... 3,495,736 3,569,178
Inventory................................................. 711,743 1,553,075
Other current assets...................................... 170,228 453,939
---------- ----------
Total current assets................................... 6,838,941 5,831,658
---------- ----------
Property and equipment:
Tooling................................................... 4,317,008 5,246,778
Other equipment........................................... 398,575 418,969
---------- ----------
4,715,583 5,665,747
Less-accumulated depreciation............................. 3,284,576 3,644,575
---------- ----------
1,431,007 2,021,172
---------- ----------
Total assets.................................... $8,269,948 $7,852,830
========== ==========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Accounts payable.......................................... $ 83,510 $ 548,040
Accrued expenses.......................................... 1,901,413 1,447,239
Accrued bonus............................................. -- 2,501,439
Accrued royalties......................................... 1,477,506 863,673
Accrued distributions..................................... 500,000 811,344
Due to related party...................................... 900,522 1,500,489
Note payable to related party............................. 1,120,000 1,140,000
---------- ----------
Total current liabilities.............................. 5,982,951 8,812,224
---------- ----------
Shareholders' investment:
Common stock, Racing Champions, Inc., no par value, 5,000
shares authorized, 1,000 shares issued and
outstanding............................................ 400 400
Common stock, Dods-Meyer, Ltd., no par value, 10,000
shares authorized, 1,000 shares issued and
outstanding............................................ 1,000 1,000
Additional paid-in capital................................ 9,600 9,600
Retained earnings (deficit)............................... 2,275,997 (970,394)
---------- ----------
Total shareholders' investment......................... 2,286,997 (959,394)
---------- ----------
Total liabilities and shareholders'
investment.................................. $8,269,948 $7,852,830
========== ==========
</TABLE>

The accompanying notes are an integral part of these balance sheets.

F-16
<PAGE> 76

RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.

COMBINED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
FOUR MONTHS
YEARS ENDED DECEMBER 31, ENDED
-------------------------- APRIL 30,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales........................................... $43,267,924 $48,592,178 $16,614,029
Cost of sales, related party........................ 25,212,148 25,556,121 9,403,514
----------- ----------- -----------
Gross profit...................................... 18,055,776 23,036,057 7,210,515
Selling, general and administrative expenses........ 9,491,222 13,312,053 4,713,344
Nonrecurring bonus expense.......................... -- -- 2,389,218
----------- ----------- -----------
Operating income.................................. 8,564,554 9,724,004 107,953
Interest expense.................................... (210,876) (132,758) (20,000)
Other income........................................ 218,985 141,932 36,299
Other expense....................................... -- (147,292) (13,452)
----------- ----------- -----------
Income before income taxes........................ 8,572,663 9,585,886 110,800
Income tax expense.................................. 348,699 193,500 39,000
----------- ----------- -----------
Net income........................................ $ 8,223,964 $ 9,392,386 $ 71,800
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-17
<PAGE> 77

RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.

COMBINED STATEMENTS OF SHAREHOLDERS' INVESTMENT

<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS INVESTMENT
------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993....................... $1,400 $9,600 $(1,840,353) $(1,829,353)
Net income..................................... -- -- 8,223,964 8,223,964
Distributions.................................. -- -- (4,000,000) (4,000,000)
------ ------ ----------- -----------
Balance, December 31, 1994....................... 1,400 9,600 2,383,611 2,394,611
Net income..................................... -- -- 9,392,386 9,392,386
Distributions.................................. -- -- (9,500,000) (9,500,000)
------ ------ ----------- -----------
Balance, December 31, 1995....................... 1,400 9,600 2,275,997 2,286,997
Net income..................................... -- -- 71,800 71,800
Distributions.................................. -- -- (3,318,191) (3,318,191)
------ ------ ----------- -----------
Balance, April 30, 1996.......................... $1,400 $9,600 $ (970,394) $ (959,394)
====== ====== =========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-18
<PAGE> 78

RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.

COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOUR MONTHS
YEARS ENDED DECEMBER 31, ENDED
--------------------------- APRIL 30,
1994 1995 1996
----------- ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 8,223,964 $ 9,392,386 $ 71,800
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation.................................. 678,583 711,778 359,999
Deferred income taxes......................... 196,256 -- --
Changes in operating assets and liabilities
Accounts receivable......................... (274,665) (895,104) (73,442)
Inventory................................... 602,899 (379,348) (841,332)
Other current assets........................ 32,694 (170,228) (283,711)
Accounts payable and accrued expenses....... (395,462) 1,115,250 1,897,962
Due to related party........................ (51,254) 496,484 599,967
----------- ------------ -----------
Net cash provided by operating
activities.......................... 9,013,015 10,271,218 1,731,263
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............... (1,128,788) (1,076,826) (950,164)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on bank note............................ (50,000) (950,000) --
Change in shareholders' notes payable............ (1,615,000) -- 20,000
Distributions to shareholders.................... (3,100,000) (9,900,000) (3,006,847)
----------- ------------ -----------
Net cash used in financing
activities.......................... (4,765,000) (10,850,000) (2,986,847)
----------- ------------ -----------
Net increase (decrease) in cash and
cash equivalents.................... 3,119,227 (1,655,608) (2,205,768)
Cash and cash equivalents, beginning of period..... 997,615 4,116,842 2,461,234
----------- ------------ -----------
Cash and cash equivalents, end of period........... $ 4,116,842 $ 2,461,234 $ 255,466
=========== ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest during the period......... $ 220,340 $ 72,758 $ --
Cash paid for taxes during the period............ 871,395 88,968 --
=========== ============ ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-19
<PAGE> 79

RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.

NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE FOUR MONTHS ENDED APRIL 30, 1996

1. DESCRIPTION OF BUSINESS

Racing Champions, Inc. ("RCI") and Dods-Meyer, Ltd. ("DML") (collectively
"the Company") is a leading producer and marketer of collectible scaled die cast
vehicle replicas. The Company is best known for its extensive line of officially
licensed, high-quality collectible replicas of actual race cars and related
vehicles from the most popular U.S. professional racing series, including NASCAR
stock car racing, National Hot Rod Association drag racing, Championship Auto
Racing Teams and Indy Racing League Indy-style racing, World of Outlaws sprint
car racing as well as Honda and Kawasaki racing motorcycles. Products are
manufactured in numerous styles for the following customer bases: national and
regional retail chains, collector and hobby shops and premium sales to
corporations. RCI has license agreements with the major U.S. automotive
manufacturers and most of the major motor sport sponsors, team owners and their
drivers.

RCI sells its products primarily in North America through sales
representatives of DML, which is owned by shareholders of RCI. Racing Champions
Limited ("RCL"), a Hong Kong company owned by a related party, oversees the
production of RCI products.

On April 30, 1996, the Company was part of a recapitalization which
involved the Company and RCL and other affiliates of RCL, whereby a new holding
company, Racing Champions Corporation, acquired all stock of RCI and all
operating assets of DML.

2. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF COMBINATION

The financial statements combine the accounts of RCI and DML after
elimination of intercompany items and transactions.

REVENUE RECOGNITION

The Company recognizes revenue based upon shipment of product to customers.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with original
maturities of 90 days or less to be cash equivalent. Such investments are valued
at market prices.

USE OF ESTIMATES

INVENTORY

F-20
<PAGE> 80

RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method for financial statement purposes with estimated useful
lives for tooling of two years and for other equipment of five to ten years.
Accelerated methods are used for income tax purposes.

INCOME TAXES

DML has elected to be treated as an S Corporation under the Internal
Revenue Code pursuant to which profits and losses are allocated to the
shareholders for inclusion in their personal tax returns. As of January 1, 1994,
RCI elected to be treated as an S Corporation. Accordingly, a deferred tax asset
of $196,256 was charged to tax expense as of January 1, 1994. The remaining tax
expense for 1995 and 1996 is due to Illinois replacement taxes.

RELATED-PARTY TRANSACTIONS

RCL's beneficial owner is a warrant holder in RCI. The stock purchase
warrant was issued in 1993 and allows the holder to purchase 500 shares of
common stock for an aggregate price of $1,000,000 and contains certain
anti-dilution provisions. The warrant is exercisable on December 30, 2003, or
upon the occurrence of certain events including a change in control, as defined,
or a filing of a registration statement for an initial public offering of the
Company's common stock. At December 31, 1995 and 1994, RCI had 500 shares of
common stock held in reserve for the exercise of this warrant. This warrant was
canceled on April 30, 1996 as part of the recapitalization of the Company.

In addition to payments related to the purchase of products, RCI paid RCL
fees of 30.5% of the cost of product shipped, which amounted to $1,772,000 in
1994, $2,123,414 in 1995 and $831,832 in 1996 which have been included in Cost
of sales, Related party, on the accompanying Combined Statements of Income.

STOCK DIVIDEND

On December 20, 1994, RCI's shareholders and directors declared a 24-to-1
stock dividend to shareholders of RCI's common stock, thereby effecting a
24-to-1 stock split. This split has been retroactively reflected in the
accompanying financial statements.

CONCENTRATION OF CREDIT RISK

Concentration of credit risk is limited to trade accounts receivable and is
subject to the financial conditions of certain major customers in which one
customer accounted for approximately 11% of net sales for the year ended
December 31, 1994, two customers accounted for approximately 15% and 10% of net
sales for the year ended December 31, 1995 and three customers accounted for
approximately 16%, 15% and 15% of net sales for the four months ended April 30,
1996. The Company does not require collateral or other security to support
customers' receivables. The Company conducts periodic reviews of its customers'
financial conditions and vendor payment practices to minimize collection risks
on trade accounts receivable. The Company insures its receivables for major
customers with a third party.

3. NOTES PAYABLE

During 1995, the Company entered into a revolving line of credit agreement
with a bank which extends through April, 1996. The maximum amount of borrowings
was the lesser of $4,000,000 or the collateral availability, as defined in the
agreement. The agreement required maintenance of certain covenants and was
secured by substantially all of the assets of the Company. As of April 30, 1996,
there was no outstanding balance on this line of credit. On April 30, 1996, as
part of the recapitalization (see Note 1) this agreement was canceled.

F-21
<PAGE> 81

RACING CHAMPIONS, INC. AND DODS-MEYER, LTD.

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

The Company has an unsecured promissory note payable to a related party (a
former shareholder) of $1,120,000 and $1,140,000 at December 31, 1995, and April
30, 1996, respectively, including accrued interest. Interest charged at 6% is
payable at maturity.

4. STOCK OPTION PLAN

During 1994, RCI established a stock option plan, under which up to 100
shares of RCI's common stock may be granted to key employees. Under this Plan,
options to purchase a total of 74.76 shares of RCI common stock at $3,960 per
share were issued during 1994. The options were issued at an exercise price
equal to fair market value. The options are exercisable upon the earlier of a
change in control of RCI, as defined, or an initial public offering of RCI's
common stock. The options expire five years from the date they become
exercisable. The options outlined above were canceled in connection with the
recapitalization (see Note 1).

F-22
<PAGE> 82

REPORT OF INDEPENDENT AUDITORS

The Shareholders
Racing Champions Limited,
(Incorporated in Hong Kong with limited liability)
Hosten Investment Limited,
(Incorporated in Hong Kong with limited liability)
Garnett Services Inc.,
(Incorporated in the British Virgin Islands with limited liability)
Bergen Services Inc.,
(Incorporated in the British Virgin Islands with limited liability)

We have audited the accompanying combined balance sheets of Racing
Champions Limited, Hosten Investment Limited, Garnett Services Inc. and Bergen
Services Inc. (hereinafter collectively referred to as "the Racing Champions
Limited Group" or "the RCL Group") as of March 31, 1995, 1996 and April 30, 1996
and the related combined statements of income, changes in shareholders' equity
and cash flows for each of the two years in the period ended March 31, 1996 and
the one month period ended April 30, 1996. These financial statements are the
responsibility of the RCL Group's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the RCL
Group as of March 31, 1995, 1996 and April 30, 1996, and the combined results of
its operations and its cash flows for each of the two years in the period ended
March 31, 1996 and for the one month period ended April 30, 1996 in conformity
with accounting principles generally accepted in the United States of America.

ERNST & YOUNG
Hong Kong

February 19, 1997

F-23
<PAGE> 83

RACING CHAMPIONS LIMITED GROUP

COMBINED BALANCE SHEETS
(IN U.S. DOLLARS)

<TABLE>
<CAPTION>
MARCH 31,
----------------------- APRIL 30,
NOTES 1995 1996 1996
------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 43,277 $ 301,240 $ 50,875
Trade receivables, net.......................... 996,405 1,739,938 1,470,941
Prepayments, deposits and other receivables..... 577,134 282,213 237,122
Amount due from Racing Champions, Inc.
("RCI")...................................... 596,828 442,660 572,434
Amount due from affiliates...................... 9 1,032,754 -- 111,965
---------- ---------- ----------
Total current assets......................... 3,246,398 2,766,051 2,443,337
Fixed assets...................................... 8 & 13 474,461 433,952 411,699
Other asset....................................... 3 -- -- 879,690
Deferred income taxes............................. 4,560 60,440 65,713
---------- ---------- ----------
Total assets............................ $3,725,419 $3,260,443 $3,800,439
========== ========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdrafts, secured........................ 12 $ 320,384 $ -- $ --
Current portion of obligations under capital
lease........................................ 13 49,596 148,151 147,888
Accounts payable and accrued liabilities........ 7 794,598 723,655 992,660
Amount due to affiliates........................ 9 -- 218,790 --
Income tax payable.............................. 38,872 136,768 151,086
---------- ---------- ----------
Total current liabilities.................... 1,203,450 1,227,364 1,291,634
Long-term obligations under capital lease......... 13 72,834 175,320 163,237
---------- ---------- ----------
Total liabilities....................... 1,276,284 1,402,684 1,454,871
Contingencies and commitments..................... 16
Shareholders' equity:
Share capital................................... 14 129,369 129,369 129,369
Retained earnings............................... 2,319,766 1,728,390 2,216,199
---------- ---------- ----------
Total shareholders' equity................... 2,449,135 1,857,759 2,345,568
---------- ---------- ----------
Total liabilities and shareholders'
equity................................ $3,725,419 $3,260,443 $3,800,439
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these combined financial
statements.

F-24
<PAGE> 84

RACING CHAMPIONS LIMITED GROUP

COMBINED STATEMENTS OF INCOME
(IN U.S. DOLLARS)

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31, ONE MONTH
------------------------------- ENDED
NOTES 1995 1996 APRIL 30, 1996
------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
Sales:
Related party - RCI........................ $ 10,316,438 $ 11,308,084 $ 1,304,352
Other customers............................ 12,014,547 26,013,536 2,547,775
------------ ------------ -----------
Total sales............................. 22,330,985 37,321,620 3,852,127
------------ ------------ -----------
Cost of sales:
Related party purchases.................... 15 (8,161,941) (11,245,727) (1,719,700)
Other purchases............................ (4,776,869) (7,643,479) (307,945)
Commission paid to RCI..................... 15 (5,777,498) (13,745,461) (1,331,278)
------------ ------------ -----------
Total cost of sales..................... (18,716,308) (32,634,667) (3,358,923)
------------ ------------ -----------
Commission received from RCI................. 15 1,673,212 2,398,325 258,387
------------ ------------ -----------
Gross profit............................ 5,287,889 7,085,278 751,591
Depreciation of fixed assets................. (360,177) (392,079) (29,268)
Selling and administrative expenses.......... 15 (2,861,294) (3,968,028) (215,760)
------------ ------------ -----------
Operating income........................ 2,066,418 2,725,171 506,563
Financial expenses, net...................... 4 & 15 (55,239) (130,004) (12,755)
Other income, net............................ 5 113,085 178,534 28,512
------------ ------------ -----------
Income before income taxes.............. 2,124,264 2,773,701 522,320
Income taxes................................. 6 (45,312) (170,677) (34,511)
------------ ------------ -----------
Net income.............................. $ 2,078,952 $ 2,603,024 $ 487,809
============ ============ ===========
</TABLE>

The accompanying notes are an integral part of these combined financial
statements.

F-25
<PAGE> 85

RACING CHAMPIONS LIMITED GROUP

COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN U.S. DOLLARS)

<TABLE>
<CAPTION>
COMBINED RETAINED
SHARE CAPITAL EARNINGS TOTAL
------------- ----------- -----------
<S> <C> <C> <C>
Balance at March 31, 1994.............................. $129,369 $ 2,868,872 $ 2,998,241
Net income........................................... -- 2,078,952 2,078,952
Dividends............................................ -- (2,628,058) (2,628,058)
-------- ----------- -----------
Balance at March 31, 1995.............................. 129,369 2,319,766 2,449,135
Net income........................................... -- 2,603,024 2,603,024
Dividends............................................ -- (3,194,400) (3,194,400)
-------- ----------- -----------
Balance at March 31, 1996.............................. 129,369 1,728,390 1,857,759
Net income........................................... -- 487,809 487,809
-------- ----------- -----------
Balance at April 30, 1996.............................. $129,369 $ 2,216,199 $ 2,345,568
======== =========== ===========
</TABLE>

The accompanying notes are an integral part of these combined financial
statements.

F-26
<PAGE> 86

RACING CHAMPIONS LIMITED GROUP

COMBINED STATEMENTS OF CASH FLOWS
(IN U.S. DOLLARS)

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31, ONE MONTH
------------------------- ENDED
1995 1996 APRIL 30, 1996
----------- ----------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 2,078,952 $ 2,603,024 $ 487,809
Adjustments to reconcile net income to net cash
provided by operating activities:
Gains on disposal of fixed assets.................. (51,809) (147,616) --
Depreciation....................................... 360,177 392,079 29,268
Deferred income taxes.............................. (29,961) (55,880) (5,273)
Decrease (increase) in assets:
Trade receivables, net........................... (107,845) (743,533) 268,997
Prepayments, deposits and other receivables...... (201,268) 294,921 45,091
Amount due from RCI.............................. 7,348 154,168 (129,774)
Amount due from affiliates....................... (679,856) 1,032,754 (111,965)
Tax refund....................................... 240,642 -- --
Increase (decrease) in liabilities:
Amounts due to affiliates........................ -- 218,790 (218,790)
Accounts payable and accrued liabilities......... 63,950 (70,943) 269,005
Income taxes payable............................. 38,355 97,896 14,318
----------- ----------- ---------
Net cash provided by operating activities..... 1,718,685 3,775,660 648,686
----------- ----------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets.............................. (75,914) (35,390) (7,015)
Purchase of other asset............................... -- -- (879,690)
Proceeds from disposal of fixed assets................ 139,715 162,995 --
----------- ----------- ---------
Net cash provided by (used in) investing
activities.................................. 63,801 127,605 (886,705)
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances (repayment) of bank overdrafts............... 320,384 (320,384) --
Dividends paid........................................ (2,628,058) (3,194,400) --
Net payments under finance lease...................... (112,426) (130,518) (12,346)
----------- ----------- ---------
Net cash used in financing activities......... (2,420,100) (3,645,302) (12,346)
Net increase (decrease) in cash and cash
equivalents................................. (637,614) 257,963 (250,365)
Cash and cash equivalents, at beginning of year......... 680,891 43,277 301,240
----------- ----------- ---------
Cash and cash equivalents, at end of year............... $ 43,277 $ 301,240 $ 50,875
=========== =========== =========
SUPPLEMENTARY CASH FLOWS DISCLOSURES:
Interest paid......................................... $ 41,735 $ 67,038 $ 4,666
Income taxes paid..................................... 36,918 128,661 25,466
Inception of a capital lease contract................. 112,894 331,559 --
=========== =========== =========
</TABLE>

F-27
<PAGE> 87

RACING CHAMPIONS LIMITED GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS
(IN U.S. DOLLARS UNLESS OTHERWISE INDICATED)

1. ORGANIZATION AND PRINCIPAL ACTIVITIES

Racing Champions Limited ("RCL"), Bergen Services Inc. ("BSI"), and Hosten
Investments ("HIL") were formed in 1989, 1989 and 1991, respectively to act as
purchasing and sales agents of collectible scaled replicas of race cars and
other vehicles for Garnett Services Inc. ("GSI"). BSI and GSI were incorporated
in the British Virgin Islands ("BVI"), and RCL and HIL were incorporated in Hong
Kong. RCL, BSI, GSI and HIL are collectively referred to as "the Racing
Champions Limited Group" or "the RCL Group".

Substantially all the RCL Group's products are sold to Racing Champions,
Inc. ("RCI"), a related party, and other customers in the United States of
America. Effective on May 1, 1996, the operations of RCL, HIL and GSI have been
acquired by Racing Champions, Inc.

2. BASIS OF PRESENTATION

The combined financial statements of the RCL Group have been prepared based
on the historical financial statements of the RCL Group of companies for the
years ended March 31, 1995 and 1996 and for one month ended April 30, 1996, in
accordance with accounting principles generally accepted in the United States of
America. All significant intercompany balances and transactions have been
eliminated.

3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES

(A) FIXED ASSETS AND DEPRECIATION

Fixed assets are stated at cost less accumulated depreciation.

Depreciation of fixed assets is calculated on the straight-line basis to
write off the cost less estimated residual value of each asset over its
estimated useful life. The principal annual rates used for this purpose are as
follows:

<TABLE>
<S> <C>
Leasehold improvements...................................... 25%
Furniture and fixtures...................................... 20%
Office equipment............................................ 20%
Motor vehicles.............................................. 30%
</TABLE>

(B) INCOME TAXES

Income taxes are determined under the liability method as required by
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes".

The RCL Group's functional currency is Hong Kong dollars ("HK$"). Foreign
currency transactions and monetary assets and liabilities denominated in foreign
currencies are translated into HK$ at the respective applicable rates of
exchange. Monetary assets and liabilities denominated in foreign currencies are
translated into HK$ at the applicable rate of exchange at the balance sheet
date. The resulting exchange gains or losses are credited or charged to the
statements of income.

The financial statements of the RCL Group where the HK$ is the functional
currency have been translated into U.S. dollars for reporting purpose in
accordance with FASB Statement No. 52, "Foreign Currency Translation." All
balance sheet accounts have been translated using the exchange rates in effect
at the balance sheet date. Income statement accounts have been translated using
the average exchange rate for the year. The gains and losses resulting from the
changes in exchange rates from year to year have been reported separately as a
component of shareholders' equity.

F-28
<PAGE> 88

RACING CHAMPIONS LIMITED GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

(D) OTHER ASSET

Other asset consists of a golf club membership debenture that is stated at
purchase cost which approximates its fair market value.

(E) REVENUE RECOGNITION

Revenue from the sale of the RCL Group's products is recognized when the
products are shipped to customers.

(F) RETIREMENT BENEFITS

The RCL Group participates in a defined contribution retirement plan
administered by an insurance company (the "Retirement Plan"). All staff covered
under the Retirement Plan are entitled to a lump sum payment, payable by the
insurance company, upon their retirement equal to the sum of employees'
contributions plus the employer's contribution. The RCL Group is required to
make contributions to the Retirement Plan at a rate of 5% of the salaries of its
existing staff. The retirement benefits contributions are charged to the
statements of income as services are provided.

Contributions made to the retirement plan during the years ended March 31,
1995, 1996 and one month ended April 30, 1996 were $17,322, $17,540 and $1,068,
respectively.

(G) CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash on hand and demand deposits with
banks with a term to maturity of three months or less at the date of
acquisition.

(H) USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

4. FINANCIAL EXPENSES, NET

Financial expenses, net consist of:

<TABLE>
<CAPTION>
ONE MONTH
YEARS ENDED MARCH 31, ENDED
------------------------ APRIL 30,
1995 1996 1996
-------- --------- ---------
<S> <C> <C> <C>
Interest income.......................... $ 32,915 $ 13,982 $ 61
Interest expenses on:
Bank overdrafts........................ (28,315) (46,598) (2,843)
Capital leases......................... (13,420) (20,440) (1,823)
Bank charges............................. (46,419) (76,948) (8,150)
-------- --------- --------
$(55,239) $(130,004) $(12,755)
======== ========= ========
</TABLE>

F-29
<PAGE> 89

RACING CHAMPIONS LIMITED GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

5. OTHER INCOME, NET

Other income, net consists of:

<TABLE>
<CAPTION>
ONE MONTH
YEARS ENDED MARCH 31, ENDED
----------------------- APRIL 30,
1995 1996 1996
-------- -------- ---------
<S> <C> <C> <C>
Foreign exchange gains/(losses), net...... $(20,564) $ 3,265 $ 51
Gains on disposal of fixed assets......... 51,809 147,616 --
Miscellaneous income...................... 81,840 27,653 28,461
-------- -------- -------
$113,085 $178,534 $28,512
======== ======== =======
</TABLE>

6. INCOME TAXES

The companies in the RCL Group operate both in Hong Kong and other
jurisdictions. Details of the related provision for income taxes are as follows:

<TABLE>
<CAPTION>
ONE MONTH
YEARS ENDED MARCH 31, ENDED
----------------------- APRIL 30,
1995 1996 1996
---------- ---------- ---------
<S> <C> <C> <C>
Income before income taxes:
Hong Kong................................. $ 322,039 $1,182,021 $209,159
Other jurisdictions....................... 1,802,225 1,591,680 313,161
---------- ---------- --------
$2,124,264 $2,773,701 $522,320
========== ========== ========
Income tax provision:
Current:
Hong Kong.............................. $ 75,273 $ 226,557 $ 39,784
Other jurisdictions.................... -- -- --
---------- ---------- --------
75,273 226,557 39,784
---------- ---------- --------
Deferred, Hong Kong....................... (29,961) (55,880) (5,273)
---------- ---------- --------
$ 45,312 $ 170,677 $ 34,511
========== ========== ========
</TABLE>

Income earned by BSI and GSI outside the BVI is not subject to tax.

Those companies carrying on business in Hong Kong are subject to Hong Kong
profits tax on their income arising in or derived from Hong Kong after adjusting
for income and expense items which are not assessable or deductible for income
tax purposes. As such, current income taxes are calculated at a statutory tax
rate of 16.5%.

F-30
<PAGE> 90

RACING CHAMPIONS LIMITED GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

A reconciliation between the actual income tax expense and income taxes
computed by applying the statutory Hong Kong tax rates to the income before
income taxes is as follows:

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31, ONE MONTH
--------------------- ENDED
1995 1996 APRIL 30, 1996
--------- --------- --------------
<S> <C> <C> <C>
Statutory Hong Kong tax rates.............. 16.5% 16.5% 16.5%
========= ========= ========
Computed expected tax expense.............. $ 350,503 $ 457,661 $ 86,183
Lower tax rate of BVI companies............ (297,367) (262,627) (51,672)
Non-deductible/(taxable) items:
Gains on disposal of fixed assets........ (8,548) (24,357) --
Expenses................................. 724 -- --
--------- --------- --------
$ 45,312 $ 170,677 $ 34,511
========= ========= ========
</TABLE>

Deferred income taxes represent temporary differences on depreciation
allowance of fixed assets. No valuation allowance for deferred income tax assets
has been recorded.

7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consist of:

<TABLE>
<CAPTION>
MARCH 31,
-------------------- APRIL 30,
1995 1996 1996
-------- -------- ---------
<S> <C> <C> <C>
Accounts payable............................. $734,443 $552,361 $818,856
Accrued liabilities.......................... 60,155 171,294 173,804
-------- -------- --------
$794,598 $723,655 $992,660
======== ======== ========
</TABLE>

8. FIXED ASSETS

Fixed assets consist of:

<TABLE>
<CAPTION>
MARCH 31,
-------------------------- APRIL 30,
1995 1996 1996
----------- ----------- -----------
<S> <C> <C> <C>
Leasehold improvements............... $ 506,553 $ 510,285 $ 510,285
Furniture and fixtures............... 249,495 255,391 255,391
Office equipment..................... 258,198 253,319 260,334
Motor vehicles....................... 487,677 453,239 453,239
----------- ----------- -----------
1,501,923 1,472,234 1,479,249
Less: Accumulated depreciation....... (1,027,462) (1,038,282) (1,067,550)
----------- ----------- -----------
$ 474,461 $ 433,952 $ 411,699
=========== =========== ===========
</TABLE>

F-31
<PAGE> 91

RACING CHAMPIONS LIMITED GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

9. AMOUNT DUE FROM (TO) AFFILIATES

Amounts due from (to) affiliates consist of:

<TABLE>
<CAPTION>
MARCH 31,
----------------------- APRIL 30,
1995 1996 1996
---------- --------- ---------
<S> <C> <C> <C>
Advances from (to) directors............. $ (96,460) $ 450,385 $ 34,605
Advances from shareholders............... 121,839 117,455 956,112
Advances from (to) related companies..... 1,007,375 (786,630) (878,752)
---------- --------- ---------
$1,032,754 $(218,790) $ 111,965
========== ========= =========
</TABLE>

Amounts due to/from directors and shareholders relate to short-term
advances. Amounts due to/from related companies pertain to short-term advances
to related parties described in Notes 1 and 15.

10. CONCENTRATION OF RISKS

Financial instruments which potentially subject the RCL Group to a
concentration of credit risk consist of cash deposits and trade receivables.

(i) Cash deposits

The RCL Group places its cash deposits with international banks in
Hong Kong.

(ii) Trade receivables

As of April 30, 1996, approximately 28.0% and 48.8% of the total trade
receivables balance were due from Racing Champions, Inc. and the two other
largest customers, respectively. The RCL Group does not have a policy of
requiring collateral for trade receivables.

Racing Champions, Inc. and the two other largest customers account for
approximately 46% and 10%; 30% and 23%; 34% and 22% of net sales, respectively,
for each of the two years ended March 31, 1995 and 1996 and one month period
ended April 30, 1996.

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of financial instruments are set out as follows:

(i) Cash deposits

The cash deposits are stated at cost which approximates market value.

(ii) Trade receivables and amounts due from related companies

Trade receivables and the amounts due from related companies are
stated at their book value less provision for doubtful debts, which
approximates the fair market value.

(iii) Other asset

Other asset is stated at purchase cost which approximates its fair
value based on current market value.

(iv) Other financial instruments

All other financial instruments are stated at their book value which
approximates their fair values.

F-32
<PAGE> 92

RACING CHAMPIONS LIMITED GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

12. BANKING FACILITIES

The RCL Group has banking facilities of $13,628,719 for overdrafts and
trade finance. Unused facilities as of April 30, 1996 amounted to $13,628,719.

The banking facilities of the RCL Group were secured by mortgages over a
director's personal leasehold land and buildings and corporate guarantees given
by the RCL Group and two directors totalling $8,150,065.

The bank overdrafts carry interest at 2.5% above the Hong Kong prime
lending rate, a weighted average of 11.5% as of April 30, 1996.

13. CAPITAL LEASES

The RCL Group leases motor vehicles under capital leases. Leases meeting
certain specific criteria are accounted for as the acquisition of an asset. The
principal amounts of leases that have been capitalized were as follows:

<TABLE>
<CAPTION>
MARCH 31,
------------------------------- APRIL 30,
1995 1996 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Motor vehicles......................... $ 487,677 $ 453,239 $ 453,239
Less: Accumulated amortization......... (361,278) (172,414) (183,745)
--------- --------- ---------
$ 126,399 $ 280,825 $ 269,494
========= ========= =========
</TABLE>

Amortization of the leased assets is included in depreciation expenses.

At April 30, 1996, future minimum payments under capital leases with
initial terms of one year or more consisted of the following:

<TABLE>
<S> <C>
Year ending April 30:
1996................................................... $ 170,026
1997................................................... 170,026
1998................................................... 16,603
---------
Total minimum lease payments............................. 356,655
Less: Interest elements.................................. (45,530)
---------
Present value of net minimum lease payments.............. 311,125
Less: current portion.................................... (147,888)
---------
Long term portion........................................ $ 163,237
=========
</TABLE>

14. SHARE CAPITAL

Share capital represented an aggregate amount of the nominal value of
issued share capital of RCL, HIL, GSI and BSI as follows:

<TABLE>
<CAPTION>
RCL HIL BSI GSI
---------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Authorized share capital.... US$129,366 US$1,293.66 US$50,000 US$50,000
Issued share capital........ US$129,366 US$ .26 US$ 2 US$ 1
Stated value per share...... US$ .13 US$ .13 US$ 1 US$ 1
</TABLE>

F-33
<PAGE> 93

RACING CHAMPIONS LIMITED GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

15. RELATED PARTY BALANCES AND TRANSACTIONS

The RCL Group paid commissions to RCI on all shipments to customers other
than RCI. These commissions represented the gross profit earned on these sales.
The RCL Group received agency fee income from RCI on all shipments based upon a
percentage of the cost of the items sold.

A significant proportion of RCL Group's products was purchased from vendors
who were either directly or indirectly, and partially owned by the RCL Group's
shareholders. Also, RCL Group paid rents to affiliated companies of $539,385,
$554,274 and $40,065 for the years ended March 31, 1995 and 1996 and the one
month ended April 30, 1996, respectively.

16. CONTINGENCIES AND COMMITMENTS

The RCL Group had the following capital commitments and contingencies:

(i) The RCL Group had bills discounted with recourse amounting to
$498,327, $63,087 and $256,668 as of March 31, 1995, March 31, 1996 and
April 30, 1996, respectively.

(ii) The RCL Group had guarantees of banking facilities granted to a
director amounting to $1,936,879, $1,888,191 and $2,018,111 as of March 31,
1995, March 31, 1996 and April 30, 1996, respectively.

(iii) Operating leases:

The RCL Group leases land and buildings under non-cancellable
operating lease arrangements. Future minimum payments under
non-cancellable operating leases with initial terms of one year or more
consisted of the following at April 30, 1996.

<TABLE>
<S> <C>
For the year ended April 30,
1997...................................................... $ 59,931
1998...................................................... 186,287
--------
$246,218
========
</TABLE>

Rental expenses under all operating leases were $539,385 and
$554,274 for the years ended March 31, 1995 and 1996, respectively, and
$40,065 for the one month ended April 30, 1996.

17. POST BALANCE SHEET EVENTS

Subsequent to the balance sheet date, on May 1, 1996, RCL, HIL, GSI (the
"Companies") and Racing Champions, Inc. ("RCI") entered into an asset and stock
purchase agreement (the "Agreement"). Pursuant to the Agreement, the Companies
agreed to sell certain of their assets and liabilities to Banerjan Company
Limited ("Banerjan"), a wholly-owned subsidiary of RCI. Certain non-business
assets and the golf club membership debenture were not sold to Banerjan.
Thereafter, the Companies ceased business and the name of Racing Champions
Limited was released to Banerjan, which was renamed Racing Champions Limited, a
wholly owned subsidiary of RCI.

F-34
<PAGE> 94

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

NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 8
The Recapitalization................... 12
Use of Proceeds........................ 13
Dividend Policy........................ 13
Dilution............................... 14
Capitalization......................... 15
Selected Financial Data................ 16
Pro Forma Statements of Income......... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 23
Business............................... 31
Management............................. 41
Certain Transactions................... 47
Principal Stockholders................. 50
Description of Capital Stock........... 51
Shares Eligible for Future Sale........ 54
Underwriting........................... 56
Legal Matters.......................... 57
Experts................................ 57
Additional Information................. 58
Index to Financial Statements.......... F-1
</TABLE>

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

UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================

5,000,000 SHARES
RACING CHAMPIONS LOGO
COMMON STOCK
----------------------

PROSPECTUS
----------------------
ROBERTW. BAIRD & CO.
INCORPORATED

WILLIAM BLAIR & COMPANY

J.C. BRADFORD & CO.
, 1997

======================================================
<PAGE> 95

PART II. INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

Not including underwriting discounts and commissions, the expenses of
issuance and distribution which are to be paid by the Company are estimated as
follows:

<TABLE>
<CAPTION>
ITEM AMOUNT
---- --------
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 24,394
NASD Filing Fee............................................. $ 8,550
NASDAQ Application Fee...................................... $ 50,000
Legal Fees and Expenses..................................... $250,000
Transfer Agent Fees and Expenses............................ $ 10,000
Accounting Fees and Expenses................................ $250,000
Miscellaneous Expenses...................................... $ 57,056
Printing and Engraving...................................... $100,000
--------
Total............................................. $750,000
========
</TABLE>

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

* To be supplied by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Set forth below is a description of certain provisions of the Amended and
Restated Certificate of Incorporation (the "Certificate of Incorporation") of
Racing Champions Corporation (the "Company"), the Amended and Restated By-Laws
of the Company (the "By-Laws") and the Delaware General Corporation Law
("DGCL"). This description is qualified in its entirety by reference to the
Certificate of Incorporation, the By-Laws and the DGCL.

The Certificate of Incorporation provides that, to the full extent provided
by law, a director will not be personally liable to the Company or its
stockholders for or with respect to any acts or omissions in the performance of
his or her duties as a director. The DGCL provides that a corporation may limit
or eliminate a director's personal liability for monetary damages to the
corporation or its stockholders, except for liability (i) for any breach of the
director's duty of loyalty to such corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for paying a dividend or approving a stock
repurchase in violation of section 174 of the DGCL or (iv) with respect to any
transaction from which the director derived an improper personal benefit.

Under the DGCL, directors and officers as well as other employees and
individuals may be indemnified against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation as a
derivative action) if they acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interest of the corporation and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe their conduct was unlawful. With respect to actions by or in the right
of the corporation as a derivative action, section 145 of the DGCL provides that
a corporation may indemnify directors, officers and other persons as described
above, except if such person has been adjudged to be liable to the corporation,
unless the court in which such action or suit was brought determines in view of
all of the circumstances of the case that such person is fairly and reasonably
entitled to indemnity for such expenses as the court deems proper.

The Certificate of Incorporation and Article V of the By-Laws provide for
the mandatory indemnification of directors, officers, employees or agents of the
Company to the full extent permitted by the DGCL. The By-Laws also contain a
nonexclusivity clause which provides in substance that the indemnification
rights under the Amended and Restated By-Laws shall not be deemed exclusive of
any other rights to which those seeking indemnification may be entitled under
any agreement with the Company, any By-Law or otherwise.

II-1
<PAGE> 96

The DGCL permits and Article V of the By-Laws authorizes the Company to
purchase and maintain insurance on behalf of any director, officer, employee or
agent of the Company against any liability asserted against or incurred by them
in such capacity or arising out of their status as such whether or not the
Company would have the power to indemnify such director, officer, employee or
agent against such liability under the applicable provisions of the DGCL, the
Certificate of Incorporation or the By-Laws.

The general effect of the foregoing provisions is to reduce the
circumstances in which an officer or director may be required to bear the
economic burdens of the foregoing liabilities and expenses.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

On April 30, 1996, the Company issued an aggregate of 4,447,252 shares of
Common Stock, 51,082.48 shares of Series A Preferred Stock and $21,570,570
principal amount of Series A Junior Subordinated Promissory Notes, for an
aggregate purchase price of $27,242,875 in cash and promissory notes to nine
purchasers, including four executive officers of the Company and five
institutional investors. The purchasers paid a purchase price of $0.13 per share
of Common Stock and $100 per share of Series A Preferred Stock, and paid face
value for the Series A Junior Subordinated Notes. These securities were issued
in reliance upon the exemption from registration provided by section 4(2) of the
Securities Act of 1933.

On April 30, 1996, the Company acquired all of the outstanding stock of
Racing Champions, Inc. and substantially all of the assets of Dods-Meyer, Ltd.
("DML"), and a subsidiary of the Company acquired substantially all of the
assets of Racing Champions Limited ("RCL"), Hosten Investment Limited ("HIL")
and Garnett Services, Inc. ("GSI"). In consideration for such stock and assets,
the Company and its subsidiary issued an aggregate principal amount of
$38,934,116 of Three Day Promissory Notes, an aggregate principal amount of
$19,526,667 of Minute Notes, an aggregate principal amount of $8,020,000 of
Senior Subordinated Promissory Notes, an aggregate principal amount of
$16,675,250 of Series A Junior Subordinated Promissory Notes, an aggregate
principal amount of $1,195,234 of Series B Junior Subordinated Promissory Notes,
an aggregate of 13,163.36 shares of Series A Preferred Stock and an aggregate of
1,145,996 shares of Common Stock, to RCL, HIL, GSI, DML, Robert Dods and Boyd
Meyer. These securities were issued in reliance upon the exemption from
registration provided by section 4(2) of the Securities Act of 1933.

On April 30, 1996, the Company issued 1,354,908 shares of Common Stock,
937,084 shares of Nonvoting Common Stock, 2,422.06 shares of Series A Preferred
Stock and 11,952.33 shares of Series B Preferred Stock to DML. DML paid a
purchase price of $0.13 per share of Common Stock, $0.13 per share of Nonvoting
Common Stock, $100 per share of Series A Preferred Stock and $100 per share of
Series B Preferred Stock. These securities were issued in reliance upon the
exemption from registration provided by section 4(2) of the Securities Act of
1933.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1 Form of Underwriting Agreement.
3.1 Form of Amended and Restated Certificate of Incorporation.
3.2** Amended and Restated By-Laws.
4.1** Amended and Restated Certificate of Incorporation (same as Exhibit 3.1).
4.2** Amended and Restated By-Laws (same as Exhibit 3.2).
5** Opinion of Reinhart, Boerner, Van Deuren, Norris & Rieselbach, s.c.
</TABLE>

II-2
<PAGE> 97
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.1** Asset and Stock Purchase Agreement, dated as of April 30, 1996, by and among the
Company, Racing Champions, Inc., Robert Dods, Boyd Meyer, Peter Chung, Dods-Meyer,
Ltd., Racing Champions Limited, Garnett Services, Inc., Hosten Investment Limited and
Banerjan Company Limited.

10.2** Stockholders Agreement, dated as of April 30, 1996, by and among the Company, Willis
Stein & Partners, L.P., Baird Capital Partners II Limited Partnership, BCP II
Affiliates Fund Limited Partnership, Nassau Capital Partners L.P., NAS Partners I
L.L.C., Robert Dods, Boyd Meyer, Peter Chung, Dods-Meyer, Ltd., Racing Champions
Limited, Garnett Services, Inc., Hosten Investment Limited, Curt Stoelting, John Olsen,
Peter Henseler and Kevin Camp.

10.3** Registration Agreement, dated as of April 30, 1996, by and among the Company, Willis
Stein & Partners, L.P., Baird Capital Partners II Limited Partnership, BCP II
Affiliates Fund Limited Partnership, Nassau Capital Partners L.P., NAS Partners I
L.L.C., Robert Dods, Boyd Meyer, Peter Chung, Dods-Meyer, Ltd., Racing Champions
Limited, Garnett Services, Inc., Hosten Investment Limited, Curt Stoelting, John Olsen,
Peter Henseler and Kevin Camp.

10.4** Executive Securities Agreement, dated as of April 30, 1996, by and among the Company,
Curt Stoelting, John Olsen, Peter Henseler, Kevin Camp, Willis Stein & Partners, L.P.,
Baird Capital Partners II Limited Partnership, BCP II Affiliates Fund Limited
Partnership, Nassau Capital Partners L.P., NAS Partners I L.L.C., Robert Dods, Boyd
Meyer and Peter Chung.

10.5** Securities Purchase Agreement, dated as of April 30, 1996, by and among the Company,
Willis Stein & Partners, L.P., Baird Capital Partners II Limited Partnership, BCP II
Affiliates Fund Limited Partnership, Nassau Capital Partners L.P., NAS Partners I
L.L.C., Curt Stoelting, John Olsen, Peter Henseler and Kevin Camp.

10.6** Amendment No. 1 to Securities Purchase Agreement, dated as of April 30, 1996, by and
among the Company, Willis Stein & Partners, L.P. and certain other purchasers of the
Company's stock.

10.7** Securities Purchase Agreement, dated as of April 30, 1996, by and between the Company
and Dods-Meyer, Ltd.

10.8** Promissory Note dated April 30, 1996 from Peter Henseler to the Company.

10.9** Executive Securities Pledge Agreement, dated as of April 30, 1996, between Peter
Henseler and the Company.

10.10** Credit Agreement, dated as of April 30, 1996, by and among the Company, Racing
Champions, Inc. and The First National Bank of Boston, as Agent.

10.11** Guarantee and Security Agreement, dated as of April 30, 1996, by and among the Company,
Racing Champions, Inc. and The First National Bank of Boston, as Agent.

10.12** Employment Agreement, dated as of April 30, 1996, by and between Racing Champions, Inc.
and Robert Dods.

10.13** Employment Agreement, dated as of April 30, 1996, by and between Racing Champions, Inc.
and Boyd Meyer.

10.14** Employment Agreement, dated as of April 30, 1996, by and between Banerjan Company
Limited and Peter Chung.

10.15** Employment Agreement, dated as of April 30, 1996, by and between Racing Champions, Inc.
and Curt Stoelting.

10.16** Employment Agreement, dated as of April 30, 1996, by and between Racing Champions, Inc.
and Peter Henseler.

10.17** Employment Agreement, dated as of April 30, 1996, by and between Racing Champions, Inc.
and John Olsen.
</TABLE>

II-3
<PAGE> 98

<TABLE>
<S> <C>
10.18** Employment Agreement, dated as of April 30, 1996, by and between Racing Champions, Inc.
and Kevin Camp.
10.19** 1996 Key Employees Stock Option Plan.
10.20** 1996 Key Employees Performance Compensation Plan.
10.21 Amendment No. 1 to 1996 Key Employees Performance Compensation Plan.
10.22 Racing Champions Corporation 1997 Stock Incentive Plan.
10.23** Racing Champions Corporation Employee Stock Purchase Plan.
21** Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ernst & Young.
23.3** Consent of Reinhart, Boerner, Van Deuren, Norris & Rieselbach, s.c. (included in its
opinion filed as Exhibit 5 hereto).
24** Power of Attorney.
27** Financial Data Schedule.
</TABLE>

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

** Previously filed.

(b) FINANCIAL STATEMENT SCHEDULES.

<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION
-------- -----------
<C> <C>
II Valuation and Qualifying Accounts
</TABLE>

ITEM 17. UNDERTAKINGS

The undersigned Registrant undertakes as follows:

(a) To provide to the Underwriters at the closing specified in the
Underwriting Agreement, certificates in such denominations and registered
in such names as required by the Underwriter to permit prompt delivery to
each purchaser.

(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

(c) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance on Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(d) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the
securities offer therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.

II-4
<PAGE> 99

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Pre-Effective Amendment No. 3 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Glen Ellyn, State of Illinois, on the 9th day of June, 1997.

RACING CHAMPIONS CORPORATION

By /s/ ROBERT E. DODS
------------------------------------
Robert E. Dods, President

Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 3 to Registration Statement has been signed by the
following persons on behalf of the Registrant in the capacities and on the dates
indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ROBERT E. DODS President and Director June 9, 1997
- ----------------------------------------------------- (Principal Executive Officer)
Robert E. Dods

* Executive Vice President and June 9, 1997
- ----------------------------------------------------- Director
Boyd L. Meyer

* Director June 9, 1997
- -----------------------------------------------------
Peter K.K. Chung

* Director June 9, 1997
- -----------------------------------------------------
Samuel B. Guren

* Director June 9, 1997
- -----------------------------------------------------
Avy H. Stein

* Director June 9, 1997
- -----------------------------------------------------
Daniel M. Gill

* Vice President-Finance and June 9, 1997
- ----------------------------------------------------- Operations and Secretary
Curtis W. Stoelting (Principal Accounting Officer
and Principal Financial Officer)

*By /s/ ROBERT E. DODS June 9, 1997
------------------------------------------------
Robert E. Dods,
Attorney-in-Fact
</TABLE>

II-5
<PAGE> 100

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of Racing Champions Corporation and Subsidiaries and the
Shareholders of Racing Champions, Inc. and Dods-Meyer, Ltd.:

We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Racing Champions Corporation and
Subsidiaries and the combined financial statements of Racing Champions, Inc. and
Dods-Meyer, Ltd. included in this Registration Statement and issued our reports
thereon dated February 15, 1997 (except with respect to matters discussed in
Note 11 as to which the date is April 9, 1997). Our audits were made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule of Valuation and Qualifying Accounts is presented for
purposes of complying with the Securities and Exchange Commissions rules and is
not a part of the basic financial statements. This schedule has been subject to
the auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

ARTHUR ANDERSEN LLP

Chicago, Illinois
February 15, 1997
(except with respect to matters discussed
in Note 11 as to which the date
is April 9, 1997)
<PAGE> 101

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS
(FOR EACH INCOME STATEMENT PRESENTED)

<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT --------------------------- BALANCE AT
BEGINNING OF CHARGED TO CHARGED TO END OF
DESCRIPTION PERIOD EXPENSE OTHER ACCOUNTS DEDUCTIONS PERIOD
----------- ------------ ---------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowances deducted from related accounts
receivable balance sheet accounts of:
Racing Champions, Inc. and Dods-Meyer,
Ltd.
Year-ended December 31, 1994........... $240,000 $ -- $ -- $ -- $240,000
Year-ended December 31, 1995........... 240,000 -- -- 40,000 200,000
Four months ended April 30, 1996....... 200,000 57,000 -- -- 257,000
Racing Champions Corporation
Eight months ended December 31, 1996... 257,000 43,000 -- -- 300,000
Allowances deducted from related inventory
balance sheet accounts of:
Racing Champions Corporation
Eight months ended December 31, 1996... -- 100,000 129,119 -- 229,119
</TABLE>
<PAGE> 102

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
1 Form of Underwriting Agreement
3.1 Form of Amended and Restated Certificate of Incorporation
3.2** Amended and Restated By-Laws.
4.1** Amended and Restated Certificate of Incorporation (same as
Exhibit 3.1).
4.2** Amended and Restated By-Laws (same as Exhibit 3.2).
5** Opinion of Reinhart, Boerner, Van Deuren, Norris &
Rieselbach, s.c.
10.1** Asset and Stock Purchase Agreement, dated as of April 30,
1996, by and among the Company, Racing Champions, Inc.,
Robert Dods, Boyd Meyer, Peter Chung, Dods-Meyer, Ltd.,
Racing Champions Limited, Garnett Services, Inc., Hosten
Investment Limited and Banerjan Company Limited.
10.2** Stockholders Agreement, dated as of April 30, 1996, by and
among the Company, Willis Stein & Partners, L.P., Baird
Capital Partners II Limited Partnership, BCP II Affiliates
Fund Limited Partnership, Nassau Capital Partners L.P., NAS
Partners I L.L.C., Robert Dods, Boyd Meyer, Peter Chung,
Dods-Meyer, Ltd., Racing Champions Limited, Garnett
Services, Inc., Hosten Investment Limited, Curt Stoelting,
John Olsen, Peter Henseler and Kevin Camp.
10.3** Registration Agreement, dated as of April 30, 1996, by and
among the Company, Willis Stein & Partners, L.P., Baird
Capital Partners II Limited Partnership, BCP II Affiliates
Fund Limited Partnership, Nassau Capital Partners L.P., NAS
Partners I L.L.C., Robert Dods, Boyd Meyer, Peter Chung,
Dods-Meyer, Ltd., Racing Champions Limited, Garnett
Services, Inc., Hosten Investment Limited, Curt Stoelting,
John Olsen, Peter Henseler and Kevin Camp.
10.4** Executive Securities Agreement, dated as of April 30, 1996,
by and among the Company, Curt Stoelting, John Olsen, Peter
Henseler, Kevin Camp, Willis Stein & Partners, L.P., Baird
Capital Partners II Limited Partnership, BCP II Affiliates
Fund Limited Partnership, Nassau Capital Partners L.P., NAS
Partners I L.L.C., Robert Dods, Boyd Meyer and Peter Chung.
10.5** Securities Purchase Agreement, dated as of April 30, 1996,
by and among the Company, Willis Stein & Partners, L.P.,
Baird Capital Partners II Limited Partnership, BCP II
Affiliates Fund Limited Partnership, Nassau Capital Partners
L.P., NAS Partners I L.L.C., Curt Stoelting, John Olsen,
Peter Henseler and Kevin Camp.
10.6** Amendment No. 1 to Securities Purchase Agreement, dated as
of April 30, 1996, by and among the Company, Willis Stein &
Partners, L.P. and certain other purchasers of the Company's
stock.
10.7** Securities Purchase Agreement, dated as of April 30, 1996,
by and between the Company and Dods-Meyer, Ltd.
10.8** Promissory Note dated April 30, 1996 from Peter Henseler to
the Company.
10.9** Executive Securities Pledge Agreement, dated as of April 30,
1996, between Peter Henseler and the Company.
10.10** Credit Agreement, dated as of April 30, 1996, by and among
the Company, Racing Champions, Inc. and The First National
Bank of Boston, as Agent.
10.11** Guarantee and Security Agreement, dated as of April 30,
1996, by and among the Company, Racing Champions, Inc. and
The First National Bank of Boston, as Agent.
10.12** Employment Agreement, dated as of April 30, 1996, by and
between Racing Champions, Inc. and Robert Dods.
</TABLE>

<PAGE> 103

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
10.13** Employment Agreement, dated as of April 30, 1996, by and
between Racing Champions, Inc. and Boyd Meyer.
10.14** Employment Agreement, dated as of April 30, 1996, by and
between Banerjan Company Limited and Peter Chung.
10.15** Employment Agreement, dated as of April 30, 1996, by and
between Racing Champions, Inc. and Curt Stoelting.
10.16** Employment Agreement, dated as of April 30, 1996, by and
between Racing Champions, Inc. and Peter Henseler.
10.17** Employment Agreement, dated as of April 30, 1996, by and
between Racing Champions, Inc. and John Olsen.
10.18** Employment Agreement, dated as of April 30, 1996, by and
between Racing Champions, Inc. and Kevin Camp.
10.19** 1996 Key Employees Stock Option Plan.
10.20** 1996 Key Employees Performance Compensation Plan.
10.21 Amendment No. 1 to 1996 Key Employees Performance
Compensation Plan.
10.22 Racing Champions Corporation 1997 Stock Incentive Plan.
10.23** Racing Champions Corporation Employee Stock Purchase Plan.
21** Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ernst & Young.
23.3** Consent of Reinhart, Boerner, Van Deuren, Norris &
Rieselbach, s.c. (included in its opinion filed as Exhibit 5
hereto).
24** Power of Attorney.
27** Financial Data Schedule
</TABLE>

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

* To be filed by amendment.

** Previously filed.

<PAGE> 1
EXHIBIT 1

RACING CHAMPIONS CORPORATION

5,000,000 SHARES OF COMMON STOCK*

UNDERWRITING AGREEMENT

_______________, 1997

ROBERT W. BAIRD & CO. INCORPORATED
WILLIAM BLAIR & COMPANY L.L.C.
J.C. BRADFORD & CO.
As Representatives of the Several Underwriters
Identified in Schedule II Annexed Hereto
c/o Robert W. Baird & Co. Incorporated
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202

Ladies and Gentlemen:

SECTION 1. INTRODUCTORY. Racing Champions Corporation, a Delaware
corporation (together with its predecessor companies, the "Company"), proposes
to sell 5,000,000 shares (the "Firm Shares") of common stock, $0.01 par value
per share (the "Common Stock"), to the several underwriters identified in
Schedule I annexed hereto (the "Underwriters"), who are acting severally and
not jointly. In addition, the Company and the several stockholders of the
Company identified in Schedule II annexed hereto (the "Selling Stockholders")
have agreed to grant to the Underwriters an option to purchase up to 750,000
additional shares of Common Stock as set forth on Schedule II annexed hereto
(the "Optional Shares") as further provided in section 6 hereof. The Firm
Shares and, to the extent such option is exercised, the Optional Shares are
hereinafter collectively referred to as the "Shares."

You, as representatives of the Underwriters (the "Representatives"), have
advised the Company and the Selling Stockholders that the Underwriters propose
to make a public offering of their respective portions of the Shares as soon
hereafter as in your judgment is advisable and that the public offering price
of the Shares initially will be $_____ per share.

The Company and the Selling Stockholders hereby confirm their respective
agreements with the Underwriters and each other as follows:

SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPAL
STOCKHOLDERS. Each of the Company and Robert E. Dods, Boyd L. Meyer, Peter
K.K. Chung, Willis Stein & Partners, L.P., Baird Capital Partners II Limited
Partnership, Nassau Capital Partners L.P., BCP II Affiliates Fund Limited
Partnership, and NAS Partners I L.L.C. (individually, a "Principal
Stockholder", and collectively, the "Principal Stockholders"), jointly and
severally, represents and warrants to, and agrees with, the several
Underwriters, and shall be deemed to represent and warrant to the several
Underwriters on each Closing Date (as hereinafter defined), that:

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

* Plus an option to acquire up to 750,000 additional shares of Common Stock
from the Company and the Selling Shareholders to cover over-allotments.

1
<PAGE> 2

(a) Each of the Company and the subsidiaries of the Company that are
listed on Exhibit 21 of the Registration Statement (as hereinafter defined)
(individually, a "Subsidiary" and collectively, the "Subsidiaries") has
been duly incorporated and is validly existing as a corporation and in good
standing under the laws of its jurisdiction of incorporation, with full
corporate power and authority to own, lease and operate its properties and
to conduct its business as presently conducted and described in the
Prospectus (as hereinafter defined) and the Registration Statement; each of
the Company and the Subsidiaries is duly registered and qualified to do
business as a foreign corporation under the laws of, and is in good
standing as such in, each jurisdiction in which such registration or
qualification is required, except where the failure to so register or
qualify would not have a material adverse effect on the condition
(financial or other), business, property, net worth or results of
operations the Company and the Subsidiaries, taken as a whole ("Material
Adverse Effect"); and no proceeding has been instituted in any such
jurisdiction revoking, limiting or curtailing, or seeking to revoke, limit
or curtail, such power and authority or qualification. Complete and
correct copies of the certificate of incorporation and by-laws, as amended
or restated ("Certificate of Incorporation" and "By-laws," respectively),
of the Company and each of the Subsidiaries as in effect on the date hereof
have been delivered to the Representatives, and no changes thereto will be
made on or subsequent to the date hereof and prior to each Closing Date.

(b) The shares of Common Stock issued and outstanding immediately
prior to the issuance and sale of the Shares to be sold by the Company
hereunder as set forth in the Prospectus have been duly authorized and
validly issued, are fully paid and nonassessable and conform to the
description thereof contained in the Prospectus and the Registration
Statement. There are no preemptive, preferential or, except as described
in the Prospectus, other rights to subscribe for or purchase any shares of
Common Stock (including the Shares), and no shares of Common Stock have
been issued in violation of such rights. The Shares to be issued and sold
by the Company to the Underwriters have been duly authorized and, when
issued, delivered and paid for pursuant to this Agreement, will be validly
issued, fully paid and nonassessable and will conform to the description
thereof contained in the Prospectus and the Registration Statement. The
delivery of certificates for the Shares to be issued and sold by the
Company hereunder and payment therefor pursuant to the terms of this
Agreement will pass valid title to such Shares to the Underwriters, free
and clear of any lien, claim, encumbrance or defect in title. Except as
described in the Prospectus, there are no outstanding options, warrants or
other rights of any description, contractual or otherwise, entitling any
person to be issued any class of security by the Company or any Subsidiary,
and there are no holders of Common Stock or other securities of the Company
or any Subsidiary, or of securities that are convertible or exchangeable
into Common Stock or other securities of the Company or any Subsidiary,
that have rights to the registration of such Common Stock or securities
under the Securities Act of 1933, as amended, and the regulations
thereunder (together, the "Act") or the securities laws or regulations of
any of the states (the "Blue Sky Laws").

(c) Except for the Subsidiaries, and as otherwise set forth in the
Prospectus, the Company has no subsidiaries and does not own any equity
interest in or control, directly or indirectly, any other corporation,
limited liability company, partnership, joint venture, association, trust
or other business organization. The Company owns directly all of the
issued and outstanding capital stock of each Subsidiary, free and clear of
any and all liens, claims, encumbrances or security interests, and all such
capital stock has been duly authorized and validly issued and is fully paid
and nonassessable. There are no outstanding options, warrants or other
rights of any description, contractual or otherwise, entitling any person
to subscribe for or purchase any shares of capital stock of any Subsidiary.

<PAGE> 3

(d) The Company has full corporate power and authority to enter into
and perform this Agreement, and the execution and delivery by the Company
of this Agreement and the performance by the Company of its obligations
hereunder and the consummation of the transactions described herein, have
been duly authorized with respect to the Company by all necessary corporate
action and will not: (i) violate any provisions of the Certificate of
Incorporation or By-laws of the Company or any Subsidiary; (ii) violate any
provisions of, or result in the breach, modification or termination of, or
constitute a default under, any provision of any agreement, lease,
franchise, license, indenture, permit, mortgage, deed of trust, evidence of
indebtedness or other instrument to which the Company or any Subsidiary is
a party or by which the Company or any Subsidiary, or any property owned or
leased by the Company or any Subsidiary, may be bound or affected; (iii)
violate any statute, ordinance, rule or regulation applicable to the
Company or any Subsidiary, or order or decree of any court, regulatory or
governmental body, arbitrator, administrative agency or instrumentality of
the United States or other country or jurisdiction having jurisdiction over
the Company or any Subsidiary; or (iv) result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of the
Company or any Subsidiary, except where such violation, breach,
modification, termination, default, creation, or imposition would not,
individually or collectively, have a Material Adverse Effect. No consent,
approval, authorization or other order of any court, regulatory or
governmental body, arbitrator, administrative agency or instrumentality of
the United States or other country or jurisdiction is required for the
execution and delivery of this Agreement by the Company, the performance of
its obligations hereunder or the consummation of the transactions
contemplated hereby, except for compliance with the Act, the Securities
Exchange Act of 1934, as amended, and the regulations thereunder (together,
the "Exchange Act"), the Blue Sky Laws applicable to the public offering of
the Shares by the several Underwriters and the clearance of such offering
and the underwriting arrangements evidenced hereby with the National
Association of Securities Dealers, Inc. (the "NASD"). This Agreement has
been duly executed and delivered by and on behalf of the Company and is a
valid and binding agreement of the Company enforceable against the Company
in accordance with its terms.

(e) A registration statement on Form S-1 (Reg. No. 333-22493) with
respect to the Shares, including a preliminary form of prospectus, has
been carefully prepared by the Company in conformity with the requirements
of the Act and has been filed with the Securities and Exchange Commission
(the "Commission"). If the Company elects to rely on Rule 462(b) of the
rules and regulations of the Commission (the "Rules and Regulations") to
register a portion of the Shares, a registration statement relating to the
Shares (the "Rule 462 registration statement") has been or will be prepared
by the Company under the provisions of the Act and the Rules and
Regulations and has been or will be filed with the Commission. The
registration statement on Form S-1 (Reg. No. 333-22493), as finally amended
and revised at the time such registration statement was or is declared
effective by the Commission (including the information contained in the
form of final prospectus, if any, filed with the Commission pursuant to
Rule 424(b) and Rule 430A under the Act and deemed to be part of the
registration statement if the registration statement has been declared
effective pursuant to Rule 430A(b)) and as thereafter amended by
post-effective amendment, if any, together with the Rule 462 registration
statement, is herein referred to as the "Registration Statement." The
related final prospectus in the form first filed with the Commission
pursuant to Rule 424(b) or, if no such filing is required, as included in
the Registration Statement, or any supplement thereto, is herein referred
to as the "Prospectus." The prospectus subject to completion in the form
included in the Registration Statement at the time of the initial filing of
the Registration Statement with the Commission, and each such prospectus as
amended from time to time until the date of the Prospectus, is referred to
herein as the "Preliminary Prospectus." The Company has prepared and filed
such amendments to the Registration Statement since its initial filing with
the Commission, if any, as may have been required to the date hereof, and
will file such additional amendments thereto

<PAGE> 4

as may hereafter be required. There have been delivered to the
Representatives three signed copies of the Registration Statement
(including the Rule 462 registration statement), and each amendment
thereto, if any, together with three copies of each exhibit filed
therewith, and such number of conformed copies for each of the Underwriters
of the Registration Statement (including the Rule 462 registration
statement) and each amendment thereto, if any (but without exhibits), and
of each Preliminary Prospectus and of the Prospectus as the Representatives
have requested.

(f) Neither the Commission nor any state securities commission has
issued any order preventing or suspending the use of any Preliminary
Prospectus, nor, to the knowledge of the Company or the Principal
Stockholders, have any proceedings for that purpose been initiated or
threatened, and each Preliminary Prospectus filed with the Commission as
part of the Registration Statement as originally filed or as part of any
amendment or supplement thereto complied in all material respects when so
filed with the requirements of the Act and, as of its date, did not include
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, other than with respect to information contained in the
Registration Statement furnished by the Representatives to the Company
pursuant to section 5 hereof. As of the effective date of the Registration
Statement, and at all times subsequent thereto up to each Closing Date, the
Registration Statement and the Prospectus contained or will contain all
statements that are required to be stated therein in accordance with the
Act and conformed or will conform in all respects to the requirements of
the Act, and neither the Registration Statement nor the Prospectus included
or will include any untrue statement of a material fact or omitted or will
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, other than with respect to
information contained in the Registration Statement furnished by the
Representatives to the Company pursuant to section 5 hereof. Neither the
Company, nor any person that controls, is controlled by (including the
Subsidiaries) or is under common control with the Company, has distributed
or will distribute prior to each Closing Date any offering material in
connection with the offering and sale of the Shares other than a
Preliminary Prospectus, the Prospectus, the Registration Statement or other
materials permitted by the Act and provided to the Representatives.

(g) Each of (i) Arthur Andersen LLP, which has expressed its opinion
with respect to (x) the consolidated financial statements and schedules of
the Company and the Subsidiaries, and (y) the combined financial statements
of Racing Champions, Inc. and Dods-Meyer, Ltd. (the "RCI Group"), and (ii)
Ernst & Young, which has expressed its opinion with respect to the combined
financial statements and schedules of Racing Champions Limited, Hosten
Investment Limited, Garnett Services, Inc., and Bergen Services Inc. (the
"RCL Group") (collectively, the financial statements referred to in clauses
(i) and (ii), the "Financial Statements"), in each case as filed with the
Commission and included as a part of each Preliminary Prospectus, the
Prospectus or the Registration Statement are independent accountants as
required by the Act.

(h) The Financial Statements and the related notes thereto included in
each Preliminary Prospectus, the Prospectus and the Registration
Statement present fairly the financial position, results of operations and
cash flows of each of the Company, RCI Group, and RCL Group as of their
respective dates or for the respective periods covered thereby, all in
conformity with generally accepted accounting principles consistently
applied throughout the periods involved. The financial statement
schedules, if any, included in the Registration Statement present fairly
the information required to be stated therein on a basis consistent with
the Financial Statements. The Company had an outstanding capitalization as
set forth in the Registration Statement and under "Capitalization" in the
Prospectus as of the date indicated therein, and there has been no material
change thereto since such date except as disclosed in the Prospectus. The
financial and statistical information and data

<PAGE> 5

relating to each of the Company, RCI Group and RCL Group in each
Preliminary Prospectus, the Prospectus and the Registration Statement are
accurately presented and prepared on a basis consistent with the Financial
Statements and books and records of the Company, RCI Group, and RCL Group,
respectively. The Financial Statements and schedules and the related notes
thereto included in each Preliminary Prospectus, the Prospectus or the
Registration Statement are the only financial statements and schedules
required under the Act to be set forth therein.

(i) Neither the Company nor any Subsidiary is, nor with the giving of
notice or passage of time or both, would be, in violation or in breach of:
(i) its respective Certificate of incorporation or By-laws; (ii) any
statute, ordinance, order, rule or regulation applicable to the Company or
such Subsidiary; (iii) any order or decree of any court, regulatory body,
arbitrator, administrative agency or other instrumentality of the United
States or other country or jurisdiction having jurisdiction over the
Company or such Subsidiary; or (iv) any provision of any agreement, lease,
franchise, license, indenture, permit, mortgage, deed of trust, evidence of
indebtedness or other instrument to which the Company or such Subsidiary is
a party or by which any property owned or leased by the Company or such
Subsidiary is bound or affected, except where such violation or breach
would not, individually or collectively, have a Material Adverse Effect.
Neither the Company nor any Subsidiary has received notice of any violation
of any applicable statute, ordinance, order, rule or regulation applicable
to the Company or any Subsidiary. The Company and each Subsidiary have
obtained and hold, and are in compliance with, all permits, certificates,
licenses, approvals, registrations, franchises, consents and authorizations
of governmental or regulatory authorities required under all laws, rules
and regulations in connection with their businesses (hereinafter "permit"
or "permits"), and all of such permits are in full force and effect; and
the Company and each Subsidiary have fulfilled and performed all of their
respective obligations with respect to each such permit and no event has
occurred which would result in, or after notice or lapse of time would
result in, revocation or termination of any such permit or result in any
other impairment of the rights of the holder of such permit, except where
such revocation, termination, or impairment would not, individually or
collectively, have a Material Adverse Effect. Neither the Company nor any
Subsidiary is or has been (by virtue of any action, omission to act,
contract to which it is a party or other occurrence) in violation of any
applicable foreign, federal, state, municipal or local statutes, laws,
ordinances, rules, regulations or orders (including those relating to
environmental protection, occupational safety and health and equal
employment practices) heretofore or currently in effect.

(j) There are no legal or governmental proceedings or investigations
pending or, to the knowledge of the Company or the Principal
Stockholders, threatened to which the Company or any Subsidiary is or may
be a party or to which any property owned or leased by the Company or any
Subsidiary is or may be subject, including, without limitation, any such
proceedings that are related to environmental or employment discrimination
matters, which are required to be described in the Registration Statement
or the Prospectus which are not so described, or which question the
validity of this Agreement or any action taken or to be taken pursuant
hereto. Except as described in the Registration Statement or the
Prospectus, neither the Company nor any Subsidiary: (i) is in violation of
any statute, ordinance, rule or regulation, or any decision, order or
decree of any court, regulatory body, arbitrator, administrative agency or
other instrumentality of the United States or other country or jurisdiction
having jurisdiction over the Company or such Subsidiary relating to the
use, disposal or release of hazardous or toxic substances or relating to
the protection or restoration of the environmental or human exposure to
hazardous or toxic substances (collectively, "environmental laws"); (ii)
owns or operates any real property contaminated with any substance that is
subject to any environmental laws; (iii) is liable for any off-site
disposal or contamination pursuant to any environmental laws; or (iv) is
subject to any claim relating to any environmental laws, which violation,
contamination, liability or claim could have a Material Adverse Effect.

<PAGE> 6

(k) There is no transaction, relationship, obligation, agreement or
other document required to be described in the Registration Statement
or the Prospectus or to be filed or deemed to be filed as an exhibit to the
Registration Statement by the Act, which has not been described or filed as
required. All such contracts or agreements to which the Company or any
Subsidiary is a party have been duly authorized, executed and delivered by
the Company or such Subsidiary, constitute valid and binding agreements of
the Company or such Subsidiary, and are enforceable by and against the
Company or such Subsidiary, in accordance with the respective terms
thereof.

(l) Neither the Company nor any Subsidiary owns any real property.
The Company or a Subsidiary has good and valid title to all property and
assets reflected as owned by the Company or such Subsidiary in the
Financial Statements included in the Registration Statement (or elsewhere
in the Registration Statement or the Prospectus), free and clear of all
liens, claims, mortgages, security interests or other encumbrance of any
kind or nature whatsoever, except those, if any, reflected in the Financial
Statements (or elsewhere in the Registration Statement or the Prospectus)
and those that would not, individually or collectively, have a Material
Adverse Effect. All property (real and personal) held or used by the
Company or a Subsidiary under leases, licenses, franchises or other
agreements is held by the Company or such Subsidiary under valid,
subsisting, binding and enforceable leases, franchises, licenses or other
agreements.

(m) Neither the Company nor any person that controls, is controlled by
(including the Subsidiaries) or is under common control with the Company
has taken or will take, directly or indirectly, any action designed to
cause or result in, or which constituted, or which could cause or result
in, stabilization or manipulation, under the Exchange Act or otherwise, of
the price of any security of the Company to facilitate the sale or resale
of the Common Stock.

(n) Except as described in the Registration Statement or the
Prospectus, since the respective dates as of which information is given in
the Registration Statement or the Prospectus and prior to each Closing
Date: (i) neither the Company nor any Subsidiary has or will have incurred
any liability or obligation, direct or contingent, or entered into any
transaction, that is material to the Company, except as in the ordinary
course of business; (ii) the Company has not and will not have paid or
declared any dividend or other distribution with respect to its capital
stock and neither the Company nor any Subsidiary is or will be delinquent
in the payment of principal or interest on any outstanding debt obligation;
and (iii) there has not been and will not have been any change in the
capital stock, any material change in the indebtedness of the Company or
any Subsidiary, or any change or development involving or which could
reasonably be expected to involve, a Material Adverse Effect, whether or
not arising from transactions in the ordinary course of business.

(o) Neither the Company nor any person that controls, is controlled by
(including the Subsidiaries) or is under common control with the Company
has, directly or indirectly: (i) made any unlawful contribution to any
candidate for political office, or failed to disclose fully any
contribution in violation of law; or (ii) made any payment to any federal,
state or foreign governmental officer or official, or other person charged
with similar public or quasi-public duties, other than payments required or
permitted by the laws of the United States or any jurisdiction thereof or
applicable foreign jurisdictions.

(p) The Company or a Subsidiary owns or possesses adequate rights to
use all patents, patent applications, trademarks, service marks, trade
names, trademark registrations, service mark registrations, copyrights and
licenses presently used in or necessary for the conduct of its business or
ownership of its properties as presently conducted, and neither the Company
nor any Subsidiary has violated or infringed upon the rights of others, or
received any notice of conflict with the

<PAGE> 7

asserted rights of others, in respect thereof, which would, individually or
collectively, have a Material Adverse Effect.

(q) The Company or a Subsidiary has in place and effective such
policies of insurance, with limits of liability in such amounts, as are
normal and prudent in the ordinary course of the business of the Company
and its Subsidiaries.

(r) No labor dispute with the employees of the Company or any
Subsidiary exists or, to the knowledge of the Company and the Principal
Stockholders, is imminent, which would, individually or collectively, have
a Material Adverse Effect, and neither the Company nor any Subsidiary is a
party to any collective bargaining agreement and, to the knowledge of the
Company and the Principal Stockholders, no union organizational attempts
have occurred or are pending. There has been no change in the relationship
of the Company or any Subsidiary with any of its principal suppliers,
manufacturers, contractors or customers resulting in or that could result
in a Material Adverse Effect.

(s) Neither the Company nor any Subsidiary is an "investment company",
an "affiliated person" of, or "promoter" or "principal underwriter" for,
an "investment company", as such terms are defined in the Investment
Company Act of 1940, as amended.

(t) All federal, state and local tax returns required to be filed by
or on behalf of the Company or any Subsidiary have been filed (or are
the subject of valid extension) with the appropriate federal, state and
local authorities, and all such tax returns, as filed, are accurate in all
material respects; all federal, state and local taxes (including estimated
tax payments) required to be shown on all such tax returns or claimed to be
due from or with respect to the business of the Company or such Subsidiary
have been paid or reflected as a liability on the Financial Statements for
appropriate periods; all deficiencies asserted as a result of any federal,
state or local tax audits have been paid or finally settled, and no issue
has been raised in any such audit which, by application of the same or
similar principles, reasonably could be expected to result in a proposed
deficiency for any other period not so audited; no state of facts exist or
has existed which would constitute grounds for the assessment of any tax
liability with respect to the periods which have not been audited by
appropriate federal, state or local authorities; there are no outstanding
agreements or waivers extending the statutory period of limitation
applicable to any federal, state or local tax return of any period; and
neither the Company nor any Subsidiary has ever been a member of an
affiliated group of corporations filing consolidated federal income tax
returns, other than a group of which the Company is and has been the common
parent.

(u) Neither the Company nor any Subsidiary is a participating employer
or plan sponsor with respect to any employee pension benefit plan as
defined in Section 3(2) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or any employee welfare benefit plan as defined
in Section 3(l) of ERISA, including, without limitation, any multiemployer
welfare or pension plan (collectively, the "Plans"). With respect to the
Plans, the Company is in substantial compliance with all applicable
regulations, including ERISA and the Code. With respect to each defined
benefit retirement plan, such plan does not have benefit liabilities (as
defined in Section 4001(a)(16) of ERISA) exceeding the assets of the plan.
The Company or the administrator of each of the Plans, as the case may be,
has timely filed the reports required to be filed by ERISA and the Code in
connection with the maintenance of the Plans, and no facts, including,
without limitation, any "reportable event" as defined by ERISA and the
regulations thereunder, exist in connection with the Plans which, under
applicable law, would be reasonably likely to constitute grounds for the

<PAGE> 8

termination of any of the Plans by the Pension Benefit Guaranty
Corporation or for the appointment by the appropriate United States
District Court of a trustee to administer any of the Plans.

(v) The Company and each Subsidiary maintain a system of internal
accounting controls sufficient to provide reasonable assurances that: (i)
transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of consolidated financial statements in conformity with
generally accepted accounting principles and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorizations; and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.

(w) Except for Samuel B. Guren, Baird Capital Partners II Limited
Partnership ("Baird Capital Partners") and BCP II Affiliates Fund Limited
Partnership ("BCP"), none of the Company, any Subsidiary, any officer or
director of the Company or any Subsidiary, or any person who owns, of
record or beneficially, any class of securities issued by the Company is:
(i) an officer, director or partner of any brokerage firm, broker or dealer
that is a member of the NASD ("NASD Member"); or (ii) directly or
indirectly, a "person associated with" an NASD member or an "affiliate", of
an NASD member, as such terms are used in the NASD Rules of Fair Practice.
In addition, neither the Company nor any Subsidiary has issued or
transferred any Common Stock, warrants, options or other securities, or any
other items of value, to any of the Underwriters or any "related person" of
any Underwriter (other than Samuel B. Guren, Baird Capital Partners and
BCP), as such term is used in the NASD Rules of Fair Practice, except as
provided in this Agreement.

(x) The Company has prepared and filed with the Commission a
registration statement for the Common Stock pursuant to Section
12(g) of the Exchange Act. Such registration statement either has been
declared effective by the Commission under the Exchange Act or will be
declared effective by the Commission prior to or concurrently with the
commencement of the public offering of the Shares. The Common Stock has
been approved for designation upon notice of issuance as a Nasdaq National
Market security on The Nasdaq Stock Market ("Nasdaq") concurrently with the
effectiveness of the Registration Statement.

(y) All offers and sales of the securities of the Company and each
Subsidiary prior to the date hereof were made in compliance with the Act
and all other applicable state and federal laws or regulations.

(z) The Company has obtained for the benefit of the Underwriters the
agreement, enforceable by Robert W. Baird & Co. Incorporated ("Baird"), of
each of the officers and directors of the Company not a party hereto set
forth under "Management" in the Prospectus, who owns of record the number
of shares of Common Stock set forth therein, that for a period of 180 days
after the date of the Prospectus, such persons will not, without the prior
written consent of Baird, directly or indirectly, offer, sell, transfer, or
pledge, contract to sell, transfer or pledge, or cause or in any way permit
to be sold, transferred, pledged, or otherwise disposed of, any: (i) shares
of Common Stock; (ii) rights to purchase shares of Common Stock (including,
without limitation, shares of Common Stock that may be deemed to be
beneficially owned by any such stockholder in accordance with the
applicable regulations of the Commission and shares of Common Stock that
may be issued upon the exercise of a stock option, warrant or other
convertible security); or (iii) securities that are convertible or
exchangeable into shares of Common Stock.

<PAGE> 9

(aa) A copy of the Power of Attorney and Custody Agreement executed by
each Selling Stockholder and a copy of each Selling Stockholder's
Selling Stockholder's Questionnaire has been furnished to counsel for the
Underwriters prior to the date hereof, along with such other information as
such counsel may reasonably request in connection with their review
thereof.

A certificate signed by any officer of the Company and delivered to the
Representatives or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company and the Principal Stockholders to
the Underwriters as to the matters covered thereby. A certificate delivered by
the Company to its counsel for purposes of enabling such counsel to render the
opinion referred to in subsection (d) to section 10 hereof will also be
furnished to the Representatives and counsel for the Underwriters and shall be
deemed to be additional representations and warranties to the Underwriters by
the Company as to the matters covered thereby.

SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. In
addition to the representations and warranties contained in section 2 hereof,
each Selling Stockholder, severally and not jointly, represents and warrants to
and agrees with the several Underwriters and the Company, and shall be deemed
to represent and warrant to the several Underwriters and the Company on each
Closing Date, that:

(a) Such Selling Stockholder has duly executed a power of attorney and
custody agreement ("Power of Attorney and Custody Agreement") naming
______________ and ________________, or either of them, as such Selling
Stockholder's attorneys-in-fact ("Attorneys-in-Fact") for the purpose of
entering into and carrying out this Agreement and naming
_____________________ as custodian ("Custodian") of the Optional Shares of
such Selling Stockholder for the purpose of selling such Optional Shares to
the Underwriters on each Closing Date and receiving payment therefor.

(b) All consents, approvals, authorizations and orders necessary for
the execution and delivery by such Selling Stockholder of this Agreement
and the Power of Attorney and Custody Agreement and for the sale and
delivery of the Optional Shares to be sold by such Selling Stockholder
hereunder, as set forth on Schedule II annexed hereto, have been obtained.
Such Selling Stockholder has, and at the time of delivery thereof hereunder
such Selling Stockholder will have, good and valid title to the Optional
Shares proposed to be sold by such Selling Stockholder hereunder, free and
clear of all voting trust arrangements, liens, encumbrances, security
interests, equities and claims, other than any created by the Power of
Attorney and Custody Agreement or this Agreement for the benefit of the
Underwriters, except for agreements to which such Selling Stockholder is a
party to be terminated at the Closing. Such Selling Stockholder has full
right, power and authority to enter into this Agreement and the Power of
Attorney and Custody Agreement and to sell, assign, transfer and deliver
such Optional Shares hereunder, free and clear of all voting trust
arrangements, liens, encumbrances, security interests, equities, claims and
community property rights, other than any created by the Power of Attorney
and Custody Agreement or this Agreement for the benefit of the
Underwriters, except for agreements to which such Selling Stockholder is a
party to be terminated at the Closing. Upon delivery of and payment for
such Optional Shares hereunder, the Underwriters will acquire good and
valid title thereto, free and clear of all voting trust arrangements,
liens, encumbrances, security interests, equities, and claims.

(c) Such Selling Stockholder has not distributed and will not
distribute any Preliminary Prospectus, the Prospectus or any other
material in connection with the offering and sale of the Shares. Such
Selling Stockholder has not taken and will not take, directly or
indirectly, any action designed to or which would reasonably be expected to
cause or result in, under the Exchange Act or otherwise, stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the Common Stock.

<PAGE> 10

(d) The execution, delivery and performance by such Selling
Stockholder of this Agreement and the Power of Attorney and Custody
Agreement will not, if applicable, result in the violation of any
provisions of the certificate of incorporation, by-laws, partnership
agreement, limited liability operating agreement or other governing
documents of such Selling Stockholder, or constitute a breach, or be in
contravention, of any provision of any material agreement, franchise,
license, indenture, mortgage, deed of trust or other instrument to which
such Selling Stockholder is a party or by which such Selling Stockholder or
such Selling Stockholder's property may be bound or affected, or any
statute, rule or regulation applicable to such Selling Stockholder, or
violate any order or decree of any court, regulatory body, administrative
agency or other governmental body having jurisdiction over such Selling
Stockholder or any of such Selling Stockholder's property. No consent,
approval, authorization or other order of any court, regulatory body,
administrative agency or other governmental body is required for the
execution and delivery of, and performance under, this Agreement by such
Selling Stockholder or the consummation by such Selling Stockholder of the
transactions contemplated by this Agreement, except for compliance with the
Act, the Exchange Act, the Blue Sky Laws applicable to the public offering
of the Shares by the Underwriters and the clearance of such offering with
the NASD. Such Selling Stockholder hereby represents and warrants that
each Attorney-in-Fact has been duly appointed as attorney-in-fact by such
Selling Stockholder for the purpose of entering into and carrying out this
Agreement, and the Power of Attorney and Custody Agreement has been duly
executed and delivered by or on behalf of such Selling Stockholder to the
Representatives.

(e) This Agreement and the Power of Attorney and Custody Agreement are
each valid and binding agreements of such Selling Stockholder
enforceable in accordance with their respective terms.

(f) Such Selling Stockholder has deposited in custody, under the Power
of Attorney and Custody Agreement, certificates in negotiable form for the
Optional Shares to be sold hereunder by such Selling Stockholder as set
forth opposite such Selling Stockholder's name on Schedule II annexed
hereto for the purpose of further delivery pursuant to this Agreement.
Such Selling Stockholder agrees that the Optional Shares of such Selling
Stockholder on deposit with the Custodian are subject to the interests of
the Company, the Underwriters and the other Selling Stockholders, that the
arrangements made for such custody, and the appointment of the
Attorneys-in-Fact pursuant to the Power of Attorney and Custody Agreement,
are to that extent irrevocable, and that the obligations of such Selling
Stockholder hereunder and under the Power of Attorney and Custody Agreement
shall not be terminated, except as provided in this Agreement and the Power
of Attorney and Custody Agreement, by any act of such Selling Stockholder,
by operation of law, or, by the dissolution, winding up or other event
affecting the legal life of such entity, or by the occurrence of any other
event. If any event should occur before the delivery of the Optional
Shares hereunder, the certificates for Optional Shares then on deposit with
the Custodian shall, to the extent such Optional Shares are purchased by
the Underwriters, be delivered by the Custodian in accordance with the
terms and conditions of this Agreement and the Power of Attorney and
Custody Agreement as if such event had not occurred, regardless of whether
or not the Custodian shall have received notice thereof. Such Selling
Stockholder represents that each Attorney-in-Fact has been authorized by
such Selling Stockholder to execute and deliver this Agreement and the
Custodian has been authorized to receive and acknowledge receipt of the
proceeds of sale of the Optional Shares sold by such Selling Stockholder
against delivery thereof and otherwise to act on behalf of such Selling
Stockholder.

(g) Insofar as it relates to such Selling Stockholder, (i) each
Preliminary Prospectus, as of its date, has conformed in all material
respects with the requirements of the Act and, as of its date,

<PAGE> 11

has not included any untrue statement of a material fact or omitted to
state a material fact necessary to, make the statements therein in
light of the circumstances under which they were made not misleading; and
(ii) on the effective date of the Registration Statement and on each
Closing Date, (x) the Registration Statement and the Prospectus, did or
will comply as to form in all material respects to the requirements of the
Act, and (y) neither the Registration Statement nor the Prospectus did or
will include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading.

(h) The information contained in such Selling Stockholder's Selling
Stockholders' Questionnaire completed in connection with the Company's
public offering and delivered to the Representatives was, as of the date of
such questionnaire, and is, as of the date of this Agreement, true and
correct.

A certificate signed by or on behalf of any Selling Stockholder as such
and delivered to the Representatives or to counsel for the
Underwriters shall be deemed a representation and warranty by such Selling
Stockholder to the Underwriters as to the matters covered thereby. A
certificate delivered by or on behalf of any Selling Stockholder to counsel for
the Selling Stockholders for purposes of enabling such counsel to render the
opinion referred in subsection (e) to section 10 hereof will also be furnished
to the Representatives and counsel for the Underwriters and shall be deemed to
be additional representations and warranties to the Underwriters by such
Selling Stockholder as to the matters covered thereby.

SECTION 4. REPRESENTATION OF UNDERWRITERS. The Representatives will
act as the representatives for the several Underwriters in connection with
the public offering of the Shares, and any action under or in respect of this
Agreement taken by the Representatives will be binding upon all of the
Underwriters.

SECTION 5. INFORMATION FURNISHED BY THE UNDERWRITERS. The information
set forth in the last paragraph on the outside front cover page of the
Prospectus concerning the terms of the offering by the Underwriters, the
paragraph on the inside front cover page of the Prospectus relating to
stabilization practices, and the concession and reallowance amounts appearing
under the caption "Underwriting" in the Prospectus constitute all of the
information furnished to the Company by and on behalf of the Underwriters for
use in connection with the preparation of the Registration Statement and the
Prospectus, as such information is referred to in this Agreement.

SECTION 6. PURCHASE, SALE AND DELIVERY OF SHARES.

(a) On the basis of the representations, warranties and agreements
herein contained, and subject to the terms and conditions
herein set forth, the Company agrees to sell to the Underwriters identified
in Schedule I annexed hereto 5,000,000 Firm Shares, and each of the
Underwriters agrees, severally and not jointly, to purchase from the
Company the number of Firm Shares as hereinafter set forth at the price per
share of $_____. The obligation of each Underwriter to the Company shall
be to purchase from the Company that number of full Firm Shares which (as
nearly as practicable in full shares as determined by the Representatives)
bears the same proportion to the number of Firm Shares to be sold by the
Company as the number of shares set forth opposite the name of such
Underwriter in Schedule I annexed hereto bears to the total number of Firm
Shares to be purchased by all of the Underwriters under this Agreement.

(b) On the First Closing Date (as hereinafter defined), the Company
will deliver to the Representatives, at the offices of Robert W.
Baird & Co. Incorporated, 777 East Wisconsin Avenue, Milwaukee, Wisconsin
53202, or through the facilities of The Depository Trust Company, for the
accounts of the several Underwriters, certificates representing the Firm
Shares to be sold by it

<PAGE> 12

against payment in Milwaukee, Wisconsin of the purchase price therefor by
certified or official bank check or checks in federal (same day) funds
payable to the order of the Company. As referred to in this Agreement, the
"First Closing Date" shall be on the third full business day after the date
of the Prospectus, at 9:00 a.m., Milwaukee, Wisconsin time, or at such
other date or time not later than ten full business days after the date of
the Prospectus as the Representatives and the Company may agree. The
certificates for the Firm Shares to be so delivered will be in
denominations and registered in such names as the Representatives request
by notice to the Company, prior to the First Closing Date, and such
certificates will be made available for checking and packaging at 9:00
a.m., Milwaukee, Wisconsin time on the first full business day preceding
the First Closing Date at a location to be designated by the
Representatives.

(c) In addition, on the basis of the representations, warranties and
agreements herein contained, and subject to the terms and conditions herein
set forth, the Company and the Selling Stockholders hereby agree to sell to
the Underwriters, and the Underwriters, severally and not jointly, shall
have the right at any time within 30 days after the date of the Prospectus
to purchase up to 357,142 Optional Shares from the Company and up to
392,858 Optional Shares from the Selling Stockholders, as set forth on
Schedule II annexed hereto, at the purchase price per share to be paid for
the Firm Shares, for use solely in covering any over-allotments made by the
Underwriters in the sale and distribution of the Firm Shares. The option
granted hereunder may be exercised once upon notice by the Representatives
to the Company and the Attorneys-in-Fact within 30 days after the date of
the Prospectus setting forth the aggregate number of Optional Shares to be
purchased by the Underwriters and sold by the Company and the Selling
Stockholders, the names and denominations in which the certificates for
such shares are to be registered and the date and place at which such
certificates will be delivered. Such date of delivery (the "Second Closing
Date") shall be determined by the Representatives, provided that the Second
Closing Date, which may be the same as the First Closing Date, shall not be
earlier than the First Closing Date and, if after the First Closing Date,
shall not be earlier than three nor later than 10 full business days after
delivery of such notice to exercise. If the Underwriters elect pursuant to
such notice to purchase less than all of the Optional Shares from the
Company and the Selling Stockholders, then each of the Company and the
Selling Stockholders shall sell to the Underwriters a number of Optional
Shares equal to its pro rata share in accordance with Schedule II annexed
hereto. Certificates for the Optional Shares will be made available for
checking and packaging at 9:00 a.m., Milwaukee, Wisconsin time, on the
first full business day preceding the Second Closing Date at a location to
be designated by the Representatives. The manner of payment for and
delivery of (including the denominations of and the names in which
certificates are to be registered) the Optional Shares shall be the same as
for the Firm Shares, except payment to the Selling Stockholders shall be as
directed by the Attorneys-in-Fact.

(d) The Representatives have advised the Company and the
Attorneys-in-Fact that each Underwriter has authorized the
Representatives to accept delivery of the Shares and to make payment
therefor. It is understood that the Representatives, individually and not
as representatives of the Underwriters, may (but shall not be obligated to)
make payment for any Shares to be purchased by any Underwriter whose
funds shall not have been received by the Representatives by the First
Closing Date or the Second Closing Date, as the case may be, for the
account of such Underwriter, but any such payment shall not relieve such
Underwriter from any obligation under this Agreement. As referred to in
this Agreement, "Closing Date" shall mean either the First Closing Date or
the Second Closing Date.

SECTION 7. COVENANTS OF THE COMPANY. The Company covenants and agrees
with the several Underwriters that:

<PAGE> 13

(a) If the effective time of the Registration Statement is not prior
to the execution and delivery of this Agreement, the Company will use
its best efforts to cause the Registration Statement to become effective at
the earliest possible time and, upon notification from the Commission that
the Registration Statement has become effective, will so advise the
Representatives and counsel to the Underwriters promptly. If the effective
time of the Registration Statement is prior to the execution and delivery
of this Agreement and any information shall have been omitted therefrom in
reliance upon Rule 430A, the Company, at the earliest possible time, will
furnish the Representatives with a copy of the Prospectus to be filed by
the Company with the Commission to comply with Rule 424(b) and Rule 430A
under the Act and, if the Representatives do not object to the contents
thereof, will comply with such Rules. Upon compliance with such Rules, the
Company will so advise the Representatives promptly. The Company will
advise the Representatives and counsel to the Underwriters and the
Attorneys-in-Fact promptly after it receives notice of the issuance by the
Commission or any state securities commission of any stop order suspending
the effectiveness of the Registration Statement or of the institution of
any proceedings for that purpose, or of any notification of the suspension
of qualification of the Shares for sale in any jurisdiction or the
initiation or threatening of any proceedings for that purpose, and will
also advise the Representatives and counsel to the Underwriters and the
Attorneys-in-Fact promptly after it receives notice of any request of the
Commission for amendment or supplement of the Registration Statement
(including the Rule 462 registration statement), of any Preliminary
Prospectus or of the Prospectus, or for additional information, and the
Company will not file any amendment or supplement to the Registration
Statement (including the Rule 462 registration statement)(either before or
after it becomes effective), to any Preliminary Prospectus or to the
Prospectus (including a prospectus filed pursuant to Rule 424(b)) if the
Representatives have not been furnished with a copy prior to such filing
(with a reasonable opportunity to review such amendment or supplement) or
if the Representatives reasonably object to such filing.

(b) If, at any time when a prospectus relating to the Shares is
required by law to be delivered in connection with sales by an Underwriter
or dealer, any event occurs as a result of which the Prospectus would
include an untrue statement of a material fact, or would omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to supplement the
Prospectus to comply with the Act, the Company promptly will advise the
Representatives and counsel to the Underwriters and the Attorneys-in-Fact
thereof and will promptly prepare and file with the Commission, at its
expense, an amendment to the Registration Statement which will correct such
statement or omission or an amendment which will effect such compliance;
and, if any Underwriter is required to deliver a prospectus nine months or
more after the effective date of the Registration Statement, the Company,
upon request of the Representatives, will prepare promptly such prospectus
or prospectuses as may be necessary to permit compliance with the
requirements of Section 10(a)(3) of the Act. The Company consents to the
use, in accordance with the provisions of the Act and with the Blue Sky
Laws of the jurisdictions in which the Shares are offered by the several
Underwriters and by dealers, of each Preliminary Prospectus.

(c) Neither the Company nor any Subsidiary will, prior to the Second
Closing Date, if any, or 30 days after the date of this Agreement,
whichever occurs first, incur any liability or obligation, direct or
contingent, or enter into any material transaction, other than in the
ordinary course of business, or enter into any transaction with an
"affiliate," as defined in Rule 405 under the Act, which is required to be
described in the Prospectus pursuant to Item 404 of Regulation S-K under
the Act, except, in each case, as described in the Prospectus.

<PAGE> 14

(d) Neither the Company nor any Subsidiary will, prior to the Second
Closing Date, if any, or 30 days after the date of this Agreement,
whichever occurs first, acquire any of the Common Stock nor will the
Company declare or pay any dividend or make any other distribution upon its
Common Stock payable to stockholders of record on a date prior to such
earlier date, except as described in the Prospectus.

(e) The Company will make generally available to its security holders
and the Representatives an earnings statement as soon as practicable, but
in no event later than 60 days after the end of its fiscal quarter in which
the first anniversary of the effective date of the Registration Statement
occurs, covering a period of 12 consecutive calendar months beginning after
the effective date of the Registration Statement, which will satisfy the
provisions of the last paragraph of Section 11(a) of the Act and Rule 158
promulgated thereunder.

(f) During such period as a prospectus is required by law to be
delivered in connection with sales by an Underwriter or dealer, the
Company will furnish to the Representatives, at the expense of the Company,
subject to subsection (b) of this section 7, copies of the Registration
Statement, the Prospectus, any Preliminary Prospectus and all amendments
and supplements to any such documents in each case as soon as available and
in such quantities as the Representatives may reasonably request for the
purposes contemplated by the Act.

(g) The Company will apply the net proceeds from the sale of the
Shares to be sold by it hereunder for the purposes set forth in the
Prospectus.

(h) The Company will cooperate with the Representatives and counsel to
the Underwriters in qualifying or registering the Shares for sale under the
Blue Sky Laws of such jurisdictions as the Representatives designate, and
will continue such qualifications or registrations in effect so long as
reasonably requested by the Representatives to effect the distribution of
the Shares. The Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any such
jurisdiction where it is not presently qualified. In each jurisdiction
where any of the Shares shall have been qualified as provided above, the
Company will file such reports and statements as may be required to
continue such qualification for a period of not less than one year from the
date of the Prospectus. The Company shall promptly prepare and file with
the Commission, from time to time, such reports as may be required to be
filed by the Act and the Exchange Act, and the Company shall comply in all
respects with the undertakings given by the Company in connection with the
qualification or registration of the Shares for offering and sale under the
Blue Sky Laws.

(i) During the period of three years from the date of the Prospectus,
the Company will furnish to each of the Representatives and to each of the
other Underwriters who may so request, as soon as available, each report,
statement or other document of the Company or its Board of Directors mailed
to its stockholders or filed with the Commission.

(j) The Company shall deliver the requisite notice of issuance to
Nasdaq and shall take all necessary or appropriate action within its power
to maintain the authorization for trading of the Common Stock as a Nasdaq
National Market security, for a period of at least 36 months after the date
of the Prospectus.

(k) Except for the issuance and sale by the Company of Common Stock
upon exercise of presently existing outstanding stock options, the
sale of the Shares to be sold by the Company pursuant to this Agreement,
and the grant of employee stock options pursuant to the Company's 1997

<PAGE> 15

Stock Incentive Plan or the Company's Employee Stock Purchase Plan, a
copy of each of which is filed as an exhibit to the Registration Statement,
the Company shall not, for a period of 180 days after the date of the
Prospectus, without the prior written consent of Baird, directly or
indirectly, offer, sell or otherwise dispose of, contract to sell or
otherwise dispose of, or cause or in any way permit to be sold or otherwise
disposed of, any: (i) shares of Common Stock; (ii) rights to purchase
shares of Common Stock; or (iii) securities that are convertible or
exchangeable into shares of Common Stock.

(l) The Company will maintain a transfer agent and, if required by law
or the rules of The Nasdaq Stock Market or any national securities
exchange on which the Common Stock is listed, a registrar (which, if
permitted by applicable laws and rules, may be the same entity as the
transfer agent) for its Common Stock. The Company shall, as soon as
practicable after the date hereof, use its reasonable best efforts to
obtain listing in Standard and Poor's Stock Guide, or such other recognized
securities manuals for which it may qualify for listing, and the Company
shall use its best efforts to maintain such listings for at least five
years after the First Closing Date.

(m) If the sale to the Underwriters of the Shares is not consummated
for any reason other than termination of this Agreement pursuant to section
13 hereof, without limiting any other rights the Underwriters may have, the
Company agrees to reimburse the Underwriters upon demand for all
out-of-pocket expenses (including reasonable fees and expenses of counsel
for the Underwriters), that shall have been incurred by the Underwriters in
connection with the proposed purchase and sale of the Shares, and the
provisions of sections 9 and 12 hereof shall at all times be effective and
apply.

(n) The Company will use reasonable efforts to comply or cause to be
complied with the conditions to the obligations of the Underwriters in
section 10 hereof.

SECTION 8. COVENANTS OF THE SELLING STOCKHOLDERS. Each Selling
Stockholder, severally and not jointly, covenants and agrees with the several
Underwriters and the Company as follows:

(a) If the effective time of the Registration Statement is not prior
to the execution and delivery of this Agreement, such Selling
Stockholder will cooperate to the extent necessary to cause the
Registration Statement to become effective at the earliest possible time;
and such Selling Stockholder will do and perform all things to be done and
performed by such Selling Stockholder prior to each Closing Date, pursuant
to this Agreement or the Power of Attorney and Custody Agreement.

(b) Such Selling Stockholder agrees to deliver to the Custodian on or
prior to the First Closing Date a properly completed and executed
United States Treasury Department Form W-9 (or other applicable substitute
form or statement specified by Treasury Department regulations in lieu
thereof).

(c) Such Selling Stockholder will pay all federal and other taxes, if
any, on the transfer or sale of the Shares being sold by such
Selling Stockholder to the Underwriters.

(d) For a period of 180 days after the date of the Prospectus, such
Selling Stockholder will not, without the prior written consent of
Baird, directly or indirectly, offer, sell, transfer, or pledge, contract
to sell, transfer or pledge or cause or in any way permit to be sold,
transferred, pledged or otherwise disposed of any: (i) shares of Common
Stock; (ii) rights to purchase shares of Common Stock (including, without
limitation, shares of Common Stock that may be deemed to be beneficially
owned by such Selling Stockholder in accordance with the rules and
regulations of the Commission

<PAGE> 16

and shares of Common Stock that may be issued upon exercise of a stock
option, warrant or other convertible security); or (iii) securities
that are convertible or exchangeable into shares of Common Stock.

(e) Such Selling Stockholder will furnish any documents, instruments
or other information which the Representatives may reasonably
request in connection with the sale and transfer of the Shares to the
Underwriters.

SECTION 9. PAYMENT OF EXPENSES. Whether or not the transactions
contemplated hereunder are consummated or this Agreement becomes effective, or
if this Agreement is terminated for any reason, the Company will pay the costs,
fees and expenses incurred in connection with the public offering of the
Shares. Such costs, fees and expenses to be paid by the Company and the
Selling Stockholders include, without limitation:

(a) All costs, fees and expenses (excluding the expenses incurred by
the Underwriters and the legal fees and disbursements of counsel for the
Underwriters, but including such fees and disbursements described in
subsection (b) of this section 9) incurred in connection with the
performance of the Company's and the Selling Stockholders' obligations
hereunder, including without limiting the generality of the foregoing: the
registration fees related to the filing of the Registration Statement with
the Commission; the fees and expenses related to the quotation of the
Shares on the Nasdaq Stock Market; the fees and expenses of the Company's
and the Selling Stockholders' counsel, accountants, transfer agent and
registrar; the costs and expenses incurred in connection with the
preparation, printing, shipping and delivery of the Registration Statement,
each Preliminary Prospectus and the Prospectus (including all exhibits and
financial statements) and all agreements and supplements provided for
herein, this Agreement and any Blue Sky memoranda and the Power of Attorney
and Custody Agreement, including, without limitation, shipping expenses via
overnight delivery and/or courier service to comply with applicable
prospectus delivery requirements; and the costs and expenses associated
with the production of materials related to, and travel expenses incurred
by the management of the Company in connection with, the various meetings
to be held between the Company's management and prospective investors.

(b) All registration fees and expenses, including legal fees and
disbursements of counsel for the Underwriters incurred in connection with
qualifying or registering all or any part of the Shares for offer and sale
under the Blue Sky Laws and the clearing of the public offering and the
underwriting arrangements evidenced hereby with the NASD.

(c) All fees and expenses related to printing of the certificates for
the Shares, and all transfer taxes, if any, with respect to the sale and
delivery of the Shares. Notwithstanding the foregoing, each Selling
Stockholder shall be solely responsible for any transfer or sales tax
imposed upon the transfer and sale of such Selling Stockholder's Shares to
the Underwriters. All costs and expenses incident to the performance of
any Selling Stockholder's obligations hereunder which are not otherwise
specifically provided for in this section 9 will be borne and paid solely
by each such Selling Stockholder. In the event any Selling Stockholder
shall fail to pay such Selling Stockholder's pro rata share of the costs,
fees and expenses described in this section 9 within five days after demand
by the Representatives therefor, the Company shall be obligated to pay such
costs, fees and expenses on demand. The provisions of this subsection (c)
shall not affect any agreement which the Company and the Selling
Stockholders may make for the allocation or sharing of such expenses and
costs.

<PAGE> 17

SECTION 10. CONDITIONS TO THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters under this Agreement shall be subject
to the accuracy of the representations and warranties on the part of the
Company, the Principal Stockholders and the Selling Stockholders herein set
forth as of the date hereof and as of each Closing Date, to the accuracy of the
statements of the Company's officers, the Selling Stockholders and the
Attorneys-in-Fact on behalf of the Selling Stockholders made pursuant to the
provisions hereof, to the performance by the Company and the Selling
Stockholders of their respective obligations hereunder, and to the following
additional conditions, unless waived in writing by the Representatives:

(a) The Registration Statement shall have been declared effective by
the Commission not later than 5:30 p.m., Washington, D.C. time,
prior to the date of this Agreement, or such later time as shall have been
consented to by the Representatives; all filings required by Rules 424(b)
and 430A under the Act shall have been timely made; no stop order
suspending the effectiveness of the Registration Statement shall have been
issued by the Commission or any state securities commission nor, to the
knowledge of the Company or the Principal Stockholders, shall any
proceedings for that purpose have been initiated or threatened; and any
request of the Commission or any state securities commission for inclusion
of additional information in the Registration Statement, or otherwise,
shall have been complied with to the reasonable satisfaction of the
Representatives.

(b) Since the dates as of which information is given in the
Registration Statement:

(i) there shall not have occurred any change or development
involving, or which could be expected to involve, a Material Adverse
Effect, whether or not arising from transactions in the ordinary
course of business; and

(ii) the Company shall not have sustained any loss or
interference from any labor dispute, strike, fire, flood, windstorm,
accident or other calamity (whether or not insured) or from any court or
governmental action, order or decree,

the effect of which on the Company, in any such case described in clause
(i) or (ii) above, is in the opinion of the Representatives so material and
adverse as to make it impracticable or inadvisable to proceed with the
public offering or the delivery of the Shares on the terms and in the
manner contemplated in the Registration Statement and the Prospectus.

(c) The Representatives shall not have advised the Company that the
Registration Statement or the Prospectus contains an untrue statement of
fact that, in the reasonable opinion of the Representatives or counsel for
the Underwriters, is material, or omits to state a fact that, in the
opinion of the Representatives or such counsel, is material and is required
to be stated therein or necessary to make the statements therein not
misleading.

(d) The Representatives shall have received an opinion of Reinhart,
Boerner, Van Deuren, Norris & Rieselbach, S.C., counsel for the Company
addressed to the Representatives, as the representatives of the
Underwriters, and dated the First Closing Date or the Second Closing Date,
as the case may be, substantially to the effect that, subject to the
qualifications and assumptions set forth therein:

(i) The Company has been duly incorporated and is validly
existing as a corporation and in good standing under the laws of its
jurisdiction of incorporation, with full corporate power and authority
to own, lease and operate its properties and conduct its business as
presently conducted and as described in the Prospectus and the
Registration Statement; the

<PAGE> 18

Company is duly qualified to do business as a foreign corporation under the
laws of, and is in good standing as such in, each jurisdiction in which
such qualification is required, except where the failure to so qualify
would not have a Material Adverse Effect;

(ii) The authorized capital stock of the Company consists of
20,000,000 shares of Common Stock, par value $0.01 per share, 100,000
shares of Series A Preferred Stock, par value $0.01 per share, 20,000
shares of Series B Preferred Stock par value $0.01 per share, and 1,000,000
shares of Nonvoting Common Stock, and all such stock conforms in all
material respects as to legal matters to the descriptions thereof in the
Prospectus and the Registration Statement;

(iii) The issued and outstanding shares of capital stock of the
Company immediately prior to the issuance and sale of the Shares to be
sold by the Company hereunder have been duly authorized and validly issued,
are fully paid and nonassessable, and there are no preemptive, preferential
or, except as described in the Prospectus and to such counsel's knowledge,
other rights to subscribe for or purchase any shares of capital stock of
the Company, and to, such counsel's knowledge, no shares of capital stock
of the Company have been issued in violation of such rights;

(iv) Except for the Subsidiaries, the Company has no subsidiaries, and
the Company does not own any equity interest in or control, directly or
indirectly, any other corporation, limited liability company, partnership,
joint venture, association, trust or other business organization except as
described in the Prospectus and the Registration Statement; each Subsidiary
has been duly incorporated and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation, with full
corporate power and authority to own, lease and operate its properties and
to conduct its business as presently conducted and as described in the
Prospectus and the Registration Statement; each Subsidiary is duly
qualified to do business as a foreign corporation under the laws of, and is
in good standing as such in, each jurisdiction in which such qualification
is required, except where the failure to so qualify would not have a
Material Adverse Effect; the issued and outstanding shares of the capital
stock of each Subsidiary have been duly authorized and validly issued, are
fully paid and nonassessable and there are no preemptive, preferential or,
to such counsel's knowledge, other rights to subscribe for or purchase any
shares of capital stock of any Subsidiary, and to such counsel's knowledge,
no shares of capital stock of any Subsidiary have been issued in violation
of such rights; the Company owns directly and, to such counsel's knowledge,
beneficially all of the issued and outstanding capital stock of each
Subsidiary, free and clear of any and all liens, claims, encumbrances and
security interests;

(v) The certificates for the Shares to be delivered hereunder are in
due and proper form and conform in all material respects to the
requirements of applicable law; and when duly countersigned by the
Company's transfer agent, and delivered to the Representatives or upon the
order of the Representatives against payment of the agreed consideration
therefor in accordance with the provisions of this Agreement, the Shares to
be sold by the Company represented thereby will be duly authorized and
validly issued, fully paid and nonassessable, and free of any preemptive,
preferential or other rights to subscribe for or purchase shares of Common
Stock;

(vi) The Registration Statement has become effective under the Act, and
to such counsel's knowledge, no stop order suspending the effectiveness of
the Registration

<PAGE> 19

Statement has been issued and no proceedings for that purpose have been
initiated or are threatened under the Act or any Blue Sky Laws; the
Registration Statement and the Prospectus and any amendment or supplement
thereto (except for the financial statements and other statistical or
financial data included therein as to which such counsel need express no
opinion) comply as to form in all material respects with the requirements
of the Act; no facts have come to the attention of such counsel which lead
it to believe that either the Registration Statement or the Prospectus or
any amendment or supplement thereto contains any untrue statement of a
material fact or omitted or will omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading or that the Prospectus, as of the First Closing Date or the
Second Closing Date, as the case may be, contained any untrue statement of
a material fact or omitted or will omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances under which they were made (except
for the financial statements and other financial data included therein as
to which such counsel need express no opinion); to such counsel's
knowledge, there are no legal or governmental proceedings pending or
threatened, including, without limitation, any such proceedings that are
related to environmental or employment discrimination matters, required to
be described in the Registration Statement or the Prospectus which are not
so described or which question the validity of this Agreement or any action
taken or to be taken pursuant thereto, nor to such counsel's knowledge is
there any transaction, relationship, agreement, contract or other document
of a character required to be described in the Registration Statement or
the Prospectus or to be filed as an exhibit to the Registration Statement
by the Act, which is not described as required;

(vii) The Company has full corporate power and authority to enter into
and perform this Agreement; the performance of the Company's obligations
hereunder and the consummation of the transactions described herein have
been duly authorized by the Company by all necessary corporate action and
this Agreement has been duly executed and delivered by and on behalf of the
Company, and is a legal, valid and binding agreement of the Company
enforceable against the Company in accordance with its terms, except that
rights to indemnity or contribution may be limited by applicable law and
except as enforceability of this Agreement may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally, and by equitable principles limiting the right to
specific performance or other equitable relief; no consent, approval,
authorization or other order or decree of any court, regulatory or
governmental body, arbitrator, administrative agency or other
instrumentality of the United States or other country or jurisdiction
having jurisdiction over the Company is required for the execution and
delivery of this Agreement by the Company or the consummation by the
Company of the transactions contemplated by this Agreement (except for
compliance with the Act, the Exchange Act, applicable Blue Sky Laws and the
clearance of the underwriting arrangements by the NASD);

(viii) The execution, delivery and performance of this Agreement by
the Company will not: (A) violate any provisions of the Certificate of
Incorporation or By-laws of the Company or any Subsidiary; (B) violate any
provisions of, or result in the breach, modification or termination of, or
constitute a default under, any agreement, lease, franchise, license,
indenture, permit, mortgage, deed of trust, other evidence of indebtedness
or other instrument to which the Company or any Subsidiary is a party or by
which the Company or such Subsidiary, or any of their respective owned or
leased property is bound, and which is filed as an exhibit to the
Registration Statement; or (C) violate any statute,

<PAGE> 20

ordinance, order, rule, writ, judgment, decree, or regulation known to
such counsel to which the Company is subject of any court, regulatory or
governmental body, arbitrator, administrative agency or other
instrumentality of the United States or other country or jurisdiction
having jurisdiction over the Company or any Subsidiary (assuming compliance
with all applicable federal and state securities laws);

(ix) To such counsel's knowledge, except as described in the
Prospectus, there are no holders of Common Stock or other securities of the
Company, or securities that are convertible or exchangeable into Common
Stock or other securities of the Company, that have rights to the
registration of such securities under the Act or any Blue Sky Laws;

(x) The Common Stock has been designated for inclusion as a National
Market security on The Nasdaq Stock Market and is registered under the
Exchange Act;

(xi) Neither the Company nor any Subsidiary is in violation of its
respective Certificate of Incorporation or By-laws or, to such counsel's
knowledge, in default in any material respect in the performance of any
agreement, lease, franchise, license, permit, mortgage, deed of trust,
evidence of indebtedness or other instrument, or any other document that is
filed as an exhibit to or incorporated by reference in the Registration
Statement, to which the Company or any Subsidiary is subject or bound;

(xii) Neither the Company nor any Subsidiary is an "investment
company", an "affiliated person" of, or "promoter" or "principal
underwriter" for, an "investment company", as such terms are defined in the
Investment Company Act of 1940, as amended, and, upon its receipt of any
proceeds from the sale of the Shares, the Company will not become or be
deemed to be an "investment company" thereunder;

(xiii) The description in the Registration Statement and the
Prospectus of statutes, law, regulations, legal and governmental
proceedings, and contracts and other legal documents described therein
fairly and correctly present, in all material respects, the information
required to be included therein by the Act; and

(xiv) All offers and sales by the Company of its capital stock before
the date hereof were at all relevant times duly registered under or exempt
from the registration requirements of the Act, and were duly registered
under or the subject of an available exemption from the registration
requirements of any applicable Blue Sky Laws.

In rendering such opinion, counsel for the Company may rely, to the extent
counsel deems such reliance proper, as to matters of fact upon certificates of
officers of the Company and of governmental officials, and copies of all such
certificates shall be furnished to the Representatives and for the Underwriters
on or before each Closing Date.

(e) The Representatives shall have received an opinion from Kirkland &
Ellis, counsel for the Selling Stockholders, dated the Second Closing Date
substantially to the effect that, subject to the qualifications and assumptions
set forth therein:

(i) Each of this Agreement and the Power of Attorney and Custody
Agreement has been duly authorized, executed and delivered by or on behalf
of each Selling Stockholder and the Power of Attorney and Custody Agreement
constitutes the valid and binding agreement of such Selling Stockholder,
enforceable in accordance with its respective terms,

<PAGE> 21

except that rights to indemnity or contribution thereunder may be
limited by applicable law and except as enforceability of such agreement
may be limited by bankruptcy, insolvency, reorganization, moratorium or
similar laws generally affecting the rights of creditors and by equitable
principles limiting the right to specific performance or other equitable
relief;

(ii) The execution and delivery of this Agreement and the Power of
Attorney and Custody Agreement and the consummation of the transactions
herein and therein contemplated will not, if applicable, result in the
violation of any provisions of the certificate of incorporation, by-laws,
partnership agreement, limited liability company agreement or other
governing documents of such Selling Stockholder, or constitute a breach, or
be in contravention, of any provision of any agreement, franchise, license,
indenture, mortgage, deed of trust or other instrument known to us to which
such Selling Stockholder is a party or by which such Selling Stockholder or
such Selling Stockholder's property may be bound or affected, or to the
best of such counsel's knowledge any statute, rule or regulation applicable
to such Selling Stockholder, or violate any order or decree of any court,
regulatory or governmental body, administrative body or instrumentality of
the United States or other jurisdiction having jurisdiction over such
Selling Stockholder or any of such Selling Stockholder's property, which
violation would reasonably be expected to have a material adverse effect on
the condition (financial or otherwise), business, properties, net worth or
results of operations of such Selling Stockholder; and

(iii) Such Selling Stockholder has full legal right, power and
authority, to enter into and perform this Agreement and the Power of
Attorney and Custody Agreement and to sell, assign, transfer and deliver
title to the Shares to be sold by such Selling Stockholder as provided
herein; and upon delivery to the Underwriters or upon the order of the
Representatives against payment of the agreed consideration therefor in
accordance with the provisions of this Agreement, the Underwriters will
acquire good and marketable title to the Shares to be sold hereunder by
such Selling Stockholder, free and clear of all voting trust arrangements,
liens, encumbrances, security interests, equities, and claims (assuming
that the Underwriters purchase such Shares in good faith and without notice
of any adverse claim within the meaning of the Uniform Commercial Code in
effect in the State of Illinois).

In rendering such opinion, counsel for the Selling Stockholders may
rely, to the extent counsel deems such reliance proper, as to matters of fact
upon certificates of the Selling Stockholders, and copies of all such
certificates shall be furnished to the Representatives and counsel for the
Underwriters on or before each Closing Date.

(f) The Representatives shall have received an opinion of McDermott,
Will & Emery, counsel for the Underwriters, dated the First Closing Date or the
Second Closing Date, as the case may be, with respect to the issuance and sale
of the Shares by the Company, the Registration Statement and other related
matters as the Representatives may require, and the Company shall have
furnished to such counsel such documents and shall have exhibited to them such
papers and records as they reasonably request for the purpose of enabling them
to pass upon such matters.

(g) The Representatives shall have received on each Closing Date, a
certificate of Robert E. Dods, President of the Company, Boyd L. Meyer,
Executive Vice President of the Company, Peter K.K. Chung, President of RCL,
and Curt W. Stoelting, Vice President-Finance and Operations and Secretary of
the Company, to the effect that:

<PAGE> 22

(i) The representations and warranties of the Company and the
Principal Stockholders set forth in section 2 hereof are true and correct
as of the date of this Agreement and as of the date of such certificate,
and the Company has complied with all the agreements and satisfied all the
conditions to be performed or satisfied by it at or prior to the date of
such certificate;

(ii) The Commission has not issued an order preventing or suspending
the use of the Prospectus or any Preliminary Prospectus or any amendment or
supplement thereto; no stop order suspending the effectiveness of the
Registration Statement has been issued; and to the knowledge of the
respective signatories, no proceedings for that purpose have been initiated
or are pending or contemplated under the Act or under the Blue Sky Laws of
any jurisdiction;

(iii) Each of the respective signatories has carefully examined the
Registration Statement and the Prospectus, and any amendment or supplement
thereto, and such documents contain all statements required to be stated
therein, and do not include any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, and, to the knowledge of the
respective signatories, since the date on which the Registration Statement
was initially filed, no event has occurred that was required to be set
forth in an amended or supplemented prospectus or in an amendment to the
Registration Statement that has not been so set forth; and

(iv) Since the date on which the Registration Statement was initially
filed with the Commission, there shall not have occurred any change or
development involving, or which could be expected to involve, a Material
Adverse Effect, whether or not arising from transactions in the ordinary
course of business, except as disclosed in the Prospectus and the
Registration Statement as heretofore amended or (but only if the
Representatives expressly consent thereto in writing) as disclosed in an
amendment or supplement thereto filed with the Commission and delivered to
the Representatives after the execution of this Agreement; since such date
and except as so disclosed or in the ordinary course of business, the
Company has not incurred any liability or obligation, direct or indirect,
or entered into any transaction which is material to the Company; since
such date and except as so disclosed, there has not been any change in the
outstanding capital stock of the Company, or any change that is material to
the Company in the short-term debt or long-term debt of the Company; since
such date and except as so disclosed, the Company has not acquired any of
the Common Stock or other capital stock of the Company nor has the Company
declared or paid any dividend, or made any other distribution, upon its
outstanding Common Stock payable to stockholders of record on a date prior
to such Closing Date; since such date and except as so disclosed, the
Company has not incurred any material contingent obligations, and no
material litigation is pending or threatened against the Company; and,
since such date and except as so disclosed, the Company has not sustained
any material loss or interference from any strike, fire, flood, windstorm,
accident or other calamity (whether or not insured) or from any court or
governmental action, order or decree.

The delivery of the certificate provided for in this subsection (g)
shall be and constitute a representation and warranty of the Company as to the
facts required in the immediately foregoing clauses (i), (ii), (iii) and (iv)
to be set forth in said certificate.

<PAGE> 23

(h) The Representatives shall have received a certificate from each
Selling Stockholder (which may be signed by such Selling Stockholder's
Attorneys-in-Fact, or either of them), dated the Second Closing Date, to
the effect that: (i) the representations and warranties of such Selling
Stockholder in section 3 hereof are true and correct as of the date of this
Agreement and as of the date of such certificate, as if again made on and
as of such Closing Date, and such Selling Stockholder has complied with all
of the agreements and satisfied all of the conditions to be performed or
satisfied by such Selling Stockholder at or prior to such Closing Date; and
(ii) such Selling Stockholder has no reason to believe that the
Registration Statement or any amendment thereto at the time it was
declared effective by the Commission contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, or that
the Prospectus, as amended or supplemented, contains any untrue statement
of a material fact or omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.

(i) At the time this Agreement is executed and also on each Closing
Date, there shall be delivered to the Representatives a letter
addressed to the Representatives, as the representatives of the
Underwriters, from Arthur Andersen LLP, the Company's independent
accountants, the first letter to be dated the date of this Agreement, the
second letter to be dated the First Closing Date, and the third letter (if
applicable) to be dated the Second Closing Date, which shall be in form and
substance satisfactory to the Representatives and shall contain information
as of a date within five days of the date of such letter. There shall not
have been any change or decrease set forth in any of the letters referred
to in this subsection (i) which makes it impracticable or inadvisable in
the judgment of the Representatives to proceed with the public offering or
purchase of the Shares as contemplated hereby.

(j) The Shares shall have been qualified or registered for sale under
the Blue Sky Laws of such jurisdictions as shall have been specified by the
Representatives, the underwriting terms and arrangements for the offering
shall have been cleared by the NASD, and the Common Stock shall have been
designated for inclusion as a Nasdaq National Market security on the Nasdaq
Stock Market and shall have been registered under the Exchange Act.

(k) Such further certificates and documents as the Representatives may
reasonably request (including certificates of officers of the Company).

All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory to the
Representatives and to McDermott, Will & Emery, counsel for the Underwriters.
The Company and the Selling Stockholders shall furnish the Representatives with
such manually signed or conformed copies of such opinions, certificates,
letters and documents as the Representatives may reasonably request.

If any condition to the Underwriters' obligations hereunder to be satisfied
prior to or at either Closing Date is not so satisfied, this Agreement at the
election of the Representatives will terminate upon notification to the Company
and the Attorneys-in-Fact for the Selling Stockholders without liability on the
part of any Underwriter, including the Representatives, the Company or the
Selling Stockholders except for the provisions of subsection (n) of section 7
hereof, the expenses to be paid by the Company and the Selling Stockholders
pursuant to section 9 hereof and except to the extent provided in section 12
hereof.

SECTION 11. MAINTAIN EFFECTIVENESS OF REGISTRATION STATEMENT. The Company
will use its best efforts to prevent the issuance of any stop order suspending
the effectiveness of the Registration Statement, and, if such stop order is
issued, to obtain as soon as possible the lifting thereof.

<PAGE> 24

SECTION 12. INDEMNIFICATION.

(a) The Company, each of the Principal Stockholders, and each of the
Selling Stockholders, jointly and severally, subject to subsection (g) of
this section 12, agree to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of the
Act or the Exchange Act, from and against any losses, claims, damages,
expenses, liabilities or actions in respect thereof ("Claims"), joint or
several, to which such Underwriter or each such controlling person may
become subject under the Act, the Exchange Act, Blue Sky Laws or other
federal or state statutory laws or regulations, at common law or otherwise
(including payments made in settlement of any litigation), insofar as such
Claims arise out of or are based upon any breach of any representation,
warranty or covenant made by the Company and the Principal Stockholders in
this Agreement, or any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, or in
any application filed under any Blue Sky Law or other document executed by
the Company for that purpose or based upon written information furnished by
the Company and filed in any state or other jurisdiction to qualify any or
all of the Shares under the securities laws thereof (any such document,
application or information being hereinafter called a "Blue Sky
Application") or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading. The Company, each
of the Principal Stockholders and each of the Selling Stockholders, jointly
and severally, subject to subsection (h) of this section 12, agree to
reimburse each Underwriter and each such controlling person for any legal
fees or other expenses incurred by such Underwriter or any such controlling
person in connection with investigating or defending any such Claim;
provided, however, that the Company, the Principal Stockholders and the
Selling Stockholders will not be liable in any such case to the extent
that: (i) any such Claim arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made
in the Registration Statement, any Preliminary Prospectus, the Prospectus
or supplement thereto or in any Blue Sky Application in reliance upon and
in conformity with the written information furnished to the Company
pursuant to section 5 hereof; or (ii) such statement or omission was
contained or made in any Preliminary Prospectus and corrected in the
Prospectus and (1) any such Claim suffered or incurred by any Underwriter
(or any person who controls any Underwriter) resulted from an action, claim
or suit by any person who purchased Shares which are the subject thereof
from such Underwriter in the offering, and (2) such Underwriter failed to
deliver or provide a copy of the Prospectus to such person at or prior to
the confirmation of the sale of such Shares in any case where such delivery
is required by the Act, unless such failure was due to failure by the
Company to provide copies of the Prospectus to the Underwriters as required
by this Agreement. The indemnification obligations of the Company, each of
the Principal Stockholders and each of the Selling Stockholders as provided
above are in addition to and in no way limit any liabilities the Company,
each of the Principal Stockholders and each of the Selling Stockholders may
otherwise have.

(b) Each Underwriter, severally and not jointly, will indemnify and
hold harmless the Company, each of its directors and each of its
officers who signs the Registration Statement, and each person, or any such
director, officer, controlling person or Selling Stockholder may become
subject under the Act, the Exchange Act, Blue Sky Laws or other federal or
state statutory laws or regulations, at common law or otherwise (including
payments made in settlement of any litigation, if such settlement is
effected with the written consent of such Underwriter and Baird), insofar
as such Claim arises out of or is based upon any untrue or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement
thereto, or arises out of or is based upon the omission or alleged omission

<PAGE> 25

to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to
the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, in reliance solely upon and in conformity
with the written information furnished by the Representatives to the
Company pursuant to section 5 hereof. Each Underwriter will severally
reimburse any legal fees or other expenses incurred by the Company, or any
such director, officer, controlling person, Principal Stockholder or
Selling Stockholder in connection with investigating or defending any such
Claim, and from any and all Claims solely resulting from failure of an
Underwriter to deliver a Prospectus, if the person asserting such Claim
purchased Shares from such Underwriter and a copy of the Prospectus (as
then amended if the Company shall have furnished any amendments thereto)
was not sent or given by or on behalf of such Underwriter to such person,
if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the
Prospectus (as so amended) would have cured the defect giving rise to such
Claim. The indemnification obligations of each Underwriter as provided
above are in addition to any liabilities any such Underwriter may otherwise
have. Notwithstanding the provisions of this section 12, no Underwriter
shall be required to indemnify or reimburse the Company, or any officer,
director, controlling person, Principal Stockholder or Selling Stockholder
in an aggregate amount in excess of the total price at which the Shares
purchased by any such Underwriter hereunder were offered to the public,
less the amount of any damages such Underwriter has otherwise been required
to pay by reason of such untrue or alleged untrue statement or omission or
alleged omission.

(c) Each Selling Stockholder, severally and not jointly, agrees to
indemnify and hold harmless the Company, each of its directors and each of
its officers who signs the Registration Statement, and each person, if any,
controlling the Company within the meaning of the Act or the Exchange Act
to the same extent as the foregoing indemnity from the Company to each
Underwriter set forth in subsection (a) of this section 12. In case any
Claim shall be brought or asserted against the Company, its directors, such
officers or any such controlling person, in respect of which indemnity may
be sought against any Selling Stockholder, such Selling Stockholder shall
have the rights and duties given to the Company, and the Company, such
directors or officers and any such controlling person shall have the rights
and duties given to the Underwriters by subsection (a) of this section 12.

(d) Promptly after receipt by an indemnified party under this section
12 of notice of the commencement of any action in respect of a Claim,
such indemnified party will, if a Claim in respect thereof is to be made
against an indemnifying party under this section 12, notify the
indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve an indemnifying party
from any liability it may have to any indemnified party under this section
12 or otherwise. In case any such action is brought against any
indemnified party, and such indemnified party notifies an indemnifying
party of the commencement thereof, the indemnifying party will be entitled
to participate in and, to the extent that it may wish, jointly with all
other indemnifying parties, similarly notified, to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified party;
provided, however, if the defendants in any such action include both the
indemnified party and any indemnifying party and the indemnified party
shall have reasonably concluded that there may be legal defenses available
to the indemnified party and/or other indemnified parties which are
different from or additional to those available to any indemnifying party,
the indemnified party or parties shall have the right to select separate
counsel to assume such legal defenses and to otherwise participate in the
defense of such action on behalf of such indemnified party or parties.

<PAGE> 26

(e) Upon receipt of notice from the indemnifying party to such
indemnified party of the indemnifying party's election to assume the
defense of such action and upon approval by the indemnified party of counsel
selected by the indemnifying party, the indemnifying party will not be liable
to such indemnified party under this section 12 for any legal fees or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof, unless:

(i) the indemnified party shall have employed separate counsel
in connection with the assumption of legal defenses in accordance
with the proviso to the last sentence of subsection (d) of this
section 12 (it being understood, however, that the indemnifying party
shall not be liable for the legal fees and expenses of more than one
separate counsel, approved by Baird, if one or more of the
Underwriters or their controlling persons are the indemnified
parties);

(ii) the indemnifying party shall not have employed counsel
reasonably satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after the indemnified
party's notice to the indemnifying party of commencement of the
action; or

(iii) the indemnifying party has authorized the employment of
counsel at the expense of the indemnifying party.

(f) If the indemnification provided for in this section 12 is
unavailable to an indemnified party under subsection (a), (b) or (c) of
this section 12 in respect of any Claim referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall,
subject to the limitations hereinafter set forth, contribute to the amount paid
or payable by such indemnified party as a result of such Claim:

(i) in such proportion as is appropriate to reflect the
relative benefits received by the Company, each Principal
Stockholder, each Selling Stockholder and the Underwriters from the
offering of the Shares; or

(ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i)
above, but also the relative fault of the Company, each Principal
Stockholder, each Selling Stockholder and the Underwriters in
connection with the statements or omissions which resulted in such
Claim, as well as any other relevant equitable considerations.

The relative benefits received by each of the Company, each Principal
Stockholder, each Selling Stockholder and the Underwriters shall be deemed to
be in such proportion so that the Underwriters are responsible for that portion
represented by the percentage that the amount of the underwriting discounts and
commissions per share appearing on the cover page of the Prospectus bears to
the public offering price per share appearing thereon, and the Company
(including its officers and directors and controlling persons), and the
Principal Stockholders, and each of the Selling Stockholders, are responsible
for the remaining portion. The relative fault of the Company, each Principal
Stockholder, each Selling Stockholder and the Underwriters shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company, such Principal
Stockholder or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The amount paid or payable by a party as a result of the Claims
referred to above shall be deemed to include,

<PAGE> 27

subject to the limitations set forth in subsections (d) and (e) of this
section 12, any legal or other fees or expenses reasonably incurred by such
party in connection with investigating or defending any action or claim.

(g) The Company, the Principal Stockholders, the Selling Stockholders
and the Underwriters agree that it would not be just and equitable if
contribution pursuant to this section 12 were determined by pro rata or per
capita allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method or allocation which does not take into
account the equitable considerations referred to in subsection (e) of this
section 12. Notwithstanding the other provisions of this section 12, no
Underwriter shall be required to contribute any amount that is greater than
the amount by which the total price at which the Shares underwritten by it
and distributed to the public were offered to the public exceeds the amount
of any damages which such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this section 12 are
several in proportion to their respective underwriting commitments and not
joint.

(h) Notwithstanding any provision of this section 12 to the contrary,
the liability of each of the Selling Stockholders and the Principal
Stockholders arising under this section 12 shall not exceed the aggregate
of the purchase price received by such Selling Stockholder from the
Underwriters for the Shares sold by such Selling Stockholder and the amount
received by such Principal Stockholders in respect of redemption or
retirement of securities held by such Principal Stockholder as set forth in
"Use of Proceeds" in the Prospectus.

SECTION 13. DEFAULT OF UNDERWRITERS. It shall be a condition to the
obligations of the Company and the Selling Stockholders to sell and deliver the
Shares hereunder, and to the obligations of each Underwriter to purchase the
Shares in the manner as described herein, that, except as hereinafter provided
in this section 13, each of the Underwriters shall purchase and pay for all the
Shares agreed to be purchased by such Underwriter hereunder upon tender to the
Representatives of all such Shares in accordance with the terms hereof. If any
Underwriter or Underwriters default in their obligations to purchase Shares
hereunder on either the First Closing Date or the Second Closing Date and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed to purchase does not exceed ten percent (10%) of the total
number of Shares which the Underwriters are obligated to purchase on such
Closing Date, the Representatives may make arrangements for the purchase of
such Shares by other persons, including any of the Underwriters, but if no such
arrangements are made by such Closing Date the nondefaulting Underwriters shall
be obligated severally, in proportion to their respective commitments
hereunder, to purchase the Shares which such defaulting Underwriters agreed but
failed to purchase on such Closing Date. If any Underwriter or Underwriters so
default and the aggregate number of Shares with respect to which such default
or defaults occur is greater than ten percent (10%) of the total number of
Shares which the Underwriters are obligated to purchase on such Closing Date,
and arrangements satisfactory to the Representatives for the purchase of such
Shares by other persons are not made within 36 hours after such default, this
Agreement will terminate without liability on the part of any nondefaulting
Underwriter, the Company, any Principal Stockholder or any Selling Stockholder
except for the expenses to be paid by the Company and the Selling Stockholders
pursuant to section 9 hereof and except to the extent provided in section 12
hereof.

In the event that Shares to which a default relates are to be purchased by
the nondefaulting Underwriters or by another party or parties, the
Representatives shall have the right to postpone the First Closing Date or the
Second Closing Date, as the case may be, for not more than seven business days
in order

<PAGE> 28

that the necessary changes in the Registration Statement, Prospectus and any
other documents, as well as any other arrangements, may be effected. As used
in this Agreement, the term "Underwriter" includes any person substituted for
an Underwriter under this section 13. Nothing herein will relieve a defaulting
Underwriter from liability for its default.

SECTION 14. EFFECTIVE DATE. This Agreement shall become effective
upon the execution and delivery of this Agreement by the parties hereto. Such
execution and delivery shall include an executed copy of this Agreement sent by
telecopier, facsimile transmission or other means of transmitting written
documents.

SECTION 15. TERMINATION. Without limiting the right to terminate this
Agreement pursuant to any other provision hereof, this Agreement may be
terminated by the Representatives prior to or on the First Closing Date and the
over-allotment option from the Company and the Selling Stockholders referred to
in section 6 hereof, if exercised, may be cancelled by the Representatives at
any time prior to or on the Second Closing Date, if in the judgment of the
Representatives, payment for and delivery of the Shares is rendered
impracticable or inadvisable because:

(a) additional governmental restrictions, not in force and effect on
the date hereof, shall have been imposed upon trading in securities
generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or the American Stock Exchange,
or trading in securities generally shall have been suspended or materially
limited on either such exchange or on The Nasdaq Stock Market or a general
banking moratorium shall have been established by either federal or state
authorities in New York, or Wisconsin;

(b) any event shall have occurred or shall exist which makes untrue or
incorrect in any material respect any statement or information contained in
the Registration Statement or which is not reflected in the Registration
Statement but should be reflected therein to make the statements or
information contained therein not misleading in any material respect; or

(c) an outbreak or escalation of hostilities or other national or
international calamity or any substantial change in political, financial or
economic conditions shall have occurred or shall have accelerated to such
extent, in the judgment of the Representatives, as to have a material
adverse effect on the financial markets of the United States, or to make it
impracticable or inadvisable to proceed with completion of the sale of and
payment for the Shares as provided in this Agreement.

Any termination pursuant to this section 15 shall be without liability
on the part of any Underwriter to the Company, any Principal Stockholder or any
Selling Stockholder, or on the part of the Company, any Principal Stockholder
or any Selling Stockholder to any Underwriter, except for expenses to be paid
by the Company and the Selling Stockholders pursuant to section 9 hereof or
reimbursed by the Company pursuant to subsection (n) of section 7 hereof and
except as to indemnification to the extent provided in section 12 hereof.

SECTION 16. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties, covenants and
other statements of the Company, of its officers or directors, of the Principal
Stockholders, of the Selling Stockholders, and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any
Underwriter, Principal Stockholder, Selling Stockholder or the Company or any
of its or their partners, officers, directors or any controlling person, as the
case may be, and will survive delivery of and payment for the Shares sold
hereunder.

<PAGE> 29

SECTION 17. NOTICES. All communications hereunder will be in writing and,
if sent to the Representatives, will be mailed, delivered, telecopied (with
receipt confirmed) or telegraphed and confirmed to Robert W. Baird & Co.
Incorporated at 777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202,
Attention: Steven G. Booth, Managing Director, with a copy to Timothy R. M.
Bryant, Esq., McDermott, Will & Emery, 227 West Monroe Street, Chicago,
Illinois 60606, and if sent to the Company, will be mailed, delivered,
telecopied (with receipt confirmed) or telegraphed and confirmed to the Company
at 800 Roosevelt Road, Glen Ellyn, Illinois 60137, Attention: Robert E. Dods
with a copy to Michael T. Pepke, Reinhart, Boerner, Van Deuren, Norris &
Rieselbach, S.C., 1000 North Water Street, Milwaukee, Wisconsin 53202; and, if
sent to the Selling Stockholders, will be mailed, delivered, telecopied (with
receipt confirmed) or telegraphed and confirmed to the Attorneys-in-Fact, or
either of them, in care of the Company, with copies to Kirkland & Ellis, 200
East Randolph Street, Chicago, Illinois, 60601, Attention: Sanford E. Perl.

SECTION 18. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors, personal
representatives and assigns, and to the benefit of the officers and directors
and controlling persons referred to in section 12 hereof and no other person
will have any right or obligation hereunder. The term "successors" shall not
include any purchaser of the Shares as such from any of the Underwriters merely
by reason of such purchase.

SECTION 19. PARTIAL UNENFORCEABILITY. If any section, paragraph, clause or
provision of this Agreement is for any reason determined to be invalid or
unenforceable, such determination shall not affect the validity or
enforceability of any other section, paragraph, clause or provision hereof.

SECTION 20. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed
by and construed in accordance with the internal laws of the State of Wisconsin
without reference to conflict of law principles thereunder. This Agreement may
be signed in various counterparts which together shall constitute one and the
same instrument, and shall be effective when at least one counterpart hereof
shall have been executed by or on behalf of each party hereto.

If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed duplicates hereof, whereupon it will
become a binding agreement among the Company, each of the Principal
Stockholders, each of the Selling Stockholders and the several Underwriters,
including the Representatives, all in accordance with its terms.

* * * *

29
<PAGE> 30

Very truly yours,

RACING CHAMPIONS CORPORATION

By:
-----------------------------------
Robert E. Dods, President

THE PRINCIPAL STOCKHOLDERS (WHO ARE NOT
SELLING STOCKHOLDERS):

---------------------------------------
Robert E. Dods

---------------------------------------
Boyd L. Meyer

---------------------------------------
Peter K.K. Chung

THE SELLING STOCKHOLDERS:

WILLIS STEIN & PARTNERS, L.P.

By:
----------------------------------
Attorney-in-Fact

BAIRD CAPITAL PARTNERS II LIMITED
PARTNERSHIP

By:
----------------------------------
Attorney-in-Fact

NASSAU CAPITAL PARTNERS L.P.

By:
----------------------------------
Attorney-in-Fact

<PAGE> 31

BCP II AFFILIATES FUND LIMITED PARTNERSHIP

By:
----------------------------------
Attorney-in-Fact

NAS PARTNERS I L.L.C.

By:
----------------------------------
Attorney-in-Fact

The foregoing Underwriting
Agreement is hereby confirmed
and accepted as of the date
first above written.

ROBERT W. BAIRD & CO. INCORPORATED
WILLIAM BLAIR & COMPANY L.L.C.
J.C. BRADFORD & CO.

By: ROBERT W. BAIRD & CO. INCORPORATED
Acting as Representative of the several
Underwriters (including itself) identified
in Schedule I annexed hereto.

By:
-------------------------------------------
Authorized Representative

<PAGE> 32

RACING CHAMPIONS CORPORATION

SCHEDULE I
----------

Number of Firm Shares
Name of Underwriter to be Purchased
- ------------------- ---------------

Robert W. Baird & Co. Incorporated . . . . . . . .

William Blair & Company L.L.C. . . . . . . . . . .

J.C. Bradford & Co. . . . . . . . . . . . . . . . _________________

Total 5,000,000

<PAGE> 33

RACING CHAMPIONS CORPORATION

SCHEDULE II

<TABLE>
<CAPTION>
Number of Number of Op-
Firm Shares tional Shares
----------- --------------
<S> <C> <C>
The Company . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 357,142

The Selling Stockholders:

Willis Stein & Partners, L.P. . . . . . . . . . . . . 0 273,253

Baird Capital Partners II Limited Partnership . . . 0 57,635

Nassau Capital Partners L.P. . . . . . . . . . . . . 0 44,498

BCP II Affiliates Fund Limited Partnership . . . . . 0 17,118

NAS Partners I L.L.C. . . . . . . . . . . . . . . . . 0 354
--------- -------
Total 5,000,000 750,000
</TABLE>

<PAGE> 1

AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
RACING CHAMPIONS CORPORATION

RACING CHAMPIONS CORPORATION, a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify that:

1. The Corporation was originally incorporated on April 24, 1996 as
Collectible Champions, Inc.

2. The Board of Directors of the Corporation and the stockholders of the
Corporation have approved the following Amended and Restated Certificate of
Incorporation of the Corporation in accordance with section 245 of the General
Corporation Law of the State of Delaware:

ARTICLE ONE

The name of the Corporation is Racing Champions Corporation.

ARTICLE TWO

The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle,
19805. The name of its registered agent at such address is The Prentice-Hall
Corporation System, Inc.

ARTICLE THREE

The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.

ARTICLE FOUR

The total number of shares of stock which the Corporation has authority to
issue is 20,000,000 shares of Common Stock, par value $.01 per share.

ARTICLE FIVE

The Corporation is to have perpetual existence.

<PAGE> 2

ARTICLE SIX

In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors of the Corporation is expressly authorized to make,
alter or repeal the by-laws of the Corporation.

ARTICLE SEVEN

Meetings of stockholders may be held within or without the State of
Delaware, as the by-laws of the Corporation may provide. The books of the
Corporation may be kept outside the State of Delaware at such place or places
as may be designated from time to time by the Board of Directors or in the
by-laws of the Corporation. Election of directors need not be by written
ballot unless the by-laws of the Corporation so provide.

ARTICLE EIGHT

The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this certificate of incorporation in the manner now or
hereafter prescribed herein and by the laws of the State of Delaware, and all
rights conferred upon stockholders herein are granted subject to this
reservation.

ARTICLE NINE

To the fullest extent permitted by the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended, a director of
the Corporation shall not be liable to the Corporation or its stockholders for
monetary damages for a breach of fiduciary duty as a director. Any repeal or
modification of this ARTICLE NINE shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.

ARTICLE TEN

Each person who is or was or had agreed to become a director or officer of
the Corporation, or each such person who is or was serving or had agreed to
serve at the request of the Board of Directors or an officer of the Corporation
as an employee or agent of the Corporation or as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise (including the heirs, executors, administrators or estate of such
person), shall be indemnified by the Corporation to the full extent permitted
by the General

2
<PAGE> 3

Corporation Law of the State of Delaware or any other applicable
laws as now or hereafter in effect. Without limiting the generality or effect
of the foregoing, the Corporation may enter into one or more agreements with
any person which provide for indemnification greater or different than that
provided in this Article. No amendment to or repeal of this ARTICLE TEN shall
apply to or have any effect on the right to indemnity permitted or authorized
hereunder for or with respect to claims asserted before or after such amendment
or repeal arising from acts or omissions occurring in whole or in part before
the effective date of such amendment or repeal.

ARTICLE ELEVEN

The Corporation expressly elects to be governed by Section 203 of the
General Corporation Law of the State of Delaware.

IN WITNESS WHEREOF, Racing Champions Corporation has caused this
Certificate to be signed by Robert E. Dods, its President, and attested by
Curtis W. Stoelting, its Secretary, this ___ day of June, 1997.

RACING CHAMPIONS CORPORATION

BY
-------------------------
Robert E. Dods, President
ATTEST:

BY
------------------------------
Curtis W. Stoelting, Secretary

<PAGE> 1

EXHIBIT 5

[REINHART, BOERNER, VAN DEUREN, NORRIS & RIESELBACH, S.C. LETTERHEAD]

May 9, 1997

Racing Champions Corporation
800 Roosevelt Road
Building C, Suite 320
Glen Ellyn, IL 60137

Gentlemen: Re: Registration Statement on Form S-1
(Securities and Exchange
Commission File No.
333-22493)

We have acted as counsel for Racing Champions Corporation, a Delaware
corporation (the "Company"), in connection with the offering by the Company and
certain of its stockholders to the public of 5,750,000 shares of common stock,
par value $.01 per share (the "Shares"), pursuant to a registration statement
filed under the Securities Act of 1933, as amended (the "Act").

In such capacity, we have examined, among other documents, the Registration
Statement (the "Registration Statement") on Form S-1 (File No. 333-22493) filed
by the Company with the Securities and Exchange Commission (the "Commission") on
February 27, 1997, as amended by Amendment No. 1 filed with the Commission on
April 11, 1997 and by Amendment No. 2 filed with the Commission on the date
hereof or shortly hereafter, including the prospectus contained therein,
covering the public offering of the Shares. Based upon the foregoing, and upon
such further examination as we have deemed relevant and necessary, we are of the
opinion that the Shares have been legally and validly authorized under the
Certificate of Incorporation of the Company and the laws of the State of
Delaware and, when issued and paid for in accordance with the descriptions set
forth in the Registration Statement, the Shares will constitute duly and validly
issued and outstanding and fully paid and nonassessable Common Stock of the
Company under the laws of the State of Delaware.

We hereby consent to the use of our name beneath the caption "Legal
Matters" in the prospectus forming part of the Registration Statement and to the
filing of a copy of this opinion as an exhibit thereto. In giving our consent,
we do not admit that we are "experts" within the meaning of Section 11 of the
Act or within the category of persons whose consent is required by Section 7 of
the Act.

Yours very truly,

REINHART, BOERNER, VAN DEUREN,
NORRIS & RIESELBACH, s.c.

By /s/ JAMES M. BEDORE

------------------------------------
James M. Bedore

<PAGE> 1

EXHIBIT 10.21

AMENDMENT NO. 1 TO
RACING CHAMPIONS, INC.
1996 KEY EMPLOYEES PERFORMANCE COMPENSATION PLAN

Effective as of April 8, 1997, the Board of Directors of Racing Champions,
Inc., an Illinois corporation, has adopted the following amendments to the
Racing Champions, Inc. 1996 Key Employees Performance Compensation Plan
(the "Plan"):

1. The definition of "Parent" in Article II of the Plan is hereby amended
by deleting such definition in its entirety and inserting the following in lieu
thereof:

"Parent" means Racing Champions Corporation, a Delaware corporation and
owner of 100% of the capital stock of the Company.

2. Article II of the Plan is hereby amended by adding the following
defined terms:

"1997 EBITDA" means Audited EBITDA for the period beginning on January 1,
1997 and ending on December 31, 1997.

"1997 Final Bonus Determination Date" means the date on which the
Parent's audited consolidated financial statements are issued for the period
beginning on January 1, 1997 and ending on December 31, 1997.

3. The Plan is hereby amended by inserting the following as Article VI:

ARTICLE VI

Award of Performance Bonus for 1997

6.1 Determination of 1997 Performance Bonus. If a Participant is employed
by the Company or any of its Subsidiaries on December 31, 1997, the "1997
Performance Bonus" of such Participant shall be equal to the Percentage Share
set forth next to such Participant's name on Schedule I multiplied by 5.12%
multiplied by 1997 EBITDA; provided that the 1997 Performance Bonus of each
Participant shall be zero if 1997 EBITDA is less than $19,009,000. If a
Participant's employment is terminated on a date (the "Termination Date") prior
to

<PAGE> 2

December 31, 1997 for reason of death, Disability, by the Company without
Cause or by the Participant for Good Reason, such Participant's 1997
Performance Bonus shall be equal to the 1997 Performance Bonus to which such
Participant would have been entitled had he or she been employed by the Company
or any of its Subsidiaries on December 31, 1997 multiplied by a fraction the
numerator of which is the number of days elapsed from January 1, 1997 to the
Termination Date and the denominator of which is the number of days elapsed
from January 1, 1997 to December 31, 1997.

6.2 Quarterly Advance of 1997 Performance Bonus.

(a) With respect to the fiscal quarter of the Company ending
March 31, 1997, the "1997 Bonus Advance" of each Participant in the Plan for
such fiscal quarter shall be equal to the Percentage Share set forth next to
such Participant's name on Schedule I multiplied by 5.12% multiplied by 50%
multiplied by Unaudited EBITDA for the three months ending March 31, 1997;
provided that the 1997 Bonus Advance of each Participant for such period shall
be zero if Unaudited EBITDA for the three months ending March 31, 1997 is less
than $2,935,000.

(b) With respect to the fiscal quarter of the Company ending June 30,
1997, the 1997 Bonus Advance of each Participant in the Plan for such fiscal
quarter shall be equal to (A) the Percentage Share set forth next to such
Participant's name on Schedule I multiplied by 5.12% multiplied by 50%
multiplied by Unaudited EBITDA for the six months ending June 30, 1997 minus
(B) the amount of any 1997 Bonus Advance received by such Participant with
respect to the fiscal quarter of the Company ending March 31, 1997 pursuant to
subsection 6.2(a) above; provided that the 1997 Bonus Advance of each
Participant for such period shall be zero if Unaudited EBITDA for the six
months ending June 30, 1997 is less than $8,780,000.

(c) With respect to the fiscal quarter of the Company ending
September 30, 1997, the 1997 Bonus Advance of each Participant in the Plan for
such fiscal quarter shall be equal to (A) the Percentage Share set forth next
to such Participant's name on Schedule I multiplied by 5.12% multiplied by 50%
multiplied by Unaudited EBITDA for the nine months ending September 30, 1997
minus (B) the amount of any 1997 Bonus Advance received by such Participant
with respect to the fiscal quarter of the Company ending June 30, 1997 pursuant
to subsection 6.2(b) above; provided that the 1997 Bonus Advance of each
Participant for such period shall be zero if Unaudited EBITDA for the nine
months ending September 30, 1997 is less than $15,842,000.

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<PAGE> 3

(d) Each Participant shall be entitled to receive his or her 1997
Bonus Advance with respect to a fiscal quarter if and only if such Participant
is employed by the Company or any of its Subsidiaries on the Quarterly Bonus
Advance Determination Date with respect to such fiscal quarter. Each 1997
Bonus Advance with respect to a fiscal quarter shall be paid within ten
business days of the Quarterly Bonus Advance Determination Date with respect to
such fiscal quarter.

6.3 Payment of 1997 Performance Bonus. With respect to each Participant,
(i) if such Participant's 1997 Performance Bonus is greater than the amounts
paid by the Company to such Participant pursuant to Section 6.2 above, the
difference shall be payable by the Company to such Participant within ten
business days of the Final Bonus Determination Date; and (ii) if the amounts
paid by the Company to such Participant pursuant to Section 6.2 above are
greater than such Participant's 1997 Performance Bonus, the difference shall be
payable by such Participant to the Company within ten business days of the
Final Bonus Determination Date.

4. The Plan is hereby amended by deleting Schedule I thereto in its
entirety and inserting in lieu thereof Schedule I attached to this Amendment.

3
<PAGE> 4

SCHEDULE I

Participant Percentage Share
----------- ----------------

Curt Stoelting 16.0% 0.82%

John Olsen 12.0 0.61

Peter Henseler 12.0 0.61

Kevin Camp 12.0 0.61

Helena Lo 7.5 0.38

Kelvin Ng 7.5 0.38

Rose Lam 5.0 0.26

Jody Taylor 4.0 0.20

Patrick Meyer 4.0 0.20

Michael Midtgaard 4.0 0.20

Unallocated 16.0 0.82

TOTAL 100% 5.12%

<PAGE> 1

EXHIBIT 10.22

RACING CHAMPIONS CORPORATION

1997 STOCK INCENTIVE PLAN

Article 1. Establishment and Purpose

1.1 Establishment. Racing Champions Corporation, a Delaware corporation
(the "Company"), hereby establishes a stock option plan for employees and
others providing services to the Company, as described herein, which shall be
known as the Racing Champions Corporation 1997 Stock Incentive Plan (the
"Plan"). It is intended that certain of the options issued pursuant to the
Plan to employees of the Company may constitute incentive stock options within
the meaning of section 422 of the Internal Revenue Code, and that other options
issued pursuant to the Plan shall constitute nonstatutory options. The Board
shall determine which options are to be incentive stock options and which are
to be nonstatutory options and shall enter into option agreements with
recipients accordingly.

1.2 Purpose. The purpose of the Plan is to provide a means for the
Company to attract and retain competent personnel and to provide to
participating directors, officers and other key employees long term incentives
for high levels of performance by providing them with a means to acquire a
proprietary interest in the Company's success.

Article II. Definitions

2.1 Definitions. For purposes of this Plan, the following terms shall be
defined as follows:

(a) "Board" means the Board of Directors of the Company.

(b) "Cause" means the definition of Cause in Optionee's employment
agreement, if any, with the Company. If no such employment agreement
or definition in such agreement exists, Cause means (i) breach by
Optionee of any covenant not to compete or confidentiality agreement
with the Company, (ii) failure by Optionee to substantially perform
his duties to the reasonable satisfaction of the Board, (iii) serious
misconduct by Optionee which is demonstrably and substantially
injurious to the Company, (iv) fraud or dishonesty by Optionee with
respect to the Company, (v) material

<PAGE> 2

misrepresentation by Optionee to a stockholder or director of the
Company or (vi) acts of negligence by Optionee in performance of
Optionee's duties that are substantially injurious to the Company.
The Board, by majority vote, shall make the determination of whether
Cause exists.

(d) "Commission" means the Securities and Exchange Commission or
any successor agency.

(e) "Committee" means the Committee provided for by Article IV
hereof, which may be created at the discretion of the Board.

(f) "Company" means Racing Champions Corporation, a Delaware
corporation.

(g) "Consultant" means any person or entity, including an officer
or director of the Company who provides services (other than as an
Employee) to the Company and includes a Qualified Director, as
defined below.

(h) "Date of Exercise" means the date the Company receives notice,
by an Optionee, of the exercise of an Option pursuant to section 9.1
of this Plan. Such notice shall indicate the number of shares of
Stock the Optionee intends to purchase upon exercise of an Option.

(i) "Employee" means any person, including an officer or director
of the Company, who is employed by the Company.

(j) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, and any successor thereto.

(k) "Fair Market Value" means the fair market value of Stock upon
which an Option is granted under this Plan, as determined by the
Board. If the Stock is traded on an over-the-counter securities
market or national securities exchange, "Fair Market Value" shall
mean an amount equal to the average of the highest and lowest
reported sales prices of the Stock reported on such over-the-counter
market or such national securities exchange on the applicable date

2
<PAGE> 3

or, if no sales of Stock have been reported for that date, on the
next preceding date for which sales where reported.

(l) "Incentive Stock Option" means an Option granted under this
Plan which is intended to qualify as an "incentive stock option"
within the meaning of section 422 of the Code.

(m) "IRS" means the Internal Revenue Service, or any successor agency.

(n) "Nonstatutory Option" means an Option granted under this Plan
which is not intended to qualify as an incentive stock option within
the meaning of section 422 of the Code. Nonstatutory Options may be
granted at such times and subject to such restrictions as the Board
shall determine without conforming to the statutory rules of section
422 of the Code applicable to incentive stock options.

(o) "Option" means the right, granted under this Plan, to purchase
Stock of the Company at the option price for a specified period of
time. For purposes of this Plan, an Option may be an Incentive Stock
Option, a Nonstatutory Option or a Reload Option.

(p) "Optionee" means an Employee or Consultant holding an Option
under the Plan.

(q) "Parent Corporation" shall have the meaning set forth in
section 424(e) of the Code with the Company being treated as the
employer corporation for purposes of this definition.

(r) "Qualified Director" means a director who is both (a) a "Non-Employee
Director" as defined in Rule 16b-3(b)(3)(i), as promulgated by the
Commission, or any successor definition adopted by the Commission,
and (b) an "Outside Director" as defined by Section 162(m) of the
Code and the regulations promulgated thereunder, or any successor
definition adopted by the IRS.

(s) "Reload Option" means an Option granted pursuant to section 8.1
of this Plan.

(t) "Rule 16b-3" means Rule 16b-3, as promulgated by the Commission
under Section 16(b) of the Exchange Act, as amended from time to
time.

(u) "Significant Stockholder" means an individual who, within the
meaning of section 422(b)(6) of the Code, owns stock possessing more
than ten percent of the total combined voting power of all

3
<PAGE> 4

classes of stock of the Company. In determining whether an
individual is a Significant Stockholder, an individual shall be
treated as owning stock owned by certain relatives of the individual
and certain stock owned by corporations in which the individual is a
partner, and estates or trusts of which the individual is a
beneficiary, all as provided in section 424(d) of the Code.

(v) "Stock" means the Common Stock, par value $.01 per share, of
the Company.

2.2 Gender and Number. Except when otherwise indicated by the context,
any masculine terminology when used in this Plan also shall include the
feminine gender and the definition of any term herein in the singular shall
also include the plural.

Article III. Eligibility and Participation.

3.1 Eligibility and Participation. All Employees are eligible to
participate in this Plan and receive Incentive Stock Options and/or
Nonstatutory Options. All Consultants are eligible to participate in this Plan
and receive Nonstatutory Options hereunder. Optionees in the Plan shall be
selected by the Board from among those Employees and Consultants who, in the
opinion of the Board, are in a position to contribute materially to the
Company's continued growth and development and to its long-term financial
success.

Article IV. Administration.

4.1 Administration. The Board shall be responsible for administering the
Plan.

The Board is authorized to interpret the Plan, to prescribe, amend, and
rescind rules and regulations relating to the Plan, to provide for conditions
and assurances deemed necessary or advisable to protect the interests of the
Company, and to make all other determinations necessary or advisable for the
administration of the Plan, but only to the extent not contrary to the express
provisions of the Plan. Determinations, interpretations or other actions made
or taken by the Board pursuant to the provisions of this Plan shall be final
and binding and conclusive for all purposes and upon all persons.

At the discretion of the Board, this Plan may be administered by a
Committee which shall be a compensation committee of the Board, consisting
solely of

4
<PAGE> 5

two or more Qualified Directors. The members of such Committee may be
directors who are eligible to receive Options under this Plan, but Options
may be granted to such persons only by action of the full Board and not by
action of the Committee. Such Committee shall have full power and authority,
subject to the limitations of the Plan and any limitations imposed by the
Board, to construe, interpret and administer this Plan and to make
determinations which shall be final, conclusive and binding upon all persons,
including, without limitation, the Company, the stockholders, the directors
and any persons having any interests in any Options which may be granted under
this Plan and, by resolution providing for the creation and issuance of any
such Option, to fix the terms up on which, the time or times at or within
which, and the price or prices at which any such shares may be purchased from
the Company upon the exercise of such Option, which terms, time or times and
price or prices shall, in every case, be set forth or incorporated by
reference in the instrument or instruments evidencing such Option, and shall
be consistent with the provisions of the Plan.

The Board may from time to time remove members from, or add members to,
the Committee. The Board may terminate the Committee at any time. Vacancies
on the Committee, howsoever caused, shall be filled by the Board. The
Committee shall select one of its members as Chairman, and shall hold meetings
at such times and places as the Chairman may determine. A majority of the
Committee at which a quorum is present, or acts reduced to or approved in
writing by all of the members of the Committee, shall be the valid acts of the
Committee. A quorum shall consist of two-thirds of the members of the
Committee.

Where the Committee has been created by the Board, references herein to
actions to be taken by the Board shall be deemed to refer to the Committee as
well, except where limited by this Plan or by the Board.

The Board shall have all of the enumerated powers of the Committee but
shall not be limited to such powers. No member of the Board or the Committee
shall be liable for any action or determination made in good faith with respect
to the Plan or any Option granted under it.

4.2 Special Provisions for Grants to Officers or Directors. Rule 16b-3
provides that the grant of a stock option to a director or officer of a company
subject to the Exchange Act will be exempt from the provisions of Section 16(b)
of the Exchange Act if the conditions set forth in Rule 16b-3 are satisfied.
Unless otherwise specified by the Board, grants of Options hereunder to
individuals who are officers or directors of the Company for purposes of
Section 16(b) of the

5
<PAGE> 6

Exchange Act shall be made in a manner that satisfies the conditions of Rule
16b-3.

6
<PAGE> 7

Article V. Stock Subject to the Plan.

5.1 Number. The total number of shares of Stock hereby made available and
reserved for issuance under the Plan shall be 311,852. The aggregate number of
shares of Stock available under this Plan shall be subject to adjustment as
provided in section 5.3. The total number of shares of Stock may be authorized
but unissued shares of Stock, or shares acquired by purchase as directed by the
Board from time to time in its discretion, to be used for issuance upon
exercise of Options granted hereunder.

5.2 Unused Stock; Payment with Stock. If an Option shall expire or
terminate for any reason without having been exercised in full, the unpurchased
shares of Stock subject thereto shall (unless the Plan shall have terminated)
become available for other Options under the Plan. In addition, upon the full
or partial payment of any option price by the transfer to the Company of shares
of Stock pursuant to section 7.7, upon satisfaction of tax withholding
obligations with shares of Stock pursuant to section 15.1 or any other payment
made or benefit realized under this Plan by the transfer or relinquishment of
shares of Stock, only the net number of shares of Stock actually issued or
transferred by the Company, after subtracting the number of shares of Stock so
transferred or relinquished, will be charged against the maximum share
limitation set forth in section 5.1 above.

5.3 Adjustment in Capitalization. In the event of any change in the
outstanding shares of Stock by reason of a stock dividend or split,
recapitalization, reclassification or other similar corporate change, the
aggregate number of shares of Stock set forth in section 5.1 shall be
appropriately adjusted by the Board, whose determination shall be conclusive;
provided, however, that fractional shares shall be rounded to the nearest whole
share. In any such case, the number and kind of shares that are subject to any
Option (including any Option outstanding after termination of employment) and
the Option price per share shall be proportionately and appropriately adjusted
without any change in the aggregate Option price to be paid therefor upon
exercise of the Option.

Article VI. Duration of the Plan.

6.1 Duration of the Plan. The Plan shall be in effect for ten years from
the date of its approval by the Company's stockholders. Any Options
outstanding at the end of such period shall remain in effect in accordance with
their terms. The Plan shall terminate before the end of such period if all
Stock subject to the Plan has been purchased pursuant to the exercise of
Options granted under the Plan.

7
<PAGE> 8

Article VII. Terms of Stock Options.

7.1 Grant of Options. Subject to section 5.1, Options may be granted to
Employees or Consultants at any time and from time to time as determined by the
Board; provided, however, that Consultants may receive only Nonstatutory
Options and may not receive Incentive Stock Options. The Board shall have
complete discretion in determining the number of Options granted to each
Optionee. In making such determinations, the Board may take into account the
nature of services rendered by such Employee or Consultant, their present and
potential contributions to the Company, and such other factors as the Board in
its discretion shall deem relevant. The Board shall also determine whether an
Option is to be an Incentive Stock Option or a Nonstatutory Option.

In the cases of Incentive Stock Options, the total Fair Market Value
(determined at the date of grant) of shares of Stock with respect to which
Incentive Stock Options are exercisable for the first time by the Optionee
during any calendar year under all plans of the Company under which incentive
stock options may be granted (and all such plans of any Parent Corporation and
any subsidiary corporations of the Company) shall not exceed $100,000.
(Hereinafter, this requirement is sometimes referred to as the "$100,000
Limitation.")

Nothing in this Article VII of the Plan shall be deemed to prevent the
grant of Options permitting exercise in excess of the maximums established by
the preceding paragraph where such excess amount is treated as a Nonstatutory
Option.

7.2 No Tandem Options. Where an Option granted under this Plan is
intended to be an Incentive Stock Option, the Option shall not contain terms
pursuant to which the exercise of the Option would affect the Optionee's right
to exercise another Option, or vice versa, such that the Option intended to be
an Incentive Stock Option would be deemed a tandem stock option within the
meaning of the regulations under section 422 of the Code.

7.3 Option Agreement; Terms and Conditions to Apply Unless Otherwise
Specified. As determined by the Board on the date of grant, each Option shall
be evidenced by an Option agreement (the "Option Agreement") that includes the
nontransferability provisions required by section 11.2 hereof and specifies:
whether the Option is an Incentive Stock Option or a Nonstatutory Option; the
Option price; the duration of the Option; the number of shares of Stock to
which the Option applies; any vesting or exercisability restrictions which the
Board may impose; in the case of an Incentive Stock Option, a provision

8
<PAGE> 9

implementing the $100,000 Limitation; and any other terms and conditions as
shall be determined by the Board at the time of grant of the Option.

All Option Agreements shall incorporate the provisions of this Plan by
reference, with certain provisions to apply depending upon whether the Option
Agreement applies to an Incentive Stock Option or to a Nonstatutory Option.

7.4 Option Price. No Incentive Stock Option granted pursuant to this Plan
shall have an Option price that is less than the Fair Market Value of Stock on
the date the Option is granted. Incentive Stock Options granted to Significant
Stockholders shall have an Option price of not less than 110 percent of the
Fair Market Value of Stock on the date of grant. The Option price for
Nonstatutory Options shall be established by the Board.

7.5 Term of Options. Each Option shall expire at such time as the Board
shall determine when it is granted, provided, however, that no Option shall be
exerciseable later than the tenth anniversary date of its grant.

7.6 Exercise of Options. Options granted under this Plan shall be
exercisable at such times and be subject to such restrictions and conditions as
the Board shall in each instance approve, which need not be the same for all
Optionees.

7.7 Payment. Payment for all shares of Stock shall be made at the time
that an Option, or any part thereof, is exercised, and no shares shall be
issued until full payment therefor has been made. Such payment may be made in
cash, outstanding shares of Stock, in combinations thereof, or any other method
of payment approved by the Board; provided, however, that (i) the deposit of any
withholding tax shall be made in accordance with applicable law and (ii) that
such shares of Stock used to pay the exercise price have been held by the
Participant for at least six months prior to the exercise date. If shares of
Stock are being used in part or full payment for the shares to be acquired upon
exercise of the Option, such shares shall be valued for the purpose of such
exchange as of the date of exercise of the Option at the Fair Market Value of
the shares. Any certificates evidencing shares of Stock used to pay the
purchase price shall be accompanied by stock powers duly endorsed in blank by
the registered holder of the certificate (with signatures thereon guaranteed).
In the event the certificates tendered by the holder in such payment cover more
shares than are required for such payment, the certificate shall also be
accompanied by instructions from the holder to the Company's transfer agent
with regard to the disposition of the balance of the shares covered thereby.

9
<PAGE> 10

Article VIII. Reload Options.

8.1 Grants of Reload Options. Concurrently with any award of Options, the
Board may grant Reload Options to purchase a number of shares of Stock equal to
the sum of (i) the number of outstanding shares of Stock used to exercise the
underlying Option pursuant to section 7.7, and (ii) the number of shares of
Stock used to satisfy any tax withholding requirement incident to the exercise
of the underlying Options pursuant to section 15.1. If the Board grants Reload
Options in connection with a grant of Options, the Option Agreement with
respect to such underlying Options shall state that Reload Options have been
granted with respect to the underlying Options. Upon exercise of an underlying
Option, the Reload Option will be evidenced by an amendment to the underlying
Option Agreement. No additional Reload Options will be granted to the Optionee
when Options are exercised pursuant to the terms of this Plan following
termination of the Optionee's employment.

8.2 Terms of Reload Options. A Reload Option will be subject to all of
the terms and conditions of the underlying Option, except that (i) the option
price per share of Stock purchasable under a Reload Option shall be equal to
the Fair Market Value of the Stock at time of grant upon exercise of the
underlying Option, and (ii) the term of the Reload Option will equal the
remaining option term of the underlying Option.

Article IX. Written Notice, Issuance of Stock Certificates, Stockholder
Privilege.

9.1 Written Notice. An Optionee wishing to exercise an Option shall give
written notice to the Company, in the form and manner prescribed by the Board.
Full payment for the Options exercised, as provided in section 7.7 above, must
accompany the written notice.

9.2 Issuance of Stock Certificate. As soon as practicable after the
receipt of written notice and payment, the Company shall deliver to the
Optionee or to a nominee of the Optionee a certificate or certificates for the
requisite number of shares of Stock.

9.3 Privileges of a Stockholder. An Optionee or any other person entitled
to exercise an Option under this Plan shall not have stockholder privileges
with respect to any Stock covered by the Option until the date of issuance of a
stock certificate for such Stock.

10
<PAGE> 11

Article X. Termination of Employment or Services.

Except as otherwise expressly specified by the Board, all Options granted
under this Plan shall be subject to the following termination provisions.

10.1 Death. If an Optionee's employment in the case of an Employee, or
provision of services as a Consultant in the case of a Consultant, terminates
by reason of death, the Option may thereafter be exercised at any time prior to
the expiration date of the Option or within 12 months after the date of such
death, whichever period is the shorter, by the person or persons entitled to do
so under the Optionee's will or, if the Optionee shall fail to make a
testamentary disposition of an Option or shall die intestate, the Optionee's
legal representative or representatives. The Option shall be exercisable only
to the extent that such Option was exercisable as of the date of death.

10.2 Termination Other Than for Cause or Due to Death. In the event of an
Optionee's termination of employment in the case of an Employee, or termination
of the provision of services as a Consultant in the case of a Consultant, other
than for Cause or by reason of death, the Optionee may exercise such portion of
his Option as was exercisable by him at the date of such termination (the
"Termination Date") at any time within three months of the Termination Date;
provided, however, that where the Optionee is an Employee, and is terminated
due to disability within the meaning of Code section 422, he may exercise such
portion of his Option as was exercisable by him on his Termination Date within
one year of his Termination Date. In any event, the Option cannot be exercised
after the expiration of the original term of the Option. Options not exercised
within the applicable period specified above shall terminate.

In the case of an Employee, a change of duties or position within the
Company, if any, shall not be considered a termination of employment for
purposes of this Plan. The Option Agreements may contain such provisions as
the Board shall approve with respect to the effect of approved leaves of
absence upon termination of employment.

10.3 Termination for Cause. In the event of an Optionee's termination of
employment in the case of an Employee, or termination of the provision of
services as a Consultant in the case of a Consultant, which termination is by
the Company for Cause, any Option or Options held by him under the Plan, to the
extent not exercised before such termination, shall forthwith terminate.

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<PAGE> 12

Article XI. Rights of Optionees

11.1 Service. Nothing in this Plan shall interfere with or limit in any
way the right of the Company to terminate any Employee's employment, or any
Consultant's services, at any time, nor confer upon any Employee any right to
continue in the employ of the Company, or upon any Consultant any right to
continue to provide services to the Company.

11.2 Nontransferability. Options granted under this Plan shall be
nontransferable by the Optionee, other than by will or the laws of descent and
distribution, and shall be exercisable during the Optionee's lifetime only by
the Optionee.

Article XII. Amendment, Modification
and Termination of the Plan

12.1 Amendment, Modification, and Termination of the Plan.
The Board may at any time terminate and from time to time may amend or modify
the Plan provided, however, that no such action of the Board, without approval
of the stockholders, may:

(a) increase the total amount of Stock which may be purchased
through Options granted under the Plan, except as provided in
Article V;

(b) change the class of Employees or Consultants eligible to
receive Options; or

No amendment, modification or termination of the Plan shall in any manner
adversely affect any outstanding Option under the Plan without the consent of
the Optionee holding the Option.

Article XIII. Acquisition, Merger and Liquidation

13.1 Acquisition. Notwithstanding anything herein to the contrary, in the
event that an Acquisition (as defined below) occurs with respect to the
Company, the Company shall have the option, but not the obligation, to cancel
Options outstanding as of the effective date of Acquisition, whether or not
such Options are then exercisable, in return for payment to the Optionees for
each Option of an amount equal to a reasonable,

<PAGE> 13

good faith estimate of an amount (hereinafter the "Spread") equal to the
difference between the net amount per share payable in the Acquisition, or as a
result of the Acquisition, less the exercise price per share of the Option. In
estimating the Spread, appropriate adjustments to give effect to the existence
of the options shall be made, such as deeming the Options to have been
exercised, with the Company receiving the exercise price payable thereunder,
and treating the shares receivable upon exercise of the Options as being
outstanding in determining the net amount per share. For purposes of this
section, an "Acquisition" shall mean any transaction in which substantially all
of the Company's assets are acquired or in which a controlling amount of the
Company's outstanding shares are acquired, in each case by a single person or
entity or an affiliated group of persons and/or entities. For purposes of this
section a controlling amount shall mean more than 50% of the issued and
outstanding shares of stock of the Company. The Company shall have such an
option regardless of how the Acquisition is effectuated, whether by direct
purchase, through a merger or similar corporate transaction, or otherwise. In
cases where the acquisition consists of the acquisition of assets of the
Company, the net amount per share shall be calculated on the basis of the net
amount receivable with respect to shares upon a distribution and liquidation by
the Company after giving effect to expenses and charges, including but not
limited to taxes, payable by the Company before the liquidation can be
completed.

Where the Company does not exercise its option under this section 13.1,
the remaining provisions of this Article XIII shall apply, to the extent
applicable.

13.2 Merger or Consolidation. Subject to Section 13.1 and to any
required action by the stockholders, if the Company shall be the surviving
corporation in any merger or consolidation, any Option granted hereunder shall
pertain to and apply to the securities to which a holder of the number of
shares of Stock subject to the Option would have been entitled in such merger
or consolidation.

13.3 Other Transactions. Subject to Section 13.1, a dissolution or a
liquidation of the Company or a merger and consolidation in which the Company
is not the surviving corporation shall cause every Option outstanding hereunder
to terminate as of the effective date of the dissolution, liquidation, merger
or consolidation. However, the Optionee either (i) shall be offered a firm
commitment whereby the resulting or surviving corporation in a merger or
consolidation will tender to the Optionee an option (the "Substitute Option")
to purchase its shares on terms and conditions both as to number of shares and
otherwise, which will substantially preserve to the Optionee the rights and
benefits of the Option outstanding hereunder granted by the Company, or (ii)
shall have the right immediately prior to such dissolution, liquidation,
merger, or consolidation to exercise any unexercised Options whether

13
<PAGE> 14

or not then exercisable, subject to the provisions of this Plan. The Board
shall have absolute and uncontrolled discretion to determine whether the
Optionee has been offered a firm commitment and whether the tendered Substitute
Option will substantially preserve to the Optionee the rights and benefits of
the Option outstanding hereunder. In any event, any Substitute Option for an
Incentive Stock Option shall comply with the requirements of the Code.

Article XIV. Securities Registration

14.1 Securities Registration. In the event that the Company shall deem it
necessary or desirable to register under the Securities Act of 1933, as
amended, or any other applicable statute, any Options or any Stock with respect
to which an Option may be or shall have been granted or exercised, or to
qualify any such Options or Stock under the Securities Act of 1933, as amended,
or any other statute, then the Optionee shall cooperate with the Company and
take such action as is necessary to permit registration or qualification of
such Options or Stock.

Unless the Company has determined that the following representation is
unnecessary, each person exercising an Option under the Plan may be required by
the Company, as a condition to the issuance of the shares pursuant to exercise
of the Option, to make a representation in writing (a) that he is acquiring
such shares for his own account for investment and not with a view to, or for
sale in connection with, the distribution of any part thereof, and (b) that
before any transfer in connection with the resale of such shares, he will
obtain the written opinion of counsel to the Company, or other counsel
acceptable to the Company, that such shares may be transferred. The Company
may also require that the certificates representing such shares contain legends
reflecting the foregoing.

Article XV. Tax Withholding

15.1 Tax Withholding. Whenever shares of Stock are to be issued in
satisfaction of Options exercised under this Plan, the Company shall have the
power to require the recipient of the Stock to remit to the Company an amount
sufficient to satisfy federal, state and local withholding tax requirements.
Unless otherwise determined by the Board, withholding obligations may be
settled with Stock, including Stock that is part of the award that gives rise
to the withholding requirement. The obligations of the Company under the Plan
shall be conditional on such payment or arrangements, and the Company, its
subsidiaries and affiliates shall, to the extent permitted by law, have the
right to deduct any such taxes from any payment otherwise due to the
participant.

14
<PAGE> 15

Article XVI. Indemnification

16.1 Indemnification. To the extent permitted by law, each person who is
or shall have been a member of the Board shall be indemnified and held harmless
by the Company against and from any loss, cost, liability, or expense that may
be imposed upon or reasonably incurred by him in connection with or resulting
from any claim, action, suit, or proceeding to which he may be a party or in
which he may be involved by reason of any action taken or failure to act under
the Plan and against and from any and all amounts paid by him in settlement
thereof, with the Company's approval, or paid by him in satisfaction of
judgment in any such action, suit or proceeding against him, provided he shall
give the Company an opportunity, at its own expense, to handle and defend it on
his own behalf. The foregoing right of indemnification shall not be exclusive
of any other rights of indemnification to which such persons may be entitled
under the Company's articles of incorporation or bylaws, as a matter of law, or
otherwise, or any power that the Company may have to indemnify them or hold
them harmless.

Article XVII. Requirements of Law

17.1 Requirements of Law. The granting of Options and the issuance of
shares of Stock upon the exercise of an Option shall be subject to all
applicable laws, rules, and regulations, and to such approvals by any
governmental agencies or national securities exchanges as may be required.

17.2 Governing Law. The Plan and all agreements hereunder shall be
construed in accordance with and governed by the laws of the state of Delaware.

Article XVIII. Compliance with Code

18.1 Compliance with Code. Incentive Stock Options granted hereunder are
intended to qualify as "incentive stock options" under Code section 422. If
any provision of this Plan is susceptible to more than one interpretation, such
interpretation shall be given thereto as is consistent with Incentive Stock
Options granted under this Plan being treated as incentive stock options under
the Code. Options granted hereunder to any person who is a "covered employee"
under Code section 162(m) at any time when the Company is subject to Code
section 162(m) are intended to qualify as performance-based compensation within
the meaning of Code section 162(m)(4)(c). If any provision of this Plan is
susceptible to more than one interpretation, such interpretation shall be
given there to as is consistent with Options granted under this Plan to
"covered employees" being treated as performance-based compensation under Code
section 162(m).

<PAGE> 1
EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

Re: Racing Champions Corporation
Pre-Effective Amendment No. 3 to
Form S-1 Registration Statement

As independent public accountants, we hereby consent to the use of our
reports dated February 15, 1997, and to all references to our Firm included in
or made a part of this Registration Statement.

s/ ARTHUR ANDERSEN LLP
Chicago, Illinois

June 6, 1997

<PAGE> 1
EXHIBIT 23.2

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference of our firm under the captions "Selected Financial
Data" and "Experts" and to the use of our report dated February 19, 1997 with
respect to the Combined financial statements of Racing Champions Limited Group,
in the Registration Statement (Form S-1 No. 333-22493) and related Prospectus
of Racing Champions Corporation for the registration of 5,000,000 shares of its
common stock.

Hong Kong

June 6, 1997 s/ Ernst & Young