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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K


(Mark One)

|  |  |                                                                                     
|- |  | ------------------------------------------------------------------------------------
|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For The Fiscal Year Ended June 30, 2002

OR

|  |  |                                                                                                           
|- |  | ----------------------------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the Transition Period From _______ To _______

Commission File Number 0-8864

PACER TECHNOLOGY

(Exact name of the registrant as specified in its charter)


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|California                               |  | 77-0080305                          
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|(State or other jurisdiction of          |  | (I.R.S. Employer Identification No.)
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|Incorporation or organization)           |  |                                     
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|9420 Santa Anita Avenue                  |  |                                     
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|Rancho Cucamonga, California             |  | 91730                               
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|(Address of principal executive offices) |  | (Zip Code)                          

Issuers telephone number (909) 987-0550

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

Securities registered under Section 12(g) of the Exchange Act: Common Stock, no par value

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

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

The aggregate market value of the voting stock held by non-affiliates of
the registrant as of September 18, 2002 was $9,923,351 (computed by reference
to the average closing bid and asked prices of such stock on September 18,
2002, as reported on the NASDAQ SmallCap Market).

The number of shares outstanding of the Registrants Common Stock, as of
September 18, 2002, was 2,928,401.

Documents Incorporated by Reference

Items 10, 11, 12 and 13 of Part III of the Form 10-K are incorporated by
reference from Registrants Definitive Proxy Statement for its Annual Meeting
that is expected to be filed on or before October 28, 2002.



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TABLE OF CONTENTS



|                           |                                                                                               |                                                          |  |  |  |  |  | 
|-------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------- |  |  |  |  |  | 
|FORWARD LOOKING STATEMENTS
|PART I                    
|                           | Item 1. DESCRIPTION OF BUSINESS                                                              
|                           |                                                                                               | Introduction                                            
|                           |                                                                                               | Fiscal 2002 Developments and Outlook For Fiscal 2003    
|                           |                                                                                               | Our Consumer Products                                   
|                           |                                                                                               | Our Industrial Products                                 
|                           |                                                                                               | Marketing                                               
|                           |                                                                                               | Sources and Availability of Raw Materials               
|                           |                                                                                               | Competition                                             
|                           |                                                                                               | Certain Factors That Could Affect Our Future Performance
|                           |                                                                                               | Research and Development                                
|                           |                                                                                               | Government and Environmental Regulation                 
|                           |                                                                                               | Trademarks, Patents and Licenses                        
|                           |                                                                                               | Employees                                               
|                           | Item 2. DESCRIPTION OF PROPERTY                                                              
|                           | Item 3. LEGAL PROCEEDINGS                                                                    
|                           | Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                           |                                                                                               | EXECUTIVE OFFICERS OF REGISTRANT                        
|PART II                   
|                           | Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                             
|                           | Item 6. SELECTED FINANCIAL DATA                                                              
|                           | Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                           | Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|                           |                                                                                               | FORWARD LOOKING STATEMENTS                              
|                           | Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|                           | Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III                  
|                           | Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|                           | Item 11. EXECUTIVE COMPENSATION                                                              
|                           | Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|                           | Item 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS                                
|                           | Item 14. CONTROLS AND PROCEDURES                                                             
|PART IV                   
|                           | Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                    
|SIGNATURES                
|INDEX TO EXHIBITS         
|EXHIBIT 4.2               
|EXHIBIT 10.8              
|EXHIBIT 10.9              
|EXHIBIT 10.10             
|EXHIBIT 10.11             
|EXHIBIT 10.12             
|EXHIBIT 21                
|EXHIBIT 23.1              
|EXHIBIT 99.1              
|EXHIBIT 99.2              



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##### Table of Contents



PACER TECHNOLOGY
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2002

TABLE OF CONTENTS

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|-------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- | ----- | -------------------------------- | -------------------------------------------------------- |  | ---- | - | 
|                                                                                 |  |                                                                                       |       |                                  |                                                          |  | PAGE
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|FORWARD LOOKING STATEMENTS                                                       |  |                                                                                       | 3     |                                 
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|PART I                                                                          
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|Item 1                                                                           |  | Description of Business                                                              
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|                                                                                 |  |                                                                                       |       |                                  | Introduction                                             |  |      | 3 | 
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|                                                                                 |  |                                                                                       |       |                                  | Fiscal 2002 Developments and Outlook For Fiscal 2003     |  |      | 3 | 
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|                                                                                 |  |                                                                                       |       |                                  | Our Consumer Products                                    |  |      | 5 | 
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|                                                                                 |  |                                                                                       |       |                                  | Our Industrial Products                                  |  |      | 5 | 
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|                                                                                 |  |                                                                                       |       |                                  | Marketing                                                |  |      | 5 | 
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|                                                                                 |  |                                                                                       |       |                                  | Sources and Availability of Raw Materials                |  |      | 6 | 
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|                                                                                 |  |                                                                                       |       |                                  | Competition                                              |  |      | 6 | 
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|                                                                                 |  |                                                                                       |       |                                  | Certain Factors that Could Affect Our Future Performance |  |      | 7 | 
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|                                                                                 |  |                                                                                       |       |                                  | Research and Development                                 |  |      | 7 | 
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|                                                                                 |  |                                                                                       |       |                                  | Government and Environmental Regulation                  |  |      | 8 | 
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|                                                                                 |  |                                                                                       |       |                                  | Trademarks, Patents and Licenses                         |  |      | 8 | 
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|                                                                                 |  |                                                                                       |       |                                  | Employees                                                |  |      | 8 | 
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|Item 2                                                                           |  | Description of Property                                                               |       |                                  | 8                                                        | 
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|Item 3                                                                           |  | Legal Proceedings                                                                     |       |                                  | 9                                                        | 
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|Item 4                                                                           |  | Submission of Matters to a Vote of Security Holders                                   |       |                                  | 9                                                        | 
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|                                                                                 |  |                                                                                       |       | Executive Officers of Registrant |                                                          |  | 9    |  
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|PART II                                                                         
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|Item 5                                                                           |  | Market for Common Equity and Related Stockholder Matters                              |       |                                  | 10                                                       | 
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|Item 6                                                                           |  | Selected Financial Data                                                               |       |                                  | 11                                                       | 
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|Item 7                                                                           |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |       |                                  | 12                                                       | 
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|Item 7A                                                                          |  | Quantitative and Qualitative Disclosures About Market Risk                            |       |                                  | 18                                                       | 
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|                                                                                 |  |                                                                                       |       | Forward Looking Statements       |                                                          |  | 19   |  
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|Item 8                                                                           |  | Financial Statements and Supplementary Data                                           |       |                                  | 20                                                       | 
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|Item 9                                                                           |  | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure  |       |                                  | 40                                                       | 
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|PART III                                                                        
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|Item 10                                                                          |  | Directors and Executive Officers of the Registrant                                    |       |                                  | 40                                                       | 
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|Item 11                                                                          |  | Executive Compensation                                                                |       |                                  | 40                                                       | 
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|Item 12                                                                          |  | Security Ownership of Certain Beneficial Owners and Management                        |       |                                  | 40                                                       | 
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|Item 13                                                                          |  | Certain Relationships and Related Party Transactions                                  |       |                                  | 40                                                       | 
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|Item 14                                                                          |  | Controls and Procedures                                                               |       |                                  | 40                                                       | 
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|PART IV                                                                         
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|Item 15                                                                          |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |       |                                  | 40                                                       | 
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|SIGNATURES                                                                       |  |                                                                                       | S  1 |                                 
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|CERTIFICATION OF CHIEF EXECUTIVE OFFICER UNDER SECTION 302 OF SARBANES-OXLEY ACT |  |                                                                                       | S  2 |                                 
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|CERTIFICATION OF CHIEF FINANCIAL OFFICER UNDER SECTION 302 OF SARBANES-OXLEY ACT |  |                                                                                       | S  3 |                                 
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|INDEX TO EXHIBITS                                                                |  |                                                                                       | E  1 |                                 

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FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K (this Report) contains forward-looking
statements, as defined in the Private Securities Litigation Reform Act of 1995.
Such statements reflect managements current views of our future financial
performance. The forward-looking information is subject to certain risks and
uncertainties, including, but not limited to, those described in Part I below
under the caption Certain Factors that Could Affect Future Performance and in
Part II under the caption Managements Discussion and Analysis of Financial
Condition and Results of Operations. Readers of this Report are urged to read
those sections of this Report and are cautioned that, due to such risks and
uncertainties, they should not place undue reliance on such forward-looking
statements, which speak only as of the date of this Report.




PART I




Item 1. DESCRIPTION OF BUSINESS




Introduction

Pacer Technology is a leading manufacturer, packager and distributor of
advanced technology, high performance glues, epoxies and other adhesives for
household, office and other consumer applications, and advanced technology,
high performance adhesives, sealants and gaskets used in manufacturing, repair
and industrial applications (collectively Adhesive Products). We sell our
products for the consumer market under such well known brand names as SUPER
GLUE, Bondini®, Future Glue®, ProSeal®, ZAP®,
Anchor-TiteTM and Go Spot Go® and
those products are sold to consumers at over 77,000 retail store locations in
the United States, including Wal-Mart, Target stores, Home Depot stores,
Walgreens and Eckerd drug stores and grocery store chains such as Kroger and
Safeway. Our Adhesive Products and sealants for manufacturing, repair and
industrial applications are sold under the brand names SUPER GLUE, ProSeal® and
Pacer Industrial. These products are sold to automotive aftermarket and
heavy-duty truck and maintenance and repair operations and manufacturers of
medical devices and electronic subassemblies and components. In the fiscal
years ended June 30, 2002, 2001 and 2000, our sales of Adhesive Products
totaled approximately $25.3 million, $27.8 million and $28.3 million,
respectively.

Additionally, as a result of our acquisitions of the California Chemical
and Cook Bates product lines in our fiscal year ended 1998, we have been a
manufacturer and supplier of nail care products and implements, including
pumice stones, emery boards, tweezers, and nail clippers, for the professional
beauty and self-nail care consumer markets. Those products were sold under
Company-owned brand names such as Gem, Kurlash and Diamon Deb and, also
pursuant to license agreements, under the Oleg Cassini, Brut and Elvira brand
names, at more than 26,000 retail establishments in the United States,
including Wal-Mart, K-Mart, Walgreens and Eckerd. We subsequently sold the
California Chemical and Cook Bates product lines in fiscal 2001 and 2002,
respectively. See Recent Developments below. We also manufacture our nail
care products for other nail product suppliers who market our products under
their own brand names. In the fiscal years ended June 30, 2002, 2001 and 2000,
our sales of nail care products totaled approximately $5.5 million, $13.9
million and $15.5 million, respectively.

During the fiscal year ended June 30, 2002, approximately 16% of our sales
were made outside of the United States, primarily in Europe and, to a lesser
extent, in Canada and Latin America. Those sales consisted almost entirely of
our Adhesive Products.




Fiscal 2002 Developments and Outlook For Fiscal 2003

Recent Developments

Sale of Nail Care Products Business. During the latter part of fiscal
2001, we concluded that our nail care business was not likely to meet the
future performance goals that we had established for that business. In
particular, nail care product sales were beginning to decline and our efforts
to significantly improve the profitability of that business were being
frustrated by, among other things, increased competition and a resulting
proliferation of products in the market. We then considered a number of
alternatives for improving future sales and increasing the profitability of our
nail care products business. However, we concluded that this would require a
considerable

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investment in capital and management resources, which could not be
justified by the likely return from such an investment. As a result, we
determined that the best alternative would be to focus on our core glue,
adhesives and sealant businesses and to seek buyers for our nail care products
business. That process, which began early in the last quarter of fiscal 2001,
led first to the sale, in June 2001, of our California Chemical business, which
consisted primarily of the production and sale of bulk liquids and powders for
sculptured acrylic finger nail processes. For that sale we received a total of
$500,000 in cash plus the transfer by the buyer to Pacer of 145,000 shares of
Pacer common stock owned by the buyer, which represented approximately 4.5% of
our outstanding shares at the time of the sale.

Then, in the first quarter of the fiscal year ended June 30, 2002, we sold
inventory and certain fixed and intangible assets related to our Cook Bates
nail care product line to another manufacturer of nail care products, for a
cash purchase price of $5.3 million. The inventory that was sold had a book
value of $3.8 million and the net book value of the remaining assets sold
totaled $105,000. In connection with the sale, we recorded transaction related
costs of $142,000, a $40,000 loss associated with the sale of holiday
merchandise at bargain prices and a gain of $1.2 million, which are included
in operating income in the accompanying Statement of Operations for the year
ended June 30, 2002.

We believe that the sales of our nail care product businesses will enable us to
achieve greater operating efficiencies and to improve the profitability of our
core Adhesive Products business operations. Furthermore, the sales of the
California Chemical and Cook Bates product lines have strengthened our
financial condition by improving the overall quality of our assets and reducing
our outstanding bank borrowings. See Managements Discussion and Analysis of
Financial Condition and Results of Operations in Part II of this Report.

Management Changes. In February 2001, the Board of Directors appointed
Richard S. Kay as its Chairman, after he had worked, since December 2000, in a
consulting capacity formulating a new strategic plan for the Company. As
Chairman of the Board, Mr. Kay began the process of implementing structural and
operational changes at the Company that were designed to strengthen the
Companys financial condition and better enable it to achieve the goals
established in the new strategic plan. On July 9, 2001, Mr. Kay was appointed
by the Board as Pacers new Chief Executive Officer and President, with a
mandate to continue those operational changes and to implement the new
strategic plan.

Fiscal 2002 Operating Results. We generated operating income of
approximately $2.2 million in the fiscal year ended June 30, 2002. Fiscal 2002
operating income was impacted by actions taken to refocus Pacers resources on
growing its core Adhesive Products business. Those actions included the sale
of the Cook Bates product line that generated a pre-tax gain (included in
operating income) of $1.2 million and restructuring charges amounting to
$516,000 consisting mainly of lease termination charges and employee
termination costs. In addition, operating income was impacted by a provision
for bad debts for K-Mart, a long-time major retail customer that filed for
Chapter 11 Bankruptcy protection and the sale of our remaining Cook Bates return
merchandise at bargain prices. We used the net proceeds from the sale of the
Cook Bates product line, which totaled approximately $5.3 million, together
with the proceeds from the collection of pre-sale Cook Bates receivables
primarily to reduce our outstanding bank borrowings, and at June 30, 2002 we
had no bank borrowings outstanding as compared to $7.6 million
at June 30, 2001.

Outlook for Fiscal 2003

We currently expect improved profitability during the fiscal year ending
June 30, 2003, due primarily to improvements made in raw materials sourcing,
new marketing and sales initiatives that are designed to achieve increases in
our market share in the consumer Adhesive Products markets, and new product
releases. However, we expect that our sales in the first two quarters of
fiscal 2003 will be lower than in the fiscal 2002 comparable quarters, due to
(i) the sale of our nail care products business, which accounted for
approximately $5.5 million, or 18%, of our total sales in fiscal 2002 and (ii)
the closure, in June 2001, of our United Kingdom facility.

Our operating results in fiscal 2003 are subject to certain risks and
uncertainties discussed below in the section entitled Certain Factors That
Could Affect Our Future Performance and, due to those and other factors or
circumstances, our actual results could differ, possibly significantly, from
our current expectations.

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Our Consumer Products

Super Glue and Other Adhesive Products and Sealants

Household and Office Products. We manufacture a broad range of glue and
Adhesive Products that we market and sell primarily under the Super Glue,
Bondini and Future Glue brand names, for household and office uses. These
products include a variety of Adhesive Products that we package into
easy-to-use tubes, bottles, syringes, glue sticks, glue pens and fasteners,
each designed for differing home and office applications. We sell these
products to mass merchandisers such as Wal-Mart and Target, drug store chains
such as Eckerd and Walgreens, grocery store chains such as Kroger, Safeway and
Vons and office products and arts and crafts retailers such as Staples and
Michaels. As of June 30, 2002, our household and office Adhesive Products could
be purchased at more than 77,000 retail stores located primarily in the United
States, and in Europe, Canada and Latin America.

Marine Products. We manufacture and market a line of high performance
epoxies under the brand name Anchor-TiteTM, which are used in the maintenance
and repair of marine vessels, personal watercraft, home swimming pools and
other marine applications. Anchor-TiteTM was recognized at the 2002 National
Hardware Show in Chicago by Popular Mechanics Magazinewith an Editors Choice
award which is given by that magazine to what it judges to be the most
innovative new products for 2003.

Automotive Aftermarket Products. We manufacture and market a line of high
performance sealants, instant gaskets and other Adhesive Products that are
designed to be used in the maintenance and repair of automobiles and heavy
trucks, including ProSeal Instant Gasket, ProWeld, Pro-Lock and ProSeal
Gasket Shellac. These products, which are designed to withstand the high
temperatures and heavy wear and tear associated with the operation of motor
vehicles, are marketed primarily into traditional automotive aftermarket
distribution channels and are available for purchase at automobile parts and
supply store chains and numerous other retail locations.

Hobby Products. We also manufacture and market a line of glue and Adhesive
Products that are used for various project and model assembly requirements. We
market these products primarily under our ZAP brand name, which is the leading
adhesive product line in the hobby market, and our Super Glue brand name and
these products are sold to mass merchandisers, drug and grocery store chains
and craft and hobby stores.

Other Adhesive Consumer Products. We manufacture and sell a number of our
glue and Adhesive Products to suppliers who market these products under their
own brand names, either as extensions of their own product lines or in kits
that they package with their products.




Our Industrial Products

We sell a wide range of high performance adhesives and sealants to
industrial customers and original equipment manufacturers which use our
products in the manufacture of automobile and heavy truck equipment
subassemblies and components, and aerospace, medical device and electronic
components and for maintenance and repair applications. These products are sold
primarily under our Pacer brand name, by our own sales personnel and to master
distributors for resale to such customers.




Marketing

Consumer Products

Our Adhesive Products for the consumer markets are marketed and sold by
our own internal sales personnel who focus on mass merchandisers and other
national retail accounts, and by independent sales representative organizations
that focus primarily on regional and local drug and grocery store chains. To
facilitate sales of our Adhesive Products to mass merchandisers and drug and
grocery store chains, we have designed a number of attractive and
eye-catching product displays that facilitate sales of our products while
minimizing the shelf space required to stock those products.

Our automobile aftermarket products are marketed and sold by our own sales
personnel and by independent sales representative organizations to retail
automotive, professional repair and installation, agribusiness and heavy duty

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truck outlets. Our hobby products are sold to dealers and model shops
through a network of independent master product distributors.

Industrial Products

Our high performance industrial adhesive and sealant products are marketed
and sold by our own sales personnel and through independent distributors. To
facilitate sales of these products we provide technical service and sales
support using factory trained personnel and sales representatives.

Foreign Sales

Our foreign sales, which accounted for 16% of total revenues in fiscal
2002, 14% in fiscal 2001 and 12% in fiscal 2000, are marketed and sold
primarily in Western Europe and, to a lesser extent, in Canada and Latin
America by our own sales personnel, independent sales representative
organizations and wholesale distributors. Following the sale of our nail care
product businesses, foreign sales are expected to represent approximately 18%
of total sales.




Sources and Availability of Raw Materials

The materials used in the manufacture of our products are available from
numerous sources, both within and outside the United States. However, to better
control the quality and to obtain favorable pricing, we follow the practice of
purchasing such materials from one or just a few suppliers. Dependence on a
single supplier for any materials or supplies presents risks, including the
risk that we may be unable to readily obtain alternative product supply sources
in the event a single source supplier encounters quality or other production
problems, which could adversely affect our sales. However, we have not
experienced any difficulties in meeting our requirements for these materials
and supplies from our traditional suppliers and have no reason to expect to
encounter such problems in the future. In most instances, we acquire materials
on a purchase order basis, with no guaranteed price or delivery agreements. In
some instances, however, we contract annually for our material requirements
under terms that specify the quantities to be purchased and the prices for
those materials.

The potential work stoppage at Southern California ports associated with the
dispute between the International Longshore and Warehouse Union (ILWU) and the
Pacific Marine Association (PMA) subcommittee, should it occur and continue
for an extended period of time, could affect our ability to receive materials
from international sources and could adversely affect our sales and
profitability. During the first quarter of fiscal 2003, we have increased our
inventories of materials typically received at effected Southern California
ports in anticipation of a potential work stoppage.

During fiscal 2002, approximately 37% of the materials and supplies we
used in our business were obtained from foreign suppliers, as compared to 32%
in fiscal 2001. As a result, our business is subject to the risk of
fluctuations in the value of the U.S. dollar on foreign currency exchanges and
related constraints associated with international trade. In addition, some of
the packaging materials we use for our products are petroleum-based and are
subject to increases in the cost of oil. However, packaging materials do not
represent a significant portion of our total costs of goods and materials. We
expect that the percentage of foreign-sourced materials and supplies will
decline to approximately 28% in the fiscal year ending June 30, 2003, due
largely to the fact that we no longer market and sell nail care products.

We operate a quality assurance department that conducts random batch
testing of the quality of the raw materials that we use in our Adhesive
Products, which we warrant to have a shelf lives ranging from six to twelve
months. In the event any defects or problems are discovered during testing, the
defective batches are removed from production and are replaced by our
suppliers. In the past, we have not experienced any material product returns or
warranty claims.




Competition

The markets for our products are characterized by intense competition.
Our principal competitors in our Adhesive Products markets include Henkel,
which markets its Adhesive Products under the Loctite/Manco brand names;
Borden/Elmers/Krazy Glue; Devcon; 3-Bond; and Alteco. The principal competitive
factors affecting our

6



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sales are brand name recognition, pricing, breadth of product line,
marketing and service and support. Competition also can be affected by the
introduction of new Adhesive Products. We believe we compete favorably with
respect to each of these factors. However, some of our competitors have greater
name recognition or greater financial and marketing resources.




Certain Factors That Could Affect Our Future Performance

Dependence on Certain Major Customers. One customer represented
approximately 12% of our total sales in fiscal 2002, and our customers include
several other large national mass merchandisers and national and regional food
and drug store chains, the loss of business from one or more of which could
result in unexpected reductions in sales and could possibly cause us to incur
operating losses and reductions in cash flow that could increase our dependence
on borrowings to fund operations.

On January 22, 2002, Kmart, a long-time major retail customer, announced
that it had filed for Chapter 11 Bankruptcy protection. For the quarters ended
December 31, 2001 and June 30, 2002, the Company made a provision for a
potential loss on the amounts due from this customer on product sales made to
it during the second quarter of our current fiscal year and prior to the
customers bankruptcy. Due to the lack of information as to the outcome of the
Kmart bankruptcy, there can be no assurances that the actual loss that will be
incurred on the Kmart receivables will not exceed managements current
estimate.

Technological Change and Competition. The markets for our products are
characterized by frequent new product introductions, declining average selling
prices over product life cycles and intense competition. As a result, our
future performance is highly dependent upon the timely completion and
introduction of new products at competitive prices and performance levels. In
addition, we must respond to competitors in the various markets in which we
operate. If we are not able to make timely introduction of new products or to
respond effectively to competition, our business and operating results could be
harmed. Moreover, a number of our competitors have greater financial and
marketing resources than we have.

Risks of Foreign Operations. Approximately 16% of our total sales in
fiscal 2002 and 14% in fiscal 2001 were made outside the United States,
primarily in Europe, Canada and Latin America and, following the sale of our
nail care products business, foreign sales are expected to represent
approximately 18% of our total sales. Additionally, approximately 37% of our
raw material purchases are made from suppliers based outside the United States.
As a result, our operating results could decline due to foreign currency
fluctuations and changes in the value of the U.S. Dollar in relation to foreign
currencies in the countries where our products are sold and where we obtain
some of our raw materials. We do not attempt to hedge the risks of foreign
currency fluctuations by means of exchange agreements or other financial
instruments.

Risks associated with Expansion of our Adhesive Products Business. If
appropriate opportunities present themselves, we also intend to acquire other
Adhesive Products businesses or product lines that we believe will help us to
expand our business. The process of integrating an acquired business or product
line may result in operating difficulties and expenditures which we cannot
anticipate and may absorb significant management attention that would otherwise
be available for further development of our existing business. Moreover, the
anticipated benefits of any acquisition may not be realized. Any future
acquisitions of other businesses or product lines might require us to obtain
additional equity or debt financing, which might not be available to us on
favorable terms or at all, and might be dilutive to existing shareholders.

Effect of Adverse Economic Conditions. During fiscal 2002, the U.S.
economy fell into recession and the anticipated economic recovery has been slow
to develop. A decline in economic conditions or a heightening of tensions or
war in the Middle East could lead to declines in consumer demand and increased
price competition in our markets that could adversely affect our operating
results in the future.




Research and Development

We conduct on-going product development and research programs, the primary
objectives of which are to enhance the quality and durability of our products
and to develop new Adhesive Products. Product development and research
expenditures were approximately $302,000, $318,000 and $467,000 in the fiscal
years ended June 30,

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2002, 2001 and 2000, respectively. The decrease in fiscal 2002 and 2001
was the result of a reduction in product development expenditures relating to
the California Chemical product line and the Companys decision to suspend
research and development efforts associated with poultry adhesive/sealants and
a medical cyanoacrylate formulation.




Government and Environmental Regulation

Our business is subject to numerous federal, state and local laws and
regulations that relate to product labeling, manufacturing safety and
recordkeeping, consumer product safety and air quality and environmental
safety. In addition, our Adhesive Products are subject to recall in the event
it is determined that they are defective or pose any safety risks. As a result,
we take particular care in the packaging and labeling of our products and we
have not encountered any material product recalls or incurred any material
liabilities arising out of the quality of our products. Additionally, we
believe that our manufacturing methods comply with all applicable safety and
environmental laws and regulations and we have not incurred any material
liabilities or had to make any material capital expenditures under such laws
and regulations.




Trademarks, Patents and Licenses

We have 27 registered trademarks, the most important of which are Pacer,
Pacer Technology, ZAP, ProSeal, Future Glue, Anchor-Tite and Go Spot Go, which
are used in the marketing of our Adhesive Products. In addition, we also have
the exclusive right to the use of a trademark for the Bondini product line. We
hold 17 patents, which relate primarily to the packaging of our products.
However, we believe that the expiration or loss of any of these patents would
not have a material impact on our business.




Employees

At August 30, 2002, we had 106 full-time employees. At various times
during the year we also employ approximately 50 additional personnel on a
temporary basis. None of our employees are employed under any collective
bargaining agreements, we have not experienced any work stoppages and we
believe that we have good relations with our employees.




Item 2. DESCRIPTION OF PROPERTY

Our headquarters, principal manufacturing and research and development
facilities are located in a 47,700 square foot building in Rancho Cucamonga,
California that is leased under an operating lease expiring on May 31, 2009.
We also occupy 26,406 square feet of a 62,134 square feet distribution
facility, also located in Rancho Cucamonga, California that is leased under an
operating lease that will expire on November 30, 2003. During fiscal 2002, we
relocated our receiving operations to our headquarters building. As a result of
the relocation, we obtained an early termination of our existing 62,134 square
foot lease at the distribution facility and replaced it with the 26,406 square
feet operating lease.

We also lease a 10,384 square foot facility in Ontario, California to
manufacture certain flammable products. This lease expires on October 31, 2004.

During fiscal 2001, we also maintained a sales and distribution office at
a leased facility in Essex, England. This lease expired in July of 2001 and was
not renewed. However, we currently maintain a small sales office in
Worcestershire, England.

We also lease a 41,040 square foot facility in Memphis, Tennessee, that we
had used to warehouse and distribute products to customers located in the
Midwest and East. As part of our restructuring and cost cutting program, we
moved those functions to our Rancho Cucamonga, California facility and vacated
the Memphis facility in June 2000. The lease for the Memphis facility expires
May 31, 2003 and we are currently sub-leasing 27,360 square feet of this
facility.

We believe our present facilities are in good operating condition and are
adequate for our present and anticipated future needs.

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Item 3. LEGAL PROCEEDINGS

None




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

None




EXECUTIVE OFFICERS OF REGISTRANT

|                   |  |     |    |        |  |                                      
|------------------ |  | --- | -- | ------ |  | -------------------------------------
|Name of officer    |  | Age |    | Office
|                   |  |     |    |       
|Richard S. Kay     |  |     | 60 |        |  | Chairman of the Board of Directors,  
|                  
|                  
|                  
|                  
|                   |  |     |    |        |  | Chief Executive Officer and President
|                  
|                  
|                  
|                  
|Ronald T. Gravette |  |     | 52 |        |  | Vice President, Sales                
|                  
|                  
|                  
|                  
|Laurence R. Huff   |  |     | 42 |        |  | Chief Financial Officer              

MR. KAY was appointed Chief Executive Officer and President on July 9,
2001. He was named Chairman of the Companys Board of Directors on February 21,
2001. Mr. Kay has been a CEO and CFO for several companies operating in
different industries, including manufacturing and consumer products, energy and
healthcare. He was the CFO for three different companies during their initial
public offerings and the CFO for four companies during the course of their
merger transactions. Most recently he served as the COO and CFO for TruCost
Food Systems, a company formed in 1999 to develop a foodservice web site.
Beginning in 1992, he served as CFO of Paragon Steakhouse Restaurants. He was
promoted to CEO in 1997 and was responsible for the turnaround for this owner
and operator of 73 upscale casual restaurants, with more than 4,000 employees
located in eleven states. Paragon was sold in 1999.

MR. GRAVETTE joined Pacer in December 2000 as the General Sales Manager
for the Central United States where his responsibilities included many of
Pacers key accounts. He was promoted to Vice President, Sales in October
2001. Prior to joining Pacer, Mr. Gravette held numerous sales and sales
related positions in a variety of industries, including foodservice,
hospitality and publishing. From 1995 to 1998, he served as Associate
Publisher for Marcoa Publishing, Inc. and then, from 1998 to 2000, for
International Business Publishers, Inc. During this same period, Mr. Gravette
also served as a consultant to Stagecoach Properties, Inc., a hotel and
restaurant family business enterprise. He earned his Bachelors degree from
the University of Redlands. Mr. Gravette is the son of Mr. E.T. Gravette who
is a director of the Company.

MR. HUFF was appointed Chief Financial Officer of the Company in September
1999. For more than the previous five years, he served as Assistant Corporate
Controller of Stater Bros. Markets, Colton, California, a major grocery store
chain, where he was responsible for budgeting and tax accounting and the
development and implementation of computerized financial and accounting
systems. Prior to joining Stater Bros., Mr. Huff served as a financial and
budgeting analyst and cost accountant for a number of the manufacturing
divisions of Rockwell International. Mr. Huff holds an MBA from the University
of La Verne and a Bachelors degree with an emphasis in accounting from
California State University, Long Beach.

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PART II




Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market for Our Shares

Our common stock is traded in the over-the-counter market and is listed on
the NASDAQ SmallCap Market under the symbol PTCH. High and low closing prices
for each of the quarters in the fiscal years ended June 30, 2002 and 2001 are
listed below:

|                                 |                |  |         |       |        |  |   |       | 
|-------------------------------- | -------------- |  | ------- | ----- | ------ |  | - | ----- | 
|                                 |                |  | High(1) |       | Low(1)
|                                 |                |  |         |       |       
|Fiscal year ended June 30, 2002: |                |  |         |       |        |  |   |      
|                                
|                                
|                                
|                                
|                                 | First Quarter  |  | $       | 3.530 |        |  | $ | 2.380 | 
|                                
|                                
|                                
|                                
|                                 | Second Quarter |  |         | 4.990 |        |  |   | 3.050 | 
|                                
|                                
|                                
|                                
|                                 | Third Quarter  |  |         | 4.730 |        |  |   | 3.800 | 
|                                
|                                
|                                
|                                
|                                 | Fourth Quarter |  |         | 5.630 |        |  |   | 4.200 | 
|                                
|                                
|                                
|                                
|Fiscal year ended June 30, 2001: |                |  |         |       |        |  |   |      
|                                
|                                
|                                
|                                
|                                 | First Quarter  |  | $       | 5.000 |        |  | $ | 3.750 | 
|                                
|                                
|                                
|                                
|                                 | Second Quarter |  |         | 4.375 |        |  |   | 1.969 | 
|                                
|                                
|                                
|                                
|                                 | Third Quarter  |  |         | 3.250 |        |  |   | 2.313 | 
|                                
|                                
|                                
|                                
|                                 | Fourth Quarter |  |         | 3.300 |        |  |   | 2.063 | 



---

|(1) |  | All amounts give retroactive effect to a 1-for-5 reverse stock split
approved by shareholders on November 21, 2000.
|--- |  | -------------------------------------------------------------------------------------------------------------------

Number of Record Shareholders

The approximate number of record holders of our shares as of September 25,
2002 was 1,415 and we have approximately 5,000 beneficial owners.

Dividends and Share Repurchases

Pacer has a policy of retaining earnings to support the growth of its
business and, therefore, we do not anticipate that any cash dividends will be
paid in the foreseeable future. In addition, payment of cash dividends is
restricted by our loan agreements.

In fiscal 2000, we adopted an open market and private stock repurchase
program. Through June 30, 2002, we purchased 305,694 shares of Pacer common
stock for $1.4 million under that program that were funded with a combination
of internally generated funds and borrowings under our bank line of credit. In
August 2002, we completed and terminated the program.

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Item 6. SELECTED FINANCIAL DATA

The consolidated selected operating data set forth below for the fiscal
years ended June 30, 2002, 2001 and 2000, and the selected balance sheet data
at June 30, 2002 and 2001, are derived from the Companys audited consolidated
financial statements included elsewhere in this Report. The selected financial
data for the fiscal years ended June 30, 1999 and 1998 and at June 30, 2000,
1999 and 1998 are derived from audited consolidated financial statements that
are not included in this Report. The consolidated selected operating data for
the fiscal year ended, and the balance sheet data at June 30, 1999 include the
operations of Cook Bates from March 4, 1998, when those operations were
acquired by Pacer. The following data should be read in conjunction with our
consolidated financial statements and the related notes thereto and
Managements Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Report.

|                                        |         |      |                                                     |      |  |      |        |       |   |      |        |      |  |   |        |      |  |   |        |      | 
|--------------------------------------- | ------- | ---- | --------------------------------------------------- | ---- |  | ---- | ------ | ----- | - | ---- | ------ | ---- |  | - | ------ | ---- |  | - | ------ | ---- | 
|                                        |         |      | Year Ended June 30,                                
|                                        |         |      |                                                    
|                                        |         |      | (All amounts in thousands except per share amounts)
|                                        |         |      |                                                    
|Selected Operating Data:                |         | 2002 |                                                     | 2001 |  | 2000 |        | 1999  |   | 1998
|                                        |         |      |                                                     |      |  |      |        |       |   |     
|Net sales(1)                            |         | $    | 30,820                                              |      |  | $    | 41,658 |       |   | $    | 43,792 |      |  | $ | 44,861 |      |  | $ | 31,364 |     
|                                       
|                                       
|                                       
|                                       
|Gross profit(1)(2)                      |         |      | 8,747                                               |      |  |      | 9,742  |       |   |      | 10,901 |      |  |   | 13,336 |      |  |   | 10,543 |     
|                                       
|                                       
|                                       
|                                       
|Selling, general &
administrative(1)(2) |         |      | 7,245                                               |      |  |      | 9,268  |       |   |      | 9,859  |      |  |   | 10,296 |      |  |   | 7,573  |     
|                                       
|                                       
|                                       
|                                       
|Restructuring charges                   |         |      | 516                                                 |      |  |      |       |       |   |      | 315    |      |  |   |       |      |  |   |       |     
|                                       
|                                       
|                                       
|                                       
|(Gain)/loss on sales of product lines   |         |      | (1,211                                              | )    |  |      | 1,042  |       |   |      |       |      |  |   |       |      |  |   |       |     
|                                       
|                                       
|                                       
|                                       
|Operating income (loss)                 |         |      | 2,197                                               |      |  |      | (568   | )     |   |      | 727    |      |  |   | 3,040  |      |  |   | 2,972  |     
|                                       
|                                       
|                                       
|                                       
|Other expense, net                      |         |      | 112                                                 |      |  |      | 841    |       |   |      | 863    |      |  |   | 803    |      |  |   | 309    |     
|                                       
|                                       
|                                       
|                                       
|Income (loss) before income taxes       |         |      | 2,085                                               |      |  |      | (1,409 | )     |   |      | (136   | )    |  |   | 2,237  |      |  |   | 2,663  |     
|                                       
|                                       
|                                       
|                                       
|Income tax expense (benefit)            |         |      | 842                                                 |      |  |      | (393   | )     |   |      | (439   | )    |  |   | 951    |      |  |   | 1,122  |     
|                                       
|                                       
|                                       
|                                       
|Net income (loss)                       |         | $    | 1,243                                               |      |  | $    | (1,016 | )     |   | $    | 303    |      |  | $ | 1,286  |      |  | $ | 1,541  |     
|                                       
|                                       
|                                       
|                                       
|Earnings (loss) per share(3):           |         |      |                                                     |      |  |      |        |       |   |      |        |      |  |   |        |      |  |   |        |     
|                                       
|                                       
|                                       
|                                       
|                                        | Basic   |      | $                                                   | 0.41 |  |      | $      | (0.31 | ) |      | $      | 0.09 |  |   | $      | 0.40 |  |   | $      | 0.49 | 
|                                       
|                                       
|                                       
|                                       
|                                        | Diluted |      | $                                                   | 0.40 |  |      | $      | (0.31 | ) |      | $      | 0.09 |  |   | $      | 0.38 |  |   | $      | 0.44 | 

|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|



---

|(1) |  | In accordance with the consensus reached by the Emerging Issue Task Force
(EITF) of the FASB in Issue 01-9 (EITF 01-9): Accounting for
Consideration Given by a Vendor to a Customer or Reseller of the Vendors
Products, the Company reclassified certain marketing and promotional
expenses from selling expenses to a reduction in sales. The change had no
effect on net income (loss) or earnings (loss) per share. Prior period financial
statements have been reclassified to comply with this EITF guidance.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | In accordance with the consensus reached by the EITF of the FASB in Issue
No. 00-10 (EITF 00-10):Accounting for Shipping and Handling Fees and
Costs, the Company reclassified freight out expense from selling, general
and administrative expense to cost of goods sold for all periods
presented. The change had no effect on net income (loss) or earnings (loss) per share.
Prior period financial statements have been reclassified to comply with
this EITF guidance.                                         
|   
|   
|   
|   
|(3) |  | See Note 10 to the Consolidated Financial Statements included elsewhere
in this Report. Per share amounts have been retroactively adjusted to give
effect for a 1-for-5 reverse stock split approved by shareholders on
November 21, 2000.                                                                                                                                                                                                                                                                             
|   
|   
|   
|   
|(4) |  | Includes current portion of long-term debt. For additional information
regarding borrowings, see Note 4 to the Companys Consolidated Financial
Statements.                                                                                                                                                                                                                                                                                                                                                            

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Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Critical Accounting Policies and Estimates

General

In accordance with accounting principles generally accepted in the United
States (GAAP), we record all of our assets at the lower of cost or fair
value. In determining the fair value of some of our assets, principally
accounts receivable, inventories and costs in excess of net assets of acquired
businesses (commonly known as goodwill), we must make judgments, estimates
and assumptions regarding future events and circumstances that could affect the
value of those assets, such as future economic conditions that will affect our
ability to collect our accounts receivable or sell our inventories in future
periods. Those judgments, estimates and assumptions are based on current
information available to us at the time they are made. Many of those events
and circumstances, however, are outside of our control and if changes in those
events or circumstances occur thereafter, GAAP may require us to adjust the
earlier estimates that are affected by those changes. Any downward adjustments
are commonly referred to as write-downs of assets involved.

It is our practice to establish reserves or allowances against which we
are able to charge any such downward adjustments or write-downs in the fair
value of any of these assets. Examples include reserves or allowances
established for uncollectible accounts receivable (sometimes referred to as
bad debt reserves) and reserves for inventory obsolescence based on estimates
or judgments that we make about the collectibility of our accounts receivable
and the market and salability of the products we have in our inventories.
Write-downs of uncollectible accounts or the value of obsolete or slow moving
inventories are charged against those reserves or allowances. The reserves or
allowances are established and replenished (following write downs), or
increased in response to changed economic conditions or other circumstances, by
charges to income. With respect to other assets, such as goodwill, we write
down their fair value directly upon determining that, due to changes in events
or circumstances, the amounts at which they are carried on our books exceed
their current fair value, by increases in general and administrative expenses.
As a result, our judgments, estimates and assumptions about future events can
and will affect not only the amounts at which we record these assets on our
balance sheet, but also our results of operations.

Under GAAP, many businesses also must make estimates or judgments
regarding the periods during which, and also in the amounts at which, sales are
recorded. Those estimates and judgments will depend on such factors as the
circumstances under which a customer would be entitled to return the products
or reject or adjust the payment for the services. Additionally, in the case of
a company that grants its customers contractual rights to return products sold
to them, GAAP may require the establishment of reserves or allowances for
product returns by means of a reduction in the amount at which its sales are
recorded, based primarily on the nature, extensiveness and duration of those
rights and its historical product return experience. In addition, promotional
allowances and discounts that are extended to customers also may be charged
against, and therefore can reduce, reported revenues.

In making our estimates and assumptions we follow GAAP and accounting
practices applicable to our business that we believe will enable us to make
fair and consistent estimates of the fair value of those assets and to
establish reserves or allowances that are adequate to absorb potential
write-downs in the value of accounts receivable and inventories. Set forth
below is a summary of the accounting policies that we believe are material to
an understanding of our financial condition and results of operations that are
discussed below.

Revenue Recognition. We provide our customers with limited rights to
return products. We recognize revenue from the sale of a product upon its
shipment to the customer and establish an allowance based on historical
experience with returns of like products.

Accounts Receivable and the Allowance for Doubtful Accounts.In the
normal course of business we extend 60-day payment terms to our customers. We
regularly review our customers accounts and estimate the amount of and
establish an allowance for uncollectible amounts or receivables in each
reporting period. The amount of that allowance is based on several factors,
including the age of unpaid amounts, a review of significant past due accounts,
and economic conditions that may affect the ability of customers to keep their
accounts current.

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Replenishments of or increases in the amount of the allowance, if
determined to be warranted by changed conditions or factors, are recorded in
the period they become known. For example, if the financial condition of the
Companys customers or economic conditions were to deteriorate, adversely
affecting their ability to make payments, increases in the allowance may be
required. Since the allowance is replenished or increased by recording a
charge against income, any replenishment of or increase in the allowance will
cause a decline in our operating results in the period when that takes place.

Reserve for Excess and Obsolete Inventory. Inventories are valued at the
lower of cost (first-in, first-out) or market and are reduced by an allowance
for excess and slow moving or obsolete inventories. The amount of the
allowance is determined on the basis of historical experience with our product
lines, estimates concerning future economic conditions and estimates of future
sales. If there is an economic downturn or a decline in sales, causing
inventories of some product lines to accumulate, it may become necessary to
increase the allowance. Other factors that can require increases in the
allowance or inventory write downs are reductions in pricing or introduction of
new or competitive products by competitors; however, due to the relative
maturity of the markets in which the Company operates, usually these are not
significant factors. Increases in this allowance also will cause a decline in
operating results as such increases are effectuated by charges against income.

Long-Lived Assets.Long-lived assets such as goodwill and intangible
assets are reviewed for impairment when events or circumstances indicate that
the carrying value may not be recoverable. Currently, estimated undiscounted
future cash flows are used to determine if an asset is impaired and, if such a
determination were to be made, the carrying value of the asset would be reduced
to fair value. Any resulting impairment would be recorded as a charge against
income in the period in which the impairment was recorded. Beginning with the
fiscal year ending June 30, 2003, however, we will be required to assess our
goodwill for impairment based on the new standards established by SFAS No. 142.
We will not be able to determine the full effect of these new standards on our
financial position or our results of operations until we are able to complete
our impairment analysis using the new standards. Under existing accounting
standards, our assessment of goodwill indicated that no impairment existed as
of June 30, 2002. In the event our analysis under the new standards indicates
this goodwill is impaired, we will be required to record a charge, retroactive
to July 1, 2002, against our earnings in fiscal 2003, the amount of which is
not presently determinable.

Impact of Recent EITF Guidance

In
accordance with EITF Issue No. 00-10 (EITF 00-10): Accounting for
Shipping and Handling Fees and Costs, the Company reclassified freight out
expense from selling, general and administrative expense to cost of sales for
all periods presented. This change has no effect on net income (loss) or
earnings (loss) per share. The change increased cost of sales and decreased
selling, general and administrative expenses during the fiscal years ended June
30, 2002, 2001 and 2000 by $1.0 million, $1.3 million and $362,000,
respectively.

The results in the accompanying financial statements reflect the
application of the consensus reached by the EITF of the FASB in Issue 01-9
(EITF 01-9): Accounting for Consideration Given by a Vendor to a Customer or
Reseller of the Vendors Products. The change requires a reclassification of
certain marketing and promotional expenses from operating expenses (selling
expenses) to a reduction in sales. The change has no effect on net income
(loss) or earnings (loss) per share. Prior period financial statements have
been reclassified to comply with this EITF guidance. The change reduced both
net sales and selling, general and administrative expenses during the fiscal
years ended June 30, 2002, 2001 and 2000 by $1.1 million, $2.3 million and $3.9
million, respectively.

Overview

In fiscal 2001, we made a strategic decision to sell our nail care product
businesses in order to focus on the more profitable glue, adhesive and sealant
business. In furtherance of that strategy, we sold our California Chemical
acrylics product line at the end of fiscal 2001 and our Cook Bates nail care
product line in the first quarter of fiscal 2002. As a result, our sales of
nail care products declined by approximately $8.4 million in fiscal 2002 to
$5.5 million from $13.9 million in fiscal 2001 and, primarily for that reason,
our total net sales for fiscal 2002 declined to $30.8 million from $41.7
million in fiscal 2001.

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At the same time we implemented cost cutting and restructuring programs
that were designed to align our operating costs to match our reduced level of
sales and improve our operating efficiencies. Among other things, we
consolidated some of our operations into our primary manufacturing facility in
Rancho Cucamonga, California, which enabled us to reduce the amount of space we
had under lease and we also restructured our sales organization and took steps
to reduce staffing. In connection with the program, we incurred restructuring
charges of $516,000. See Results of Operations  Restructuring Charges
below.

Fiscal 2002 Operating Results. We generated operating income of
approximately $2.2 million in the fiscal year ended June 30, 2002. Fiscal 2002
operating income was impacted by actions taken to refocus Pacers resources on
growing its core Adhesive Products business. Those actions included the sale
of the Cook Bates product line that generated a pre-tax gain (included in
operating income) of $1.2 million and restructuring charges amounting to
$516,000 consisting mainly of lease termination charges and employee
termination costs. In addition, operating income was impacted by a provision
for bad debts for K-Mart, a long-time major retail customer that filed for
Chapter 11 Bankruptcy protection and the sale of our remaining Cook Bates return
merchandise at bargain prices. We used the net proceeds from the sale of the
Cook Bates product line, which totaled approximately $5.3 million, together
with the proceeds from the collection of pre-sale Cook Bates receivables
primarily to reduce our outstanding bank borrowings, and at June 30, 2002 we
had no bank borrowings outstanding as compared to $7.6 million at June 30, 2001.

Outlook for Fiscal 2003

We currently expect improved profitability during the fiscal year ending
June 30, 2003, due primarily to improvements in raw materials sourcing, new
marketing and sales initiatives that are designed to achieve increases in our
market share in the consumer Adhesive Products markets, and new product
releases. However, we expect that our sales in the first two quarters of
fiscal 2003, will be lower than in the fiscal 2002 comparable quarters, due to
the sale of our nail care products business, which accounted for approximately
$5.5 million, or 18%, of our total sales in fiscal 2002 and the closure of our
United Kingdom facility.

Results of Operations

The following table sets forth, for the periods indicated, certain
financial data expressed as a percentage of the Companys net sales:

|                                           |  |      |       |      |  |      |       |    |  |  |       |   
|------------------------------------------ |  | ---- | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                           |  | 2002 |       | 2001 |  | 2000
|                                           |  |      |       |      |  |     
|Net sales                                  |  |      | 100.0 | %    |  |      | 100.0 | %  |  |  | 100.0 | % 
|                                          
|                                          
|                                          
|                                          
|Cost of sales                              |  |      | 71.6  | %    |  |      | 76.6  | %  |  |  | 75.1  | % 
|                                          
|                                          
|                                          
|                                          
|Gross profit                               |  |      | 28.4  | %    |  |      | 23.4  | %  |  |  | 24.9  | % 
|                                          
|                                          
|                                          
|                                          
|Selling, general & administrative expenses |  |      | 23.5  | %    |  |      | 22.2  | %  |  |  | 22.5  | % 
|                                          
|                                          
|                                          
|                                          
|Restructuring charges                      |  |      | 1.7   | %    |  |      |      |    |  |  | 0.7   | % 
|                                          
|                                          
|                                          
|                                          
|(Gain)/loss on sale of product lines       |  |      | (3.9  | )%   |  |      | 2.5   | %  |  |  |      |   
|                                          
|                                          
|                                          
|                                          
|Other expense, net                         |  |      | 0.3   | %    |  |      | 2.1   | %  |  |  | 2.0   | % 
|                                          
|                                          
|                                          
|                                          
|Income (loss) before taxes                 |  |      | 6.8   | %    |  |      | (3.4  | )% |  |  | (0.3  | )%
|                                          
|                                          
|                                          
|                                          
|Net income (loss)                          |  |      | 4.0   | %    |  |      | (2.4  | )% |  |  | 0.7   | % 

Fiscal Years Ended June 30, 2002 and 2001

Net Sales. Net sales in fiscal 2002 declined $10.8 million to $30.8
million, a 26.0% decrease from the prior year. Sales in the United States,
which represented 84% of our total sales in fiscal 2002, decreased 27.5% from
$35.7 million to $25.9 million. Of that decline, $8.4 million was primarily
attributable to the sale of our nail care product lines. Adhesive sales in the
United States declined by $1.4 million or 5.9% of net sales, as compared to the
prior fiscal year, due to a number of factors including a decision to
discontinue sales of products to K-Mart, that accounted for approximately
$650,000 of the decrease in U.S. adhesive net sales; consolidation among
retailers in the sales channels where we sell our products; increased pricing
pressures and new entrants into the marketplace.

International sales, in fiscal 2002, which consisted primarily of Adhesive
Product sales, also contributed to $1.0 million of the total net sales decline,
as such sales decreased to approximately $4.9 million, in fiscal 2002, as
compared to $5.9 million, in fiscal 2001. The decrease in international sales
is primarily attributable to the closure of our facilities in the United
Kingdom.

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##### Table of Contents



In fiscal 2001, net sales declined by $2.1 million to $41.7 million or
4.8% from the prior year. Sales in the United States, that represented 86% of
total net sales in fiscal 2001, decreased by $2.8 million or 7.3% from $38.5
million to $35.7 million. The domestic revenue decline of approximately $1.2
million was primarily attributable to the slowing of the United States economy
in fiscal 2001. Promotional and advertising expenses decreased by $1.6 million
as a result of the sale of the Cook Bates product line that impacted net sales.
International sales increased in fiscal 2001 as compared to the prior fiscal
year, totaling $6.0 million, or 14% of total net sales for fiscal year 2001, as
compared to $5.3 million and 12% of total net sales in fiscal 2000.

Gross Profit. Our gross margin (gross profits stated as a percentage of
net sales) increased to 28.4% in fiscal 2002 from 23.4% in fiscal 2001, due
primarily to improved raw material sourcing, the closure of our United Kingdom
facility, a reduction of approximately $300,000 in distribution related costs
and a favorable shift in product mix associated with the disposition of our
nail care product lines.

Our gross margin declined to 23.4% in fiscal 2001 from 24.9% in fiscal
2000, due primarily to $500,000 of charges in the quarter ended June 30, 2001
resulting from the closure of our United Kingdom facility. Excluding those
charges, our gross margin would have remained relatively unchanged at
approximately 24.6%.

We currently anticipate further improvements in our gross margin during
the fiscal year ending June 30, 2003, as we expect to realize additional
benefits from improvements in raw materials sourcing and our business will no
longer be impacted by write-offs associated with the Cook Bates product line.

Selling, General & Administrative Expenses. Selling, general and
administrative (SG&A) expenses, decreased by $2.0 million from $9.3 million
or 22.2% of net sales in fiscal 2001 to $7.3 million or 23.5% of net sales in
fiscal 2002. The decrease in SG&A expenses was primarily the result of
workforce reductions that we were able to make as the result of the sale of the
Cook Bates product line. The increase in SG&A, as a percentage of net sales
in fiscal 2002, is mainly attributable to bad debt expense associated with
K-Marts, filing, in January 2002, for Chapter 11 Bankruptcy protection and the
fact that net sales declined at a greater rate than did SG&A expenses.

In fiscal 2001, SG&A decreased by $591,000, and as a percent of net sales,
declined to 22.2% compared to 22.5% in fiscal 2000. This decline in fiscal
2001 was primarily the result of higher than normal expenses in fiscal 2000
that amounted to $350,000 associated with a costs incurred to defend a proxy
contest waged by a group of dissident shareholders at the Annual Meeting held
in November 2000.

Restructuring Charges. During fiscal 2002, we implemented a restructuring
program to bring our operating costs in line with our operations following the
sale of our nail care product lines. That program included the consolidation
of operations, formerly conducted at multiple facilities, into our primary
manufacturing facility in Rancho Cucamonga, California and work force
reductions. As a result, restructuring charges totaled $516,000 and were
mainly lease termination charges and employee termination charges, which
represented 1.7% of our net sales in fiscal 2002. There were no restructuring
charges in fiscal 2001.

Gain/Loss on Sale of Product Lines. We sold inventory and certain fixed
and intangible assets related to the Cook Bates product line (which consisted
largely of personal care manicure implements, seasonal gift sets and Halloween
merchandise) for $5.3 million cash. That inventory totaled $3.8 million and
the net book value of the remaining assets sold in that transaction totaled
$105,000. In connection with the sale, we recorded transaction related
costs of $142,000, a $40,000 loss associated with the sale of holiday
merchandise at bargain prices and a gain of $1.2 million or 3.9% of net sales,
which are included in operating income in the accompanying statement of
operations for the year ended June 30, 2002.

In fiscal year 2001, we sold all of the assets, properties and goodwill of
the California Chemical product line, which consisted primarily of bulk liquids
and powders for the sculptured acrylic finger nail processes to Esschem, Inc.
in exchange for $500,000 cash plus the transfer by Esschem to Pacer of 145,000
shares of Pacer common stock owned by Esschem. As a result of this transaction,
we wrote off the remaining goodwill that arose from the acquisition in
1997. The goodwill impairment, a one-time, non-cash charge, of $1.0 million or
2.5% of net sales is included in the accompanying 2001 consolidated statement
of operations.

15



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##### Table of Contents



Other Expense, Net. Other expense, net, which consists primarily of
interest charges on outstanding bank borrowings, was $112,000 in fiscal 2002 as
compared to $841,000 in fiscal 2001. Interest expense decreased by $708,000
during fiscal 2002 as a result of reductions in outstanding debt made possible
by the Cook Bates sale and, to a lesser extent, declines in prevailing rates of
interest.

Other expense, net, in fiscal 2001, which also consisted primarily of
interest charges on outstanding bank borrowings, was $841,000 as compared to
$863,000 in fiscal 2000. That decline was due to declining rates of interest
in fiscal 2001 as compared to fiscal 2000.

Liquidity and Capital Resources

Net cash provided by all activities in fiscal 2002 was $728,000 versus net
cash provided of $20,000 in the prior year.

Cash provided by operating activities during fiscal year 2002 was $9.6
million compared to $4.7 million in fiscal year 2001. This increase was due
primarily to the receipt of the cash proceeds from the sale of the Cook Bates
product line in September 2001 and a $2.9 million reduction in accounts
receivable due, in large part, to the collection of accounts receivable from
sales of our Cook Bates products prior to the sale of the Cook Bates product
line and the sale of our remaining inventories of Cook Bates products.

We used cash of $467,000 in investing activities to fund capital
expenditures in fiscal 2002. In fiscal 2001, the $500,000 in cash proceeds
from the California Chemical sale more that offset capital expenditures and, as
a result, investing activities provided cash of $22,000 in fiscal 2001.

We used the cash provided by operations in fiscal 2002, principally
generated by the Cook Bates sale, to reduce net borrowings under our bank
credit facilities by $7.6 million and to repurchase common shares in our open
market and private stock repurchase program. As a result, cash used in
financing activities in fiscal 2002 increased to $8.4 million as compared to
$4.7 million in fiscal 2001.

During fiscal 2002, we funded our working capital requirements primarily
with a combination of internally generated funds and borrowings under a
revolving bank credit line pursuant to which we may borrow up to the lesser of
(i) $7 million or (ii) the sum of 70% of the face dollar amount of eligible
accounts receivable plus 46% of the cost of our finished goods inventories and
approximately 35% of raw material inventories (the borrowing base).
Borrowings under the credit facility are payable in monthly interest only
installments until the maturity date of the credit line, which is October 1,
2003. During fiscal 2002 our credit line borrowings bore interest at the
banks prime rate (4.75% at June 30, 2002), less 0.25%, or at the banks LIBOR
base rate, plus 2.50%. Effective June 30, 2002, the rate for LIBOR borrowings
will be reduced to the banks LIBOR base rate, pursuant to the terms of our
bank credit line agreement, because we generated earnings before interest,
taxes, depreciation and amortization (EBITDA) of more than $1 million for the
six months ended June 30, 2002. This new LIBOR borrowing rate will continue in
effect provided that we are able to achieve EBITDA of at least $500,000 in each
subsequent fiscal quarter.

At June 30, 2002, we had no borrowings outstanding on our revolving bank
credit line and approximately $4.9 million of unused borrowings were available
(based on eligible collateral). By comparison, at June 30, 2001, outstanding
credit line borrowings totaled $7.6 million.

We also have a bank credit facility under which we may obtain commercial
letters of credit, standby letters of credit, and bankers acceptances in
amounts not exceeding $1.5 million in the aggregate. Any amount outstanding on
this additional credit facility will reduce the borrowing base on the revolving
bank credit line. This credit facility expires on October 1, 2003. As of June
30, 2002, there were no amounts outstanding under this credit facility.

From December 1999 to July 2002, we made $1.4 million of repurchases of
our common stock pursuant to an open market and private common stock repurchase
plan. On March 1, 2001, the amount we could use to repurchase common stock was
increased to $800,000 per year, subject to certain bank covenants. The amount
of repurchases was also limited by certain Securities and Exchange Commission
volume and price restrictions. Pursuant to that plan we used borrowings and
internally generated funds totaling $731,000 to repurchase 163,504 of our
shares in fiscal

16



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##### Table of Contents



2002 and bank borrowings of $323,000 to repurchase 87,290 of our shares in
fiscal 2001. In August 2002, we completed and terminated the stock repurchase
program. We do not currently anticipate making additional share repurchases
during the fiscal year ending June 30, 2003.

We believe that availability under the credit line, together with
internally generated funds, will be sufficient to enable us to meet our working
capital and other cash requirements over the next twelve months. However, we
may take advantage of opportunities to acquire other Adhesive Products
businesses, should they arise, or to invest in new product introductions, in
which case we may incur borrowings to do so. At the present time, we are
introducing our new Anchor-TiteTM and Go Spot Go® products.

Seasonality and Quarterly Financial Data

Historically, we have sold a greater volume of nail care products in the
third calendar quarter of the year (our first fiscal quarter), than in other
quarters, because merchants tend to begin stocking such products during the
fall in anticipation of increases in holiday sales during the last calendar
quarter of the year. As a result of the sale of the Cook Bates product line, we
expect that we will cease to encounter such sizable quarterly variations in our
sales and operating results.

The following table presents unaudited quarterly financial information for
each of the fiscal years ended June 30, 2002 and 2001. This information has
been prepared by us on a basis consistent with our audited consolidated
financial statements included elsewhere in this Report. The information
includes all necessary adjustments, consisting only of normal recurring
adjustments, that management considers necessary for a fair presentation of the
unaudited quarterly operating results when read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Report. These quarterly operating results are not necessarily indicative of
results that may be expected in future periods.

|                            |         |      |               |      |          |      |          |      |          |   |       |     |  |   |       |     | 
|--------------------------- | ------- | ---- | ------------- | ---- | -------- | ---- | -------- | ---- | -------- | - | ----- | --- |  | - | ----- | --- | 
|                            |         |      | Quarter Ended
|                            |         |      |              
|                            |         |      | Sept. 30,     |      | Dec. 31, |      | Mar. 31, |      | June 30,
|FY2002                      |         | 2001 |               | 2001 |          | 2002 |          | 2002
|                            |         |      |               |      |          |      |          |     
|Net sales                   |         | $    | 10,359        |      |          | $    | 6,886    |      |          | $ | 6,567 |     |  | $ | 7,008 |    
|                           
|                           
|                           
|                           
|Gross profit                |         |      | 2,938         |      |          |      | 1,864    |      |          |   | 1,993 |     |  |   | 1,952 |    
|                           
|                           
|                           
|                           
|Net income (loss)           |         |      | 904           |      |          |      | (70      | )    |          |   | 353   |     |  |   | 56    |    
|                           
|                           
|                           
|                           
|Net income (loss) per share |         |      |               |      |          |      |          |      |          |   |       |     |  |   |       |    
|                           
|                           
|                           
|                           
|                            | Basic   |      | $             | .29  |          |      | $        | (.02 | )        |   | $     | .12 |  |   | $     | .02 | 
|                           
|                           
|                           
|                           
|                            | Diluted |      | $             | .29  |          |      | $        | (.02 | )        |   | $     | .11 |  |   | $     | .02 | 

|                                |         |      |           |      |          |      |          |      |          |   |        |     |  |   |        |      |  
|------------------------------- | ------- | ---- | --------- | ---- | -------- | ---- | -------- | ---- | -------- | - | ------ | --- |  | - | ------ | ---- | -
|                                |         |      | Sept. 30, |      | Dec. 31, |      | Mar. 31, |      | June 30,
|FY 2001                         |         | 2000 |           | 2000 |          | 2001 |          | 2001
|                                |         |      |           |      |          |      |          |     
|Net sales                       |         | $    | 13,987    |      |          | $    | 8,877    |      |          | $ | 10,141 |     |  | $ | 8,653  |     
|                               
|                               
|                               
|                               
|Gross profit                    |         |      | 4,066     |      |          |      | 2,397    |      |          |   | 2,862  |     |  |   | 417    |     
|                               
|                               
|                               
|                               
|Net income (loss)               |         |      | 869       |      |          |      | 158      |      |          |   | 389    |     |  |   | (2,432 | )   
|                               
|                               
|                               
|                               
|Net income (loss) per share (1) |         |      |           |      |          |      |          |      |          |   |        |     |  |   |        |     
|                               
|                               
|                               
|                               
|                                | Basic   |      | $         | .26  |          |      | $        | .05  |          |   | $      | .12 |  |   | $      | (.76 | )
|                               
|                               
|                               
|                               
|                                | Diluted |      | $         | .26  |          |      | $        | .05  |          |   | $      | .12 |  |   | $      | (.76 | )



---

|(1) |  | Per share data for periods prior to November 21, 2000 have been
retroactively adjusted to give effect to a 1-for-5 reverse stock split of
Pacers outstanding shares that was approved by shareholders on November
21, 2000.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Impact of Recently Issued Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets. Under the new rules, goodwill and indefinite lived
intangible assets will no longer be amortized but will be reviewed annually for
impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. The
non-amortization provisions of SFAS No. 142 apply to goodwill and intangible
assets acquired after June 30, 2001. With respect to goodwill and intangible
assets acquired prior to July 1, 2001, the Company will apply the new
accounting rules beginning July 1, 2002. The Company will be required to
reassess the useful lives of other intangible assets within its first fiscal
quarter after adoption of SFAS No. 142. We are currently assessing what
financial impact, if any, SFAS No. 142 will have on our consolidated financial
statements and operating results.

17



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##### Table of Contents



In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires entities to record the fair
value of a liability for an asset retirement obligation when an existing law or
contract requires that the obligation be settled. The statement requires that
the amount recorded as a liability be capitalized by increasing the carrying
amount of the related long-lived asset. The capitalized cost is depreciated
over the useful life of the related asset. SFAS No. 143 will be effective for
financial statements beginning after January 1, 2003, with earlier application
encouraged. The Company is currently evaluating the impact on its consolidated
financial statements of adopting this statement.

In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which is effective for financial
statements issued for fiscal years beginning after December 15, 2001. SFAS 144
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, and applies to all long-lived
assets (including discontinued operations). We are currently assessing what
financial impact, if any, SFAS No. 144 will have on our consolidated financial
statements and operating results.

Impact of Recent EITF Guidance

In accordance with EITF Issue No. 00-10 (EITF 00-10): Accounting for
Shipping and Handling Fees and Costs, the Company reclassified freight out
expense from selling, general and administrative expense to cost of sales for
all periods presented. This change has no effect on net income or earnings per
share.

The change increased cost of sales and decreased selling, general and
administrative expenses during the fiscal years ended June 30, 2002, 2001 and
2000 by $1.0 million, $1.3 million and $362,000, respectively.

The results in the accompanying financial statements reflect the
application of the consensus reached by the EITF of the FASB in Issue 01-9
(EITF 01-9): Accounting for Consideration Given by a Vendor to a Customer or
Reseller of the Vendors Products. The change requires a reclassification of
certain marketing and promotional expenses from operating expenses (selling
expenses) to a reduction in sales. The change has no effect on net income or
earnings per share. Prior period financial statements have been reclassified
to comply with EITF 00-10 and 01-9.

The change reduced both net sales and selling, general and administrative
expenses during the fiscal years ended June 30, 2002, 2001 and 2000 by $1.1
million, $2.3 million and $3.9 million, respectively.




Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Pacers exposure to market risk with respect to financial instruments is
primarily related to changes in interest rates with respect to borrowing
activities, which may adversely affect its financial position, results of
operations and cash flows. To a lesser degree, we are exposed to market risk
from foreign currency fluctuations associated with our purchases of raw
materials and sales of products outside of the United States. We do not use
financial instruments for trading or other speculative purposes and we are not
party to any derivative financial instruments.

In seeking to minimize the risks from interest rate fluctuations, we
manage exposures through our regular operating and financing activities. The
fair value of borrowings under our revolving bank credit facility and term note
approximate the carrying value of such obligations.

18



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##### Table of Contents






FORWARD LOOKING STATEMENTS

This Report, including Managements Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements as
defined in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are estimates of, or statements about our
expectations or beliefs regarding, our future financial performance that are
based on current information and that are subject to a number of risks and
uncertainties that could cause our actual operating results in the future to
differ significantly from those expected at the current time, including the
risks and uncertainties described in Part I of this Report under the caption
Item I  Description of Business  Certain Factors That Could Affect Our
Future Performance and in Managements Discussion and Analysis of Financial
Condition and Results of Operations above.

Due to these and other possible uncertainties and risks, readers are
cautioned not to place undue reliance on the forward-looking statements
contained in this Report, which speak only as of the date of this Report, or to
make predictions based solely on historical financial performance.

We also disclaim any obligation to update forward-looking statements
contained in this Report.

19



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##### Table of Contents









Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following consolidated financial statements are included herein:

|                                                                                                  |  |      |    | 
|------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                  |  | Page
|                                                                                                  |  | No. 
|                                                                                                  |  |     
|Report of Independent Auditors                                                                    |  |      | 21 | 
|Consolidated Balance Sheets  June 30, 2002 and 2001                                              |  |      | 22 | 
|Consolidated Statements of Operations  Fiscal Years Ended June 30, 2002, 2001 and 2000           |  |      | 23 | 
|Consolidated Statements of Shareholders Equity  Fiscal Years Ended June 30, 2002, 2001 and 2000 |  |      | 24 | 
|Consolidated Statements of Cash Flows  Fiscal Years Ended June 30, 2002, 2001 and 2000           |  |      | 25 | 
|Notes to Consolidated Financial Statements                                                        |  |      | 26 | 
|Schedule II  Valuation and Qualifying Accounts  Fiscal years ended June 30, 2002, 2001 and 2000 |  |      | 39 | 

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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Board of Directors
Pacer Technology

We have audited the accompanying consolidated balance sheets of Pacer
Technology as of June 30, 2002 and 2001, and the related consolidated
statements of operations, shareholders equity, and cash flows for each of the
three years in the period ended June 30, 2002. Our audits also included the
financial statement schedules listed in the Index at Item 15(a) as of June 30,
2002 and 2001 and for the years then ended. These financial statements and
schedules are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 consolidated financial position of Pacer Technology
at June 30, 2002 and 2001, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended June 30, 2002,
in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedules when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.

| |                       
| | ----------------------
| | /s/  ERNST & YOUNG LLP
| |                       

Orange County, California
August 14, 2002

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PACER TECHNOLOGY

CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

|                                               |                                                                                                                            |   |                           |                            |  |          |        |       |  |        |        | 
|---------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------- | - | ------------------------- | -------------------------- |  | -------- | ------ | ----- |  | ------ | ------ | 
|                                               |                                                                                                                            |   |                           |                            |  | June 30,
|                                               |                                                                                                                            |   |                           |                            |  |         
|                                               |                                                                                                                            |   |                           |                            |  | 2002     |        | 2001 
|                                               |                                                                                                                            |   |                           |                            |  |          |        |      
|Assets                                        
|Current assets:                                |                                                                                                                            |   |                           |                            |  |          |        |      
|                                               | Cash                                                                                                                       |   | $                         | 1,199                      |  |          | $      | 471   | 
|                                               | Trade receivables, less allowance for doubtful accounts of $518 in 2002 and
$343 in 2001                                   |   |                           | 5,186                      |  |          |        | 8,292 | 
|                                               | Other receivables                                                                                                          |   |                           | 442                        |  |          |        | 966   | 
|                                               | Inventories, net                                                                                                           |   |                           | 3,387                      |  |          |        | 7,950 | 
|                                               | Prepaid expenses                                                                                                           |   |                           | 709                        |  |          |        | 292   | 
|                                               | Deferred income taxes                                                                                                      |   |                           | 347                        |  |          |        | 1,860 | 
|                                               |                                                                                                                            |   |                           |                            |  |          |        |      
|                                               |                                                                                                                            |   | Total current assets      |                            |  | 11,270   |        |       |  | 19,831 |       
|Equipment and leasehold improvements, net      |                                                                                                                            |   | 1,262                     |                            |  |          | 1,634  |      
|Deferred income taxes                          |                                                                                                                            |   | 238                       |                            |  |          |       |      
|Intangible assets, net                         |                                                                                                                            |   | 1,163                     |                            |  |          | 1,406  |      
|                                               |                                                                                                                            |   |                           |                            |  |          |        |      
|                                               |                                                                                                                            | $ | 13,933                    |                            |  | $        | 22,871 |      
|                                               |                                                                                                                            |   |                           |                            |  |          |        |      
|Liabilities and Shareholders Equity          
|Current liabilities:                           |                                                                                                                            |   |                           |                            |  |          |        |      
|                                               | Accounts payable                                                                                                           |   | $                         | 1,160                      |  |          | $      | 2,391 | 
|                                               | Accrued expenses                                                                                                           |   |                           | 1,020                      |  |          |        | 1,506 | 
|                                               | Revolving bank line of credit                                                                                              |   |                           |                           |  |          |        | 4,648 | 
|                                               | Current installments of long-term debt                                                                                     |   |                           | 100                        |  |          |        | 3,042 | 
|                                               |                                                                                                                            |   |                           |                            |  |          |        |      
|                                               |                                                                                                                            |   | Total current liabilities |                            |  | 2,280    |        |       |  | 11,587 |       
|Deferred income taxes                          |                                                                                                                            |   |                          |                            |  |          | 44     |      
|Long-term debt, excluding current installments |                                                                                                                            |   | 67                        |                            |  |          | 166    |      
|                                               |                                                                                                                            |   |                           |                            |  |          |        |      
|                                               |                                                                                                                            |   |                           | Total liabilities          |  |          | 2,347  |       |  |        | 11,797 | 
|Commitments and contingencies                  |                                                                                                                            |   |                           |                            |  |          |        |      
|Shareholders equity:                          |                                                                                                                            |   |                           |                            |  |          |        |      
|                                               | Common stock, no par value. Authorized: 50,000,000 shares; issued and
outstanding: 2,928,401 in 2002 and 3,091,905 in 2001 |   |                           | 7,157                      |  |          |        | 7,888 | 
|                                               | Retained earnings                                                                                                          |   |                           | 4,429                      |  |          |        | 3,186 | 
|                                               |                                                                                                                            |   |                           |                            |  |          |        |      
|                                               |                                                                                                                            |   |                           | Total shareholders equity |  |          | 11,586 |       |  |        | 11,074 | 
|                                               |                                                                                                                            |   |                           |                            |  |          |        |      
|                                               |                                                                                                                            | $ | 13,933                    |                            |  | $        | 22,871 |      
|                                               |                                                                                                                            |   |                           |                            |  |          |        |      

See accompanying notes to consolidated financial statements.

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PACER TECHNOLOGY

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                           |                  |                                   |                   |     |                                          |       |          |     |          |        |        |       |        |     | 
|------------------------------------------ | ---------------- | --------------------------------- | ----------------- | --- | ---------------------------------------- | ----- | -------- | --- | -------- | ------ | ------ | ----- | ------ | --- | 
|                                           |                  |                                   |                   |     | Years Ended                             
|                                           |                  |                                   |                   |     |                                         
|                                           |                  |                                   |                   |     | June 30,                                 |       | June 30, |     | June 30,
|                                           |                  |                                   |                   |     | 2002                                     |       | 2001     |     | 2000    
|                                           |                  |                                   |                   |     |                                          |       |          |     |         
|                                           |                  |                                   |                   |     | (In thousands, except per share amounts)
|Net sales                                  |                  | $                                 | 30,820            |     |                                          | $     | 41,658   |     |          | $      | 43,792 |      
|Cost of sales                              |                  |                                   | 22,073            |     |                                          |       | 31,916   |     |          |        | 32,891 |      
|                                           |                  |                                   |                   |     |                                          |       |          |     |          |        |        |      
|                                           |                  | Gross profit                      |                   |     | 8,747                                    |       |          |     | 9,742    |        |        |       | 10,901 |    
|Selling, general & administrative expenses |                  |                                   | 7,245             |     |                                          |       | 9,268    |     |          |        | 9,859  |      
|Restructuring charges                      |                  |                                   | 516               |     |                                          |       |         |     |          |        | 315    |      
|Gain on sale of Cook Bates                 |                  |                                   | (1,211            | )   |                                          |       |         |     |          |        |       |      
|Loss on sale of California Chemical        |                  |                                   |                  |     |                                          |       | 1,042    |     |          |        |       |      
|                                           |                  |                                   |                   |     |                                          |       |          |     |          |        |        |      
|                                           |                  | Operating income (loss)           |                   |     | 2,197                                    |       |          |     | (568     | )      |        |       | 727    |    
|Other (income) expense:                    |                  |                                   |                   |     |                                          |       |          |     |          |        |        |      
|                                           | Interest income  |                                   |                   | (4  | )                                        |       |          | (2  | )        |        |        | (34   | )     
|                                           | Interest expense |                                   |                   | 144 |                                          |       |          | 852 |          |        |        | 1,005 |       
|                                           | Other, net       |                                   |                   | (28 | )                                        |       |          | (9  | )        |        |        | (108  | )     
|                                           |                  |                                   |                   |     |                                          |       |          |     |          |        |        |      
|                                           |                  |                                   | 112               |     |                                          |       | 841      |     |          |        | 863    |      
|                                           |                  |                                   |                   |     |                                          |       |          |     |          |        |        |      
|Income (loss) before income taxes          |                  |                                   | 2,085             |     |                                          |       | (1,409   | )   |          |        | (136   | )    
|Income tax expense (benefit)               |                  |                                   | 842               |     |                                          |       | (393     | )   |          |        | (439   | )    
|                                           |                  |                                   |                   |     |                                          |       |          |     |          |        |        |      
|                                           |                  |                                   | Net income (loss) |     | $                                        | 1,243 |          |     | $        | (1,016 | )      |       | $      | 303 | 
|                                           |                  |                                   |                   |     |                                          |       |          |     |          |        |        |      
|Weighted average shares  basic(1)         |                  |                                   | 3,022             |     |                                          |       | 3,260    |     |          |        | 3,345  |      
|                                           |                  |                                   |                   |     |                                          |       |          |     |          |        |        |      
|                                           |                  | Basic earnings (loss) per share   |                   | $   | .41                                      |       |          | $   | (.31     | )      |        | $     | .09    |    
|                                           |                  |                                   |                   |     |                                          |       |          |     |          |        |        |      
|Weighted average shares  diluted(1)       |                  |                                   | 3,092             |     |                                          |       | 3,260    |     |          |        | 3,374  |      
|                                           |                  |                                   |                   |     |                                          |       |          |     |          |        |        |      
|                                           |                  | Diluted earnings (loss) per share |                   | $   | .40                                      |       |          | $   | (.31     | )      |        | $     | .09    |    
|                                           |                  |                                   |                   |     |                                          |       |          |     |          |        |        |      



---

|(1) |  | The numbers of shares outstanding at June 30, 2000 have been
retroactively adjusted to give effect to a 1-for-5 reverse stock split of
outstanding shares approved by shareholders on November 21, 2000.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.

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PACER TECHNOLOGY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Years Ended June 30, 2002, 2001 and 2000
(In thousands, except share amounts)

|                             |                                                       |  |             |          |        |   |          |      |           |   |        |        |               |   |               |    |             |   |     |     |   |   |        |        |  
|---------------------------- | ----------------------------------------------------- |  | ----------- | -------- | ------ | - | -------- | ---- | --------- | - | ------ | ------ | ------------- | - | ------------- | -- | ----------- | - | --- | --- | - | - | ------ | ------ | -
|                             |                                                       |  | Number of   |          |        |   |          |      |           |   |        |        |               |   |               |    | Accumulated |   |     |     |  
|                             |                                                       |  | Issued      |          |        |   |          |      |           |   |        |        | Notes         |   | Other         |    |             |   |    
|                             |                                                       |  | and         |          |        |   |          |      |           |   |        |        | Receivable    |   | Comprehensive |    | Total      
|                             |                                                       |  | Outstanding |          | Common |   | Retained |      | From      |   | Income |        | Shareholders'
|                             |                                                       |  | Shares      |          | Stock  |   | Earnings |      | Directors |   | (Loss) |        | Equity       
|                             |                                                       |  |             |          |        |   |          |      |           |   |        |        |              
|Balances at June 30, 1999(1) |                                                       |  | 3,357,995   |          |        | $ | 8,802    |      |           | $ | 3,899  |        |               | $ | (47           | )  |             | $ | (13 | )   |   | $ | 12,641 |       
|                             | Net income                                            |  |             |         |        |   |          |     |           |   |        | 303    |               |   |               |   |             |   |     |    |   |   |        | 303    |  
|                             | Foreign currency translation
adjustment               |  |             |         |        |   |          |     |           |   |        |       |               |   |               |   |             |   |     | (66 | ) |   |        | (66    | )
|                             |                                                       |  |             |          |        |   |          |      |           |   |        |        |               |   |               |    |             |   |     |     |   |   |        |       
|                             | Comprehensive income                                  |  |             |         |        |   |          |     |           |   |        |       |               |   |               |   |             |   |     |    |   |   |        | 237    |  
|                             | Shares issued upon exercise of
options(1)             |  |             | 17,800   |        |   |          | 64   |           |   |        |       |               |   |               |   |             |   |     |    |   |   |        | 64     |  
|                             | Shares issued to employees(1)                         |  |             | 3,300    |        |   |          | 15   |           |   |        |       |               |   |               |   |             |   |     |    |   |   |        | 15     |  
|                             | Shares repurchased(1)                                 |  |             | (54,900  | )      |   |          | (305 | )         |   |        |       |               |   |               |   |             |   |     |    |   |   |        | (305   | )
|                             | Promissory note payments from
directors               |  |             |         |        |   |          |     |           |   |        |       |               |   |               | 47 |             |   |     |    |   |   |        | 47     |  
|                             |                                                       |  |             |          |        |   |          |      |           |   |        |        |               |   |               |    |             |   |     |     |   |   |        |       
|Balances at June 30, 2000(1) |                                                       |  | 3,324,195   |          |        |   | 8,576    |      |           |   | 4,202  |        |               |   |              |    |             |   | (79 | )   |   |   | 12,699 |       
|                             | Net loss                                              |  |             |         |        |   |          |     |           |   |        | (1,016 | )             |   |               |   |             |   |     |    |   |   |        | (1,016 | )
|                             | Foreign currency translation
adjustment               |  |             |         |        |   |          |     |           |   |        |       |               |   |               |   |             |   |     | 79  |   |   |        | 79     |  
|                             |                                                       |  |             |          |        |   |          |      |           |   |        |        |               |   |               |    |             |   |     |     |   |   |        |       
|                             | Comprehensive loss                                    |  |             |         |        |   |          |     |           |   |        |       |               |   |               |   |             |   |     |    |   |   |        | (937   | )
|                             | Shares retired related to sale
of California Chemical |  |             | (145,000 | )      |   |          | (435 | )         |   |        |       |               |   |               |   |             |   |     |    |   |   |        | (435   | )
|                             | Shares repurchased                                    |  |             | (87,290  | )      |   |          | (323 | )         |   |        |       |               |   |               |   |             |   |     |    |   |   |        | (323   | )
|                             | Warrants issued to consultants                        |  |             |         |        |   |          | 70   |           |   |        |       |               |   |               |   |             |   |     |    |   |   |        | 70     |  
|                             |                                                       |  |             |          |        |   |          |      |           |   |        |        |               |   |               |    |             |   |     |     |   |   |        |       
|Balances at June 30, 2001    |                                                       |  | 3,091,905   |          |        |   | 7,888    |      |           |   | 3,186  |        |               |   |              |    |             |   |    |     |   |   | 11,074 |       
|                             | Net income and comprehensive
income                   |  |             |         |        |   |          |     |           |   |        | 1,243  |               |   |               |   |             |   |     |    |   |   |        | 1,243  |  
|                             | Shares repurchased                                    |  |             | (163,504 | )      |   |          | (731 | )         |   |        |       |               |   |               |   |             |   |     |    |   |   |        | (731   | )
|                             |                                                       |  |             |          |        |   |          |      |           |   |        |        |               |   |               |    |             |   |     |     |   |   |        |       
|Balances at June 30, 2002    |                                                       |  | 2,928,401   |          |        | $ | 7,157    |      |           | $ | 4,429  |        |               | $ |              |    |             | $ |    |     |   | $ | 11,586 |       
|                             |                                                       |  |             |          |        |   |          |      |           |   |        |        |               |   |               |    |             |   |     |     |   |   |        |       



---

|(1) |  | The numbers of shares outstanding at June 30, 2000 and 1999 have been
retroactively adjusted to give effect to a 1-for-5 reverse stock split of
outstanding shares approved by the shareholders on November 21, 2000.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.

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PACER TECHNOLOGY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

|                                                                                         |                                                                                 |                                                     |                                                          |         |             |        |          |         |          |       |     |         |        |       |  
|---------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | --------------------------------------------------- | -------------------------------------------------------- | ------- | ----------- | ------ | -------- | ------- | -------- | ----- | --- | ------- | ------ | ----- | -
|                                                                                         |                                                                                 |                                                     |                                                          |         | Years Ended
|                                                                                         |                                                                                 |                                                     |                                                          |         |            
|                                                                                         |                                                                                 |                                                     |                                                          |         | June 30,    |        | June 30, |         | June 30,
|                                                                                         |                                                                                 |                                                     |                                                          |         | 2002        |        | 2001     |         | 2000    
|                                                                                         |                                                                                 |                                                     |                                                          |         |             |        |          |         |         
|Net income (loss)                                                                        |                                                                                 | $                                                   | 1,243                                                    |         |             | $      | (1,016   | )       |          | $     | 303 |        
|Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |                                                                                 |                                                     |                                                          |         |             |        |          |         |          |       |     |        
|                                                                                         | Depreciation                                                                    |                                                     |                                                          | 525     |             |        |          | 515     |          |       |     | 512     |       
|                                                                                         | Amortization of other assets                                                    |                                                     |                                                          | 222     |             |        |          | 330     |          |       |     | 287     |       
|                                                                                         | Write-off of property and equipment                                             |                                                     |                                                          | 144     |             |        |          |        |          |       |     |        |       
|                                                                                         | Allowance for doubtful accounts                                                 |                                                     |                                                          | 175     |             |        |          | 39      |          |       |     | (600    | )     
|                                                                                         | Deferred income taxes                                                           |                                                     |                                                          | 1,231   |             |        |          | (421    | )        |       |     | (207    | )     
|                                                                                         | Restructuring charges                                                           |                                                     |                                                          | 516     |             |        |          |        |          |       |     | 315     |       
|                                                                                         | Gain on sale of Cook Bates product line                                         |                                                     |                                                          | (1,211  | )           |        |          |        |          |       |     |        |       
|                                                                                         | Cash received on sale of Cook Bates product line                                |                                                     |                                                          | 5,341   |             |        |          |        |          |       |     |        |       
|                                                                                         | (Gain) loss on sale of property and equipment                                   |                                                     |                                                          | 86      |             |        |          | 35      |          |       |     | (5      | )     
|                                                                                         | Warrants issued to consultants                                                  |                                                     |                                                          |        |             |        |          | 70      |          |       |     |        |       
|                                                                                         | Goodwill impairment on sale of California Chemical product line                 |                                                     |                                                          |        |             |        |          | 1,042   |          |       |     |        |       
|                                                                                         | Changes in operating assets and liabilities, excluding effects of
dispositions: |                                                     |                                                          |         |             |        |          |         |          |       |     |         |       
|                                                                                         |                                                                                 |                                                     | Decrease in trade receivables                            |         |             | 2,931  |          |         |          | 616   |     |         |        | 463   |  
|                                                                                         |                                                                                 |                                                     | (Increase) decrease in other receivables                 |         |             | 524    |          |         |          | 86    |     |         |        | (907  | )
|                                                                                         |                                                                                 |                                                     | Decrease in notes receivable                             |         |             |       |          |         |          | 116   |     |         |        | 157   |  
|                                                                                         |                                                                                 |                                                     | Decrease in inventories                                  |         |             | 681    |          |         |          | 3,913 |     |         |        | 1,715 |  
|                                                                                         |                                                                                 |                                                     | (Increase) decrease in prepaid expenses and other assets |         |             | (417   | )        |         |          | 162   |     |         |        | 170   |  
|                                                                                         |                                                                                 |                                                     | Decrease in accounts payable                             |         |             | (1,231 | )        |         |          | (885  | )   |         |        | (343  | )
|                                                                                         |                                                                                 |                                                     | Increase (decrease) in accrued expenses                  |         |             | (1,145 | )        |         |          | 115   |     |         |        | (579  | )
|                                                                                         |                                                                                 |                                                     |                                                          |         |             |        |          |         |          |       |     |        
|                                                                                         |                                                                                 | Net cash provided by operating activities           |                                                          |         | 9,615       |        |          |         | 4,717    |       |     |         | 1,281  |      
|                                                                                         |                                                                                 |                                                     |                                                          |         |             |        |          |         |          |       |     |        
|Cash flows from investing activities:                                                    |                                                                                 |                                                     |                                                          |         |             |        |          |         |          |       |     |        
|                                                                                         | Proceeds from sale of California Chemical                                       |                                                     |                                                          |        |             |        |          | 500     |          |       |     |        |       
|                                                                                         | Proceeds from sale of property and equipment                                    |                                                     |                                                          |        |             |        |          |        |          |       |     | 33      |       
|                                                                                         | Capital expenditures                                                            |                                                     |                                                          | (467    | )           |        |          | (478    | )        |       |     | (341    | )     
|                                                                                         |                                                                                 |                                                     |                                                          |         |             |        |          |         |          |       |     |        
|                                                                                         |                                                                                 | Net cash provided
by (used in) investing activities |                                                          |         | (467        | )      |          |         | 22       |       |     |         | (308   | )    
|                                                                                         |                                                                                 |                                                     |                                                          |         |             |        |          |         |          |       |     |        
|Cash flows from financing activities:                                                    |                                                                                 |                                                     |                                                          |         |             |        |          |         |          |       |     |        
|                                                                                         | Principal payments on debt and line of credit                                   |                                                     |                                                          | (12,809 | )           |        |          | (19,073 | )        |       |     | (17,466 | )     
|                                                                                         | Borrowings on debt and line of credit                                           |                                                     |                                                          | 7,731   |             |        |          | 13,594  |          |       |     | 17,504  |       
|                                                                                         | Principal payments on term-loan                                                 |                                                     |                                                          | (2,611  | )           |        |          | (917    | )        |       |     | (915    | )     
|                                                                                         | Borrowings on term-loan                                                         |                                                     |                                                          |        |             |        |          | 2,000   |          |       |     |        |       
|                                                                                         | Notes receivable payments from directors                                        |                                                     |                                                          |        |             |        |          |        |          |       |     | 47      |       
|                                                                                         | Repurchase of common stock, net                                                 |                                                     |                                                          | (731    | )           |        |          | (323    | )        |       |     | (226    | )     
|                                                                                         |                                                                                 |                                                     |                                                          |         |             |        |          |         |          |       |     |        
|                                                                                         |                                                                                 | Net cash used in financing activities               |                                                          |         | (8,420      | )      |          |         | (4,719   | )     |     |         | (1,056 | )    
|                                                                                         |                                                                                 |                                                     |                                                          |         |             |        |          |         |          |       |     |        
|Net increase (decrease) in cash                                                          |                                                                                 |                                                     | 728                                                      |         |             |        | 20       |         |          |       | (83 | )      
|Cash at beginning of year                                                                |                                                                                 |                                                     | 471                                                      |         |             |        | 451      |         |          |       | 534 |        
|                                                                                         |                                                                                 |                                                     |                                                          |         |             |        |          |         |          |       |     |        
|Cash at end of year                                                                      |                                                                                 | $                                                   | 1,199                                                    |         |             | $      | 471      |         |          | $     | 451 |        
|                                                                                         |                                                                                 |                                                     |                                                          |         |             |        |          |         |          |       |     |        
|Supplemental disclosures of cash flow information:                                       |                                                                                 |                                                     |                                                          |         |             |        |          |         |          |       |     |        
|                                                                                         | Cash paid during the year for interest                                          |                                                     | $                                                        | 138     |             |        | $        | 890     |          |       | $   | 981     |       
|                                                                                         |                                                                                 |                                                     |                                                          |         |             |        |          |         |          |       |     |        
|                                                                                         | Cash paid during the year for income taxes                                      |                                                     | $                                                        | 280     |             |        | $        | 320     |          |       | $   | 750     |       
|                                                                                         |                                                                                 |                                                     |                                                          |         |             |        |          |         |          |       |     |        

See accompanying notes to consolidated financial statements.

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PACER TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2002, 2001 and 2000

(1) The Company and Summary of Significant Accounting Policies

Nature of Business

Pacer Technology (Pacer or Company) is a vertically integrated
manufacturing formulator and packager of adhesives, sealants and other related
products used in hobby, cosmetic, industrial, automotive aftermarket, consumer
and private label applications. Pacer produces the plastic containers used to
package their adhesives and produces plastic containers for other customers.
These products are sold primarily in the United States and internationally
through its UK subsidiary, Pacer Tech Limited (Pacer Tech).

The significant accounting policies followed by the Company in preparing
the accompanying financial statements are as follows:

Principles of Consolidation

The consolidated financial statements include the accounts of Pacer and
its subsidiary, Pacer Tech, which was formed in 1986 to conduct business
operations as a distributor of adhesives primarily in the United Kingdom. In
June 2001, the scope of Pacer Techs operations were reduced and it is now
operated as an international sales office. All significant intercompany
accounts and transactions have been eliminated in consolidation.

Reverse Stock Split

Effective November 21, 2000, the Company shareholders approved a 1-for-5
reverse stock split of its outstanding shares of common stock. All share and
per share amounts in these financial statements have been retroactively
restated to reflect such reverse split.

Use of Estimates

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

Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid investment instruments
with original maturities of three months or less.

Concentration of Credit Risk

Financial instruments, which potentially expose the Company to
concentrations of credit risk, consist primarily of cash and accounts
receivable. Credit is extended for all customers based upon an evaluation of
the customers financial condition and credit history and generally the Company
does not require collateral. Credit losses are provided for in the consolidated
financial statements by management based upon a detailed evaluation of the
collectibility of accounts receivable.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or
market (net realizable value).

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PACER TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2002, 2001 and 2000

Equipment and Leasehold Improvements

Equipment and leasehold improvements are stated at cost less accumulated
depreciation and amortization. Equipment depreciation is calculated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term or estimated useful life of the asset.

Costs in Excess of Net Assets of Businesses Acquired

Costs in excess of net assets of businesses acquired are amortized on the
straight-line method over an 8-year to 20-year life. Pacer assesses the
recoverability of this intangible asset by determining whether the amortization
of the asset balance over its remaining useful life can be recovered through
undiscounted future operating cash flows of the acquired operations. The
accumulated amortization on the assets of businesses acquired was $1.6 million
and $1.4 million as of June 30, 2002 and 2001, respectively.

Revenue Recognition

The
Company provides its customers with limited rights to return
products. The Company
recognizes revenue from the sale of a product upon its shipment to the customer
and establishes an allowance based on historical experience with returns of like
products.

Advertising

Cooperative advertising obligations are accrued and the costs are
immediately recorded as a charge against sales when incurred. Advertising
expense was approximately $600,000, $1,300,000 and $1,400,000, for 2002, 2001
and 2000, respectively.

Restructuring Charges

During
the fiscal year ended June 30, 2002, the Company recorded $516,000 of
restructuring charges mainly as a result of lease termination charges and
employee termination costs. The Company has also acquired certain equipment and made
certain leasehold improvements to accommodate the relocated
operations at its
retained facilities at a cost of approximately $200,000, which was
capitalized and will be depreciated over the useful lives of the acquired assets.

Restructuring charges for employee severance, and lease termination
associated with relocation and closure of facilities amounted to $315,000 in
the fiscal year ended June 30, 2000.

Earnings (Loss) Per Share

Basic earnings (loss) per share (EPS) are based on the weighted average
number of shares outstanding during the periods reported and exclude any
dilutive effects of options.

Income Taxes

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

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PACER TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2002, 2001 and 2000

Foreign Currency Translation

Assets and liabilities denominated in a functional currency other than
U.S. dollars are translated into U.S. dollars at the current rate of exchange
existing at year-end, and revenues and expenses are translated at the average
monthly exchange rates. Translation adjustments are included as a separate
component of shareholders equity. Transaction gains and losses included in net
income (loss) are immaterial.

Fair Value of Financial Instruments

The fair value of financial instruments is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
As of June 30, 2002, the fair value of all financial instruments approximated
carrying value.

Research and Development

Research and development costs are charged to selling, general and
administrative expenses as incurred and amounted to $302,000, $318,000 and
$467,000 in 2002, 2001 and 2000, respectively.

Product Warranties

Pacer provides limited warranties for some products for periods generally
ranging from 6 to 12 months. Estimated warranty costs have historically been
consistent and do not vary significantly from month to month and therefore are
recognized as incurred.

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of

Pacer reviews its long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to the future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.

Stock Option Plans

Pacer applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations, in accounting for its stock options.
As such, compensation expense would be recorded on the date of grant only if
the current market price of the underlying stock exceeded the exercise price.

Impact of Recently Issued Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets. Under the new rules, goodwill and indefinite lived
intangible assets will no longer be amortized but will be reviewed annually for
impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. The
non-amortization provisions of SFAS No. 142 apply to goodwill and intangible
assets acquired after June 30, 2001. With respect to goodwill and intangible
assets acquired prior to July 1, 2001, the Company will apply the new
accounting rules beginning July 1, 2002. The Company will be required to
determine if any other identifiable intangible assets exist within its first
fiscal quarter after adoption of SFAS No. 142. The Company is currently
assessing what financial impact, if any, SFAS No. 142 will have on its
consolidated financial statements and operating results.

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PACER TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2002, 2001 and 2000

In
June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires entities to record the fair
value of a liability for an asset retirement obligation when an existing law or
contract requires that the obligation be settled. The statement requires that
the amount recorded as a liability be capitalized by increasing the carrying
amount of the related long-lived asset. The capitalized cost is depreciated
over the useful life of the related asset. SFAS No. 143 will be effective for
financial statements beginning after January 1, 2003, with earlier application
encouraged. The Company is currently evaluating the impact on its consolidated
financial statements of adopting this statement.

In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which is effective for financial
statements issued for fiscal years beginning after December 15, 2001. SFAS 144
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, and applies to all long-lived
assets (including discontinued operations). The Company is currently assessing
what financial impact, if any, SFAS No. 144 will have on its consolidated
financial statements and operating results.

Impact of Recent EITF Guidance

In accordance with
EITF Issue No. 00-10 (EITF 00-10): Accounting for Shipping and
Handling Fees and Costs, the Company reclassified freight out expense from
selling, general and administrative expense to cost of sales for all periods
presented. This change has no effect on net income (loss) or earnings
(loss) per share.

The change increased cost of sales and decreased selling, general and
administrative expenses during the fiscal years ended June 30, 2002, 2001 and
2000 by $1.0 million, $1.3 million and $362,000, respectively.

The results in the accompanying financial statements reflect the
application of the consensus reached by the EITF of the FASB in Issue 01-9
(EITF 01-9): Accounting for Consideration Given by a Vendor to a Customer or
Reseller of the Vendors Products. The change requires a reclassification of
certain marketing and promotional expenses from operating expenses (selling
expenses) to a reduction in sales. The change has no effect on net
income (loss) or
earnings (loss) per share. Prior period financial statements have been reclassified
to comply with EITF 00-10 and 01-9.

The change reduced both net sales and selling, general and administrative
expenses during the fiscal years ended June 30, 2002, 2001 and 2000 by $1.1
million, $2.3 million and $3.9 million, respectively.

Reclassifications

Certain reclassifications have been made to the 2001 and 2000 consolidated
financial statements to conform with the 2002 consolidated financial statement
presentation.

(2) Inventories

Inventories are summarized as follows:

|                 |  |                |       |      |  |   |       |  
|---------------- |  | -------------- | ----- | ---- |  | - | ----- | -
|                 |  | June 30,      
|                 |  |               
|                 |  | 2002           |       | 2001
|                 |  |                |       |     
|                 |  | (In thousands)
|Raw materials    |  | $              | 1,579 |      |  | $ | 4,378 |  
|Work-in-process  |  |                | 323   |      |  |   | 508   |  
|Finished goods   |  |                | 1,505 |      |  |   | 3,341 |  
|Less: reserves   |  |                | (20   | )    |  |   | (277  | )
|                 |  |                |       |      |  |   |       |  
|Inventories, net |  | $              | 3,387 |      |  | $ | 7,950 |  
|                 |  |                |       |      |  |   |       |  

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PACER TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2002, 2001 and 2000

(3) Equipment and Leasehold Improvements

Equipment and leasehold improvements and the useful lives used for
computing depreciation and amortization are summarized as follows:

|                                               |  |              |      |      |  |                |        |   |  |   |        |  
|---------------------------------------------- |  | ------------ | ---- | ---- |  | -------------- | ------ | - |  | - | ------ | -
|                                               |  |              |      |      |  | June 30,      
|                                               |  |              |      |      |  |               
|                                               |  | Estimated    |      |      |  |                |        |  
|                                               |  | Useful Lives |      | 2002 |  | 2001          
|                                               |  |              |      |      |  |               
|                                               |  |              |      |      |  | (In thousands)
|Shop equipment                                 |  |              | 5-10 |      |  | $              | 4,845  |   |  | $ | 6,017  |  
|Leasehold improvements                         |  |              | 10   |      |  |                | 1,082  |   |  |   | 1,062  |  
|Office furniture and equipment                 |  |              | 5-7  |      |  |                | 227    |   |  |   | 279    |  
|Transportation equipment                       |  |              | 3    |      |  |                | 53     |   |  |   | 106    |  
|Construction in progress                       |  |              |      |      |  |                | 6      |   |  |   | 34     |  
|                                               |  |              |      |      |  |                |        |   |  |   |        |  
|                                               |  |              |      |      |  |                | 6,213  |   |  |   | 7,498  |  
|Less accumulated depreciation and amortization |  |              |      |      |  |                | (4,951 | ) |  |   | (5,864 | )
|                                               |  |              |      |      |  |                |        |   |  |   |        |  
|                                               |  |              |      |      |  | $              | 1,262  |   |  | $ | 1,634  |  
|                                               |  |              |      |      |  |                |        |   |  |   |        |  

(4) Borrowings

Pacer has a revolving bank credit line that permits it to borrow up to the
lesser of (i) $7.0 million, or (ii) the sum of 70% of the amount of eligible
accounts receivable plus 46% of the cost of its finished goods inventories and
35% of its raw material inventories. Credit line borrowings are used primarily
to fund working capital requirements. Borrowings under the credit line bear
interest at the banks prime rate (4.75% as of June 30, 2002) less 0.25%, or at
a LIBOR base rate plus 2.50%. The agreement provides for a reduction in the
LIBOR rate of 0.25% on any outstanding borrowings if the Company reached EBITDA
targets of $1.0 million for the six-month period January through June 2002 and
$500,000 in any subsequent quarter. Pacer is required to make monthly interest
only payments on outstanding borrowings until the maturity date of the credit
line, which is October 1, 2003. As of June 30, 2002, no borrowings were
outstanding under the credit line. At June 30, 2002, the Company had
approximately $4.9 million of borrowings available based on eligible
collateral.

In connection with this credit line, the Company maintains Commercial
Letters of Credit, Standby Letters of Credit, and Bankers Acceptances, not to
exceed $1.5 million in the aggregate. Any amount outstanding on this
additional credit facility reduces the borrowing base on the revolving bank
credit line. This credit facility expires on October 1, 2003. As of June 30,
2002, there were no letters of credit, standby letters of credit or bankers
acceptances outstanding under this facility.

The agreement with the bank requires Pacer to maintain certain financial
ratios and to comply with certain restrictive covenants. As of June 30, 2002,
Pacer was in compliance with or had received waivers for all of these
covenants. All borrowings from the bank are secured by a first priority
security interest in all of the Companys assets.

In June of 2000, Pacer incurred additional long-term debt of $426,000
related to its acquisition of the intellectual property rights for the Pro-Tel
Bondini product line. The current portion of this debt is based on certain
minimum royalty payments in accordance with the agreement. The payments
commenced on June 1, 2000 and will be made over a term of five years. As of
June 30, 2002, the outstanding balance was $167,000.

Long-term debt, excluding the revolving line of credit at June 30, 2002
and 2001, consisted of the following:

|                           |  |                |      |      |  |   |        |  
|-------------------------- |  | -------------- | ---- | ---- |  | - | ------ | -
|                           |  | 2002           |      | 2001
|                           |  |                |      |     
|                           |  | (In thousands)
|Term loan                  |  | $              |     |      |  | $ | 2,611  |  
|Capital expenditure loan   |  |                |     |      |  |   | 331    |  
|Pro-Tel Bondini            |  |                | 167  |      |  |   | 266    |  
|Less: current installments |  |                | (100 | )    |  |   | (3,042 | )
|                           |  |                |      |      |  |   |        |  
|Total Long-Term Debt       |  | $              | 67   |      |  | $ | 166    |  
|                           |  |                |      |      |  |   |        |  

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PACER TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2002, 2001 and 2000

Future payments of debt are as follows:

|                     |  |                |     | 
|-------------------- |  | -------------- | --- | 
|Year Ending June 30, |  | Payments      
|                     |  |               
|                     |  | (In thousands)
|2003                 |  | $              | 100 | 
|2004                 |  |                | 67  | 
|                     |  |                |     | 
|Total Payments       |  | $              | 167 | 
|                     |  |                |     | 

(5) Accrued Expenses

Accrued expenses consist of the following:

|                                     |                        |   |                |       |      |   |     |       | 
|------------------------------------ | ---------------------- | - | -------------- | ----- | ---- | - | --- | ----- | 
|                                     |                        |   | 2002           |       | 2001
|                                     |                        |   |                |       |     
|                                     |                        |   | (In thousands)
|Sales and marketing expenses         |                        | $ | 57             |       |      | $ | 111 |      
|Legal and accounting expenses        |                        |   | 24             |       |      |   | 90  |      
|Warranty                             |                        |   |               |       |      |   | 214 |      
|Income and other taxes               |                        |   |               |       |      |   | 3   |      
|Employee incentive plan              |                        |   | 280            |       |      |   |    |      
|Accrued payroll and related expenses |                        |   | 311            |       |      |   | 602 |      
|Deferred rent                        |                        |   | 122            |       |      |   | 218 |      
|Other                                |                        |   | 226            |       |      |   | 268 |      
|                                     |                        |   |                |       |      |   |     |      
|                                     | Total accrued expenses |   | $              | 1,020 |      |   | $   | 1,506 | 
|                                     |                        |   |                |       |      |   |     |      

Accrued payroll and related expenses for 2001 include approximately
$216,000 for employee severance.

(6) Lease Obligations

Pacer leases two manufacturing facilities under operating leases expiring
in October 2004 and May 2009. Pacer also leases two distribution facilities and
office equipment under operating lease agreements. Leases for the two
distribution facilities expire in May 2003 and November 2003. Future minimum
lease payments under non-cancelable operating leases as of June 30, 2002 are as
follows:

|                              |      |                |                  |     | 
|----------------------------- | ---- | -------------- | ---------------- | --- | 
|                              |      |                | Operating Leases
|Year Ending June 30,          |      |               
|                              |      | (In thousands)
|                              | 2003 |                | $                | 569 | 
|                              | 2004 |                |                  | 344 | 
|                              | 2005 |                |                  | 261 | 
|                              | 2006 |                |                  | 245 | 
|                              | 2007 |                |                  | 237 | 
|Thereafter                    |      |                | 487              |    
|                              |      |                |                  |    
|Minimum future lease payments |      | $              | 2,143            |    
|                              |      |                |                  |    

Rent expense was $619,000, $723,000 and $766,000 in 2002, 2001 and 2000,
respectively.

(7) Major Customers and Export Sales

Pacer has one customer that accounted for approximately 12% in fiscal 2002
of its net sales and export sales represent approximately 16%, 14% and 12% of
net sales in 2002, 2001 and 2000 respectively. There was no customer that
accounted for more than 10% of its net sales in 2001.

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PACER TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2002, 2001 and 2000

(8) Income Taxes

Income tax expense (benefit) from continuing operations for the years
ended June 30, 2002, 2001 and 2000 consist of:

|                                   |          |   |                |       |      |   |      |      |   |   |      |      |  
|---------------------------------- | -------- | - | -------------- | ----- | ---- | - | ---- | ---- | - | - | ---- | ---- | -
|                                   |          |   | 2002           |       | 2001 |   | 2000
|                                   |          |   |                |       |      |   |     
|                                   |          |   | (In thousands)
|Federal:                           |          |   |                |       |      |   |      |      |   |   |      |     
|                                   | Current  |   | $              | (323  | )    |   | $    |     |   |   | $    |     |  
|                                   | Deferred |   |                | 1,168 |      |   |      | (416 | ) |   |      | (394 | )
|                                   |          |   |                |       |      |   |      |      |   |   |      |     
|                                   |          |   | 845            |       |      |   | (416 | )    |   |   | (394 | )   
|                                   |          |   |                |       |      |   |      |      |   |   |      |     
|State:                             |          |   |                |       |      |   |      |      |   |   |      |     
|                                   | Current  |   |                | (150  | )    |   |      |     |   |   |      |     |  
|                                   | Deferred |   |                | 63    |      |   |      | (5   | ) |   |      | (81  | )
|                                   |          |   |                |       |      |   |      |      |   |   |      |     
|                                   |          |   | (87            | )     |      |   | (5   | )    |   |   | (81  | )   
|                                   |          |   |                |       |      |   |      |      |   |   |      |     
|Foreign:                           |          |   |                |       |      |   |      |      |   |   |      |     
|                                   | Current  |   |                | 84    |      |   |      | 28   |   |   |      | 36   |  
|                                   | Deferred |   |                |      |      |   |      |     |   |   |      |     |  
|                                   |          |   |                |       |      |   |      |      |   |   |      |     
|                                   |          |   | 84             |       |      |   | 28   |      |   |   | 36   |     
|                                   |          |   |                |       |      |   |      |      |   |   |      |     
|Total income tax expense (benefit) |          | $ | 842            |       |      | $ | (393 | )    |   | $ | (439 | )   
|                                   |          |   |                |       |      |   |      |      |   |   |      |     

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at June 30, 2002 and 2001 are presented
below:

|                                               |                                                   |  |                |      |      |  |   |       |  
|---------------------------------------------- | ------------------------------------------------- |  | -------------- | ---- | ---- |  | - | ----- | -
|                                               |                                                   |  | 2002           |      | 2001
|                                               |                                                   |  |                |      |     
|                                               |                                                   |  | (In thousands)
|Current deferred tax assets (liabilities):     |                                                   |  |                |      |      |  |   |      
|                                               | Allowance for doubtful accounts                   |  | $              | 222  |      |  | $ | 147   |  
|                                               | Inventories                                       |  |                | 33   |      |  |   | 159   |  
|                                               | Prepaid expenses                                  |  |                | (133 | )    |  |   | (29   | )
|                                               | Vacation accruals                                 |  |                | 83   |      |  |   | 86    |  
|                                               | Warranty accruals                                 |  |                |     |      |  |   | 91    |  
|                                               | Advertising accruals                              |  |                | 56   |      |  |   | 120   |  
|                                               | Amortization                                      |  |                |     |      |  |   | 179   |  
|                                               | Net operating loss                                |  |                |     |      |  |   | 890   |  
|                                               | Other                                             |  |                | 86   |      |  |   | 217   |  
|                                               |                                                   |  |                |      |      |  |   |      
|                                               | Net current deferred tax assets                   |  | $              | 347  |      |  | $ | 1,860 |  
|                                               |                                                   |  |                |      |      |  |   |      
|Non-current deferred tax assets (liabilities): |                                                   |  |                |      |      |  |   |      
|                                               | Depreciation                                      |  | $              | 126  |      |  | $ | 202   |  
|                                               | Amortization                                      |  |                | 165  |      |  |   |      |  
|                                               | Net operating loss                                |  |                | 36   |      |  |   |      |  
|                                               | Other                                             |  |                | (89  | )    |  |   | (246  | )
|                                               |                                                   |  |                |      |      |  |   |      
|                                               | Net non-current deferred tax assets (liabilities) |  | $              | 238  |      |  | $ | (44   | )
|                                               |                                                   |  |                |      |      |  |   |      

Pacer believes that it is more likely than not that the net deferred tax
assets will be realized. This belief is based on past and anticipated future
earnings.

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PACER TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2002, 2001 and 2000

The total income tax expense (benefit) differs from the expected tax
expense (benefit) (computed by applying the U.S. Federal corporate income tax
rate of 34%) for 2002, 2001 and 2000 as follows:

|                                                    |                                    |   |                |     |      |   |      |      |   |   |      |      |  
|--------------------------------------------------- | ---------------------------------- | - | -------------- | --- | ---- | - | ---- | ---- | - | - | ---- | ---- | -
|                                                    |                                    |   | 2002           |     | 2001 |   | 2000
|                                                    |                                    |   |                |     |      |   |     
|                                                    |                                    |   | (In thousands)
|Expected income tax provision                       |                                    | $ | 567            |     |      | $ | (479 | )    |   | $ | (46  | )   
|Non-deductible expenses                             |                                    |   | 25             |     |      |   | 43   |      |   |   | 49   |     
|State income tax, net of Federal income tax benefit |                                    |   | 87             |     |      |   | (82  | )    |   |   | (23  | )   
|Effect of foreign operations                        |                                    |   | 167            |     |      |   | 28   |      |   |   | (54  | )   
|Benefit from tax planning                           |                                    |   |               |     |      |   |     |      |   |   | (365 | )   
|Other                                               |                                    |   | (4             | )   |      |   | 97   |      |   |   |     |     
|                                                    |                                    |   |                |     |      |   |      |      |   |   |      |     
|                                                    | Total Income Tax Expense (Benefit) |   | $              | 842 |      |   | $    | (393 | ) |   | $    | (439 | )
|                                                    |                                    |   |                |     |      |   |      |      |   |   |      |     

Loss carry forwards for federal tax purposes, at June 30, 2002, were
approximately $106,000, and expire at various dates through 2021.

(9) Shareholders Equity

Nonqualified Stock Option and Incentive Stock Option Plans

All shares and per share amounts below have been retroactively restated to
reflect the one-for-five reverse stock split approved by shareholders on
November 21, 2000.

During the year ended June 30, 2002, Pacer adopted the 2001 Stock
Incentive Plan that qualifies as incentive stock options under Section 442 of
the Internal Revenue Code.

Under the 2001 Stock Incentive Plan, options to purchase up to an
aggregate of 300,000 shares of Pacer common stock can be granted. The purchase
price shall be no less than the fair market value of the common stock on the
grant date. In the event such option is granted to an employee who, at the time
the option is granted, owns common stock possessing more than 10% of the total
combined voting power of all classes of stock of Pacer, the exercise price of
the option shall be no less than 110% of the fair market value. The exercise
period for the options shall not exceed ten years, except that it shall not be
greater than five years in the case of any options granted to an employee who
owns common stock possessing more than 10% of the total combined voting power
of all classes of stock of Pacer. The option agreement may provide (a) that the
right to exercise the option shall accrue over time in accordance with a
vesting schedule, which shall provide that options will become exercisable at
least in annual installments of 20% per year over the first five years of the
term of the option; or (b) that such accrual shall be accelerated upon the
occurrence of certain specified event(s).

There were no stock options granted under this Plan during fiscal year
2002.

During the year ended June 30, 1995, Pacer adopted the 1994 Stock Option
Plan to provide key employees and directors an opportunity to purchase common
stock of Pacer pursuant to non-qualified stock options at the discretion of
the Board of Directors.

Under the 1994 Stock Option Plan, options to purchase up to 440,000 shares
of Pacer common stock are authorized to be granted. The purchase price shall be
no less than fair market value on the grant date. The exercise period shall not
exceed ten years from grant date and options vest immediately.

In fiscal year 2000, under this Plan, Pacer granted an option to a
Director to purchase 20,000 shares of Pacers common stock at $4.925 per share.
The market value of the stock was $4.925 per share, on the date of grant. The
fair value of the stock option granted during fiscal 2000 was $79,000 on the
date of grant using the Black Scholes option-pricing model with the following
assumptions: volatility rate of 67.85%, risk-free interest rate of 6.68%, and

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PACER TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2002, 2001 and 2000

an expected life of 10 years. There were no stock options granted under the
nonqualified Stock Option Plan during fiscal years 2002 or 2001.

During the year ended June 30, 1995, Pacer adopted the 1994 Incentive
Stock Option Plan that qualifies as incentive stock options under Section 422
of the Internal Revenue Service Code.

Under the 1994 Incentive Stock Option Plan, options to purchase up to an
aggregate of 400,000 shares of Pacer common stock can be granted. The purchase
price shall be no less than the fair market value of the common stock on the
grant date. In the event such option is granted to an employee who, at the time
the option is granted, owns common stock possessing more than 10% of the total
combined voting power of all classes of stock of Pacer, the exercise price of
the option shall be no less than 110% of the fair market value. The exercise
period for the options shall not exceed ten years, except that it shall not be
greater than five years in the case of any options granted to an employee who
owns common stock possessing more than 10% of the total combined voting power
of all classes of stock of Pacer. The option agreement may provide (a) that the
right to exercise the option in whole or in part shall not accrue until a
certain date or the occurrence of an event; (b) that the right to exercise the
option shall accrue over time in accordance with a vesting schedule; or (c)
that such accrual shall be accelerated upon the occurrence of certain specified
event(s).

In fiscal year 2000, under this Plan, Pacer granted options to an employee
to purchase a total of 7,000 shares of Pacers common stock at $4.90 per share.
The market value of the stock was $4.90 per share on the date of grant. The
fair value of the stock options granted during fiscal 2000 was $27,000 on the
date of grant using the Black Scholes option-pricing model with the following
assumptions: volatility rate of 67.85%, risk-free interest rate of 5.92%, and
an expected life of 10 years.

In fiscal year 2001, under this Plan, the Company granted options to an
employee to purchase a total of 100,000 shares of Pacers common stock at
$2.625 per share. The market value was $2.625 per share on the date of grant.
The fair value of the stock options granted during fiscal year 2001 was
$172,000 on the date of grant using the Black Scholes option-pricing model with
the following assumptions: volatility rate of 47.57%, risk free interest rate
of 5.06% and an expected life of 10 years.

In fiscal year 2002, under this Plan, the Company granted options to
various employees to purchase a total of 163,000 shares of Pacers common stock
at prices ranging from $3.02 to $4.50 per share, which equaled the market price
of the Companys common stock at date of grant. The fair value of the stock
options granted during fiscal year 2002 was $312,000 on the dates of grant
using the Black Scholes option-pricing model with the following assumptions:
volatility rate of 47.8%, risk free interest rate of 4.08% and an expected life
of 10 years.

Under the 1982 Stock Option Plan, options to purchase up to an aggregate
of 360,000 shares of common stock could be granted to both directors and key
employees. The purchase price was not normally less than the fair market value
of the shares on the date the option was granted, and in no event was the
purchase price less than 85% of the fair market value of the shares on the date
the option was granted. The exercise period for an option could not exceed ten
years, and options granted vested immediately. This plan expired in 1992 and no
options were granted under this plan thereafter.

34



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##### Table of Contents



PACER TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2002, 2001 and 2000

Pacer applies APB Opinion No. 25 in accounting for its stock option plans
and, accordingly, no compensation expense has been recognized for its stock
options in the financial statements. Had Pacer determined compensation expense
based on the fair value at the grant date for its stock options under SFAS No.
123, Pacers net income would have been reduced to the pro forma amounts
indicated below:

|                                                |  |      |                                          |      |  |      |        |   |  |   |     | 
|----------------------------------------------- |  | ---- | ---------------------------------------- | ---- |  | ---- | ------ | - |  | - | --- | 
|                                                |  | 2002 |                                          | 2001 |  | 2000
|                                                |  |      |                                          |      |  |     
|                                                |  |      | (In
thousands, except per share amounts)
|Net income (loss) as reported                   |  | $    | 1,243                                    |      |  | $    | (1,016 | ) |  | $ | 303 | 
|Pro forma net income (loss)                     |  | $    | 888                                      |      |  | $    | (1,071 | ) |  | $ | 263 | 
|As reported  basic earnings (loss) per share   |  | $    | .41                                      |      |  | $    | (.31   | ) |  | $ | .09 | 
|Pro forma  basic earnings (loss) per share     |  | $    | .29                                      |      |  | $    | (.33   | ) |  | $ | .08 | 
|As reported  diluted earnings (loss) per share |  | $    | .40                                      |      |  | $    | (.31   | ) |  | $ | .09 | 
|Pro forma  diluted earnings (loss) per share   |  | $    | .29                                      |      |  | $    | (.33   | ) |  | $ | .08 | 

Summary of changes in stock options outstanding are as follows:

1994 SOP & ISOP

|                          |                   |  |           |          |             |  |          |         |                 |   |            |      |                  |  |   |      | 
|------------------------- | ----------------- |  | --------- | -------- | ----------- |  | -------- | ------- | --------------- | - | ---------- | ---- | ---------------- |  | - | ---- | 
|                          |                   |  |           |          |             |  |          |         |                 |   | Weighted   |      | Weighted Average
|                          |                   |  | Options   |          |             |  |          |         | Average         |   | Fair Value
|                          |                   |  | Available |          | Number      |  | Exercise |         | Per Share of   
|                          |                   |  | For Grant |          | Outstanding |  | Prices   |         | Options Granted
|                          |                   |  |           |          |             |  |          |         |                
|Balances at June 30, 1999 |                   |  | 280,000   |          |             |  | 506,000  |         |                 | $ | 4.71       |      |                  |  |   |     
|                          | Options granted   |  |           | (27,000  | )           |  |          | 27,000  |                 |   |            | 2.01 |                  |  | $ | 3.94 | 
|                          | Options exercised |  |           |         |             |  |          | (18,000 | )               |   |            | 3.60 |                  |  |   |      | 
|                          |                   |  |           |          |             |  |          |         |                 |   |            |      |                  |  |   |     
|Balances at June 30, 2000 |                   |  | 253,000   |          |             |  | 515,000  |         |                 | $ | 4.76       |      |                  |  |   |     
|                          | Options granted   |  |           | (100,000 | )           |  |          | 100,000 |                 |   |            | 2.63 |                  |  | $ | 1.72 | 
|                          | Options cancelled |  |           | 10,000   |             |  |          | (10,000 | )               |   |            | 5.23 |                  |  |   |      | 
|                          |                   |  |           |          |             |  |          |         |                 |   |            |      |                  |  |   |     
|Balances at June 30, 2001 |                   |  | 163,000   |          |             |  | 605,000  |         |                 | $ | 5.10       |      |                  |  |   |     
|                          | Options granted   |  |           | (163,000 | )           |  |          | 163,000 |                 |   |            | 3.28 |                  |  | $ | 2.10 | 
|                          | Options cancelled |  |           | 85,000   |             |  |          | (85,000 | )               |   |            | 3.89 |                  |  |   |      | 
|                          |                   |  |           |          |             |  |          |         |                 |   |            |      |                  |  |   |     
|Balances at June 30, 2002 |                   |  | 85,000    |          |             |  | 683,000  |         |                 | $ | 3.41       |      |                  |  |   |     
|                          |                   |  |           |          |             |  |          |         |                 |   |            |      |                  |  |   |     

The following table summarizes information about the 1994 SOP & ISOP stock
options at June 30, 2002:

|               |  |            |                    |                |                  |                  |           |            |                    |                     |                   |  |         |  |         |   |                  |   |      |  | 
|-------------- |  | ---------- | ------------------ | -------------- | ---------------- | ---------------- | --------- | ---------- | ------------------ | ------------------- | ----------------- |  | ------- |  | ------- | - | ---------------- | - | ---- |  | 
|               |  |            |                    |                |                  |                  |           |            |                    |                     | Weighted Average  |  |         |  |         |   | Weighted Average
|               |  |            | Shares Outstanding |                | Weighted Average |                  | Remaining |            | Shares Exercisable |                     | Exercise Price of
|Exercise Price |  | at 6/30/02 |                    | Exercise Price |                  | Contractual Life |           | at 6/30/02 |                    | Exercisable Options
|               |  |            |                    |                |                  |                  |           |            |                    |                    
|$2.63          |  |            | 100,000            |                |                  | $                | 2.63      |            |                    | 8.6 years           |                   |  | 40,000  |  |         | $ | 2.63             |  
|$3.02-$3.60    |  |            | 149,000            |                |                  | $                | 3.11      |            |                    | 8.6 years           |                   |  | 141,000 |  |         | $ | 3.08             |  
|$4.32-$4.92    |  |            | 74,000             |                |                  | $                | 4.58      |            |                    | 7.2 years           |                   |  | 67,000  |  |         | $ | 4.58             |  
|$5.00          |  |            | 360,000            |                |                  | $                | 5.00      |            |                    | 2.7 years           |                   |  | 360,000 |  |         | $ | 5.00             |  
|               |  |            |                    |                |                  |                  |           |            |                    |                     |                   |  |         |  |         |   |                  |   |      | 
|               |  |            | 683,000            |                |                  |                  |           |            |                    |                     |                   |  |         |  | 608,000 |   |                  | $ | 4.35 | 
|               |  |            |                    |                |                  |                  |           |            |                    |                     |                   |  |         |  |         |   |                  |   |      | 

35



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##### Table of Contents



PACER TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2002, 2001 and 2000

1982 Other Stock Option Plan

|                          |                 |  |                     |         |          |   |            |            |  |   |         |          |  
|------------------------- | --------------- |  | ------------------- | ------- | -------- | - | ---------- | ---------- |  | - | ------- | -------- | -
|                          |                 |  | Outstanding Options
|                          |                 |  |                    
|                          |                 |  | Number              |         | Exercise |   | Aggregate 
|                          |                 |  | of Shares           |         | Prices   |   | Value     
|                          |                 |  |                     |         |          |   |           
|Balances at June 30, 1999 |                 |  | 140,000             |         |          | $ | 5.00-$5.40 |            |  | $ | 706,000 |         
|                          |                 |  |                     |         |          |   |            |            |  |   |         |         
|Balances at June 30, 2000 |                 |  | 140,000             |         |          | $ | 5.00-$5.40 |            |  | $ | 706,000 |         
|                          | Options expired |  |                     | (60,000 | )        |   | $          | 5.00-$5.40 |  |   |         | (306,000 | )
|                          |                 |  |                     |         |          |   |            |            |  |   |         |         
|Balances at June 30, 2001 |                 |  | 80,000              |         |          | $ | 5.00       |            |  | $ | 400,000 |         
|                          | Options expired |  |                     | (20,000 | )        |   | $          | 5.00       |  |   |         | (100,000 | )
|                          |                 |  |                     |         |          |   |            |            |  |   |         |         
|Balances at June 30, 2002 |                 |  | 60,000              |         |          | $ | 5.00       |            |  | $ | 300,000 |         
|                          |                 |  |                     |         |          |   |            |            |  |   |         |         

Warrant to Purchase Common Stock

At June 30, 2000, there were no warrants outstanding to purchase shares of
the Companys common stock.

During the year ended June 30, 2001, the Company issued a warrant to
purchase 66,667 shares of common stock at a price of $2.9375 per share that
expires on January 28, 2004. The Company valued the warrant at $70,000 using
the Black-Scholes option-pricing model.

The Company did not issue any new warrants during the current year. At
June 30, 2002, there is a warrant outstanding to purchase 66,667
shares of common stock.

(10) Earnings (Loss) Per Share

Earnings (loss) per share were computed as follows:

|                                                          |                                                                                                                          |   |                                          |       |      |   |        |       |  |   |       |       | 
|--------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | - | ---------------------------------------- | ----- | ---- | - | ------ | ----- |  | - | ----- | ----- | 
|                                                          |                                                                                                                          |   | 2002                                     |       | 2001 |   | 2000  
|                                                          |                                                                                                                          |   |                                          |       |      |   |       
|                                                          |                                                                                                                          |   | (In thousands, except per share amounts)
|Numerator:                                                |                                                                                                                          |   |                                          |       |      |   |        |       |  |   |       |      
|Numerator for basic and diluted earnings (loss)
per share |                                                                                                                          | $ | 1,243                                    |       |      | $ | (1,016 | )     |  | $ | 303   |      
|                                                          |                                                                                                                          |   |                                          |       |      |   |        |       |  |   |       |      
|Denominator:                                              |                                                                                                                          |   |                                          |       |      |   |        |       |  |   |       |      
|                                                          | Denominator for basic earnings (loss) per share
 weighted average number of common shares
outstanding during the period |   |                                          | 3,022 |      |   |        | 3,260 |  |   |       | 3,345 | 
|                                                          | Incremental common shares attributable to
exercise
of outstanding options                                                |   |                                          | 70    |      |   |        |      |  |   |       | 29    | 
|                                                          |                                                                                                                          |   |                                          |       |      |   |        |       |  |   |       |      
|Denominator for diluted earnings (loss) per share         |                                                                                                                          |   | 3,092                                    |       |      |   | 3,260  |       |  |   | 3,374 |      
|                                                          |                                                                                                                          |   |                                          |       |      |   |        |       |  |   |       |      
|Basic earnings (loss) per share                           |                                                                                                                          | $ | .41                                      |       |      | $ | (.31   | )     |  | $ | .09   |      
|                                                          |                                                                                                                          |   |                                          |       |      |   |        |       |  |   |       |      
|Diluted earnings (loss) per share                         |                                                                                                                          | $ | .40                                      |       |      | $ | (.31   | )     |  | $ | .09   |      
|                                                          |                                                                                                                          |   |                                          |       |      |   |        |       |  |   |       |      

(11) 401(k) PLAN

Pacers 401(k) plan is available to all full-time employees who have
completed a minimum service of 90 days at January 1, April 1, July 1 or October
1 of each year.

Employees who elect to participate in the plan may make contributions to
the plan on a pre-tax basis from 2% to 16% of their annual compensation. Pacer
contributions, when made, will match 50% of employee contributions up to 4% of
salaries paid. Pacer contributions are accrued as participant contributions are
withheld. Participants become fully vested in Pacer contributions after six
years of service.

Plan expenses for the years ended June 30, 2002, 2001 and 2000 were
$59,000, $67,000 and $62,000, respectively.

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PACER TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2002, 2001 and 2000

(12) Quarterly Financial Data (Unaudited)

The following table presents unaudited quarterly financial information for
each of the fiscal years ended June 30, 2002 and 2001. This information has
been prepared by Pacer on a basis consistent with its audited consolidated
financial statements for those years. The information includes all necessary
adjustments, consisting only of normal recurring adjustments, that management
considers necessary for a fair presentation of the unaudited quarterly
operating results when read in conjunction with Pacers audited consolidated
financial statements and notes thereto. These quarterly operating results are
not necessarily indicative of results that may be expected in future periods.

|                             |         |      |               |      |          |      |          |      |          |   |       |     |  |   |       |     | 
|---------------------------- | ------- | ---- | ------------- | ---- | -------- | ---- | -------- | ---- | -------- | - | ----- | --- |  | - | ----- | --- | 
|                             |         |      | Quarter Ended
|                             |         |      |              
|                             |         |      | Sept. 30,     |      | Dec. 31, |      | Mar. 31, |      | June 30,
|FY 2002                      |         | 2001 |               | 2001 |          | 2002 |          | 2002
|                             |         |      |               |      |          |      |          |     
|Net
sales                    |         | $    | 10,359        |      |          | $    | 6,886    |      |          | $ | 6,567 |     |  | $ | 7,008 |    
|Gross profit                 |         |      | 2,938         |      |          |      | 1,864    |      |          |   | 1,993 |     |  |   | 1,952 |    
|Net income (loss)            |         |      | 904           |      |          |      | (70      | )    |          |   | 353   |     |  |   | 56    |    
|Net income (loss) per share: |         |      |               |      |          |      |          |      |          |   |       |     |  |   |       |    
|                             | Basic   |      | $             | .29  |          |      | $        | (.02 | )        |   | $     | .12 |  |   | $     | .02 | 
|                             | Diluted |      | $             | .29  |          |      | $        | (.02 | )        |   | $     | .11 |  |   | $     | .02 | 

|                             |         |      |               |      |          |      |          |      |          |   |        |     |  |   |        |      |  
|---------------------------- | ------- | ---- | ------------- | ---- | -------- | ---- | -------- | ---- | -------- | - | ------ | --- |  | - | ------ | ---- | -
|                             |         |      | Quarter Ended
|                             |         |      |              
|                             |         |      | Sept. 30,     |      | Dec. 31, |      | Mar. 31, |      | June 30,
|FY 2001                      |         | 2000 |               | 2000 |          | 2001 |          | 2001
|                             |         |      |               |      |          |      |          |     
|Net
sales                    |         | $    | 13,987        |      |          | $    | 8,877    |      |          | $ | 10,141 |     |  | $ | 8,653  |     
|Gross profit                 |         |      | 4,066         |      |          |      | 2,397    |      |          |   | 2,862  |     |  |   | 417    |     
|Net income (loss)            |         |      | 869           |      |          |      | 158      |      |          |   | 389    |     |  |   | (2,432 | )   
|Net income (loss) per share: |         |      |               |      |          |      |          |      |          |   |        |     |  |   |        |     
|                             | Basic   |      | $             | .26  |          |      | $        | .05  |          |   | $      | .12 |  |   | $      | (.76 | )
|                             | Diluted |      | $             | .26  |          |      | $        | .05  |          |   | $      | .12 |  |   | $      | (.76 | )

(13) Acquisitions & Dispositions

On June 1, 2000, Pacer entered into an intellectual property license
agreement pursuant to which Pacer obtained exclusive marketing and distribution
rights from Pro-Tel, Inc., to the Bondini product line. The Bondini product
line includes various Adhesive Products marketed under the Bondini brand name.
The license agreement calls for monthly royalty payments over a five-year
period, which are subject to minimum and maximum amount constraints. The
license agreement also allows for Pacer to purchase all intellectual properties
associated with the Pro-Tel and Bondini product line at the conclusion of the
five-year term for a nominal purchase price.

On June 11, 2001, the Company sold all of the assets, properties and
goodwill of its California Chemical product line, which consists primarily of
bulk liquids and powders for sculptured acrylic finger nail processes to
Esschem, Inc. in exchange for $500,000 cash plus the transfer by Esschem to
Pacer of 145,000 shares of Pacer common stock owned by Esschem. As a result of
this transaction, the Company wrote off the remaining goodwill that arose from
the acquisition in 1997. The goodwill impairment, a one-time, non-cash charge,
of $1,042,000 is included in the accompanying 2001 consolidated statement of
operations.

On September 28, 2001, the Company sold inventory and certain fixed and
intangible assets related to the Cook Bates product line (which consisted
largely of personal care manicure implements, seasonal gift sets and Halloween
merchandise) for $5.3 million cash. That inventory totaled $3.8 million and
the net book value of the remaining assets sold in that transaction totaled
$105,000. In connection with the sale, Pacer recorded transaction related
costs of $142,000, a $40,000 loss associated with the sale of holiday
merchandise at bargain prices and a gain of $1.2 million, which are included in
operating income in the accompanying statement of operations for the year ended
June 30, 2002.

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##### Table of Contents



PACER TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2002, 2001 and 2000

(14) United Kingdom Distribution Facility Closure

During the fourth quarter ended June 30, 2001, the Board of Directors
instituted a repositioning plan to focus the Companys resources on its core
adhesive and sealant business. In connection with this repositioning plan, the
Company decided to close its United Kingdom operations and distribution
facility. As a result of this closure, the Company did not renew the facility
lease, which expired in July 2001. The Company will, however, continue to
maintain a small sales office. Included in cost of sales in the accompanying
2001 consolidated statement of operations is a write off of $500,000 associated
with the cost of closure.

(15) Commitments and Contingencies

The Company has
entered into sales agreements with many of its customers that
contain pricing terms, including the amounts of promotional and cooperative
advertising allowances that Pacer will provide to those customers. Each of
these agreements is unique and may include one or more of these features as
part of its terms. In the case of agreements that provide for promotional and
cooperative allowances, those allowances are established at fixed dollar
amounts, rather than varying with the volume of the customers purchases of
products from Pacer and, therefore, those allowances represent commitments on
the part of Pacer to such customers.

Pacer has severance compensation agreements with certain of its officers.
Those agreements provide for, in the event of termination on change of control
or termination without cause, a lump-sum payment equal to 2.99 times the sum of
the officers highest base salary within the twelve-month period prior to the
termination and an amount equal to any bonuses that would have be paid.

Pacer is involved in certain legal actions and claims arising in the
ordinary course of business. It is the opinion of management that such
litigation will be resolved without material effect on Pacers financial
position or results of operations.

(16) Related Party Transactions

During the years ended June 30, 2002, 2001 and 2000, Pacer incurred legal
expenses of $62,000, $83,000 and $151,000, respectively, to a law firm, one of
the partners of which is a shareholder and, until August 2002, was a member of
Pacers Board of Directors.

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##### Table of Contents



SCHEDULE II  PACER TECHNOLOGY

VALUATION AND QUALIFYING ACCOUNTS
(In thousands)

|                                 |  |            |     |           |  |               |     |           |  |   |      |         |  |   |     | 
|-------------------------------- |  | ---------- | --- | --------- |  | ------------- | --- | --------- |  | - | ---- | ------- |  | - | --- | 
|                                 |  | Balance At |     |           |  |               |     |           |  |   |      | Balance
|                                 |  | Beginning  |     |           |  |               |     |           |  |   |      | At End 
|Description                      |  | of Period  |     | Additions |  | Deductions(1) |     | of Period
|                                 |  |            |     |           |  |               |     |          
|Allowance for doubtful accounts: |  |            |     |           |  |               |     |           |  |   |      |         |  |   |     | 
|Year Ended June 30, 2000         |  | $          | 904 |           |  | $             | 119 |           |  | $ | (719 | )       |  | $ | 304 | 
|Year Ended June 30, 2001         |  | $          | 304 |           |  | $             | 499 |           |  | $ | (460 | )       |  | $ | 343 | 
|Year Ended June 30, 2002         |  | $          | 343 |           |  | $             | 703 |           |  | $ | (528 | )       |  | $ | 518 | 



---

|(1) |  | Write-off of doubtful accounts against the allowance and recoveries.
|--- |  | --------------------------------------------------------------------

|                                                 |  |            |     |           |  |               |     |           |  |   |      |         |  |   |     | 
|------------------------------------------------ |  | ---------- | --- | --------- |  | ------------- | --- | --------- |  | - | ---- | ------- |  | - | --- | 
|                                                 |  | Balance At |     |           |  |               |     |           |  |   |      | Balance
|                                                 |  | Beginning  |     |           |  |               |     |           |  |   |      | At End 
|Description                                      |  | of Period  |     | Additions |  | Deductions(1) |     | of Period
|                                                 |  |            |     |           |  |               |     |          
|Allowance for obsolete or slow-moving inventory: |  |            |     |           |  |               |     |           |  |   |      |         |  |   |     | 
|Year Ended June 30, 2000                         |  | $          | 811 |           |  | $             | 426 |           |  | $ | (599 | )       |  | $ | 638 | 
|Year Ended June 30, 2001                         |  | $          | 638 |           |  | $             | 84  |           |  | $ | (445 | )       |  | $ | 277 | 
|Year Ended June 30, 2002                         |  | $          | 277 |           |  | $             | 258 |           |  | $ | (515 | )       |  | $ | 20  | 



---

|(1) |  | Write-off of slow-moving or obsolete inventory or sale of inventory at
reduced margin.
|--- |  | --------------------------------------------------------------------------------------

39



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##### Table of Contents






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

None




PART III




Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Except for information concerning the Companys executive officers which
is included in Part I of this Report, the information required by Item 10 is
incorporated by reference from the Companys definitive proxy statement
expected to be filed with the Commission on or before October 28, 2002 for the
Companys annual shareholders meeting.




Item 11. EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated herein by reference
from the Companys definitive proxy statement expected to be filed with the
Commission on or before October 28, 2002 for the Companys annual shareholders
meeting.




Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12 is incorporated herein by reference
from the Companys definitive proxy statement expected to be filed with the
Commission on or before October 28, 2002 for the Companys annual shareholders
meeting.




Item 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

The information required by Item 13 is incorporated herein by reference
from the Companys definitive proxy statement expected to be filed with the
Commission on or before October 28, 2002 for the Companys annual shareholders
meeting.




Item 14. CONTROLS AND
PROCEDURES

Not Applicable




PART IV




Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K



|(a) |  | (1) Financial Statements                                                      
|--- |  | ------------------------------------------------------------------------------
|   
|    |  | See Financial Statement Index included in Item 8 of Part II of this Form 10-K.
|   
|(a) |  | (2) Financial Statement Schedule                                              

Schedule II. Valuation and Qualifying Accounts

All other schedules have been omitted as the required information is
reported or incorporated by reference elsewhere in this Annual Report or is not
applicable.

40



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##### Table of Contents





| | (a) |  | (3) Exhibits
| | --- |  | ------------

The following is a list of the exhibits filed with this Annual Report on Form
10-K.

|              |  |                                                                                                       
|------------- |  | ------------------------------------------------------------------------------------------------------
|Exhibit 3.1   |  | Articles of Incorporation (1)                                                                         
|Exhibit 3.2   |  | By-laws (1)                                                                                           
|Exhibit 4.1   |  | Stock Purchase Warrant for 66,667 shares of Common Stock issued to the Prince Henry
Group (2)         
|Exhibit 4.2   |  | 2001 Stock Incentive Plan approved by shareholders on November 13, 2001                               
|Exhibit 10.7  |  | Agreement to Extend Term of Lease agreement dated March 1, 1988 for facilities in
Rancho Cucamonga (3)
|Exhibit 10.8  |  | Lease Termination Agreement for facilities in Rancho Cucamonga dated October 25, 2001                 
|Exhibit 10.9  |  | New Operating Lease for facilities located in Rancho Cucamonga dated May 9, 2002                      
|Exhibit 10.10 |  | Severance Compensation Agreement with Richard S. Kay dated January 30, 2002                           
|Exhibit 10.11 |  | Severance Compensation Agreement with Ronald T. Gravette dated January 30, 2002                       
|Exhibit 10.12 |  | Credit Agreement with Wells Fargo Bank dated May 1, 2002                                              
|Exhibit 21    |  | Subsidiaries of Registrant                                                                            
|Exhibit 23.1  |  | Consent of Independent Auditors                                                                       
|Exhibit 99.1  |  | CEO Certifications under Section 906 of the Sarbanes-Oxley Act                                        
|Exhibit 99.2  |  | CFO Certifications under Section 906 of the Sarbanes-Oxley Act                                        



---

|(1) |  | Incorporated by reference to exhibits to Form 10-K for fiscal year ended
June 30, 1986.
|--- |  | ---------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Incorporated by reference to exhibits to Form 10-K for fiscal year ended
June 30, 2001.
|   
|   
|   
|   
|(3) |  | Incorporated by reference to exhibits to Form 10-K for fiscal year ended
June 30, 1999.

(b)  Reports on Form 8-K

None

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##### Table of Contents






SIGNATURES

Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.

|                         |  |  |                  |                                                                                          
|------------------------ |  |  | ---------------- | -----------------------------------------------------------------------------------------
|Date: September 25, 2002 |  |  | PACER TECHNOLOGY
|                        
|                         |  |  | By:              | /s/ RICHARD S. KAY                                                                       
|                         |  |  |                  | Richard S. Kay,
Chairman of the Board of Directors,
Chief Executive Officer and President

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

Each person whose signature to this Report appears below hereby appoints
Richard S. Kay and Laurence R. Huff, or any of them, individually, to act
severally as attorneys-in-fact and agents, with power of substitution and
resubstitution, for each of them, to sign on his behalf, individually and in
the capacities stated below, and to file any and all amendments to this Annual
Report, which amendment or amendments may make changes and additions as such
attorneys-in-fact may deem necessary or appropriate.

|                                         |  |                                                                                     |  |                   
|---------------------------------------- |  | ----------------------------------------------------------------------------------- |  | ------------------
|Signature                                |  | Title                                                                               |  | Date              
|                                         |  |                                                                                     |  |                   
|/s/ RICHARD S. KAYRichard S. Kay         |  | Chairman of the Board of Directors,
Chief Executive Officer, President
and Director |  | September 25, 2002
|                                        
|/s/ LAURENCE R. HUFFLaurence R. Huff     |  | Chief Financial Officer (Principal
Financial and Principal Accounting
Officer)      |  | September 25, 2002
|                                        
|/s/ E. T. GRAVETTEE. T. Gravette         |  | Director                                                                            |  | September 25, 2002
|                                        
|/s/ JOHN G. HOCKIN, IIJohn G. Hockin, II |  | Director                                                                            |  | September 25, 2002
|                                        
|/s/ CARL HATHAWAYCarl Hathaway           |  | Director                                                                            |  | September 25, 2002
|                                        
|/s/ D. STEPHEN ANTIOND. Stephen Antion   |  | Director                                                                            |  | September 25, 2002

S-1



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##### Table of Contents



CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER
UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT

I, Richard S. Kay, Chairman, Chief Executive Officer and President of Pacer Technology, certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of Pacer
Technology;                                                                                                                                                                                                                                                    
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report.                   

Date:  September 25, 2002

| |  |                                                               
| |  | --------------------------------------------------------------
| |  | /s/      RICHARD S. KAY                                       
| |  | Richard S. Kay
Chairman, Chief Executive Officer and President

S-2



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##### Table of Contents



CERTIFICATIONS OF CHIEF FINANCIAL OFFICER
UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT

I, Laurence R. Huff, Chief Financial Officer of Pacer Technology, certify
that:



| | 1. |  | I have reviewed this annual report on Form 10-K of Pacer
Technology;                                                                                                                                                                                                                                                    
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report.                   

Date:  September 25, 2002

| |  |                                         
| |  | ----------------------------------------
| |  | /s/       LAURENCE R. HUFF              
| |  | Laurence R. Huff
Chief Financial Officer

S-3



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##### Table of Contents






INDEX TO EXHIBITS

|              |  |                                                                                                       |  | 
|------------- |  | ----------------------------------------------------------------------------------------------------- |  | 
|Number        |  | Description                                                                                           |  | 
|              |  |                                                                                                       | 
|Exhibit 3.1   |  | Articles of Incorporation(1)                                                                          |  | 
|Exhibit 3.2   |  | By-laws(1)                                                                                            |  | 
|Exhibit 4.1   |  | Stock Purchase Warrant for 66,667 shares of Common Stock issued to the Prince Henry
Group(2)          |  | 
|Exhibit 4.2   |  | 2001 Stock Incentive Plan approved by shareholders on November 13, 2001                               |  | 
|Exhibit 10.7  |  | Agreement to Extend Term of Lease agreement dated March 1, 1988 for facilities in
Rancho Cucamonga(3) |  | 
|Exhibit 10.8  |  | Lease Termination Agreement for facilities in Rancho Cucamonga dated October 25, 2001                 |  | 
|Exhibit 10.9  |  | New Operating Lease for facilities located in Rancho Cucamonga dated May 9, 2002                      |  | 
|Exhibit 10.10 |  | Severance Compensation Agreement with Richard S. Kay dated January 30, 2002                           |  | 
|Exhibit 10.11 |  | Severance Compensation Agreements with Ronald T. Gravette dated January 30, 2002                      |  | 
|Exhibit 10.12 |  | Credit Agreement with Wells Fargo Bank dated May 1, 2002                                              |  | 
|Exhibit 21    |  | Subsidiaries of Registrant                                                                            |  | 
|Exhibit 23.1  |  | Consent of Independent Auditors                                                                       |  | 
|Exhibit 99.1  |  | CEO Certifications under Section 906 of the Sarbanes-Oxley Act                                        |  | 
|Exhibit 99.2  |  | CFO Certifications under Section 906 of the Sarbanes-Oxley Act                                        |  | 



---

|(1) |  | Incorporated by reference to exhibits to Form 10-K for fiscal year ended
June 30, 1986
|--- |  | --------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Incorporated by reference to exhibits to Form 10-K for fiscal year ended
June 30, 2001
|   
|   
|   
|   
|(3) |  | Incorporated by reference to exhibits to Form 10-K for fiscal year ended
June 30, 1999

E-1