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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended December 31, 2001

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 X   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 JANUARY 31, 2002
|                              |  |                                
|Common Stock, $0.01 Par Value |  | 17,424,045 Shares              





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TABLE OF CONTENTS



|                                                          |                                                                                               |  |  |  |  |  |  | 
|--------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I- FINANCIAL INFORMATION                            
|                                                          | ITEM 1. Financial Statements                                                                 
|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                                               
|EXHIBIT INDEX                                            
|EX-10.67                                                 



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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.
Condensed Consolidated Balance Sheets
December 31, 2001 and September 30, 2001
(in thousands, except per share data)

|                                     |                                                                                         |                                     |                             |         |              |         |               |         |        |         | 
|------------------------------------ | --------------------------------------------------------------------------------------- | ----------------------------------- | --------------------------- | ------- | ------------ | ------- | ------------- | ------- | ------ | ------- | 
|                                     |                                                                                         |                                     |                             |         | December 31, |         | September 30,
|                                     |                                                                                         |                                     |                             |         | 2001         |         | 2001         
|                                     |                                                                                         |                                     |                             |         |              |         |              
|                                     |                                                                                         |                                     |                             |         | (Unaudited)  |         |               |         |       
|ASSETS                               |                                                                                         |                                     |                             |         |              |         |               |        
|                                    
|                                    
|                                    
|                                    
|Current Assets:                      |                                                                                         |                                     |                             |         |              |         |               |        
|                                    
|                                    
|                                    
|                                    
|                                     | Cash and cash equivalents                                                               |                                     | $                           | 64,352  |              |         | $             | 64,514  |       
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts receivable, net                                                                |                                     |                             | 38,654  |              |         |               | 40,725  |       
|                                    
|                                    
|                                    
|                                    
|                                     | Inventories                                                                             |                                     |                             | 24,083  |              |         |               | 25,120  |       
|                                    
|                                    
|                                    
|                                    
|                                     | Prepaid royalties                                                                       |                                     |                             | 10,036  |              |         |               | 10,222  |       
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred tax asset                                                                      |                                     |                             | 2,639   |              |         |               | 2,672   |       
|                                    
|                                    
|                                    
|                                    
|                                     | Prepaid expenses and other assets                                                       |                                     |                             | 1,769   |              |         |               | 1,392   |       
|                                     |                                                                                         |                                     |                             |         |              |         |               |        
|                                     |                                                                                         |                                     | Total Current Assets        |         |              | 141,533 |               |         |        | 144,645 | 
|                                    
|                                    
|                                    
|                                    
|Property and Equipment, net          |                                                                                         |                                     | 42,280                      |         |              |         | 40,356        |        
|                                    
|                                    
|                                    
|                                    
|Goodwill                             |                                                                                         |                                     | 76,577                      |         |              |         | 76,937        |        
|                                    
|                                    
|                                    
|                                    
|Licenses and Trademark               |                                                                                         |                                     | 12,480                      |         |              |         | 12,785        |        
|                                    
|                                    
|                                    
|                                    
|Other Assets                         |                                                                                         |                                     | 3,995                       |         |              |         | 4,230         |        
|                                     |                                                                                         |                                     |                             |         |              |         |               |        
|                                     |                                                                                         | $                                   | 276,865                     |         |              | $       | 278,953       |        
|                                     |                                                                                         |                                     |                             |         |              |         |               |        
|LIABILITIES AND SHAREHOLDERS EQUITY |                                                                                         |                                     |                             |         |              |         |               |        
|                                    
|                                    
|                                    
|                                    
|Current Liabilities:                 |                                                                                         |                                     |                             |         |              |         |               |        
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts payable                                                                        |                                     | $                           | 13,827  |              |         | $             | 18,371  |       
|                                    
|                                    
|                                    
|                                    
|                                     | Accrued royalties                                                                       |                                     |                             | 13,149  |              |         |               | 16,792  |       
|                                    
|                                    
|                                    
|                                    
|                                     | Accrued expenses and other                                                              |                                     |                             | 18,389  |              |         |               | 18,755  |       
|                                    
|                                    
|                                    
|                                    
|                                     | Current portion of long-term debt                                                       |                                     |                             | 379     |              |         |               | 424     |       
|                                     |                                                                                         |                                     |                             |         |              |         |               |        
|                                     |                                                                                         |                                     | Total Current Liabilities   |         |              | 45,744  |               |         |        | 54,342  | 
|                                     |                                                                                         |                                     |                             |         |              |         |               |        
|Long-Term Liabilities:               |                                                                                         |                                     |                             |         |              |         |               |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                         | 43⁄4%  convertible subordinated notes |                             |         | 49,933       |         |               |         | 54,933 |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                         | Other long-term debt                |                             |         | 2,045        |         |               |         | 2,063  |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                         | Other                               |                             |         | 4,456        |         |               |         | 4,710  |        
|                                     |                                                                                         |                                     |                             |         |              |         |               |        
|                                     |                                                                                         |                                     | Total Long-Term Liabilities |         |              | 56,434  |               |         |        | 61,706  | 
|                                     |                                                                                         |                                     |                             |         |              |         |               |        
|Commitments and Contingencies        |                                                                                         |                                     |                             |         |              |         |               |        
|                                    
|                                    
|                                    
|                                    
|Minority Interests                   |                                                                                         |                                     | 2,971                       |         |              |         | 3,079         |        
|                                    
|                                    
|                                    
|                                    
|Shareholders Equity:                |                                                                                         |                                     |                             |         |              |         |               |        
|                                    
|                                    
|                                    
|                                    
|                                     | Common stock, $.01 par value, 25,000 shares authorized, 17,492 and
17,313 shares issued |                                     |                             | 175     |              |         |               | 173     |       
|                                    
|                                    
|                                    
|                                    
|                                     | Additional paid-in capital                                                              |                                     |                             | 125,034 |              |         |               | 121,669 |       
|                                    
|                                    
|                                    
|                                    
|                                     | Treasury stock, at cost, 145 and 143 shares                                             |                                     |                             | (1,284  | )            |         |               | (1,221  | )     
|                                    
|                                    
|                                    
|                                    
|                                     | Accumulated other comprehensive loss                                                    |                                     |                             | (5,269  | )            |         |               | (5,625  | )     
|                                    
|                                    
|                                    
|                                    
|                                     | Retained earnings                                                                       |                                     |                             | 53,060  |              |         |               | 44,830  |       
|                                     |                                                                                         |                                     |                             |         |              |         |               |        
|                                     |                                                                                         |                                     | Total Shareholders Equity  |         |              | 171,716 |               |         |        | 159,826 | 
|                                     |                                                                                         |                                     |                             |         |              |         |               |        
|                                     |                                                                                         | $                                   | 276,865                     |         |              | $       | 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 Months Ended December 31, 2001 and 2000
(in thousands, except per share data)

|                                                         |                                     |                          |        |                                 |        |      |        |        |        | 
|-------------------------------------------------------- | ----------------------------------- | ------------------------ | ------ | ------------------------------- | ------ | ---- | ------ | ------ | ------ | 
|                                                         |                                     |                          |        | Three Months Ended December 31,
|                                                         |                                     |                          |        |                                
|                                                         |                                     |                          |        | 2001                            |        | 2000
|                                                         |                                     |                          |        |                                 |        |     
|Sales                                                    |                                     | $                        | 84,136 |                                 |        | $    | 50,888 |       
|                                                        
|                                                        
|                                                        
|                                                        
|Cost of sales                                            |                                     |                          | 52,285 |                                 |        |      | 32,806 |       
|                                                         |                                     |                          |        |                                 |        |      |        |       
|Gross profit                                             |                                     |                          | 31,851 |                                 |        |      | 18,082 |       
|                                                         |                                     |                          |        |                                 |        |      |        |       
|Operating expenses:                                      |                                     |                          |        |                                 |        |      |        |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Selling, general and administrative |                          |        | 17,172                          |        |      |        | 14,867 |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Amortization of goodwill            |                          |        |                                |        |      |        | 985    |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Amortization of licenses            |                          |        | 506                             |        |      |        | 768    |       
|                                                         |                                     |                          |        |                                 |        |      |        |       
|                                                         |                                     | Total operating expenses |        |                                 | 17,678 |      |        |        | 16,620 | 
|                                                         |                                     |                          |        |                                 |        |      |        |       
|Income from operations                                   |                                     |                          | 14,173 |                                 |        |      | 1,462  |       
|                                                        
|                                                        
|                                                        
|                                                        
|Interest expense                                         |                                     |                          | (845   | )                               |        |      | (1,445 | )     
|                                                        
|                                                        
|                                                        
|                                                        
|Minority interests and other, net                        |                                     |                          | (126   | )                               |        |      | (140   | )     
|                                                         |                                     |                          |        |                                 |        |      |        |       
|Income (loss) before income taxes and extraordinary gain |                                     |                          | 13,202 |                                 |        |      | (123   | )     
|                                                        
|                                                        
|                                                        
|                                                        
|Income taxes                                             |                                     |                          | 5,122  |                                 |        |      | (50    | )     
|                                                         |                                     |                          |        |                                 |        |      |        |       
|Income (loss) before extraordinary gain                  |                                     |                          | 8,080  |                                 |        |      | (73    | )     
|                                                        
|                                                        
|                                                        
|                                                        
|Extraordinary gain, net of tax                           |                                     |                          | 150    |                                 |        |      |       |       
|                                                         |                                     |                          |        |                                 |        |      |        |       
|Net income (loss)                                        |                                     |                          | 8,230  |                                 |        |      | (73    | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Other comprehensive income          |                          |        | 356                             |        |      |        | 1,499  |       
|                                                         |                                     |                          |        |                                 |        |      |        |       
|                                                         | Comprehensive income                |                          | $      | 8,586                           |        |      | $      | 1,426  |       
|                                                         |                                     |                          |        |                                 |        |      |        |       
|EARNINGS PER COMMON SHARE:                               |                                     |                          |        |                                 |        |      |        |       
|                                                        
|                                                        
|                                                        
|                                                        
|Basic-                                                   |                                     |                          |        |                                 |        |      |        |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Income before extraordinary gain    |                          | $      | 0.47                            |        |      | $      |       |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Extraordinary gain, net of tax      |                          |        | 0.01                            |        |      |        |       |       
|                                                         |                                     |                          |        |                                 |        |      |        |       
|                                                         | Net income                          |                          | $      | 0.48                            |        |      | $      |       |       
|                                                         |                                     |                          |        |                                 |        |      |        |       
|Diluted-                                                 |                                     |                          |        |                                 |        |      |        |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Income before extraordinary gain    |                          | $      | 0.45                            |        |      | $      |       |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Extraordinary gain, net of tax      |                          |        | 0.01                            |        |      |        |       |       
|                                                         |                                     |                          |        |                                 |        |      |        |       
|                                                         | Net income                          |                          | $      | 0.46                            |        |      | $      |       |       
|                                                         |                                     |                          |        |                                 |        |      |        |       



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

4



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ACTION PERFORMANCE COMPANIES, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
Three Months Ended December 31, 2001 and 2000
(in thousands)

|                                      |                                                                 |                                         |                                              |  |                                 |  |      |        |        |        |   |        |        |        |  
|------------------------------------- | --------------------------------------------------------------- | --------------------------------------- | -------------------------------------------- |  | ------------------------------- |  | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                                      |                                                                 |                                         |                                              |  | Three Months Ended December 31,
|                                      |                                                                 |                                         |                                              |  |                                
|                                      |                                                                 |                                         |                                              |  | 2001                            |  | 2000
|                                      |                                                                 |                                         |                                              |  |                                 |  |     
|CASH FLOWS FROM OPERATING ACTIVITIES: |                                                                 |                                         |                                              |  |                                 |  |      |        |        |        |   |       
|                                     
|                                     
|                                     
|                                     
|                                      | Net income (loss)                                               |                                         |                                              |  |                                 |  | $    | 8,230  |        |        | $ | (73    | )     
|                                     
|                                     
|                                     
|                                     
|                                      | Adjustments to reconcile net income to cash used in operations- |                                         |                                              |  |                                 |  |      |        |        |        |  
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                 | Deferred income taxes                   |                                              |  |                                 |  |      |        | 6      |        |   |        | 2,704  |       
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                 | Depreciation and amortization           |                                              |  |                                 |  |      |        | 5,862  |        |   |        | 6,216  |       
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                 | Tax benefit on stock option exercises   |                                              |  |                                 |  |      |        | 1,226  |        |   |        |       |       
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                 | Gain on extinguishment of debt          |                                              |  |                                 |  |      |        | (239   | )      |   |        |       |       
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                 | Other                                   |                                              |  |                                 |  |      |        | (129   | )      |   |        | 318    |       
|                                     
|                                     
|                                     
|                                     
|                                      | Changes in assets and liabilities, net-                         |                                         |                                              |  |                                 |  |      |        |        |        |   |        |       
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                 | Accounts receivable                     |                                              |  |                                 |  |      |        | 1,941  |        |   |        | (3,502 | )     
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                 | Accounts payable                        |                                              |  |                                 |  |      |        | (4,426 | )      |   |        | (3,013 | )     
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                 | Inventories                             |                                              |  |                                 |  |      |        | 957    |        |   |        | 3,880  |       
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                 | Prepaid royalties and accrued royalties |                                              |  |                                 |  |      |        | (3,457 | )      |   |        | (2,896 | )     
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                 | Other                                   |                                              |  |                                 |  |      |        | (6,212 | )      |   |        | (4,864 | )     
|                                      |                                                                 |                                         |                                              |  |                                 |  |      |        |        |        |   |       
|                                      |                                                                 |                                         | Net cash from (used in) operating activities |  |                                 |  |      |        |        | 3,759  |   |        |        | (1,230 | )
|                                      |                                                                 |                                         |                                              |  |                                 |  |      |        |        |        |   |       
|CASH FLOWS FROM INVESTING ACTIVITIES: |                                                                 |                                         |                                              |  |                                 |  |      |        |        |        |   |       
|                                     
|                                     
|                                     
|                                     
|                                      | Capital expenditures, net                                       |                                         |                                              |  |                                 |  |      | (5,533 | )      |        |   | (6,902 | )     
|                                     
|                                     
|                                     
|                                     
|                                      | Dispositions of Fantasy Sports, net of costs                    |                                         |                                              |  |                                 |  |      |       |        |        |   | 3,950  |       
|                                     
|                                     
|                                     
|                                     
|                                      | Other                                                           |                                         |                                              |  |                                 |  |      | (238   | )      |        |   |       |       
|                                      |                                                                 |                                         |                                              |  |                                 |  |      |        |        |        |   |       
|                                      |                                                                 |                                         | Net cash used in investing activities        |  |                                 |  |      |        |        | (5,771 | ) |        |        | (2,952 | )
|                                      |                                                                 |                                         |                                              |  |                                 |  |      |        |        |        |   |       
|CASH FLOWS FROM FINANCING ACTIVITIES: |                                                                 |                                         |                                              |  |                                 |  |      |        |        |        |   |       
|                                     
|                                     
|                                     
|                                     
|                                      | Long-term debt repayments                                       |                                         |                                              |  |                                 |  |      | (198   | )      |        |   | (86    | )     
|                                     
|                                     
|                                     
|                                     
|                                      | Stock option exercise proceeds                                  |                                         |                                              |  |                                 |  |      | 2,139  |        |        |   |       |       
|                                     
|                                     
|                                     
|                                     
|                                      | Other                                                           |                                         |                                              |  |                                 |  |      |       |        |        |   | (529   | )     
|                                      |                                                                 |                                         |                                              |  |                                 |  |      |        |        |        |   |       
|                                      |                                                                 |                                         | Net cash from (used in) financing activities |  |                                 |  |      |        |        | 1,941  |   |        |        | (615   | )
|                                      |                                                                 |                                         |                                              |  |                                 |  |      |        |        |        |   |       
|                                      | Effect of exchange rates on cash and cash equivalents           |                                         |                                              |  |                                 |  |      | (91    | )      |        |   | 271    |       
|                                      |                                                                 |                                         |                                              |  |                                 |  |      |        |        |        |   |       
|                                      | Net change in cash and cash equivalents                         |                                         |                                              |  |                                 |  |      | (162   | )      |        |   | (4,526 | )     
|                                     
|                                     
|                                     
|                                     
|                                      | Cash and cash equivalents, beginning of period                  |                                         |                                              |  |                                 |  |      | 64,514 |        |        |   | 22,758 |       
|                                      |                                                                 |                                         |                                              |  |                                 |  |      |        |        |        |   |       
|                                      | Cash and cash equivalents, end of period                        |                                         |                                              |  |                                 |  | $    | 64,352 |        |        | $ | 18,232 |       
|                                      |                                                                 |                                         |                                              |  |                                 |  |      |        |        |        |   |       
|Supplemental Disclosures:             |                                                                 |                                         |                                              |  |                                 |  |      |        |        |        |   |       
|                                     
|                                     
|                                     
|                                     
|                                      | Interest paid                                                   |                                         |                                              |  |                                 |  | $    | 1,346  |        |        | $ | 2,682  |       
|                                     
|                                     
|                                     
|                                     
|                                      | Income taxes paid, net                                          |                                         |                                              |  |                                 |  |      | 4,814  |        |        |   | 117    |       



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
DECEMBER 31, 2001

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.

GAIN ON EXTINGUISHMENT OF DEBT

During the three months ended December 31, 2001, we repurchased 43/4%
convertible subordinated notes with a face value of $5.0 million, at a gain of
$0.2 million, net of tax. The repurchase traded in December 2001 and settled
in cash in January 2002.

RECENT ACCOUNTING PRONOUNCEMENTS

We adopted SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142) early,
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 will complete an evaluation of goodwill by March 31, 2002, in accordance
with SFAS 142. We have completed an evaluation of other intangibles, which
include licenses and trademark. The trademark was acquired in May 2001, and
has an indefinite life. We have made no adjustments to income (loss) to date
and we do not anticipate making any adjustments. However, we would record any
income (loss) adjustments necessary as cumulative effect of change in
accounting principle.

As of October 1, 2001, goodwill and trademark amortization ceased, in
accordance with SFAS 142. Goodwill and trademark amortization had been
approximately $1.0 million per quarter in fiscal 2001. For the three months
ended December 31, 2000, goodwill amortization was $985 thousand or $766
thousand, net of tax. Excluding the impact of goodwill amortization, net of
tax, income before extraordinary gain and net income both would have been $693
thousand. Earnings per share would have been $0.05 per share, both basic and
diluted.

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.

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

6



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##### Table of Contents



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 December 31,
|      |                     |                                             |   |                                
|      |                     |                                             |   |                                 |        |          |   | Inter-       |   | Depreciation |    | Operating
|      |                     |                                             |   | External                        |        | segment  |   | and          |   | Income      
|      |                     |                                             |   | Revenues                        |        | Revenues |   | Amortization |   | (Loss)      
|      |                     |                                             |   |                                 |        |          |   |              |   |             
|      |                     |                                             |   |                                 |        |          |   |              |   |              | (a | )         |       |  | (a | )     
|     
|     
|     
|     
|2001: |                     |                                             |   |                                 |        |          |   |              |   |              |    |           |       |  |    |       
|     
|     
|     
|     
|      | Domestic die-cast   |                                             | $ | 47,659                          |        |          | $ | 2,571        |   |              | $  | 2,920     |       |  | $  | 16,772 |       
|     
|     
|     
|     
|      | Domestic apparel    |                                             |   | 28,026                          |        |          |   |             |   |              |    | 493       |       |  |    | 3,702  |       
|     
|     
|     
|     
|      | Foreign die-cast    |                                             |   | 7,462                           |        |          |   |             |   |              |    | 1,012     |       |  |    | 1,557  |       
|     
|     
|     
|     
|      | Corporate and other |                                             |   | 989                             |        |          |   |             |   |              |    | 1,437     |       |  |    | (8,163 | )     
|     
|     
|     
|     
|      | Eliminations        |                                             |   |                                |        |          |   | (2,571       | ) |              |    |          |       |  |    | 305    |       
|      |                     |                                             |   |                                 |        |          |   |              |   |              |    |           |       |  |    |       
|      |                     | Total per consolidated
financial statements |   | $                               | 84,136 |          |   | $            |  |              |    | $         | 5,862 |  |    | $      | 14,173 | 
|      |                     |                                             |   |                                 |        |          |   |              |   |              |    |           |       |  |    |       
|2000: |                     |                                             |   |                                 |        |          |   |              |   |              |    |           |       |  |    |       
|     
|     
|     
|     
|      | Domestic die-cast   |                                             | $ | 22,638                          |        |          | $ | 933          |   |              | $  | 2,453     |       |  | $  | 5,045  |       
|     
|     
|     
|     
|      | Domestic apparel    |                                             |   | 18,322                          |        |          |   |             |   |              |    | 1,194     |       |  |    | 253    |       
|     
|     
|     
|     
|      | Foreign die-cast    |                                             |   | 6,393                           |        |          |   |             |   |              |    | 855       |       |  |    | 1,312  |       
|     
|     
|     
|     
|      | Foreign apparel     |                                             |   | 1,705                           |        |          |   |             |   |              |    | 61        |       |  |    | (637   | )     
|     
|     
|     
|     
|      | Corporate and other |                                             |   | 1,830                           |        |          |   |             |   |              |    | 1,653     |       |  |    | (4,511 | )     
|     
|     
|     
|     
|      | Eliminations        |                                             |   |                                |        |          |   | (933         | ) |              |    |          |       |  |    |       |       
|      |                     |                                             |   |                                 |        |          |   |              |   |              |    |           |       |  |    |       
|      |                     | Total per consolidated
financial statements |   | $                               | 50,888 |          |   | $            |  |              |    | $         | 6,216 |  |    | $      | 1,462  | 
|      |                     |                                             |   |                                 |        |          |   |              |   |              |    |           |       |  |    |       

|                        |                                             |   |                     |         |           |   |        |         | 
|----------------------- | ------------------------------------------- | - | ------------------- | ------- | --------- | - | ------ | ------- | 
|                        |                                             |   | Identifiable Assets
|                        |                                             |   |                    
|                        |                                             |   | Dec. 31,            |         | Sept. 30,
|                        |                                             |   | 2001                |         | 2001     
|                        |                                             |   |                     |         |          
|Domestic die-cast       |                                             | $ | 56,011              |         |           | $ | 52,526 |        
|                       
|                       
|                       
|                       
|Domestic apparel        |                                             |   | 85,435              |         |           |   | 92,136 |        
|                       
|                       
|                       
|                       
|Foreign die-cast        |                                             |   | 40,920              |         |           |   | 40,599 |        
|                       
|                       
|                       
|                       
|Corporate and other (b) |                                             |   | 97,379              |         |           |   | 95,869 |        
|                       
|                       
|                       
|                       
|Eliminations            |                                             |   | (2,880              | )       |           |   | (2,177 | )      
|                        |                                             |   |                     |         |           |   |        |        
|                        | Total per consolidated
financial statements |   | $                   | 276,865 |           |   | $      | 278,953 | 
|                        |                                             |   |                     |         |           |   |        |        



---

|(a) |  | Goodwill ceased amortizing October 1, 2001, with the adoption of SFAS
142. Depreciation and amortization and operating income (loss) for the
three months ended December 31, 2000, included goodwill amortization
totaling $985 thousand ($126 thousand for domestic die-cast, $701 thousand
for domestic apparel and $158 thousand for foreign die-cast).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(b) |  | Corporate and other identifiable assets includes $60.8 million in cash at
December 31, 2001, and $60.9 million in cash at September 30, 2001.                                                                                                                                                                                                             

7



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##### Table of Contents



EARNINGS PER COMMON SHARE (EPS)

Reconciliations of the numerators and denominators in the EPS computations for
income (loss) before extraordinary gain follow (in thousands):

|                                                                                   |  |                                 |        |      |  |   |        |  
|---------------------------------------------------------------------------------- |  | ------------------------------- | ------ | ---- |  | - | ------ | -
|                                                                                   |  | Three Months Ended December 31,
|                                                                                   |  |                                
|                                                                                   |  | 2001                            |        | 2000
|                                                                                   |  |                                 |        |     
|NUMERATOR:                                                                         |  |                                 |        |      |  |   |        |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Basic  income (loss) before extraordinary gain                                    |  | $                               | 8,080  |      |  | $ | (73    | )
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Effect of dilutive convertible subordinated notes                                  |  |                                 | 449    |      |  |   |       |  
|                                                                                   |  |                                 |        |      |  |   |        |  
|Diluted  adjusted income (loss) before extraordinary gain and
assumed conversions |  | $                               | 8,529  |      |  | $ | (73    | )
|                                                                                   |  |                                 |        |      |  |   |        |  
|DENOMINATOR:                                                                       |  |                                 |        |      |  |   |        |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Basic  weighted average shares                                                    |  |                                 | 17,245 |      |  |   | 16,243 |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Effect of dilutive stock options and warrants                                      |  |                                 | 673    |      |  |   |       |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Effect of dilutive convertible subordinated notes                                  |  |                                 | 1,135  |      |  |   |       |  
|                                                                                   |  |                                 |        |      |  |   |        |  
|Diluted  adjusted weighted average shares and assumed conversions                 |  |                                 | 19,053 |      |  |   | 16,243 |  
|                                                                                   |  |                                 |        |      |  |   |        |  

The impacts of options and warrants outstanding for the purchases of 60
thousand shares of common stock, at an average price of $34.63 were not
included in the calculation of diluted EPS for the three months ended December
31, 2001, 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 three months ended December 31, 2001, but could potentially dilute EPS in
the future. In January 2002, we granted additional options to purchase 448
thousand shares at an exercise price of $39.85 per share. These options also
could potentially dilute EPS in the future.




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 replicas of cars driven by individual drivers and are
principally NASCAR, Formula One and NHRA replicas. 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.                                                           

8



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##### Table of Contents



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.                                      

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.

Results of Operations

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

|                                                         |  |                    |       |      |  |  |       |   
|-------------------------------------------------------- |  | ------------------ | ----- | ---- |  |  | ----- | --
|                                                         |  | Three Months Ended
|                                                         |  |                   
|                                                         |  | 2001               |       | 2000
|                                                         |  |                    |       |     
|Sales                                                    |  |                    | 100.0 | %    |  |  | 100.0 | % 
|                                                        
|                                                        
|                                                        
|                                                        
|Cost of sales                                            |  |                    | 62.1  |      |  |  | 64.5  |   
|                                                        
|                                                        
|                                                        
|                                                        
|Gross profit                                             |  |                    | 37.9  |      |  |  | 35.5  |   
|                                                         |  |                    |       |      |  |  |       |   
|Selling, general and administrative expenses             |  |                    | 20.4  |      |  |  | 29.2  |   
|                                                        
|                                                        
|                                                        
|                                                        
|Amortization of goodwill                                 |  |                    |      |      |  |  | 1.9   |   
|                                                        
|                                                        
|                                                        
|                                                        
|Amortization of licenses                                 |  |                    | 0.6   |      |  |  | 1.5   |   
|                                                         |  |                    |       |      |  |  |       |   
|                                                         |  |                    | 21.0  |      |  |  | 32.6  |   
|                                                        
|                                                        
|                                                        
|                                                        
|Income from operations                                   |  |                    | 16.9  |      |  |  | 2.9   |   
|                                                        
|                                                        
|                                                        
|                                                        
|Interest expense                                         |  |                    | (1.0  | )    |  |  | (2.8  | ) 
|                                                        
|                                                        
|                                                        
|                                                        
|Minority interest and other, net                         |  |                    | (0.2  | )    |  |  | (0.3  | ) 
|                                                         |  |                    |       |      |  |  |       |   
|Income (loss) before income taxes and extraordinary gain |  |                    | 15.7  |      |  |  | (0.2  | ) 
|                                                        
|                                                        
|                                                        
|                                                        
|Income taxes                                             |  |                    | 6.1   |      |  |  | (0.1  | ) 
|                                                         |  |                    |       |      |  |  |       |   
|Income (loss) before extraordinary gain                  |  |                    | 9.6   | %    |  |  | (0.1  | )%
|                                                         |  |                    |       |      |  |  |       |   

Three Months Ended December 31, 2001 Compared with Three Months Ended December
31, 2000

Sales increased 65.3% to $84.1 million for the three months ended December 31
2001, from $50.9 million in the prior year period. Sales increased in both
die-cast and apparel distribution channels. Die-cast segment sales increased
89.9% to $55.1 million from $29.0 million in the prior-year quarter. Sales of
Winners Circle brand die-cast, acquired in May 2001, contributed $7.6 million
of the $26.1 million increase in die-cast sales. Winners Circle, a
mass-retail channel, is expected to be cyclically strong during the holiday
season, which resulted in higher sales levels in the first fiscal quarter,
typically the weakest quarter in our fiscal year. Apparel segment sales,
exclusive of trackside, rose 42.7% to $20.0 million from $14.0 million in the
year-ago quarter, reflecting increased demand from both wholesale and mass
retail channels. Trackside sales were up 33.4% to $8.0 million from $6.0
million.

Gross profit improved to 37.9 % of sales in the first quarter of fiscal 2001
from 35.5% in the fiscal 2000 period. Gross margins for the quarter improved
as we continued to enforce operating and purchasing controls and also reduced
low margin sales.

Selling, general and administrative expenses were $17.2 million, or 20.4% of
sales, in the quarter ended December 31, 2001 compared to $14.9 million, or
29.2% of sales in the prior year quarter. Under our current business model,
our selling, general and administrative costs are largely fixed and do not
proportionately increase with sales volumes. The first fiscal 2002 quarter
reflects a $1.0 provision for potential losses related to Kmart receivables.
First quarter fiscal 2002 die-cast and apparel sales to Kmart were
approximately $3.6 million, or approximately 4% of total sales for the

9



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##### Table of Contents



quarter. We expect Kmarts bankruptcy to have little, if any, effect on future
sales, as Kmart has initially indicated that it anticipates no reduction in
sales of our products.

Goodwill amortization ceased effective October 1, 2001, with the adoption of
FAS 142. Goodwill amortization in the prior fiscal first quarter was $985
thousand, or 1.9% of sales.

Interest expense of $845 thousand for the three months ended December 31, 2001,
was $600 thousand lower than interest expense for the comparable period in the
prior year as a result of the convertible subordinated note repurchases since
last fiscal first quarter.

The effective tax rate of 38.8% in the 2001 first fiscal quarter reflects
current expectations for the effective tax rate for fiscal 2002.

Liquidity and Capital Resources

Working capital improved $5.5 million to $95.8 million at December 31, 2001,
from $90.3 million at September 30, 2001. Cash remained virtually unchanged
from September 30, 2001 at $64.4 million. Operating cash flows ($3.8 million)
reflect payment of 2002 guaranteed royalty payments, payment of fiscal 2001
executive bonuses, and semi-annual interest on the 43/4% subordinated
convertible notes ($1.3 million) and US tax payments ($4.5 million).

Days sales outstanding, calculated on quarterly sales, improved 12.4% from the
first fiscal quarter of 2000 to the first fiscal quarter of 2001, as a result
of improved receivables management. Inventory turns, calculated on quarterly
cost of sales, improved 88.0% over the first fiscal quarter of 2000, with the
implementation of a build-to-order approach in die-cast operations and better
inventory management. Our backlog at December 31, 2001, was approximately $115
million compared to $120 million at September 30, 2001.

During the three months ended December 31, 2001, we repurchased 43/4%
convertible subordinated notes with a face value of $5.0 million, at a gain of
$0.2 million, net of tax. The repurchase traded in December 2001 and settled
in cash in January 2002.

Capital expenditures for the three months ended December 31, 2001, totaled $5.5
million, related principally to ongoing investments in tooling, and included
$2.8 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 $7.8 million at January 31, 2001. 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 December
31, 2001.

10



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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.

11



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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. Action is informed by its counsel that the motions will likely be
decided within six months. The Complaint alleges that Action did not provide
accurate commission payments to Speedway for souvenirs and memorabilia sold at
various racetracks. Action contends that there is no merit to these
allegations.




ITEM 2.  Changes in Securities and Use of Proceeds

In connection with our purchase of an 80% interest
in Castaway Collectibles, LLC, we issued warrants to purchase 25,000
shares of common stock at an exercise price of $20.35 per share. The
warrants vested and became exercisable upon grant.

In connection with certain personal services
performed in connection with a license agreement, we issued warrants
to purchase 100,000 shares of the common stock, at an exercise price
of $18.21 per share. The warrants vest over three years.

We issued the all of the above warrants without
registration under the Securities Act in reliance on the exception
provided by Section 4(2) of the Securities Act as a transaction by an
issuer not involved in a public offering.




ITEM 3.  Defaults Upon Senior Securities

Not applicable




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

Not applicable




ITEM 5.  Other Information

On February 11, 2002, we announced that Action Performance Companies, Inc. will
transfer its stock listing from Nasdaq (ACTN) to the New York Stock Exchange
(NYSE) effective February 20, 2002, and will trade under its new ticker symbol,
ATN.




ITEM 6.  Exhibits and Reports on Form 8-K

|    |  |                            |  |                                                                                                                                                                                               
|--- |  | -------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Exhibits                  |  |                                                                                                                                                                                               
|   
|   
|   
|   
|    |  | Exhibit 10.67              |  | Second Amendment to Loan and Security Agreement, dated
January 31, 2001, by and among Action Performance Companies, Inc.,
certain subsidiaries and affiliates, as guarantors, and Bank One, NA
|   
|   
|   
|   
|(c) |  | Reports on Form 8-K  None

12



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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)   |  | February 11, 2001
|                                       
|                                       
|                                       
|                                       
|                                        |  |                                                                                               |  |                  
|                                       
|                                       
|                                       
|                                       
|/s/ R. David Martin
R. David Martin     |  | Chief Financial Officer, Secretary and Treasurer
(Principal Financial and Accounting Officer) |  | February 11, 2001

13



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##### Table of Contents






EXHIBIT INDEX

|              |  |                                                                                                                                                                                               
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits No.  |  | Description                                                                                                                                                                                   
|              |  |                                                                                                                                                                                               
|Exhibit 10.67 |  | Second Amendment to Loan and Security Agreement, dated
January 31, 2001, by and among Action Performance Companies, Inc.,
certain subsidiaries and affiliates, as guarantors, and Bank One, NA

14