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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-K

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

For fiscal year ended September 30, 2001

Commission file number 0-21630



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ACTION PERFORMANCE COMPANIES, INC.

(Exact Name of Registrant as Specified in Its Charter)


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

4707 E. Baseline Road
Phoenix, Arizona 85042
(602) 337-3700(Address, including zip code, and telephone number, including area code, of principal executive offices)

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

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

Common Stock, par value $.01 per share

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 [CHECKBOX]    No [BOX]

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

The aggregate market value of Common Stock held by nonaffiliates of the
registrant (15,258,595 shares) based on the closing price of the registrants
Common Stock as reported on the Nasdaq National Market on December 12, 2001,
was $534,050,825. For purposes of this computation, all officers, directors
and 10% beneficial owners of the registrant are deemed to be affiliates. Such
determination should not be deemed to be an admission that such officers,
directors or 10% beneficial owners are, in fact, affiliates of the registrant.

As of December 12, 2001, there were outstanding 17,343,112 shares of
registrants common stock, par value $.01 per share.

Documents incorporated by reference: Portions of the registrants definitive
Proxy Statement for the 2002 Annual Meeting of Shareholders are incorporated by
reference into Part III of this Report.





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TABLE OF CONTENTS



|              |                                                                                               |  |  |  |  |  |  | 
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|PART I       
|              | ITEM 1. BUSINESS                                                                             
|              | ITEM 2. PROPERTIES                                                                           
|              | ITEM 3. LEGAL PROCEEDINGS                                                                    
|              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II      
|              | ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS            
|              | ITEM 6. SELECTED FINANCIAL DATA                                                              
|              | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|              | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|              | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|              | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III     
|              | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|              | ITEM 11. EXECUTIVE COMPENSATION                                                              
|              | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|              | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|PART IV      
|              | ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                    
|SIGNATURES   
|              | REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                                     
|              | CONSOLIDATED BALANCE SHEETS                                                                  
|              | CONSOLIDATED STATEMENTS OF OPERATIONS                                                        
|              | CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY                                              
|              | CONSOLIDATED STATEMENTS OF CASH FLOWS                                                        
|              | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                   
|EXHIBIT INDEX
|EX-21        
|EX-23        



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ACTION PERFORMANCE COMPANIES, INC.

ANNUAL REPORT ON FORM 10-K

FISCAL YEAR ENDED SEPTEMBER 30, 2001

TABLE OF CONTENTS

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|ITEM 1.                                                 |  | BUSINESS                                                                              |          |  | 1  | 
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|ITEM 2.                                                 |  | PROPERTIES                                                                            |          |  | 20 | 
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|ITEM 3.                                                 |  | LEGAL PROCEEDINGS                                                                     |          |  | 21 | 
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|ITEM 4.                                                 |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |          |  | 21 | 
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|ITEM 5.                                                 |  | MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS             |          |  | 22 | 
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|ITEM 6.                                                 |  | SELECTED FINANCIAL DATA                                                               |          |  | 23 | 
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|ITEM 7.                                                 |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS |          |  | 24 | 
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|ITEM 7A.                                                |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |          |  | 30 | 
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|ITEM 8.                                                 |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                           |          |  | 31 | 
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|ITEM 9.                                                 |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE  |          |  | 31 | 
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|ITEM 10.                                                |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                    |          |  | 31 | 
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|ITEM 11.                                                |  | EXECUTIVE COMPENSATION                                                                |          |  | 31 | 
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|ITEM 12.                                                |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT                        |          |  | 31 | 
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|ITEM 13.                                                |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                        |          |  | 31 | 
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|ITEM 14.                                                |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K                      |          |  | 31 | 
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|SIGNATURES                                              |  |                                                                                       | 34       | 
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|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE |  |                                                                                       | F-1      | 



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Statement Regarding Forward-Looking Statements

The statements contained in this report on Form 10-K that are not purely
historical are forward-looking statements within the meaning of applicable
securities laws. Forward-looking statements include statements regarding our
expectations, anticipation, intentions, beliefs, or strategies
regarding the future. Forward-looking statements also include statements
regarding revenue, margins, expenses, and earnings analysis for fiscal 2002 and
thereafter; our strategy to focus on our core products and licenses; our
product and distribution channel development strategies; the success of
particular product or marketing programs; revenue generated as a result of
licensing arrangements; and liquidity and anticipated cash needs and
availability. All forward-looking statements included in this report are based
on information available to us as of the filing date of this report, and we
assume no obligation to update any such forward-looking statements. Our actual
results could differ materially from the forward-looking statements. Among the
factors that could cause actual results to differ materially are the factors
discussed in Item 1, Special Considerations.





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PART I




ITEM 1. BUSINESS

Introduction

We are the worldwide leader in the design and sale of licensed motorsports
collectible and consumer products. Our products include die-cast scaled
replicas of motorsports vehicles, apparel (including t-shirts, hats, and
jackets), and souvenirs. We market our products through U.S. and German
subsidiaries under an extensive portfolio of license arrangements with various
drivers, team owners, sponsors, sanctioning bodies, and others, including the
following:



| |  |  | NASCAR (National Association for Stock Car Auto Racing)
Winston Cup Drivers: Tony Stewart, Dale Earnhardt, Sr., Dale
Earnhardt, Jr., Jeff Gordon, Dale Jarrett, Bobby Labonte, Bill
Elliott, Rusty Wallace, Ricky Rudd, Kevin Harvick and Sterling
Marlin;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | NASCAR Team Owners: Robert Yates Racing, Richard Childress
Racing Enterprises, Joe Gibbs Racing, Evernham Motorsports, Chip
Ganassi racing, and Dale Earnhardt, Inc.;                                                                                     
|
| |  |  | NHRA (National Hot Rod Association) champions John Force and Kenny Bernstein;                                                                                                                                                                             
|
| |  |  | Formula One Teams; and                                                                                                                                                                                                                                    
|
| |  |  | Sanctioning Bodies: NASCAR, NHRA, IRL (Indy Racing League), and World of Outlaws.                                                                                                                                                                         

Third parties manufacture all of our motorsports collectibles and most of our
apparel and souvenirs, generally utilizing our designs, tools, and dies. We
screen print and embroider a portion of the licensed motorsports apparel that
we sell.

Our products are marketed in the United States,
Germany and worldwide through the following:



| |  |  | Distributor networks which target specialty retailers,                                                    
| | - |  | ----------------------------------------------------------------------------------------------------------
|
| |  |  | Mobile trackside souvenir stores which target motorsports event attendees,                                
|
| |  |  | Mass-market retailers,                                                                                    
|
| |  |  | A members-only collectors catalog club (Racing Collectables
Club of America, the Club), managed by QVC,
|
| |  |  | Television programming on QVC,                                                                            
|
| |  |  | Internet sites including, goracing.com, an Internet site maintained by QVC, and                           
|
| |  |  | Other distribution channels.                                                                              

Historically, our business concentrated on designing and marketing die-cast
collectibles featuring NASCAR Winston Cup drivers and vehicles. Since 1995, we
have expanded our lines of die-cast collectibles to include replicas of
motorsports vehicles from Formula One, NHRA drag racing, World of Outlaws
sprint car racing, and motorcycle racing. Through a series of acquisitions and
licensing arrangements between fiscal 1997 and fiscal 1999, we expanded our
product offerings to include apparel (hats, t-shirts and jackets) and other
memorabilia. During that time period, the motorsports industry experienced a
period of rapid growth and we expanded our distribution channels to reach the
expanded fan base.

We continue to pursue a strategy designed to enhance our leadership position in
the motorsports collectible and consumer products industry. Key aspects of
this strategy include (a) focusing on licensing the top drivers and teams, (b)
focusing on large promotion programs that allow us to market more products
under our key existing licensing arrangements, (c) developing promotional
programs for corporate sponsors, and (d) strengthening and developing our
existing distribution channels.





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Our company was incorporated in Arizona in 1992. Principal executive offices
are located at 4707 East Baseline Road, Phoenix, Arizona 85042, and our
telephone number is (602) 337-3700. All references to our business operations
in this report include the operations of Action Performance Companies, Inc. and
our subsidiaries and operating divisions.

Our Business

Industry Overview

Motorsports racing consists of several distinct segments, each with its own
organizing bodies and events. The largest segment in the United States, in
terms of attendance and media exposure, is stock car racing, which is dominated
by NASCAR. The other principal segments include the following:



| |  |  | drag racing, with NHRA the most prominent organizing body;                                                   
| | - |  | -------------------------------------------------------------------------------------------------------------
|
| |  |  | open wheel racing and the IRL;                                                                               
|
| |  |  | dirt track racing, which includes the World of Outlaws and USAC;                                             
|
| |  |  | sports car racing, which includes the United States Road
Racing Championship and the American Le Mans Series;
|
| |  |  | motorcycle racing, which includes the American Motorcycle Association; and                                   
|
| |  |  | Formula One.                                                                                                 

Millions of racing fans attend racing events in North America or tune in to
televised racing events each year. In 2001, public interest in NASCAR is up
significantly over 2000 as indicated by television ratings. A significant
portion of the increase this year is due to a new six-year, $2.4 billion
broadcast contract signed by NASCAR. Under the contract, FOX broadcasts the
first half of the season and NBC and TNT broadcasts the second half. The 20
races on NBC and TNT in the second half of the 2001 Winston Cup season drew
audiences 34 percent larger than for those races last year. Fox Sports and
cable channel FX saw ratings go up 29 percent for 19 races. Ratings increased
across the country for NBC and TNT, going up 74 percent in the Southwest, 66
percent in the Pacific region, and 47 percent in the Northeast. Each rating
point represents a little more than one million television households.
Internationally, Formula One events are broadcast worldwide to approximately
130 countries.

Since 1996, new speedways have been opened in the Los Angeles, Dallas/Ft.
Worth, Las Vegas, Kansas City, and Chicago metropolitan areas. These new
speedways are bringing NASCAR and other major motorsports events to new
geographic markets with much larger population bases than many of the
traditional NASCAR venues located in the southeastern United States. The
geographical expansion of new speedways has expanded the awareness of NASCAR
racing.

Strategy

We plan to continue to grow revenues and increase profitability by pursuing a
strategy that is designed to continue our leadership position in the
motorsports collectible and consumer products industry, leverage the growing
popularity of motorsports (particularly NASCAR) and take advantage of
our exclusive license arrangements with the most popular figures in these sports.
This strategy includes focusing on core licensed motorsports products, further
developing existing licensing arrangements, continuing to develop promotional
programs, strengthening existing distribution channels, expanding into new
distribution channels, exploiting the growth and popularity of motorsports
internationally, and continuing to develop and bring new products to market.
Specific initiatives include growing the Winners Circle brand of collectibles
within the mass-retail market, launching new products, such as
replica die-cast boats and
engines, through existing distribution channels, developing programs for
the increasingly popular NHRA and Sprint car series and working with major
corporate clients on major national or international promotional programs.

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Products

Die-Cast Replica Vehicles

We design and market replicas of motorsports-related vehicles that are
constructed using die-cast bodies and chassis with free-spinning wheels and
tires. We design our collectible die-cast replicas as high-quality collectible
items. We market our die-cast products under approximately 250 active licenses
with racecar drivers, team owners, and sponsors as well as under license
agreements with NASCAR, IRL, Ford Motor Company, several divisions of General
Motors Corp., and others. The die-cast products that we offer relate to NASCAR
Winston Cup, Busch, and Craftsman Truck racing series; Formula One; NHRA
drag racing; GT and other sports car racing; USAC racing; and World of
Outlaws sprint car racing. We also produce die-cast replicas of certain
factory production cars.

Our die-cast replicas typically range in price at retail from approximately
$10.00 to $99.00 per item, depending on size, type of vehicle, and level of
detail. A 1:24th scale replica of an actual racing vehicle typically retails
for $59.99 to $69.99. We offer our die-cast collectibles primarily through our
wholesale distributor network to specialty retailers, the Club, direct
response television through our relationship with QVC, our trackside stores,
and corporate promotional programs. We offer Winners Circle products
principally through mass retail.

We enhance the collectible value and appeal of our products through various
measures. These measures include (a) designing die-cast collectibles that
include features that are not offered by our competitors; (b) limiting the
quantities of each collectible item that we produce and sell; (c) specifying,
on certain products themselves and on the packaging material of certain other
die-cast collectibles, the quantity of that limited-edition item actually
produced; (d) offering certain items only through the Club; and (e) designing
packaging concepts to improve the display of each collectible item.

We market a line of die-cast replica racing vehicles to mass retailers under
the Winners Circle brand name. These die-cast
products are completely distinct from
our other products and do not compete directly with our limited-edition
motorsports die-cast collectible products.

Apparel and Other Consumer Products

We market various licensed motorsports apparel, souvenirs, and other consumer
products, including t-shirts, jackets, hats, coffee mugs, pins, key chains,
knives, coolers, and tote bags. Each of the motorsports consumer products
generally features the name, likeness, and car number of a popular racecar
driver.

Our licensed motorsports apparel items utilize creative designs that are
printed or applied to high-quality shirts, hats, jackets, and other products.
We design and sell our motorsports apparel products in sizes ranging from
infant to youth to men and womens adult sizes.

We design our motorsports consumer products primarily for distribution through
retail outlets, trackside stores, direct response television through our
relationship with QVC, and promotional programs with corporate sponsors of
racing teams and racing events.

Chase-Branded Apparel

We own an 80% interest in Chase Racewear, L.L.C., a motorsports-related apparel
brand and licensing company. Chase licenses apparel and clothing accessories
that bear Chase brand marks, including Chase Authentics, Competitors
View, and a stylized C, which is generally embroidered on the shirt cuff or
pocket. NASCAR drivers including Jeff Gordon, Rusty Wallace, Dale Jarrett,
Terry Labonte, Bobby Labonte, and others, have agreed, subject to certain
exceptions, to ensure that licensed apparel products bearing their names,
likenesses, or signatures will also bear Chase brand marks. These drivers
also have agreed to endorse Chase-branded apparel as the exclusive trackside
apparel of top NASCAR drivers. All apparel the Company sells utilizes Chase
brand . In addition, Chase Racewear, L.L.C. licenses the brand to others,
including VF Knitwear.

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Sales and Distribution

We market our die-cast replicas worldwide to approximately 10,000 specialty
retailers through our wholesale distributor network, the Club, direct
response television through our relationship with QVC, trackside
stores, mass retail and corporate promotional programs. We
market our apparel and other consumer products through certain distributors
primarily through an in-house sales force and independent representatives to
approximately 10,000 specialty retailers and to major discount and department
stores, retail automotive product outlets, and convenience stores; direct trackside sales to race fans; and promotional programs with
corporate sponsors.

Die-cast Distribution

We currently market our die-cast collectibles on a wholesale basis through 18
distributors operating in the United States and 45 distributors operating in 45
countries throughout the world. The distributors solicit orders for our
die-cast products from approximately 5,000 specialty retailers throughout the
United States and approximately 5,000 specialty retailers in other countries
throughout the world. The retailers include stores specializing in motorsports
collectibles and apparel and stores specializing in other sports collectible
items, and a limited number of hobby shops. We advertise our die-cast
collectibles in newspapers and magazines covering motorsports and the
collectibles markets. We also take measures to increase consumer awareness of
our products through radio and television advertising, including promotion of
our collectibles on home shopping television programs (such as QVC Networks
For Race Fans Only program) and advertising during popular television
programs of interest to motorsports enthusiasts. We market our Winners Circle
die-cast through mass retail merchants.

Apparel and Other Consumer Products Distribution

Our in-house sales force and independent representatives market certain
motorsports consumer products on a wholesale basis to major discount and
department stores, such as Wal-Mart and K-Mart, to automotive retail stores,
and to convenience stores. We also utilize our distributor network as well as
an in-house sales force and independent representatives to market our
motorsports apparel, souvenirs, and other consumer products on a wholesale
basis to the same specialty retailers that sell our die-cast collectibles.

Club

We market certain of our die-cast collectibles exclusively through the Club.
Members of the Club pay a lifetime membership fee that entitles them to receive
a membership kit, a monthly magazine, catalogs, and other special sales
materials highlighting our collectibles and other products. Membership in the
Club was approximately 230 thousand members as of September 30, 2001.
Approximately 120 thousand members are active, having made a purchase in the
last twelve months.

Under a ten-year outsourcing and exclusive supply agreement with QVC, Inc., QVC
assumed responsibilities for the day-to-day marketing and distribution
operations of the Club in fiscal 2001. We are QVCs exclusive supplier for
motorsports memorabilia offered by the Club, and QVC is the exclusive
distributor for Club products, including distribution over the Internet.

Under the agreement, we retain ultimate control over the decision-making
processes regarding pricing, production quantities, marketing, and promotion of
the products to be sold to the Clubs members. We produce and consign our
inventory with QVC, which sells and retains 20% to 40% of the revenue generated
based upon quantity of products shipped and whether products are sold through
direct response television. QVC retains all membership fees paid and has the
exclusive opportunity to sell club products over interactive television and its
web site after the initial sales window reserved for club members has expired.

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Trackside Sales

We currently operate 30 fully equipped trackside stores to capitalize on the
large base of potential customers that attend NASCAR-sanctioned races and other
events throughout the United States. Some or all of our mobile trackside
stores travel to each NASCAR Winston Cup race (39 events in fiscal 2001) as
well as to other selected racing events. Each mobile trackside store is
decorated with the logos and color scheme of a particular racing team and
driver and sells a complete assortment of licensed motorsports apparel,
souvenirs, and die-cast collectibles dedicated to that team and driver. These
mobile stores represent the only authorized trackside opportunities for racing
enthusiasts to purchase motorsports products using the name and likeness of the
driver and racing team featured in each store.

Internet

In April 2001, we entered into an agreement with QVC to re-establish our online
interactive merchandising presence. QVC assumed day-to-day responsibility for
operating and promoting our goracing.com Internet site as an online motorsports
retail store that will market our die-cast and apparel racing merchandise. QVC
also assumed all costs associated with redesigning, restructuring and operating
goracing.com, including processing online purchases. In October, we relaunched
the website, with initial offerings of die-cast products. We plan to add apparel and
other consumer products to the offerings in fiscal 2002.

Special Promotion Programs

We develop and implement extensive promotional programs, generally with popular
drivers, that feature special, one-time themes or events intended to reinforce
awareness of the identity of corporate sponsors, and other licensors of
intellectual property and which will increase the market for the Companys
products. We market a broad variety of specially designed die-cast vehicles and
other collectibles, apparel, and souvenirs based on these programs.

Building on the success of the Looney Tunes program
(one of the largest in our history which exceeded $20 million in die-cast sales primarily in the
fourth quarter of fiscal 2001) as well as other successful promotions including
Coca Cola, Harley Davidson, Home Depot and others, we have scheduled
several significant promotions in 2002. Some of these feature Elvis Presley,
James Dean, the 20th anniversary of the release of Steven Spielbergs ET and
the rock band KISS.

Design and Production

Die-cast Scaled Replica Vehicles

We design each die-cast collectible that we market. Many of our die-cast
collectibles include features, such as opening hoods and trunks, detailed
engines, and working suspensions. We also devote a significant amount of time
and effort to the production of our die-cast collectibles to ensure that the
resulting products display a level of quality and detail that is superior to
competing products. For example, we produce most of our die-cast collectibles
with pad printing instead of stickers or decals.

Our design artists take numerous photographs of the actual racing cars, trucks,
and other vehicles to be produced as die-cast replicas. Working from these
photographs, our artists and engineers use computer software to create detailed
scale renderings of the vehicles. After approval of the rendering by the
vehicle owner, driver, team sponsor, and other licensors whose approval may be
required, we supply computerized renderings to one of our manufacturers in
China. The manufacturer produces a sample or model, which we then inspect for
quality and detail. After final approval, the manufacturer produces the
die-cast replicas, packages them, and ships the finished products to us or, in
certain instances, directly to our customers.

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A substantial portion of our die-cast collectibles is manufactured under an
exclusive agreement with one third-party manufacturer in China. The term of
the agreement currently extends through October 31, 2005 and automatically
renews for five successive one-year terms unless terminated by either party by
giving written notice to the other party at least 90 days prior to the end of
the then-current term.

We own a significant portion of the tooling that the third-party manufacturer
uses to produce die-cast collectibles for our company, and we have partial
control over the production of our die-cast collectibles under the
manufacturing agreement. We invested $15.1 million in fiscal 2001 tooling for
our proprietary lines of die-cast collectibles. We believe the breadth and
quality of the tooling program provides us with a competitive advantage in the
motorsports collectible market.

We believe that our primary overseas manufacturer of die-cast collectibles is
dedicated to high quality and productivity as well as support for new product
development. There are significant risks inherent in relying on a single
manufacturer for a substantial portion of our die-cast products. See Item 1,
Special Considerations  We depend on third-party manufacturers and shippers.

We obtain the approximately 20% of the die-cast sold from other manufacturers
in China. We currently do not have a formal, long-term arrangement with any of
these manufacturers.

Apparel and Other Consumer Products

We currently obtain substantially all of our licensed motorsports apparel,
souvenirs, and other consumer products on a purchase order basis from
approximately 200 third-party manufacturers and suppliers located primarily in
the United States. We also screen print and embroider a portion of the
licensed motorsports apparel that we sell. The apparel and souvenir suppliers
present product ideas and artistic designs to us. We then select those
products and artistic designs that we believe will appeal to motorsports
enthusiasts and distinguish our apparel and souvenir products from those of our
competitors. We engage in a bidding process for certain items, such as
embroidered hats or t-shirt blanks, in order to negotiate favorable prices and
other terms. We also purchase and resell certain finished items, such as tote
bags and coolers, from domestic and foreign companies that have licenses for
those items with the drivers and other licensors.

We work closely with the third-party apparel and souvenir manufacturers in
order to ensure that the products conform to design specifications and meet or
exceed our quality requirements. We believe that a number of alternative
manufacturers for each of these products are readily available in the event
that we are unable to obtain products from any particular manufacturer. We own
the tooling and dies used to manufacture certain of our motorsports consumer
products. As we develop new motorsports consumer products that require
specialized tooling, we intend to build or purchase the new tooling that will
be required to permit the third-party manufacturers to produce those items.

Licenses

We focus on developing long-term relationships with and we engage in
comprehensive efforts to license the most popular drivers, team owners, and
other personalities in each top racing category, their sponsors, various
sanctioning bodies, and others in the motorsports industry. We develop
opportunities to market innovative collectible and consumer products that
appeal to motorsports enthusiasts. We believe that our license agreements with
top racecar drivers and other licensors significantly enhance the consumer
appeal and marketability of our products. By aligning our company with top
racing personalities and providing them with a broad range of revenue
opportunities, we believe that we will be able to leverage those relationships
to attract additional licensors in order to generate increased revenue for our
company as well as increased earnings for the licensors.

6



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##### Table of Contents



Significant Driver License and Endorsement Agreements; Significant Team Owner
Licenses

We have long-term license agreements with NASCAR Winston Cup Points champions
Jeff Gordon, Dale Jarrett, Bobby Labonte, Bill Elliott, and Rusty Wallace and
eleven-time NHRA Funny Car champion John Force. These licenses generally
provide us with a right of first refusal to market certain die-cast, apparel,
and other products bearing the drivers name and likeness. The license
agreements also generally provide that, to the extent that we exercise our
right of first refusal, the driver will not personally market and will not
permit others to market, through the same channels of distribution used by our
company, any products bearing the drivers likeness that are the same or
similar to products marketed by our company. Each of the license agreements
requires us to pay the licensor royalties based on a percentage of the
wholesale or retail price of licensed products that we sell. Certain of the
license agreements also provide for minimum guaranteed royalty payments each
year during the term of the agreement. These agreements, as well as many of
our other significant license agreements, give the licensors the right to
terminate or significantly shorten the term of the agreements if our business
is sold or transferred or if there is a significant change in our management
team.

We have personal service and endorsement agreements with popular racecar
drivers. During the term of the endorsement agreements, we have the right to
use the drivers name, likeness, signature, and endorsement in connection with
the advertisement, promotion, and sale of the die-cast collectibles and other
products approved by the driver and marketed by our company.

We also have license agreements with several of the most popular NASCAR race
car team owners, including Robert Yates Racing, Inc.; Richard Childress Racing
Enterprises, Inc.; Redline Sports Marketing, Inc. (the licensing entity for the
Joe Gibbs race team); Evernham Motorsports, LLC; Chip Ganassi Racing and Dale
Earnhardt, Inc. The team owner licenses provide us with either the exclusive
right or a right of first refusal to market certain products bearing the
likeness and number of each owners Winston Cup cars and other racing vehicles.
To the extent that we exercise our right of first refusal, the team owner
licenses provide that the licensor will not permit others to market, through
the same distribution channels used by our company, any of the licensed
products. Certain of the team owner licenses also provide that the licensors
will not directly market any of the licensed products through such channels.
Each of the license agreements with the team owners requires us to pay the
licensor royalties based on a percentage of the wholesale or retail price of
licensed products that we sell. Certain of the license agreements also provide
for minimum guaranteed royalty payments to the licensors.

The following table sets forth certain information with respect to the license
or personal service agreements with the drivers and team owners described
above:

|                                                          |  |                             |  |                  
|--------------------------------------------------------- |  | --------------------------- |  | -----------------
|Licensor                                                  |  | Driver                      |  | Expiration Date  
|                                                          |  |                             |  |                  
|The estate of Dale
Earnhardt and Dale
    Earnhardt, Inc. |  | Dale Earnhardt              |  | November 7, 2011 
|                                                         
|                                                         
|                                                         
|                                                         
|Jeff Gordon and JG
Motorsports, Inc.                      |  | Jeff Gordon                 |  | December 31, 2005
|                                                         
|                                                         
|                                                         
|                                                         
|Rusty Wallace and Rusty
Wallace, Inc.                     |  | Rusty Wallace               |  | December 31, 2007
|                                                         
|                                                         
|                                                         
|                                                         
|John Force and John
Force Racing                          |  | John Force                  |  | December 31, 2005
|                                                         
|                                                         
|                                                         
|                                                         
|Robert Yates Racing, Inc.                                 |  | Dale Jarrett
Ricky Rudd     |  | December 31, 2012
|                                                         
|                                                         
|                                                         
|                                                         
|Richard Childress Racing
Enterprises, Inc.                |  | Dale Earnhardt
Robby Gordon |  | December 31, 2007
|                                                         
|                                                         
|                                                         
|                                                         
|Redline Sports
Marketing, Inc.    (Joe
Gibbs race team)   |  | Bobby Labonte
Tony Stewart  |  | December 31, 2006

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|                          |  |                                                |  |                                                  
|------------------------- |  | ---------------------------------------------- |  | -------------------------------------------------
|Licensor                  |  | Driver                                         |  | Expiration Date                                  
|                          |  |                                                |  |                                                  
|                         
|                         
|                         
|                         
|Dale Earnhardt, Inc.      |  | Steve Park
Dale Earnhardt, Jr.
Michael Waltrip |  | December 31, 2005
(Park and Waltrip through 2002)
|                         
|                         
|                         
|                         
|Evernham Motorsports, LLC |  | Bill Elliott, Jr.
Jeremy Mayfield              |  | December 31, 2005                                
|                         
|                         
|                         
|                         
|Chip Ganassi Racing       |  | Sterling Marlin
Jimmy Spencer                  |  | December 31, 2011                                

Additional Product Licenses

We maintain other licenses with various other drivers, car owners, sponsors,
and manufacturers. Other popular drivers under license with our company
include NASCAR Winston Cup driver Terry Labonte; Jerry Nadeau; IRL Driver Al
Unser, Jr.; NHRA drag racers Kenny Bernstein and Larry Dixon; and NHRA Pro
Stock motorcycle driver Matt Hines. We also have licenses with Formula One
teams and with other popular team owners, car sponsors, NASCAR, World of
Outlaws, Ford Motor Company, several divisions of General Motors Corp. and
DaimlerChrysler.

Other License Arrangements

We have a license agreement with Revell-Monogram,
Inc. that gives us the exclusive right to use the Revell Racing, Revell
Select, and Revell Collection trademarks in connection with sales of NASCAR,
NHRA, and certain other motorsports-related die-cast collectibles in the United
States and Canada. The license also gives us an exclusive right to use the
Revell trademarks described above in connection with NASCAR, NHRA, and certain
motorsports-related die-cast products. The term of the Revell license runs
through December 31, 2007, at which time we may automatically extend for
successive one-year terms if sales exceed $12 million annually.

We have a licensing agreement with NASCAR that gives
us the non-exclusive right to use the NASCAR name and logo on all of our
NASCAR-related products and product packaging as well as on related sales,
marketing, and promotional materials. We pay NASCAR royalty payments based on
a percentage of the wholesale or retail price of licensed products that we
sell. The licensing arrangement expires on October 7, 2003 with respect to
licensed products that bear both the NASCAR mark and the name, image, or
likeness of a NASCAR driver, team, or track. The license agreement with NASCAR
will automatically renew for two additional five-year terms unless it has been
terminated in accordance with its terms.

We have a license agreement with the Indianapolis Motor Speedway Corporation,
the owner and operator of the Indianapolis Motor Speedway and the host of the
Indianapolis 500, Brickyard 400 and U.S. Grand Prix, that gives us the
non-exclusive right to use the IRL teams, drivers, and drivers likeness on our
die-cast replicas and other motorsports products and apparel. The license
agreement extends through 2003. Under the agreement, we must pay IMS a royalty
based on a percentage of our net sales of licensed product, subject to
guaranteed minimum royalty payments by us.

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Acquisitions

Mass Market Products and the Winners Circle Brands

We design, manufacture, and market licensed die-cast racecar toy replicas for
the mass retail market through our Winners Circle brand of products. In May
2001, we acquired Winners Circle brand name and related die-cast inventory
and tooling from Hasbro Inc. We use our licenses with approximately 15 drivers
to produce die-cast replicas of their racecars, including both standard and
special paint schemes. The items produced under this brand name principally
include miniature toy die-cast replicas of motorsports vehicles. We believe
that our entry into the mass retail die-cast market furthers our strategy to
establish our presence in all licensed die-cast racecar replica marketing
channels and expands our line of licensed motorsports merchandise for mass
retail customers to include both die-cast products and apparel. Prior to our
acquisition of the Winners Circle brand, we licensed to Hasbro the rights to
produce specific motorsports-related products for sale to the mass market. The
mass market die-cast products manufactured and marketed under the Winners
Circle brand are distinct form our current products and do not compete
directly with our limited edition motorsports die-cast collectible products.

Die-Cast Scaled Replica Bass Fishing Boats

In September 2001, we acquired an 80% interest in a development stage business
that manufactures and distributes collectible die-cast models of popular
high-performance bass fishing boats. The die-cast replicas are distributed
under our Castaway brand through most of the same channels as our other
die-cast collectibles including QVC cable television and QVC online. Our Castaway line of collectibles will be replicas of bass boats
designed and manufactured by Forest Woods Ranger Boats and Tracker Marine,
including Tracker Marines Pro Craft and Nitro brands. We plan to produce
product lines featuring a NASCAR Winston Cup driver series and a bass
professional angler signature series. Our NASCAR Winston Cup series will
include bass boats utilizing the paint schemes of certain top drivers, including
Dale Earnhardt, Dale Earnhardt Jr., Jeff Gordon, Kevin Harvick, Dale Jarrett,
Bobby Labonte, Steve Park, Tony Stewart, Rusty Wallace, and Michael Waltrip.
Our Castaway Bass Professional Angler Signature Series includes bass boats used
and endorsed by Hank Parker and other top professional bass anglers. We
believe that the crossover of demographics of motorsports and competitive bass
fishing will provide an opportunity for the Castaway product line to appeal to
a large audience.

Competition

Our motorsports die-cast collectibles compete with die-cast and other
motorsports collectibles and, to a certain extent, die-cast replicas of
motorsports vehicles that are sold through mass retail channels. Our
motorsports apparel and souvenirs compete with similar products sold or
licensed by drivers, team owners, sponsors, and other licensors with which we
currently do not have licenses as well as with sports apparel licensors and
manufacturers in general. Emerging companies also may increase their
participation in these markets. Our promotional products compete for
advertising dollars against other specialty advertising programs and media,
such as television, radio, newspapers, magazines, and billboards.

We believe that our relationships and licenses with top racecar drivers, car
owners, and other popular licensors represent a significant advantage over our
competitors in the motorsports collectible and consumer products industry. We
strive to expand and strengthen these relationships and to develop
opportunities to market innovative licensed collectible and consumer products
that appeal to motorsports enthusiasts. Our ability to compete successfully
depends on a number of factors both within and outside our control.

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Intellectual Property

Our business depends upon valuable trademarks and other rights that we license
from third parties. Our performance and ability to compete also depend to a
significant degree on the value of our various tradenames and marks, as well as
our proprietary technology and other rights. We are seeking protection of our
significant service marks and trademarks in the United States, including
various Action names and logos, goracing.com, and other names and logos.

Insurance

We maintain a total of $26 million in liability insurance to cover the sale of
our die-cast and other related products. In addition, we maintain a separate
policy to cover our tooling located at our third-party manufacturer in China.
The current coverage limit is $15 million for damage to our property as well as
an additional $15 million for business interruption insurance from resulting
damage to the property. We believe that our current insurance coverage and
program is adequate for our exposures.

Employees

As of December 12, 2001, we had approximately 500 full-time employees. We have
experienced no work stoppages, and we are not a party to a collective
bargaining agreement. We believe that we maintain good relations with our
employees.

Executive Officers

The following table sets forth certain information regarding each of our executive officers.

|                      |  |     |    |               |  |                                                              
|--------------------- |  | --- | -- | ------------- |  | -------------------------------------------------------------
|Name                  |  | Age |    | Position Held
|                      |  |     |    |              
|Fred W. Wagenhals     |  |     | 60 |               |  | Chairman of the Board, President, and Chief
Executive Officer
|                     
|                     
|                     
|                     
|R. David Martin       |  |     | 55 |               |  | Chief Financial Officer, Secretary and
Director              
|                     
|                     
|                     
|                     
|Melodee L. Volosin    |  |     | 37 |               |  | Executive Vice President  Sales and
Director                
|                     
|                     
|                     
|                     
|John S. Bickford, Sr. |  |     | 55 |               |  | Executive Vice President  Strategic Alliances and Director  

Fred W. Wagenhalshas served as our Chairman of the Board, President, and Chief
Executive Officer since November 1993 and served as Chairman of the Board and
Chief Executive Officer from May 1992 until September 1993 and as President
from July 1993 until September 1993.

R. David Martinhas served as our Chief Financial Officer since August 2000 and
as a director since December 2000. Previously, Mr. Martin joined Deloitte & Touche in June
1968 and served as a partner of that firm from August 1978 until May 2000.

Melodee L. Volosinhas served as our Executive Vice President  Sales since
December 1999 and as a director since January 1997. Ms. Volosin served as our
Vice President  Wholesale Division from September 1997 until December 1999.
Ms. Volosin served as the Director of our Wholesale Division from May 1992 to
September 1997. Ms. Volosins duties include managing all of our wholesale
distribution of die-cast collectibles and other products, including advertising
programs and budgeting.

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John S. Bickford, Sr.has served as our Vice President  Strategic Alliances
since July 1997 and as a director of our company since January 1997. Mr.
Bickford also served as a consultant to our company from January 1997 to June
1997. From 1976 to present, Mr. Bickford has served as President of MPD Racing
Products, Inc., which manufactures racecar parts for distribution through speed
shops and high-performance engine shops. Mr. Bickford served as President of
Bickford Motorsports, Inc., which provided consulting and special project
coordination services to racecar drivers, car owners, and other businesses,
from 1990 until 1997. Mr. Bickford also published Racing for Kids magazine
during 1996 and 1997. Mr. Bickford served as General Manager of Jeff Gordon,
Inc. from 1990 to 1995. Mr. Bickford currently serves as a director of
Equipoise Balancing, Inc., a privately held company.

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Special Considerations

The following factors, in addition to those discussed elsewhere in this report,
should be carefully considered in evaluating our company and our business.

A variety of factors could adversely affect our operating results.

A wide variety of factors could adversely impact our operating results. These
factors include the following:



| |  |  | our ability to identify popular motorsports personalities,
teams, and other licensors and to enter into and maintain mutually
satisfactory licensing arrangements with them;                                                                                                       
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the racing success of the key motorsports personalities,
teams, and other licensors with whom we have license arrangements;                                                                                                                                                        
|
| |  |  | our ability to identify trends in the motorsports
collectibles and consumer markets and to create and introduce on a
timely basis products and services that take advantage of those
trends and that compete effectively on the basis of price and
consumer tastes and preferences;
|
| |  |  | our ability to design and arrange for the timely production
and delivery of our products;                                                                                                                                                                                          
|
| |  |  | our ability to identify, develop, and implement special
merchandising and marketing programs on a timely basis;                                                                                                                                                                    
|
| |  |  | the level and timing of orders placed by customers;                                                                                                                                                                                                                                
|
| |  |  | our ability to expand our distribution channels and to
effectively manage the growth of our operations;                                                                                                                                                                            
|
| |  |  | seasonality; and                                                                                                                                                                                                                                                                   
|
| |  |  | competition and competitive pressures on prices.                                                                                                                                                                                                                                   

Many of the factors described above are beyond our control.

Our business depends on our relationships and license arrangements with key licensors.

We market our products under licensing arrangements with racecar drivers, team
owners, sponsors, automobile and truck manufacturers, NASCAR, NHRA, IRL, and
other entities. The licensing arrangements vary in scope and duration, but
generally authorize us to sell specified licensed products for short periods of
time. Some license agreements require us to pay minimum royalties or other
fixed amounts regardless of the level of sales of products licensed under that
agreement or the profitability of those sales. The success of licensing
arrangements depends on many factors, including the following:



| |  |  | the continued popularity of motorsports in general,                                                   
| | - |  | ------------------------------------------------------------------------------------------------------
|
| |  |  | the reasonableness of license fees in relationship to revenue
generated by sales of licensed products,
|
| |  |  | the continued popularity of the licensors,                                                            
|
| |  |  | the continued performance, public image, and health of the individual drivers.                        

A drivers popularity could be adversely affected if the driver fails to
maintain a successful racing career or engages in behavior that the general
public considers objectionable.

12



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In addition, our ability to enforce our rights under licensing agreements may
be limited by the interpretation and enforcement of those agreements. Some
license agreements contain provisions that allow the licensor to terminate the
agreement upon the occurrence of certain events, including a change in the
drivers team owner or sponsor, a change of control of our company, or a
significant change in our management team. The termination, cancellation, or
inability to renew or enforce material licensing arrangements, or the inability
to develop and enter into or enforce new licensing arrangements, would have a
material adverse effect on our business.

We depend on the popularity of the motorsports industry in general and NASCAR racing in particular.

The growth rate of the motorsports industry and its appeal to consumers has a
significant effect on the sales of motorsports merchandise and corporation
sponsorship. Motorsports competes for television viewership, attendance,
merchandise sales, and sponsorship funding with other sports, entertainment,
and recreational events. The competition in the sports, entertainment, and
recreation industries is intense.

Sales of die-cast replicas and other licensed merchandise related to NASCAR
racing represented approximately 70.0% of our revenue in fiscal 2001. Although
we have expanded our product lines to include vehicles from other segments of
motorsports, we expect that products related to NASCAR racing will continue to
account for a significant percentage of our revenue for the foreseeable future.
As a result, the popularity of NASCAR-sanctioned racing is important to the
success of our business.

Any decrease in the growth of the motorsports industry may have a material
adverse effect on our business, and any continued growth decline of the
motorsports industry, and NASCAR racing in particular, would continue to have a
material adverse effect on our business.

We depend on third-party manufacturers and shippers.

We depend upon third parties to manufacture all of our motorsports collectibles
and most of our consumer products. In particular, we rely on one manufacturer,
which operates a single facility in China, to produce most of our die-cast
products. Although we own most of the tools, dies, and molds used in the
manufacturing processes of our collectible products and own the tooling and
dies used to manufacture certain of our consumer products, we have limited
control over the manufacturing processes themselves. As a result, any
difficulties encountered by the third-party manufacturers that result in
product defects, production delays, cost overruns, or the inability to fulfill
orders on a timely basis could have a material adverse effect on our business.

We obtain die-cast products from our primary manufacturer in China under an
agreement that extends through October 31, 2006, and that automatically renews
for successive one-year terms unless terminated by either party giving written
notice to the other at least 90 days prior to the end of the then-current term.
We do not have long-term contracts with any other of our third-party
manufacturers.

Because we own most of the tools and dies used in the manufacturing process, we
believe that we would be able to secure other third-party manufacturers to
produce our products in the event that either party terminates that agreement.
Our operations would be adversely affected, however, by the following:



| |  |  | the loss of our relationship with certain of our current
suppliers, including particularly our primary manufacturer of
die-cast products;          
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the disruption or termination of the operations of one or
more of our current suppliers; or                                                        
|
| |  |  | the disruption or termination of sea or air transportation
with our China-based die-cast manufacturers, even for a relatively
short period of time.

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Significant damage to the facilities of our third-party manufacturers,
particularly the facilities used by our die-cast product manufacturers in
China, also could result in the loss of or damage to a material portion of our
key tools, dies, and molds in addition to production delays while new
facilities were being arranged and replacement tools, dies, and molds were
being produced. We do not maintain an inventory of sufficient size to provide
protection for any significant period against an interruption of supply,
particularly if we are required to obtain alternative sources of supply.

We do not directly purchase the raw materials used to manufacture most of our
products. We may, however, be subject to variations in the prices we pay our
third-party manufacturers for products if their raw materials, labor, and other
costs increase. Although to date we have been able to increase the prices at
which we sell our products in order to cover the increased prices that we pay
for such products, we may not be able to continue to pass along such price
increases to our customers in the future.

We also depend upon a number of third-party shippers, such as the U.S. Postal
Service, United Parcel Service, and Federal Express, to deliver goods to our
customers and us. Strikes or other service interruptions affecting our
shippers would have a material adverse effect on our ability to deliver
merchandise on a timely basis.

Our success depends on our ability to respond to rapid market changes.

The markets for our products and services are subject to rapidly changing
customer tastes, a high level of competition, seasonality, and a constant need
to create and market new products and services, especially related to our core
licensors. Demand for motorsports collectible and consumer products depends
upon a wide variety of factors, including the following:



| |  |  | the popularity of drivers, teams, and other licensors,           
| | - |  | -----------------------------------------------------------------
|
| |  |  | the popularity of current product and service concepts or themes,
|
| |  |  | cultural and demographic trends,                                 
|
| |  |  | marketing and advertising expenditures, and                      
|
| |  |  | general economic conditions.                                     

Because these factors can change rapidly, customer demand also can shift
quickly. We frequently are able to successfully market new products or
services for only a limited time.

Our ability to increase our sales and marketing efforts to stimulate customer
demand and our ability to monitor third-party manufacturing arrangements in
order to maintain satisfactory delivery schedules and product quality are
important factors in our long-term prospects. Because of the amount of time
and financial resources that may be required to bring new products or services
to market, we may not always be able to accurately forecast required inventory
levels or to respond to changes in customer tastes and demands. We could
experience a material adverse effect on our business, financial condition, and
operating results if we are unable to respond quickly to market changes or a
slowdown in demand for our products or services.

The market for our products and
services are competitive.

The motorsports collectible and
consumer products market is competitive. We compete with major
domestic and international companies. Some of these competitors have
greater market recognition and substantially greater financial,
technical, marketing, distribution, and other resources than we
possess.

Our motorsports die-cast collectibles compete with
die-cast and other motorsports collectibles and, to a certain extent,
die-cast replicas of motorsports vehicles that are sold through mass
retail channels. Our motorsports apparel and souvenirs compete with
similar products sold or licensed by drivers, owners, sponsors, and
other licensors with which we currently do not have licenses as well
as with sports apparel licensors and manufacturers in general. Other
companies also may increase their participation in these motorsports
markets. Our promotional programs must compete for advertising
dollars against other specialty advertising programs and media, such
as television, radio, newspapers, magazines, and billboards.

Certain current and potential competitors may be
able to devote greater resources to marketing and promotional
campaigns, adopt more aggressive pricing or inventory availability
policies, and devote substantially more resources to their business
than we do.

14



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We may experience seasonal fluctuations in sales that could affect our earnings and the trading price of our common stock.

We may experience seasonality in our business, which could result in
unfavorable quarterly earnings comparisons and affect the trading price of our
common stock. Because the auto-racing season is concentrated between the
months of February and November, the second and third calendar quarters of each
calendar year (our third and fourth fiscal quarters) generally are
characterized by higher sales of motorsports products. We also are increasing
our efforts to develop large corporate promotional programs. These programs
typically result in significant levels of revenue and income, which may
increase quarter-to-quarter variations in our operating results. As a result
of these and other factors, we may experience seasonality and quarterly
fluctuations in our business, which could result in unfavorable quarterly
earnings comparisons and affect the trading price of our common stock.
Fluctuations in quarterly sales may require us to take temporary measures,
including changes in personnel levels, borrowing amounts, and production and
marketing activities. These factors and any seasonal and cyclical patterns
that emerge in consumer purchasing could result in unfavorable quarterly
earnings comparisons. As a result, it is difficult to predict our future
revenue and operating results. Any shortfall in revenue or fluctuations in
operating results may have a material adverse effect on our business and stock
price. You should not rely on quarter-to-quarter comparisons of our operating
results as an indication of future performance.

We face a variety of risks
associated with acquisitions and dispositions.

We completed a number of acquisitions in prior
years. Although our short-term strategy does not anticipate any
acquisitions, we may wish to acquire complementary businesses,
products, services, or technologies in the future. We may not be able
to identify suitable acquisition candidates, make acquisitions on
commercially acceptable terms, or have adequate capital to do so.

We conduct due diligence reviews of each acquired
business and we obtain representations and warranties for each. Unforeseen liabilities and operating difficulties
can arise. Contractual or other remedies may not be sufficient to
compensate us in the event unforeseen liabilities and operating
difficulties arise. In addition, our ability to enforce our rights or
remedies in connection with acquisitions of businesses outside the
United States may be limited by the interpretation and enforcement of
those agreements under the laws of countries other than the
United States.

We periodically engage in discussions with various motorsports-related and
other businesses regarding potential acquisition and disposition of businesses.
In connection with these discussions, we and other parties exchange confidential operational and financial information, conduct
due diligence inquiries, and consider the structure, terms, and conditions of
the potential transactions. In certain cases, the third party agrees
not to discuss a potential transaction with any other party
for a specific period of time and agrees to take other actions designed to
enhance the possibility of the transaction. Discussions
frequently take place over a longer period of time and often involve difficult
business integration and other issues, including in some cases retention of
management personnel and related matters. As a result of these and other
factors, a number of potential transactions that from time to time appear
likely to occur may not result in binding legal agreements and may not be
consummated.

We face risks associated with our international operations, international trade, exchange, and financing.

We obtain most of our products from overseas manufacturers, particularly one
third-party manufacturer of die-cast collectibles and other replicas in China.
During fiscal 2001, we derived approximately 45% of total revenue and 80% of
our die-cast revenue from products that were manufactured by this third-party
manufacturer. Because most of our products are manufactured overseas, we face
risks in addition to the risks generally created by obtaining our products from
third parties. We maintain business operations in Germany and we market
motorsports collectible products throughout the world. Our reliance on
third-party manufacturers to provide personnel and facilities in China; our
maintenance of personnel, equipment, and inventories abroad; and our plans to
expand our product sales in international markets expose us to certain economic
and political risks. These risks include the following:



| |  |  | management of a multi-national organization,                                                             
| | - |  | ---------------------------------------------------------------------------------------------------------
|
| |  |  | compliance with local laws and regulatory requirements, as
well as changes in such laws and requirements,
|
| |  |  | restrictions on the repatriation of funds,                                                               
|
| |  |  | employment and severance issues,                                                                         
|
| |  |  | overlap of tax issues,                                                                                   

15



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##### Table of Contents





| |  |  | the business and financial condition of the third-party manufacturers,
| | - |  | ----------------------------------------------------------------------
|
| |  |  | political and economic conditions abroad, and                         
|
| |  |  | the possibility of                                                    
|
| |   |  |  expropriation or nationalization of assets,                         
|
| |   |  |  supply disruptions,                                                 
|
| |   |  |  currency controls,                                                  
|
| |   |  |  exchange rate fluctuations, and                                     
|
| |   |  |  changes in tax laws, tariffs, and freight rates.                    

Protectionist trade legislation in either the United States or foreign
countries, such as a change in the current tariff structures, export compliance
laws, or other trade policies, could adversely affect our ability to purchase
our products from foreign suppliers or the price at which we can obtain those
products. In November 1999, the United States and China signed an agreement
that will lift trade barriers between the two countries and that advances
Chinas efforts to join the World Trade Organization. Special interest groups
have raised objections to these efforts and we cannot be certain whether or to
what extent trade relations with China will continue to improve. Any
developments that adversely affect trade relations between the United States
and China in the future could impact our ability to obtain die-cast collectible
products from our manufacturers.

All of our purchases from our foreign manufacturers are denominated in U.S.
dollars or in Hong Kong dollars, which are pegged to the U.S. dollar. As a
result, the foreign manufacturers bear any risks associated with exchange rate
fluctuations subsequent to the date we place orders with those manufacturers.
An extended period of financial pressure on overseas markets or a devaluation
of the Chinese currency that results in a financial setback to our overseas
manufacturers, however, could have an adverse impact on our operations.
Purchases of die-cast products from the China-based manufacturers generally
require us to provide an international letter of credit in an amount equal to
the purchase order. Although we currently have in place financing arrangements
in an amount that we consider adequate for anticipated purchase levels, the
inability to fund any letter of credit required by a supplier would have an
adverse impact on our operations.

Substantially all of our sales are denominated in either U.S. dollars or Euros.
As a result, international customers for our products bear any risks
associated with exchange rate fluctuations subsequent to the date the order is
placed. We may, however, experience losses as a result of exchange rate
fluctuations between the dollar and the Euro. In the future, we may seek to
limit such exposure by entering into forward foreign exchange contracts or
engaging in similar hedging strategies. Any currency exchange strategy may be
unsuccessful in avoiding exchange-related losses, and the failure to manage
currency risks effectively may have a material adverse effect on our business,
financial condition, and operating results. In addition, revenue earned in
foreign countries may be subject to taxation by more than one jurisdiction,
which would adversely affect our earnings.

We depend on management and other key personnel.

Our development and operations to date have been, and our proposed operations
will be, substantially dependent upon the efforts and abilities of our senior
management, particularly Fred W. Wagenhals, our Chairman of the Board,
President, and Chief Executive Officer. The loss of services of one or more of
our key employees, particularly Mr. Wagenhals, could have a material adverse
effect on our company. We maintain key person insurance on the life of Mr.
Wagenhals in the amount of $3.0 million. We do not maintain such insurance on
any of our other officers.

16



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##### Table of Contents



We have limited protection of our intellectual property, and others could infringe on or misappropriate our rights.

We regard our trademarks, trade dress, copyrights, and other intellectual
properties as critical to our success. Our failure to adequately protect our
intellectual property could materially and adversely affect our business,
operating results, and financial position. Our intellectual property rights
primarily consist of our trade names, logos, and art. We have copyright
protection for all original material that we produce to promote our products
and services.

We have registered trademarks for certain of our Action names and logos. We
have applied for federal registration in the United States for various other
Action names and logos, as well as goracing.com and other marks. Our
ability to prevent others from using trademarks or names similar to marks and
names that we use may be adversely impacted if our marks are regarded as
descriptive or weak. Our inability to obtain trademark protection for our
marks and names could have a material adverse effect on our business.

We may not be able to obtain effective trademark, service mark, copyright, and
trade secret protection in every country in which we make our products and
services available. We may find it necessary to take legal action in the
future to enforce or protect our intellectual property rights or to defend
against claims of infringement. Policing unauthorized use of our proprietary
rights is difficult. Litigation can be very expensive and can distract our
managements time and attention, which could adversely affect our business. In
addition, we may not be able to obtain a favorable outcome in any intellectual
property litigation.

As part of our confidentiality procedures, we generally enter into agreements
with our employees and consultants. These agreements may be ineffective in
preventing misappropriation of technology and could be unenforceable.
Misappropriation of our intellectual property or the litigation costs
associated with our intellectual property could have a material adverse effect
on us.

In addition, we may receive notices from third
parties that claim aspects of our business infringe their rights.
While we are not currently subject to any such claim, any future
claim, with or without merit, could result in significant litigation
costs and diversion of resources, including the attention of
our management, and could require us to enter into royalty and
licensing agreements.

The market price of our common stock and notes may be extremely volatile.

The market price of our common stock has fluctuated dramatically. The trading
price of our common stock in the past has been, and in the future could be,
subject to wide fluctuations in response to a number of factors, including the
following:



| |  |  | quarterly variations in our operating results,                                                    
| | - |  | --------------------------------------------------------------------------------------------------
|
| |  |  | actual or anticipated announcements of new products or
services by our company or our competitors,
|
| |  |  | changes in analysts estimates of our financial performance,                                      
|
| |  |  | general conditions in the markets in which we compete, and                                        
|
| |  |  | worldwide economic and financial conditions.                                                      

The stock market also has experienced extreme price and volume fluctuations
that have affected the market prices for many rapidly expanding companies and
that often have been unrelated to the operating performance of such companies.
These broad market fluctuations and other factors may adversely affect the
market price of our common stock.

The trading price of our subordinated notes will depend on the factors
described above as well as on other factors, such as prevailing interest rates,
perceptions of our creditworthiness, the market price of our common stock into
which the subordinated notes are convertible, and the market for similar
securities. As a result, the market price of our subordinated notes may trade
at a discount from their principal amount based on such factors.

17



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We face risks associated with our
exclusive relationship with QVC and the outsourcing of our Club
operations.

We outsource the distribution of Club products
through QVC under a ten-year exclusive agreement expiring in 2011.
Although we will remain responsible for acquisition of licenses,
product selection, development, and manufacturing, we face risks
associated with our agreement with QVC, including the following:



| |  |  | potential damage to our
reputation as a result of reduced levels of customer service; and
| | - |  | -----------------------------------------------------------------------------------------
|
| |  |  | reduced sales generated from
Club products.                                              

Holders of our subordinated notes and holders of our common stock will be subject to additional risks associated with those notes.

Our subordinated notes are general unsecured obligations, subordinated in right
of payment to all of our existing and future senior indebtedness. As a result
of this subordination, in the event of any insolvency, liquidation or
reorganization of our company or upon acceleration of the subordinated notes
due to an event of default (as defined in the indenture governing the notes),
the assets of our company will be available to pay obligations on the notes
only after the administrative expenses of any bankruptcy proceeding and all
senior indebtedness, if any, have been paid in full. As a result, there may
not be sufficient assets remaining to pay amounts due on the notes and any of
our other subordinated indebtedness then outstanding. The indenture does not
prohibit or limit the ability of our company and our subsidiaries to incur
additional indebtedness, including senior indebtedness. The incurrence of such
indebtedness could adversely affect our ability to pay our obligations under
the notes. In addition, the notes are not guaranteed by any of our
subsidiaries. As a result, the notes effectively rank junior to all creditors
of our subsidiaries.

Upon the occurrence of certain adverse events, each holder of subordinated
notes may require us to repurchase all or a portion of the notes. If such an
event were to occur, we may not have sufficient financial resources or may not
be able to arrange financing to pay the repurchase price for all subordinated
notes tendered by holders thereof. Our ability to repurchase the notes in such
event may be limited by law, the indenture, and the terms of other agreements
relating to borrowings that constitute senior indebtedness, as such
indebtedness or agreements may be entered into, replaced, supplemented, or
amended from time to time. We may be required to refinance senior indebtedness
in order to make any such repurchase payments. If we are prohibited from
repurchasing the subordinated notes, such failure would constitute an event of
default under the indenture, which may constitute a further default under
certain of our existing agreements relating to borrowings and the terms of
other indebtedness that we may enter into from time to time. In such
circumstances, the subordination provisions in the indenture would prohibit
payments to the holders of the subordinated notes. Furthermore, we may not
have the financial ability to repurchase the subordinated notes in the event
that maturity of senior indebtedness is accelerated as a result of a default
under the applicable loan or similar agreement. The repurchase of subordinated
notes under the circumstances described above, or our inability to repurchase
subordinated notes as required, could have a material adverse affect on our
financial condition and operating results.

Rights to acquire shares will result in dilution to other holders of our common stock.

As of December 12, 2001, options to acquire a total of 1.6 million shares of
our common stock were outstanding under our stock option plans. In addition,
warrants to purchase 200 thousand shares of our common stock at prices ranging
from $6.88 to $20.35 were outstanding at December 12, 2001. We also offer our
employees the opportunity to buy our common stock at a discount under our
employee stock purchase plan. At December 12, 2001, holders of our
subordinated notes have the right to convert their notes into an aggregate of
1,139,689 shares of common stock at a conversion price of $48.20 per share.
Holders of stock options, holders of warrants, employees who participate in the
purchase plan, and holders of subordinated notes will have the opportunity to
profit from an increase in the market price of our common stock, with resulting
dilution in the interests of other holders of common stock. The existence of
such stock options, notes, and our purchase plan could adversely affect the
terms on which we can obtain additional financing, and the option holders, note
holders, and purchase plan participants can be expected to buy shares at a time
when we, in all likelihood, would be able to obtain additional capital by
offering shares of common stock on terms more favorable to us than those
provided by such options, notes, and the purchase plan.

18



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Sales of additional shares of common stock could have a depressive effect on the market price of our common stock.

Sales of substantial amounts of common stock by our shareholders, or even the
potential for such sales, may have a depressive effect on the market price of
our common stock. A majority of the 17,343,112 shares of common stock
outstanding as of December 12, 2001, currently are eligible for resale in the
public market without restriction or further registration unless held by an
affiliate of our company, as that term is defined under applicable securities
laws. A portion of the shares of common stock outstanding are restricted
securities, as that term is defined in Rule 144 under the securities laws, and
may be sold only in compliance with Rule 144, pursuant to registration under
the securities laws, or pursuant to an exemption there from. We have
registered an aggregate of approximately 472,300 shares of such restricted
securities for resale pursuant to effective registration statements.
Affiliates also are subject to certain of the resale limitations of Rule 144.
Generally, under Rule 144, each person who beneficially owns restricted
securities with respect to which at least one year has elapsed since the later
of the date the shares were acquired from us or an affiliate of our company
may, every three months, sell in ordinary brokerage transactions or to market
makers an amount of shares equal to the greater of 1% of our then-outstanding
common stock or the average weekly trading volume for the four weeks prior to
the proposed sale of such shares. The majority of the shares held by our
officers and directors currently are available for sale under Rule 144.

It may be difficult for a third party to acquire us, even if the acquisition would be in the best interests of shareholders.

Our articles of incorporation, bylaws, and Arizona law contain provisions that
may have the effect of making more difficult or delaying attempts by others to
obtain control of our company, even when those attempts may be in the best
interests of our shareholders. Our articles of incorporation also authorize
our board of directors, without shareholder approval, to issue one or more
series of preferred stock, which could have voting, liquidation, dividend,
conversion, or other rights that adversely affect or dilute the voting power of
the holders of common stock. In addition, many of our license agreements are
subject to termination in the event of a change in control of our company.

Our operating results could differ materially from the forward-looking statements included in this report.

Some of the statements and information contained in this report concerning
future, proposed, and anticipated activities of our company, anticipated trends
with respect to our revenue, operating results, capital resources, and
liquidity or with respect to the markets in which we compete or the motorsports
industry in general, and other statements contained in this report regarding
matters that are not historical facts are forward-looking statements, as that
term is defined in the securities laws. Forward-looking statements, by their
very nature, include risks and uncertainties, many of which are beyond our
control. Accordingly, actual results may differ, perhaps materially, from
those expressed in or implied by such forward-looking statements. Factors that
could cause actual results to differ materially include those discussed
elsewhere under this Item 1, Special Considerations.

19



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##### Table of Contents






ITEM 2. PROPERTIES

We lease a 140,000 square foot building in Phoenix, Arizona. We use
approximately 31,000 square feet of this facility for our corporate
headquarters. We have subleased substantially all of the remaining space. The
initial term of the lease expires in August 2007, with two five-year renewal
options.

We also lease a facility in the vicinity of Charlotte, North Carolina,
approximately 121,000 square foot, for our operations in that area. We utilize
approximately 42,000 square feet of the new facility for offices and
approximately 79,000 square feet for warehouse space and distribution
operations. The initial term of the lease expires in June 2018, with four
five-year renewal options.

We currently lease two facilities in Atlanta, Georgia. One facility consists
of approximately 77,400 square feet, of which we utilize approximately 14,000
square feet for offices and approximately 63,400 square feet for manufacturing
and warehouse operations. The lease on this facility expires in January 2002.
The second facility consists of approximately 21,900 square feet, of which we
utilize approximately 19,400 square feet for warehouse and distribution
operations and approximately 2,500 square feet for offices. The lease on this
facility expires in February 2002.

We own a facility in Aachen, Germany, which is approximately 53,000 square
feet. We utilize approximately 40,000 square feet of this facility for our
European warehouse and distribution operations and approximately 13,000 square
feet for office space. We have 38,000 square feet of warehouse space under
construction with completion scheduled for May 2002 and 13,000 square feet of
office space under construction with completion scheduled March 2003.

20



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##### Table of Contents






ITEM 3. LEGAL PROCEEDINGS

On November 30, 1999, a class action lawsuit was filed against our company in
the United States District Court for the District of Arizona, case No. CIV99
2106 PHXROS. Fred W. Wagenhals our Chairman of the Board, President, and Chief
Executive Officer, and Tod J. Wagenhals and Christopher S. Besing, former
directors and officers of our company, also were named as defendants. The
lawsuit alleged that our company and the other defendants violated the
Securities Exchange Act of 1934 by (a) making allegedly false statements about
the state of our business and the shipment of certain products to a customer or
(b) participating in a fraudulent scheme that was intended to inflate the price
of our common stock. The alleged class of plaintiffs consisted of all persons
who purchased our publicly traded securities between July 27, 1999 and December
16, 1999. The lawsuit was dismissed in September 2001.




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

Not applicable.

21



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##### Table of Contents






PART II




ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock has been quoted on the Nasdaq National Market under the symbol
ACTN since April 27, 1993. The following table sets forth the high and low
sales prices of our common stock on the Nasdaq National Market during the
calendar quarters indicated.

| |       |                                            |  |              |       |     |  |   |       | 
| | ----- | ------------------------------------------ |  | ------------ | ----- | --- |  | - | ----- | 
| |       |                                            |  | Common Stock
| |       |                                            |  |             
| |       |                                            |  | High         |       | Low
| |       |                                            |  |              |       |    
| |       |                                            |  |              |       |     |  |  
|
|
|
|
| | 1999: |                                            |  |              |       |     |  |   |      
|
|
|
|
| |       | First Quarter                              |  | $            | 48.00 |     |  | $ | 27.88 | 
| |       | Second Quarter                             |  |              | 42.00 |     |  |   | 26.88 | 
| |       | Third Quarter                              |  |              | 37.06 |     |  |   | 17.75 | 
| |       | Fourth Quarter                             |  |              | 23.69 |     |  |   | 9.25  | 
|
|
|
|
| | 2000: |                                            |  |              |       |     |  |   |      
|
|
|
|
| |       | First Quarter                              |  | $            | 16.00 |     |  | $ | 7.75  | 
| |       | Second Quarter                             |  |              | 13.75 |     |  |   | 5.81  | 
| |       | Third Quarter                              |  |              | 10.94 |     |  |   | 2.86  | 
| |       | Fourth Quarter                             |  |              | 4.06  |     |  |   | 2.25  | 
|
|
|
|
| | 2001: |                                            |  |              |       |     |  |   |      
|
|
|
|
| |       | First Quarter                              |  | $            | 11.56 |     |  | $ | 2.31  | 
| |       | Second Quarter                             |  |              | 27.00 |     |  |   | 10.25 | 
| |       | Third Quarter                              |  |              | 29.25 |     |  |   | 14.75 | 
| |       | Fourth Quarter (through December 12, 2001) |  |              | 37.17 |     |  |   | 17.13 | 

As of December 12, 2001, there were 358 holders of record of our common stock.
On December 12, 2001, the closing sales price of our common stock on the Nasdaq
National Market was $35.00 per share.

22



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##### Table of Contents






ITEM 6. SELECTED FINANCIAL DATA

The selected historical financial data presented below as of and for the five
years ended September 30, 2001 are derived from our consolidated financial
statements, which have been audited by Arthur Andersen LLP, independent public
accountants. The selected financial data should be read in conjunction with
Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations and the Consolidated Financial Statements and the Notes
thereto included elsewhere in this report.

|                                                                            |  |                                          |         |         |  |         |         |         |  |         |         |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------- |  | ---------------------------------------- | ------- | ------- |  | ------- | ------- | ------- |  | ------- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                            |  | Fiscal Year Ended September 30,         
|                                                                            |  |                                         
|                                                                            |  | 1997(1)                                  |         | 1998(2) |  | 1999(3) |         | 2000(4) |  | 2001(5)
|                                                                            |  |                                          |         |         |  |         |         |         |  |        
|                                                                            |  | (in thousands, except per share amounts)
|                                                                            |  |                                          |         |         |  |         |         |         |  |         |         |   |  |   |         |   |  |   |         |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Statement of Operations Data:                                               |  |                                          |         |         |  |         |         |         |  |         |         |   |  |   |         |   |  |   |         |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |  |                                          |         |         |  |         |         |         |  |         |         |   |  |   |         |   |  |   |         |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Net sales(7)                                                                |  | $                                        | 132,852 |         |  | $       | 256,307 |         |  | $       | 347,842 |   |  | $ | 258,105 |   |  | $ | 323,352 |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Cost of sales(7)                                                            |  |                                          | 83,467  |         |  |         | 161,509 |         |  |         | 216,165 |   |  |   | 209,102 |   |  |   | 208,375 |  
|                                                                            |  |                                          |         |         |  |         |         |         |  |         |         |   |  |   |         |   |  |   |         |  
|Gross profit                                                                |  |                                          | 49,385  |         |  |         | 94,798  |         |  |         | 131,677 |   |  |   | 49,003  |   |  |   | 114,977 |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Selling, general and administrative
expenses(6)                             |  |                                          | 29,964  |         |  |         | 46,294  |         |  |         | 71,636  |   |  |   | 107,942 |   |  |   | 69,456  |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Amortization of goodwill and other
intangibles                              |  |                                          | 1,286   |         |  |         | 4,392   |         |  |         | 6,818   |   |  |   | 16,753  |   |  |   | 6,157   |  
|                                                                            |  |                                          |         |         |  |         |         |         |  |         |         |   |  |   |         |   |  |   |         |  
|                                                                            |  |                                          | 31,250  |         |  |         | 50,686  |         |  |         | 78,454  |   |  |   | 124,695 |   |  |   | 75,613  |  
|                                                                            |  |                                          |         |         |  |         |         |         |  |         |         |   |  |   |         |   |  |   |         |  
|Income (loss) from operations                                               |  |                                          | 18,135  |         |  |         | 44,112  |         |  |         | 53,223  |   |  |   | (75,692 | ) |  |   | 39,364  |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Interest expense and other, net                                             |  |                                          | (1,225  | )       |  |         | (3,134  | )       |  |         | (6,328  | ) |  |   | (6,987  | ) |  |   | (6,142  | )
|                                                                            |  |                                          |         |         |  |         |         |         |  |         |         |   |  |   |         |   |  |   |         |  
|Income (loss) before income taxes
and extraordinary gain                    |  |                                          | 16,910  |         |  |         | 40,978  |         |  |         | 46,895  |   |  |   | (82,679 | ) |  |   | 33,222  |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Income taxes                                                                |  |                                          | 6,764   |         |  |         | 16,391  |         |  |         | 18,526  |   |  |   | (24,592 | ) |  |   | 10,205  |  
|                                                                            |  |                                          |         |         |  |         |         |         |  |         |         |   |  |   |         |   |  |   |         |  
|Income (loss) before
extraordinary gain                                     |  | $                                        | 10,146  |         |  | $       | 24,587  |         |  | $       | 28,369  |   |  | $ | (58,087 | ) |  | $ | 23,017  |  
|                                                                            |  |                                          |         |         |  |         |         |         |  |         |         |   |  |   |         |   |  |   |         |  
|Income (loss) before
extraordinary gain per common
share, assuming dilution |  | $                                        | 0.69    |         |  | $       | 1.48    |         |  | $       | 1.65    |   |  | $ | (3.52   | ) |  | $ | 1.37    |  
|                                                                            |  |                                          |         |         |  |         |         |         |  |         |         |   |  |   |         |   |  |   |         |  
|Weighted average number of
common shares, assuming
dilution                 |  |                                          | 14,624  |         |  |         | 16,647  |         |  |         | 19,179  |   |  |   | 16,515  |   |  |   | 16,849  |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |  |                                          |         |         |  |         |         |         |  |         |         |   |  |   |         |   |  |   |         |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Consolidated Balance Sheet Data
(at end of period):                         |  |                                          |         |         |  |         |         |         |  |         |         |   |  |   |         |   |  |   |         |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Working capital                                                             |  | $                                        | 56,975  |         |  | $       | 86,939  |         |  | $       | 107,797 |   |  | $ | 64,524  |   |  | $ | 90,303  |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Total assets                                                                |  |                                          | 141,325 |         |  |         | 305,934 |         |  |         | 335,747 |   |  |   | 255,917 |   |  |   | 278,953 |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Total debt                                                                  |  |                                          | 22,586  |         |  |         | 135,596 |         |  |         | 111,921 |   |  |   | 109,278 |   |  |   | 57,420  |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Shareholders equity                                                        |  |                                          | 103,168 |         |  |         | 136,432 |         |  |         | 172,991 |   |  |   | 102,718 |   |  |   | 159,826 |  



---

|(1) |  | Fiscal 1997 results include the results of operations of Sports Image,
Inc., Motorsports Traditions Limited Partnership and Creative Marketing
and Promotions, Inc., Robert Yates Promotions, Inc., Image Works, Inc.,
and motorsports collectibles product lines of Simpson Products, Inc.,
beginning as of their respective dates of acquisition.                                                          
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Fiscal 1998 results include the results of operations of the purchase of
assets related to sale of merchandise licensed to Rusty Wallace, the
purchase of assets from Revell Monogram, Inc., and the acquisitions of
Brookfield Collectors Guild, Inc., Chase Racewear, L.L.C., Pauls Model
Art/MiniChamps, and Performance Plus Nutritional, L.L.C., beginning as of
their respective dates of acquisition.
|   
|   
|   
|   
|(3) |  | Fiscal 1999 results includes the results of operations of Intellectual Properties
Group, Inc., Tech 2000 Worldwide, Inc., and Goodsports Holdings Pty Ltd.,
beginning as of their respective dates of acquisition.                                                                                                                                                                                           

23



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##### Table of Contents



|(4) |  | Fiscal 2000 results include the results of operations of Fantasy Sports
Enterprises, Inc., beginning as of date of acquisition. Also includes
$64.8 million of restructuring and other charges.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(5) |  | Fiscal 2001 results include
the results of operations of Winners Circle
beginning in May 2001.                                                                                                
|   
|   
|   
|   
|(6) |  | Includes settlement costs and related legal and other expenses of $5.4
million in 1997, $1.0 million in 1998, and $3.6 million in 1999.                                                        
|   
|   
|   
|   
|(7) |  | Adjusted to reflect adoption of EITF 00-10, Accounting for Shipping and
Handling Fees and Costs, in the quarter ended September 30, 2001.                                                      




ITEM 7. 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. Formula One vehicles and apparel 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 impact revenue positively and negatively.

We strive to structure our operations such that:



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

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



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

24



---



##### Table of Contents



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, for the fiscal years indicated, the percentage
of total revenue represented by certain expense and revenue items.

|                                                         |  |      |       |      |  |      |       |      |  |      |       |   |  |  |       |    |  |  |       |  
|-------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -- |  |  | ----- | -
|                                                         |  | 1997 |       | 1998 |  | 1999 |       | 2000 |  | 2001
|                                                         |  |      |       |      |  |      |       |      |  |     
|Net sales                                                |  |      | 100.0 | %    |  |      | 100.0 | %    |  |      | 100.0 | % |  |  | 100.0 | %  |  |  | 100.0 | %
|                                                        
|                                                        
|                                                        
|                                                        
|Cost of sales                                            |  |      | 62.8  |      |  |      | 63.0  |      |  |      | 62.1  |   |  |  | 81.0  |    |  |  | 64.4  |  
|                                                         |  |      |       |      |  |      |       |      |  |      |       |   |  |  |       |    |  |  |       |  
|Gross profit                                             |  |      | 37.2  |      |  |      | 37.0  |      |  |      | 37.9  |   |  |  | 19.0  |    |  |  | 35.6  |  
|                                                        
|                                                        
|                                                        
|                                                        
|Selling, general and administrative expenses             |  |      | 22.6  |      |  |      | 18.1  |      |  |      | 20.6  |   |  |  | 41.8  |    |  |  | 21.5  |  
|                                                        
|                                                        
|                                                        
|                                                        
|Amortization of goodwill and other intangibles           |  |      | 1.0   |      |  |      | 1.7   |      |  |      | 2.0   |   |  |  | 6.5   |    |  |  | 1.9   |  
|                                                         |  |      |       |      |  |      |       |      |  |      |       |   |  |  |       |    |  |  |       |  
|Income (loss) from operations                            |  |      | 13.6  |      |  |      | 17.2  |      |  |      | 15.3  |   |  |  | (29.3 | )  |  |  | 12.2  |  
|                                                        
|                                                        
|                                                        
|                                                        
|Interest expense and other, net                          |  |      | (0.9  | )    |  |      | (1.2  | )    |  |      | (1.8  | ) |  |  | (2.7  | )  |  |  | (1.9  | )
|                                                         |  |      |       |      |  |      |       |      |  |      |       |   |  |  |       |    |  |  |       |  
|Income (loss) before income taxes and
extraordinary gain |  |      | 12.7  |      |  |      | 16.0  |      |  |      | 13.5  |   |  |  | (32.0 | )  |  |  | 10.3  |  
|                                                        
|                                                        
|                                                        
|                                                        
|Income taxes                                             |  |      | 5.1   |      |  |      | 6.4   |      |  |      | 5.3   |   |  |  | (9.5  | )  |  |  | 3.2   |  
|                                                         |  |      |       |      |  |      |       |      |  |      |       |   |  |  |       |    |  |  |       |  
|Net income (loss) before extraordinary gain              |  |      | 7.6   | %    |  |      | 9.6   | %    |  |      | 8.2   | % |  |  | (22.5 | )% |  |  | 7.1   | %
|                                                         |  |      |       |      |  |      |       |      |  |      |       |   |  |  |       |    |  |  |       |  

The above percentages have been adjusted to reflect adoption of EITF 00-10, Accounting
for Shipping and Handling Fees and Costs, in the quarter ended September 30,
2001.

Special Charges

In fiscal 2000, we recorded charges of $17.5 million arising from the decision
to abandon our Internet strategy, relating to goracing.com. The charges
include provision for the write-off of goodwill, endorsements, sponsorship
commitments, employee severance and termination costs, and the withdrawal of
the initial public offering of goracing.com. The charges are reflected in the
fiscal 2000 financial statements as follows (in millions):

|                                               |                   |                                          |                                     |   |      |     | 
|---------------------------------------------- | ----------------- | ---------------------------------------- | ----------------------------------- | - | ---- | --- | 
|                                               |                   |                                          |                                     |   | 2000
|                                               |                   |                                          |                                     |   |     
|Selling, General and Administrative:           |                   |                                          |                                     |  
|                                              
|                                              
|                                              
|                                              
|                                               | Non-cash charges- |                                          |                                     |   |     
|                                              
|                                              
|                                              
|                                              
|                                               |                   | Accounts receivable and prepaids         |                                     | $ | 1.5  |    
|                                              
|                                              
|                                              
|                                              
|                                               |                   | Initial public offering withdrawal       |                                     |   | 2.3  |    
|                                              
|                                              
|                                              
|                                              
|                                               |                   | Other                                    |                                     |   | 0.3  |    
|                                              
|                                              
|                                              
|                                              
|                                               | Cash charges-     |                                          |                                     |   |     
|                                              
|                                              
|                                              
|                                              
|                                               |                   | Professional fees                        |                                     |   | 0.8  |    
|                                              
|                                              
|                                              
|                                              
|                                               |                   | Employee severance and termination costs |                                     |   | 0.7  |    
|                                              
|                                              
|                                              
|                                              
|                                               |                   | Endorsements and sponsorships            |                                     |   | 4.3  |    
|                                               |                   |                                          |                                     |  
|                                               |                   |                                          | Selling, general and administrative |   |      | 9.9 | 
|                                              
|                                              
|                                              
|                                              
|Amortization of Goodwill and Other Intangibles |                   |                                          | 7.6                                 |  
|                                               |                   |                                          |                                     |  
|                                               |                   | $                                        | 17.5                                |  
|                                               |                   |                                          |                                     |  

We completely utilized the accruals for the above cash charges of $5.8 million
with cash payments of $0.7 million in fiscal 2001 and $5.1 million in fiscal
2000.

25



---



##### Table of Contents



In addition to the goracing.com charges, the fiscal 2000 financial statements
include charges of $47.3 million for restructuring and other costs.
Anticipated sponsorships, and driver and marketing programs did not materialize as
anticipated, contributing to $13.3 million in inventory write-downs. Vendor
discounts totaling $3.0 million were anticipated but not received due to lower
than anticipated volumes. A change in the estimated useful lives of tooling
equipment and identification of obsolete items caused tooling write-downs and
amortization totaling $8.5 million. We decided to concentrate future
production on core drivers and core programs contributing to write downs of
prepaid royalties and sponsorship fees of $7.8 million. Revised estimates of
the collectibility of certain customer account balances indicated $6.1 million
of additional receivable reserve requirements. We determined the goodwill
related to the die-cast helmet product line was worthless resulting in a $1.9
million impairment. These charges are reflected in the fiscal 2000 financial
statements as follows (in millions):

|                                                             |                                      |                      |                                           |      |     |      |  | 
|------------------------------------------------------------ | ------------------------------------ | -------------------- | ----------------------------------------- | ---- | --- | ---- |  | 
|                                                             |                                      |                      |                                           |      |     | 2000
|                                                             |                                      |                      |                                           |      |     |     
|Cost of Sales:                                               |                                      |                      |                                           |     
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Inventory write-downs                |                      | $                                         | 13.3 |    
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Vendor discounts                     |                      |                                           | 3.0  |    
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Depreciation-                       
|                                                             |                                      | Tooling write-down   |                                           |      | 1.9 |     
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                      | Tooling amortization |                                           |      | 6.6 |     
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Prepaid royalty and sponsorship fees |                      |                                           | 7.8  |    
|                                                             |                                      |                      |                                           |     
|                                                             |                                      |                      | Total
cost of sale                        |      |     | 32.6 | 
|                                                             |                                      |                      |                                           |     
|Selling, General and Administrative:                         |                                      |                      |                                           |     
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Accounts receivable                  |                      |                                           | 6.1  |    
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Other assets                         |                      |                                           | 4.3  |    
|                                                             |                                      |                      |                                           |     
|                                                             |                                      |                      | Total selling, general and administrative |      |     | 10.4 | 
|                                                             |                                      |                      |                                           |     
|Amortization of Goodwill and Other Intangibles  impairments |                                      |                      | 1.9                                       |     
|                                                            
|                                                            
|                                                            
|                                                            
|Minority Interests and Other, Net:                           |                                      |                      |                                           |     
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Other                                |                      |                                           | 0.4  |    
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Equity investments                   |                      |                                           | 2.0  |    
|                                                             |                                      |                      |                                           |     
|                                                             |                                      | $                    | 47.3                                      |     
|                                                             |                                      |                      |                                           |     

Fiscal Year Ended September 30, 2001 Compared with Fiscal Year Ended September 30, 2000

Sales increased 25.3% to $323.4 million for 2001 from $258.1 million in the
prior year. Domestic die-cast sales increased 12.9%. Domestic apparel sales
increased 35.8% and foreign sales increased 35.2%. In the second fiscal
quarter, in connection with the start of the NASCAR racing season, consumer
demand increased significantly. Due to the shorter production lead-time, sales
in domestic apparel operations strengthened after the first quarter. However,
because of the 90-120 day lead-time required to produce and ship die-cast
replicas, product was not available for shipment to customers until late in the
third quarter. As a result, domestic die-cast sales growth was lower than
apparel sales growth.

Gross profit improved to $115.0 million in fiscal 2001 from $49.0 million in
the fiscal 2000. The prior year period included $32.6 million of special
charges. The gross profit percentage improved to 35.6% of sales from 31.6% of
sales, after considering the effect of special charges. The increase in gross profit
as a percentage of sales resulted from reduced freight, product and production
costs and the leverage attained from higher die-cast production quantities with
relatively fixed tooling and die depreciation costs.

Selling, general and administrative expenses decreased to $69.5 million in 2001 from
$107.9 million in the prior year. The prior year included $20.3 million of
special charges. Selling, general and administrative, excluding the special
charges, represented 21.5% of sales in 2001 and 34.0% of sales in 2000. The
decrease as a percentage of sales resulted primarily from costs eliminated as a
result of the outsourcing agreement with QVC and cost reductions realized from
management and restructuring changes made in the third and fourth
quarters of
fiscal 2000. We also benefited from the full year effect of headcount
reductions in fiscal 2000.

26



---



##### Table of Contents



Amortization of goodwill and other intangibles decreased to $6.2 million for
2001 from $16.8 million in the prior year. The prior year period included $9.5
million of special charges. The $1.1 million decrease, net of the special
charge, is related to the elimination of goodwill and related amortization from
the sale of Fantasy Sports and the reductions in amortization expense as a
result of the impairment write-offs of goodwill and other intangibles recorded
in the third and fourth quarters of fiscal 2000.

Interest expense and other, net for 2001 was $0.8 million lower than the prior
year. The reduction is primarily the result of the $1.2 million reduction in
interest expense as a result of the convertible subordinated note repurchases
discussed further in Liquidity and Capital Resources and other long-term debt
and liabilities reductions since last year.

The effective tax rate of 30.7% in 2001 compares to an effective rate of 29.7%
in 2000.

Fiscal Year Ended September 30, 2000 Compared with Fiscal Year Ended September 30, 1999

We incurred a loss of $58.1 million for fiscal 2000 compared with net income of
$28.4 million for the fiscal 1999. The fiscal year 2000 loss included $64.8
million of restructuring and other charges as discussed in Special Charges
above.

Net sales decreased to $258.1 million in fiscal 2000, a decline of 25.8% from
the $347.8 million reported for fiscal 1999. The decrease reflected a general
decline in sports licensed merchandise sales, a decline in the number of
promotional programs, and a decline in sales for certain licensed products that
had enjoyed materially increased sales in the previous year.

Cost of sales for fiscal 2000 was $209.1 million or 81.0% of sales compared
with $216.2 million for fiscal 1999 or 62.1% of sales. Before special charges,
cost of sales was $176.5 million or 68.4% of sales. This percentage was
greater than the percentage for 1999 because of increased freight costs as a
percentage of cost of sales, increased manufacturing costs due to change
orders, and lower order quantities and sales of product at discounted prices.

Selling, general, and administrative expenses were $107.9 million or 41.8% of
sales for fiscal 2000 compared with $71.6 million for fiscal 1999 or 20.6% of
sales. Excluding special charges, such expenses were $87.6 million for fiscal
2000 or 34.0% of sales. The increase before special charges of $16.0 million
for fiscal 2000 was principally due to the costs of operating goracing.com
prior to abandoning our Internet strategy, the costs of operating Fantasy
Sports, which was acquired in fiscal 2000, and an increase in sponsorships and
additional professional fees. The percentage increase was also due to the
reduction in sales volume without a corresponding reduction in such costs.

Amortization of goodwill and other intangibles was $16.8 million for fiscal
2000 compared with $6.8 million for fiscal 1999. Excluding the special charge
for the write-off of the goracing.com and Simpson Products, Inc. intangible,
amortization was $7.3 million for fiscal 2000.

Interest expense and other, net for 2000 reflects reduced minority interests of
$1.6 million resulting from lower income from our 80% owned German subsidiary.

We recorded an income tax benefit of $24.6 million for fiscal 2000,
representing 29.7% of the pre-tax, loss compared with a tax provision of $18.5
million for fiscal 1999, representing 39.5% of the pre-tax income. The
percentage income tax benefit for fiscal 2000 was less than the percentage tax
provision for fiscal 1999 principally because of the special charges for the
write-off of intangibles that did not have a tax basis and because no benefit
was recorded for state and federal tax jurisdictions.

27



---



##### Table of Contents



Quarterly Results of Operations

The following table sets forth certain unaudited quarterly results of
operations for each of the quarters in the three fiscal years ended September
30, 2001 (in
thousands, except per share amounts). All quarterly information was obtained from unaudited financial
statements not otherwise contained in this report. We believe that all
necessary adjustments have been made to present fairly the quarterly
information when read in conjunction with the Consolidated Financial Statements
and Notes thereto included elsewhere in this report. The operating results for
any quarter are not necessarily indicative of the results for any future
period.

|                                                            |  |             |        |             |  |             |        |                |  |   |         |  |  |   |        | 
|----------------------------------------------------------- |  | ----------- | ------ | ----------- |  | ----------- | ------ | -------------- |  | - | ------- |  |  | - | ------ | 
|                                                            |  | Fiscal 1999
|                                                            |  |            
|                                                            |  | 1st Quarter |        | 2nd Quarter |  | 3rd Quarter |        | 4th Quarter(1)
|                                                            |  |             |        |             |  |             |        |               
|Net sales(7)                                                |  | $           | 72,961 |             |  | $           | 80,249 |                |  | $ | 103,019 |  |  | $ | 91,613 | 
|                                                           
|                                                           
|                                                           
|                                                           
|Gross profit                                                |  |             | 25,735 |             |  |             | 29,995 |                |  |   | 40,836  |  |  |   | 35,111 | 
|                                                           
|                                                           
|                                                           
|                                                           
|Income from operations                                      |  |             | 9,678  |             |  |             | 12,393 |                |  |   | 20,957  |  |  |   | 10,195 | 
|                                                           
|                                                           
|                                                           
|                                                           
|Net income before extraordinary
gain                        |  | $           | 4,923  |             |  | $           | 6,504  |                |  | $ | 11,570  |  |  | $ | 5,372  | 
|                                                           
|                                                           
|                                                           
|                                                           
|Net income per common share,
assuming dilution              |  | $           | 0.29   |             |  | $           | 0.38   |                |  | $ | 0.64    |  |  | $ | 0.31   | 
|                                                           
|                                                           
|                                                           
|                                                           
|Weighted average number of common
shares, assuming dilution |  |             | 16,878 |             |  |             | 17,179 |                |  |   | 19,297  |  |  |   | 17,137 | 

|                                                            |  |                |        |             |  |                |        |                |  |   |         |   |  |   |         |     
|----------------------------------------------------------- |  | -------------- | ------ | ----------- |  | -------------- | ------ | -------------- |  | - | ------- | - |  | - | ------- | ----
|                                                            |  | Fiscal 2000   
|                                                            |  |               
|                                                            |  | 1st Quarter(2) |        | 2nd Quarter |  | 3rd Quarter(3) |        | 4th Quarter(4)
|                                                            |  |                |        |             |  |                |        |               
|Net sales(7)                                                |  | $              | 65,694 |             |  | $              | 58,948 |                |  | $ | 77,183  |   |  | $ | 56,280  |     
|                                                           
|                                                           
|                                                           
|                                                           
|Gross profit (loss)                                         |  |                | 19,895 |             |  |                | 18,165 |                |  |   | 14,991  |   |  |   | (4,048  | )(5)
|                                                           
|                                                           
|                                                           
|                                                           
|Loss from operations                                        |  |                | (2,348 | )           |  |                | (6,517 | )              |  |   | (27,671 | ) |  |   | (39,156 | )(6)
|                                                           
|                                                           
|                                                           
|                                                           
|Net loss before extraordinary gain                          |  | $              | (2,129 | )           |  | $              | (4,138 | )              |  | $ | (23,571 | ) |  | $ | (28,250 | )   
|                                                           
|                                                           
|                                                           
|                                                           
|Net loss per common share,
assuming dilution                |  | $              | (0.13  | )           |  | $              | (0.25  | )              |  | $ | (1.44   | ) |  | $ | (1.73   | )   
|                                                           
|                                                           
|                                                           
|                                                           
|Weighted average number of common
shares, assuming dilution |  |                | 16,909 |             |  |                | 16,748 |                |  |   | 16,358  |   |  |   | 16,366  |     

|                                                                                 |  |             |        |             |  |             |        |             |  |   |        |  |  |   |         | 
|-------------------------------------------------------------------------------- |  | ----------- | ------ | ----------- |  | ----------- | ------ | ----------- |  | - | ------ |  |  | - | ------- | 
|                                                                                 |  | Fiscal 2001
|                                                                                 |  |            
|                                                                                 |  | 1st Quarter |        | 2nd Quarter |  | 3rd Quarter |        | 4th Quarter
|                                                                                 |  |             |        |             |  |             |        |            
|Net sales(7)                                                                     |  | $           | 50,888 |             |  | $           | 71,074 |             |  | $ | 92,975 |  |  | $ | 108,415 | 
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Gross profit (loss)                                                              |  |             | 18,082 |             |  |             | 23,987 |             |  |   | 33,646 |  |  |   | 39,262  | 
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Income (loss) from operations                                                    |  |             | 1,462  |             |  |             | 5,870  |             |  |   | 14,186 |  |  |   | 17,846  | 
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Net income (loss) before extraordinary
gain                                      |  | $           | (73    | )           |  | $           | 2,596  |             |  | $ | 8,228  |  |  | $ | 12,266  | 
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Net income (loss) before extraordinary
gain, per common share,
assuming dilution |  | $           |       |             |  | $           | 0.16   |             |  | $ | 0.48   |  |  | $ | 0.67    | 
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Weighted average number of common
shares, assuming dilution                      |  |             | 16,243 |             |  |             | 16,205 |             |  |   | 18,516 |  |  |   | 19,059  | 



---

|(1) |  | Includes a one-time charge of approximately $3.6 million for costs and
legal and other expenses related to the settlement of a lawsuit.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Includes $2.3 million charge related to the withdrawal of the
goracing.com initial public offering.                                    

28



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##### Table of Contents



|(3) |  | Includes $15.2 million of goracing.com related charges and other charges
of $15.0 million of asset write-downs and impairments.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(4) |  | Includes $32.2 million of special, principally non-cash charges related
to restructuring, costs associated with a reorganization, and a decision
to refocus on our core drivers and core programs.                                                                                                                                                                                                                                                                                                                                                                     
|   
|   
|   
|   
|(5) |  | Our cost of sales was $60.3 million during the fourth quarter of fiscal
2000, or 107.1% of sales, compared with $56.5 million during the fourth
quarter of fiscal 1999, or 61.7% of sales. Before special charges, fourth
quarter cost of sales was $40.1 million, or 71.3% of sales. The increase
in the percentage of sales during the fourth quarter of fiscal 2000
related to increased freight costs and sales of product at discounted
prices.                                                                                                                   
|   
|   
|   
|   
|(6) |  | Loss from operations reflects the factors described in footnote (5) above
as well as increases in selling, general, and administrative expenses.
Selling, general, and administrative expenses were $34.9 million during
the fourth quarter of fiscal 2000, or 62.6% of sales, compared with $22.7
million during fiscal 1999, or 25.1% of sales. Excluding special charges
during fiscal 2000, such expenses were $24.8 million, or 44.4% of sales.
The percentage increase was in part due to the reduction in sales without
a corresponding reduction in such costs.
|   
|   
|   
|   
|(7) |  | Revenues have been restated in all periods for adoption of EITF 00-10,
Accounting for Shipping and Handling Fees and Costs, in the quarter ended
September 30, 2001.                                                                                                                                                                                                                                                                                                                                                                                                   

Our revenue and operating results are subject to quarterly fluctuations as a
result of seasonality factors related to the commencement (February) and
completion (November) of the NASCAR race season. We believe that
quarter-to-quarter comparisons of our past financial results may not
necessarily be meaningful and should not be relied upon as an indication of
future performance.

Seasonality

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) generally are characterized by higher sales of
motorsports products.

Liquidity and Capital Resources

Our working capital position increased to $90.3 million at September 30, 2001,
from $64.5 million at September 30, 2000. Cash increased as a result of
increased profitability, proceeds from the sale Fantasy Sports ($3.8 million),
receipt of an income tax refund ($17.8 million), proceeds upon exercise of
stock options ($3.0 million) and other operating activities, including net
inventory reductions since September 30, 2000. The increases in cash were
offset by reductions in cash for repurchases of convertible subordinated notes
($11.1 million) and other debt ($6.0 million), treasury stock purchases ($1.5
million), Winners Circle acquisition ($1.3 million), expenditures for
equipment ($16.6 million) and other operating activities, including volume
related increases in accounts receivable ($19.3 million).

Days sales outstanding, calculated on quarterly sales, improved 7.7% over
fiscal 2000 as a result of improved receivables management. Inventory turns,
calculated on quarterly cost of sales, improved 46.1% over fiscal 2000, with
the implementation of a build-to-order approach in die-cast operations and
better inventory management. Our backlog at September 30, 2001, was
approximately $120 million, with fulfillment scheduled primarily over the
following two fiscal quarters.

29



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##### Table of Contents



As of September 30, 2001, $54.9 million
of 4 3/4% convertible subordinated
notes were outstanding. The subordinated notes are convertible, at the option
of the holders, into shares of common stock at the initial conversion price of
$48.20 per share, subject to adjustments in certain events. Interest on the
notes is payable semi-annually on April 1 and October 1 of each year. The
notes mature on April 1, 2005. The notes are general unsecured obligations of
our company, subordinated in right of payment to all existing and future senior
indebtedness, as defined in the notes. The indenture governing the notes does
not limit or prohibit our company or our subsidiaries from incurring additional
debt, including senior indebtedness. We have the option to redeem the notes in
whole or in part at any time on or after April 1, 2001, at redemption prices
set forth in the indenture governing the notes. Upon the occurrence of a
change in control or a termination of trading, as defined in the indenture,
the holders of the subordinated notes will have the right to require us to
repurchase all or any part of such holders notes at 100% of their principal
amount, plus accrued and unpaid interest.

In July 2001, the Board of Directors approved a one-year program in which we
may purchase up to one million shares of our common stock in the open market or
in privately negotiated transactions. No shares have been purchased under the
program.

During fiscal 2001, we repurchased Notes with a face value of $45.1 million at
pretax gains of $13.4 million. The notes were repurchased using $11.1 million
in cash and 829 thousand shares of common stock, previously, reacquired as
treasury stock, with a market value of $19.5 million. The difference between
the treasury shares $6.9 million cost and $19.5 million market value increased
additional paid-in capital.

During fiscal 2001, we also paid $4.0 million in cash to settle a long-term
obligation, extending through 2007, and valued at $4.8 million. The resulting
$0.8 million pre-tax gain is included in extraordinary gain. The settlement
also eliminated future contingent royalty payments for trademark usage through
2007.

In September 2000, the Company entered into a Loan and Security Agreement (the
Agreement) with a subsidiary of Bank One (Bank One), providing for borrowings
up to $30.0 million, subject to the limitation of a calculated borrowing base,
and including up to $15.0 million of stand by letters of credit. The line of
credit bears interest at the Bank One corporate base plus 0.5% or LIBOR
plus 2.5%. The agreement provides for commitment fee of 0.5% of the
average unused line of credit and 1.75% to 2.5% of the average unused letters of
credit payable annually and expires December 2002. The Agreement is secured
principally by inventory, receivables and equipment. The Agreement contains
covenants, which require the Company to meet certain financial tests
principally related to tangible net worth and EBITDA, and restricts the payment
of dividends. The calculated borrowing base generally totals less than $30.0
million at current accounts receivable levels. At September 30, 2001, letters
of credit totaled $5.8 million and the available line of credit totaled $22.2
million. We believe that the revised borrowing base will be adequate to cover
our letter of credit and other liquidity needs for the next 12 months after
considering anticipated cash flow from operations.

We anticipate that our capital expenditures in fiscal 2001 will principally
relate to expenditures for tooling and a building addition in Germany. Our
capital expenditures are not anticipated to exceed $21 million.




ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk is limited to interest rate risk associated with
our credit instruments and foreign currency exchange rate risk associated with
our foreign operations. We do not currently use and we have not historically
used derivative financial instruments to manage or reduce market risk.

At September 30, 2001, we had $54.9 million outstanding under our convertible
subordinated notes at an interest rate of 4.75%, and approximately $2.5 million
of debt outstanding at various rates and terms, principally under promissory
notes and capital leases. Interest rates on these credit instruments are fixed
and comparable to current market rates.

30



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##### Table of Contents



The functional currency for our foreign operation is the Euro. As such,
changes in exchange rates between the Euro and the U.S. dollar could adversely
affect our future earnings. Given the level of income we currently derive from
our foreign operations, we consider this exposure to be minimal. A 10% change
in exchange rates would not have a significant impact on our future earnings.




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the financial statements, the notes thereto, and reports
thereon, commencing at page F-1 of this report, which financial statements,
notes, and report are incorporated herein by reference.




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

Not applicable.




PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item relating to directors of our company is
incorporated herein by reference to the definitive Proxy Statement to be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934 for our 2002
Annual Meeting of Shareholders. The information required by this Item relating
to our executive officers is included in Item 1, Our Business  Executive
Officers.




ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated herein by reference to
the definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2002 Annual Meeting of Shareholders.




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated herein by reference to
the definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2002 Annual Meeting of Shareholders.




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated herein by reference to
the definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2002 Annual Meeting of Shareholders.




PART IV




ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K



|(a) |  | Financial Statements and Financial Statement Schedules
|--- |  | ------------------------------------------------------



| | (1) |  | Financial Statements are listed in the Index to Consolidated
Financial Statements and Schedule on page F-1 of this Report.                                                  
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | The Financial Statement Schedule II  VALUATION AND
QUALIFYING ACCOUNTS is listed in the Index to Consolidated Financial
Statements and Schedule on page F-1 of this report.



|(b) |  | Reports on Form 8-K- Not applicable.
|--- |  | ------------------------------------

31



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##### Table of Contents





|(c) |  | Exhibits
|--- |  | --------

|        |  |                                                                                                                                                                                                                                                         
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                         
|Number  |  | Exhibit                                                                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                         
|3.1     |  | First Amended and Restated Articles of Incorporation of Registrant(1)                                                                                                                                                                                   
|       
|       
|       
|       
|3.2     |  | Amended and Restated Bylaws of Registrant(1)                                                                                                                                                                                                            
|       
|       
|       
|       
|4.1     |  | Form of Certificate of Common Stock(2)                                                                                                                                                                                                                  
|       
|       
|       
|       
|4.2     |  | Indenture dated as of March 24, 1998, between Action Performance
Companies, Inc. and First Union National Bank, as Trustee, including forms
of Notes(3)                                                                                                 
|       
|       
|       
|       
|10.4.2  |  | 1993 Stock Option Plan, as amended and restated through January 16, 1997(6)                                                                                                                                                                             
|       
|       
|       
|       
|10.8    |  | Form of Indemnification Agreement entered into with the Directors of the Registrant(2)                                                                                                                                                                  
|       
|       
|       
|       
|10.27   |  | Manufacturing Agreement between the Registrant and Early Light
International Co. Ltd. dated November 1, 2000(5)                                                                                                                                         
|       
|       
|       
|       
|10.52   |  | 1998 Non-qualified Stock Option Plan(3)                                                                                                                                                                                                                 
|       
|       
|       
|       
|10.49   |  | Standard Form Industrial Lease dated April 8, 1997, between
Hewson/Breckner-Baseline, L.L.C. and Action Performance Companies, Inc.(7)                                                                                                                  
|       
|       
|       
|       
|10.50   |  | Lease Agreement dated July 9, 1997, by and between Performance Park
Partners, LLC and Sports Image, Inc.(7)                                                                                                                                             
|       
|       
|       
|       
|10.52   |  | 1998 Non-qualified Stock Option Plan(3)                                                                                                                                                                                                                 
|       
|       
|       
|       
|10.54   |  | Registration Rights Agreement dated March 24, 1998, by and among Action
Performance Companies, Inc., NationsBanc Montgomery Securities LLC, CIBC
Oppenheimer Corp., EVEREN Securities, Inc., and Piper Jaffray Inc.(3)                                  
|       
|       
|       
|       
|10.56   |  | 1999 Employee Stock Purchase Plan(8)                                                                                                                                                                                                                    
|       
|       
|       
|       
|10.57   |  | Standard Form Industrial Lease (Single Tenant) dated June 28, 1999,
between H-B Tempe, L.L.C. and Action Performance Companies, Inc.(9)                                                                                                                 
|       
|       
|       
|       
|10.58   |  | Master Lease Agreement dated August 9, 1999 between General Electric
Capital Corporation and goracing.com, inc., together with Schedule No. 01,
Commitment Letter dated October 4, 1999, and Corporate Guaranty by Action
Performance Companies, Inc.(9)
|       
|       
|       
|       
|10.59   |  | Distribution Agreement dated September 13, 2000 by and between the
Registrant and QVC, Inc.(5)                                                                                                                                                          
|       
|       
|       
|       
|10.60   |  | Sublease dated March 28, 2000 by and between Action Performance
Companies, Inc., and Integrated Information Systems, Inc.(5)                                                                                                                            
|       
|       
|       
|       
|10.61   |  | Equipment Sublease dated March 28, 2000 by and among goracing.com, inc.,
Action Performance Companies, Inc., and Integrated Information Systems,
Inc.(5)                                                                                                
|       
|       
|       
|       
|10.62   |  | Equipment Sublease dated March 28, 2000 by and between Integrated
Information Systems, Inc. and goracing.com, inc.(5)                                                                                                                                   
|       
|       
|       
|       
|10.63   |  | Loan and Security Agreement dated September 29, 2000 by and among Action
Performance Companies, Inc., certain subsidiaries and affiliates, as
guarantors, and American National Bank and Trust Company of Chicago.(5)                                   
|       
|       
|       
|       
|10.64   |  | Pledge Agreement dated October 2, 2000 by and between Racing
Collectables Club of America, Inc., and American National Bank and Trust
Company of Chicago.(5)                                                                                            
|       
|       
|       
|       
|10.65   |  | Pledge Agreement dated October 2, 2000 by and between Action Performance
Companies, Inc., and American National Bank and Trust Company of Chicago.(5)                                                                                                   
|       
|       
|       
|       
|10.66   |  | Pledge Agreement dated October 2, 2000 by and between goracing.com,
inc., and American National Bank and Trust Company of Chicago.(5)                                                                                                                   
|       
|       
|       
|       
|21      |  | List of Subsidiaries of the Registrant                                                                                                                                                                                                                  
|       
|       
|       
|       
|23      |  | Consent of Arthur Andersen LLP                                                                                                                                                                                                                          
|       
|       
|       
|       
|25.1    |  | Statement of Eligibility of Trustee under the Trust Indenture Act of 1939 on Form T-1(13)                                                                                                                                                               



---

|(1) |  | Incorporated by reference to the Registrants Form 10-QSB for the quarter
ended March 31, 1996, as filed with the Securities and Exchange Commission
on May 2, 1996.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Incorporated by reference to the Registrants Registration Statement on
Form SB-2 and amendments thereto (Registration No. 33-57414-LA).                            
|   
|   
|   
|   
|(3) |  | Incorporated by reference to the Registrants Form 10-Q for the quarter
ended March 31, 1998, as filed with the Securities and Exchange Commission
on May 15, 1998. 

32



---



##### Table of Contents



|(4) |  | Incorporated by reference to the Registrants Registration Statement on
Form S-8 (Registration No. 333-82879).                                                           
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(5) |  | Incorporated by reference to the Registrants Form 10-K for the year
ended September 30, 2000, as filed with the Securities and Exchange
Commission on December 29, 2000.
|   
|   
|   
|   
|(6) |  | Incorporated by reference to the Registrants Form 10-Q for the quarter
ended March 31, 1997, as filed with the Securities and Exchange Commission
on May 15, 1997.      
|   
|   
|   
|   
|(7) |  | Incorporated by reference to the Registrants Form 10-K for the year
ended September 30, 1997, as filed with the Securities and Exchange
Commission on December 22, 1997.
|   
|   
|   
|   
|(8) |  | Incorporated by reference to the Registrants Registration Statement on
Form S-8 (Registration No. 333-82879).                                                           
|   
|   
|   
|   
|(9) |  | Incorporated by reference to the Registrants Form 10-K for the year
ended September 30, 1999, as filed with the Securities and Exchange
Commission on December 29, 1999.

33



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##### Table of Contents






SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

|                        |  |                                                                                                      
|----------------------- |  | -----------------------------------------------------------------------------------------------------
|                        |  | ACTION PERFORMANCE COMPANIES, INC.                                                                   
|                       
|                        |  |                                                                                                      
|                       
|                        |  |                                                                                                      
|                       
|Date: December 19, 2001 |  | /s/ Fred W. WagenhalsFred W. Wagenhals, Chairman of the Board,
President, and Chief Executive Officer

In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.

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

Fred W. Wagenhals       |  | Chairman of the Board, President, and Chief
Executive Officer (Principal Executive Officer) |  | December 19, 2001
|                                              
|                                              
|                                              
|                                              
|                                               |  |                                                                                             |  |                  
|                                              
|                                              
|                                              
|                                              
|/s/ R. David Martin, Jr.

R. David Martin, Jr. |  | Chief Financial Officer and Director
(Principal Financial and Accounting Officer)           |  | December 19, 2001
|                                              
|                                              
|                                              
|                                              
|                                               |  |                                                                                             |  |                  
|/s/ Melodee L. Volosin

Melodee L. Volosin     |  | Executive Vice President  Sales and Director                                               |  | December 19, 2001
|                                               |  |                                                                                             |  |                  
|/s/ John S. Bickford

John S. Bickford         |  | Vice President  Strategic Alliances and Director                                           |  | December 19, 2001
|                                               |  |                                                                                             |  |                  
|/s/ Herbert M. Baum

Herbert M. Baum           |  | Director                                                                                    |  | December 19, 2001
|                                               |  |                                                                                             |  |                  
|/s/ Edward J. Bauman

Edward J. Bauman         |  | Director                                                                                    |  | December 19, 2001
|                                               |  |                                                                                             |  |                  
|Jack M. Lloyd                                  |  | Director                                                                                    |  | December 19, 2001
|                                               |  |                                                                                             |  |                  
|/s/ Robert L. Matthews

Robert L. Matthews     |  | Director                                                                                    |  | December 19, 2001
|                                               |  |                                                                                             |  |                  
|/s/ Lowell L. Robertson

Lowell L. Robertson   |  | Director                                                                                    |  | December 19, 2001

34



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##### Table of Contents



ACTION PERFORMANCE COMPANIES, INC.
Index to Consolidated Financial Statements and Schedule

|                                                                                                      |  |     
|----------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                      |  | Page
|                                                                                                      |  |     
|Report of Independent Public Accountants                                                              |  | F-2 
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      |  |     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Consolidated Balance Sheets as of September 30, 2001 and 2000                                         |  | F-3 
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      |  |     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Consolidated Statements of Operations for the Years
Ended September 30, 2001, 2000 and 1999           |  | F-4 
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      |  |     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Consolidated Statements of Shareholders Equity for the Years
Ended September 30, 2001, 2000 and 1999 |  | F-5 
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      |  |     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Consolidated Statements of Cash Flows for the Years
Ended September 30, 2001, 2000 and 1999           |  | F-6 
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      |  |     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Notes to Consolidated Financial Statements                                                            |  | F-7 
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                      |  |     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Schedule II  Valuation and Qualifying Accounts                                                       |  | F-22

F-1



---



##### Table of Contents






REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Action Performance Companies, Inc.:

We have audited the accompanying consolidated balance sheets of ACTION
PERFORMANCE COMPANIES, INC. (an Arizona corporation) and subsidiaries as of
September 30, 2001 and 2000, and the related consolidated statements of
operations, shareholders equity and cash flows for each of the three years in
the period ended September 30, 2001. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Action Performance Companies,
Inc. and subsidiaries as of September 30, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 2001, in conformity with accounting principles generally
accepted in the United States.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements and schedule is presented for purposes of
complying with the Securities and Exchange Commissions rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

/s/ Arthur Andersen LLP
Phoenix, Arizona
November 2, 2001

F-2



---



##### Table of Contents






ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS

September 30, 2001 and 2000
(in thousands, except per share data)

|                                                    |                                                                                          |                             |                            |         |        |         |         |         |         |         | 
|--------------------------------------------------- | ---------------------------------------------------------------------------------------- | --------------------------- | -------------------------- | ------- | ------ | ------- | ------- | ------- | ------- | ------- | 
|                                                    |                                                                                          |                             |                            |         | 2001   |         | 2000   
|                                                    |                                                                                          |                             |                            |         |        |         |        
|ASSETS                                              |                                                                                          |                             |                            |         |        |         |         |        
|                                                   
|                                                   
|                                                   
|                                                   
|CURRENT ASSETS:                                     |                                                                                          |                             |                            |         |        |         |         |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Cash and cash equivalents                                                                |                             | $                          | 64,514  |        |         | $       | 22,758  |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Accounts receivable, net of allowance of $2,141 and $3,392                               |                             |                            | 40,725  |        |         |         | 22,901  |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Inventories                                                                              |                             |                            | 25,120  |        |         |         | 32,017  |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Prepaid royalties                                                                        |                             |                            | 10,222  |        |         |         | 7,262   |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Estimated income tax receivable                                                          |                             |                            |        |        |         |         | 14,000  |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Deferred taxes                                                                           |                             |                            | 2,672   |        |         |         | 5,905   |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Prepaid expenses and other                                                               |                             |                            | 1,392   |        |         |         | 1,942   |        
|                                                    |                                                                                          |                             |                            |         |        |         |         |        
|                                                    |                                                                                          |                             | Total current assets       |         |        | 144,645 |         |         |         | 106,785 | 
|                                                   
|                                                   
|                                                   
|                                                   
|PROPERTY AND EQUIPMENT, net                         |                                                                                          |                             | 40,356                     |         |        |         | 46,066  |        
|                                                   
|                                                   
|                                                   
|                                                   
|GOODWILL AND OTHER INTANGIBLES, net                 |                                                                                          |                             | 89,722                     |         |        |         | 94,894  |        
|                                                   
|                                                   
|                                                   
|                                                   
|DEFERRED TAXES                                      |                                                                                          |                             |                           |         |        |         | 1,423   |        
|                                                   
|                                                   
|                                                   
|                                                   
|DEPOSITS AND OTHER                                  |                                                                                          |                             | 4,230                      |         |        |         | 6,749   |        
|                                                    |                                                                                          |                             |                            |         |        |         |         |        
|                                                    |                                                                                          | $                           | 278,953                    |         |        | $       | 255,917 |        
|                                                    |                                                                                          |                             |                            |         |        |         |         |        
|LIABILITIES AND SHAREHOLDERS EQUITY                |                                                                                          |                             |                            |         |        |         |         |        
|                                                   
|                                                   
|                                                   
|                                                   
|CURRENT LIABILITIES:                                |                                                                                          |                             |                            |         |        |         |         |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Accounts payable                                                                         |                             | $                          | 18,371  |        |         | $       | 16,510  |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Accrued royalties                                                                        |                             |                            | 16,792  |        |         |         | 9,998   |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Accrued expenses                                                                         |                             |                            | 11,281  |        |         |         | 14,250  |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Income tax payable                                                                       |                             |                            | 7,474   |        |         |         |        |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Current portion of long-term debt                                                        |                             |                            | 424     |        |         |         | 1,503   |        
|                                                    |                                                                                          |                             |                            |         |        |         |         |        
|                                                    |                                                                                          | Total current liabilities   |                            |         | 54,342 |         |         |         | 42,261  |        
|                                                    |                                                                                          |                             |                            |         |        |         |         |        
|LONG-TERM LIABILITIES:                              |                                                                                          |                             |                            |         |        |         |         |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Deferred taxes                                                                           |                             |                            | 3,968   |        |         |         |        |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | 4 3/4% convertible subordinated notes                                                    |                             |                            | 54,933  |        |         |         | 100,000 |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Other long-term debt                                                                     |                             |                            | 2,063   |        |         |         | 7,775   |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Other                                                                                    |                             |                            | 742     |        |         |         | 565     |        
|                                                    |                                                                                          |                             |                            |         |        |         |         |        
|                                                    |                                                                                          | Total long-term liabilities |                            |         | 61,706 |         |         |         | 108,340 |        
|                                                    |                                                                                          |                             |                            |         |        |         |         |        
|MINORITY INTERESTS                                  |                                                                                          |                             | 3,079                      |         |        |         | 2,598   |        
|                                                   
|                                                   
|                                                   
|                                                   
|COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS EQUITY: |                                                                                          |                             |                            |         |        |         |         |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Preferred stock, no par value, 5,000 shares authorized,
no shares issued and outstanding |                             |                            |        |        |         |         |        |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Common stock, $.01 par value, 25,000 shares authorized;
17,313 and 16,964 shares issued  |                             |                            | 173     |        |         |         | 170     |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Additional paid-in capital                                                               |                             |                            | 121,669 |        |         |         | 102,813 |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Treasury stock, at cost, 143 and 592 shares                                              |                             |                            | (1,221  | )      |         |         | (6,520  | )      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Accumulated other comprehensive loss                                                     |                             |                            | (5,625  | )      |         |         | (6,639  | )      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Retained earnings                                                                        |                             |                            | 44,830  |        |         |         | 12,894  |        
|                                                    |                                                                                          |                             |                            |         |        |         |         |        
|                                                    |                                                                                          |                             | Total shareholders equity |         |        | 159,826 |         |         |         | 102,718 | 
|                                                    |                                                                                          |                             |                            |         |        |         |         |        
|                                                    |                                                                                          | $                           | 278,953                    |         |        | $       | 255,917 |        
|                                                    |                                                                                          |                             |                            |         |        |         |         |        

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

F-3



---



##### Table of Contents






ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended September 30, 2001, 2000 and 1999
(in thousands, except per share data)

|                                                                         |                                                |                                         |                                         |        |      |        |         |         |       |         |         |        |      |        | 
|------------------------------------------------------------------------ | ---------------------------------------------- | --------------------------------------- | --------------------------------------- | ------ | ---- | ------ | ------- | ------- | ----- | ------- | ------- | ------ | ---- | ------ | 
|                                                                         |                                                |                                         |                                         |        | 2001 |        | 2000    |         | 1999 
|                                                                         |                                                |                                         |                                         |        |      |        |         |         |      
|Net sales                                                                |                                                | $                                       | 323,352                                 |        |      | $      | 258,105 |         |       | $       | 347,842 |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Cost of sales                                                            |                                                |                                         | 208,375                                 |        |      |        | 209,102 |         |       |         | 216,165 |       
|                                                                         |                                                |                                         |                                         |        |      |        |         |         |       |         |         |       
|Gross profit                                                             |                                                |                                         | 114,977                                 |        |      |        | 49,003  |         |       |         | 131,677 |       
|                                                                         |                                                |                                         |                                         |        |      |        |         |         |       |         |         |       
|Operating expenses:                                                      |                                                |                                         |                                         |        |      |        |         |         |       |         |         |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Selling, general and administrative            |                                         |                                         | 69,456 |      |        |         | 107,942 |       |         |         | 71,636 |     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Amortization of goodwill and other intangibles |                                         |                                         | 6,157  |      |        |         | 16,753  |       |         |         | 6,818  |     
|                                                                         |                                                |                                         |                                         |        |      |        |         |         |       |         |         |       
|                                                                         |                                                |                                         | Total operating expenses                |        |      | 75,613 |         |         |       | 124,695 |         |        |      | 78,454 | 
|                                                                         |                                                |                                         |                                         |        |      |        |         |         |       |         |         |       
|Income (loss) from operations                                            |                                                |                                         | 39,364                                  |        |      |        | (75,692 | )       |       |         | 53,223  |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Interest expense                                                         |                                                |                                         | (5,102                                  | )      |      |        | (6,291  | )       |       |         | (6,929  | )     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Minority interests and other, net                                        |                                                |                                         | (1,040                                  | )      |      |        | (696    | )       |       |         | 601     |       
|                                                                         |                                                |                                         |                                         |        |      |        |         |         |       |         |         |       
|Income (loss) before income taxes and extraordinary gain                 |                                                |                                         | 33,222                                  |        |      |        | (82,679 | )       |       |         | 46,895  |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Income taxes                                                             |                                                |                                         | 10,205                                  |        |      |        | (24,592 | )       |       |         | 18,526  |       
|                                                                         |                                                |                                         |                                         |        |      |        |         |         |       |         |         |       
|Income (loss) before extraordinary gain                                  |                                                |                                         | 23,017                                  |        |      |        | (58,087 | )       |       |         | 28,369  |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Extraordinary gain on extinguishment of debt,
net of $5,300 income taxes |                                                |                                         | 8,919                                   |        |      |        |        |         |       |         |        |       
|                                                                         |                                                |                                         |                                         |        |      |        |         |         |       |         |         |       
|Net income (loss)                                                        |                                                |                                         | 31,936                                  |        |      |        | (58,087 | )       |       |         | 28,369  |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Currency translation                                                     |                                                |                                         | 1,014                                   |        |      |        | (5,925  | )       |       |         | (2,396  | )     
|                                                                         |                                                |                                         |                                         |        |      |        |         |         |       |         |         |       
|Comprehensive income (loss)                                              |                                                | $                                       | 32,950                                  |        |      | $      | (64,012 | )       |       | $       | 25,973  |       
|                                                                         |                                                |                                         |                                         |        |      |        |         |         |       |         |         |       
|EARNINGS PER COMMON SHARE:                                               |                                                |                                         |                                         |        |      |        |         |         |       |         |         |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Basic-                                         |                                         |                                         |        |      |        |         |         |       |         |         |        |     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                |                                         | Income (loss) before extraordinary gain |        | $    | 1.41   |         |         | $     | (3.52   | )       |        | $    | 1.69   | 
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                |                                         | Extraordinary gain, net of tax          |        |      | 0.54   |         |         |       |        |         |        |      |       | 
|                                                                         |                                                |                                         |                                         |        |      |        |         |         |       |         |         |       
|                                                                         |                                                |                                         | Net income (loss)                       |        | $    | 1.95   |         |         | $     | (3.52   | )       |        | $    | 1.69   | 
|                                                                         |                                                |                                         |                                         |        |      |        |         |         |       |         |         |       
|                                                                         | Diluted-                                       |                                         |                                         |        |      |        |         |         |       |         |         |        |     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                | Income (loss) before extraordinary gain |                                         | $      | 1.37 |        |         | $       | (3.52 | )       |         | $      | 1.65 |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                |                                         | Extraordinary gain, net of tax          |        |      | 0.53   |         |         |       |        |         |        |      |       | 
|                                                                         |                                                |                                         |                                         |        |      |        |         |         |       |         |         |       
|                                                                         |                                                |                                         | Net income (loss)                       |        | $    | 1.90   |         |         | $     | (3.52   | )       |        | $    | 1.65   | 
|                                                                         |                                                |                                         |                                         |        |      |        |         |         |       |         |         |       

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

F-4



---



##### Table of Contents






ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

For the Years Ended September 30, 2001, 2000 and 1999
(in thousands)

|                                                                  |  |              |        |            |  |          |     |        |  |               |         |          |  |       |        |   |  |             |        |   |  |   |         |   |  |   |         |  
|----------------------------------------------------------------- |  | ------------ | ------ | ---------- |  | -------- | --- | ------ |  | ------------- | ------- | -------- |  | ----- | ------ | - |  | ----------- | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                                                  |  |              |        |            |  |          |     |        |  |               |         |          |  |       |        |   |  | Accumulated |        |   |  |   |         |   |  |  
|                                                                  |  |              |        |            |  |          |     |        |  |               |         |          |  |       |        |   |  | Other       |        |   |  |   |         |   |  |  
|                                                                  |  | Common Stock |        | Additional |  |          |     |        |  | Comprehensive |         |          |  |       |        |   |  |            
|                                                                  |  |              |        | Paid-in    |  | Treasury |     | Income |  | Retained      |         |          |  |      
|                                                                  |  | Shares       |        | Amount     |  | Capital  |     | Stock  |  | (Loss)        |         | Earnings |  | Total
|                                                                  |  |              |        |            |  |          |     |        |  |               |         |          |  |      
|BALANCE, SEPTEMBER 30, 1998                                       |  |              | 16,423 |            |  | $        | 164 |        |  | $             | 91,974  |          |  | $     |       |   |  | $           | 1,682  |   |  | $ | 42,612  |   |  | $ | 136,432 |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Stock option exercises                                            |  |              | 333    |            |  |          | 3   |        |  |               | 3,835   |          |  |       |       |   |  |             |       |   |  |   |        |   |  |   | 3,838   |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Stock option tax benefits                                         |  |              |       |            |  |          |    |        |  |               | 2,450   |          |  |       |       |   |  |             |       |   |  |   |        |   |  |   | 2,450   |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Common stock issuances                                            |  |              | 173    |            |  |          | 2   |        |  |               | 4,296   |          |  |       |       |   |  |             |       |   |  |   |        |   |  |   | 4,298   |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Currency translation                                              |  |              |       |            |  |          |    |        |  |               |        |          |  |       |       |   |  |             | (2,396 | ) |  |   |        |   |  |   | (2,396  | )
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Net income                                                        |  |              |       |            |  |          |    |        |  |               |        |          |  |       |       |   |  |             |       |   |  |   | 28,369  |   |  |   | 28,369  |  
|                                                                  |  |              |        |            |  |          |     |        |  |               |         |          |  |       |        |   |  |             |        |   |  |   |         |   |  |   |         |  
|BALANCE, SEPTEMBER 30, 1999                                       |  |              | 16,929 |            |  |          | 169 |        |  |               | 102,555 |          |  |       |       |   |  |             | (714   | ) |  |   | 70,981  |   |  |   | 172,991 |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Stock option exercises                                            |  |              | 21     |            |  |          | 1   |        |  |               | 129     |          |  |       |       |   |  |             |       |   |  |   |        |   |  |   | 130     |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Stock option tax benefits                                         |  |              |       |            |  |          |    |        |  |               | 19      |          |  |       |       |   |  |             |       |   |  |   |        |   |  |   | 19      |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Common stock issuances for employee
stock purchase plan           |  |              | 14     |            |  |          |    |        |  |               | 110     |          |  |       |       |   |  |             |       |   |  |   |        |   |  |   | 110     |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Common stock purchases, 592 shares                                |  |              |       |            |  |          |    |        |  |               |        |          |  |       | (6,520 | ) |  |             |       |   |  |   |        |   |  |   | (6,520  | )
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Currency translation                                              |  |              |       |            |  |          |    |        |  |               |        |          |  |       |       |   |  |             | (5,925 | ) |  |   |        |   |  |   | (5,925  | )
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Net loss                                                          |  |              |       |            |  |          |    |        |  |               |        |          |  |       |       |   |  |             |       |   |  |   | (58,087 | ) |  |   | (58,087 | )
|                                                                  |  |              |        |            |  |          |     |        |  |               |         |          |  |       |        |   |  |             |        |   |  |   |         |   |  |   |         |  
|BALANCE, SEPTEMBER 30, 2000                                       |  |              | 16,964 |            |  |          | 170 |        |  |               | 102,813 |          |  |       | (6,520 | ) |  |             | (6,639 | ) |  |   | 12,894  |   |  |   | 102,718 |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Stock option exercises                                            |  |              | 329    |            |  |          | 3   |        |  |               | 2,986   |          |  |       |       |   |  |             |       |   |  |   |        |   |  |   | 2,989   |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Stock option tax benefits                                         |  |              |       |            |  |          |    |        |  |               | 1,396   |          |  |       |       |   |  |             |       |   |  |   |        |   |  |   | 1,396   |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Warrant issuances for services and
licenses                       |  |              |       |            |  |          |    |        |  |               | 1,641   |          |  |       |       |   |  |             |       |   |  |   |        |   |  |   | 1,641   |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Common stock issuances for employee
stock purchase plan and other |  |              | 20     |            |  |          |    |        |  |               | 205     |          |  |       |       |   |  |             |       |   |  |   |        |   |  |   | 205     |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Treasury stock issuances for note
repurchases, 829 shares         |  |              |       |            |  |          |    |        |  |               | 12,628  |          |  |       | 6,859  |   |  |             |       |   |  |   |        |   |  |   | 19,487  |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Common stock purchases, 380 shares                                |  |              |       |            |  |          |    |        |  |               |        |          |  |       | (1,560 | ) |  |             |       |   |  |   |        |   |  |   | (1,560  | )
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Currency translation                                              |  |              |       |            |  |          |    |        |  |               |        |          |  |       |       |   |  |             | 1,014  |   |  |   |        |   |  |   | 1,014   |  
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Net income                                                        |  |              |       |            |  |          |    |        |  |               |        |          |  |       |       |   |  |             |       |   |  |   | 31,936  |   |  |   | 31,936  |  
|                                                                  |  |              |        |            |  |          |     |        |  |               |         |          |  |       |        |   |  |             |        |   |  |   |         |   |  |   |         |  
|BALANCE, SEPTEMBER 30, 2001                                       |  |              | 17,313 |            |  | $        | 173 |        |  | $             | 121,669 |          |  | $     | (1,221 | ) |  | $           | (5,625 | ) |  | $ | 44,830  |   |  | $ | 159,826 |  
|                                                                  |  |              |        |            |  |          |     |        |  |               |         |          |  |       |        |   |  |             |        |   |  |   |         |   |  |   |         |  

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

F-5



---



##### Table of Contents






ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended September 30, 2001, 2000 and 1999
(in thousands)

|                                                                                                   |                                                                            |                                                          |                                        |         |         |         |         |         |        |         |         |         |        |        |  
|-------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | -------------------------------------------------------- | -------------------------------------- | ------- | ------- | ------- | ------- | ------- | ------ | ------- | ------- | ------- | ------ | ------ | -
|                                                                                                   |                                                                            |                                                          |                                        |         | 2001    |         | 2000    |         | 1999  
|                                                                                                   |                                                                            |                                                          |                                        |         |         |         |         |         |       
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                              |                                                                            |                                                          |                                        |         |         |         |         |         |        |         |         |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Net income (loss)                                                                                  |                                                                            | $                                                        | 31,936                                 |         |         | $       | (58,087 | )       |        | $       | 28,369  |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities- |                                                                            |                                                          |                                        |         |         |         |         |         |        |         |         |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                            | Deferred income taxes                                    |                                        |         | 8,560   |         |         |         | (9,227 | )       |         |         | 159    |       
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                            | Depreciation and amortization, excluding special
charges |                                        |         | 28,366  |         |         |         | 25,111 |         |         |         | 22,946 |       
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                            | Special charges                                          |                                        |         |        |         |         |         | 58,988 |         |         |         |       |       
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                            | Extraordinary gain on extinguishment of debt             |                                        |         | (14,219 | )       |         |         |       |         |         |         |       |       
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                            | (Gain) loss on property and equipment sales              |                                        |         | 311     |         |         |         | (176   | )       |         |         |       |       
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                            | Stock options tax benefits                               |                                        |         | 1,396   |         |         |         | 19     |         |         |         | 2,450  |       
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                            | Minority interest undistributed earnings                 |                                        |         | 298     |         |         |         | 298    |         |         |         | 1,930  |       
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Change in assets and liabilities, net of businesses
acquired and disposed: |                                                          |                                        |         |         |         |         |         |        |         |         |         |       
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                            |                                                          | Accounts receivable, net               |         |         | (19,347 | )       |         |        | 10,920  |         |         |        | (8,065 | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                            |                                                          | Inventories                            |         |         | 5,935   |         |         |        | (561    | )       |         |        | (9,067 | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                            |                                                          | Prepaid royalties                      |         |         | (2,960  | )       |         |        | (7,771  | )       |         |        | (3,725 | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                            |                                                          | Other assets                           |         |         | 699     |         |         |        | (3,531  | )       |         |        | (2,157 | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                            |                                                          | Accounts payable and accrued expenses  |         |         | 1,413   |         |         |        | (2,757  | )       |         |        | 6,731  |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                            |                                                          | Accrued royalties                      |         |         | 7,069   |         |         |        | (3,502  | )       |         |        | 2,931  |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                            |                                                          | Income tax payable and receivable, net |         |         | 22,337  |         |         |        | (14,000 | )       |         |        | 6,476  |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                            |                                                          | Other liabilities                      |         |         | (581    | )       |         |        | 3,255   |         |         |        | (1,058 | )
|                                                                                                   |                                                                            |                                                          |                                        |         |         |         |         |         |        |         |         |        
|                                                                                                   | Net cash provided by (used in) operating activities                        |                                                          |                                        | 71,213  |         |         |         | (1,021  | )      |         |         | 47,920  |       
|                                                                                                   |                                                                            |                                                          |                                        |         |         |         |         |         |        |         |         |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                              |                                                                            |                                                          |                                        |         |         |         |         |         |        |         |         |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Property and equipment purchases                                                                   |                                                                            |                                                          | (16,580                                | )       |         |         | (25,862 | )       |        |         | (26,693 | )      
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Property and equipment sales proceeds                                                              |                                                                            |                                                          | 60                                     |         |         |         | 1,963   |         |        |         | 155     |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|(Acquisitions) dispositions, net of costs                                                          |                                                                            |                                                          | 2,513                                  |         |         |         | (3,063  | )       |        |         | (4,738  | )      
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Notes receivable collected (issued), net                                                           |                                                                            |                                                          |                                       |         |         |         | 1,080   |         |        |         | 1,043   |        
|                                                                                                   |                                                                            |                                                          |                                        |         |         |         |         |         |        |         |         |        
|                                                                                                   | Net cash used in investing activities                                      |                                                          |                                        | (14,007 | )       |         |         | (25,882 | )      |         |         | (30,233 | )     
|                                                                                                   |                                                                            |                                                          |                                        |         |         |         |         |         |        |         |         |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                              |                                                                            |                                                          |                                        |         |         |         |         |         |        |         |         |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Stock option exercise proceeds                                                                     |                                                                            |                                                          | 2,989                                  |         |         |         | 130     |         |        |         | 3,838   |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Employee stock purchase plan stock issuance proceeds                                               |                                                                            |                                                          | 30                                     |         |         |         | 110     |         |        |         |        |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Common stock purchases for treasury                                                                |                                                                            |                                                          | (1,482                                 | )       |         |         | (6,520  | )       |        |         |        |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Long-term debt repayments, net                                                                     |                                                                            |                                                          | (17,111                                | )       |         |         | (2,015  | )       |        |         | (24,143 | )      
|                                                                                                   |                                                                            |                                                          |                                        |         |         |         |         |         |        |         |         |        
|                                                                                                   | Net cash used in financing activities                                      |                                                          |                                        | (15,574 | )       |         |         | (8,295  | )      |         |         | (20,305 | )     
|                                                                                                   |                                                                            |                                                          |                                        |         |         |         |         |         |        |         |         |        
|Effect of exchange rate changes on cash and cash
equivalents                                       |                                                                            |                                                          | 124                                    |         |         |         | (567    | )       |        |         | 274     |        
|                                                                                                   |                                                                            |                                                          |                                        |         |         |         |         |         |        |         |         |        
|Net change in cash and cash equivalents                                                            |                                                                            |                                                          | 41,756                                 |         |         |         | (35,765 | )       |        |         | (2,344  | )      
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Cash and cash equivalents, beginning of year                                                       |                                                                            |                                                          | 22,758                                 |         |         |         | 58,523  |         |        |         | 60,867  |        
|                                                                                                   |                                                                            |                                                          |                                        |         |         |         |         |         |        |         |         |        
|Cash and cash equivalents, end of year                                                             |                                                                            | $                                                        | 64,514                                 |         |         | $       | 22,758  |         |        | $       | 58,523  |        
|                                                                                                   |                                                                            |                                                          |                                        |         |         |         |         |         |        |         |         |        

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

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##### Table of Contents






ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THE COMPANY

Operations

Action Performance Companies, Inc., an Arizona corporation, and its United
States and German subsidiaries (Action) designs and sells licensed motorsports
collectible and consumer products. Our products include die-cast scaled
replicas of motorsports vehicles, apparel (including t-shirts, hats, and
jackets), and souvenirs. In the United States, Action is licensee of the
National Association for Stock Car Auto Racing (NASCAR), Indy Racing League
(IRL), World of Outlaws and National Hot Rod Association (NHRA). In Germany,
we merchandise Formula One and high-end auto manufacturer die-cast replica
vehicles. We closed our Australian and England subsidiaries (collectively
Goodsports) effective September 30, 2001. See Acquisitions and Dispositions
for further discussion.

Our products are marketed in the United States, Germany and worldwide through:



| |  |  | Distributor networks which target specialty retailers,                        
| | - |  | ------------------------------------------------------------------------------
|
| |  |  | Mobile trackside souvenir stores which target motorsports event attendees,    
|
| |  |  | Mass-market retailers,                                                        
|
| |  |  | A members only collectors catalog club, managed by QVC,                      
|
| |  |  | Television programming on QVC,                                                
|
| |  |  | Internet sites including goracing.com, an Internet site maintained by QVC, and
|
| |  |  | Other distribution channels.                                                  

We work closely with drivers, teams, owners, track operators and sponsors, to
design and merchandise products. We outsource production of the die-cast and
most of the apparel and souvenirs. We retain ownership and control over
designs and tooling, however, and maintain close working relationships with
outsourced manufacturers to help ensure quality product.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Action
Performance Companies, Inc. and its wholly owned and majority owned
subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation. Actions fiscal year ends September 30. Certain
reclassifications have been made in prior period financial statements to
conform to the current presentation.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

Preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates are used for, but not limited to, the accounting for
doubtful accounts, inventory values, depreciation, amortization, prepaid
royalty allowances, taxes and contingencies. Actual results could differ from
those estimates.

F-7



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##### Table of Contents



Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, title
passes to the customer, the fee is fixed or determinable and collectibility is
probable. Most distributor sales are recognized when product is shipped to a
distributor because title to the product passes to the distributors at
shipment. We recognize trackside souvenir sales when the consumer purchases
product trackside. Sales to mass-market retailers are recognized when title to
product passes to the retailer, either at time of shipment to the retailer or
receipt by the retailer. Under terms of our consignment agreement with QVC,
collectors club catalog sales are recognized when QVC ships product to the
consumer. A portion of the product sold through television programming is
consignment product, for which sales are recognized when QVC ships the product
to the consumer. Internet and other sales are generally recognized when
delivered to the consumer.

Inventory

Inventories are stated at cost (first-in, first-out method) or estimated net
realizable value if lower. The cost of purchased inventory includes the cost
of the purchased product and freight in. Cost of sales also includes freight
out.

Licenses and Royalties

License agreements generally require payments of royalties to drivers,
sponsors, teams and other parties on a calendar year basis. Royalties payable
are recognized as cost of sales when the related sale is recognized.
Guarantees advanced under license agreements are carried as prepaid royalties
until earned by the third party. Prepaid royalties are evaluated quarterly and
expensed to cost of sales to the extent projected to be unrecoverable through
sales. Royalties are generally payable within thirty days of each quarter end.

Personal Services

Amounts due under personal service agreements for driver appearance fees and
similar matters, are expensed to selling, general and administrative over the
term during which the services are provided.

Cash and Cash Equivalents

Cash and cash equivalents includes cash and all highly liquid investments with
original maturities of three months or less.

Property and Equipment

Property and equipment is recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets,
which range up to twenty-five years. Depreciation of tooling and other
production assets is included in cost of sales. All other depreciation is
included in selling, general and administrative. Maintenance and repairs are
charged to expense as incurred. The costs of renewals and betterments that
materially extend the useful lives of assets or increase their productivity are
capitalized.

Goodwill and Other Intangibles

Goodwill represents the cost in excess of the fair value of net assets acquired
in business combinations and is amortized using the straight-line method over
periods ranging from seven to twenty-five years which represents our estimate
of the estimated economic lives of the assets. Other intangibles, which
consist of licenses, are amortized using the straight-line method over their
contractual lives, which range from three to fifteen years.

F-8



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##### Table of Contents



Long-Lived Assets

We periodically evaluate long-lived assets and certain identifiable intangible
assets used in operations for impairment whenever events or circumstances
indicate that the carrying amount of an asset may not be fully recoverable.
Determination of recoverability is based on the sum of the expected long-term
undiscounted cash flows compared to the carrying amount of the long-lived
assets being evaluated.

Currency Translation

Financial information relating to foreign operations is reported in accordance
with SFAS No. 52, Foreign Currency Translation. The financial statements of
non-U.S. subsidiaries are measured using the local currency as the functional
currency. Assets and liabilities of these non-U.S. subsidiaries are translated
at exchange rates in effect as of each balance sheet date, and related revenues
and expenses are translated at average exchange rates in effect during the
period. The resulting currency translation adjustments are recorded directly
to shareholders equity as a component of other comprehensive income (loss).

RECENT ACCOUNTING PRONOUNCEMENTS

We implemented Emerging Issues Task Force Issue 00-10, Accounting for Shipping
and Handling Fees and Costs (Issue 00-10), as required, in the quarter ended
September 30, 2001. Amounts billed to customers for shipping and handling have
been reclassified as sales in all periods presented. Prior to implementation,
amounts billed to customers for shipping and handling were classified as a
reduction of cost of sales. These billings totaled $2.5 million in 2001, $3.4
million in 2000 and $5.4 million in 1999.

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. We will complete an evaluation of goodwill by March 31, 2002,
and other intangibles by December 31, 2001, in accordance with SFAS 142. We do
not anticipate making adjustments. However, we would record any necessary
adjustments as cumulative effect of change in accounting principle. As of
October 1, 2001, goodwill amortization ceased, in accordance with SFAS 142.
Goodwill amortization had been approximately $1.0 million per quarter in fiscal
2001.

SFAS No. 141, Business Combinations, requires all business combinations
initiated after June 30, 2001, be accounted for under the purchase method and
in accordance with the statement. Accordingly, all acquisitions initiated
after June 30, 2001, have been recorded in compliance with the statement.

SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
establishes a single accounting method for long-lived assets to be disposed of
by sale, whether previously held and used or newly acquired and extends the
presentation of discontinued operations to include more disposal transactions.
The statement also requires an impairment loss be recognized for assets held
for use when the carrying amount is not recoverable, using an undiscounted cash
flow test. We intend to early adopt the statement in the first quarter of
fiscal 2002. We expect adoption will not have a material effect on financial
position or results of operations.

SPECIAL CHARGES

The fiscal 2000 financial statements include charges of $17.5 million arising
from the decision to abandon our internet strategy, relating to goracing.com.
The charges include provision for the write-off of goodwill, endorsements,
sponsorship commitments, employee severance and termination costs, and the
withdrawal of the initial public offering of goracing.com. The charges are
reflected in the fiscal 2000 financial statements as follows (in millions):

F-9



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##### Table of Contents



|                                               |                   |                                          |                                     |   |      |     | 
|---------------------------------------------- | ----------------- | ---------------------------------------- | ----------------------------------- | - | ---- | --- | 
|                                               |                   |                                          |                                     |   | 2000
|                                               |                   |                                          |                                     |   |     
|Selling, General and Administrative:           |                   |                                          |                                     |  
|                                              
|                                              
|                                              
|                                              
|                                               | Non-cash charges- |                                          |                                     |   |     
|                                              
|                                              
|                                              
|                                              
|                                               |                   | Accounts receivable and prepaids         |                                     | $ | 1.5  |    
|                                              
|                                              
|                                              
|                                              
|                                               |                   | Initial public offering withdrawal       |                                     |   | 2.3  |    
|                                              
|                                              
|                                              
|                                              
|                                               |                   | Other                                    |                                     |   | 0.3  |    
|                                              
|                                              
|                                              
|                                              
|                                               | Cash charges-     |                                          |                                     |   |     
|                                              
|                                              
|                                              
|                                              
|                                               |                   | Professional fees                        |                                     |   | 0.8  |    
|                                              
|                                              
|                                              
|                                              
|                                               |                   | Employee severance and termination costs |                                     |   | 0.7  |    
|                                              
|                                              
|                                              
|                                              
|                                               |                   | Endorsements and sponsorships            |                                     |   | 4.3  |    
|                                               |                   |                                          |                                     |  
|                                               |                   |                                          | Selling, general and administrative |   |      | 9.9 | 
|                                              
|                                              
|                                              
|                                              
|Amortization of Goodwill and Other Intangibles |                   |                                          | 7.6                                 |  
|                                               |                   |                                          |                                     |  
|                                               |                   | $                                        | 17.5                                |  
|                                               |                   |                                          |                                     |  

We completely utilized the accruals for the above cash charges of $5.8 million
with cash payments of $0.7 million in fiscal 2001 and $5.1 million in fiscal
2000.

In addition to the goracing.com charges, the fiscal 2000 financial statements
include charges of $47.3 million for restructuring and other costs.
Anticipated sponsorships, driver and marketing programs did not materialize as
anticipated, contributing to $13.3 million in inventory write-downs. Vendor
discounts totaling $3.0 million were anticipated but not received due to lower
than anticipated volumes. A change in the estimated useful lives of tooling
equipment and identification of obsolete items caused tooling write-downs and
amortization totaling $8.5 million. We decided to concentrate future
production on core drivers and core programs contributing to write downs of
prepaid royalties and sponsorship fees of $7.8 million. Revised estimates of
the collectibility of certain customer account balances indicated $6.1 million
of additional receivable reserve requirements. We determined the goodwill
related to the die-cast helmet product line was worthless resulting in a $1.9
million impairment. These charges are reflected in the fiscal 2000 financial
statements as follows (in millions):

|                                                             |                                      |                      |                                           |                     |     |      |      | 
|------------------------------------------------------------ | ------------------------------------ | -------------------- | ----------------------------------------- | ------------------- | --- | ---- | ---- | 
|                                                             |                                      |                      |                                           |                     |     | 2000
|                                                             |                                      |                      |                                           |                     |     |     
|Cost of Sales:                                               |                                      |                      |                                           |                    
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Inventory write-downs                |                      | $                                         | 13.3                |    
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Vendor discounts                     |                      |                                           | 3.0                 |    
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Depreciation-                       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                      | Tooling write-down   |                                           |                     | 1.9 |     
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                      | Tooling amortization |                                           |                     | 6.6 |     
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Prepaid royalty and sponsorship fees |                      |                                           | 7.8                 |    
|                                                             |                                      |                      |                                           |                    
|                                                             |                                      |                      |                                           | Total cost of sales |     |      | 32.6 | 
|                                                             |                                      |                      |                                           |                    
|Selling, General and Administrative:                         |                                      |                      |                                           |                    
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Accounts receivable                  |                      |                                           | 6.1                 |    
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Other assets                         |                      |                                           | 4.3                 |    
|                                                             |                                      |                      |                                           |                    
|                                                             |                                      |                      | Total selling, general and administrative |                     |     | 10.4 |     
|                                                             |                                      |                      |                                           |                    
|Amortization of Goodwill and Other Intangibles  impairments |                                      |                      | 1.9                                       |                    
|                                                            
|                                                            
|                                                            
|                                                            
|Minority Interests and Other, Net:                           |                                      |                      |                                           |                    
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Other                                |                      |                                           | 0.4                 |    
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Equity investments                   |                      |                                           | 2.0                 |    
|                                                             |                                      |                      |                                           |                    
|                                                             |                                      | $                    | 47.3                                      |                    
|                                                             |                                      |                      |                                           |                    

ACQUISITIONS AND DISPOSITIONS

In September 2001, the board of directors approved liquidation of Goodsports
Holdings Pty Ltd (Goodsports), a subsidiary and marketer of licensed Formula
One product, operating primarily in England. In October, liquidation
proceedings began in England. Action will receive no proceeds from the
liquidation. In 2001, we accrued $0.9 million, pre-tax, for severance, legal,
accounting and other costs related to the liquidation. In 1999, we had acquired
Goodsports for consideration consisting of assumption of certain liabilities.
Historical operating results for Goodsports are summarized in Segment
Information.

F-10



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##### Table of Contents



In July 2001, we purchased an 80% ownership interest in Castaway Collectables
LLC (Castaway). We allocated $0.7 million to goodwill in the initial purchase
price allocation. The first shipments of Castaway product will occur in
December 2001.

Effective May 2001, we acquired Hasbros Winners Circle brand name and
related die-cast inventory and tooling (Winners Circle). We allocated $0.5
million of the initial $1.3 million purchase price to tooling and inventory,
and the remainder to the trademark and a non-compete agreement. As additional
consideration, we agreed to pay 3% of related product sales to Hasbro,
quarterly, for the next five years. The additional consideration will be added
to the price of the trademark quarterly. The trademark will not be amortized
under SFAS 142. We began designing, manufacturing and marketing licensed
die-cast racecar toy replicas for the mass retail market in May 2001. Fiscal
2001 sales, for the five months, totaled approximately $6.5 million. Winners
Circle sales are included in the domestic die-cast segment.

In November 2000, we sold Fantasy Sports Enterprises, Inc. (Fantasy Sports) for
an aggregate sale price of $4.2 million. Net proceeds to the Company totaled
$3.8 million, which approximated Fantasy Sports net assets. In October 1999,
we had acquired substantially all of the assets and assumed certain liabilities
of Fantasy Sports for $3.1 million in cash. Fantasy Sports operated Fantasy
Cup Auto Racing through its Web site at www.fantasycup.com. In connection with
the October 1999 acquisition, we had recorded goodwill of approximately $4.0
million, which, until disposition, had been amortizing straight-line over 15
years.

In November 1998, we acquired Tech 2000 Worldwide, Inc. and the goracing.com
Internet web site for 137,925 shares of restricted common stock valued at $4.3
million and recorded goodwill of $5.4 million, which, until impaired and
written off in Special Charges, had been amortizing straight-line over 7 years.

In October 1998, we acquired Intellectual Properties Group, Inc. (IPG) for
35,000 shares of common stock. The transaction was accounted for as a pooling
of interests. IPGs historical operating results and financial position were
not material to our operating results and financial position, and thus prior
period financial statements were not restated.

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
other souvenir operation is based in Charlotte, with a screen-printing facility
in Atlanta. The foreign die-cast operation is based in Germany. The foreign
apparel and souvenir operation (Goodsports) was based in England. Goodsports
was closed effective September 30, 2001.

We evaluate performance and allocate resources based on segment operating
income (loss). The accounting policies of the reportable segments are the same
as those used in the consolidated financial statements. Domestic licensing
costs and certain management 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. The operating results of goracing.com are included in corporate and
other. It is impracticable to separately present the operating results of
goracing.com, although it was a reportable operating segment in 2000, as
defined in SFAS 131. Financial information for the reportable segments follows
(in thousands):

F-11



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##### Table of Contents



|                    |                                             |   |                   |         |          |   |               |   |                  |   |                  |        |                     |   |                     |         |   |   |        |        |  |   |        |         | 
|------------------- | ------------------------------------------- | - | ----------------- | ------- | -------- | - | ------------- | - | ---------------- | - | ---------------- | ------ | ------------------- | - | ------------------- | ------- | - | - | ------ | ------ |  | - | ------ | ------- | 
|                    |                                             |   |                   |         |          |   | Inter-segment |   | Depreciation and |   | Operating Income |        | Net Capital         |   | Identifiable Assets
|                    |                                             |   | External Revenues |         | Revenues |   | Amortization  |   | (Loss)           |   | Expenditures     |        | As of September 30,
|                    |                                             |   |                   |         |          |   |               |   |                  |   |                  |        |                    
|Fiscal 2001:        |                                             |   |                   |         |          |   |               |   |                  |   |                  |        |                     |   |                     |         |   |   |        |        |  |   |        |        
|                   
|                   
|                   
|                   
|Domestic die-cast   |                                             | $ | 135,571           |         |          | $ | 9,972         |   |                  | $ | 13,568           |        |                     | $ | 36,274              |         |   | $ | 8,670  |        |  | $ | 52,526 |        
|                   
|                   
|                   
|                   
|Domestic apparel    |                                             |   | 142,954           |         |          |   |              |   |                  |   | 5,028            |        |                     |   | 23,181              |         |   |   | 386    |        |  |   | 92,136 |        
|                   
|                   
|                   
|                   
|Foreign die-cast    |                                             |   | 28,793            |         |          |   | 122           |   |                  |   | 3,789            |        |                     |   | 6,385               |         |   |   | 6,692  |        |  |   | 40,599 |        
|                   
|                   
|                   
|                   
|Foreign apparel     |                                             |   | 11,055            |         |          |   | 190           |   |                  |   | 263              |        |                     |   | (2,591              | )       |   |   | 257    |        |  |   |       |        
|                   
|                   
|                   
|                   
|Corporate and other |                                             |   | 4,979             |         |          |   |              |   |                  |   | 5,718            |        |                     |   | (23,059             | )       |   |   | 515    |        |  |   | 95,869 | (e)    
|                   
|                   
|                   
|                   
|Eliminations        |                                             |   |                  |         |          |   | (10,284       | ) |                  |   |                 |        |                     |   | (826                | )       |   |   |       |        |  |   | (2,177 | )      
|                    |                                             |   |                   |         |          |   |               |   |                  |   |                  |        |                     |   |                     |         |   |   |        |        |  |   |        |        
|                    | Total per consolidated
financial statements |   | $                 | 323,352 |          |   | $             |  |                  |   | $                | 28,366 |                     |   | $                   | 39,364  |   |   | $      | 16,520 |  |   | $      | 278,953 | 
|                    |                                             |   |                   |         |          |   |               |   |                  |   |                  |        |                     |   |                     |         |   |   |        |        |  |   |        |        
|Fiscal 2000:        |                                             |   |                   |         |          |   |               |   |                  |   |                  |        |                     |   |                     |         |   |   |        |        |  |   |        |        
|                   
|                   
|                   
|                   
|Domestic die-cast   |                                             | $ | 120,078           |         |          | $ | 5,659         |   |                  | $ | 23,110           | (a)    |                     | $ | 3,367               | (a)     |   | $ | 15,108 |        |  | $ | 49,715 |        
|                   
|                   
|                   
|                   
|Domestic apparel    |                                             |   | 105,292           |         |          |   |              |   |                  |   | 4,897            |        |                     |   | (2,737              | )(b)    |   |   | 2,748  |        |  |   | 90,301 |        
|                   
|                   
|                   
|                   
|Foreign die-cast    |                                             |   | 19,661            |         |          |   |              |   |                  |   | 2,668            |        |                     |   | 2,054               |         |   |   | 5,776  |        |  |   | 33,314 |        
|                   
|                   
|                   
|                   
|Foreign apparel     |                                             |   | 9,816             |         |          |   |              |   |                  |   | 228              |        |                     |   | (5,108              | )(d)    |   |   | 246    |        |  |   | 6,031  |        
|                   
|                   
|                   
|                   
|Corporate and other |                                             |   | 3,258             |         |          |   |              |   |                  |   | 12,208           | (c)    |                     |   | (73,268             | )(c)    |   |   | 21     |        |  |   | 77,681 | (e)    
|                   
|                   
|                   
|                   
|Eliminations        |                                             |   |                  |         |          |   | (5,659        | ) |                  |   |                 |        |                     |   |                    |         |   |   |       |        |  |   | (1,125 | )      
|                    |                                             |   |                   |         |          |   |               |   |                  |   |                  |        |                     |   |                     |         |   |   |        |        |  |   |        |        
|                    | Total per consolidated
financial statements |   | $                 | 258,105 |          |   | $             |  |                  |   | $                | 43,111 |                     |   | $                   | (75,692 | ) |   | $      | 23,899 |  |   | $      | 255,917 | 
|                    |                                             |   |                   |         |          |   |               |   |                  |   |                  |        |                     |   |                     |         |   |   |        |        |  |   |        |        
|Fiscal 1999:        |                                             |   |                   |         |          |   |               |   |                  |   |                  |        |                     |   |                     |         |   |   |        |        |  |   |        |        
|                   
|                   
|                   
|                   
|Domestic die-cast   |                                             | $ | 188,866           |         |          | $ | 12,285        |   |                  | $ | 9,977            |        |                     | $ | 64,665              |         |   | $ | 11,840 |        |  |   | (f     | )      
|                   
|                   
|                   
|                   
|Domestic apparel    |                                             |   | 117,387           |         |          |   |              |   |                  |   | 4,264            |        |                     |   | 17,145              |         |   |   | 2,270  |        |  |   | (f     | )      
|                   
|                   
|                   
|                   
|Foreign die-cast    |                                             |   | 29,282            |         |          |   |              |   |                  |   | 3,476            |        |                     |   | 7,498               |         |   |   | 5,471  |        |  | $ | 37,884 |        
|                   
|                   
|                   
|                   
|Foreign apparel     |                                             |   | 6,741             |         |          |   |              |   |                  |   | 225              |        |                     |   | (1,332              | )       |   |   | 217    |        |  |   | 7,163  |        
|                   
|                   
|                   
|                   
|Corporate and other |                                             |   | 5,566             |         |          |   |              |   |                  |   | 5,004            |        |                     |   | (34,753             | )       |   |   | 6,740  |        |  |   | (f     | )      
|                   
|                   
|                   
|                   
|Eliminations        |                                             |   |                  |         |          |   | (12,285       | ) |                  |   |                 |        |                     |   |                    |         |   |   |       |        |  |   | (f     | )      
|                    |                                             |   |                   |         |          |   |               |   |                  |   |                  |        |                     |   |                     |         |   |   |        |        |  |   |        |        
|                    | Total per consolidated
financial statements |   | $                 | 347,842 |          |   | $             |  |                  |   | $                | 22,946 |                     |   | $                   | 53,223  |   |   | $      | 26,538 |  |   | $      | 340,061 | 
|                    |                                             |   |                   |         |          |   |               |   |                  |   |                  |        |                     |   |                     |         |   |   |        |        |  |   |        |        



---

|(a) |  | Domestic die-cast segment depreciation and amortization reflects
tooling write-down, tooling amortization, and goodwill and intangible
impairments special charges totaling $10.4 million. Domestic die-cast
segment operating income (loss) reflects these charges and $13.0
million of additional charges.                                                                             
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(b) |  | Domestic apparel operating income (loss) reflects $7.7 million of
inventory write-downs and accounts receivable special charges.                                                                                                                                                                                                                                                         
|   
|   
|   
|   
|(c) |  | Corporate and other depreciation and amortization includes goodwill
and intangible write-offs totaling $7.8 million related to goracing.com
and other. Corporate and other operating income (loss) reflects these
charges and $22.3 million of additional special charges related to
goracing.com, prepaid royalties and sponsorships, accounts receivable,
equity investments and other.
|   
|   
|   
|   
|(d) |  | Foreign apparel segment operating income (loss) includes $1.4
million of other assets special charges.                                                                                                                                                                                                                                                                                   
|   
|   
|   
|   
|(e) |  | Corporate and other assets includes $60.9 million in cash at
September 30, 2001, and $20.2 million in cash at September 30, 2000.                                                                                                                                                                                                                                                        
|   
|   
|   
|   
|(f) |  | It is not practicable to determine the identifiable assets of each
segment as of September 30, 1999, in a manner consistent with 2000 and
2001.                                                                                                                                                                                                                                          

F-12



---



##### Table of Contents



INVENTORIES

Inventories consist of the following at September 30 (in thousands):

|                                                            |  |      |        |      |  |   |        | 
|----------------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                                                            |  | 2001 |        | 2000
|                                                            |  |      |        |     
|Raw Materials (apparel blank stock)                         |  | $    | 3,462  |      |  | $ | 4,595  | 
|                                                           
|                                                           
|                                                           
|                                                           
|Finished Goods (die-cast collectibles and finished apparel) |  |      | 21,658 |      |  |   | 27,422 | 
|                                                            |  |      |        |      |  |   |        | 
|                                                            |  | $    | 25,120 |      |  | $ | 32,017 | 
|                                                            |  |      |        |      |  |   |        | 

We depend upon third parties to manufacture all die-cast product and most
apparel and souvenirs. Most significantly, one manufacturer produces over 80%
of die-cast product. Any difficulty experienced by this manufacturer in
producing and delivering the die-cast collectible product could have an adverse
effect on results of operations.

PROPERTY AND EQUIPMENT

Property and equipment consists of the following at September 30 (in
thousands):

|                                          |  |      |         |      |  |                       |         |   |  |            |  | 
|----------------------------------------- |  | ---- | ------- | ---- |  | --------------------- | ------- | - |  | ---------- |  | 
|                                          |  | 2001 |         | 2000 |  | Estimated Useful Life
|                                          |  |      |         |      |  |                      
|Land, building and leasehold improvements |  | $    | 8,392   |      |  | $                     | 8,208   |   |  | 2-25 years
|                                         
|                                         
|                                         
|                                         
|Tooling                                   |  |      | 79,269  |      |  |                       | 74,421  |   |  | 1-3 years 
|                                         
|                                         
|                                         
|                                         
|Equipment, software and other             |  |      | 21,196  |      |  |                       | 22,678  |   |  | 3-5 years 
|                                         
|                                         
|                                         
|                                         
|Trackside trailers and vehicles           |  |      | 5,231   |      |  |                       | 5,266   |   |  | 5 years   
|                                          |  |      |         |      |  |                       |         |   |  |            |  | 
|                                          |  |      | 114,088 |      |  |                       | 110,573 |   |  |            |  | 
|                                         
|                                         
|                                         
|                                         
|Less - accumulated depreciation           |  |      | (73,732 | )    |  |                       | (64,507 | ) |  |            |  | 
|                                          |  |      |         |      |  |                       |         |   |  |            |  | 
|                                          |  | $    | 40,356  |      |  | $                     | 46,066  |   |  |            |  | 
|                                          |  |      |         |      |  |                       |         |   |  |            |  | 

During fiscal 2000, we reduced the depreciable lives of certain tooling
equipment from 5 and 2 years to 3 and 1.5 years, respectively. The revision was
based on current information pertaining to the remaining economic useful lives
of these assets, taking into consideration factors such as changes in the
timing of the introduction of auto body design changes by the major U.S.
automobile manufacturers and the increased rate at which tooling equipment is
being used in the manufacturing process. This change in accounting estimate
increased depreciation $6.6 million in fiscal 2000 (See Special Charges).

GOODWILL AND OTHER INTANGIBLES

Goodwill and other intangibles consists of the following at September 30 (in
thousands):

|                                                    |                          |           |        |         |        |            |           |                  |        |        |        |            |           |                  |  |  |  | 
|--------------------------------------------------- | ------------------------ | --------- | ------ | ------- | ------ | ---------- | --------- | ---------------- | ------ | ------ | ------ | ---------- | --------- | ---------------- |  |  |  | 
|                                                    |                          |           |        |         |        |            |           | Weighted Average |        |        |        |            |           | Weighted Average
|                                                    |                          |           |        |         |        |            |           | Amortization     |        |        |        |            |           | Amortization    
|                                                    |                          |           |        | 2001    |        | Period     |           | 2000             |        | Period
|                                                    |                          |           |        |         |        |            |           |                  |        |       
|Intangibles
with Indefinite Lives:
Carrying amount- |                          |           |        |         |        |            |           |                  |        |        |        |            |           |                  |  | 
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                          | Goodwill  |        | $       | 93,470 |            |           | 23.6 years       |        | $      | 95,927 |            |           | 23.3 years      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                          | Trademark |        |         | 1,095  |            |           | 15.0 years       |        |        |       |            |           | NA              
|                                                    |                          |           |        |         |        |            |           |                  |        |        |        |            |           |                  |  | 
|                                                    |                          |           | 94,565 |         |        | 23.5 years |           |                  | 95,927 |        |        | 23.3 years
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Accumulated amortization |           |        | (16,553 | )      |            |           |                  |        |        |        | (12,683    | )         |                  |  |  | 
|                                                    |                          |           |        |         |        |            |           |                  |        |        |        |            |           |                  |  | 
|                                                    |                          |           | 78,012 |         |        |            |           |                  |        |        | 83,244 |            |           |                  |  | 
|                                                    |                          |           |        |         |        |            |           |                  |        |        |        |            |           |                  |  | 
|Intangibles with Definite Lives:                    |                          |           |        |         |        |            |           |                  |        |        |        |            |           |                  |  | 
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Carrying amount          |           |        | 18,021  |        |            | 8.9 years |                  |        | 17,089 |        |            | 8.2 years
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Accumulated amortization |           |        | (6,311  | )      |            |           |                  |        |        |        | (5,439     | )         |                  |  |  | 
|                                                    |                          |           |        |         |        |            |           |                  |        |        |        |            |           |                  |  | 
|                                                    |                          |           | 11,710 |         |        |            |           |                  |        |        | 11,650 |            |           |                  |  | 
|                                                    |                          |           |        |         |        |            |           |                  |        |        |        |            |           |                  |  | 
|                                                    |                          | $         | 89,722 |         |        |            |           |                  |        | $      | 94,894 |            |           |                  |  | 
|                                                    |                          |           |        |         |        |            |           |                  |        |        |        |            |           |                  |  | 

Goodwill and the trademark ceased amortizing effective October 1, 2001 with the
adoption of SFAS 142. Intangibles with definite lives consists principally of
licenses and will continue amortizing under SFAS 142.

F-13



---



##### Table of Contents



DEBT AND FINANCING

The 4 3/4% convertible subordinated notes (the Notes) are convertible at the
option of the holders into shares of common stock at the initial conversion
price of $48.20 per share, subject to adjustments in certain events. The Notes
are generally unsecured obligations of the Company. The indenture governing
the Notes does not limit or prohibit additional indebtedness, including senior
indebtedness. We may, at our option, redeem the Notes in whole or in part at
any time on or after April 1, 2001, at redemption prices set forth in the
indenture. The Notes mature April 1, 2005. Upon the occurrence of a change
in control or a termination of trading, as defined in the indenture, each
holder of the Notes will have the right to require Action to repurchase notes,
in whole or in part, at face value plus accrued and unpaid interest. The
related offering expenses and initial purchasers discount of 3% are included in
other long-term assets and are being amortized into interest expense using the
effective interest rate method.

During fiscal 2001, we repurchased Notes with a face value of $45.1 million at
pre-tax gains of $13.4 million. The notes were repurchased using $11.1 million
in cash and 829 thousand shares of common stock with a market value of $19.5
million. The stock was reissued from treasury. The difference between the
treasury shares $6.9 million cost and $19.5 million market value increased
additional paid-in capital.

During fiscal 2001 we also paid $4.0 million in cash to settle a long-term
obligation, extending through 2007, and valued at $4.8 million. The resulting
$0.8 million pre-tax gain is included in extraordinary gain. The settlement
also eliminated future contingent royalty payments for trademark usage through
2007.

Other long-term debt of $0.5 million was also extinguished early, at no gain or
loss.

Other long-term debt consists of the following at September 30 (in thousands):

|                                                               |  |      |       |      |  |   |        |  
|-------------------------------------------------------------- |  | ---- | ----- | ---- |  | - | ------ | -
|                                                               |  | 2001 |       | 2000
|                                                               |  |      |       |     
|Notes payable, secured by property and equipment, 6.0% to 8.4% |  | $    | 2,487 |      |  | $ | 4,060  |  
|                                                              
|                                                              
|                                                              
|                                                              
|Long-term obligations, unsecured, 8.0%                         |  |      |      |      |  |   | 5,207  |  
|                                                              
|                                                              
|                                                              
|                                                              
|Other                                                          |  |      |      |      |  |   | 11     |  
|                                                               |  |      |       |      |  |   |        |  
|                                                               |  |      | 2,487 |      |  |   | 9,278  |  
|                                                              
|                                                              
|                                                              
|                                                              
|Less current portion                                           |  |      | (424  | )    |  |   | (1,503 | )
|                                                               |  |      |       |      |  |   |        |  
|                                                               |  | $    | 2,063 |      |  | $ | 7,775  |  
|                                                               |  |      |       |      |  |   |        |  

The aggregate future maturities of the 4 3/4% convertible subordinated notes
(the Notes) and other long-term debt at September 30, 2001, follows (in
thousands):

|            |       |       |        |                      |  |   |     |       | 
|----------- | ----- | ----- | ------ | -------------------- |  | - | --- | ----- | 
|Fiscal Year |       | Notes |        | Other Long-Term Debt
|            |       |       |        |                     
|2002        |       | $     |       |                      |  | $ | 424 |      
|           
|           
|           
|           
|2003        |       |       |       |                      |  |   | 359 |      
|           
|           
|           
|           
|2004        |       |       |       |                      |  |   | 387 |      
|           
|           
|           
|           
|2005        |       |       | 54,933 |                      |  |   | 175 |      
|           
|           
|           
|           
|2006        |       |       |       |                      |  |   | 188 |      
|           
|           
|           
|           
|Thereafter  |       |       |       |                      |  |   | 954 |      
|            |       |       |        |                      |  |   |     |      
|            | Total |       | $      | 54,933               |  |   | $   | 2,487 | 
|            |       |       |        |                      |  |   |     |      

The fair value of the Notes on September 30, 2001, using quoted market prices,
was $46.8 million. The carrying amounts of other long-term debt approximate
fair value based on current market prices for similar debt instruments.

F-14



---



##### Table of Contents



In September 2000, the Company entered into a Loan and Security Agreement (the
Agreement) with a subsidiary of Bank One (Bank One), providing for borrowings
up to $30.0 million, subject to the limitation of a calculated borrowing base,
and including up to $15.0 million of stand by letters of credit. The line of
credit bears interest at the Bank One corporate base plus 0.5 percent or LIBOR
plus 2.5 percent. The agreement provides for commitment fee of 0.5% of the
average unused line of credit and 1.75% to 2.5% of the average unused letters of
credit payable annually and expires December 2002. The Agreement is secured
principally by inventory, receivables and equipment. The Agreement contains
covenants, which require the Company to meet certain financial tests
principally related to tangible net worth and EBITDA, and restricts the payment
of dividends. The calculated borrowing base generally totals less than $30.0
million at current accounts receivable levels. At September 30, 2001, letters
of credit totaled $5.8 million and the available line of credit totaled $22.2
million.

CREDIT AND MARKET RISK

Concentrations of credit risk with respect to accounts receivable are limited
due to the large number of customers comprising our credit base and the
geographical dispersion of the customers.

Cash equivalents consist of cash and $49.4 million of investments in overnight
reverse repurchase agreements at September 30, 2001. Repurchase agreements are
collateralized at 102% of securities provided as collateral by the counterparty
bank. The bank provides securities with a market value at least equal to the
funds held by the bank under the underlying repurchase agreement.

SHAREHOLDERS EQUITY

As of September 30, 2001, options on 258,487 shares of common stock were
available for grant to key employees, consultants, independent contractors and
non-employee directors under the 1993 Stock Option Plan, 1998 Non-Qualified
Stock Option Plan and the 2000 Stock Option Plan, as approved by shareholders.
The stock option plans allow awards in the form of incentive stock options,
non-statutory stock, stock appreciation rights and shares of common stock. In
October 2001, the board of directors amended the 2000 Stock Option Plan and
increased the number of shares issuable under the plan from 7% of issued common
shares not to exceed 2 million shares, to 13% of issued common shares not to
exceed 3 million shares. This amendment is subject to shareholder approval.
The board also increased the number of shares reserved for issuance under the
2000 Stock Option Plan, from 2 million shares to 3 million shares. As a result
of the board action, as of September 30, 2001, the total shares reserved for
issuance under the stock option plans increased to 5,482,135 shares and options
on 1,288,703 shares were available for grant.

Stock option plan activity and data follows:

|                                                           |  |        |           |          |  |          |       |          |  |        |           |          |  |   |       |  |  |          |          |   |  |   |       | 
|---------------------------------------------------------- |  | ------ | --------- | -------- |  | -------- | ----- | -------- |  | ------ | --------- | -------- |  | - | ----- |  |  | -------- | -------- | - |  | - | ----- | 
|                                                           |  | 2001   |           | 2000     |  | 1999    
|                                                           |  |        |           |          |  |         
|                                                           |  |        |           |          |  | Weighted |       |          |  |        |           | Weighted |  |   |       |  |  | Weighted
|                                                           |  | Number |           | Average  |  | Number   |       | Average  |  | Number |           | Average 
|                                                           |  | of     |           | Exercise |  | of       |       | Exercise |  | of     |           | Exercise
|                                                           |  | Shares |           | Price    |  | Shares   |       | Price    |  | Shares |           | Price   
|                                                           |  |        |           |          |  |          |       |          |  |        |           |         
|Outstanding
at beginning of year                           |  |        | 1,279,775 |          |  | $        | 16.27 |          |  |        | 996,387   |          |  | $ | 21.23 |  |  |          | 930,811  |   |  | $ | 14.61 | 
|                                                          
|                                                          
|                                                          
|                                                          
|Granted                                                    |  |        | 1,063,000 |          |  |          | 9.91  |          |  |        | 491,500   |          |  |   | 8.94  |  |  |          | 419,500  |   |  |   | 28.50 | 
|                                                          
|                                                          
|                                                          
|                                                          
|Exercised                                                  |  |        | (329,232  | )        |  |          | 9.07  |          |  |        | (20,918   | )        |  |   | 6.16  |  |  |          | (332,924 | ) |  |   | 11.53 | 
|                                                          
|                                                          
|                                                          
|                                                          
|Canceled                                                   |  |        | (249,514  | )        |  |          | 18.25 |          |  |        | (187,194  | )        |  |   | 27.48 |  |  |          | (21,000  | ) |  |   | 26.64 | 
|                                                           |  |        |           |          |  |          |       |          |  |        |           |          |  |   |       |  |  |          |          |   |  |   |       | 
|Outstanding at end of year                                 |  |        | 1,764,029 |          |  | $        | 13.50 |          |  |        | 1,279,775 |          |  | $ | 16.27 |  |  |          | 996,387  |   |  | $ | 21.23 | 
|                                                           |  |        |           |          |  |          |       |          |  |        |           |          |  |   |       |  |  |          |          |   |  |   |       | 
|Outstanding exercisable at
end of year                     |  |        | 519,016   |          |  | $        | 21.30 |          |  |        | 659,323   |          |  | $ | 17.47 |  |  |          | 460,668  |   |  | $ | 14.88 | 
|                                                          
|                                                          
|                                                          
|                                                          
|Options available for grant
at end of year                 |  |        | 258,487   |          |  |          |       |          |  |        | 1,020,038 |          |  |   |       |  |  |          | 174,360  |   |  |   |       | 
|                                                          
|                                                          
|                                                          
|                                                          
|Weighted average fair value
of options granted in the
year |  |        |           |          |  | $        | 9.82  |          |  |        |           |          |  | $ | 7.43  |  |  |          |          |   |  | $ | 13.93 | 

F-15



---



##### Table of Contents



Options outstanding and exercisable by price range as of September 30, 2001,
are as follows:

|                |               |             |  |             |                     |          |  |             |  |          |                     |       |  |  |  |          |  |  |   |       |  | 
|--------------- | ------------- | ----------- |  | ----------- | ------------------- | -------- |  | ----------- |  | -------- | ------------------- | ----- |  |  |  | -------- |  |  | - | ----- |  | 
|                |               |             |  |             | Options Outstanding |          |  |             |  |          | Options Exercisable
|                |               |             |  |             |                     |         
|                |               |             |  |             |                     |          |  | Weighted    |  |          |                     |       |  |  |  |          |  |  |   |      
|                |               |             |  |             |                     |          |  | Average     |  | Weighted |                     |       |  |  |  | Weighted
|                |               |             |  |             |                     |          |  | Remaining   |  | Average  |                     |       |  |  |  | Average 
|Range of        |               | Options     |  | Contractual |                     | Exercise |  | Options     |  | Exercise
|Exercise Prices |               | Outstanding |  | Life        |                     | Price    |  | Exercisable |  | Price   
|                |               |             |  |             |                     |          |  |             |  |         
|                | $2.38$  7.38 |             |  | 745,500     |                     |          |  | 9.2         |  |          | $                   | 4.35  |  |  |  | 33,666   |  |  | $ | 5.45  | 
|               
|               
|               
|               
|                | 7.39  14.75  |             |  | 242,473     |                     |          |  | 6.9         |  |          |                     | 10.01 |  |  |  | 93,301   |  |  |   | 10.60 | 
|               
|               
|               
|               
|                | 14.76  22.13 |             |  | 437,556     |                     |          |  | 6.9         |  |          |                     | 20.19 |  |  |  | 105,889  |  |  |   | 18.55 | 
|               
|               
|               
|               
|                | 22.14  29.50 |             |  | 285,000     |                     |          |  | 3.6         |  |          |                     | 26.06 |  |  |  | 237,829  |  |  |   | 26.05 | 
|               
|               
|               
|               
|                | 29.51  36.88 |             |  | 53,500      |                     |          |  | 5.7         |  |          |                     | 35.27 |  |  |  | 48,331   |  |  |   | 35.59 | 
|                |               |             |  |             |                     |          |  |             |  |          |                     |       |  |  |  |          |  |  |   |      
|                | 2.38  36.88  |             |  | 1,764,029   |                     |          |  | 7.3         |  |          | $                   | 13.50 |  |  |  | 519,016  |  |  | $ | 21.30 | 
|                |               |             |  |             |                     |          |  |             |  |          |                     |       |  |  |  |          |  |  |   |      

We account for stock-based compensation plans under APB No. 25, under which no
compensation expense has been recognized, as all options have been granted with
an exercise price equal to or exceeding the fair value of the common stock on
the date of grant. For SFAS No. 123, Accounting for Stock-Based Compensation
(SFAS 123), we estimated the fair value of each option grant as of the date of
grant using the Black-Scholes option pricing method with the following
assumptions:

|                         |  |         |      |         |  |         |       |   |  |  |     |  
|------------------------ |  | ------- | ---- | ------- |  | ------- | ----- | - |  |  | --- | -
|                         |  | 2001    |      | 2000    |  | 1999   
|                         |  |         |      |         |  |        
|Volatility               |  |         | 81.0 | %       |  |         | 112.6 | % |  |  | 7.1 | %
|                        
|                        
|                        
|                        
|Risk-free interest rate  |  |         | 4.5  | %       |  |         | 5.3   | % |  |  | 5.8 | %
|                        
|                        
|                        
|                        
|Dividend rate            |  |         | 0.0  | %       |  |         | 0.0   | % |  |  | 0.0 | %
|                        
|                        
|                        
|                        
|Expected life of options |  | 3 years |      | 6 years |  | 3 years

Options generally vest ratably over three years. Had compensation costs been
determined consistent with SFAS 123, utilizing the assumptions detailed above
and amortizing the resulting fair value of stock options granted over the
respective vesting period of the options, the net income (loss) before
extraordinary gain and per share amounts would have been the following pro
forma amounts (in thousands, except per share data):

|                         |             |  |      |        |      |  |      |         |   |  |   |        | 
|------------------------ | ----------- |  | ---- | ------ | ---- |  | ---- | ------- | - |  | - | ------ | 
|                         |             |  | 2001 |        | 2000 |  | 1999
|                         |             |  |      |        |      |  |     
|Net Income (Loss) Before |             |  |      |        |      |  |      |         |   |  |   |       
|                        
|                        
|                        
|                        
|Extraordinary Gain:      |             |  |      |        |      |  |      |         |   |  |   |       
|                        
|                        
|                        
|                        
|                         | As Reported |  | $    | 23,017 |      |  | $    | (58,087 | ) |  | $ | 28,369 | 
|                        
|                        
|                        
|                        
|                         | Pro Forma   |  | $    | 20,309 |      |  | $    | (60,597 | ) |  | $ | 25,056 | 
|                        
|                        
|                        
|                        
|Basic EPS:               |             |  |      |        |      |  |      |         |   |  |   |       
|                        
|                        
|                        
|                        
|                         | As Reported |  | $    | 1.41   |      |  | $    | (3.52   | ) |  | $ | 1.69   | 
|                        
|                        
|                        
|                        
|                         | Pro Forma   |  | $    | 1.24   |      |  | $    | (3.67   | ) |  | $ | 1.49   | 
|                        
|                        
|                        
|                        
|Diluted EPS:             |             |  |      |        |      |  |      |         |   |  |   |       
|                        
|                        
|                        
|                        
|                         | As Reported |  | $    | 1.37   |      |  | $    | (3.52   | ) |  | $ | 1.65   | 
|                        
|                        
|                        
|                        
|                         | Pro Forma   |  | $    | 1.21   |      |  | $    | (3.67   | ) |  | $ | 1.47   | 

In 2001, we issued warrants to purchase 200 thousand shares of common stock at
an average exercise price of $14.23 per share, in connection with business
acquisitions and license agreements. The common stock had an average market
price of $14.55 on the issuance dates. The warrants had a fair value of
approximately $1.6 million as estimated by the Black-Scholes option pricing
method (average assumed volatility 60%, risk-free rate 4.31% and term of 5.1
years). Issuance resulted in increases in additional paid-in-capital and
goodwill and intangible assets.

F-16



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A total of 1,800,000 shares of the Companys common stock are reserved for sale
to employees under the Action Performance Companies, Inc. 1999 Employee Stock
Purchase Plan. The plan allows eligible employees to purchase shares of common
stock at the lesser of 85% of the fair value of such shares at the beginning or
end of each semi-annual offering period. Purchases are limited to 15% of an
employees eligible compensation, subject to a maximum limitation of $25
thousand per employee annually. Employee withholdings under the plan commenced
on August 1999 and share purchases occur semi-annually.

In July 2001, the Board of Directors approved a one-year program in which we
may purchase up to 1 million shares of our common stock in the open market or
in privately negotiated transactions. No shares have been purchased under the
program.

EARNINGS PER COMMON SHARE

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

|                                                                                                           |  |      |        |      |  |      |         |   |  |   |        | 
|---------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------- | - |  | - | ------ | 
|                                                                                                           |  | 2001 |        | 2000 |  | 1999
|                                                                                                           |  |      |        |      |  |     
|NUMERATOR:                                                                                                 |  |      |        |      |  |      |         |   |  |   |        | 
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Basic  income (loss) before extraordinary gain                                                            |  | $    | 23,017 |      |  | $    | (58,087 | ) |  | $ | 28,369 | 
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Effect of dilutive 4 3/4% convertible subordinated
notes, tax affected interest                            |  |      |       |      |  |      |        |   |  |   | 3,216  | 
|                                                                                                           |  |      |        |      |  |      |         |   |  |   |        | 
|Diluted  adjusted income (loss) before extraordinary
gain and assumed conversions                         |  | $    | 23,017 |      |  | $    | (58,087 | ) |  | $ | 31,585 | 
|                                                                                                           |  |      |        |      |  |      |         |   |  |   |        | 
|DENOMINATOR:                                                                                               |  |      |        |      |  |      |         |   |  |   |        | 
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Basic  weighted average shares                                                                            |  |      | 16,373 |      |  |      | 16,515  |   |  |   | 16,789 | 
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Effect of dilutive stock options and warrants                                                              |  |      | 476    |      |  |      |        |   |  |   | 315    | 
|                                                                                                          
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Effect of dilutive 4 3/4% convertible subordinated notes                                                   |  |      |       |      |  |      |        |   |  |   | 2,075  | 
|                                                                                                           |  |      |        |      |  |      |         |   |  |   |        | 
|Diluted  adjusted weighted average shares and assumed
conversion of 4 3/4% convertible subordinated notes |  |      | 16,849 |      |  |      | 16,515  |   |  |   | 19,179 | 
|                                                                                                           |  |      |        |      |  |      |         |   |  |   |        | 

The impacts of options and warrants outstanding for the purchase of 925
thousand shares of common stock at an average price of $22.50 were not included
in the calculation of diluted EPS for fiscal 2001 because to do so would be
antidilutive. Those options and warrants had exercise prices greater than the
average market price of the common stock in fiscal 2001. The impacts of
outstanding 4 3/4% convertible subordinated notes were not included in the
calculation of diluted EPS for fiscal 2001, because to do so also would have
been antidilutive. The antidilutive options, antidilutive warrants, and
4 3/4% convertible subordinated notes could potentially dilute EPS in the
future.

EMPLOYEE BENEFITS

Our defined contribution plan qualifies as a cash or deferred profit sharing
plan under Sections 401(a) and 401(k) of the Internal Revenue Code and is
available to substantially all domestic employees. Participating employees may
defer from 1% to 15% of their pre-tax compensation. The plan provides for an
employer matching contribution of fifty cents for each dollar contributed by
the employee, up to a maximum of 2% of the employees defined compensation.
The plan also provides for an annual employer profit sharing contribution in
such amounts as the Board of Directors may determine. In fiscal years 2001,
2000 and 1999, employer-matching contributions expensed totaled $157 thousand,
$191 thousand, and $206 thousand.

INCOME TAXES

We provide for income taxes under SFAS No. 109, Accounting for Income Taxes
(SFAS 109). SFAS 109 requires the use of an asset and liability approach in
accounting for income taxes. Deferred tax assets and liabilities are recorded
based on the differences between the financial statement and tax bases of
assets and liabilities and the tax rates in effect when these differences are
expected to reverse.

F-17



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##### Table of Contents



Income taxes, excluding income taxes on extraordinary gain, consists of the
following (in thousands):

|             |         |                                           |        |       |        |      |         |         |        |   |        |        |     | 
|------------ | ------- | ----------------------------------------- | ------ | ----- | ------ | ---- | ------- | ------- | ------ | - | ------ | ------ | --- | 
|             |         |                                           |        | 2001  |        | 2000 |         | 1999   
|             |         |                                           |        |       |        |      |         |        
|Current:     |         |                                           |        |       |        |      |         |         |        |   |        |       
|            
|            
|            
|            
|             | Federal |                                           | $      | 4,557 |        |      | $       | (15,765 | )      |   | $      | 14,877 |    
|            
|            
|            
|            
|             | State   |                                           |        | 409   |        |      |         |        |        |   |        | 849    |    
|            
|            
|            
|            
|             | Foreign |                                           |        | 1,228 |        |      |         | 400     |        |   |        | 2,641  |    
|             |         |                                           |        |       |        |      |         |         |        |   |        |       
|             |         |                                           | 6,194  |       |        |      | (15,365 | )       |        |   | 18,367 |       
|            
|            
|            
|            
|Deferred:    |         |                                           |        |       |        |      |         |         |        |   |        |       
|            
|            
|            
|            
|             |         | Change in net deferred tax
liability      |        |       | 8,560  |      |         |         | (9,227 | ) |        |        | 159 | 
|            
|            
|            
|            
|             |         | Change in estimated income
tax receivable |        |       | (4,549 | )    |         |         |       |   |        |        |    | 
|             |         |                                           |        |       |        |      |         |         |        |   |        |       
|             |         |                                           | 4,011  |       |        |      | (9,227  | )       |        |   | 159    |       
|             |         |                                           |        |       |        |      |         |         |        |   |        |       
|Income taxes |         | $                                         | 10,205 |       |        | $    | (24,592 | )       |        | $ | 18,526 |       
|             |         |                                           |        |       |        |      |         |         |        |   |        |       

A reconciliation of the federal income tax rate to the Companys effective rate
follows:

|                                    |  |      |    |      |  |      |     |    |  |  |    |  
|----------------------------------- |  | ---- | -- | ---- |  | ---- | --- | -- |  |  | -- | -
|                                    |  | 2001 |    | 2000 |  | 1999
|                                    |  |      |    |      |  |     
|Statutory federal rate              |  |      | 35 | %    |  |      | (35 | )% |  |  | 35 | %
|                                   
|                                   
|                                   
|                                   
|State taxes, net of federal benefit |  |      | 2  |      |  |      | (2  | )  |  |  | 2  |  
|                                   
|                                   
|                                   
|                                   
|Foreign incremental rate            |  |      |   |      |  |      |    |    |  |  | 2  |  
|                                   
|                                   
|                                   
|                                   
|Non-deductible expenses             |  |      | 1  |      |  |      | 2   |    |  |  |   |  
|                                   
|                                   
|                                   
|                                   
|Valuation allowances                |  |      | (2 | )    |  |      | 5   |    |  |  |   |  
|                                   
|                                   
|                                   
|                                   
|US benefit of Goodsports closure    |  |      | (5 | )    |  |      |    |    |  |  |   |  
|                                    |  |      |    |      |  |      |     |    |  |  |    |  
|                                    |  |      | 31 | %    |  |      | (30 | )% |  |  | 39 | %
|                                    |  |      |    |      |  |      |     |    |  |  |    |  

F-18



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##### Table of Contents



The components of deferred taxes at September 30 follow (in thousands):

|                                   |           |                       |                                 |   |        |        |        |   |        |        |  
|---------------------------------- | --------- | --------------------- | ------------------------------- | - | ------ | ------ | ------ | - | ------ | ------ | -
|                                   |           |                       |                                 |   | 2001   |        | 2000  
|                                   |           |                       |                                 |   |        |        |       
|Deferred Tax Assets:               |           |                       |                                 |   |        |        |        |  
|                                  
|                                  
|                                  
|                                  
|                                   | Domestic- |                       |                                 |   |        |        |        |   |       
|                                  
|                                  
|                                  
|                                  
|                                   |           |                       | Inventory cost capitalization   |   | $      | 800    |        |   | $      | 869    |  
|                                  
|                                  
|                                  
|                                  
|                                   |           |                       | Reserves and accruals           |   |        | 3,718  |        |   |        | 8,752  |  
|                                  
|                                  
|                                  
|                                  
|                                   |           |                       | Deferred compensation           |   |        | 320    |        |   |        | 220    |  
|                                  
|                                  
|                                  
|                                  
|                                   |           |                       | Intangible asset capitalization |   |        | 1,239  |        |   |        | 2,183  |  
|                                  
|                                  
|                                  
|                                  
|                                   |           |                       | Capital loss carryforwards      |   |        | 758    |        |   |        | 752    |  
|                                  
|                                  
|                                  
|                                  
|                                   |           |                       | State net operating losses      |   |        | 1,548  |        |   |        | 1,102  |  
|                                  
|                                  
|                                  
|                                  
|                                   |           | Valuation allowance   |                                 |   | (2,131 | )      |        |   | (1,636 | )     
|                                  
|                                  
|                                  
|                                  
|                                   | Foreign-  |                       |                                 |   |        |        |        |   |       
|                                  
|                                  
|                                  
|                                  
|                                   |           | Reserves and accruals |                                 |   | 217    |        |        |   | 350    |       
|                                  
|                                  
|                                  
|                                  
|                                   |           | Net operating losses  |                                 |   | 2,483  |        |        |   | 6,125  |       
|                                  
|                                  
|                                  
|                                  
|                                   |           | Valuation allowance   |                                 |   | (1,164 | )      |        |   | (2,516 | )     
|                                   |           |                       |                                 |   |        |        |        |  
|Net deferred tax assets            |           |                       | 7,788                           |   |        |        | 16,201 |  
|                                   |           |                       |                                 |   |        |        |        |  
|Deferred Tax Liabilities:          |           |                       |                                 |   |        |        |        |  
|                                  
|                                  
|                                  
|                                  
|                                   | Domestic- |                       |                                 |   |        |        |        |   |       
|                                  
|                                  
|                                  
|                                  
|                                   |           |                       | Accelerated tax depreciation    |   |        | (1,829 | )      |   |        | (1,248 | )
|                                  
|                                  
|                                  
|                                  
|                                   |           |                       | Accelerated tax amortization    |   |        | (3,462 | )      |   |        | (2,817 | )
|                                  
|                                  
|                                  
|                                  
|                                   |           |                       | Reserves and accruals           |   |        | (314   | )      |   |        | (457   | )
|                                  
|                                  
|                                  
|                                  
|                                   | Foreign-  |                       |                                 |   |        |        |        |   |       
|                                  
|                                  
|                                  
|                                  
|                                   |           |                       | Accelerated tax depreciation    |   |        | (897   | )      |   |        | (3,567 | )
|                                  
|                                  
|                                  
|                                  
|                                   |           |                       | Accelerated tax amortization    |   |        | (2,530 | )      |   |        | (759   | )
|                                  
|                                  
|                                  
|                                  
|                                   |           |                       | Reserves and accruals           |   |        | (52    | )      |   |        | (25    | )
|                                   |           |                       |                                 |   |        |        |        |  
|Net deferred tax liabilities       |           |                       | (9,084                          | ) |        |        | (8,873 | )
|                                   |           |                       |                                 |   |        |        |        |  
|Net deferred tax asset (liability) |           | $                     | (1,296                          | ) |        | $      | 7,328  |  
|                                   |           |                       |                                 |   |        |        |        |  

SFAS 109 requires the reduction of deferred tax assets by a valuation allowance
if, based on the weight of available evidence, it is more likely than not that
some or all of the deferred tax asset may not be realized. During 2001, we
reduced valuation allowances by $1.5 million because 2001 taxable income was
sufficient to realize state net operating loss tax assets and other deferred
tax assets. In 2001, we also offset $2.1 million of valuation allowances
against deferred tax assets when Goodsports liquidated. Valuation allowances
as of September 30, 2001, include $1.2 million to fully reserve a foreign tax
asset for net operating losses generated by a German subsidiary, $1.3 million
to fully reserve tax assets for state net operating losses expected to expire
before realized and $0.8 million to fully reserve capital loss carryforwards.
Those capital loss carryforwards of $2.0 million expire $1.0 million in 2005
and $1.0 million in 2006.

No United States federal income taxes have been provided on undistributed
earnings of German subsidiaries deemed permanently reinvested. Those earnings
total $4.1 million at September 30, 2001.

SUPPLEMENTAL CASH FLOW INFORMATION

The supplemental cash flow disclosures and non-cash transactions follow (in
thousands):

F-19



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##### Table of Contents



|                          |                                                          |  |      |         |      |  |      |       |  |  |   |        | 
|------------------------- | -------------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ----- |  |  | - | ------ | 
|                          |                                                          |  | 2001 |         | 2000 |  | 1999
|                          |                                                          |  |      |         |      |  |     
|Supplemental disclosures: |                                                          |  |      |         |      |  |      |       |  |  |   |       
|                         
|                         
|                         
|                         
|                          | Interest paid                                            |  | $    | 5,222   |      |  | $    | 6,276 |  |  | $ | 4,279  | 
|                         
|                         
|                         
|                         
|                          | Income taxes paid (refunded), net                        |  |      | (17,032 | )    |  |      | 2,332 |  |  |   | 12,052 | 
|                         
|                         
|                         
|                         
|Non-cash transactions:    |                                                          |  |      |         |      |  |      |       |  |  |   |       
|                         
|                         
|                         
|                         
|                          | Common stock issued in acquisitions                      |  |      | 175     |      |  |      |      |  |  |   | 4,298  | 
|                         
|                         
|                         
|                         
|                          | Warrants issued in acquisitions                          |  |      | 241     |      |  |      |      |  |  |   |       | 
|                         
|                         
|                         
|                         
|                          | Warrants issued for licenses                             |  |      | 1,399   |      |  |      |      |  |  |   |       | 
|                         
|                         
|                         
|                         
|                          | Licenses contributed for minority interest               |  |      | 173     |      |  |      |      |  |  |   |       | 
|                         
|                         
|                         
|                         
|                          | Shares issued to repurchase debt                         |  |      | 12,628  |      |  |      |      |  |  |   |       | 
|                         
|                         
|                         
|                         
|                          | Debt and liabilities incurred or assumed in acquisitions |  |      |        |      |  |      | 833   |  |  |   | 3,999  | 
|                         
|                         
|                         
|                         
|                          | Property and equipment acquired with debt                |  |      |        |      |  |      |      |  |  |   | 1,078  | 

LEGAL MATTERS

Action was named as defendant in lawsuits that alleged anti-competitive
activities in violation of federal anti-trust law on the part of certain
entities, prior to Actions acquisition of those entities. In order to avoid
further expense and the distraction of management in September 1999, Action
entered into a settlement agreement for the lawsuit. In connection with the
settlement, we recorded a pre-tax charge of $3.6 million during fiscal 1999 to
reflect the financial terms of the settlement, legal and other expenses. This
charge is included in selling, general and administrative. The settlement
required $1.9 million cash payment and $1.1 million coupon distribution. We
paid the cash portion of the settlement during fiscal 2000. Recipients may
redeem the coupons before the end of 2002. Action must pay 25% of the
unredeemed coupon value to a charity of the settlement parties choice.

On November 30, 1999, a class action lawsuit was filed against Action alleging
Action and other defendants violated the Securities Exchange Act of 1934 by (a)
making allegedly false statements about the state of Actions business and the
shipment of certain products to a customer, or (b) participating in a
fraudulent scheme that was intended to inflate the price of the common stock.
The lawsuit was dismissed in September 2001.

COMMITMENTS AND CONTINGENCIES

Aggregate future minimum guaranteed royalty payments and personal service
agreement payments are as follows as of September 30, 2001 (in thousands):

| |  |               |      |         |         |                  |        |   |       |   |     | 
| |  | ------------- | ---- | ------- | ------- | ---------------- | ------ | - | ----- | - | --- | 
| |  | Calendar Year |      | Royalty |         | Personal Service
| |  |               |      |         |         |                 
| |  |               | 2002 |         |         | $                | 20,817 |   |       | $ | 825 | 
|
|
|
|
| |  |               | 2003 |         |         |                  | 16,695 |   |       |   | 800 | 
|
|
|
|
| |  |               | 2004 |         |         |                  | 15,650 |   |       |   | 600 | 
|
|
|
|
| |  |               | 2005 |         |         |                  | 14,323 |   |       |   | 100 | 
|
|
|
|
| |  |               | 2006 |         |         |                  | 10,015 |   |       |   | 100 | 
|
|
|
|
| |  | Thereafter    |      |         | 23,670  |                  |        |   |      |  
| |  |               |      |         |         |                  |        |   |       |   |     | 
| |  | Total         |      | $       | 101,170 |                  |        | $ | 2,425 |  
| |  |               |      |         |         |                  |        |   |       |   |     | 

Royalties expensed under licenses, including guaranteed minimums, were $46.2
million, $48.4 million and $49.7 million for the fiscal years 2001, 2000 and
1999.

F-20



---



##### Table of Contents



Aggregate future payments and receipts under noncancellable operating leases
and subleases are as follows as of September 30, 2001 (in thousands):

| |  |             |      |          |        |          |       |          |        |   |       | 
| |  | ----------- | ---- | -------- | ------ | -------- | ----- | -------- | ------ | - | ----- | 
| |  |             |      |          |        | Lease    |       | Sublease
| |  | Fiscal Year |      | Payments |        | Receipts
| |  |             |      |          |        |         
| |  |             | 2002 |          |        | $        | 4,970 |          |        | $ | 2,523 | 
|
|
|
|
| |  |             | 2003 |          |        |          | 3,636 |          |        |   | 1,327 | 
|
|
|
|
| |  |             | 2004 |          |        |          | 3,222 |          |        |   | 1,327 | 
|
|
|
|
| |  |             | 2005 |          |        |          | 3,192 |          |        |   | 1,505 | 
|
|
|
|
| |  |             | 2006 |          |        |          | 2,985 |          |        |   | 1,522 | 
|
|
|
|
| |  | Thereafter  |      |          | 17,043 |          |       |          | 3,860  |  
| |  |             |      |          |        |          |       |          |        |   |       | 
| |  | Total       |      | $        | 35,048 |          |       | $        | 12,064 |  
| |  |             |      |          |        |          |       |          |        |   |       | 

In the sublease arrangements, we remain the primary obligor under the terms of
the original lease agreements. Rent expense related to these lease agreements
totaled $5.6 million, $5.7 million, and $4.8 million for the fiscal years 2001,
2000 and 1999.

Purchase commitments at September 30, 2001, totaled $7.5 million, including
commitments supported by letters of credit.

We entered into a contractual agreement providing
severance benefits to a
key employee in the event of a potential change of ownership or termination of
employment. Commitments under this arrangement totaled approximately $1.8
million at September 30, 2001.

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.

RELATED PARTY TRANSACTIONS

We previously leased and now own a building in Tempe, Arizona, which we previously used for corporate,
administrative, sales, and warehousing purposes. We paid our chairman rent on
the facility of approximately $120 thousand for fiscal 1999. In fiscal 1999,
we completed the $2.1 million
purchase of the facility. During fiscal year 2000, we reduced the carrying
value of the property to estimated current market value. The property is
included in other long-term assets and is currently held for sale.

In August 2001, we advanced our chairman $262 thousand in connection with the
exercise of stock options. The advance was repaid in full in November
2001.

F-21



---



##### Table of Contents



Schedule II

ACTION PERFORMANCE COMPANIES, INC.

VALUATION AND QUALIFYING ACCOUNTS

Years Ended September 30, 2001, 2000 and 1999
(in thousands)

Additions

|                   |  |                   |       |                  |  |                  |       |                |  |      |      |                   |  |   |        |   |  |   |       | 
|------------------ |  | ----------------- | ----- | ---------------- |  | ---------------- | ----- | -------------- |  | ---- | ---- | ----------------- |  | - | ------ | - |  | - | ----- | 
|                   |  | Balance at        |       | Charged to costs |  | Charged to other |       |                |  |      |      | Balance at end of
|Description        |  | beginning of year |       | and expenses     |  | accounts (B)     |       | Deductions (A) |  | year
|                   |  |                   |       |                  |  |                  |       |                |  |     
|Allowance for      |  |                   |       |                  |  |                  |       |                |  |      |      |                   |  |   |        |   |  |   |       | 
|                  
|                  
|                  
|                  
|doubtful accounts: |  |                   |       |                  |  |                  |       |                |  |      |      |                   |  |   |        |   |  |   |       | 
|                  
|                  
|                  
|                  
|2001               |  | $                 | 3,392 |                  |  | $                | 768   |                |  | $    | (144 | )                 |  | $ | (1,875 | ) |  | $ | 2,141 | 
|                  
|                  
|                  
|                  
|2000               |  |                   | 1,421 |                  |  |                  | 7,022 |                |  |      |     |                   |  |   | (5,051 | ) |  |   | 3,392 | 
|                  
|                  
|                  
|                  
|1999               |  |                   | 986   |                  |  |                  | 1,130 |                |  |      |     |                   |  |   | (695   | ) |  |   | 1,421 | 



| | (A) |  | Amounts indicated as deductions are for amounts charged against
these reserves in the ordinary course of business.                                             
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (B) |  | Amounts indicated as charged to other accounts represent allowance
written off in connection with disposition of the investment in
Goodsports Holdings Pty Ltd.





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##### Table of Contents






EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                                          
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                          
|Number  |  | Description                                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                          
|3.1     |  | First Amended and Restated Articles of Incorporation of Registrant(1)                                                                                                                                                                                    
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|        |  |                                                                                                                                                                                                                                                          
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|3.2     |  | Amended and Restated Bylaws of Registrant(1)                                                                                                                                                                                                             
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|        |  |                                                                                                                                                                                                                                                          
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|4.1     |  | Form of Certificate of Common Stock(2)                                                                                                                                                                                                                   
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|        |  |                                                                                                                                                                                                                                                          
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|4.2     |  | Indenture dated as of March 24, 1998, between Action Performance
Companies, Inc. and First Union National Bank, as Trustee, including
forms of Notes(3)                                                                                                  
|       
|       
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|       
|        |  |                                                                                                                                                                                                                                                          
|       
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|10.4.2  |  | 1993 Stock Option Plan, as amended and restated through January 16,
1997(6)                                                                                                                                                                              
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|        |  |                                                                                                                                                                                                                                                          
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|10.8    |  | Form of Indemnification Agreement entered into with the Directors of
the Registrant (2)                                                                                                                                                                  
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|        |  |                                                                                                                                                                                                                                                          
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|10.27   |  | Manufacturing Agreement between the Registrant and Early Light
International Co. Ltd. dated November 1, 2000(5)                                                                                                                                          
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|        |  |                                                                                                                                                                                                                                                          
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|10.52   |  | 1998 Non-qualified Stock Option Plan(3)                                                                                                                                                                                                                  
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|        |  |                                                                                                                                                                                                                                                          
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|10.49   |  | Standard Form Industrial Lease dated April 8, 1997, between
Hewson/Breckner-Baseline, L.L.C. and Action Performance Companies, Inc.
(7)                                                                                                                  
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|        |  |                                                                                                                                                                                                                                                          
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|10.50   |  | Lease Agreement dated July 9, 1997, by and between Performance Park
Partners, LLC and Sports Image, Inc.(7)                                                                                                                                              
|       
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|        |  |                                                                                                                                                                                                                                                          
|       
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|10.52   |  | 1998 Non-qualified Stock Option Plan(3)                                                                                                                                                                                                                  
|       
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|        |  |                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|10.54   |  | Registration Rights Agreement dated March 24, 1998, by and among Action
Performance Companies, Inc., NationsBanc Montgomery Securities LLC,
CIBC Oppenheimer Corp., EVEREN Securities, Inc., and Piper Jaffray Inc.
(3)                                  
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                                                                          
|       
|       
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|       
|10.56   |  | 1999 Employee Stock Purchase Plan (8)                                                                                                                                                                                                                    
|       
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|        |  |                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|10.57   |  | Standard Form Industrial Lease (Single Tenant) dated June 28, 1999,
between H-B Tempe, L.L.C. and Action Performance Companies, Inc. (9)                                                                                                                 
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                                                                          
|       
|       
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|       
|10.58   |  | Master Lease Agreement dated August 9, 1999 between General Electric
Capital Corporation and goracing.com, inc., together with Schedule No.
01, Commitment Letter dated October 4, 1999, and Corporate Guaranty by
Action Performance Companies, Inc. (9)
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                                                                          
|       
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|10.59   |  | Distribution Agreement dated September 13, 2000 by and between the
Registrant and QVC, Inc. (5)                                                                                                                                                          
|       
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|        |  |                                                                                                                                                                                                                                                          
|       
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|10.60   |  | Sublease dated March 28, 2000 by and between Action Performance
Companies, Inc., and Integrated Information Systems, Inc. (5)                                                                                                                            
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|        |  |                                                                                                                                                                                                                                                          
|       
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|10.61   |  | Equipment Sublease dated March 28, 2000 by and among goracing.com,
inc., Action Performance Companies, Inc., and Integrated Information
Systems, Inc. (5)                                                                                                
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                                                                          
|       
|       
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|10.62   |  | Equipment Sublease dated March 28, 2000 by and between Integrated
Information Systems, Inc. and goracing.com, inc.(5)                                                                                                                                    
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|10.63   |  | Loan and Security Agreement dated September 29, 2000 by and among
Action Performance Companies, Inc., certain subsidiaries and
affiliates, as guarantors, and American National Bank and Trust Company
of Chicago.(5)                                    
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|10.64   |  | Pledge Agreement dated October 2, 2000 by and between Racing
Collectables Club of America, Inc., and American National Bank and
Trust Company of Chicago.(5)                                                                                             
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|10.65   |  | Pledge Agreement dated October 2, 2000 by and between Action
Performance Companies, Inc., and American National Bank and Trust
Company of Chicago.(5)                                                                                                    
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                                                                          
|       
|       
|       
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|10.66   |  | Pledge Agreement dated October 2, 2000 by and between goracing.com,
inc., and American National Bank and Trust Company of Chicago. (5)                                                                                                                   
|       
|       
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|       
|        |  |                                                                                                                                                                                                                                                          
|       
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|       
|21      |  | List of Subsidiaries of the Registrant                                                                                                                                                                                                                   
|       
|       
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|       
|        |  |                                                                                                                                                                                                                                                          
|       
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|23      |  | Consent of Arthur Andersen LLP                                                                                                                                                                                                                           
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|25.1    |  | Statement of Eligibility of Trustee under the Trust Indenture Act of
1939 on Form T-1(13)                                                                                                                                                                



---

|(1) |  | Incorporated by reference to the Registrants Form 10-QSB for the
quarter ended March 31, 1996, as filed with the Securities and Exchange
Commission on May 2, 1996.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Incorporated by reference to the Registrants Registration Statement on
Form SB-2 and amendments thereto (Registration No. 33-57414-LA).                            
|   
|   
|   
|   
|(3) |  | Incorporated by reference to the Registrants Form 10-Q for the quarter
ended March 31, 1998, as filed with the Securities and Exchange Commission
on May 15, 1998. 

|(4) |  | Incorporated by reference to the Registrants Registration Statement on
Form S-8 (Registration No. 333-82879).                                                           
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(5) |  | Incorporated by reference to the Registrants Form 10-K for the year ended
September 30, 2000, as filed with the Securities and Exchange Commission on
December 29, 2000.
|   
|   
|   
|   
|(6) |  | Incorporated by reference to the Registrants Form 10-Q for the quarter
ended March 31, 1997, as filed with the Securities and Exchange Commission
on May 15, 1997.      
|   
|   
|   
|   
|(7) |  | Incorporated by reference to the Registrants Form 10-K for the year ended
September 30, 1997, as filed with the Securities and Exchange Commission on
December 22, 1997.
|   
|   
|   
|   
|(8) |  | Incorporated by reference to the Registrants Registration Statement on
Form S-8 (Registration No. 333-82879).                                                           
|   
|   
|   
|   
|(9) |  | Incorporated by reference to the
Registrants Form 10-K for the year ended September 30, 1999, as filed with
the Securities and Exchange Commission on December 29, 1999.