##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

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

For the quarterly period ended March 31, 2002

Commission file number 0-21630

ACTION PERFORMANCE COMPANIES, INC.

(Exact Name of Registrant as Specified in Its Charter)


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

4707 E. Baseline Road
Phoenix, AZ 85042
(602) 337-3700

(Address, including zip code, and telephone number, including area code, of principal executive offices)

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 þ No___

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date.

|                              |  |                              
|----------------------------- |  | -----------------------------
|CLASS                         |  | OUTSTANDING AT APRIL 30, 2002
|Common Stock, $0.01 Par Value |  | 17,795,783 Shares            





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TABLE OF CONTENTS



|                                                          |                                                                                               |  |  |  |  |  |  | 
|--------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|Unaudited Condensed Consolidated Balance Sheets          
|Unaudited Condensed Consolidated Statements of Operations
|Unaudited Condensed Consolidated Statements of Cash Flows
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS               
|                                                          | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                          | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II  OTHER INFORMATION                              
|                                                          | ITEM 1. Legal Proceedings                                                                    
|                                                          | ITEM 2. Changes in Securities and Use of Proceeds                                            
|                                                          | ITEM 3. Defaults Upon Senior Securities                                                      
|                                                          | ITEM 4. Submissions of Matters to a Vote of Security Holders                                 
|                                                          | ITEM 5. Other Information                                                                    
|                                                          | ITEM 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                               



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##### Table of Contents



PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

2



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##### Table of Contents



ACTION PERFORMANCE COMPANIES, INC.




Unaudited Condensed Consolidated Balance Sheets


March 31, 2002 and September 30, 2001
(in thousands, except per share data)


|                                     |                                                         |                             |         |           |         |               |         |         |         | 
|------------------------------------ | ------------------------------------------------------- | --------------------------- | ------- | --------- | ------- | ------------- | ------- | ------- | ------- | 
|                                     |                                                         |                             |         | March 31, |         | September 30,
|                                     |                                                         |                             |         | 2002      |         | 2001         
|                                     |                                                         |                             |         |           |         |              
|ASSETS                               |                                                         |                             |         |           |         |               |         |        
|                                    
|                                    
|                                    
|                                    
|Current Assets:                      |                                                         |                             |         |           |         |               |         |        
|                                    
|                                    
|                                    
|                                    
|                                     | Cash and cash equivalents                               |                             | $       | 67,084    |         |               | $       | 64,514  |        
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts receivable, net                                |                             |         | 42,206    |         |               |         | 40,725  |        
|                                    
|                                    
|                                    
|                                    
|                                     | Inventories                                             |                             |         | 25,385    |         |               |         | 25,120  |        
|                                    
|                                    
|                                    
|                                    
|                                     | Prepaid royalties                                       |                             |         | 11,040    |         |               |         | 10,222  |        
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred tax asset                                      |                             |         | 2,624     |         |               |         | 2,672   |        
|                                    
|                                    
|                                    
|                                    
|                                     | Prepaid expenses and other assets                       |                             |         | 1,880     |         |               |         | 1,392   |        
|                                     |                                                         |                             |         |           |         |               |         |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                         | Total Current Assets        |         |           | 150,219 |               |         |         | 144,645 | 
|                                    
|                                    
|                                    
|                                    
|Property and Equipment, net          |                                                         |                             | 41,296  |           |         |               | 40,356  |        
|                                    
|                                    
|                                    
|                                    
|Goodwill                             |                                                         |                             | 76,319  |           |         |               | 76,937  |        
|                                    
|                                    
|                                    
|                                    
|Licenses and Trademark               |                                                         |                             | 12,073  |           |         |               | 12,785  |        
|                                    
|                                    
|                                    
|                                    
|Other Assets                         |                                                         |                             | 5,113   |           |         |               | 4,230   |        
|                                     |                                                         |                             |         |           |         |               |         |        
|                                     |                                                         | $                           | 285,020 |           |         | $             | 278,953 |        
|                                     |                                                         |                             |         |           |         |               |         |        
|LIABILITIES AND SHAREHOLDERS EQUITY |                                                         |                             |         |           |         |               |         |        
|                                    
|                                    
|                                    
|                                    
|Current Liabilities:                 |                                                         |                             |         |           |         |               |         |        
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts payable                                        |                             | $       | 13,631    |         |               | $       | 18,371  |        
|                                    
|                                    
|                                    
|                                    
|                                     | Accrued royalties                                       |                             |         | 16,102    |         |               |         | 16,792  |        
|                                    
|                                    
|                                    
|                                    
|                                     | Accrued expenses and other                              |                             |         | 10,420    |         |               |         | 18,755  |        
|                                    
|                                    
|                                    
|                                    
|                                     | Current portion of long-term debt                       |                             |         | 314       |         |               |         | 424     |        
|                                     |                                                         |                             |         |           |         |               |         |        
|                                     |                                                         | Total Current Liabilities   |         |           | 40,467  |               |         |         | 54,342  | 
|                                     |                                                         |                             |         |           |         |               |         |        
|Long-Term Liabilities:               |                                                         |                             |         |           |         |               |         |        
|                                    
|                                    
|                                    
|                                    
|                                     | 4 3/4% convertible subordinated notes                   |                             |         | 48,933    |         |               |         | 54,933  |        
|                                    
|                                    
|                                    
|                                    
|                                     | Other long-term debt                                    |                             |         | 1,563     |         |               |         | 2,063   |        
|                                    
|                                    
|                                    
|                                    
|                                     | Other                                                   |                             |         | 4,552     |         |               |         | 4,710   |        
|                                     |                                                         |                             |         |           |         |               |         |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                         | Total Long-Term Liabilities |         |           | 55,048  |               |         |         | 61,706  | 
|                                     |                                                         |                             |         |           |         |               |         |        
|Commitments and Contingencies        |                                                         |                             |         |           |         |               |         |        
|                                    
|                                    
|                                    
|                                    
|Minority Interests                   |                                                         |                             | 2,888   |           |         |               | 3,079   |        
|                                    
|                                    
|                                    
|                                    
|Shareholders Equity:                |                                                         |                             |         |           |         |               |         |        
|                                    
|                                    
|                                    
|                                    
|                                     | Common stock, $.01 par value, 25,000 shares authorized, |                             |         |           |         |               |         |         |        
|                                     | 17,684 and 17,313 shares issued                         |                             |         | 177       |         |               |         | 173     |        
|                                    
|                                    
|                                    
|                                    
|                                     | Additional paid-in capital                              |                             |         | 130,001   |         |               |         | 121,669 |        
|                                    
|                                    
|                                    
|                                    
|                                     | Treasury stock, at cost, 145 and 143 shares             |                             |         | (1,284    | )       |               |         | (1,221  | )      
|                                    
|                                    
|                                    
|                                    
|                                     | Accumulated other comprehensive loss                    |                             |         | (6,498    | )       |               |         | (5,625  | )      
|                                    
|                                    
|                                    
|                                    
|                                     | Retained earnings                                       |                             |         | 64,221    |         |               |         | 44,830  |        
|                                     |                                                         |                             |         |           |         |               |         |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                         | Total Shareholders Equity  |         |           | 186,617 |               |         |         | 159,826 | 
|                                     |                                                         |                             |         |           |         |               |         |        
|                                     |                                                         | $                           | 285,020 |           |         | $             | 278,953 |        
|                                     |                                                         |                             |         |           |         |               |         |        

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

3



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##### Table of Contents



ACTION PERFORMANCE COMPANIES, INC.




Unaudited Condensed Consolidated Statements of Operations


Three and Six Months Ended March 31, 2002 and 2001
(in thousands, except per share data)


|                                        |                                     |                          |         |                    |        |                  |        |        |        |      |         |        |        |   |         |        |        | 
|--------------------------------------- | ----------------------------------- | ------------------------ | ------- | ------------------ | ------ | ---------------- | ------ | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                        |                                     |                          |         | Three Months Ended |        | Six Months Ended
|                                        |                                     |                          |         |                    |        |                 
|                                        |                                     |                          |         | 2002               |        | 2001             |        | 2002   |        | 2001
|                                        |                                     |                          |         |                    |        |                  |        |        |        |     
|Net sales                               |                                     | $                        | 100,185 |                    |        | $                | 71,074 |        |        | $    | 184,321 |        |        | $ | 121,962 |       
|                                       
|                                       
|                                       
|                                       
|Cost of sales                           |                                     |                          | 61,328  |                    |        |                  | 47,087 |        |        |      | 113,613 |        |        |   | 79,893  |       
|                                        |                                     |                          |         |                    |        |                  |        |        |        |      |         |        |        |   |         |       
|Gross profit                            |                                     |                          | 38,857  |                    |        |                  | 23,987 |        |        |      | 70,708  |        |        |   | 42,069  |       
|                                        |                                     |                          |         |                    |        |                  |        |        |        |      |         |        |        |   |         |       
|Operating expenses:                     |                                     |                          |         |                    |        |                  |        |        |        |      |         |        |        |   |         |       
|                                       
|                                       
|                                       
|                                       
|                                        | Selling, general and administrative |                          |         | 18,929             |        |                  |        | 16,632 |        |      |         | 36,101 |        |   |         | 31,499 |       
|                                       
|                                       
|                                       
|                                       
|                                        | Amortization of goodwill            |                          |         |                   |        |                  |        | 960    |        |      |         |       |        |   |         | 1,945  |       
|                                       
|                                       
|                                       
|                                       
|                                        | Amortization of intangibles         |                          |         | 581                |        |                  |        | 525    |        |      |         | 1,087  |        |   |         | 1,293  |       
|                                        |                                     |                          |         |                    |        |                  |        |        |        |      |         |        |        |   |         |       
|                                        |                                     | Total operating expenses |         |                    | 19,510 |                  |        |        | 18,117 |      |         |        | 37,188 |   |         |        | 34,737 | 
|                                        |                                     |                          |         |                    |        |                  |        |        |        |      |         |        |        |   |         |       
|Income from operations                  |                                     |                          | 19,347  |                    |        |                  | 5,870  |        |        |      | 33,520  |        |        |   | 7,332   |       
|                                       
|                                       
|                                       
|                                       
|Interest expense                        |                                     |                          | (861    | )                  |        |                  | (1,541 | )      |        |      | (1,706  | )      |        |   | (2,986  | )     
|                                       
|                                       
|                                       
|                                       
|Minority interests and other, net       |                                     |                          | (245    | )                  |        |                  | 1      |        |        |      | (371    | )      |        |   | (139    | )     
|                                        |                                     |                          |         |                    |        |                  |        |        |        |      |         |        |        |   |         |       
|Income before income taxes and          |                                     |                          |         |                    |        |                  |        |        |        |      |         |        |        |   |         |       
|                                        | extraordinary gain (loss)           |                          |         | 18,241             |        |                  |        | 4,330  |        |      |         | 31,443 |        |   |         | 4,207  |       
|                                       
|                                       
|                                       
|                                       
|Income taxes                            |                                     |                          | 7,078   |                    |        |                  | 1,734  |        |        |      | 12,200  |        |        |   | 1,684   |       
|                                        |                                     |                          |         |                    |        |                  |        |        |        |      |         |        |        |   |         |       
|Income before extraordinary gain (loss) |                                     |                          | 11,163  |                    |        |                  | 2,596  |        |        |      | 19,243  |        |        |   | 2,523   |       
|                                       
|                                       
|                                       
|                                       
|Extraordinary gain (loss), net          |                                     |                          | (2      | )                  |        |                  | 6,087  |        |        |      | 148     |        |        |   | 6,087   |       
|                                        |                                     |                          |         |                    |        |                  |        |        |        |      |         |        |        |   |         |       
|Net income                              |                                     |                          | 11,161  |                    |        |                  | 8,683  |        |        |      | 19,391  |        |        |   | 8,610   |       
|                                       
|                                       
|                                       
|                                       
|                                        | Other comprehensive loss            |                          |         | (1,229             | )      |                  |        | (2,314 | )      |      |         | (873   | )      |   |         | (815   | )     
|                                        |                                     |                          |         |                    |        |                  |        |        |        |      |         |        |        |   |         |       
|                                        | Comprehensive income                |                          | $       | 9,932              |        |                  | $      | 6,369  |        |      | $       | 18,518 |        |   | $       | 7,795  |       
|                                        |                                     |                          |         |                    |        |                  |        |        |        |      |         |        |        |   |         |       
|EARNINGS PER COMMON SHARE:              |                                     |                          |         |                    |        |                  |        |        |        |      |         |        |        |   |         |       
|                                       
|                                       
|                                       
|                                       
|Basic-                                  |                                     |                          |         |                    |        |                  |        |        |        |      |         |        |        |   |         |       
|                                        | Income before extraordinary gain    |                          | $       | 0.64               |        |                  | $      | 0.16   |        |      | $       | 1.11   |        |   | $       | 0.16   |       
|                                       
|                                       
|                                       
|                                       
|                                        | Extraordinary gain, net of tax      |                          |         |                   |        |                  |        | 0.38   |        |      |         | 0.01   |        |   |         | 0.37   |       
|                                        |                                     |                          |         |                    |        |                  |        |        |        |      |         |        |        |   |         |       
|                                        | Net income                          |                          | $       | 0.64               |        |                  | $      | 0.54   |        |      | $       | 1.12   |        |   | $       | 0.53   |       
|                                        |                                     |                          |         |                    |        |                  |        |        |        |      |         |        |        |   |         |       
|Diluted-                                |                                     |                          |         |                    |        |                  |        |        |        |      |         |        |        |   |         |       
|                                       
|                                       
|                                       
|                                       
|                                        | Income before extraordinary gain    |                          | $       | 0.60               |        |                  | $      | 0.16   |        |      | $       | 1.05   |        |   | $       | 0.16   |       
|                                       
|                                       
|                                       
|                                       
|                                        | Extraordinary gain, net of tax      |                          |         |                   |        |                  |        | 0.37   |        |      |         | 0.01   |        |   |         | 0.37   |       
|                                        |                                     |                          |         |                    |        |                  |        |        |        |      |         |        |        |   |         |       
|                                        | Net income                          |                          | $       | 0.60               |        |                  | $      | 0.53   |        |      | $       | 1.06   |        |   | $       | 0.53   |       
|                                        |                                     |                          |         |                    |        |                  |        |        |        |      |         |        |        |   |         |       

The accompanying notes are an integral part of these consolidated statements.

4



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##### Table of Contents



ACTION PERFORMANCE COMPANIES, INC.




Unaudited Condensed Consolidated Statements of Cash Flows


Six Months Ended March 31, 2002 and 2001
(in thousands)


|                                                      |                                                              |                                              |                                       |                                       |         |                            |         |       |         |        |        |  
|----------------------------------------------------- | ------------------------------------------------------------ | -------------------------------------------- | ------------------------------------- | ------------------------------------- | ------- | -------------------------- | ------- | ----- | ------- | ------ | ------ | -
|                                                      |                                                              |                                              |                                       |                                       |         | Six Months Ended March 31,
|                                                      |                                                              |                                              |                                       |                                       |         |                           
|                                                      |                                                              |                                              |                                       |                                       |         | 2002                       |         | 2001 
|                                                      |                                                              |                                              |                                       |                                       |         |                            |         |      
|CASH FLOWS FROM OPERATING ACTIVITIES:                 |                                                              |                                              |                                       |                                       |         |                            |         |      
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Net income                                                   |                                              | $                                     | 19,391                                |         |                            | $       | 8,610 |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Adjustments to reconcile net income to cash from operations- |                                              |                                       |                                       |         |                            |         |       |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                              | Deferred income taxes                        |                                       |                                       | 1       |                            |         |       | 5,907   |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                              | Depreciation and amortization                |                                       |                                       | 11,589  |                            |         |       | 13,659  |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                              | Stock option tax benefits                    |                                       |                                       | 3,180   |                            |         |       |        |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                              | Extraordinary gain on extinguishment of debt |                                       |                                       | (235    | )                          |         |       | (9,663  | )     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                              | Other                                        |                                       |                                       | (348    | )                          |         |       | 750     |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Changes
in assets and liabilities, net-                      |                                              |                                       |                                       |         |                            |         |       |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                              | Accounts receivable, net                     |                                       |                                       | (1,638  | )                          |         |       | (9,603  | )     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                              | Accounts payable                             |                                       |                                       | (4,571  | )                          |         |       | (546    | )     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                              | Income tax payable and receivable            |                                       |                                       | (5,078  | )                          |         |       | 17,819  |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                              | Inventories                                  |                                       |                                       | (394    | )                          |         |       | 5,700   |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                              | Prepaid royalties and accrued royalties      |                                       |                                       | (1,507  | )                          |         |       | (1,850  | )     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                              | Other                                        |                                       |                                       | (4,321  | )                          |         |       | (4,776  | )     
|                                                      |                                                              |                                              |                                       |                                       |         |                            |         |      
|                                                      |                                                              |                                              | Net cash from operating activities    |                                       |         | 16,069                     |         |       |         | 26,007 |       
|                                                      |                                                              |                                              |                                       |                                       |         |                            |         |      
|CASH FLOWS FROM INVESTING ACTIVITIES:                 |                                                              |                                              |                                       |                                       |         |                            |         |      
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                              | Capital expenditures, net                    |                                       |                                       | (12,009 | )                          |         |       | (7,792  | )     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                              | Disposition of Fantasy Sports, net of costs  |                                       |                                       |        |                            |         |       | 3,847   |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                              | Other                                        |                                       |                                       | (237    | )                          |         |       |        |       
|                                                      |                                                              |                                              |                                       |                                       |         |                            |         |      
|                                                      |                                                              |                                              |                                       | Net cash used in investing activities |         |                            | (12,246 | )     |         |        | (3,945 | )
|                                                      |                                                              |                                              |                                       |                                       |         |                            |         |      
|CASH FLOWS FROM FINANCING ACTIVITIES:                 |                                                              |                                              |                                       |                                       |         |                            |         |      
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                              | Long-term debt repayments                    |                                       |                                       | (6,227  | )                          |         |       | (7,841  | )     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                              | Common stock purchases for treasury          |                                       |                                       |        |                            |         |       | (1,375  | )     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                              | Stock option exercise proceeds               |                                       |                                       | 5,154   |                            |         |       |        |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                              | Other                                        |                                       |                                       |        |                            |         |       | 18      |       
|                                                      |                                                              |                                              |                                       |                                       |         |                            |         |      
|                                                      |                                                              |                                              | Net cash used in financing activities |                                       |         | (1,073                     | )       |       |         | (9,198 | )     
|                                                      |                                                              |                                              |                                       |                                       |         |                            |         |      
|Effect of exchange rates on cash and cash equivalents |                                                              |                                              | (180                                  | )                                     |         |                            | (63     | )    
|                                                      |                                                              |                                              |                                       |                                       |         |                            |         |      
|Net change in cash and cash equivalents               |                                                              |                                              | 2,570                                 |                                       |         |                            | 12,801  |      
|                                                     
|                                                     
|                                                     
|                                                     
|Cash and cash equivalents, beginning of period        |                                                              |                                              | 64,514                                |                                       |         |                            | 22,758  |      
|                                                      |                                                              |                                              |                                       |                                       |         |                            |         |      
|Cash and cash equivalents, end of period              |                                                              | $                                            | 67,084                                |                                       |         | $                          | 35,559  |      
|                                                      |                                                              |                                              |                                       |                                       |         |                            |         |      
|Supplemental Disclosures:                             |                                                              |                                              |                                       |                                       |         |                            |         |      
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                              | Interest paid                                |                                       | $                                     | 1,433   |                            |         | $     | 2,923   |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                              | Income taxes paid (refunded), net            |                                       |                                       | 14,035  |                            |         |       | (19,600 | )     

The accompanying notes are an integral part of these consolidated statements.

5



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##### Table of Contents



ACTION PERFORMANCE COMPANIES, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31, 2002


INTERIM FINANCIAL REPORTING


The accompanying condensed consolidated financial statements for Action
Performance Companies, Inc. and subsidiaries have been prepared without audit
by independent public accountants pursuant to the rules and regulations of the
Securities and Exchange Commission. In our opinion, all normal recurring
adjustments necessary for a fair statement of financial position and results of
operations for the interim periods included herein have been made. Certain
information and note disclosures normally included in the financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted from these statements pursuant to
such rules and regulations. Accordingly, these financial statements should be
read in conjunction with our Form 10-K for the fiscal year ended September 30,
2001. The results of operations for the interim periods are not necessarily
indicative of the operating results that may be expected for the fiscal year
ending September 30, 2002.

Certain prior period amounts have been reclassified to conform to the current
year presentation.

RECENT ACCOUNTING PRONOUNCEMENTS

We adopted SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142),
effective October 1, 2001. This standard establishes new guidelines for
determining the accounting value of goodwill and other intangibles and
eliminates the amortization requirement for goodwill and intangibles with an
indefinite life. Goodwill and intangibles with indefinite lives will be
subject to an impairment test, based on fair value, at least annually.

We have completed evaluations of goodwill and of other intangibles, which
include licenses and the Winners Circle trademark, in accordance with SFAS
142. The reporting units for SFAS 142 are domestic die-cast, domestic apparel,
foreign die-cast and corporate and other, which are also our reporting
segments. Goodwill and the trademark, which has an indefinite life, have been
allocated to those reporting units as indicated below in Segment Information.
We have made no adjustments to income (loss) to date in connection with the
evaluations, and we do not anticipate making any adjustments.

As of October 1, 2001, goodwill and trademark amortization ceased, in
accordance with SFAS 142. The trademark was acquired in May 2001. For the
three and six months ended March 31, 2001, goodwill amortization was $960
thousand and $1.9 million or $754 thousand and $1.5 million, net of tax.
Excluding the impact of goodwill amortization, net of tax, income before
extraordinary gain and net income for the three and six months ended March 31,
2001,would have been the following (in thousands, except per share data):

|                                        |          |                                  |       |        |      |        |        |      |      | 
|--------------------------------------- | -------- | -------------------------------- | ----- | ------ | ---- | ------ | ------ | ---- | ---- | 
|                                        |          |                                  |       | Three  |      | Six   
|                                        |          |                                  |       | Months |      | Months
|                                        |          |                                  |       | Ended  |      | Ended 
|                                        |          |                                  |       |        |      |       
|Income before extraordinary gain (loss) |          | $                                | 3,350 |        |      | $      | 4,043  |     
|                                       
|                                       
|                                       
|                                       
|Net income                              |          | $                                | 9,437 |        |      | $      | 10,130 |     
|                                       
|                                       
|                                       
|                                       
|Earnings Per Common Share:              |          |                                  |       |        |      |        |        |     
|                                       
|                                       
|                                       
|                                       
|                                        | Basic-   |                                  |       |        |      |        |        |      |     
|                                       
|                                       
|                                       
|                                       
|                                        |          | Income before extraordinary gain | $     | 0.21   |      |        | $      | 0.25 |     
|                                       
|                                       
|                                       
|                                       
|                                        |          | Net income                       |       | $      | 0.59 |        |        | $    | 0.62 | 
|                                       
|                                       
|                                       
|                                       
|                                        | Diluted- |                                  |       |        |      |        |        |      |     
|                                       
|                                       
|                                       
|                                       
|                                        |          | Income before extraordinary gain | $     | 0.21   |      |        | $      | 0.25 |     
|                                       
|                                       
|                                       
|                                       
|                                        |          | Net income                       |       | $      | 0.58 |        |        | $    | 0.62 | 

6



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##### Table of Contents



SEGMENT INFORMATION

Reportable segments are based on divisions operating geographically, domestic
and abroad, and specializing in either die-cast or apparel and other souvenirs.
The domestic die-cast operation is based in Phoenix. The domestic apparel and
souvenir operation is based in Charlotte, with a screen-printing facility in
Atlanta. The foreign die-cast operation is based in Germany. The foreign
apparel and souvenir operation (Goodsports) was based in England. Goodsports
was closed effective September 30, 2001.

We evaluate performance and allocate resources based on segment operating
income (loss). The accounting policies of the reportable segments are the same
as those used in the consolidated financial statements. Domestic licensing
costs and certain management and information systems costs are not allocated to
the domestic operating segments and are included in corporate and other.
Intangible licenses are included in corporate and other assets. Each domestic
segment is allocated royalty expense based on the incremental royalty due on
that segments sales. Domestic royalty guarantees advanced and unearned are an
expense of corporate and other. Financial information for the reportable
segments follows (in thousands):

|      |                     |                                             |   |                              |         |          |   |              |   |              |   |           |       |     |   |        |        | 
|----- | ------------------- | ------------------------------------------- | - | ---------------------------- | ------- | -------- | - | ------------ | - | ------------ | - | --------- | ----- | --- | - | ------ | ------ | 
|      |                     |                                             |   | Three Months Ended March 31,
|      |                     |                                             |   |                             
|      |                     |                                             |   |                              |         |          |   | Inter-       |   | Depreciation |   | Operating
|      |                     |                                             |   | External                     |         | segment  |   | and          |   | Income      
|      |                     |                                             |   | Revenues                     |         | Revenues |   | Amortization |   | (Loss)      
|      |                     |                                             |   |                              |         |          |   |              |   |             
|      |                     |                                             |   |                              |         |          |   |              |   |              |   | (a)       |       | (a)
|2002: |                     |                                             |   |                              |         |          |   |              |   |              |   |           |       |     |   |       
|     
|     
|     
|     
|      | Domestic die-cast   |                                             | $ | 53,428                       |         |          | $ | 3,621        |   |              | $ | 2,658     |       |     | $ | 17,423 |       
|     
|     
|     
|     
|      | Domestic apparel    |                                             |   | 38,741                       |         |          |   |             |   |              |   | 513       |       |     |   | 8,256  |       
|     
|     
|     
|     
|      | Foreign die-cast    |                                             |   | 7,351                        |         |          |   |             |   |              |   | 1,118     |       |     |   | 1,561  |       
|     
|     
|     
|     
|      | Corporate and other |                                             |   | 665                          |         |          |   |             |   |              |   | 1,438     |       |     |   | (7,248 | )     
|     
|     
|     
|     
|      | Eliminations        |                                             |   |                             |         |          |   | (3,621       | ) |              |   |          |       |     |   | (645   | )     
|      |                     |                                             |   |                              |         |          |   |              |   |              |   |           |       |     |   |        |       
|      |                     | Total per consolidated
financial statements |   | $                            | 100,185 |          |   | $            |  |              |   | $         | 5,727 |     |   | $      | 19,347 | 
|      |                     |                                             |   |                              |         |          |   |              |   |              |   |           |       |     |   |        |       
|2001: |                     |                                             |   |                              |         |          |   |              |   |              |   |           |       |     |   |       
|     
|     
|     
|     
|      | Domestic die-cast   |                                             | $ | 24,196                       |         |          | $ | 1,709        |   |              | $ | 3,734     |       |     | $ | 3,579  |       
|     
|     
|     
|     
|      | Domestic apparel    |                                             |   | 33,413                       |         |          |   |             |   |              |   | 1,336     |       |     |   | 5,822  |       
|     
|     
|     
|     
|      | Foreign die-cast    |                                             |   | 8,102                        |         |          |   | 122          |   |              |   | 970       |       |     |   | 2,019  |       
|     
|     
|     
|     
|      | Foreign apparel     |                                             |   | 3,777                        |         |          |   | 190          |   |              |   | 57        |       |     |   | (138   | )     
|     
|     
|     
|     
|      | Corporate and other |                                             |   | 1,586                        |         |          |   |             |   |              |   | 1,346     |       |     |   | (5,412 | )     
|     
|     
|     
|     
|      | Eliminations        |                                             |   |                             |         |          |   | (2,021       | ) |              |   |          |       |     |   |       |       
|      |                     |                                             |   |                              |         |          |   |              |   |              |   |           |       |     |   |        |       
|      |                     | Total per consolidated
financial statements |   | $                            | 71,074  |          |   | $            |  |              |   | $         | 7,443 |     |   | $      | 5,870  | 
|      |                     |                                             |   |                              |         |          |   |              |   |              |   |           |       |     |   |        |       

7



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##### Table of Contents



|      |                     |                                             |   |                            |         |          |   |              |   |              |   |           |        |     |   |         |        | 
|----- | ------------------- | ------------------------------------------- | - | -------------------------- | ------- | -------- | - | ------------ | - | ------------ | - | --------- | ------ | --- | - | ------- | ------ | 
|      |                     |                                             |   | Six Months Ended March 31,
|      |                     |                                             |   |                           
|      |                     |                                             |   |                            |         |          |   | Inter-       |   | Depreciation |   | Operating
|      |                     |                                             |   | External                   |         | segment  |   | and          |   | Income      
|      |                     |                                             |   | Revenues                   |         | Revenues |   | Amortization |   | (Loss)      
|      |                     |                                             |   |                            |         |          |   |              |   |             
|      |                     |                                             |   |                            |         |          |   |              |   |              |   | (a)       |        | (a)
|2002: |                     |                                             |   |                            |         |          |   |              |   |              |   |           |        |     |   |        
|     
|     
|     
|     
|      | Domestic die-cast   |                                             | $ | 101,087                    |         |          | $ | 6,192        |   |              | $ | 5,578     |        |     | $ | 33,595  |       
|     
|     
|     
|     
|      | Domestic apparel    |                                             |   | 66,767                     |         |          |   |             |   |              |   | 1,006     |        |     |   | 10,328  |       
|     
|     
|     
|     
|      | Foreign die-cast    |                                             |   | 14,813                     |         |          |   |             |   |              |   | 2,130     |        |     |   | 3,118   |       
|     
|     
|     
|     
|      | Corporate and other |                                             |   | 1,654                      |         |          |   |             |   |              |   | 2,875     |        |     |   | (13,181 | )     
|     
|     
|     
|     
|      | Eliminations        |                                             |   |                           |         |          |   | (6,192       | ) |              |   |          |        |     |   | (340    | )     
|      |                     |                                             |   |                            |         |          |   |              |   |              |   |           |        |     |   |         |       
|      |                     | Total per consolidated
financial statements |   | $                          | 184,321 |          |   | $            |  |              |   | $         | 11,589 |     |   | $       | 33,520 | 
|      |                     |                                             |   |                            |         |          |   |              |   |              |   |           |        |     |   |         |       
|2001: |                     |                                             |   |                            |         |          |   |              |   |              |   |           |        |     |   |        
|     
|     
|     
|     
|      | Domestic die-cast   |                                             | $ | 46,834                     |         |          | $ | 2,642        |   |              | $ | 6,187     |        |     | $ | 8,624   |       
|     
|     
|     
|     
|      | Domestic apparel    |                                             |   | 51,735                     |         |          |   |             |   |              |   | 2,530     |        |     |   | 6,075   |       
|     
|     
|     
|     
|      | Foreign die-cast    |                                             |   | 14,495                     |         |          |   | 122          |   |              |   | 1,825     |        |     |   | 3,331   |       
|     
|     
|     
|     
|      | Foreign apparel     |                                             |   | 5,482                      |         |          |   | 190          |   |              |   | 118       |        |     |   | (775    | )     
|     
|     
|     
|     
|      | Corporate and other |                                             |   | 3,416                      |         |          |   |             |   |              |   | 2,999     |        |     |   | (9,923  | )     
|     
|     
|     
|     
|      | Eliminations        |                                             |   |                           |         |          |   | (2,954       | ) |              |   |          |        |     |   |        |       
|      |                     |                                             |   |                            |         |          |   |              |   |              |   |           |        |     |   |         |       
|      |                     | Total per consolidated
financial statements |   | $                          | 121,962 |          |   | $            |  |              |   | $         | 13,659 |     |   | $       | 7,332  | 
|      |                     |                                             |   |                            |         |          |   |              |   |              |   |           |        |     |   |         |       

|                        |                                             |   |                     |         |                        |   |           |         |           |   |        |        |  |   |        |        | 
|----------------------- | ------------------------------------------- | - | ------------------- | ------- | ---------------------- | - | --------- | ------- | --------- | - | ------ | ------ |  | - | ------ | ------ | 
|                        |                                             |   | Identifiable Assets |         | Goodwill and Trademark
|                        |                                             |   |                     |         |                       
|                        |                                             |   | March 31,           |         | Sept. 30,              |   | March 31, |         | Sept. 30,
|                        |                                             |   | 2002                |         | 2001                   |   | 2002      |         | 2001     
|                        |                                             |   |                     |         |                        |   |           |         |          
|Domestic die-cast (b)   |                                             | $ | 50,083              |         |                        | $ | 52,526    |         |           | $ | 13,032 |        |  | $ | 12,656 |       
|                       
|                       
|                       
|                       
|Domestic apparel        |                                             |   | 94,012              |         |                        |   | 92,136    |         |           |   | 51,079 |        |  |   | 51,079 |       
|                       
|                       
|                       
|                       
|Foreign die-cast        |                                             |   | 40,281              |         |                        |   | 40,599    |         |           |   | 13,659 |        |  |   | 14,277 |       
|                       
|                       
|                       
|                       
|Corporate and other (c) |                                             |   | 102,551             |         |                        |   | 95,869    |         |           |   |       |        |  |   |       |       
|                       
|                       
|                       
|                       
|Eliminations            |                                             |   | (1,907              | )       |                        |   | (2,177    | )       |           |   |       |        |  |   |       |       
|                        |                                             |   |                     |         |                        |   |           |         |           |   |        |        |  |   |        |       
|                        | Total per consolidated
financial statements |   | $                   | 285,020 |                        |   | $         | 278,953 |           |   | $      | 77,770 |  |   | $      | 78,012 | 
|                        |                                             |   |                     |         |                        |   |           |         |           |   |        |        |  |   |        |       



---

|(a) |  | Goodwill ceased amortizing October 1, 2001, with the adoption of SFAS
142. Depreciation and amortization and operating income (loss), included
goodwill amortization totaling $960 thousand ($170 thousand for domestic
die-cast, $621 thousand for domestic apparel and $169 thousand for foreign
die-cast) for the three months ended March 31, 2001 and totaling $1.9
million ($296 thousand for domestic die-cast, $1.3 million for domestic
apparel and $327 thousand for foreign die-cast) for the six months ended
March 31, 2001.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(b) |  | Domestic die-cast identifiable assets include the Winners Circle
trademark, purchased from Hasbro in May 2001. As additional consideration
we pay 3% of the related product sales to Hasbro, quarterly through May
2006. The additional consideration is added to the cost of the trademark
quarterly.                                                                                                                                                                                                                                  
|   
|   
|   
|   
|(c) |  | Corporate and other identifiable assets includes $63.1 million in cash at
March 31, 2002, and $60.9 million in cash at September 30, 2001.                                                                                                                                                                                                                                                                                                                                                                                               

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##### Table of Contents



EARNINGS PER COMMON SHARE (EPS)

Reconciliations of the numerators and denominators in the EPS computations for
income before extraordinary gain for the periods ended March 31 follow in
thousands:

|                                                                                   |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |        | 
|---------------------------------------------------------------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                                                                                   |  | Three Months Ended |        | Six Months Ended
|                                                                                   |  |                    |        |                 
|                                                                                   |  | 2002               |        | 2001             |  | 2002 |        | 2001
|                                                                                   |  |                    |        |                  |  |      |        |     
|NUMERATOR:                                                                         |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |        | 
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Basic  income (loss) before extraordinary gain                                    |  | $                  | 11,163 |                  |  | $    | 2,596  |      |  | $ | 19,243 |  |  | $ | 2,523  | 
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Effect of dilutive convertible subordinated notes                                  |  |                    | 405    |                  |  |      |       |      |  |   | 852    |  |  |   |       | 
|                                                                                   |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |        | 
|Diluted  adjusted income (loss) before
extraordinary gain and assumed conversions |  | $                  | 11,568 |                  |  | $    | 2,596  |      |  | $ | 20,095 |  |  | $ | 2,523  | 
|                                                                                   |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |        | 
|DENOMINATOR:                                                                       |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |        | 
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Basic  weighted average shares                                                    |  |                    | 17,434 |                  |  |      | 16,043 |      |  |   | 17,338 |  |  |   | 16,141 | 
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Effect of dilutive stock options and warrants                                      |  |                    | 799    |                  |  |      | 162    |      |  |   | 771    |  |  |   | 97     | 
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Effect of dilutive convertible subordinated notes                                  |  |                    | 1,028  |                  |  |      |       |      |  |   | 1,082  |  |  |   |       | 
|                                                                                   |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |        | 
|Diluted  adjusted weighted average shares and
assumed conversions                 |  |                    | 19,261 |                  |  |      | 16,205 |      |  |   | 19,191 |  |  |   | 16,238 | 
|                                                                                   |  |                    |        |                  |  |      |        |      |  |   |        |  |  |   |        | 

The impact of options and warrants outstanding for the purchases of 493
thousand shares of common stock, at an average price of $39.76 were not
included in the calculation of diluted EPS for the six months ended March 31,
2002, because to do so would be antidilutive. The options and warrants had an
exercise price greater than the average market price of the common stock for
the six months ended March 31, 2002, but could potentially dilute EPS in the
future.

GAIN ON EXTINGUISHMENT OF DEBT

During the three and six months ended
March 31, 2002, we repurchased 4 3/4%
convertible subordinated notes with a face value of $1.0 million and $6.0
million, at a loss of $2 thousand and a gain of $148 thousand, net of tax.
During April 2002, we extinguished additional notes with a face value of $10.0
million, at a loss of $1.0 million, net of tax, using 145 thousand shares from
treasury and 95 thousand newly issued shares.

COMMITMENTS AND CONTINGENCIES

In the ordinary course of business, we are subject to certain lawsuits and
asserted and unasserted claims. We believe that the resolution of any such
matters will not have a material adverse effect on financial position or
results of operations.

In certain sublease arrangements, we remain the primary obligor under the terms
of the original lease agreements. One of our sublessees became in arrears on
lease payments during the quarter ended March 31, 2002, and subsequent to March
31, 2002, we have paid lease payments on behalf of the sublessee. The
subleases with this party include a building lease, which expires October 2009,
and equipment leases, which expire between September and October
2002. The building currently has annual lease
payments of $960 thousand.
The future minimum lease payments, including payments to acquire the equipment,
and the payments we have made but have not been reimbursed for on the equipment
leases, total $1.6 million. While we continue to pursue our options with
respect to recovery of amounts due from the sublessee, we have established a
reserve at March 31, 2002, for $1.1 million for our current estimate of the
potential loss on these leases

9



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##### Table of Contents






ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We design and market licensed motorsports products, including collectible
die-cast scaled replicas of motorsports vehicles, apparel and souvenirs. The
die-cast vehicles are principally replicas of cars driven in NASCAR, Formula
One and NHRA races. Third parties manufacture all of the motorsports vehicles
and most of the apparel and souvenirs, generally utilizing our designs, tools
and dies. We screen-print and embroider a portion of the apparel in an Atlanta
facility. Formula One vehicles are designed and marketed by subsidiaries in
Germany.

The popularity and performance of drivers and teams under license, the
popularity of motorsports, particularly NASCAR, and the general demand for
licensed sports merchandise impacts revenue positively and negatively.

We strive to structure our operations such that:



| |  |  | We maintain price point control over product in the marketplace.                                                     
| | - |  | ---------------------------------------------------------------------------------------------------------------------
|
| |  |  | Manufacturing costs are fixed due to outsourcing under fixed-price contracts.                                        
|
| |  |  | Royalties are generally variable with sales.                                                                         
|
| |  |  | Research and development is basic design and engineering.                                                            
|
| |  |  | Capital expenditures are principally tooling for die-cast.                                                           
|
| |  |  | Due to agreements with distributors and QVC, incremental volume
does not proportionately increase distribution costs.
|
| |  |  | Functions outside of core skills are generally outsourced.                                                           

Cost of sales consists primarily of the cost of products procured from
third-party manufacturers, freight charges, royalty payments to licensors and
depreciation of tooling and dies. Significant factors affecting cost of sales
as a percentage of sales include the following:



| |  |  | Product mix,                                                                                                                                      
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The effect of amortizing the fixed cost components of cost of
sales, primarily depreciation of tooling and dies, over varying levels
of net sales,
|
| |  |  | The type of freight charges, and                                                                                                                  
|
| |  |  | Additional charges related to lower than minimum order quantities,
cancellation of specific purchase orders, etc.                                 

Because the auto-racing season is concentrated between the months of February
and November, the second and third calendar quarters of each year (our third
and fourth fiscal quarters) are historically characterized by higher sales of
motorsports products.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operation
are based upon our financial statements, which have been prepared in accordance
with generally accepted accounting principles (GAAP) in the United States.
During preparation of these financial statements, we are required to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to product returns, bad debts, inventories, fixed assets,
intangible assets, income taxes, royalties, contingencies and litigation. We
base our estimates on historical experience and on various other assumptions
that we believe are reasonable under the circumstances. The results form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.

10



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##### Table of Contents



We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements.

We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. We determine
the adequacy of this allowance by regularly evaluating individual customer
receivables, considering a customers financial condition, credit history and
current economic conditions. If the financial condition of our customers were
to deteriorate, additional allowances may be required.

We write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those
projected by management, additional inventory write-downs may be required.

License agreements generally require payments of royalties to drivers,
sponsors, teams and other parties on a calendar year basis. Royalties payable
are recognized as costs of sales when the related sale is recognized.
Guarantees advanced under license agreements are carried as prepaid royalties
until earned by the third party. We evaluate prepaid royalties regularly and
expense prepaids to cost of sales to the extent projected to be unrecoverable
through sales.

We evaluate goodwill for impairment at least annually, in accordance with FAS
142. If the carrying amount of an intangible asset exceeds its fair value, we
would recognize an impairment loss. We first compare the fair value of a
reporting unit with its carrying amount, including goodwill. If the carrying
amount of a reporting unit exceeds the fair value of a reporting unit,
additional tests would be used to measure the amount of impairment loss, if
any. We use a present value technique to measure reporting unit fair value. We
have not recognized any impairment losses to date. If events occur and
circumstances change, causing the fair value of a reporting unit to fall below
its carrying amount, impairment losses may be recognized in the future.

We estimate our actual current tax exposure together with the temporary
differences that have resulted from the differing treatment of items dictated
by generally accepted accounting principles versus U.S. and German tax laws.
These temporary differences result in deferred tax assets and liabilities. On
an on-going basis, we then assess the likelihood that our deferred tax assets
will be recovered from future taxable income. If we were to believe that the
recovery were not more likely than not, we would establish a valuation
allowance against the deferred tax asset and charge the amount as an income tax
expense in the period in which such a determination were made.

Results of Operations

The following table sets forth the percentage of total revenue represented by
certain expense and revenue items for the periods ended March 31:

|                                                  |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |  
|------------------------------------------------- |  | ------------------ | ----- | ---------------- |  | ---- | ----- | ---- |  |  | ----- | - |  |  | ----- | -
|                                                  |  | Three Months Ended |       | Six Months Ended
|                                                  |  |                    |       |                 
|                                                  |  | 2002               |       | 2001             |  | 2002 |       | 2001
|                                                  |  |                    |       |                  |  |      |       |     
|Sales                                             |  |                    | 100.0 | %                |  |      | 100.0 | %    |  |  | 100.0 | % |  |  | 100.0 | %
|                                                 
|                                                 
|                                                 
|                                                 
|Cost of sales                                     |  |                    | 61.2  |                  |  |      | 66.3  |      |  |  | 61.7  |   |  |  | 65.5  |  
|                                                  |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |  
|Gross profit                                      |  |                    | 38.8  |                  |  |      | 33.7  |      |  |  | 38.3  |   |  |  | 34.5  |  
|                                                  |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |  
|Selling, general and
administrative expenses      |  |                    | 18.9  |                  |  |      | 23.4  |      |  |  | 19.6  |   |  |  | 25.8  |  
|                                                 
|                                                 
|                                                 
|                                                 
|Amortization of goodwill                          |  |                    |      |                  |  |      | 1.3   |      |  |  |      |   |  |  | 1.6   |  
|                                                 
|                                                 
|                                                 
|                                                 
|Amortization of licenses                          |  |                    | 0.6   |                  |  |      | 0.7   |      |  |  | 0.6   |   |  |  | 1.1   |  
|                                                  |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |  
|Income from operations                            |  |                    | 19.3  |                  |  |      | 8.3   |      |  |  | 18.1  |   |  |  | 6.0   |  
|                                                 
|                                                 
|                                                 
|                                                 
|Interest Expense                                  |  |                    | (0.9  | )                |  |      | (2.2  | )    |  |  | (0.9  | ) |  |  | (2.4  | )
|                                                 
|                                                 
|                                                 
|                                                 
|Minority Interest and other, net                  |  |                    | (0.2  | )                |  |      |      |      |  |  | (0.2  | ) |  |  | (0.1  | )
|                                                  |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |  
|Income before income taxes and
extraordinary gain |  |                    | 18.2  |                  |  |      | 6.1   |      |  |  | 17.0  |   |  |  | 3.5   |  
|                                                 
|                                                 
|                                                 
|                                                 
|Income taxes                                      |  |                    | 7.1   |                  |  |      | 2.4   |      |  |  | 6.6   |   |  |  | 1.4   |  
|                                                  |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |  
|Income before extraordinary gain                  |  |                    | 11.1  |                  |  |      | 3.7   |      |  |  | 10.4  |   |  |  | 2.1   |  
|                                                  |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |  

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Three Months Ended March 31, 2002 Compared with Three Months Ended March 31, 2001

Sales increased 41.0% to $100.2 million for the three months ended March 31,
2002, from $71.1 million in the prior year period. Sales increased in both
die-cast and apparel distribution channels. Die-cast segment sales increased
88.2% to $60.8 million from $32.3 million in the prior-year quarter. Sales of
Winners Circle brand die-cast, acquired in May 2001, contributed $5.7 million
of the $28.5 million increase in die-cast sales. Apparel segment sales,
exclusive of trackside, rose 18.3% to $26.8 million from $22.7 million in the
year-ago quarter, reflecting increased demand from both wholesale and
mass-retail channels. Trackside sales decreased 17.9% to $11.9 million from
$14.5 million due primarily to the date of Easter weekend, which caused the
revenues from the Texas Winston Cup race to fall into the third fiscal quarter
this year, versus the second fiscal quarter of last year.

Gross profit improved to 38.8 % of sales in the second quarter of fiscal 2002
from 33.7% in the fiscal 2001 period. Domestic die-cast margins improved as
the depreciation of tooling and dies has slightly fallen since last year
although sales have more than doubled. Our annual investment in tooling has
decreased because we focused our product line on fewer drivers. In addition,
segments are generally benefiting from improved selling prices while costs per
unit have generally remained stable or fallen due to improved cost controls and
increased volume. Effective September 30, 2001, we also closed the Goodsports
foreign apparel operation, which had a lower margin than the corporate average.

Selling, general and administrative expenses were $18.9 million, or 18.9% of
sales, in the quarter ended March 31, 2002, compared to $16.6 million, or 23.4%
of sales in the prior year quarter, reflecting strong expense controls and the
leverage we obtain from increased revenues.

Goodwill amortization ceased effective October 1, 2001, with the adoption of
FAS 142. Goodwill amortization in the prior fiscal second quarter was $960
thousand, or 1.3% of sales.

Interest expense of $861 thousand for the three months ended March 31, 2002,
was $680 thousand lower than interest expense for the comparable period in the
prior year as a result of the convertible subordinated note repurchases and
other long-term debt reductions since last fiscal second quarter.

The effective tax rate of 38.8% in the three months
ended March 31, 2002,
reflects current expectations for the effective tax rate for fiscal 2002.

Six Months Ended March 31, 2002 Compared with Six Months Ended March 31, 2001

Sales increased 51.1% to $184.3 million for the six months ended March 31,
2002, from $122.0 million in the prior year period. Sales increased in both
die-cast and apparel distribution channels. Die-cast sales increased 89.0% to
$115.9 million from $61.3 million in the prior year period. Apparel segment
sales, exclusive of trackside, rose 27.6% to $46.8 million from $36.7 million
in the prior year period, reflecting increased demand from both wholesale and
mass retail channels. Trackside sales decreased 2.9% to $19.9 million from
$20.5 million, due primarily to the date of Easter weekend, which caused the
revenues from the Texas Winston Cup race to fall into the third fiscal quarter
this year, versus the second fiscal quarter of last year.

Gross profit improved to 38.3% of sales in the first six months of fiscal 2002
from 34.5% in the comparable fiscal 2001 period. Domestic die-cast margins
improved as the depreciation of tooling and dies has slightly fallen since last
year although sales have more than doubled. Our annual investment in tooling
has decreased because we focused our product line on fewer drivers. In
addition, segments are generally benefiting from improved selling prices while
costs per unit have generally remained stable or fallen due to improved cost
controls and increased volume. Effective September 30, 2001, we also closed
the Goodsports foreign apparel operation, which had a lower margin than the
corporate average.

Selling, general and administrative expenses were $36.1 million, or 19.6% of
sales in the first six months of fiscal 2002, compared to $31.5 million, or
25.8% of sales in the comparable fiscal 2001 period, reflecting strong expense
controls and the leverage we obtain from increased revenues.

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Goodwill amortization ceased effective October 1, 2001, with the adoption of
FAS 142. Goodwill amortization in the fiscal 2001 period was $1.9 million, or
1.6% of sales.

Interest expense of $1.7 million for the six months ended March 31, 2002, was
$1.3 million lower than interest expense for the comparable period in the prior
year as a result of the convertible subordinated note repurchases and other
long-term debt reduction since the six months ended March 31, 2001.

The effective tax rate of 38.8% in the six months
ended March 31, 2002, reflects
current expectations for the effective tax rate for fiscal 2002.

Liquidity and Capital Resources

Working capital improved $19.5 million to $109.8 million at March 31, 2002,
from $90.3 million at September 30, 2001. Cash increased $2.6 million to $67.1
million at March 31, 2002, from $64.5 million at September 31, 2001. Operating
cash flows ($16.1 million) were reduced by payment of semi-annual interest on
the 43/4% convertible subordinated notes ($1.3 million) and U.S. tax payments
($14.0 million).

Days sales outstanding, calculated on quarterly sales, improved 7.7% from the
second fiscal quarter of 2001 to the second fiscal quarter of 2002, as a result
of improved receivables management. Inventory turns, calculated on quarterly
cost of sales, improved 34.7% over the second fiscal quarter of 2001, with the
implementation of a build-to-order approach in die-cast operations and better
inventory management. Our backlog at March 31, 2002, was approximately $115
million compared to $120 million at September 30, 2001.

As of April 30, 2002, 4 3/4% convertible subordinated notes with a face value
of $38.9 million remained outstanding. The market price of our common stock
has exceeded the $48.20 initial conversion price. We may redeem the notes,
upon 30 days notice, in whole or in part, at the redemption prices in the
indenture, currently 102% of face value. We are evaluating whether to redeem
the notes, which currently trade at approximately 111% of face value.

During the six months ended March 31, 2002, we repurchased 43/4% convertible
subordinated notes with a face value of $6.0 million, at a gain of $148
thousand, net of tax. During April 2002, we extinguished additional notes with
a face value of $10.0 million, at a loss of $1.0 million, net of tax, using 145
thousand shares from treasury and 95 thousand newly issued shares.

Capital expenditures for the six months ended March 31, 2002, totaled $12.0
million, related principally to ongoing investments in tooling, and included
$4.2 million applicable to foreign operations. Capital expenditures for fiscal
year 2002 are not expected to exceed $25 million.

As amended January 2002, the loan and security agreement with Bank One (the
Agreement), provides for borrowings of up to $20.0 million, subject to the
limitation of a calculated borrowing base. The Agreement consists of a $20.0
million revolving line of credit, which includes up to $15.0 million of letters
of credit. Prior to the amendment, the Agreement had included a revolving line
of credit of up to $30.0 million. The $10.0 million reduction in available
line of credit reduces commitment fees payable. We have never borrowed under
the Agreement (originally dated September 2000). We believe that the line of
credit reduction was warranted by this fact and current cash flow and cash
positions. We believe that the Agreement will be adequate to cover letter of
credit and other liquidity needs for the next 12 months after considering our
current cash position and anticipated cash flows from operations.

The line of credit bears interest at Bank Ones base rate, or LIBOR plus 2.5%.
A commitment fee of 0.5% of the average unused line of credit and 1.5%-2.5% of
the average letters of credit is payable annually on the loan. The Agreement
maturity date was extended from December 2002 to March 2003. Outstanding
letters of credit totaled $4.3 million at March 31, 2002. The Agreement is
secured principally by inventory, receivables, and equipment and no longer
prohibits the payment of dividends

Under the Agreement, as amended, we are required to meet certain financial
tests principally related to debt coverage, tangible net worth and funded
indebtedness to EBIDA. We were in compliance with those covenants at March 31,
2002.

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##### Table of Contents



Cautionary Statement Regarding Forward-Looking Statements

This report contains forward-looking statements, including statements regarding
business strategies, business, and the industry in which we operate. These
forward-looking statements are based primarily on our expectations and are
subject to a number of risks and uncertainties, some of which are beyond our
control. Actual results could differ materially from the forward-looking
statements as a result of numerous factors, including those set forth in our
Form 10-K for the year ended September 30, 2001, as filed with the Securities
and Exchange Commission.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no significant change in our exposure to market risk since
year-end. The risk is limited to interest rate risk associated with credit
instruments and foreign currency exchange rate risk associated with operations
in Germany. We have never used derivative financial instruments to manage or
reduce market risk.

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##### Table of Contents






PART II  OTHER INFORMATION




ITEM 1. Legal Proceedings

In November 2001, Speedway Systems LLC and Charlotte Motor Speedway, LLC,
Atlanta Motor Speedway, Inc., Bristol Motor Speedway, Inc., Texas Motor
Speedway, Inc. and Sears Point Raceway, LLC (Speedway) brought an action in
the Superior Court for Cabarrus County, North Carolina against Action
Performance Companies, Inc. and Action Sports Image, LLC (Action), alleging
breach of contract, fraud and unfair competition. In December 2001, Action
timely removed the action to the United States District Court for the Middle
District of North Carolina and, shortly thereafter, Action moved to dismiss the
complaint. The Complaint alleged that Action did not provide accurate
commission payments to Speedway for souvenirs and memorabilia sold at various
racetracks. Action contended that there was no merit to these allegations. In
February 2002, as a part of a new marketing agreement with Speedway, the
pending lawsuit was dismissed.




ITEM 2. Changes in Securities and Use of Proceeds

During April 2002, we issued 240 thousand shares of common stock to repurchase
4 3/4% convertible subordinated notes with a face value of $10.0 million from
existing noteholders. We issued these shares without registration under the
Securities Act in reliance upon the exemption provided by Section 3(a)(9) of
the Securities Act as an exchange by the issuer with its existing security
holders where no commission or other remuneration is paid or given directly or
indirectly for soliciting such exchange.




ITEM 3. Defaults Upon Senior Securities

Not applicable




ITEM 4. Submissions of Matters to a Vote of Security Holders

The annual meeting of shareholders was held on March 4, 2002. The following
nominees were elected to the board of directors to serve as directors until
their successors are elected and qualified: Fred W. Wagenhals, R. David Martin,
Melodee L. Volosin, John S. Bickford, Sr., Edward J. Bauman, Herbert M. Baum,
Lowell L. Robertson, Robert L. Matthews. The shareholders also ratified the
appointment of Arthur Andersen LLP as independent public accountants of our
company for 2002, by the following vote: 15,892,930 for, 530,541 against, and
13,191 abstaining. The shareholders also approved an annual incentive plan for
2002, by the following vote: 11,830,524 for, 324,736 against, and 27,154
abstaining. The shareholders also approved an amendment to the 2000 Stock
Option Plan by the following vote: 6,137,459 for, 6,007,536 against, and 37,419
abstaining.




ITEM 5. Other Information

On February 20, 2002, we transferred our stock listing from Nasdaq (ACTN) to
the New York Stock Exchange. We now trade on the New York Stock Exchange under
the ticker symbol ATN.

On May 28, 2002, the shareholders will vote at a special meeting of the
shareholders to increase the number of shares of our authorized common stock
from 25.0 million to 62.5 million shares. The proposed increase in the number of
authorized shares will allow the board of directors to consider a stock split
in the form of a stock dividend.




ITEM 6. Exhibits and Reports on Form 8-K



|(a) |  | Exhibits  Not applicable
|--- |  | -------------------------
|   
|(b) |  | Reports on Form 8-K      



| |                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On March 18, 2002, we filed a current report on Form 8-K relating
reporting that we dismissed Arthur Andersen LLP as our independent
public accountants and, effective March 22, 2002, engaged the
accounting firm of PricewaterhouseCoopers LLP as our new
independent public accountants.

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##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

ACTION PERFORMANCE COMPANIES, INC.

|                                         |  |                                                                                               |  |            
|---------------------------------------- |  | --------------------------------------------------------------------------------------------- |  | -----------
|Signature                                |  | Capacity                                                                                      |  | Date       
|                                         |  |                                                                                               |  |            
|                                         |  |                                                                                               |  |            
|                                        
|                                        
|                                        
|                                        
|/s/ Fred W. Wagenhals

Fred W. Wagenhals |  | Chairman of the Board, President, and
Chief Executive Officer
(Principal Executive Officer)   |  | May 7, 2002
|                                        
|                                        
|                                        
|                                        
|                                         |  |                                                                                               |  |            
|                                        
|                                        
|                                        
|                                        
|/s/ R. David Martin

R. David Martin     |  | Chief Financial Officer, Secretary and Treasurer
(Principal Financial and Accounting Officer) |  | May 7, 2002

16