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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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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, 2003



OR



| ̈ |  | 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



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PACER TECHNOLOGY

(Exact name of Registrant as specified in its charter)



|California                                                     |  | 77-0080305                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|9420 Santa Anita Avenue,Rancho Cucamonga, California |  | 91730     
|---------------------------------------------------- |  | ----------
|(Address of principal executive offices)             |  | (Zip Code)



(909) 987-0550

(Registrants telephone number, including area code)



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



None



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



Common Stock, without par value

(Title of Class)



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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 ̈



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



Indicate by check mark whether
the Registrant is an accelerated filer (as defined in Securities Exchange Act Rule 12b-2).    Yes ̈No  x



The aggregate market value, as of December 31, 2002, of the outstanding shares of registrants common stock held by registrants non-affiliates was $7,705,739 (computed by reference to the average closing
bid and asked prices of such stock on December 31, 2002, as reported on the NASDAQ SmallCap Market).



The number of shares outstanding of the Registrants Common Stock, as of September 22, 2003, was 2,939,851.



Documents Incorporated by Reference



Except as otherwise stated therein, 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, 2003.

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##### Table of Contents

PACER TECHNOLOGY

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED JUNE 30, 2003



TABLE OF CONTENTS



|                           |  |          |  | Page                                                                                           
|-------------------------- |  | -------- |  | -----------------------------------------------------------------------------------------------
|FORWARD LOOKING STATEMENTS |  | 1       
|                           |  |          | 
|                           |  | PART I   |  |                                                                                                
|                           |  |          | 
|                           |  | Item 1   |  | Description of Business                                                                        
|                           |  |          |  | Introduction                                                                                   
|                           |  |          |  | Our Consumer Products                                                                          
|                           |  |          |  | Our Industrial Products                                                                        
|                           |  |          |  | Marketing and Distribution                                                                     
|                           |  |          |  | 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                                     
|                           |  | Item 8   |  | Financial Statements and Supplementary Data                                                    
|                           |  |          |  | Report of Independent Auditors                                                                 
|                           |  |          |  | Consolidated Balance SheetsJune 30, 2003 and 2002                                             
|                           |  |          |  | Consolidated Statements of OperationsFiscal Years Ended June 30, 2003, 2002 and 2001          
|                           |  |          |  | Consolidated Statements of Shareholders EquityFiscal Years Ended June 30, 2003, 2002 and 2001
|                           |  |          |  | Consolidated Statements of Cash FlowsFiscal Years Ended June 30, 2003, 2002 and 2001          
|                           |  |          |  | Notes to Consolidated Financial Statements                                                     
|                           |  |          |  | Schedule IIValuation and Qualifying AccountsFiscal years ended June 30, 2003, 2002 and 2001  
|                           |  | Item 9   |  | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure           
|                           |  | Item 9A  |  | Controls and Procedures                                                                        
|                           |  |          | 
|                           |  | 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                                           
|                           |  |          | 
|                           |  | PART IV  |  |                                                                                                
|                           |  |          | 
|                           |  | Item 15  |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                               
|                           | 
|SIGNATURES                 |  | S1     
|                           | 
|INDEX TO EXHIBITS          |  | E1     



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FORWARD LOOKING STATEMENTS



Statements contained in this Report that are not historical facts or that discuss our expectations or beliefs regarding our future operations or future financial performance, or financial or other trends in our business, constitute
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the 1933 Act) and Section 21E of the Securities Exchange Act of 1934, as amended (the 1934 Act).
Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, such statements include the words believe, expect, anticipate, intend,
plan, estimate, project, or words of similar meaning, or future or conditional verbs such as will, would, should, could, or may. Forward-looking
statements are based on current information and are subject to a number of risks and uncertainties that could cause our financial condition or operating results in the future to differ significantly from those expected at the current time. Those
risks and uncertainties are 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 Operation. Accordingly, readers of this Report are urged to read the cautionary statements contained in those Sections of this Report.



Due to these uncertainties and risks, readers are cautioned not to place undue reliance on forward-looking statements contained in this Report, which
speak only as of the date of this Annual Report. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.



PART I



Item 1. DESCRIPTION OF BUSINESS



Introduction



Pacers
Business



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.



We sell our
high performance glue, adhesive and sealant products for the consumer market under such well known brand names as SUPER GLUE, Bondini®, Future Glue®, ProSeal®, ZAP®, Anchor-TiteTMand Go Spot Go® 1and those products are sold to consumers at over 77,000
retail store locations in the United States, including Wal-Mart, Target stores and The Home Depot stores. Our adhesive products, sealants and gaskets 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. We are also a private label manufacturer for many major cosmetic, industrial and household adhesives.



Recent DevelopmentsMerger Agreement with Cyan Holding
Co.



As previously reported, on July 29, 2003 Pacer entered
into an Agreement and Plan of Merger (the Merger Agreement) with Cyan Holding Co., a subsidiary of Cyan Investments, LLC (Cyan). Cyan and its affiliates own a total of approximately 30% of Pacers outstanding shares of
common stock and one of the two principal owners of Cyan is Ellis T. Gravette, Jr., who served as a director of Pacer from March 2000 to March 2003 and as Chairman of its Board of Directors from March 2000 to February 2001.



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|1 |  | Future Glue®, ProSeal®, ZAP® and Go Spot Go® are registered trademarks owned by Pacer. See Trademarks, Patents and Licenses.
|- |  | ------------------------------------------------------------------------------------------------------------------------------



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The Merger Agreement provides for a merger of Pacer and a wholly owned subsidiary of Cyan (the
Merger) that, if consummated, will result in:



| |  |  | each shareholder of Pacer (other than Cyan and its affiliates and any dissenting shareholders) receiving $6.95 in cash for each of their Pacer shares; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Pacer becoming a wholly owned subsidiary of Cyan and ceasing to be a publicly traded company.
| | - |  | ---------------------------------------------------------------------------------------------



The Merger Agreement also provides for cancellation of Pacers outstanding stock options, which are held primarily by
officers, directors and other Pacer employees, in return for which each option holder would receive a cash amount equal to $6.95 minus the per share exercise price of such holders option, multiplied by the number of shares of common stock
issuable upon exercise of the option.



The price of $6.95 to be
paid for each of Pacers shares in the proposed Merger, together with the cash that will be paid for the Pacer options, places the aggregate value of Pacers shares (inclusive of the shares held by Cyan and the Pacer options) at
approximately $22.6 million.



Cyan initially submitted a
proposal, in March 2003, to acquire all of the Pacer shares it and its affiliates did not own for a price of $6.00 per share in cash. Following the receipt of that initial proposal Pacers Board of Directors established a Special Committee,
comprised solely of disinterested directors, to consider and evaluate and to respond to that proposal. The Special Committee retained Houlihan Lokey Howard and Zukin (Houlihan Lokey), as its financial advisor to assist it in that
evaluation. Following that evaluation, the Special Committee advised Cyan that it could not accept Cyans $6.00 per share proposal and directed Houlihan Lokey to contact other potential financial and strategic buyers that might have an interest
in an acquisition of or other strategic transaction with Pacer. Those contacts, and a resulting bidding contest that followed, led to an increase by Cyan in its offer to $6.95 per share in cash.



On July 29, 2003, the Special Committee voted unanimously to recommend that
Pacers Board of Directors approve the proposed Merger with Cyan. That recommendation was based on a number of factors, including an opinion received from Houlihan Lokey that the proposed cash price of $6.95 per share was fair, from a financial
point of view, to Pacers shareholders (other than Cyan and its affiliates). Later that same day, the Board of Directors unanimously approved the Merger Agreement and Merger.



Consummation of the Merger is subject to satisfaction of certain conditions, all as more fully set forth in the Merger
Agreement. Those conditions include, among others, that any third party consents required for the Merger be obtained and that the Merger Agreement be approved by the holders of at least 50% of the Pacer shares not owned by Cyan. Cyans
obligation to consummate the Merger is not conditioned on obtaining of financing, and Cyan provided to the Special Committee evidence of Cyans ability to fund the Merger consideration.



A Special Meeting of Pacers Shareholders has been scheduled for
November 12, 2003, at which Pacers shareholders will be asked to vote on approval of the Merger Agreement. Pacer has filed preliminary proxy materials with the Securities and Exchange Commission, for the purpose of soliciting proxies from
shareholders which would be voted at the Meeting to approve the Merger. Once the proxy materials have been finalized, definitive proxy materials, including a proxy statement and a copy of the Merger Agreement, will be mailed to shareholders no less
than 20 days prior to the date of that meeting.



The definitive
proxy materials will contain important information regarding the proposed Merger. Shareholders are advised to read the definitive proxy materials, including the proxy statement and the Agreement and Plan of Merger, before making any decisions
regarding the Merger. It will be possible to obtain copies of the proxy materials, and any amendments or supplements to those materials, without charge, at the SECs website at www.sec.gov or Pacers website at www.pacertechnology.com, as
they become available.



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Our Consumer Products



Super
Glue and Other Adhesive Products and Sealants



Household and Office Products. We formulate and package 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 are packaged into easy-to-use tubes, bottles, syringes, glue sticks, glue pens and fasteners, each designed for differing home and office applications. These products are sold to mass
merchandisers such as Wal-Mart, Target and The Home Depot and arts and crafts retailers such as Michaels. As of June 30, 2003, our household and office adhesive products could be purchased at more than 77,000 retail stores locations primarily in the
United States, and some of which, are located in Europe, Canada and Latin America.



In fiscal 2003, we introduced a new consumer adhesive product, under the brand name Anchor-Tite Permanent Patch, which is a sunlight and ultra violet (UV) light curable glass reinforced polyester material,
layered with 2 nylon sheets. This product utilizes a peel and stick formulation that can be molded and cut to any shape or size in order to provide a permanent repair that is heat resistant, waterproof and can be drilled, sanded and
painted. This new product, which can be used for household, landscape and plumbing, and automotive and marine applications, was recently awarded the Editors Choice Award by Popular Mechanics Magazine at the 2003 National Hardware Show. That
award recognizes what that magazine judges to be the most innovative of the new products for the year introduced at that Show.



Marine Products. We manufacture and market a line of high performance epoxies under the brand name Anchor-Tite, which are used in the maintenance
and repair of marine vessels, personal watercraft, home swimming pools and other marine applications. The Anchor-Tite underwater epoxy was recognized at the 2002 National Hardware Show in Chicago by Popular Mechanics Magazinewith an
Editors Choice award.



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 are designed to withstand the high temperatures and heavy wear and tear associated with the operation of motor vehicles.



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 the ZAP brand name, which is the leading adhesive product line in the hobby market, and the Super Glue brand name.



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 these 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.



Marketing and Distribution



Consumer Products



Our adhesive products for
the consumer markets are marketed and sold by 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



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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 these products. Larger national mass merchandisers and national and regional food and drug store chains account for a substantial portion of our
consumer product sales. See DESCRIPTION OF BUSINESSCertain Factors That Could Affect Our Future PerformanceDependence on Certain Major Customers below in this Report.



Our automobile aftermarket products are marketed and sold by internal sales
personnel and by independent sales representative organizations to retail automotive, professional repair and installation, agribusiness and heavy duty truck outlets. Our hobby products are sold to dealers and to mass merchandisers, drug and grocery
store chains and craft and hobby stores through a network of independent master product distributors.



Industrial Products



Our high performance industrial adhesive and sealant products are marketed and sold by internal 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 18% of total revenues in fiscal 2003, 16% in fiscal 2002 and 14% in fiscal 2001, are marketed and sold primarily in
Western Europe and, to a lesser extent, in Canada and Latin America by internal sales personnel, independent sales representative organizations and wholesale distributors.



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. During the fiscal years ended June 30, 2003, 2002 and 2001, one of those suppliers accounted for 20%, 18% and 11%, respectively, of our requirements for such materials. Dependence on a
single supplier for any materials or supplies presents risks that could adversely affect our sales. See, DESCRIPTION OF BUSINESSCertain Factors That Could Affect Our Future PerformanceDependence on a Limited Number of Raw
Materials Suppliers below in this Report. 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.



During
fiscal 2003, approximately 29% of the materials and supplies we used in our business were obtained from foreign suppliers, as compared to 37% in fiscal 2002 and 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. The decline in foreign purchases in fiscal 2003 was primarily due to the sale, in fiscal 2002, of our nail care implements
business, which purchased a high percentage of its inventories from foreign sources.



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 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.



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Competition



The markets for our
products are characterized by intense competition. Our principal competitors 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 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 and greater financial and marketing resources than we have (see DESCRIPTION OF BUSINESSCertain Factors That Could Affect Our Future
Performance below).



Certain Factors That Could Affect Our Future Performance



Dependence on Certain Major Customers.In fiscal 2003, The Home Depot accounted for approximately 14% and Pacific World Corporation accounted for approximately 11% of net sales and The Home Depot accounted for
approximately 12% of net sales in fiscal 2002. Other customers include several 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, and
possibly significant reductions in sales and earnings.



Dependence on a Limited Number of Raw Materials Suppliers. Although the materials used in the manufacture of our products are available from numerous sources, both within and outside the United States, it has been our practice to
purchase such materials from one or just a few suppliers in order to control the quality of and to obtain favorable pricing for such materials. One of those suppliers accounted for 20%, 18% and 11%, respectively, of our requirements for such
materials during the fiscal years ended June 30, 2003, 2002 and 2001. 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 or our relationship with the supplier changes, which could adversely affect our sales.



Risks of Foreign Operations.Our operating results could decline as a result of war, economic disruption or foreign
currency fluctuations and changes in the value of the U.S. Dollar in relation to foreign currencies in countries in Europe, Asia and Latin America where we sell products and where we obtain some of our raw materials. Foreign sales accounted for 18%
of our total revenues in fiscal year 2003. Purchases of raw materials from foreign countries were 29% of all raw materials purchased by us in fiscal year 2003.



Change in Business Strategy and Operations.We sold our California Chemical nail acrylics business in June 2001 and our Cook Bates nail care
implements business in September 2001, in order to focus and grow our core adhesives products business. Although these actions resulted in a significant decline in net sales in the fiscal year ended June 30, 2003, when net sales totaled
approximately $24.4 million, as compared to net sales of approximately $30.8 million and $41.7 million in the fiscal years ended June 30, 2002 and 2001, respectively, we believe that the sales of these nail care products businesses will enable us to
improve our profitability. However, future profitability also could be adversely affected if we are not able to reduce and, thereby, align our future operating costs to match sales levels in future periods or if we are unable to grow and thereby
meaningfully increase the revenues of our core adhesives business.



Costs and Expenses Related To The Proposed Merger with Cyan.We have expended a substantial amount of time and resources relating to the proposed Merger with Cyan and administrative expenses have increased due to transaction related
expenses associated with the merger. These increased administrative expenses reduced our fourth quarter and fiscal year 2003 operating income and net earnings. See SELECTED FINANCIAL DATA and  MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS in Part II of this Report. We expect to incur additional administrative expenses during the first and second quarters of fiscal year 2004 in connection with proceedings to complete the
Merger, which will reduce operating results in those quarters. If the proposed Merger is not consummated for any reason, including failure to obtain required shareholder approval or to satisfy other conditions to the Merger, the costs and expenses
incurred by us as a result of the Merger will negatively affect our operating results in fiscal 2004.



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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 $254,000, $302,000 and $318,000 in the fiscal years ended June 30, 2003, 2002 and 2001, respectively.



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 to date 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 37 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 September 2, 2003,
we had 113 full-time employees. At various times during the year we also employ approximately 30 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 October 31, 2004. 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. We also currently maintain a small sales office in Worcestershire, England.



We also had leased 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 a 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 expired May 31, 2003.



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



Set forth below is information, as of September 2, 2003, regarding the Companys executive officers.



|Name of officer    |  | Age |  | Office                                                                                                    
|------------------ |  | --- |  | ----------------------------------------------------------------------------------------------------------
|Richard S. Kay     |  | 61  |  | Chairman of the Board of Directors, Chief Executive Officer and President; Acting Chief Financial Officer*
|Ronald T. Gravette |  | 53  |  | Vice President, Sales                                                                                     

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|* |  | Mr. Kay assumed the position of acting Chief Financial Officer on August 28, 2003, when Laurence Huff, who had been the Companys Chief Financial Officer since September 1999,
left the Company to accept another employment opportunity.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Richard S. Kay. Mr. Kay was appointed Chief Executive Officer and President of Pacer 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.



Ronald T. Gravette. 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 former director of the Company and one of the principal owners of Cyan (see DESCRIPTION OF BUSINESSIntroductionRecent DevelopmentsMerger Agreement with Cyan Holding Co.).



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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, 2003 and 2002 are set forth below:



|                                 |  | High(1) |      | Low(1)
|-------------------------------- |  | ------- | ---- | ------
|Fiscal year ended June 30, 2003: |  |         |      |       
|First Quarter                    |  | $       | 5.15 |       
|Second Quarter                   |  |         | 4.16 |       
|Third Quarter                    |  |         | 4.29 |       
|Fourth Quarter                   |  |         | 5.86 |       
|Fiscal year ended June 30, 2002: |  |         |      |       
|First Quarter                    |  | $       | 3.53 |       
|Second Quarter                   |  |         | 4.99 |       
|Third Quarter                    |  |         | 4.73 |       
|Fourth Quarter                   |  |         | 5.63 |       

---

|(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



As of September 22, 2003, the approximate number of record holders of our
shares was 1,369 and there were approximately 4,000 beneficial owners of our shares.



Dividends and Share Repurchases



We have a policy of retaining earnings to support the growth of our 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 August 31, 2002, when we terminated that program, we had purchased 314,070 shares of Pacer common stock for $1.4 million under that program with a combination of internally generated funds and borrowings
under our bank line of credit.



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##### Table of Contents

Item 6. SELECTED FINANCIAL DATA



The consolidated selected operating data set forth below for the fiscal years ended June 30, 2003, 2002 and 2001, and the selected balance sheet data at June 30, 2003 and 2002, are derived from Pacers audited consolidated financial
statements included elsewhere in this Report. The selected operating data for the fiscal years ended June 30, 2000 and 1999, and the selected balance sheet data at June 30, 2001, 2000 and 1999, are derived from audited consolidated financial
statements that are not included in this Report. The consolidated selected operating data for the fiscal year ended June 30, 1999, 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, and the consolidated selected operating data for the fiscal year ended June 30, 2002, and the balance sheet data at June 30, 2002 include the operations of Cook Bates only until September 28, 2001, when the Cook
Bates product line was sold. The following data should be read in conjunction with Pacers 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.



|                                          |  | Years Ended June 30,                 
|----------------------------------------- |  | -------------------------------------
|                                          |  | 2003                                 
|                                          |  | (In thousands, except per share data)
|Selected Operating Data:                  |  |                                      
|Net sales(1)                              |  | $                                    
|Gross profit(1)(2)                        |  |                                      
|Selling, general and administrative(1)(2) |  |                                      
|Restructuring charges                     |  |                                      
|(Gain)/loss on sales of product lines     |  |                                      
|Operating income (loss)                   |  |                                      
|Other (income) expense, net               |  |                                      
|Income (loss) before income taxes         |  |                                      
|Income tax expense (benefit)              |  |                                      
|Net income (loss)                         |  | $                                    
|Earnings (loss) per share(3)              |  |                                      
|Basic                                     |  | $                                    
|Diluted                                   |  | $                                    



|                     |  | As of June 30,                       
|-------------------- |  | -------------------------------------
|                     |  | 2003                                 
|                     |  | (In thousands, except per share data)
|Balance Sheet Data:  |  |                                      
|Total assets         |  | $                                    
|Working capital      |  |                                      
|Borrowings(4)        |  |                                      
|Shareholders equity |  |                                      
|Book value per share |  | $                                    

---

|(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, we 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, we 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 12 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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##### Table of Contents

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), Pacer records all of its assets at the lower of cost
or fair value. In determining the fair value of some assets, principally accounts receivable, inventories and costs in excess of net assets of acquired businesses (commonly known as goodwill), Pacer 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 its ability to collect accounts receivable or sell inventories in future periods. Those judgments,
estimates and assumptions are based on current information available to Pacer at the time they are made. Many of those events and circumstances, however, are outside of Pacers control and if changes in those events or circumstances occur
thereafter, GAAP may require Pacer 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 Pacers practice to establish reserves or allowances against which
Pacer is 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 Pacer makes about the collectibility of its accounts receivable and the market and salability of the products in 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 operations. With respect to other assets, such as goodwill, Pacer writes down their fair value directly upon determining that, due to changes in events or circumstances, the amounts at which
they are carried on its books exceed their current fair value, by increases in operating expenses. As a result, judgments, estimates and assumptions about future events can and will affect not only the amounts at which Pacer records these assets on
its balance sheet, but also Pacers 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 products. 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 estimates and assumptions Pacer follows GAAP and accounting practices applicable to its business that it believes
will enable it 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 Pacer believes are material to an understanding of its financial condition and results of operations that are discussed below.



Revenue Recognition and Shipping Costs. Pacer provides its customers with limited rights to return products. Pacer
recognizes revenue upon concluding that all of the fundamental criteria for revenue recognition have been met. The criteria are usually met at the time of product shipment. Pacer establishes an allowance based on historical experience with returns
of like products. Shipping costs are included as a component of cost of sales.



Accounts Receivable and the Allowance for Doubtful Accounts. In the normal course of business Pacer extends 60-day payment terms to its customers. Pacer regularly reviews its customers accounts and
estimates the amount of and establishes 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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##### Table of Contents

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 Pacer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 Pacers operating results in the period when that takes
place.



Costs in Excess of Assets Acquired. Pacer
adopted SFAS No. 142 in the first quarter of fiscal 2003. SFAS 142 requires that goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment, and upon adoption
through a transitional impairment test. Intangible assets that have finite useful lives will continue to be amortized over their useful lives. The goodwill test for impairment consists of a two-step process that begins with an estimation of the fair
value of a reporting unit. The first step is a screen for potential impairment and the second step measures the amount of impairment, if any. For purposes of this impairment test, Pacer is considered to have only one reporting unit. Pacer has
completed the transitional goodwill impairment tests and have determined that the fair value of the net assets exceeded the carrying value of those assets and that, as a result, no goodwill impairment had occurred and it was not be necessary to
record an impairment charge in fiscal 2003.



Stock-Based
Compensation. In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based CompensationTransition and Disclosure (FAS
148), which amends Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (FAS 123). FAS 148 provides alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In addition, FAS 148 amends the disclosure requirements of FAS 123 to require more prominent and more frequent disclosures in financial statements of the effects of stock-based
compensation. The transition guidance and annual disclosure provisions of FAS 148 are effective for fiscal years ending after December 15, 2002. The Company adopted FAS 148 as of January 1, 2003 through its continued application of the intrinsic
value method of accounting under APB 25.



Results of Operations



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



|                                             |  | 2003  |   |  | 2002  |    |  | 2001  |   
|-------------------------------------------- |  | ----- | - |  | ----- | -- |  | ----- | --
|Net sales                                    |  | 100.0 | % |  | 100.0 | %  |  | 100.0 | % 
|Cost of sales                                |  | 68.1  | % |  | 71.6  | %  |  | 76.6  | % 
|Gross profit                                 |  | 31.9  | % |  | 28.4  | %  |  | 23.4  | % 
|Selling, general and administrative expenses |  | 26.3  | % |  | 23.5  | %  |  | 22.2  | % 
|Restructuring charges                        |  |      |   |  | 1.7   | %  |  |      |   
|(Gain)/loss on sale of product lines         |  |      |   |  | (3.9  | )% |  | 2.5   | % 
|Operating income (loss)                      |  | 5.6   | % |  | 7.1   | %  |  | (1.3  | )%
|Other expense, net                           |  |      |   |  | 0.3   | %  |  | 2.1   | % 
|Income (loss) before taxes                   |  | 5.6   | % |  | 6.8   | %  |  | (3.4  | )%
|Net income (loss)                            |  | 3.5   | % |  | 4.0   | %  |  | (2.4  | )%



Fiscal Years Ended
June 30, 2003 and 2002



Net Sales. Net sales in
fiscal 2003 declined $6.4 million to $24.4 million, a 20.8% decrease from the prior year. That decrease, which was expected, was primarily the result of the sale of the Cook Bates product line in the first quarter of fiscal 2002. The Cook Bates
product line accounted for $5.5 million of sales in the year ended June 30, 2002, as compared to no sales in the year ended June 30, 2003. Adhesive sales in the United States, which represented 82% of our total sales in fiscal 2003, decreased by
$460,000 when compared to the prior year.



International
adhesive sales accounted for approximately $581,000 of the total net sales decline in fiscal 2003, which sales decreased to approximately $4.3 million from $4.9 million in fiscal 2002. This decrease was primarily attributable to a major European
customers decision to purchase some adhesive products from an alternate source.



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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 Pacers 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 Pacers 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 Pacer sells its products; increased pricing pressures and new entrants into the marketplace. International sales contributed
to $1.0 million of the total net sales decline when compared to fiscal 2001. The decrease in international sales is primarily attributable to the closure of our facilities in the United Kingdom.



Gross Profit. Pacers gross margin (gross profits stated as a
percentage of sales) increased to 31.9% in fiscal 2003 from 28.4% in fiscal 2002. These improvements in gross margin were attributable to a number of factors, including improved operating efficiencies that resulted from the sale of Pacers nail
care businesses, reductions in raw material costs and a favorable shift in product mix.



Gross margin 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 Pacers nail care product lines.



Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses decreased by $838,000 from $7.2
million, or 23.5% of net sales, in fiscal 2002, to $6.4 million, or 26.3% of net sales, in fiscal 2003. Fiscal 2003 administrative expenses were favorably impacted by workforce reductions that were the result of the sale of the Cook Bates product
line and the restructuring program described below. Included in the current year SG&A expense is $415,000 of transaction related costs associated with the Cyan acquisition transaction. If the transaction related costs were excluded, SG&A
would have decreased $1.3 million over fiscal 2002.



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 Pacer was 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.



Restructuring Charges. During fiscal 2002, Pacer implemented a restructuring program to bring its operating costs in line with its operations
following the sale of its nail care product lines. That program included the consolidation of operations, formerly conducted at multiple facilities, into Pacers 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 Pacers net sales in fiscal 2002. There were no restructuring charges in
fiscal 2003 or 2001.



Gain/Loss on Sale of Product
Lines. Pacer 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 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, Pacer sold all of the assets, properties and goodwill of
the California Chemical product line 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, Pacer 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 2001 consolidated statement of operations.



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Operating income (loss). For the year ended June 30, 2003, income from operations totaled $1.4
million or 5.6% of net sales compared to $2.2 million, or 7.1% of sales for the year ended June 30, 2002, of which $1.2 million, or 3.9% of net sales, represented the gain on the sale of the Cook Bates product line in the first quarter of fiscal
2002. Excluding that gain, and the $516,000 restructuring charge discussed above (which represented 1.7% of net sales), operating income for the year ended June 30, 2002 would have been $1.5 million or 4.9% of net sales.



For the year ended June 30, 2002, income from operations totaled $2.2 million
or 7.1% of net sales compared to an operating loss of $568,000 million, or 1.3% of sales for the year ended June 30, 2001, of which $1.0 million, or 2.5% of net sales, represented a one-time non-cash charge for goodwill impairment associated with
the sale of the California Chemical product line in fiscal 2001. Excluding that charge discussed above, operating income for the year ended June 30, 2001 would have been $474,000 million or 1.1% of net sales.



Other (Income) Expense, Net. Other expense, net totaling $112,000 in
fiscal 2002 consists primarily of interest expense on outstanding bank borrowings. Interest expense decreased by $141,000 during fiscal 2003 as a result of reductions in outstanding debt made possible by the Cook Bates sale.



Other expense, net, in fiscal 2002, which consisted primarily of interest
charges on outstanding bank borrowings, was $112,000 compared to $841,000 in fiscal 2001. That decline was due to declining rates of interest and a reduction of outstanding bank borrowings in fiscal 2002.



Net income (loss). Pacer generated net income of $849,000, or 3.5% of
net sales, in the fiscal year ended June 30, 2003, as compared to net income of $1.2 million, or 4.0% of net sales, in the year ended June 30, 2002. However, operating results for the year ended June 30, 2002 included a pre-tax gain of $1.2 million
on the sale of the Cook Bates product line and restructuring charges of $516,000.



Pacer generated net income of $1.2 million in the fiscal year ended June 30, 2002, as compared to a net loss of $1.0 million, or 2.4% of net sales, in the year ended June 30, 2001. However, operating results for the
year ended June 30, 2001 included a goodwill impairment charge of $1.0 million on the sale of the California Chemical product line.



Liquidity and Capital Resources



Net cash provided by all activities in fiscal 2003 was $2.1 million versus net cash provided of $728,000 in the prior year.



Cash provided by operating activities during fiscal year 2003 was $2.3
million compared to $9.6 million in fiscal year 2002. Cash provided by operations in the prior year included 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 holiday sales of Cook Bates products.



Pacer used cash of $236,000 and $467,000 in investing activities to fund capital expenditures in fiscal 2003 and fiscal 2002, respectively.



Cash provided by financing activities during fiscal 2003 was $12,000,
generated primarily by the exercise of stock options, as compared to cash used of $8.4 million in fiscal 2002, when Pacer used cash generated by the Cook Bates sale to reduce outstanding bank borrowings and to repurchase common shares in
Pacers open market and private stock repurchase program and an odd-lot share repurchase program.



During fiscal 2003, Pacer funded its working capital requirements with internally generated funds. However, Pacer maintains a revolving bank credit line
pursuant to which it 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 its 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 the year ended June 30, 2003,
Pacers credit line bore interest at the banks prime rate (4.00% as of June 30, 2003), less 0.25%, or at the banks LIBOR base rate, plus 2.50%. As of June 30, 2003, Pacer had no borrowings outstanding on its revolving bank credit
line and approximately $4.2 million of unused borrowings were



13



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##### Table of Contents

available (based on eligible collateral). As of June 30, 2003, there were no amounts outstanding under this credit facility.



Pacer also has a bank credit facility under which it 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, 2003, there were no amounts outstanding under this credit facility.



Pacer believes that internally generated funds, together with available borrowings under the credit line, will be sufficient to enable it to meet its
working capital and other cash requirements through the October 1, 2003 maturity date of the credit line. Pacer plans to seek, and it currently expects to be able to obtain, an extension of its existing bank line of credit. In addition, Pacer may
seek to take advantage of opportunities to acquire other businesses, should such opportunities arise, or to invest in new product introductions, in which case it may incur borrowings to do so.



Seasonality and Quarterly Financial Data



Historically, Pacer has sold a greater volume of nail care products in the
third calendar quarter of the year (its 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, Pacer expects that it will cease to encounter such sizable quarterly variations in its sales and operating results.



The following table presents unaudited quarterly financial information for each of the fiscal years ended June 30, 2003 and
2002. This information has been prepared by Pacer on a basis consistent with its 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.



|                             |  | Quarters Ended                           |      
|---------------------------- |  | ---------------------------------------- | -----
|FY 2003                      |  | Sept. 30,2002                            |      
|                             |  | (In thousands, except per share amounts) |      
|Net sales                    |  | $                                        | 6,523
|Gross profit                 |  |                                          | 2,074
|Net income (loss)            |  |                                          | 385  
|Net income (loss) per share: |  |                                          |      
|Basic                        |  | $                                        | .13  
|Diluted                      |  | $                                        | .13  



|                             |  | Quarters Ended                          
|---------------------------- |  | ----------------------------------------
|FY 2002                      |  | Sept. 30,2001(1)                        
|                             |  | (In thousands, except per share amounts)
|Net sales                    |  | $                                       
|Gross profit                 |  |                                         
|Net income (loss)            |  |                                         
|Net income (loss) per share: |  |                                         
|Basic                        |  | $                                       
|Diluted                      |  | $                                       

---

|(1) |  | Operating results in the fiscal quarter ended September 30, 2001 include the operations of Cook Bates from July 1, 2001 until its product line and related assets were sold on
September 29, 2001. During that quarter, Cook Bates net sales totaled $4,490,000.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Impact of Recently Issued Accounting Pronouncements



In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of
Accounting Research Bulletin (ARB) No. 51, Consolidated Financial Statements (Interpretation 46). The Interpretation significantly changes previous consolidation guidance pertaining to SPEs. The Interpretation clarifies the application of ARB No. 51
to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support.
These entities are defined as variable interest entities or VIEs. Most SPEs will be evaluated for consolidation under the Interpretation as VIEs. All enterprises with variable interests in VIEs created after January 31, 2003, are required to apply
the provisions of the Interpretation immediately. A public entity with a variable interest in a VIE created before February 1, 2003, is required to apply the consolidation provisions of the Interpretation to that entity in the first fiscal year or
interim period beginning after June 15, 2003. The Interpretation also requires certain disclosures in all financial statements initially issued after January 31, 2003, regardless of the date on which the VIE was created if it is reasonably possible
that an enterprise will consolidate or disclose information about a VIE when the Interpretation becomes effective. We do not expect the provision of this statement to have a significant impact on our results of operations or financial position.



In April 2003, the FASB issued Statement of Financial
Accounting Standard No. 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities, (FAS 149) which amends and clarifies financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities under FAS 133. FAS 149 is effective for contracts entered into or modified after June 30, 2003 except for the provisions that were cleared by the FASB in prior
pronouncements. We do not expect the provision of this statement to have a significant impact on our results of operations or financial position.



In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity, (FAS 150). This statement improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. FAS 150 requires that those instruments be
classified as liabilities in the balance sheet. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003.
We do not expect the provisions of this statement to have a significant impact on our results of operations or financial position.



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, Pacer is exposed to market risk from foreign currency fluctuations associated with the purchases of raw materials and sales of
products outside of the United States. Pacer does not use financial instruments for trading or other speculative purposes and is not party to any derivative financial instruments.



In seeking to minimize the risks from interest rate fluctuations, Pacer manages exposure through the regular operating and
financing activities. Although there are currently no borrowings under its revolving bank credit facility or term note, when Pacer does borrow under the credit facility or term note, the fair value of borrowings under the revolving bank credit
facility and term note approximate the carrying value of such obligations.



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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



The following consolidated financial statements are included herein:



|                                                                                                |  | Page No.
|----------------------------------------------------------------------------------------------- |  | --------
|Report of Independent Auditors                                                                  |  | 17      
|                                                                                                | 
|Consolidated Balance SheetsJune 30, 2003 and 2002                                              |  | 18      
|                                                                                                | 
|Consolidated Statements of OperationsFiscal Years Ended June 30, 2003, 2002 and 2001           |  | 19      
|                                                                                                | 
|Consolidated Statements of Shareholders EquityFiscal Years Ended June 30, 2003, 2002 and 2001 |  | 20      
|                                                                                                | 
|Consolidated Statements of Cash FlowsFiscal Years Ended June 30, 2003, 2002 and 2001           |  | 21      
|                                                                                                | 
|Notes to Consolidated Financial Statements                                                      |  | 22      
|                                                                                                | 
|Schedule IIValuation and Qualifying AccountsFiscal years ended June 30, 2003, 2002 and 2001   |  | 36      



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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, 2003 and 2002, and the related consolidated statements of operations, shareholders equity, and cash flows for each of the three years in the period ended June 30, 2003. Our audits also included the financial statement
schedules listed in the Index at Item 15(a). 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, 2003 and 2002, and the consolidated results of
its operations and its cash flows for each of the three years in the period ended June 30, 2003, 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.



As discussed in Note 1 to the consolidated financial statements, in 2003 the Company changed its method of accounting for costs in excess of net assets of
businesses acquired.





/s/ ERNST & YOUNG LLP




Orange County, California

August 11, 2003



17



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##### Table of Contents

PACER TECHNOLOGY



CONSOLIDATED BALANCE SHEETS



|                                                                                                                           |  | June 30,                           
|-------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------
|                                                                                                                           |  | 2003                               
|                                                                                                                           |  | (In thousands, exceptshare amounts)
|ASSETS                                                                                                                     |  |                                    
|Current assets:                                                                                                            |  |                                    
|Cash                                                                                                                       |  | $                                  
|Trade receivables, less allowance for doubtful accounts of $753 in 2003 and $518 in 2002                                   |  |                                    
|Other receivables                                                                                                          |  |                                    
|Inventories, net                                                                                                           |  |                                    
|Prepaid expenses                                                                                                           |  |                                    
|Deferred income taxes                                                                                                      |  |                                    
|                                                                                                                           |  |                                    
|Total current assets                                                                                                       |  |                                    
|Equipment and leasehold improvements, net                                                                                  |  |                                    
|Deferred income taxes                                                                                                      |  |                                    
|Intangible assets, net                                                                                                     |  |                                    
|                                                                                                                           |  |                                    
|                                                                                                                           |  | $                                  
|                                                                                                                           |  |                                    
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                       |  |                                    
|Current liabilities:                                                                                                       |  |                                    
|Accounts payable                                                                                                           |  | $                                  
|Accrued expenses                                                                                                           |  |                                    
|Current installments of capital lease obligation                                                                           |  |                                    
|Current installments of long-term debt                                                                                     |  |                                    
|                                                                                                                           |  |                                    
|Total current liabilities                                                                                                  |  |                                    
|Long-term capital leases obligation, excluding current installments                                                        |  |                                    
|Long-term debt, excluding current installments                                                                             |  |                                    
|                                                                                                                           |  |                                    
|Total liabilities                                                                                                          |  |                                    
|Commitments and contingencies                                                                                              |  |                                    
|Shareholders equity:                                                                                                      |  |                                    
|Common stock, no par value. Authorized: 50,000,000 shares; issued and outstanding: 2,939,851 in 2003 and 2,928,401 in
2002 |  |                                    
|Retained earnings                                                                                                          |  |                                    
|                                                                                                                           |  |                                    
|Total shareholders equity                                                                                                 |  |                                    
|                                                                                                                           |  |                                    
|                                                                                                                           |  | $                                  
|                                                                                                                           |  |                                    



See accompanying notes
to consolidated financial statements.



18



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##### Table of Contents

PACER TECHNOLOGY



CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                 |  | Years Ended June 30,                     |       
|------------------------------------------------ |  | ---------------------------------------- | ------
|                                                 |  | 2003                                     |       
|                                                 |  | (In thousands, except per share amounts) |       
|Net sales                                        |  | $                                        | 24,402
|Cost of sales                                    |  |                                          | 16,619
|                                                 |  |                                          |       
|Gross profit                                     |  |                                          | 7,783 
|Selling, general and administrative expenses     |  |                                          | 6,407 
|Restructuring charges                            |  |                                          |      
|Gain on sale of Cook Bates product line          |  |                                          |      
|Loss on sale of California Chemical product line |  |                                          |      
|                                                 |  |                                          |       
|Operating income (loss)                          |  |                                          | 1,376 
|Other (income) expense:                          |  |                                          |       
|Interest income                                  |  |                                          | (3    
|Interest expense                                 |  |                                          | 3     
|Other, net                                       |  |                                          | (5    
|                                                 |  |                                          |       
|                                                 |  |                                          | (5    
|                                                 |  |                                          |       
|Income (loss) before income taxes                |  |                                          | 1,381 
|Income tax expense (benefit)                     |  |                                          | 532   
|                                                 |  |                                          |       
|Net income (loss)                                |  | $                                        | 849   
|                                                 |  |                                          |       
|Weighted average sharesbasic(1)                 |  |                                          | 2,921 
|                                                 |  |                                          |       
|Basic earnings (loss) per share                  |  | $                                        | .29   
|                                                 |  |                                          |       
|Weighted average sharesdiluted(1)               |  |                                          | 3,027 
|                                                 |  |                                          |       
|Diluted earnings (loss) per share                |  | $                                        | .28   
|                                                 |  |                                          |       

---

|(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 the
shareholders on November 21, 2000.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See
accompanying notes to consolidated financial statements.



19



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##### Table of Contents

PACER TECHNOLOGY



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

Years Ended June 30, 2003, 2002 and 2001

(In thousands, except share amounts)



|                                                                   |  | Number of Issued and Outstanding Shares |   |  | Common Stock |       |   | Retained Earnings |   |        | Accumulated Other ComprehensiveIncome (Loss) |  |   | Total Shareholders Equity |  
|------------------------------------------------------------------ |  | --------------------------------------- | - |  | ------------ | ----- | - | ----------------- | - | ------ | -------------------------------------------- |  | - | -------------------------- | -
|Balances at June 30, 2000(1)                                       |  | 3,324,195                               |   |  | $            | 8,576 |   |                   | $ | 4,202  |                                              |  | $ | (79                        | )
|Net loss                                                           |  |                                        |   |  |              |      |   |                   |   | (1,016 | )                                            |  |   |                           |  
|Foreign currency translation adjustment                            |  |                                        |   |  |              |      |   |                   |   |       |                                              |  |   | 79                         |  
|                                                                   |  |                                         |   |  |              |       |   |                   |   |        |                                              |  |   |                            |  
|Comprehensive loss                                                 |  |                                        |   |  |              |      |   |                   |   |       |                                              |  |   |                           |  
|Shares retired related to sale of California Chemical product line |  | (145,000                                | ) |  |              | (435  | ) |                   |   |       |                                              |  |   |                           |  
|Shares repurchased                                                 |  | (87,290                                 | ) |  |              | (323  | ) |                   |   |       |                                              |  |   |                           |  
|Warrants issued to consultants                                     |  |                                        |   |  |              | 70    |   |                   |   |       |                                              |  |   |                           |  
|                                                                   |  |                                         |   |  |              |       |   |                   |   |        |                                              |  |   |                            |  
|Balances at June 30, 2001                                          |  | 3,091,905                               |   |  |              | 7,888 |   |                   |   | 3,186  |                                              |  |   |                           |  
|Net income and comprehensive income                                |  |                                        |   |  |              |      |   |                   |   | 1,243  |                                              |  |   |                           |  
|Shares repurchased                                                 |  | (163,504                                | ) |  |              | (731  | ) |                   |   |       |                                              |  |   |                           |  
|                                                                   |  |                                         |   |  |              |       |   |                   |   |        |                                              |  |   |                            |  
|Balances at June 30, 2002                                          |  | 2,928,401                               |   |  |              | 7,157 |   |                   |   | 4,429  |                                              |  |   |                           |  
|Net income and comprehensive income                                |  |                                        |   |  |              |      |   |                   |   | 849    |                                              |  |   |                           |  
|Shares issued upon exercise of options                             |  | 20,000                                  |   |  |              | 99    |   |                   |   |       |                                              |  |   |                           |  
|Shares repurchased                                                 |  | (8,550                                  | ) |  |              | (42   | ) |                   |   |       |                                              |  |   |                           |  
|                                                                   |  |                                         |   |  |              |       |   |                   |   |        |                                              |  |   |                            |  
|Balances at June 30, 2003                                          |  | 2,939,851                               |   |  | $            | 7,214 |   |                   | $ | 5,278  |                                              |  | $ |                           |  
|                                                                   |  |                                         |   |  |              |       |   |                   |   |        |                                              |  |   |                            |  

---

|(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 the
shareholders on November 21, 2000.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See
accompanying notes to consolidated financial statements.



20



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##### Table of Contents

PACER TECHNOLOGY



CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                         |  | Years Ended June 30, |      
|---------------------------------------------------------------------------------------- |  | -------------------- | -----
|                                                                                         |  | 2003                 |      
|                                                                                         |  | (In thousands)       |      
|Net income (loss)                                                                        |  | $                    | 849  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                      |      
|Depreciation                                                                             |  |                      | 415  
|Amortization of other assets                                                             |  |                      |     
|Write-off of property and equipment                                                      |  |                      |     
|Allowance for doubtful accounts                                                          |  |                      | 235  
|Deferred income taxes                                                                    |  |                      | 145  
|Restructuring charges                                                                    |  |                      |     
|Gain on sale of Cook Bates product line                                                  |  |                      |     
|Cash received on sale of Cook Bates product line                                         |  |                      |     
|Loss on sale of property and equipment                                                   |  |                      | 1    
|Warrants issued to consultants                                                           |  |                      |     
|Goodwill impairment on sale of California Chemical product line                          |  |                      |     
|Changes in operating assets and liabilities, excluding effects of dispositions:          |  |                      |      
|Decrease in trade receivables                                                            |  |                      | 1,181
|(Increase) decrease in other receivables                                                 |  |                      | (5   
|Decrease in notes receivable                                                             |  |                      |     
|(Increase) decrease in inventories                                                       |  |                      | (789 
|(Increase) decrease in prepaid expenses and other assets                                 |  |                      | 159  
|Decrease in accounts payable                                                             |  |                      | (8   
|Increase (decrease) in accrued expenses                                                  |  |                      | 114  
|                                                                                         |  |                      |      
|Net cash provided by operating activities                                                |  |                      | 2,297
|                                                                                         |  |                      |      
|Cash flows from investing activities:                                                    |  |                      |      
|Proceeds from sale of California Chemical product line                                   |  |                      |     
|Proceeds from sale of equipment                                                          |  |                      | 9    
|Capital expenditures                                                                     |  |                      | (245 
|                                                                                         |  |                      |      
|Net cash provided by (used in) investing activities                                      |  |                      | (236 
|Cash flows from financing activities:                                                    |  |                      |      
|Principal payments on debt and line of credit                                            |  |                      | (104 
|Borrowings on debt and line of credit                                                    |  |                      | 59   
|Principal payments on term-loan                                                          |  |                      |     
|Borrowings on term-loan                                                                  |  |                      |     
|Exercise of stock options                                                                |  |                      | 99   
|Repurchase of common stock                                                               |  |                      | (42  
|                                                                                         |  |                      |      
|Net cash provided by (used in) financing activities                                      |  |                      | 12   
|                                                                                         |  |                      |      
|Net increase in cash                                                                     |  |                      | 2,073
|Cash at beginning of year                                                                |  |                      | 1,199
|                                                                                         |  |                      |      
|Cash at end of year                                                                      |  | $                    | 3,272
|                                                                                         |  |                      |      
|Supplemental disclosures of cash flow information:                                       |  |                      |      
|Cash paid during the year for interest                                                   |  | $                    | 3    
|                                                                                         |  |                      |      
|Cash paid during the year for income taxes                                               |  | $                    | 619  
|                                                                                         |  |                      |      
|Non-cash borrowings on capital lease                                                     |  | $                    | 590  
|                                                                                         |  |                      |      



See accompanying notes
to consolidated financial statements.



21



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##### Table of Contents

PACER TECHNOLOGY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 2003, 2002 and 2001



(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 subsidiaries, RECAP, Ltd. and 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 to 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).



22



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##### Table of Contents

PACER TECHNOLOGY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 2003, 2002 and 2001



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



As of July 1, 2002, the
Company adopted Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets. In accordance with SFAS 142, the Company has ceased amortizing goodwill recorded in past business
combinations effective as of July 1, 2002 and instead will test at least annually for impairment. As a result, there is no charge for goodwill amortization expense contained in the Companys statement of operations for the year ended June 30,
2003, whereas the Companys statements of operations for the years ended June 30, 2002 and 2001 do contain charges for goodwill amortization expense. The accumulated amortization on the assets of businesses acquired was $1.6 million as of June
30, 2003 and 2002.



Revenue Recognition and Shipping Costs



The Company provides its customers with limited rights to
return products. The Company recognizes revenue upon concluding that all of the fundamental criteria for revenue recognition have been met. The criteria are usually met at the time of product shipment. The Company establishes an allowance based on
historical experience with returns of like products. Shipping costs are included as a component of cost of sales.



Advertising and Promotional Expenses



Cooperative advertising and other promotional obligations are accrued and the costs are immediately recorded as a charge against sales when incurred.
Advertising and promotional expense were approximately $647,000, $1,139,000 and $2,303,000 for 2003, 2002 and 2001, 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.



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.



23



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##### Table of Contents

PACER TECHNOLOGY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 2003, 2002 and 2001



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, 2003, 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 $254,000, $302,000 and $318,000 in 2003, 2002 and 2001, 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-Based Compensation



In December 2002,
the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based CompensationTransition and Disclosure (FAS 148), which amends Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (FAS 123). FAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, FAS 148 amends the disclosure requirements of FAS 123 to require more prominent and more frequent disclosures in financial statements of the effects of stock-based compensation. The transition guidance
and annual disclosure provisions of FAS 148 are effective for fiscal years ending after December 15, 2002. The Company adopted FAS 148 as of January 1, 2003 but continued its application of the intrinsic value method of accounting under APB 25.
Financial statement disclosures of the effect on net income (loss) and earnings (loss) per share if fair value provisions of FAS 148 had been applied are set forth below.



Pacer has stock-based employee compensation plans and 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. The following table illustrates the effect on net income (loss) and earnings (loss) per share as if the Company had applied the fair value recognition
provisions of FAS 123.



24



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##### Table of Contents

PACER TECHNOLOGY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 2003, 2002 and 2001



|                                                                                                                                    |  | Years Ended June 30, |      
|----------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | -----
|                                                                                                                                    |  | 2003                 |      
|                                                                                                                                    |  | (In thousands)       |      
|Net income (loss), as reported                                                                                                      |  | $                    | 849  
|Deduct: Total stock-based employee compensation determined under fair value based method for all awards, net of related tax
effects |  |                      | (79  
|                                                                                                                                    |  |                      |      
|Pro forma net income (loss)                                                                                                         |  | $                    | 770  
|                                                                                                                                    |  |                      |      
|Earnings (loss) per share:                                                                                                          |  |                      |      
|Basicas reported                                                                                                                   |  | $                    | 0.29 
|Weighted Average SharesBasic                                                                                                       |  |                      | 2,921
|Dilutedas reported                                                                                                                 |  | $                    | 0.28 
|Weighted Average SharesDiluted                                                                                                     |  |                      | 3,027
|Basicpro forma                                                                                                                     |  | $                    | 0.26 
|Weighted Average SharesBasic                                                                                                       |  |                      | 2,921
|Dilutedpro forma                                                                                                                   |  | $                    | 0.25 
|Weighted Average SharesDiluted                                                                                                     |  |                      | 3,082



Impact of Recently
Issued Accounting Pronouncements



In January 2003, the
FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51, Consolidated Financial Statements (Interpretation 46). The Interpretation significantly changes previous
consolidation guidance pertaining to Special Purpose Entities (SPEs). The Interpretation clarifies the application of ARB No. 51 to certain entities in which equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. These entities are defined as variable interest entities or VIEs. Most SPEs will be evaluated for
consolidation under the Interpretation as VIEs. All enterprises with variable interests in VIEs created after January 31, 2003, are required to apply the provisions of the Interpretation immediately. A public entity with a variable interest in a VIE
created before February 1, 2003, is required to apply the consolidation provisions of the Interpretation to that entity in the first fiscal year or interim period beginning after June 15, 2003. The Interpretation also requires certain disclosures in
all financial statements initially issued after January 31, 2003, regardless of the date on which the VIE was created if it is reasonably possible that an enterprise will consolidate or disclose information about a VIE when the Interpretation
becomes effective. The Company does not expect the provision of this statement to have a significant impact on the Companys results of operations or financial position.



In April 2003, the FASB issued Statement of Financial Accounting Standard No. 149 Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, (FAS 149) amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging
activities under FAS 133. FAS 149 is effective for contracts entered into or modified after June 30, 2003 except for the provisions that were cleared by the FASB in prior pronouncements. The Company does not expect the provision of this statement to
have a significant impact on the Companys results of operations or financial position.



In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, (FAS 150).
This statement improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. FAS 150 requires that those instruments be classified as liabilities in the balance sheet. This statement is
effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not expect the provisions of this statement to
have a significant impact on the Companys results of operations or financial position.



25



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##### Table of Contents

PACER TECHNOLOGY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 2003, 2002 and 2001



(2) Inventories



Inventories are summarized as follows:



|                 |  | June 30,       |      
|---------------- |  | -------------- | -----
|                 |  | 2003           |      
|                 |  | (In thousands) |      
|Raw materials    |  | $              | 1,991
|Work-in-process  |  |                | 323  
|Finished goods   |  |                | 1,887
|Less: reserves   |  |                | (25  
|                 |  |                |      
|Inventories, net |  | $              | 4,176
|                 |  |                |      



(3) Equipment and Leasehold
Improvements



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



|                                               |  | Estimated Useful Lives |      | June 30, |       
|---------------------------------------------- |  | ---------------------- | ---- | -------- | ------
|                                               |  |                        | 2003 |          |       
|                                               |  | (In thousands)         |     
|Shop equipment                                 |  | 5-10                   |      | $        | 5,622 
|Leasehold improvements                         |  | 10                     |      |          | 1,092 
|Office furniture and equipment                 |  | 5-7                    |      |          | 232   
|Transportation equipment                       |  | 3                      |      |          | 53    
|Construction in progress                       |  |                        |      |          | 14    
|                                               |  |                        |      |          |       
|                                               |  |                        |      |          | 7,013 
|Less accumulated depreciation and amortization |  |                        |      |          | (5,341
|                                               |  |                        |      |          |       
|                                               |  |                        |      | $        | 1,672 
|                                               |  |                        |      |          |       



(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 (4.00% as of June 30, 2003) less 0.25%, or at a LIBOR base rate plus 2.50%. 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, 2003, no borrowings were outstanding under the credit line. At June 30, 2003, the Company had approximately $4.2 million of borrowings
available based on eligible collateral.



In connection with
this credit line, the Company has available 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, 2003, 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, 2003, 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.



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PACER TECHNOLOGY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 2003, 2002 and 2001



In November 2002, the Company obtained a sixty-month capital expenditure loan totaling $59,000 from
the same bank. This loan bears interest as a rate of 6.77% per annum and is payable in monthly installments of principal and interest of $1,155. As of June 30, 2003, the outstanding balance was $53,000 and the current portion was approximately
$11,000.



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, 2003, the outstanding balance was $69,000, all of which is classified as current.



Future payments of debt are as follows:



|Years Ending June 30, |  | Payments      
|--------------------- |  | --------------
|                      |  | (In thousands)
|2004                  |  | $             
|2005                  |  |               
|2006                  |  |               
|2007                  |  |               
|2008                  |  |               
|                      |  |               
|Total Payments        |  | $             
|                      |  |               



(5) Capital Lease Obligation



During the current year, the Company leased certain
equipment under a capital lease. The lease is for a term of five years and bears interest at a rate of 7.5%, payable in monthly installments of approximately $12,000.



Future minimum lease payments under this lease are as follows:



|Years Ending June 30,                          |  | Payments       |     
|---------------------------------------------- |  | -------------- | ----
|                                               |  | (In thousands) |     
|2004                                           |  | $              | 142 
|2005                                           |  |                | 142 
|2006                                           |  |                | 142 
|2007                                           |  |                | 142 
|2008                                           |  |                | 141 
|                                               |  |                |     
|Total minimum lease payments                   |  |                | 709 
|Less: amounts representing interest            |  |                | (119
|                                               |  |                |     
|Present value of future minimum lease payments |  |                | 590 
|Less: current portion                          |  |                | (101
|                                               |  |                |     
|Long-term portion                              |  | $              | 489 
|                                               |  |                |     



(6) Costs in Excess of Assets
Acquired



As of July 1, 2002, the Company adopted
Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets. In accordance with SFAS 142, the Company has ceased amortizing goodwill recorded in past business combinations effective as
of July 1, 2002. As a result, there is no charge for goodwill amortization expense contained in the Companys statement of operations for the year ended June 30, 2003, whereas the Companys statements of operations for the years ended June
30, 2002 and 2001 do contain charges for goodwill amortization expense.



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PACER TECHNOLOGY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 2003, 2002 and 2001



Had amortization of goodwill been discontinued at July 1, 2001, rather than at July 1, 2002, the
reported net income (loss) and earnings (loss) per share for the years ended June 30, 2003, 2002 and 2001, respectively, would have been as follows:



|                                   |  | Years Ended June 30, |     
|---------------------------------- |  | -------------------- | ----
|                                   |  | 2003                 |     
|                                   |  | (In thousands)       |     
|Net income (loss)                  |  |                      |     
|Reported net income (loss)         |  | $                    | 849 
|Add back: amortization, net of tax |  |                      |    
|                                   |  |                      |     
|Adjusted net income (loss)         |  | $                    | 849 
|                                   |  |                      |     
|Earnings (loss) per sharebasic    |  |                      |     
|Reported net income (loss)         |  | $                    | 0.29
|Add back: amortization, net of tax |  |                      |    
|                                   |  |                      |     
|Adjusted net income (loss)         |  | $                    | 0.29
|                                   |  |                      |     
|Earnings (loss) per sharediluted  |  |                      |     
|Reported net income (loss)         |  | $                    | 0.28
|Add back: amortization, net of tax |  |                      |    
|                                   |  |                      |     
|Adjusted net income (loss)         |  | $                    | 0.28
|                                   |  |                      |     



SFAS 142 also requires
that goodwill be tested for impairment annually, or more frequently if circumstances indicate potential impairment, by comparing the fair value of the asset to its carrying amount. Such testing requires, as an initial step, that each of the
Companys reporting units, as defined in SFAS 142, be identified and that the Companys assets and liabilities, including the existing goodwill and intangible assets, be assigned to those reporting units. The Company has determined that it
has a single reporting unit.



The Company has completed the
transitional goodwill impairment tests, which involved an assessment of the fair value of the Company and a comparison of that value to the Companys carrying value. In determining fair value, the Company considered the guidance in SFAS 142,
including the Companys market capitalization, discounted cash flows and other indicators of fair value. Based on this analysis, the Company determined that the fair value of the net assets of the Company exceeded their carrying value and,
therefore, that no goodwill impairment had occurred and no impairment charge was required to be taken.



(7) Accrued Expenses



Accrued expenses consist of the following:



|                                     |  | 2003           |       | 2002
|------------------------------------ |  | -------------- | ----- | ----
|                                     |  | (In thousands)
|Accrued payroll and related expenses |  | $              | 316   |     
|Legal and accounting expenses        |  |                | 229   |     
|Employee incentive plan              |  |                | 220   |     
|Deferred rent                        |  |                | 113   |     
|Sales and marketing expenses         |  |                | 42    |     
|Other                                |  |                | 214   |     
|                                     |  |                |       |     
|Total accrued expenses               |  | $              | 1,134 |     
|                                     |  |                |       |     



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PACER TECHNOLOGY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 2003, 2002 and 2001



(8) Operating Lease Obligations



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



|Years Ending June 30,        |  | OperatingLeases
|---------------------------- |  | ---------------
|                             |  | (In thousands) 
|2004                         |  | $              
|2005                         |  |                
|2006                         |  |                
|2007                         |  |                
|2008                         |  |                
|Thereafter                   |  |                
|                             |  |                
|Total minimum lease payments |  | $              
|                             |  |                



Rent expense was
$524,000, $619,000 and $723,000 in 2003, 2002 and 2001, respectively.



(9)
Major Customers, Suppliers and Export Sales



Pacer has two
customers that each accounted for approximately 14% and 11%, respectively, in fiscal 2003, of net sales and one customer accounted for more than approximately 12% of net sales in fiscal 2002. Pacer has one supplier that accounted for 20%, 18% and
11% of Pacers total material purchases during the fiscal years ended June 30, 2003, 2002 and 2001, respectively. Export sales represent approximately 18%, 16% and 14% of net sales in 2003, 2002 and 2001, respectively.



(10) Income Taxes



Income tax expense (benefit) from continuing operations for the fiscal years ended June 30, 2003, 2002 and 2001 consist of:



|                                   |  | 2003           |     | 2002 |   |       | 2001 | 
|---------------------------------- |  | -------------- | --- | ---- | - | ----- | ---- | 
|                                   |  | (In thousands) |    
|Federal:                           |  |                |     |      |   |       |      | 
|Current                            |  | $              | 299 |      | $ | (323  | )    | 
|Deferred                           |  |                | 103 |      |   | 1,168 |      | 
|                                   |  |                |     |      |   |       |      | 
|                                   |  |                | 402 |      |   | 845   |      | 
|                                   |  |                |     |      |   |       |      | 
|State:                             |  |                |     |      |   |       |      | 
|Current                            |  |                | 39  |      |   | (150  | )    | 
|Deferred                           |  |                | 42  |      |   | 63    |      | 
|                                   |  |                |     |      |   |       |      | 
|                                   |  |                | 81  |      |   | (87   | )    | 
|                                   |  |                |     |      |   |       |      | 
|Foreign:                           |  |                |     |      |   |       |      | 
|Current                            |  |                | 49  |      |   | 84    |      | 
|Deferred                           |  |                |    |      |   |      |      | 
|                                   |  |                |     |      |   |       |      | 
|                                   |  |                | 49  |      |   | 84    |      | 
|                                   |  |                |     |      |   |       |      | 
|Total income tax expense (benefit) |  | $              | 532 |      | $ | 842   |      | 
|                                   |  |                |     |      |   |       |      | 



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PACER TECHNOLOGY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 2003, 2002 and 2001



The tax effects of temporary differences that give rise to significant portions of the deferred tax
assets at June 30, 2003 and 2002 are presented below:



|                                                  |  | 2003           |      |   | 2002 |  
|------------------------------------------------- |  | -------------- | ---- | - | ---- | -
|                                                  |  | (In thousands) |     
|Current deferred tax assets (liabilities):        |  |                |      |   |      |  
|Allowance for doubtful accounts                   |  | $              | 323  |   |      | $
|Inventories                                       |  |                | 11   |   |      |  
|Prepaid expenses                                  |  |                | (121 | ) |      |  
|Vacation accruals                                 |  |                | 63   |   |      |  
|Advertising accruals                              |  |                | 34   |   |      |  
|Other                                             |  |                | 112  |   |      |  
|                                                  |  |                |      |   |      |  
|Net current deferred tax assets                   |  | $              | 422  |   |      | $
|                                                  |  |                |      |   |      |  
|Non-current deferred tax assets (liabilities):    |  |                |      |   |      |  
|Depreciation                                      |  | $              | 60   |   |      | $
|Amortization                                      |  |                | 46   |   |      |  
|Net operating loss                                |  |                |     |   |      |  
|Other                                             |  |                | (88  | ) |      |  
|                                                  |  |                |      |   |      |  
|Net non-current deferred tax assets (liabilities) |  | $              | 18   |   |      | $
|                                                  |  |                |      |   |      |  



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.



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 2003, 2002 and 2001 as follows:



|                                                    |  | 2003           |     |   | 2002 |   |     | 2001 | 
|--------------------------------------------------- |  | -------------- | --- | - | ---- | - | --- | ---- | 
|                                                    |  | (In thousands) |    
|Expected income tax provision                       |  | $              | 469 |   |      | $ | 567 |      | 
|Non-deductible expenses                             |  |                | 49  |   |      |   | 25  |      | 
|State income tax, net of Federal income tax benefit |  |                | 53  |   |      |   | 87  |      | 
|Effect of foreign operations                        |  |                | (39 | ) |      |   | 167 |      | 
|Other                                               |  |                |    |   |      |   | (4  | )    | 
|                                                    |  |                |     |   |      |   |     |      | 
|Total income tax expense (benefit)                  |  | $              | 532 |   |      | $ | 842 |      | 
|                                                    |  |                |     |   |      |   |     |      | 



(11) Shareholders Equity



Nonqualified Stock Option and Incentive Stock Option
Plans



Effective November 21, 2000, the Companys
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.



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



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PACER TECHNOLOGY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 2003, 2002 and 2001



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 2003 or 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 2003, under this Plan, Pacer
granted an option to a Director to purchase 20,000 shares of Pacers common stock at $4.95 per share. The market value of the stock was $4.95 per share, on the date of grant. The fair value of the stock option granted during fiscal 2003 was
$63,000 on the date of grant using the Black Scholes option-pricing model with the following assumptions: volatility rate of 48.29%, risk-free interest rate of 3.58%, and 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 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.



In fiscal year 2003, under this Plan, the Company granted options to various employees to purchase a total of 45,000 shares of Pacers common
stock at prices ranging from $3.90 to $4.31 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 2003 was $121,000 on the dates of grant using
the Black Scholes option-pricing model with the following assumptions: volatility rate of 48.29% to 48.48%, risk free interest rate of 3.58% to 4.31% and an expected life of 10 years.



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PACER TECHNOLOGY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 2003, 2002 and 2001



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.



In 1993, the Company granted an option to purchase 60,000
shares of common stock at a price equal to fair market value of the shares on the date the option was granted. The exercise period for the option was ten years and options granted vested immediately. This grant was not associated with any stock
option plan.



Summary of changes in stock options outstanding
are as follows:



1994 SOP & ISOP



|                          |  | Options Available For Grant |   |  | Number Outstanding |   |  | WeightedAverageExercise Prices |      | WeightedAverage FairValue Per Share of OptionsGranted
|------------------------- |  | --------------------------- | - |  | ------------------ | - |  | ------------------------------ | ---- | -----------------------------------------------------
|Balances at June 30, 2000 |  | 253,000                     |   |  | 515,000            |   |  | $                              | 4.76 |                                                      
|Options granted           |  | (100,000                    | ) |  | 100,000            |   |  |                                | 2.63 |                                                      
|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 |                                                      
|Options cancelled         |  | 85,000                      |   |  | (85,000            | ) |  |                                | 3.89 |                                                      
|                          |  |                             |   |  |                    |   |  |                                |      |                                                      
|Balances at June 30, 2002 |  | 85,000                      |   |  | 683,000            |   |  | $                              | 3.41 |                                                      
|Options granted           |  | (65,000                     | ) |  | 65,000             |   |  |                                | 4.48 |                                                      
|Options exercised         |  |                            |   |  | (20,000            | ) |  |                                | 4.95 |                                                      
|Options cancelled         |  | 10,000                      |   |  | (10,000            | ) |  |                                | 3.02 |                                                      
|                          |  |                             |   |  |                    |   |  |                                |      |                                                      
|Balances at June 30, 2003 |  | 30,000                      |   |  | 718,000            |   |  | $                              | 4.21 |                                                      
|                          |  |                             |   |  |                    |   |  |                                |      |                                                      



The following table
summarizes information about the 1994 SOP & ISOP stock options at June 30, 2003:



|Exercise Price |  | SharesOutstanding at 6/30/03 |  | Weighted Average Exercise Price |      | Weighted Average Remaining Contractual Life |           | Shares Exercisable at 6/30/03 |         | Weighted AverageExercise Price ofExercisableOptions
|-------------- |  | ---------------------------- |  | ------------------------------- | ---- | ------------------------------------------- | --------- | ----------------------------- | ------- | ---------------------------------------------------
|$2.63          |  | 100,000                      |  | $                               | 2.63 |                                             | 7.6 years |                               | 60,000  |                                                    
|$ 3.02$3.90   |  | 144,000                      |  | $                               | 3.14 |                                             | 7.3 years |                               | 134,000 |                                                    
|$ 4.31$4.95   |  | 114,000                      |  | $                               | 4.48 |                                             | 7.2 years |                               | 79,000  |                                                    
|$5.00          |  | 360,000                      |  | $                               | 5.00 |                                             | 1.7 years |                               | 360,000 |                                                    
|               |  |                              |  |                                 |      |                                             |           |                               |         |                                                    
|               |  | 718,000                      |  |                                 |      |                                             |           |                               | 633,000 |                                                    
|               |  |                              |  |                                 |      |                                             |           |                               |         |                                                    



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PACER TECHNOLOGY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 2003, 2002 and 2001



1982 Stock Option Plan and Other Shares Granted



|                                   |  | Outstanding Options |  
|---------------------------------- |  | ------------------- | -
|                                   |  | Number of Shares    |  
|Balances at June 30, 2000          |  | 140,000             |  
|Options expired                    |  | (60,000             | )
|                                   |  |                     |  
|Balances at June 30, 2001          |  | 80,000              |  
|Options expired                    |  | (20,000             | )
|                                   |  |                     |  
|Balances at June 30, 2002 and 2003 |  | 60,000              |  
|                                   |  |                     |  



Warrant to Purchase
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 years ended June 30,
2003 or 2002. At June 30, 2003, there is a warrant outstanding to purchase 66,667 shares of common stock.



(12) Earnings (Loss) Per Share



Earnings (loss) per share were computed as follows:



|                                                                                                                       |  | 2003                                     |       | 2002 |   | 2001  | 
|---------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ----- | ---- | - | ----- | 
|                                                                                                                       |  | (In thousands, except per share amounts) |      
|Numerator:                                                                                                             |  |                                          |       |      |   |       | 
|Numerator for basic and diluted earnings (loss) per share                                                              |  | $                                        | 849   |      | $ | 1,243 | 
|                                                                                                                       |  |                                          |       |      |   |       | 
|Denominator:                                                                                                           |  |                                          |       |      |   |       | 
|Denominator for basic earnings (loss) per shareweighted average number of common shares outstanding during the
period |  |                                          | 2,921 |      |   | 3,022 | 
|Incremental common shares attributable to exercise of outstanding options                                              |  |                                          | 106   |      |   | 70    | 
|                                                                                                                       |  |                                          |       |      |   |       | 
|Denominator for diluted earnings (loss) per share                                                                      |  |                                          | 3,027 |      |   | 3,092 | 
|                                                                                                                       |  |                                          |       |      |   |       | 
|Basic earnings (loss) per share                                                                                        |  | $                                        | .29   |      | $ | .41   | 
|                                                                                                                       |  |                                          |       |      |   |       | 
|Diluted earnings (loss) per share                                                                                      |  | $                                        | .28   |      | $ | .40   | 
|                                                                                                                       |  |                                          |       |      |   |       | 



(13) 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, net of forfeitures for the years ended
June 30, 2003, 2002 and 2001 were $38,000, $59,000 and $67,000, respectively.



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PACER TECHNOLOGY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 2003, 2002 and 2001



(14) Quarterly Financial Data (Unaudited)



The following table presents unaudited quarterly financial information for each of the fiscal years ended June 30, 2003 and
2002. 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.



|                             |  | Quarters Ended |      
|---------------------------- |  | -------------- | -----
|FY 2003                      |  | Sept. 30, 2002 |      
|Net sales                    |  | $              | 6,523
|Gross profit                 |  |                | 2,074
|Net income (loss)            |  |                | 385  
|Net income (loss) per share: |  |                |      
|Basic                        |  | $              | .13  
|Diluted                      |  | $              | .13  



|                             |  | Quarters Ended
|---------------------------- |  | --------------
|FY 2002                      |  | Sept. 30, 2001
|Net sales                    |  | $             
|Gross profit                 |  |               
|Net income (loss)            |  |               
|Net income (loss) per share: |  |               
|Basic                        |  | $             
|Diluted                      |  | $             



(15) Acquisitions &
Dispositions



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.



(16) 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



34



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##### Table of Contents

PACER TECHNOLOGY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 2003, 2002 and 2001



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.



(17) Commitments and Contingencies



In June of 2000, the Company 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. As part of this agreement, the Company has the obligation to make a monthly royalty payment to
Pro-Tel equal to 10% of net sales through the fiscal year ended June 30, 2005.



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 due to a 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.



(18) Related Party Transactions



During the years ended June 30, 2003, 2002 and 2001, Pacer incurred legal
expenses of $7,000, $62,000 and $83,000, 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.



(19) Subsequent Event



On July 30, 2003, Pacer Technology and Cyan Investments, LLC announced that they have signed a definitive merger agreement
providing for Cyan Holding Co., a subsidiary of Cyan Investments, LLC (Cyan), to acquire, for $6.95 per share in cash, the approximately 70% of Pacers outstanding common stock that Cyan does not already own. In addition, all of
Pacers outstanding stock options will be converted into a right to receive cash in an amount equal to the difference between $6.95 per share and the respective exercise prices of those options. The per share consideration, together with the
cash that will be paid for the options, places the aggregate value of Pacers shares (inclusive of options) at approximately $22.6 million.



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##### Table of Contents

SCHEDULE IIPACER TECHNOLOGY



VALUATION AND QUALIFYING ACCOUNTS

(In thousands)



|Description                      |  | Balance At Beginning of Period |     | Additions |   | Deductions(1) |  |   | Balance At End of Period
|-------------------------------- |  | ------------------------------ | --- | --------- | - | ------------- |  | - | ------------------------
|                                 |  | (In thousands)                
|Allowance for doubtful accounts: |  |                                |     |           |   |               |  |   |                         
|Year Ended June 30, 2001         |  | $                              | 304 |           | $ | 499           |  | $ | (460                    
|Year Ended June 30, 2002         |  | $                              | 343 |           | $ | 703           |  | $ | (528                    
|Year Ended June 30, 2003         |  | $                              | 518 |           | $ | 472           |  | $ | (237                    

---

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



|Description                                      |  | Balance At Beginning of Period |     | Additions |   | Deductions(1) |  |   | Balance At End of Period
|------------------------------------------------ |  | ------------------------------ | --- | --------- | - | ------------- |  | - | ------------------------
|Allowance for obsolete or slow-moving inventory: |  |                                |     |           |   |               |  |   |                         
|Year Ended June 30, 2001                         |  | $                              | 638 |           | $ | 84            |  | $ | (445                    
|Year Ended June 30, 2002                         |  | $                              | 277 |           | $ | 258           |  | $ | (515                    
|Year Ended June 30, 2003                         |  | $                              | 20  |           | $ | 63            |  | $ | (58                     

---

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



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##### Table of Contents

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



None



Item 9A. CONTROLS AND PROCEDURES



Pacers management, under the supervision and with the participation of its Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Companys disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) in effect as of June 30, 2003. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of
June 30, 2003, Pacers disclosure controls and procedures were adequate and effective and designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to them by others within
these entities.



There were no significant changes in
Pacers internal controls or in other factors that could significantly affect these controls subsequent to June 30, 2003. As no significant deficiencies or material weaknesses were found, no corrective actions were taken.



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 for its Annual Meeting of Shareholders that is expected to be filed with the Commission on or before October 28, 2003.



Item 11. EXECUTIVE COMPENSATION



The information required by Item 11 is incorporated herein by reference from the Companys definitive proxy statement which is expected to be filed with the Commission on or before October 28, 2003 for the Companys annual
shareholders meeting.



Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



Except for the information below regarding our equity compensation plans, 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 on or before October 28, 2003 for the Companys annual stockholders meeting.



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##### Table of Contents

The following table provides information relating to our equity compensation plans as of June 30, 2003.
Amounts in this table have been retroactively adjusted for a 1-for-5 reverse stock split effectuated in November 2000:



|                                                     |  | Column A                                                                           |  | Column B                                                          |      | Column C                                                                                                                              
|---------------------------------------------------- |  | ---------------------------------------------------------------------------------- |  | ----------------------------------------------------------------- | ---- | --------------------------------------------------------------------------------------------------------------------------------------
|                                                     |  | Number of Securities to be Issued upon Exerciseof Outstanding Options and
Warrants |  | Weighted-Average Exercise Price ofOutstanding Optionsand Warrants |      | Number of SecuritiesRemaining Available forFuture Issuance under Equity Compensation Plans (Excluding SecuritiesReflected in Column A)
|Equity compensation plans approved by shareholders   |  | 718,000                                                                            |  | $                                                                 | 4.21 |                                                                                                                                       
|Equity compensation not approved by shareholders (1) |  | 126,667                                                                            |  |                                                                   | 3.91 |                                                                                                                                       
|                                                     |  |                                                                                    |  |                                                                   |      |                                                                                                                                       
|Total                                                |  | 844,667                                                                            |  | $                                                                 | 4.17 |                                                                                                                                       
|                                                     |  |                                                                                    |  |                                                                   |      |                                                                                                                                       

---

|(1) |  | Issuable under a stock purchase warrant that was granted to a consultant for services rendered to Pacer in fiscal 2001.
|--- |  | -----------------------------------------------------------------------------------------------------------------------



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 that is expected to be filed with the Commission on or before October 28, 2003 for the
Companys annual shareholders meeting.



Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICE



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 are not applicable.



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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.



|Number        |  | Description                                                                                                                    
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------
|              | 
|Exhibit 2.1   |  | Agreement and Plan of Merger, dated July 29, 2003, by and among Pacer Technology, Cyan Holding Co. and PT Acquisition Corp. (1)
|              | 
|Exhibit 3.1   |  | Articles of Incorporation(2)                                                                                                   
|              | 
|Exhibit 3.2   |  | By-laws(2)                                                                                                                     
|              | 
|Exhibit 4.1   |  | Stock Purchase Warrant for 66,667 shares of Common Stock (3)                                                                   
|              | 
|Exhibit 4.2   |  | 2001 Stock Incentive Plan approved by shareholders on November 13, 2001(5)                                                     
|              | 
|Exhibit 10.7  |  | Agreement to Extend Term of Lease agreement dated March 1, 1988 for facilities in Rancho Cucamonga (4)                         
|              | 
|Exhibit 10.8  |  | Lease Termination Agreement for facilities in Rancho Cucamonga dated October 25, 2001(4)                                       
|              | 
|Exhibit 10.9  |  | New Operating Lease for facilities located in Rancho Cucamonga dated May 9, 2002 (5)                                           
|              | 
|Exhibit 10.10 |  | Severance Compensation Agreement with Richard S. Kay dated January 30, 2002 (5)                                                
|              | 
|Exhibit 10.11 |  | Severance Compensation Agreements with Ronald T. Gravette dated January 30, 2002 (5)                                           
|              | 
|Exhibit 10.12 |  | Credit Agreement with Wells Fargo Bank dated May 1, 2002 (5)                                                                   
|              | 
|Exhibit 21    |  | Subsidiaries of Registrant                                                                                                     
|              | 
|Exhibit 23.1  |  | Consent of Independent Auditors                                                                                                
|              | 
|Exhibit 31.1  |  | CEO Certification under Section 302 of the Sarbanes-Oxley Act of 2002                                                          
|              | 
|Exhibit 31.2  |  | CFO Certification under Section 302 of the Sarbanes-Oxley Act of 2002                                                          
|              | 
|Exhibit 32.1  |  | CEO Certifications under Section 906 of the Sarbanes-Oxley Act                                                                 
|              | 
|Exhibit 32.2  |  | CFO Certifications under Section 906 of the Sarbanes-Oxley Act                                                                 

---

|(1) |  | Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K dated July 29, 2003
|--- |  | ------------------------------------------------------------------------------------------

|(2) |  | Incorporated by reference to the same numbered Exhibit to the Annual Report on Form 10-K for fiscal year ended June 30, 1986.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------

|(3) |  | Incorporated by reference to the same numbered Exhibit to the Annual Report on Form 10-K for fiscal year ended June 30, 2001.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------

|(4) |  | Incorporated by reference to the same numbered Exhibit to the Annual Report on Form 10-K for fiscal year ended June 30, 1999.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------

|(5) |  | Incorporated by reference to the same numbered Exhibit to the Annual Report on Form 10-K for fiscal year ended June 30, 2002.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------



| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------



Pacer filed a Current Report on Form 8-K dated July 29, 2003 to report, under Item 5Other Events the signing of the
Agreement and Plan of Merger dated as of July 29, 2003 among Pacer, Cyan Holding Co., and its wholly owned subsidiary, PT Acquisition corp. A copy of that Agreement was appended as Exhibit 2.1 to that Current Report.



Pacer filed a Current Report Form 8-K dated August 26, 2003
to report, under Item 12Results of Operations and Financial Condition, the issuance by Pacer of a press release announcing its earnings for the quarter and fiscal year ended June 30, 2003.



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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, 2003 |  | PACER TECHNOLOGY
|------------------------ |  | ----------------
|                         |  |                 
|                         |  | By:             
|                         |  |                 
|                         |  |                 
|                         |  |                 



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 to act severally as attorney-in-fact and agent, with power of substitution and resubstitution, to sign on his behalf, 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 attorney-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, 2003
|                                 |  |                                                                                      
|/s/ RICHARD S. KAYRichard S. Kay |  | Acting Chief Financial Officer (Principal Financial and Principal Accounting Officer) |  | September 25, 2003
|                                 |  |                                                                                      
|/s/ JOHN G. HOCKIN, II           |  | Director                                                                              |  | September 25, 2003
|John G. Hockin, II               |  |                                                                                       |  |                   
|                                 |  |                                                                                      
|/s/ CARL HATHAWAY                |  | Director                                                                              |  | September 25, 2003
|Carl Hathaway                    |  |                                                                                       |  |                   



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##### Table of Contents

INDEX TO EXHIBITS



|Number        |  | Description                                                                                                                    
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------
|              | 
|Exhibit 2.1   |  | Agreement and Plan of Merger, dated July 29, 2003, by and among Pacer Technology, Cyan Holding Co. and PT Acquisition Corp.
(1)
|              | 
|Exhibit 3.1   |  | Articles of Incorporation(2)                                                                                                   
|              | 
|Exhibit 3.2   |  | By-laws(2)                                                                                                                     
|              | 
|Exhibit 4.1   |  | Stock Purchase Warrant for 66,667 shares of Common Stock (3)                                                                   
|              | 
|Exhibit 4.2   |  | 2001 Stock Incentive Plan approved by shareholders on November 13, 2001(5)                                                     
|              | 
|Exhibit 10.7  |  | Agreement to Extend Term of Lease agreement dated March 1, 1988 for facilities in Rancho Cucamonga (4)                         
|              | 
|Exhibit 10.8  |  | Lease Termination Agreement for facilities in Rancho Cucamonga dated October 25, 2001(4)                                       
|              | 
|Exhibit 10.9  |  | New Operating Lease for facilities located in Rancho Cucamonga dated May 9, 2002 (5)                                           
|              | 
|Exhibit 10.10 |  | Severance Compensation Agreement with Richard S. Kay dated January 30, 2002 (5)                                                
|              | 
|Exhibit 10.11 |  | Severance Compensation Agreements with Ronald T. Gravette dated January 30, 2002 (5)                                           
|              | 
|Exhibit 10.12 |  | Credit Agreement with Wells Fargo Bank dated May 1, 2002 (5)                                                                   
|              | 
|Exhibit 21    |  | Subsidiaries of Registrant                                                                                                     
|              | 
|Exhibit 23.1  |  | Consent of Independent Auditors                                                                                                
|              | 
|Exhibit 31.1  |  | CEO Certification under Section 302 of the Sarbanes-Oxley Act of 2002                                                          
|              | 
|Exhibit 31.2  |  | CFO Certification under Section 302 of the Sarbanes-Oxley Act of 2002                                                          
|              | 
|Exhibit 32.1  |  | CEO Certifications under Section 906 of the Sarbanes-Oxley Act                                                                 
|              | 
|Exhibit 32.2  |  | CFO Certifications under Section 906 of the Sarbanes-Oxley Act                                                                 

---

|(1) |  | Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K dated July 29, 2003
|--- |  | ------------------------------------------------------------------------------------------

|(2) |  | Incorporated by reference to the same numbered Exhibit to the Annual Report on Form 10-K for fiscal year ended June 30, 1986.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------

|(3) |  | Incorporated by reference to the same numbered Exhibit to the Annual Report on Form 10-K for fiscal year ended June 30, 2001.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------

|(4) |  | Incorporated by reference to the same numbered Exhibit to the Annual Report on Form 10-K for fiscal year ended June 30, 1999.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------

|(5) |  | Incorporated by reference to the same numbered Exhibit to the Annual Report on Form 10-K for fiscal year ended June 30, 2002.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------



E-1