##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


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, 2002

Commission file number 0-21630

ACTION PERFORMANCE COMPANIES, INC.

(Exact Name of Registrant as Specified in Its Charter)


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

4707 E. Baseline Road
Phoenix, 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:

|                                       |  |                                          
|-------------------------------------- |  | -----------------------------------------
|Title of Each Class                    |  | Name of Each Exchange on Which Registered
|                                       |  |                                          
|Common Stock, par value $.01 per share |  | New York Stock Exchange                  

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

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

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

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

The aggregate market value of Common Stock held by nonaffiliates of the
registrant (16,017,006 shares) based on the closing price of the registrants
Common Stock as reported on the New York Stock Exchange on March 28, 2002,
which was the last business day of the registrants most recently completed
second fiscal quarter, was $788,837,546. 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 November 30, 2002, there were outstanding 17,830,409 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 2003 Annual Meeting of Shareholders are incorporated by
reference into Part III of this Report.





---

TABLE OF CONTENTS



|                                                        |                                                                                                         |  |  |  |  |  |  | 
|------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|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 AND RELATED STOCKHOLDER MATTERS
|                                                        | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                
|                                                        | ITEM 14. CONTROLS AND PROCEDURES                                                                       
|PART IV                                                
|                                                        | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                              
|SIGNATURES                                             
|CERTIFICATION OF CHIEF EXECUTIVE OFFICER               
|CERTIFICATION OF CHIEF FINANCIAL OFFICER               
|Index to Consolidated Financial Statements and Schedule
|EX-3.1                                                 
|EX-10.69                                               
|EX-21                                                  
|EX-23.1                                                
|EX-23.2                                                
|EX-99.1                                                
|EX-99.2                                                



---



##### Table of Contents



ACTION PERFORMANCE COMPANIES, INC.

ANNUAL REPORT ON FORM 10-K


FISCAL YEAR ENDED SEPTEMBER 30, 2002


TABLE OF CONTENTS


|                                                        |                                                                                                |     |     
|------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | --- | ----
|                                                        |                                                                                                |     | Page
|                                                        |                                                                                                |     |     
|PART I                                                  |                                                                                                |    
|ITEM 1                                                  | BUSINESS                                                                                       |     | 1   
|ITEM 2.                                                 | PROPERTIES                                                                                     |     | 24  
|ITEM 3.                                                 | LEGAL PROCEEDINGS                                                                              |     | 24  
|ITEM 4.                                                 | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                            |     | 24  
|PART II                                                 |                                                                                                |    
|ITEM 5.                                                 | MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS                      |     | 25  
|ITEM 6.                                                 | SELECTED FINANCIAL DATA                                                                        |     | 26  
|ITEM 7.                                                 | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS          |     | 27  
|ITEM 7A.                                                | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                     |     | 37  
|ITEM 8.                                                 | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                    |     | 37  
|ITEM 9.                                                 | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE           |     | 37  
|PART III                                                |                                                                                                |    
|ITEM 10.                                                | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                             |     | 38  
|ITEM 11.                                                | EXECUTIVE COMPENSATION                                                                         |     | 38  
|ITEM 12.                                                | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED SHAREHOLDER MATTERS |     | 38  
|ITEM 13.                                                | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                 |     | 38  
|ITEM 14.                                                | CONTROLS AND PROCEDURES                                                                        |     | 38  
|PART IV                                                 |                                                                                                |    
|ITEM 15.                                                | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K                               |     | 39  
|SIGNATURES                                              |                                                                                                | 42 
|CERTIFICATION OF CHIEF EXECUTIVE OFFICER                |                                                                                                | 43 
|CERTIFICATION OF CHIEF FINANCIAL OFFICER                |                                                                                                | 44 
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE |                                                                                                | F-1

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 2003 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 license agreements; 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.

i



---



##### Table of Contents






PART I




ITEM 1. BUSINESS

Introduction

We are the leading designer and marketer of licensed motorsports products
related to NASCAR, including die-cast scaled replicas of motorsports vehicles,
apparel, and memorabilia. NASCAR is the most prominent motorsports sanctioning
body in the United States and sanctions the Winston Cup series of stock car
races, which drew approximately 280 million television viewers to its 39
televised events during 2001. We currently have exclusive license agreements
with many of the most recognized names in NASCAR. We also design and sell
products relating to other motorsports, including racing sanctioned by the
NHRA, Formula One, the IRL, and the World of Outlaws. We distribute our
products through a broad range of channels, including a network of wholesale
distributors, leading mass-market retailers, mobile trackside stores, QVC, and
our members-only collectors club catalog.

We focus on securing long-term license agreements with top motorsports drivers
and team owners. These license agreements generally provide us with an
exclusive right to market certain die-cast, apparel, and other products bearing
the drivers name, likeness, and image for periods typically ranging from six
to ten years. Racing fans are interested in purchasing products associated
with top drivers and team owners. As a result, we believe these license
agreements provide us with a significant competitive advantage.

We derive approximately 60% of our revenue from sales of licensed die-cast
scaled replicas of motorsports vehicles in the collectible and mass-retail
markets. In the United States, we market our, Action Racing Collectables, AP,
Revell and Brookfield Collectors Guild collectible die-cast brands primarily
through our network of wholesale distributors. We market our Winners Circle
brand die-cast products to mass-market retailers and our Racing Collectables
Club of America brand though our collectors club which is managed by QVC. In
Germany, we market our Minichamps collectible die-cast brand primarily thorough
a network of wholesale distributors.

We derive approximately 25% of our revenue from sales of licensed apparel,
gifts, and other memorabilia. These products are marketed primarily under our
Chase Authentics brand and Winner Circle brand. We market our Chase
Authentics brand products through wholesale distributors and our Winners
Circle brand products to mass-market retailers. Revenues of recently acquired
companies, discussed further in Recent Acquisitions and Alliances, are
included in this segment.

We derive approximately 15% of our revenue from trackside sales. We market
Chase Authentics brand apparel and memorabilia and Action Racing Collectables
brand die-cast at mobile trackside stores. Approximately 90% of our trackside
sales are derived from the sale of apparel and memorabilia. As our revenues
grow, we anticipate trackside sales will decrease as a percentage of total
revenue.

In this report, we refer to various distinct segments of motorsports racing,
including the National Association of Stock Car Auto Racing, or NASCAR; the
National Hot Rod Association, or NHRA; Formula One; the Indy Racing League, or
IRL; and the World of Outlaws.

Our fiscal year ends September 30. In this report, unless otherwise noted,
2002, 2001, 2000, 1999, 1998, refer to our fiscal years.

Our website is located at www.action-performance.com. Through our website, we
make available free of charge our annual reports on Form 10-K, our proxy
statements, our quarterly reports on Form 10-Q, our current reports on Form
8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15 (d) under the Securities Exchange Act. These reports are available
as soon as reasonably practicable after we electronically file those materials
with the Securities and Exchange Commission.

1



---



##### Table of Contents



The Motorsports Industry

Motorsports is one of the fastest growing spectator sports in the United
States. According to Joyce Julius & Associates, total spectator attendance for
motorsports in the 2001 season was 18.4 million. Racing formats in the United
States include NASCAR, NHRA, and IRL.

The most popular auto racing format in the United States is stock car racing,
the racing of specially equipped standard passenger automobiles. The most
prominent stock car sanctioning organization is NASCAR, which was founded and
developed in the late 1940s in the southeastern United States. Today, NASCAR
operates three primary racing series: The Winston Cup, The Busch Grand
National, and the Craftsman Truck Series, each with races throughout the United
States. Of these, the Winston Cup, which in the 2002 season consisted of 39
televised events, is the most popular in terms of attendance and television
viewership. The Busch series included 34 racing events in the 2002 season, and
the Craftsman Truck series included 22 events. We focus our product offerings
on Winston Cup items. Busch series and Craftsman Truck series product
offerings are limited, primarily to promotional items.

Sales of our products related to NASCAR represented approximately 80% of our
revenue during fiscal 2002. Based on television viewership and trackside
attendance, motorsports racing is one of the most watched and fastest growing
sports in the United States. According to NASCAR market research, 37% of
Americans considered themselves NASCAR fans during the 2001 season, up 19% over
2000. Television ratings are growing even faster, due in part to a six-year,
$2.4 billion television broadcast contract with FOX, NBC, and their affiliates.
During the 2001 season, the first year of the new contract, average household
viewership of Winston Cup increased 36% compared with 2000. In the 2002
season, the trend continued with NBC/TNT ratings increasing from 3.8 to 4.3 and
Fox maintaining a 5.8 rating. More than 280 million viewers tuned in to NASCAR
televised events during the 2001 season. In addition, according to Kagan Media
Sports, approximately 6.8 million fans attended a NASCAR race in the 2001
season.

Since 1996, new speedways have been opened in the Los Angeles, Dallas/Ft.
Worth, 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, further expanding the awareness of
NASCAR racing.

In the 2001 season, approximately $1.5 billion was spent on corporate
sponsorship in the motorsports industry, according to IEG Sponsorship Report,
Chicago. The demographic profiles and loyal fan bases in motorsports have
attracted significant corporate sponsorship to many aspects of the motorsports
industry. Sponsors support racing team and venue operations, seek driver
endorsements, and sponsor major media coverage of motorsports. Major corporate
sponsors of motorsports include the major automobile manufacturers, consumer
product companies, and nationally recognized retail organizations.

We believe that the long-term nature of the broadcast contracts will provide
the incentive for networks to promote events heavily to increase ratings,
further the reach of NASCAR popularity into less penetrated markets and
accelerate corporate sponsorship.

Our Competitive Strengths

We believe our growth and leading market position are a result of the following
competitive strengths:

Ability to Attract Additional Licensors and Distribution Partners

Our position as the leading designer and marketer of NASCAR-related motorsports
products enhances our appeal to new and existing licensors and distribution
partners. We believe our market-leading position enables us to maintain
advantageous license agreements with existing licensors and to secure new
license agreements with up-and-coming drivers; to enhance our distribution
channels; to secure additional shelf space in mass-retail establishments; and
to conduct successful special promotional programs.

2



---



##### Table of Contents



License Agreements

We have exclusive, long-term license agreements with many of the most
recognized names in NASCAR, such as the Estate of Dale Earnhardt Sr., Dale
Earnhardt Jr., Jeff Gordon, Dale Jarrett, Bobby Labonte, Tony Stewart, Rusty
Wallace, and various other drivers and teams. These license agreements
generally provide us with an exclusive right to market certain die-cast,
apparel, and other products bearing the drivers name, likeness, and image for
periods typically ranging from six to ten years. Racing fans generally are
interested in purchasing products associated with top drivers and teams. As a
result, we believe these license agreements provide us with a significant
competitive advantage.

Significant Design and Development Expertise

We have significant expertise in product design and in the development of
innovative marketing and special promotional programs for our drivers, teams,
and large corporate sponsors. This expertise enables us to offer products with
significant customer appeal, to develop innovative marketing campaigns and
special promotional programs to promote the sale of our products, and to
attract additional consumer interest and revenue opportunities for our
licensors and the corporate sponsors of our promotional programs.

High Quality and Authenticity

Our well-recognized brands are known for high quality and authenticity,
providing us with a solid base of existing customers as well as an attractive
platform to launch new products, such as our recent launch of our die-cast
replica bass fishing boats. We believe that the significant time and effort we
devote to the quality and authenticity of our products enhances their appeal
and attractiveness to motorsports fans.

Broad Distribution

We have established a broad range of distribution channels through which our
products are marketed, including a network of wholesale distributors that sell
to thousands of specialty retailers; leading mass-market retailers, including
Wal-Mart, Kmart, and Target; mobile trackside stores; QVC; our collectors
catalog club; and the goracing.com Internet site.

Highly Scalable Operating Model

Our operating model allows us to service higher levels of sales with limited
increases in operating expenses and capital investment. The principal elements
of this operating structure include the following:



| |  |  | We have the ability to exert a high degree of control over product
pricing.                                                  
| | - |  | -----------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Manufacturing costs are largely fixed as a percentage of sales due
to outsourcing under fixed-price contracts.               
|
| |  |  | Royalties are paid generally as a percentage of sales.                                                                       
|
| |  |  | Due to our agreements with distributors and QVC, incremental volume
does not proportionately increase our operating expenses.
|
| |  |  | Research and development is limited to basic design and engineering.                                                         
|
| |  |  | Capital expenditures are principally limited to tooling for die-cast.                                                        
|
| |  |  | Functions such as manufacturing and others outside of our core skills are generally outsourced.                              

This model allows us to focus on our core strengths, which are the design and
marketing of motorsports products and innovative programs that appeal to
motorsports fans. Because we strive to structure our operations such that many
of our operating expenses are fixed, increases in sales generally will result
in increased operating margins. We can limit advertising expenditures and
still increase revenues given the nature of our licensed products.

3



---



##### Table of Contents



Our Growth Strategy

Our objective is to grow by leveraging our competitive strengths to maximize
our business opportunities resulting from the continued growth and popularity
of motorsports in general, and NASCAR in particular. Key elements of our
strategy include the following:

Capitalizing on Existing License Agreements and Cultivating New License
Agreements

We intend to capitalize on our existing license agreements and cultivate new
relationships with up-and-coming drivers and teams to assure we continue to
have the leading portfolio of license agreements. We currently have license
agreements with many of the leading racecar drivers, car owners, manufacturers,
sanctioning bodies, racetrack operators, and corporate sponsors. These license
agreements enable us to design and sell distinctive products that appeal to
motorsports enthusiasts. We believe that these relationships provide us with a
competitive advantage.

Pursuing Strategic Acquisitions and Alliances

We plan to pursue opportunities to acquire other businesses and form strategic
alliances that fit our current economic model and broaden our product
offerings, add distribution channels, increase management depth, or otherwise
offer growth opportunities. Recently we have made acquisitions consistent with
this strategy. In May 2001, we acquired the Winners Circle trademark, helping
us to gain entry into the mass-retail market for die-cast scaled replicas. In
June 2002 through November 2002, we completed several transactions, discussed
further in Recent Acquisitions and Alliances, which broaden our product
offerings, add distribution channels, and increase management depth.

Selectively Increasing Our Mass-Market Distribution and Establishing New
Distribution Channels

We plan to continue to increase our mass-market distribution channels and
establish new distribution channels in order to expand the market for our
products. For example, during 2001, we entered the mass-retail market for
die-cast scaled replicas of motorsports vehicles, and certain of our products
are now sold in Wal-Mart, Kmart, and Target. In addition we plan to continue
to enhance our other distribution channels, which include the following:



| |  |  | our distributor network, which targets specialty retailers;               
| | - |  | --------------------------------------------------------------------------
|
| |  |  | our mobile trackside stores, which target motorsports event attendees;    
|
| |  |  | our collectors club, which is managed by QVC;                            
|
| |  |  | direct response television and e-business;                                
|
| |  |  | through our agreement with QVC;                                           
|
| |  |  | special promotion programs; and                                           
|
| |  |  | catalog merchandising programs targeted at corporate motorsports sponsors.

Increasing Our Development of Special Promotional Programs

We plan to continue to create and conduct special promotional programs under
our license agreements that allow us to market new product designs with
entertainment companies and sports properties. These promotions often
commemorate milestones, such as The 25th Anniversary of The Muppet Show, or
highlight new entertainment releases, such as the June 2002 release of Warner
Bros. Scooby-Doo movie. Special promotional programs typically involve one-time
productions of our licensed die-cast replica racecars, apparel, and
memorabilia. When we partnered with The Jim Henson Company, as an example, we
designed Muppet themed racecars for 15 drivers in the NASCAR, NHRA, and World
of Outlaws series that were raced in the summer of 2002. We produced the
licensed merchandise that supported this program. These products were sold
through various channels, including our national network of distributors. In
this fashion, we expand demand beyond products featuring regular paint schemes
to products featuring special paint schemes.

4



---



##### Table of Contents



We continually engage in discussions and make contact with outside entities and
corporations to bring additional special promotions to a variety of racing
series. All programs are intended to increase brand awareness and name
recognition, as well as increase excitement in the sport, enabling us to sell
additional quantities of our product.

Continuing to Enhance Existing and Introducing New Products

We continually seek to enhance our existing products and to introduce new
products that appeal to motorsports enthusiasts. During the last two years, we
have launched several new products, such as die-cast replicas of raced versions
of motorsports vehicles, and replica die-cast boats and engines; and developed
new programs for the increasingly popular NHRA and Sprint car series.

Capitalizing on the Growth and Popularity of Motorsports Outside of the United
States

We plan to continue to capitalize on the growth and popularity of motorsports
and continually develop new products and promotional programs that appeal to
motorsports enthusiasts. We believe that the introduction of NASCAR races
internationally through new speedways in Germany and England will provide
increased visibility for the sport and provide an opportunity for us to market
and sell our products worldwide. If NASCAR popularity increases
internationally, we intend to capitalize on opportunities to leverage our
experience in the U.S. motorsports industry to international markets.

Licenses

We focus on developing long-term relationships with and we engage in
comprehensive efforts to license popular drivers, team owners, and other
personalities in each top racing category, their sponsors, various sanctioning
bodies, and others in the motorsports industry. Through these licensing
efforts, we develop opportunities to market innovative 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.

Significant Driver License and Endorsement Agreements; Significant Team Owner Licenses

We have long-term license agreements with NASCAR Winston Cup Points champions
Bill Elliott, Jeff Gordon, Dale Jarrett, Bobby Labonte, Tony Stewart, Rusty
Wallace, and twelve-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. Certain of these 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 also 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.

5



---



##### Table of Contents



We also have license agreements with several of the most popular NASCAR race
car team owners, including Chip Ganassi Racing; The Estate of Dale Earnhardt,
Inc.; Evernham Motorsports, LLC; Redline Sports Marketing, Inc., which is the
licensing entity for the Joe Gibbs race team; Richard Childress Racing
Enterprises, Inc.; and Robert Yates Racing, 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, 2007
|                                                     
|Robert Yates Racing, Inc.                             |  | Dale Jarrett
Elliott Sadler                    |  | December 31, 2017
|                                                     
|Richard Childress Racing Enterprises, Inc.            |  | Kevin Harvick
Robby Gordon                     |  | May 23, 2012     
|                                                     
|Redline Sports Marketing, Inc. (Joe Gibbs race team)  |  | Bobby Labonte
Tony Stewart                     |  | December 31, 2006
|                                                     
|Dale Earnhardt, Inc.                                  |  | Dale Earnhardt, Jr.
Steve Park
Michael Waltrip |  | December 31, 2005
|                                                     
|Evernham Motorsports, LLC                             |  | Bill Elliott, Jr.
Jeremy Mayfield              |  | May 23, 2012     
|                                                     
|Chip Ganassi Racing                                   |  | Sterling Marlin
Casey Mears
Jamie McMurray     |  | December 31, 2011

Additional Product Licenses

We maintain other licenses with various other drivers, car owners, sponsors,
and manufacturers, including other NASCAR Winston Cup drivers, on a
non-exclusive basis, NHRA drivers and teams, Formula One teams, Ford Motor
Company, several divisions of General Motors Corp., and Daimler-Chrysler. As a
result of recent acquisitions, we also maintain licenses with professional
sports organizations like the National Basketball Association, National
Football League, National Hockey League, Major League Baseball, and various
professional sports franchises and collegiate sports teams.

6



---



##### Table of Contents



Other License Agreements

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 license 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 license
agreement 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. Unless there is an event of default, as defined in the
agreement, the license agreement with NASCAR will automatically renew for two
additional five-year 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.

Our license agreement with VF Imagewear (east), Inc. (VFI), formerly VF
Knitwear, gives VFI the right to use the Chase brands in a variety of retail
distribution channels. In some distribution channels, VFI has the exclusive
right to use certain of the Chase brands. VFI pays us royalties based on its
sales of Chase-branded apparel. VFI pays us a higher royalty in those
distribution channels where its rights are exclusive. The license agreement
expires on December 31, 2008, subject to VFIs right to extend the agreement
for two successive five-year terms.

Products

Our principal products are die-cast scaled replicas of actual motorsports
vehicles, apparel, and memorabilia. Through recent acquisitions we have added
seasonal gifts, leather jackets, terry products, and golf gifts to our product
lines.

Die-Cast

We design and market replicas of motorsports-related vehicles that are
constructed using die-cast bodies and chassis with free-spinning wheels and
tires. Our die-cast products are scaled replicas of actual racing vehicles,
pit wagons, trucks and trailers, and vehicle transporters. We produce our
die-cast replicas to a reduced scale of the actual size of the vehicle, ranging
from scales of 1:9 to 1:96. Many of our die-cast products 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 replicas to assure that the resulting products display a level of
quality and detail that is superior to competing products.

Collectibles.We design our collectible die-cast products as high-quality
collectible items. The die-cast collectibles that we offer in the United
States relate principally to the NASCAR Winston Cup and NHRA drag racing. In
Germany, we offer Formula One and high-end auto manufacturer die-cast replica
vehicles.

7



---



##### Table of Contents



We sell approximately 90% of our die-cast on a wholesale basis. At retail, our
die-cast collectibles typically range in price from approximately $40.00 to
$120.00 per item, depending on size, type of vehicle, and level of detail. A
1:24th scale replica of an actual racing vehicle typically retails from $60.00
to $70.00. We offer our die-cast collectibles primarily through our wholesale
distributor network to specialty retailers, our collectors club, direct
response television through our relationship with QVC, our trackside stores,
and special promotional programs.

We enhance the collectible value and appeal of our products through various
measures. These measures include the following:



| |  |  | designing die-cast collectibles that include features that are not offered by our competitors;                                                                               
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | limiting the quantities of each collectible item that we produce and sell;                                                                                                   
|
| |  |  | 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;
|
| |  |  | offering certain items for specified periods only through our collectors club; and                                                                                          
|
| |  |  | designing packaging concepts to improve the display of each collectible item.                                                                                                

Mass Retail.We design and market licensed miniature die-cast replicas for the
mass-retail market through our Winners Circle brand of products. Our Winners
Circle die-cast products range in price at retail from $5.00 to $20.00.

We believe that our presence in 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 and related die-cast inventory and
tooling from Hasbro Inc. in May 2001, we licensed to Hasbro the rights to
produce specific motorsports-related products for sale in the mass-market. The
mass-market die-cast products manufactured and marketed under the Winners
Circle brand are distinct from and are designed not to compete directly with
our limited edition motorsports die-cast collectible products.

Die-Cast Scaled Replica Bass Fishing Boats.We design and market collectible
die-cast models of popular high performance bass fishing boats under our
Castaway brand. We distribute these products through most of the same channels
as our motorsports die-cast collectibles, including QVC cable television and
QVC online. Our Castaway line of collectibles are replicas of bass fishing
boats designed and manufactured by Forest Woods Ranger Boats and Tracker
Marine, including Tracker Marines Pro Craft and Nitro brands. We have a
NASCAR Winston Cup driver series and a bass professional angler signature
series. Our NASCAR Winston Cup series includes bass fishing boats utilizing
the paint schemes of certain top drivers, including Dale Earnhardt Sr., 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
shared demographics of motorsports and competitive bass fishing will provide an
opportunity for the Castaway product line to appeal to a large audience.

Apparel and Memorabilia

We design and market various licensed motorsports apparel, including t-shirts,
jackets, hats, and memorabilia, such as coffee mugs, ornaments,
towels, key
chains, and tote bags. Each of these products generally features the name,
likeness, image, and car number of a popular racecar driver or other licensed
logos and images.

8



---



##### Table of Contents



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 a wide range of styles
and sizes. We distribute our apparel and memorabilia products to mass-market
retailers, through mobile trackside stores and to wholesale distributors.

We sell Winners Circle branded apparel to mass-market retailers. Most of our
apparel sold in other distribution channels bears our Chase brand marks,
including Chase Authentics and a stylized C, which is generally embroidered
on the shirt cuff or pocket. NASCAR drivers, including Jeff Gordon, Dale
Jarrett, Bobby Labonte, Terry Labonte, and Rusty Wallace, have agreed, subject
to certain exceptions, to assure that licensed apparel products bearing their
names, likeness, or signatures will also bear Chase brand marks. These
drivers have also agreed to endorse Chase-branded apparel as the exclusive
trackside apparel of the top NASCAR drivers.

Sales and Distribution

We distribute our products through a broad range of channels, including a
network of wholesale distributors, leading mass-market retailers, our
collectors club, QVC, and mobile trackside stores. 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 targeted at programs of
interest to motorsports enthusiasts.

Wholesale Distribution Network

We currently market our die-cast collectibles and our apparel and memorabilia
products on a wholesale basis through 17 distributors operating in the United
States and 45 distributors operating in 45 countries throughout the world. The
distributors solicit orders for our die-cast and apparel products from
thousands of specialty retailers throughout the United States and thousands of
specialty retailers in other countries throughout the world. The retailers
include stores specializing in motorsports collectibles and apparel, stores
specializing in other sports collectible items, and a limited number of hobby
shops.

Mass-Market Retailers

Our in-house sales force markets our Winners Circle die-cast products on a
wholesale basis to major discount and department stores, such as Wal-Mart,
Kmart, and Target. We also utilize our in-house sales force, as well as
independent representatives, to market motorsports apparel and memorabilia
products on a wholesale basis to the same discount and department stores, and
to automotive retail stores and convenience stores.

Collectors Club

We market certain of our die-cast collectibles, for exclusive periods, through
our collectors club. Club members pay a lifetime membership fee to QVC that
entitles them to receive a membership kit and monthly catalogs. The
collectors club has approximately 100 thousand members active, having made a
purchase in the last 12 months.

Under a 10-year outsourcing and exclusive supply agreement, QVC assumed
responsibilities for the day-to-day marketing and distribution operations of
our collectors club in 2001. 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 clubs members.

QVC Direct Response Television and Internet

We also sell our products to QVC, which markets and sells our die-cast
collectible products during a weekly television program on QVC called For Race
Fans Only. Viewers can order our products, which are generally products that
we sell to our wholesale distributors, but have been specially produced and
packaged, and are marked For Race Fans Only.

9



---



##### Table of Contents



We also market our die-cast products, apparel, and memorabilia products through
our goracing.com Internet site, which serves as an online motorsports retail
store. Through a ten-year agreement, QVC has assumed the day-to-day
responsibility for operating and promoting our Internet site and processing
online orders.

Mobile Trackside Stores

We operate approximately 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 2002) 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 die-cast collectibles, apparel, and
memorabilia 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 the store.

Promotional Programs

We develop, design, and implement extensive special promotional programs that
feature themes or events intended to reinforce brand and corporate awareness
for our partners, while increasing the market for our companys products.
These promotions often involve the top drivers in a variety of motorsports
series. We design and market a broad variety of specially designed die-cast
vehicles, apparel, and memorabilia for these programs. For example, when we
partnered with The Jim Henson Company, we designed Muppet themed racecars for
15 drivers in the NASCAR, NHRA, and World of Outlaws series that were raced in
the summer of 2002. We then produced die-cast collectibles that are scale
replicas of each special paint scheme car and other memorabilia that were sold
through our distribution channels.

Another successful large-scale promotion in 2002 was The Monte Carlo 400 with
the Looney Tunes  The Rematch! This program was brought back in 2002 because
of the success of the promotion the previous year with Warner Bros. and
Chevrolet. The program included nine drivers in the NASCAR Winston Cup series
in 2001 and expanded to include an additional two drivers in the NASCAR Busch
series in 2002.

Other partners for special promotions in 2002 included KISS, Elvis Presley
Enterprises, Harley-Davidson, Major League Baseball, and Universal Studios to
celebrate the 20th Anniversary of E.T.

In addition to our special promotional programs, we work with large corporate
sponsors to design and create promotional programs aimed at increasing the
awareness of their brands and encouraging consumers to purchase their products.
We provide all levels of creative services (design, graphic layout, and
advertising support) and have the capacity to produce a wide array of
promotional products, such as die-cast replica racecars, t-shirts, and hats.
We also provide in-house marketing and distribution support for these
promotional programs, including in-bound order processing and order
fulfillment. For some programs, corporate sponsors use our products developed
for their program as a free or low-cost award with the purchase of their own
products, as sweepstakes offers, as employee gifts or other promotions. We
have successfully completed recent programs for United Parcel Service,
Supercuts, and Home Depot. The products that we develop and sell in
conjunction with these programs generally are sold directly to the sponsors
rather than through our usual distribution channels.

10



---



##### Table of Contents



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 assure 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 mass-market die-cast
replicas have fewer features than our die-cast collectibles.

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.

Virtually all of our die-cast collectibles marketed in the United States are
manufactured under an exclusive agreement with Early Light Industrial Co. Ltd.,
a manufacturer in China. We have had a relationship with Early Light since
1994, and Early Light has been our sole manufacturer of domestic die-cast
products since that time. The term of the agreement currently extends through
October 31, 2006 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 the tooling that Early Light uses to produce die-cast replicas for our
company, and we have partial control over the production of our die-cast
replicas under the manufacturing agreement. We invested $7.7 million in 2002
for tooling, which is used in manufacturing by Early Light. We believe the
breadth and quality of the tooling program provides us with a competitive
advantage in the motorsports collectible market.

We believe that Early Light is dedicated to high quality and productivity as
well as support for new product development. There are significant risks,
however, inherent in relying on a single manufacturer for a substantial portion
of our die-cast products.

We obtain the die-cast collectibles marketed in Germany from other
manufacturers in China. We invested $5.9 million in 2002 for tooling, which is
used by these manufacturers. We currently do not have a formal, long-term
agreement with any of these manufacturers.

Apparel and Memorabilia

We currently obtain substantially all of our licensed motorsports apparel and
memorabilia 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 memorabilia 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 memorabilia 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 under licenses with drivers and other licensors.

11



---



##### Table of Contents



We work closely with the third-party apparel and memorabilia manufacturers in
order to assure 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 apparel and memorabilia 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.

In connection with our acquisition of Trevco Trading Corporation, we entered
into a manufacturing agreement with a Hong Kong company, expiring in September
2006, for the manufacture and design of licensed ornaments, figurines, and
other gifts.

Recent Acquisitions and Alliances

In June 2002, we acquired Trevco Trading Corp. Trevco designed and distributed
primarily licensed seasonal gift products, including products under NASCAR
driver and team licenses. Products were produced by a contract manufacturer in
China and were sold on a direct import basis, by both in-house and independent
sales representative to mass retailers, many of which were not our customers
historically. We have entered into a long-term outsourcing agreement with
Trevcos contract manufacturer to continue current production and to design and
produce future product lines. We intend to enhance the historical product line
with our licenses and plan to sell those products in the historical
distribution channels and in our existing distribution channels. Trevcos
historical mass-market customers will also provide additional distribution
opportunities for our existing products. We believe we broadened our
management depth in gift design, procurement, and marketing with the
acquisition.

In July 2002, we acquired terry and golf product businesses, which will operate
as McArthur Towel and Sports, Inc. McArthur distributed terry and golf
products to specialty retailers and institutions. A portion of the acquired
product is decorated with team logos under licenses with professional teams in
the National Football League, National Hockey League, National Basketball
Association, Major League Baseball, Professional Golf Association, and colleges
and universities. We will continue to distribute the products to teams for
in-stadium promotions and to specialty and mass retailers, golf pro shops, and
other organizations that promote and sponsor events with licensed premiums and
gifts. We intend to expand the existing products by designing and producing
similar specialty licensed products with our licensed NASCAR driver and team
logos and images. As a result, the historical retail customers will benefit
from a wider choice of licensed products, while we will continue to increase
our portfolio of licensed motorsports merchandise for our distribution
channels. We also believe the acquisition allowed us to broaden our
management depth in corporate promotions.

In September 2002, we acquired a producer of premium leather jackets and other
apparel, which will operate as Jeff Hamilton Collection, Inc. In connection
with the acquisition, we purchased the Jeff Hamilton marks. A portion of the
product acquired is decorated with team logos under licenses with the NBA, NFL
and other major sports leagues. This acquisition leverages our existing
licenses into new, high-margin products for our NASCAR distribution channels
and continues our expansion into proven merchandise for other sports leagues
and into specialty fashion and other upstairs retail channels. We believe we
have enhanced our apparel design capabilities as a result of the acquisition.

In November 2002, we entered into a joint venture with TMP International, Inc.,
the producer of McFarlane Toys, to produce and market a new series of action
figures based on NASCAR drivers. The joint venture will be constituted as
Action-McFarlane LLC, and production will begin the second half of 2003. The
affiliation will capitalize on our exclusive license agreements with NASCARs
top drivers and McFarlane Toys expertise in creating detailed, high-quality
action figures. This affiliation will also provide access to McFarlanes toy
distribution channels for existing products.

12



---



##### Table of Contents



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
mass-retail die-cast replicas of motorsports products compete with die-cast
replicas sold in mass-retail channels. Our motorsports apparel and memorabilia
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. Other
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 race-car 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.

Intellectual Property

Our business depends upon valuable trademarks and other rights that we license
from third parties. We regard our trademarks, trade dress, copyrights, and
other intellectual properties as important to our success. Our intellectual
property rights consist primarily of our trademarks, 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, and
our Winners Circle, Chase, and certain goracing.com brands. 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.

Employees

As of November 30, 2002, we had approximately 550 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.

13



---



##### Table of Contents



Executive Officers

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

|                      |  |     |    |               |  |                                             |  | 
|--------------------- |  | --- | -- | ------------- |  | ------------------------------------------- |  | 
|Name                  |  | Age |    | Position Held
|                      |  |     |    |              
|Fred W. Wagenhals     |  |     | 61 |               |  | Chairman of the Board, President, and Chief
|                      |  |     |    |               |  | Executive Officer                          
|R. David Martin       |  |     | 56 |               |  | Chief Financial Officer, Secretary and     
|                      |  |     |    |               |  | Director                                   
|Melodee L. Volosin    |  |     | 38 |               |  | Executive Vice
President  Sales and       
|                      |  |     |    |               |  | Director                                   
|John S. Bickford, Sr. |  |     | 55 |               |  | Executive Vice
President  Strategic       
|                      |  |     |    |               |  | Alliances and Director                     

Fred W. Wagenhals, founded our company during 1992, and has served as our
Chairman of the Board, President, and Chief Executive Officer for more than
five years.

R. David Martinhas served as our Chief Financial Officer since August 2000, as
Secretary and Treasurer since March 2001, and as a director since December
2000. 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.

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. Since
1976, 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 currently serves as a director of
Equipoise Balancing, Inc., a privately held company.

14



---



##### Table of Contents



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.

Any decrease in popularity or growth rate of motorsports, and NASCAR racing in
particular, could adversely affect our business, including our net sales.

The popularity of motorsports and its appeal to consumers have a significant
effect on sales of our products. Motorsports competes for television
viewership, event attendance, merchandise sales, and sponsorship funding with
other sports, entertainment, and recreational events. The competition for the
attention of consumers in the sports, entertainment, and recreation industries
is intense. Sales of licensed merchandise related to NASCAR racing accounted
for approximately 80% of our revenue during 2002. We expect that products
related to NASCAR racing will continue to account for the significant portion
of our revenue for the foreseeable future. As a result, the popularity of
NASCAR sanctioned racing is critical to the success of our business. The
popularity of NASCAR racing depends on many factors, including the extent and
popularity of television coverage of NASCAR racing events. Any decrease in the
popularity or growth rate of motorsports, and NASCAR racing in particular,
could have a material adverse effect on our business, including our net sales.

If our existing license agreements are unsuccessful, or if we are unable to
enter into successful license agreements in the future or renew our existing
successful license agreements, our business could be adversely affected.

We market our products under license agreements with race-car drivers, team
owners, sponsors, automobile and truck manufacturers, NASCAR, NHRA, and other
entities. We believe these license agreements are critical to the consumer
appeal and marketability of our products because most racing fans are
interested in purchasing products associated with top drivers and teams. The
license agreements vary in scope and duration, but generally authorize us to
sell specified licensed products for designated periods of time. Some license
agreements require us to pay minimum royalties or other fixed amounts
regardless of the level of sales of the licensed products or the profitability
of those sales

The success of any particular license agreement depends on many factors,
including the following:



| |  |  | the reasonableness of the license fees under the applicable license
agreement to revenue generated by sales of the licensed products under
the agreement;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the popularity and success of the particular licensor; and                                                                                               
|
| |  |  | in the case of driver licensors, the performance, public image, and health of the driver.                                                                

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. If our existing license agreements were
unsuccessful, our business would be adversely affected.

Our business also depends on our ability to enter into successful license
agreements with new licensors, including up-and-coming drivers, and to renew
our existing successful license agreements on advantageous terms in the future.
It is difficult to predict which car drivers, team owners, and other licensors
will prove to be successful licensors, particularly in the case of
up-and-coming drivers. In some cases the process for obtaining the license
rights from potential licensors is competitive. Our ability to renew our
existing successful license agreements depends largely on our relationship with
the particular licensor, which may be affected by a number of factors outside
our control. If we are unable to enter into successful license agreements with
new licensors or renew our existing successful license agreements on
advantageous terms in the future, our business could be materially adversely
affected.

15



---



##### Table of Contents



If we were unable to enforce and preserve our rights under our license
agreements, we would lose the competitive advantage provided by these
agreements.

The ability to enforce our rights under our license 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
designated changes in our management team. Other license agreements contain
provisions that depend upon our achieving designated performance levels. For
example, some of our exclusive license agreements become non-exclusive if
designated sales figures are not met. The termination, cancellation, or
inability to renew or enforce any of our material license agreements would have
a material adverse effect on our business.

If we were unable to maintain and capitalize on our key license agreements, our
business would be adversely affected.

A large portion of our revenue is generated under a relatively small number of
our most successful license agreements. Products sold under licenses from our
top five licensors currently account for approximately 50% to 60% of our sales.
Our success depends, in part, on our ability to capitalize on revenue
opportunities from these licenses, which involves various factors, including
the following:



| |  |  | our ability to maintain our relationships with these licensors; and                                                                                              
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our ability to develop and market motorsports products and special
promotions that appeal to our customers and that capitalize on the
success of these licensors.

Our failure to maintain these key licenses or to capitalize on the revenue
opportunities utilizing these licenses would have a material adverse effect on
our business.

Any disruptions in the business of our third-party manufacturers, particularly
Early Light Industrial Co. Ltd., could adversely affect our business.

We depend on third parties to manufacture all of our motorsports die-cast
replicas and most of our apparel and racing fan memorabilia. As a result, we
have limited control over the manufacturing processes themselves and any
significant 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.

In particular, we rely on one manufacturer, Early Light Industrial Co. Ltd.,
which operates a single facility in China, to produce most of our die-cast
products. In 2002, products manufactured by Early Light accounted for
approximately 50% of our revenue. Our manufacturing agreement with Early Light
extends through October 31, 2006 and then automatically renews for successive
one-year terms unless terminated by either party. We generally do not have
long-term contracts with our other third-party manufacturers.

We own most of the tools and dies used in the manufacturing process, but we
believe that it would take a period of time for us to secure other third-party
manufacturers to produce our products with our tools and dies in the event our
relationship with Early Light was terminated. Our operations would be
adversely affected by the following:



| |  |  | the loss of our relationship with certain of our current
manufacturers, particularly Early Light;                            
| | - |  | -----------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the disruption or termination of the operations of one or more of
our current key manufacturers, particularly Early Light; or

16



---



##### Table of Contents





| |  |  | the disruption or termination of sea or air transportation with our
China-based die-cast manufacturers, even for a relatively short period
of time.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

Furthermore, a material portion of the tools, dies, and molds used to
manufacture our die-cast products and certain of our apparel and memorabilia
products are located in the facilities of our third-party manufacturers. Any
significant damage to the facilities of our third-party manufacturers,
particularly to Early Lights facility, could result in the loss of or damage
to a material portion of our key tools, dies, and molds and the resultant
production delays while new facilities are being arranged and replacement
tools, dies, and molds are being produced. We do not maintain an inventory of
sufficient size to provide protection for any significant period against an
interruption of manufacturing resources, particularly if we are required to
obtain alternative manufacturing sources. Therefore, any significant damage to
the facilities of our third-party manufacturers, particularly to Early Lights
facility, would have a material adverse effect on our business.

Our business could be adversely affected if we are unable to continue to design
and market high-quality products that appeal to our customers.

Our success depends on our ability to continue to create and market new
products, especially those related to our most popular licensors. Demand for
our motorsports products depends on a wide variety of factors, including the
following:



| |  |  | the popularity of motorsports, particularly NASCAR racing;                   
| | - |  | -----------------------------------------------------------------------------
|
| |  |  | the popularity of the drivers, teams, and others with which we have licenses;
|
| |  |  | the success of our special promotional programs;                             
|
| |  |  | marketing and advertising expenditures devoted to motorsports;               
|
| |  |  | cultural and demographic trends; and                                         
|
| |  |  | general economic conditions.                                                 

Because these factors can change rapidly, customer demand also can shift
quickly. We frequently are able to market new products successfully 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 to market,
we may not always be able to forecast accurately required production quantities
or to respond to changes in customer tastes and demands. We could experience a
material adverse effect on our business, financial conditions, and operating
results if we are unable to respond quickly to market changes or a slowdown in
demand for our products.

The demand for certain of our die-cast products depends, in part, on their
collectible value and appeal. We cannot assure that these products will
achieve or maintain long-term collectible appeal or value.

We face a variety of risks associated with the acquisition and integration of
new business operations.

We plan to consider opportunities to acquire other businesses. Our growth may
be slower than anticipated if we are unable to identify suitable acquisition
candidates and make acquisitions on commercially acceptable terms.

17



---



##### Table of Contents



The integration of the management, personnel, operations, products, services,
technologies, and facilities of any businesses that we acquire in the future
could involve unforeseen difficulties. These difficulties could disrupt our
ongoing business, distract our management and employees, and increase our
expenses.

Unforeseen liabilities and difficulties can arise in connection with the
operation of acquired businesses. Contractual or other remedies may not be
sufficient to compensate us in the event unforeseen liabilities or other
difficulties arise. We may not be able to achieve revenue increases, integrate
facilities, functions, and personnel in order to achieve operating
efficiencies; or otherwise realize anticipated strategic advantages or cost
savings as a result of acquisitions. The inability to achieve revenue
increases or cost savings could have a material adverse effect on our business,
financial condition, and operating results.

We face risks associated with our exclusive relationship with QVC and the
outsourcing of the operations of our collectors club.

We have outsourced the day-to-day operations and distribution of our
collectors club products to QVC since 2001 under a 10-year exclusive
agreement, although we remain responsible for acquisition of licenses, product
selection, development, and manufacturing. We face risks associated with our
agreement with QVC, including the following:



| |  |  | the ability of QVC to operate the collectors club in a successful manner;             
| | - |  | ---------------------------------------------------------------------------------------
|
| |  |  | potential damage to our reputation, as a result reduced levels of customer service; and
|
| |  |  | reduced sales generated from collectors club products.                                

Any disruption in the operations and distribution of collectors club products
by QVC could have a material adverse effect on our business.

Our business could be adversely affected by the loss of key members of our
senior management, particularly Fred W. Wagenhals.

Our future success depends substantially upon the efforts and abilities of Fred
W. Wagenhals, our Chairman of the Board, President, and Chief Executive
Officer. In particular, Mr. Wagenhals relationships with our licensors and
third-party manufacturers are important to the success of our business. Some
of our license agreements provide the licensor with the option to terminate the
agreement in the event that Mr. Wagenhals no longer serves our company in
certain designated capacities. The loss of services of Mr. Wagenhals would
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.

In addition, our future success depends substantially upon the efforts and
abilities of other members of our senior management team, including R. David
Martin, our Chief Financial Officer, Melodee L. Volosin, our Executive Vice
President  Sales, and John S. Bickford, Sr., our Executive Vice
President 
Strategic Alliances.

We depend on a limited number of wholesale distributors to sell a significant
portion of our products.

We currently market our products on a wholesale basis through 17 distributors
operating in the United States. We depend on these distributors to sell our
products to thousands of specialty retailers throughout the United States. If
a significant distributor discontinues selling our products, performs poorly,
does not pay for purchased products, reorganizes, or liquidates and is unable
to continue selling our products, our business, financial condition, and
operating results could be adversely affected. Our failure or inability to
replace poorly performing distributors could have a material adverse effect on
our business.

18



---



##### Table of Contents



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. In addition, variances
in our quarter-to-quarter operating results may result from various factors,
including the following:



| |  |  | the timing of NASCAR model changes;                                                                                                                                                            
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the timing of special promotional programs, which typically result
in significant levels of revenue and expense and involve difficult
coordination and scheduling issues with multiple parties;
|
| |  |  | the timing of major races, which generally generate significant
levels of revenue and income; and                                                                                              
|
| |  |  | the timing of Chinese New Year, which affects our ability to work
with Early Light to bring our products to market in time for the
beginning of the racing season.                             

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 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. Any shortfall in revenue or
fluctuations in operating results may have an 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.

Our competitive position depends on a number of factors, and we may encounter
competition from companies that are able to devote greater resources to
marketing and promotional campaigns than we do.

Our competitive position depends on a number of factors, both within and
outside our control, including the following:



| |  |  | our relationships with and the popularity of race car drivers,
teams, and other licensors of the products we sell;    
| | - |  | ----------------------------------------------------------------------------------------------------------------------
|
| |  |  | our ability to develop and maintain effective marketing programs
that enable us to sell products to motorsports fans; 
|
| |  |  | the success of our distribution channels; and                                                                         
|
| |  |  | our ability to recognize industry trends, anticipate shifts in
consumer demands, and identify and market new products.

Other companies may increase their participation in the motorsports markets.
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.

19



---



##### Table of Contents



Our motorsports die-cast collectibles and mass-retail die-cast replicas compete
with die-cast and other motorsports collectibles and die-cast replicas of
motorsports vehicles that are sold through mass retail channels. Our
motorsports apparel and memorabilia 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. Our promotional programs must compete for
advertising dollars against other specialty advertising programs and media,
such as television, radio, newspapers, magazines, and billboards.

We face risks associated with our international operations.

We obtain our die-cast products from overseas manufacturers, particularly Early
Light, the primary China-based third-party manufacturer of our die-cast
products. Because of the manufacturing of these products overseas, we face
risks in addition to the risks generally involved in utilizing third-party
manufacturers. We also maintain business operations in Germany, and we market
motorsports 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 and operating challenges. These risks and challenges include
the following:



| |  |  | coordination of multi-national operations;                                                                                                                               
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | compliance with local laws and regulatory requirements, as well as
changes in such laws and requirements;                                                                
|
| |  |  | difficulties in supervising foreign operations;                                                                                                                          
|
| |  |  | purchases of die-cast products from China-based manufacturers
generally require us to provide an international letter of credit in an
amount equal to the purchase order;
|
| |  |  | overlap of tax issues;                                                                                                                                                   
|
| |  |  | political and economic conditions abroad; and                                                                                                                            
|
| |  |  | the possibility of expropriation or nationalization of assets.                                                                                                           

To the extent we are unable to adequately address these risks and challenges,
some of which are beyond our control, our business may be adversely affected.

Because we import our die-cast products, our business is subject to potential
adverse trade regulations and restrictions.

Protectionist trade legislation in either the United States or China, such as a
change in the current tariff structures, export compliance laws, or other trade
policies, could adversely affect our ability to obtain our products from our
third-party manufacturers or the price at which we can obtain those products.
Any developments that adversely affect trade relations between the United
States and China in the future could impact our ability to obtain die-cast
products from our third-party manufacturers.

20



---



##### Table of Contents



Substantially all of our products are subject to United States Customs Service
duties and regulations. These regulations include requirements that we
disclose information regarding the country of origin on our products, such as
Made in China. Within its discretion, the United States Customs Service may
also establish new regulations, including regulations regarding the amount of
duty to be paid and the value of merchandise to be reported. Our costs could
increase if the Generalized System of Preferences program is not renewed or
extended each year. The Generalized System of Preferences allows selected
products of beneficiary countries to enter the United States duty free. In
addition, we could be adversely affected if countries that are currently
accorded Most Favored Nation status by the United States, such as China,
cease to have such status. We cannot predict what regulatory changes may occur
or the type or amount of any financial impact these changes may have on us in
the future. Failure to comply with these regulations may result in the
imposition of additional duties or penalties or forfeiture of merchandise.

In addition, China may impose new quotas, duties, tariffs, or other changes or
restrictions. This could adversely affect our business, financial condition,
results of operations, and ability to continue to import products at current or
increased levels.

We have exposure to Chinese and European currency rate fluctuations.

Substantially all of our sales are denominated in either U.S. dollars or euros,
with less than 10% being denominated in euros. As a result, international
customers for our products primarily bear any risks associated with exchange
rate fluctuations subsequent to the date of the purchase order. 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 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.

Any material increase in the cost of the raw materials used to manufacture our
products could have a material adverse effect on our cost of sales.

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, or other
costs increase. We may not be able to pass along cost increases to our
customers. As a result, any material increase in the cost of raw materials,
labor, or other costs associated with the manufacturing of our products could
have a material adverse effect on our cost of sales.

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 important to our success. Our failure to protect our
intellectual property could adversely affect our business, operating results,
and financial position. Our intellectual property rights consist primarily of
our trademarks, trade names, logos, and art. We have copyright protection for
all original material that we produce to promote our products.

We have registered trademarks for certain of our Action names and logos, and
our Winners Circle, Chase, and certain goracing.com brands. 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.

21



---



##### Table of Contents



We may not be able to obtain effective trademark, service mark, copyright, and
trade secret protection in every country in which we market our products. 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
from others. 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 intellectual property 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 that aspects of our business infringe on 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 management, and could require us to enter into
royalty and license agreements.

Product liability, product recalls, and other claims relating to the use of our
products could adversely affect our business.

Because we sell our products to consumers, we face product liability risks
relating to the use of our products. We also must comply with a variety of
product safety and product testing regulations. If we fail to comply with
these regulations or if we face product liability claims, we may be subject to
damage awards or settlement costs that exceed our insurance coverage and we may
incur significant costs in complying with recall requirements. Even if a
product liability claim is without merit, the claim could harm our business.

The market price of our common stock has been, and in the future could 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 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 more rapidly expanding companies and
that often have been unrelated to the operating performance of these companies.
These broad market fluctuations and other factors may adversely affect the
market price of our common stock.

22



---



##### Table of Contents



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

Almost all of our common stock outstanding, is 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 security
laws. A portion of the shares of common stock outstanding is restricted
shares, 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 from the registration
requirements. 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 the shares. The majority of the shares
held by our officers and directors currently are available for sale under Rule
144. 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.

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.

23



---



##### 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,
containing approximately 121,000 square feet for our operations in that area.
We utilize approximately 42,000 square feet of the 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 are currently adding an additional 60,000 square
feet for warehouse space and distribution operations. We currently lease
23,000 square feet of warehouse space near Charlotte. The term of that lease
expires in December 2002. We do not plan to renew this lease. We also rent
mall space for retail stores to support the Charlotte operation, seasonally,
for periods of less than one year.

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
screen-printing and warehouse operations. The lease on this facility expires
in January 2003 and will not be renewed. 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 2003
and will not be renewed. In October 2002, we entered into a lease on a new
facility in Atlanta, Georgia in order to consolidate operations into one
location. The facility consists of approximately 92,000 square feet, of which
we will utilize 20,000 square feet for offices and approximately 72,000 square
feet for manufacturing and warehouse operations. The lease on this facility
expires in April 2008.

We also lease a 45,000 square foot facility in Baraboo, Wisconsin. We utilize
approximately 10,000 square feet of the facility for offices and approximately
35,000 square feet for warehouse space and distribution operations. The term
of this lease expires in June 2003.

We also lease a 38,750 square foot facility in Los Angeles, California. We
utilize approximately 9,000 square feet of the facility for offices and
approximately 29,750 square feet for apparel assembly and warehouse operations.
The term of this lease expires in March 2005.

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 an additional 38,000 square feet of warehouse
space under construction with completion scheduled for March 2003.




ITEM 3. LEGAL PROCEEDINGS

We are involved in various legal proceedings arising out of our operations in
the ordinary course of business. We do not believe that such proceedings, even
if determined adversely, will have a material adverse effect on our business,
financial condition, or results of operations.




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

Not applicable.

24



---



##### Table of Contents






PART II




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

Our common stock has been listed on the New York Stock Exchange under the
symbol ATN since February 20, 2002. From April 27, 1993, the date of our
initial public offering, until February 19, 2002, our common stock was quoted
on the Nasdaq National Market under the symbol ACTN. The following table
sets forth the high and low sale prices of the common stock for each calendar
quarter indicated as reported on the New York Stock Exchange or Nasdaq National
Market , as applicable.

|      |                                            |  |              |       |     |  |   |       | 
|----- | ------------------------------------------ |  | ------------ | ----- | --- |  | - | ----- | 
|      |                                            |  | Common Stock
|      |                                            |  |             
|      |                                            |  | High         |       | Low
|      |                                            |  |              |       |    
|2002: |                                            |  |              |       |     |  |   |      
|      | First Quarter                              |  | $            | 50.27 |     |  | $ | 30.03 | 
|      | Second Quarter                             |  |              | 51.99 |     |  |   | 27.75 | 
|      | Third Quarter                              |  |              | 34.30 |     |  |   | 20.68 | 
|      | Fourth Quarter (through November 29, 2002) |  |              | 26.71 |     |  |   | 15.80 | 
|2001: |                                            |  |              |       |     |  |   |      
|      | First Quarter                              |  | $            | 11.56 |     |  | $ | 2.31  | 
|      | Second Quarter                             |  |              | 27.00 |     |  |   | 10.25 | 
|      | Third Quarter                              |  |              | 29.25 |     |  |   | 14.75 | 
|      | Fourth Quarter                             |  |              | 37.17 |     |  |   | 17.13 | 
|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  | 

On November 29, 2002, the closing sale price of our common stock on the New
York Stock Exchange was $22.15 per share. As of November 29, 2002, there were
379 holders of record of our common stock.

Dividend Policy

During September 2002, we announced the initiation of an ongoing quarterly
dividend after our Board of Directors reviewed current business conditions and
future prospects.

We paid an initial cash dividend on our common stock of $0.03 per share for the
fourth quarter of 2002. The fourth quarter 2002 dividend was paid on October
28, 2002, to shareholders of record as of October 10, 2002. On December 2,
2002, we declared a cash dividend payable on our common stock of $0.03 per
share for the first quarter of 2003. The first quarter 2003 dividend is
payable January 13, 2003, to shareholders of record as of December 23, 2002.
As long as our cash flow from operations remains adequate for our planned
operations, we intend to pay comparable cash dividends in the future.

25



---



##### 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, 2002, are derived from our consolidated
financial statements. 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,
|                                                                                 |  |                                
|                                                                                 |  | 2002                            |         | 2001 |  | 2000(2)                                  |         | 1999 |  | 1998
|                                                                                 |  |                                 |         |      |  |                                          |         |      |  |     
|                                                                                 |  |                                 |         |      |  | (in thousands, except per share amounts) |         |      |  |     
|Consolidated Statement of Operations Data (1):                                   |  |                                 |         |      |  |                                          |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Net sales (3)                                                                    |  | $                               | 406,902 |      |  | $                                        | 323,352 |      |  | $    | 258,105 |   |  | $ | 347,842 |   |  | $ | 256,307 |  
|Cost of sales (3)                                                                |  |                                 | 250,810 |      |  |                                          | 208,375 |      |  |      | 209,102 |   |  |   | 216,165 |   |  |   | 161,509 |  
|                                                                                 |  |                                 |         |      |  |                                          |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Gross profit                                                                     |  |                                 | 156,092 |      |  |                                          | 114,977 |      |  |      | 49,003  |   |  |   | 131,677 |   |  |   | 94,798  |  
|Selling, general and
administrative expenses (4)                                 |  |                                 | 77,214  |      |  |                                          | 69,456  |      |  |      | 107,942 |   |  |   | 71,636  |   |  |   | 46,294  |  
|Amortization of goodwill and
trademark (5)                                       |  |                                 |        |      |  |                                          | 4,097   |      |  |      | 11,295  |   |  |   | 2,895   |   |  |   | 3,109   |  
|Amortization of licenses and
other intangibles                                   |  |                                 | 2,797   |      |  |                                          | 2,060   |      |  |      | 5,458   |   |  |   | 3,923   |   |  |   | 1,283   |  
|                                                                                 |  |                                 |         |      |  |                                          |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Income (loss) from operations                                                    |  |                                 | 76,081  |      |  |                                          | 39,364  |      |  |      | (75,692 | ) |  |   | 53,223  |   |  |   | 44,112  |  
|Interest expense                                                                 |  |                                 | (3,029  | )    |  |                                          | (5,102  | )    |  |      | (6,291  | ) |  |   | (6,929  | ) |  |   | (5,398  | )
|Minority interests and other, net                                                |  |                                 | 862     |      |  |                                          | (1,040  | )    |  |      | (696    | ) |  |   | 601     |   |  |   | 2,264   |  
|                                                                                 |  |                                 |         |      |  |                                          |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Income (loss) before income
taxes and extraordinary items                        |  |                                 | 73,914  |      |  |                                          | 33,222  |      |  |      | (82,679 | ) |  |   | 46,895  |   |  |   | 40,978  |  
|Income taxes                                                                     |  |                                 | 28,113  |      |  |                                          | 10,205  |      |  |      | (24,592 | ) |  |   | 18,526  |   |  |   | 16,391  |  
|                                                                                 |  |                                 |         |      |  |                                          |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Income (loss) before
extraordinary items                                         |  | $                               | 45,801  |      |  | $                                        | 23,017  |      |  | $    | (58,087 | ) |  | $ | 28,369  |   |  | $ | 24,587  |  
|                                                                                 |  |                                 |         |      |  |                                          |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Income (loss) before
extraordinary items per common
share, assuming dilution (6) |  | $                               | 2.46    |      |  | $                                        | 1.37    |      |  | $    | (3.52   | ) |  | $ | 1.65    |   |  | $ | 1.48    |  
|                                                                                 |  |                                 |         |      |  |                                          |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Weighted average number of
common shares, 
assuming dilution
(6)                 |  |                                 | 19,231  |      |  |                                          | 16,849  |      |  |      | 16,515  |   |  |   | 19,179  |   |  |   | 16,647  |  
|Cash dividends declared per
common share                                         |  | $                               | 0.03    |      |  | $                                        |        |      |  | $    |        |   |  | $ |        |   |  | $ |        |  
|Consolidated Balance Sheet Data (1):                                             |  |                                 |         |      |  |                                          |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Working capital                                                                  |  | $                               | 117,518 |      |  | $                                        | 90,303  |      |  | $    | 64,524  |   |  | $ | 107,797 |   |  | $ | 86,939  |  
|Total assets                                                                     |  |                                 | 337,916 |      |  |                                          | 278,953 |      |  |      | 255,917 |   |  |   | 335,747 |   |  |   | 305,934 |  
|Total debt                                                                       |  |                                 | 40,783  |      |  |                                          | 57,420  |      |  |      | 109,278 |   |  |   | 111,921 |   |  |   | 135,596 |  
|Total shareholders equity                                                       |  |                                 | 229,388 |      |  |                                          | 159,826 |      |  |      | 102,718 |   |  |   | 172,991 |   |  |   | 136,432 |  



---

|(1) |  | This financial data includes the results of acquired operations,
including Trevco, McArthur and Jeff Hamilton, acquired in 2002, and
Goodsports Holdings Pty Ltd. (Goodsports), acquired in 1999, and closed in
2001. Results also include net sales of Winners Circle product beginning
as of the date of acquisition of the Winners Circle trademark in 2001.
Prior to acquisition of the Winners Circle trademark, we recorded license
income with respect to Winners Circle products.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Results in 2000 include $64.8 million of restructuring and other
special charges.                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(3) |  | Net sales and cost of sales have been adjusted for all periods presented
to reflect adoption of EITF 00-10, Accounting for Shipping and Handling
Fees and Costs, in the quarter ended September 30, 2001.                                                                                                                                                                                                                                                                                    

26



---



##### Table of Contents



|(4) |  | Results in 1999 and 1998 include settlement costs and related legal and
other expenses of $3.6 million and $1.0 million, respectively.                            
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(5) |  | Goodwill and trademark ceased amortizing October 1, 2000, with the
adoption of SFAS No. 142, Goodwill and Other Intangible Assets.                                
|   
|(6) |  | Results for 2002 and 1999 include the dilutive effect of outstanding
4 3/4% convertible subordinated notes assuming conversion as of the
beginning of each period.




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

Overview

We are the leading designer and marketer of licensed motorsports products
related to NASCAR, including die-cast scaled replicas of motorsports vehicles,
apparel and memorabilia. We currently have exclusive license agreements with
many of the most recognized names in NASCAR. We also design and sell products
relating to other motorsports, including racing sanctioned by the NHRA, Formula
One, the IRL and the World of Outlaws. In Germany, we merchandise Formula One
and high-end auto manufacturer die-cast replica vehicles. We work closely with
drivers, team owners, track operators and sponsors to design and merchandise
our products. Third parties manufacture all of the replica motorsports
vehicles and most apparel and memorabilia, generally utilizing our designs,
tools and dies. We retain ownership and control over designs and tooling and
have close working relationships with our third-party manufacturers to help
assure product quality.

We have structured our operations to enable us to respond to challenging
business conditions and to service higher levels of sales with limited
increases in operating expenses and capital investments. The principal
elements of this operating structure include the following:



| |  |  | We have the ability to exert a high degree of control over product
pricing.                                                  
| | - |  | -----------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Manufacturing costs are largely fixed as a percentage of sales due
to outsourcing under fixed-price contracts.               
|
| |  |  | Royalties are paid generally as a percentage of sales.                                                                       
|
| |  |  | Due to our agreements with distributors and QVC, incremental volume
does not proportionately increase our operating expenses.
|
| |  |  | Research and development is limited to basic design and engineering.                                                         
|
| |  |  | Capital expenditures are principally limited to tooling for die-cast.                                                        
|
| |  |  | Functions such as manufacturing and others outside of our core skills are generally outsourced.                              

Revenue

Our revenue is primarily derived from the sale of our licensed motorsports
products. The popularity and performance of drivers and teams under license,
the popularity of motorsports in general and NASCAR in particular, the general
demand for licensed sports merchandise and our ability to design, produce, and
distribute our products in a timely manner influence the level of our net
sales.

27



---



##### Table of Contents



We distribute our products through a broad range of channels, including a
network of wholesale distributors, leading mass-market retailers, mobile
trackside stores, QVC, and our collectors club catalog. We recognize revenue
when persuasive evidence of an arrangement exists, title passes to the
customer, the fee is fixed or determinable, and collection 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. 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. We
recognize trackside sales when the consumer purchases product at the point of
sale. 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.

Cost of Sales

Cost of sales consists primarily of the cost of products procured from
third-party manufacturers, royalty payments to licensors, depreciation of
tooling and dies, and freight charges. Substantial portions of our die-cast
products are manufactured under an exclusive agreement with Early Light, a
manufacturer in China. We obtain substantially all of our apparel and
memorabilia products on a purchase order basis from several third-party
manufacturers and suppliers.

Due to the variable nature of most of the components of our cost of sales, our
gross margin generally does not fluctuate significantly. However, certain
factors do affect our gross margin, including the following:



| |  |  | product mix,                                                                                                                                      
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our ability to control product pricing without discounting,                                                                                       
|
| |  |  | 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.                                   

Selling, General and Administrative Expenses

Selling general and administrative expenses consist primarily of employee
compensation, advertising and promotion, rent and other facility costs, and
depreciation and amortization. The majority of these costs are fixed and, as a
result, incremental sales volume generally results in a decline in selling,
general and administrative expenses as a percentage of net sales.

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) are historically characterized by higher sales.

28



---



##### Table of Contents



Application of Critical Accounting Policies

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

The following critical accounting policies require us to make significant
judgments and estimates used in the preparation of our financial statements.

Allowance for Doubtful Accounts

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

Inventory Reserves

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

Royalties

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

Goodwill and Other Intangibles

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

29



---



##### Table of Contents



Deferred Tax Assets

We estimate our actual current tax exposure together with the temporary
differences that have resulted from the differing treatment of items dictated
by generally accepted accounting principles versus U.S. and German tax laws.
These temporary differences result in deferred tax assets and liabilities. On
an on-going basis, we then assess the likelihood that our deferred tax assets
will be recovered from future taxable income. If we were to believe the
recovery was less than likely, we would establish a valuation allowance against
the deferred tax asset and charge the amount as an income tax expense in the
period in which such a determination was made.

Stock-Based Compensation

We account for employee stock-based compensation in accordance with Accounting
Principles Board Opinion 25, Accounting for Stock Issued to Employees and
related interpretations (APB No. 25). Common stock options issued under our
plans generally do not result in compensation expense because the exercise
price of the stock options equals the market price of the underlying stock on
the date of grant.

Results of Operations

The following table sets forth, for the years indicated, the percentage of
total revenue represented by certain expense and revenue items.

|                                                          |  |      |       |      |  |      |       |   |  |  |       |   
|--------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | --
|                                                          |  | 2002 |       | 2001 |  | 2000
|                                                          |  |      |       |      |  |     
|Net sales (1)                                             |  |      | 100.0 | %    |  |      | 100.0 | % |  |  | 100.0 | % 
|Cost of sales (1) (3)                                     |  |      | 61.6  |      |  |      | 64.4  |   |  |  | 81.0  |   
|                                                          |  |      |       |      |  |      |       |   |  |  |       |   
|Gross profit                                              |  |      | 38.4  |      |  |      | 35.6  |   |  |  | 19.0  |   
|Selling, general and administrative                       |  |      | 19.0  |      |  |      | 21.5  |   |  |  | 41.8  |   
|Amortization of goodwill and trademark (2)                |  |      |      |      |  |      | 1.3   |   |  |  | 4.4   |   
|Amortization of licenses and other intangibles            |  |      | 0.7   |      |  |      | 0.6   |   |  |  | 2.1   |   
|                                                          |  |      |       |      |  |      |       |   |  |  |       |   
|Income (loss) from operations                             |  |      | 18.7  |      |  |      | 12.2  |   |  |  | (29.3 | ) 
|Interest expense                                          |  |      | (0.7  | )    |  |      | (1.6  | ) |  |  | (2.4  | ) 
|Minority interests and other, net                         |  |      | 0.2   |      |  |      | (0.3  | ) |  |  | (0.3  | ) 
|                                                          |  |      |       |      |  |      |       |   |  |  |       |   
|Income (loss) before income taxes and extraordinary items |  |      | 18.2  |      |  |      | 10.3  |   |  |  | (32.0 | ) 
|Income taxes                                              |  |      | 6.9   |      |  |      | 3.2   |   |  |  | (9.5  | ) 
|                                                          |  |      |       |      |  |      |       |   |  |  |       |   
|Net income (loss) before extraordinary items              |  |      | 11.3  | %    |  |      | 7.1   | % |  |  | (22.5 | )%
|                                                          |  |      |       |      |  |      |       |   |  |  |       |   



---

|(1) |  | Adjusted to reflect adoption of EITF 00-10, Accounting for Shipping and
Handling Fees and Costs, in the quarter ended September 30, 2001.    
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Goodwill and trademark amortization ceased effective October 1, 2001 with
the adoption of SFAS No. 142, Goodwill and Other Intangible Assets.
|   
|(3) |  | Results in 2000 include $64.8 million of restructuring and other
charges.                                                                    

Special Charges

In 2000, we recorded charges of $17.5 million arising from the decision to
abandon our Internet strategy, relating to goracing.com. The goracing.com
network at that time consisted of various motorsports-related; e-commerce
enabled web sites that we developed, operated and maintained. 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
2000 financial statements as follows (in millions):

30



---



##### 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 Trademark |                    |                                          | 4.5                                 |  
|Amortization of Licenses               |                    |                                          | 3.1                                 |  
|                                       |                    |                                          |                                     |   |     
|                                       |                    | $                                        | 17.5                                |  
|                                       |                    |                                          |                                     |   |     

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

As a result of the decision to abandon our Internet strategy and in response to
demand changes, we evaluated our operations and concluded it was necessary to
reorganize the company and refocus on our core strengths. Consequently, in
addition to the goracing.com charges, the 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 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 Trademark |                                      |                      | 1.9                                       |                    
|Minority Interests and Other, Net:     |                                      |                      |                                           |                    
|                                       | Other                                |                      |                                           | 0.4                 |    
|                                       | Equity investments                   |                      |                                           | 2.0                 |    
|                                       |                                      |                      |                                           |                     |    
|                                       |                                      | $                    | 47.3                                      |                    
|                                       |                                      |                      |                                           |                     |    

31



---



##### Table of Contents



Year Ended September 30, 2002 Compared with Year Ended September 30, 2001

Net sales increased 25.8% to $406.9 million for 2002, from $323.4 million in
the prior year. Sales increased in both die-cast and apparel distribution
channels. Domestic die-cast sales increased 54.5% from the prior year while
foreign die-cast sales increased 2.2%. Sales of die-cast products to mass
retailers under the Winners Circle brand accounted for 40% of the increase in
domestic die-cast sales. The remaining increase in domestic die-cast sales
reflects a continuation of the increase in consumer demand, which began in the
second quarter of 2001. Domestic apparel and memorabilia segment sales,
exclusive of trackside, increased $24.5 million, or 29.5%, from the prior year.
Revenues from businesses acquired in 2002 accounted for 52.9% of this
increase. The remaining increase in revenues reflects increased demand from
both wholesale and mass retail channels. Trackside sales decreased 4.4% to
$57.3 million from $59.9 million. Trackside revenues in 2001 reflected
substantial sales of Dale Earnhardt Sr. product. Revenues for 2001 included
$11.1 million from Goodsports, which was closed effective September 30, 2001.

Gross profit improved to 38.4% of sales in 2002 from 35.6% in 2001. Domestic
die-cast margins improved as the depreciation of tooling and dies has declined
as a percentage of revenues. In addition, segments generally benefited from
stable costs and increased volume. Effective September 30, 2001, we also
closed the Goodsports foreign apparel operation, which had a lower margin than
the corporate average. These improvements in gross margin were partially
offset by the negative impacts of higher margin apparel sales being a smaller
component of total sales this year than last year.

Selling, general and administrative expenses were $77.2 million, or 19.0% of
sales, in 2002 compared to $69.5 million, or 21.5% of sales in 2001, reflecting
strong expense controls and the leverage we obtain from increased revenues due
to our economic model in which there is only limited variability in each
seasonal quarter.

Goodwill and trademark amortization ceased effective October 1, 2001, with the
adoption of SFAS 142. Goodwill and trademark amortization in 2001 was $4.1
million, or 1.3% of sales.

Interest expense of $3.0 million in 2002, was $2.1 million lower than interest
expense for the prior year as a result of the convertible subordinated note
repurchases and other long-term debt reductions.

The 38.0% effective tax rate for 2002 was higher than the 30.7% effective rate
for 2001 because 2001 benefited from the recognition of U.S. tax benefits from
the closure of our UK operation and valuation allowance reduction.

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

Net 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% from the prior year to
$135.6 million and foreign die-cast sales increased 46.5% from the prior year
to $28.8 million. Domestic apparel sales, exclusive of trackside, increased
35.9% from the prior year to $83.1 million and foreign apparel sales increased
12.6% from the prior year to $11.1 million. Trackside sales increased 35.6% to
$59.9 million. In the second quarter, in connection with the start of the
NASCAR racing season, consumer demand increased significantly. Demand was
driven in part by increased consumer awareness as a result of improved NASCAR
television coverage. 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 2001 from $49.0 million in 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.

32



---



##### Table of Contents



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
2000. We also benefited from the full year effect of headcount reductions in
2000.

Amortization of goodwill, trademark, licenses, 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
licenses recorded in the third and fourth quarters of 2000.

Interest expense for 2001 was $1.2 million lower than the prior year. The
reduction is primarily the 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.

Quarterly Results of Operations

The following table sets forth certain unaudited quarterly results of
operations for each of the quarters in the three years ended September 30, 2002
(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.

|                                                                     |  |             |        |             |  |             |         |             |  |   |         |  |  |   |         | 
|-------------------------------------------------------------------- |  | ----------- | ------ | ----------- |  | ----------- | ------- | ----------- |  | - | ------- |  |  | - | ------- | 
|                                                                     |  | 2002       
|                                                                     |  |            
|                                                                     |  | 1st Quarter |        | 2nd Quarter |  | 3rd Quarter |         | 4th Quarter
|                                                                     |  |             |        |             |  |             |         |            
|Net sales (6)                                                        |  | $           | 84,136 |             |  | $           | 100,185 |             |  | $ | 112,085 |  |  | $ | 110,496 | 
|Gross profit                                                         |  |             | 31,851 |             |  |             | 38,857  |             |  |   | 43,738  |  |  |   | 41,646  | 
|Income from operations                                               |  |             | 14,173 |             |  |             | 19,347  |             |  |   | 22,834  |  |  |   | 19,727  | 
|Income before extraordinary items                                    |  | $           | 8,080  |             |  | $           | 11,163  |             |  | $ | 13,546  |  |  | $ | 13,012  | 
|Income before extraordinary item
per common share, assuming
dilution |  | $           | 0.45   |             |  | $           | 0.60    |             |  | $ | 0.72    |  |  | $ | 0.70    | 
|Weighted average number of
common shares, assuming dilution          |  |             | 19,053 |             |  |             | 19,261  |             |  |   | 19,388  |  |  |   | 19,148  | 

|                                                                     |  |             |        |             |  |             |        |             |  |   |        |  |  |   |         | 
|-------------------------------------------------------------------- |  | ----------- | ------ | ----------- |  | ----------- | ------ | ----------- |  | - | ------ |  |  | - | ------- | 
|                                                                     |  | 2001       
|                                                                     |  |            
|                                                                     |  | 1st Quarter |        | 2nd Quarter |  | 3rd Quarter |        | 4th Quarter
|                                                                     |  |             |        |             |  |             |        |            
|Net sales (6)                                                        |  | $           | 50,888 |             |  | $           | 71,074 |             |  | $ | 92,975 |  |  | $ | 108,415 | 
|Gross profit                                                         |  |             | 18,082 |             |  |             | 23,987 |             |  |   | 33,646 |  |  |   | 39,262  | 
|Income from operations                                               |  |             | 1,462  |             |  |             | 5,870  |             |  |   | 14,186 |  |  |   | 17,846  | 
|Income (loss) before
extraordinary items                             |  | $           | (73    | )           |  | $           | 2,596  |             |  | $ | 8,228  |  |  | $ | 12,266  | 
|Income before extraordinary item
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  | 

33



---



##### Table of Contents



|                                                                     |  |                |        |             |  |                |        |                |  |   |         |   |  |   |         |     
|-------------------------------------------------------------------- |  | -------------- | ------ | ----------- |  | -------------- | ------ | -------------- |  | - | ------- | - |  | - | ------- | ----
|                                                                     |  | 2000          
|                                                                     |  |               
|                                                                     |  | 1st Quarter(1) |        | 2nd Quarter |  | 3rd Quarter(2) |        | 4th Quarter(3)
|                                                                     |  |               
|Net sales (6)                                                        |  | $              | 65,694 |             |  | $              | 58,948 |                |  | $ | 77,183  |   |  | $ | 56,280  |     
|Gross profit (loss)                                                  |  |                | 19,895 |             |  |                | 18,165 |                |  |   | 14,991  |   |  |   | (4,048  | )(4)
|Loss from operations                                                 |  |                | (2,348 | )           |  |                | (6,517 | )              |  |   | (27,671 | ) |  |   | (39,156 | )(5)
|Loss before extraordinary items                                      |  | $              | (2,129 | )           |  | $              | (4,138 | )              |  | $ | (23,571 | ) |  | $ | (28,250 | )   
|Income before extraordinary item
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  |     



---

|(1) |  | Includes $2.3 million charge related to the withdrawal of the
goracing.com initial public offering.                                                                                                                                                                                                                                                                                                                                                                                                 
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes $15.2 million of goracing.com related charges and other charges
of $15.0 million of asset write-downs and impairments.                                                                                                                                                                                                                                                                                                                                                                     
|   
|(3) |  | 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.                                                                                                                                                                                                                                                                                                  
|   
|(4) |  | Cost of sales was $60.3 million during the fourth quarter of 2000, or
107.1% of sales. Before special charges, fourth quarter cost of sales was
$40.1 million, or 71.3% of sales. The cost of sales percentage during the
fourth quarter of 2000 reflected increased freight costs and sales of
product at discounted prices.                                                                                                                                                                       
|   
|(5) |  | Loss from operations reflects the factors described in footnote (4) 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 2000, or 62.6% of sales. Excluding special charges
during 2000, such expenses were $24.8 million, or 44.4% of sales. The
selling, general and administrative expenses reflected a reduction in
sales without a corresponding reduction in such costs.
|   
|(6) |  | Adjusted to reflect 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.

Liquidity and Capital Resources

Working capital improved $27.2 million to $117.5 million at September 30, 2002,
from $90.3 million at September 30, 2001. Cash increased $5.1 million to $69.6
million at September 30, 2002, from $64.5 million at September 31, 2001. Cash
increased as a result of proceeds upon exercise of stock options ($6.5 million)
and other operating activities. The increases in cash were offset by
reductions in cash for net property and equipment expenditures ($25.5 million),
acquisitions ($19.0 million), repurchases of convertible subordinated notes and
other debt ($6.4 million), and other operating activities, including U.S. tax
payments ($27.5 million).

34



---



##### Table of Contents



Days sales outstanding, calculated on quarterly sales, increased 47.7% to 51.0
days as of September 30, 2002, compared to 34.6 days as of September 30, 2001.
Days sales outstanding for continuing wholesale distribution channels increased
from 33.8 to 39.5 days; days sales outstanding for mass-market retail channels
increased from 71.2 to 77.4 days; and newly acquired specialty channel days
sales outstanding was 56.2 days. The increase in days sales outstanding
reflects the change in our business towards mass-market retailers, which
generally have longer payment terms, and our acquisitions. During 2002,
approximately 50% of our sales to mass-market retailers were supported by
letters of credit.

Days in inventory, calculated on quarterly cost of sales, increased 33.8% to
44.7 days as of September 30, 2002, compared to 33.4 days as of September 30,
2001. Growth in inventories arose from inventories of acquired companies that
were not included a year ago, growth in mass apparel retail inventories staged
and awaiting shipment in early October, and from the inventories that were on
ships at September 30, 2002, due to the west coast dock problems. Our backlog
at September 30, 2002, was approximately $90 million compared to $120 million
at September 30, 2001.

During 2002, we repurchased 4 3/4% convertible subordinated notes with a face
value of $16.0 million, at a loss of $0.9 million, using $5.7 million in cash
and 145 thousand shares from treasury and 95 thousand newly issued shares at an
average price of $47.60. In total, since January 1, 2001, we have repurchased
notes with a face value of $61.1 million, using $16.8 million in cash and 1.1
million shares of common stock. We continually evaluate opportunities to
redeem or repurchase the notes.

As of September 30, 2002, 4 3/4% convertible subordinated notes with a face
value of $38.9 million remained 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 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.

Net capital expenditures related to ongoing investments in tooling and building
additions in Charlotte, North Carolina and Aachen, Germany, totaled $25.5
million during 2002, and included $9.7 million applicable to foreign
operations. Net capital expenditures for 2003 are not expected to exceed $25
million.

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

The line of credit bears interest at Bank Ones base rate, or LIBOR plus 2.5%.
A commitment fee of 0.5% of the average unused line of credit and 1.5%-2.5% of
the average letters of credit is payable annually on the loan. The Agreement
maturity date was extended from December 2002 to March 2003. Outstanding
letters of credit total $10.6 million at September 30, 2002. The Agreement is
secured principally by inventory, receivables, and equipment and no longer
prohibits the payment of dividends.

35



---



##### Table of Contents



Under the Agreement, as amended, we are required to meet certain financial
tests principally related to debt coverage, tangible net worth, and funded
indebtedness to EBIDA (earnings before interest, depreciation and
amortization). We were in compliance with those covenants at September 30,
2002.

In May 2002, at a special meeting of shareholders, the shareholders approved an
increase in the number of authorized common shares from 25.0 million shares to
62.5 million shares.

In July 2001, the Board of Directors approved a one-year program in which we
may purchase up to 1.0 million shares of our common stock in the open market or
in privately negotiated transactions. Under this program, 80,000 shares were
purchased at an average price of $24.70 per share. In July 2002, the Board of
Directors approved a one-year program in which we may purchase up to 1.0
million shares of our common stock in the open market or in privately
negotiated transactions. In October 2002, under this program, 110,000 shares
were purchased at a price of $18.39 per share.

In September 2002, we initiated an ongoing quarterly dividend policy with an
initial dividend of $0.03 per share. We paid an initial cash dividend on our
common stock at $0.03 per share for the fourth quarter of 2002. The fourth
quarter 2002 dividend was paid on October 28, 2002, to shareholders of record
as of October 10, 2002. On December 2, 2002, we declared a cash dividend
payable on our common stock of $0.03 per share for the first quarter of 2003.
The first quarter 2003 dividend is payable January 13, 2003, to shareholders of
record as of December 23, 2002.

In 2002, we issued warrants to purchase a total of 200 thousand shares of
common stock in connection with license agreements, at an average exercise price of $28.06 per share. The
warrants had a fair market value of $2.2 million as estimated by the
Black-Scholes option pricing method (average assumed volatility 48.51%,
risk-free rate 3.99% and term of 5.0 years). Issuance resulted in increases in
additional paid-in-capital and intangible assets.

Contractual Obligations and Commercial Commitments

Aggregate future minimum payments due contractually under royalty agreement
guarantees, personal service agreements, long-term debt, noncancellable
operating leases, commercial letters of credit, and other unconditional
purchase obligations are as follows as of September 30, 2002 (in thousands):

|           |      |            |                   |            |                  |      |           |          |       |             |          |        |  |   |        |       |  |   |               |        |  |   |         |        | 
|---------- | ---- | ---------- | ----------------- | ---------- | ---------------- | ---- | --------- | -------- | ----- | ----------- | -------- | ------ |  | - | ------ | ----- |  | - | ------------- | ------ |  | - | ------- | ------ | 
|           |      |            |                   |            |                  |      |           |          |       |             |          |        |  |   |        |       |  |   | Unconditional |        |  |   |        
|           |      |            | Royalty Agreement |            | Personal Service |      | Long-term |          | Lease |             | Purchase |        |  |   |       
|Year       |      | Guarantees |                   | Agreements |                  | Debt |           | Payments |       | Obligations |          | Total 
|           |      |            |                   |            |                  |      |           |          |       |             |          |       
|           | 2003 |            | $                 | 16,589     |                  |      | $         | 1,563    |       |             | $        | 423    |  |   | $      | 5,916 |  |   | $             | 14,190 |  |   | $       | 38,681 | 
|           | 2004 |            |                   | 20,128     |                  |      |           | 1,450    |       |             |          | 426    |  |   |        | 3,675 |  |   |               |       |  |   |         | 25,679 | 
|           | 2005 |            |                   | 16,292     |                  |      |           | 1,100    |       |             |          | 39,103 |  |   |        | 3,517 |  |   |               |       |  |   |         | 60,012 | 
|           | 2006 |            |                   | 11,795     |                  |      |           | 413      |       |             |          | 181    |  |   |        | 3,281 |  |   |               |       |  |   |         | 15,670 | 
|           | 2007 |            |                   | 6,908      |                  |      |           | 100      |       |             |          | 195    |  |   |        | 3,130 |  |   |               |       |  |   |         | 10,333 | 
|Thereafter |      |            | 29,770            |            |                  |      |          |          |       |             | 455      |        |  |   | 14,298 |       |  |   |              |        |  |   | 44,523  |       
|           |      |            |                   |            |                  |      |           |          |       |             |          |        |  |   |        |       |  |   |               |        |  |   |         |       
|Total      |      | $          | 101,482           |            |                  | $    | 4,626     |          |       | $           | 40,783   |        |  | $ | 33,817 |       |  | $ | 14,190        |        |  | $ | 194,898 |       
|           |      |            |                   |            |                  |      |           |          |       |             |          |        |  |   |        |       |  |   |               |        |  |   |         |       

Unconditional purchase obligations at September 30, 2002, included $3.6 million
for property and equipment and $10.6 million of outstanding letters of credit.

36



---



##### Table of Contents



In certain sublease arrangements, we remain the primary obligor under the terms
of the original lease agreements. Commitments under these subleases expire as
follows (in thousands):

|           |      |                      |       |     | 
|---------- | ---- | -------------------- | ----- | --- | 
|Year       |      | Sublease Commitments
|           |      |                     
|           | 2003 |                      | $     | 384 | 
|           | 2004 |                      |       | 384 | 
|           | 2005 |                      |       | 384 | 
|           | 2006 |                      |       | 384 | 
|           | 2007 |                      |       | 352 | 
|Thereafter |      |                      |      |    
|           |      |                      |       |    
|Total      |      | $                    | 1,888 |    
|           |      |                      |       |    

One of our sublessees fell in arrears on lease payments, during 2002. The
subleases with this party include a building lease, which expires October 2009,
and equipment and furniture leases, which expired October 2002. The building
lease has annual lease payments of $1.0 million. We acquired the equipment and
furniture under the subleases in October 2002. During 2002, we have reserved
$3.0 million representing our current estimate of the total potential loss
under these sublease agreements.




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, 2002, we had $38.9 million outstanding under our convertible
subordinated notes at an interest rate of 4 3/4%, and approximately $1.8
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.

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.
Additionally, at September 30, 2002, we had $14.2 million in intercompany
advances denominated in euros for which the exchange rate gain or loss is
charged to results of operations.




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

37



---



##### Table of Contents






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 2003
Annual Meeting of Shareholders. The information required by this Item relating
to our executive officers is included in Item 1, 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 2003 Annual Meeting of Shareholders.




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

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 2003 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 2003 Annual Meeting of Shareholders.




ITEM 14. CONTROLS AND PROCEDURES

Based on their evaluation, as of a date within 90 days prior to the date of the
filing of this report, of the effectiveness of our disclosure controls and
procedures, our Chief Executive Officer and Chief Financial Officer have each
concluded that our disclosure controls and procedures are effective and
sufficient to ensure that we record, process, summarize, and report information
required to be disclosed by us in our periodic reports filed under the
Securities Exchange Act within the time periods specified by the Securities and
Exchange Commissions rules and forms.

Subsequent to the date of their evaluation, there have not been any significant
changes in our internal controls or in other factors that could significantly
affect these controls, including any corrective action with regard to
significant deficiencies and material weaknesses.

38



---



##### Table of Contents






PART IV




ITEM 15. 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.

(c) Exhibits

39



---



##### Table of Contents



|        |  |                                                                                                                                                                                                                                                          
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                          
|Number  |  | Exhibit                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                          
|3.1     |  | First Amended and Restated Articles of Incorporation of Registrant, as amended                                                                                                                                                                           
|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)                                   

40



---



##### Table of Contents



|        |  |                                                                                                                                                                                                             
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                             
|Number  |  | Exhibit                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                             
|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)                                                                      
|10.67   |  | Second Amendment to Loan and Security Agreement, dated January 31, 2001, by and among Action Performance Companies, Inc., and certain subsidiaries and affiliates, as guarantors, and Bank One, NA. (10)    
|10.68   |  | First Amended and Restated 2000 Stock Option Plan (11)                                                                                                                                                      
|10.69   |  | Consent and Third Amendment to Loan and Security Agreement, dated September 2002, by and among Action Performance Companies, Inc., and certain subsidiaries and affiliates, as guarantors, and Bank One,
NA.
|21      |  | List of Subsidiaries of the Registrant                                                                                                                                                                      
|23.1    |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                       
|23.2    |  | Statement regarding consent of Arthur Andersen LLP                                                                                                                                                          
|99.1    |  | Certification of the Chief Executive Officer of the Registrant, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                     
|99.2    |  | Certification of the Chief Financial Officer of the Registrant, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                     



---

|(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.  
|    
|(10) |  | Incorporated by reference to the Registrants Form 10-Q for the quarter
ended December 31, 2001, as filed with the Securities and Exchange
Commission on February 13, 2002.
|    
|(11) |  | Incorporated by reference to the Registrants Registration Statement on
Form S-8 (Registration No. 333-88114).                                                             

41



---



##### 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 20, 2002 |  | /s/                                |  | Fred W. Wagenhals                        
|                        |  |                                    |  |                                          
|                        |  |                                    |  | Fred 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. WagenhalsFred W. Wagenhals     |  | Chairman of the Board, President, and Chief
Executive Officer (Principal Executive Officer)    |  | December 20, 2002
|                                          
|/s/ R. David MartinR. David Martin         |  | Chief Financial Officer, Secretary, and Treasurer
(Principal Financial and Accounting Officer) |  | December 20, 2002
|                                          
|/s/ Melodee L. VolosinMelodee L. Volosin   |  | Executive Vice President  Sales and Director                                                  |  | December 20, 2002
|                                          
|/s/ John S. BickfordJohn S. Bickford       |  | Vice President  Strategic Alliances and Director                                              |  | December 20, 2002
|                                          
|/s/ Herbert M. BaumHerbert M. Baum         |  | Director                                                                                       |  | December 20, 2002
|                                          
|/s/ Edward J. BaumanEdward J. Bauman       |  | Director                                                                                       |  | December 20, 2002
|                                          
|/s/ Roy A. HerbergerRoy A. Herberger       |  | Director                                                                                       |  | December 20, 2002
|                                          
|/s/ Robert L. MatthewsRobert L. Matthews   |  | Director                                                                                       |  | December 20, 2002
|                                          
|/s/ Lowell L. RobertsonLowell L. Robertson |  | Director                                                                                       |  | December 20, 2002

42



---



##### Table of Contents






CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Fred W. Wagenhals, certify that:

1.       I have reviewed this annual report on Form 10-K of Action Performance
Companies, Inc.;



|2. |  | Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations, and cash flows of the registrant as of, and for, the
periods presented in this annual report;                  
|  
|4. |  | The registrants other certifying officer and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and have:                                                                                                   



| | a) |  | Designed such disclosure controls and procedures
to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly
during the period in which this annual report is being
prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the Evaluation
Date); and                                                                                                    
|
| | c) |  | Presented in this annual report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have
disclosed, based on our most recent evaluation, to the registrants
auditors and the audit committee of the registrants board of
directors (or persons performing the equivalent functions):
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | All significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrants ability to record, process, summarize, and
report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrants internal controls; and                                                                                                                                         



|6. |  | The registrants other certifying officer and I have
indicated in this annual report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: December 20, 2002

/s/ Fred W. Wagenhals

Fred W. Wagenhals
Chairman of the Board, President, and
Chief Executive Officer

43



---



##### Table of Contents






CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, R. David Martin, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Action Performance
Companies, Inc.;                                                                                                                                                                                                                                  
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations, and cash flows of the registrant as of, and for, the
periods presented in this annual report;                  
|  
|4. |  | The registrants other certifying officer and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and have:                                                                                                   



| | a) |  | Designed such disclosure controls and procedures
to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly
during the period in which this annual report is being
prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the Evaluation
Date); and                                                                                                    
|
| | c) |  | Presented in this annual report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have
disclosed, based on our most recent evaluation, to the registrants
auditors and the audit committee of the registrants board of
directors (or persons performing the equivalent functions):
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | All significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrants ability to record, process, summarize, and
report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrants internal controls; and                                                                                                                                         



|6. |  | The registrants other certifying officer and I have
indicated in this annual report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: December 20, 2002

/s/ R. David Martin

R. David Martin
Chief Financial Officer, Secretary, and Treasurer

44



---



##### Table of Contents



ACTION PERFORMANCE COMPANIES, INC.




Index to Consolidated Financial Statements and Schedule

|                                                                                                                            |  |      |      | 
|--------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | 
|                                                                                                                            |  | Page
|                                                                                                                            |  |     
|Reports of Independent Public Accountants                                                                                   |  |      | F-2  | 
|Consolidated Balance Sheets as of September 30, 2002 and 2001                                                               |  |      | F-4  | 
|Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years
Ended September 30, 2002, 2001 and 2000 |  |      | F-5  | 
|Consolidated Statements of Shareholders Equity for the Years
Ended September 30, 2002, 2001 and 2000                       |  |      | F-6  | 
|Consolidated Statements of Cash Flows for the Years
Ended September 30, 2002, 2001 and 2000                                 |  |      | F-7  | 
|Notes to Consolidated Financial Statements                                                                                  |  |      | F-8  | 
|Schedule II
 Valuation and Qualifying Accounts                                                                             |  |      | F-26 | 

F-1



---



##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of Action Performance Companies, Inc.:

In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Action Performance Companies, Inc. and its subsidiaries at
September 30, 2002, and the results of their operations and their cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility
of the Companys management; our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our
audit. We conducted our audit of these statements in accordance with auditing
standards generally accepted in the United States of America, which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion. The Companys consolidated financial
statements as of September 30, 2001, and for each of the two years in the
period ended September 30, 2001, prior to the revision described in the
Goodwill and Other Intangibles Note to the consolidated financial statements,
were audited by other independent accountants who have ceased operations.
Those independent accountants expressed an unqualified opinion on those
financial statements.

As discussed above, the Companys consolidated financial statements as of
September 30, 2001, and for each of the two years in the period ended September
30, 2001, were audited by other independent accountants who have ceased
operations. As described in the Goodwill and Other Intangibles Note, those
financial statements have been revised to include the transitional disclosures
required by Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, which was adopted by the Company as of October 1,
2001. We audited the transitional disclosures for 2001 and 2000 included in
the Goodwill and Other Intangibles Note. In our opinion, the transitional
disclosures for 2001 and 2000 in the Goodwill and Other Intangibles Note are
appropriate. However, we were not engaged to audit, review, or apply any
procedures to the 2001 or 2000 financial statements of the Company other than
with respect to such disclosures and, accordingly, we do not express an opinion
or any other form of assurance on the 2001 or 2000 financial statements taken
as a whole.

/s/PricewaterhouseCoopers LLP

Phoenix, Arizona
November 5, 2002

F-2



---



##### Table of Contents



THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP (ANDERSEN). THIS REPORT HAS NOT BEEN REISSUED BY ANDERSEN AND ANDERSEN DID
NOT CONSENT TO THE INCORPORATION BY REFERENCE OF THIS REPORT (AS INCLUDED IN
THIS FORM 10-K) INTO ANY OF THE COMPANYS REGISTRATION STATEMENTS.

AS DISCUSSED IN THE GOODWILL AND OTHER INTANGIBLES NOTE, THE COMPANY HAS
REVISED ITS FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND
2000 TO INCLUDE THE TRANSITIONAL DISCLOSURES REQUIRED BY STATEMENT OF FINANCIAL
ACCOUNTING STANDARDS NO. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. THE
ANDERSEN REPORT DOES NOT EXTEND TO THESE CHANGES. THE REVISIONS TO THE 2001
AND 2000 FINANCIAL STATEMENTS RELATED TO THESE TRANSITIONAL DISCLOSURES WERE
REPORTED ON BY PRICEWATERHOUSECOOPERS LLP, AS STATED IN THEIR REPORT APPEARING
HEREIN.

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 and comprehensive income (loss), 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-3



---



##### Table of Contents



ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS

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

|                                                 |                                                                                                    |                             |                            |         |        |         |         |         |        |         | 
|------------------------------------------------ | -------------------------------------------------------------------------------------------------- | --------------------------- | -------------------------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | 
|                                                 |                                                                                                    |                             |                            |         | 2002   |         | 2001   
|                                                 |                                                                                                    |                             |                            |         |        |         |        
|ASSETS                                           |                                                                                                    |                             |                            |         |        |         |         |        
|CURRENT ASSETS:                                  |                                                                                                    |                             |                            |         |        |         |         |        
|                                                 | Cash and cash equivalents                                                                          |                             | $                          | 69,585  |        |         | $       | 64,514  |       
|                                                 | Accounts receivable, net of allowance of $2,127 and $2,141                                         |                             |                            | 61,313  |        |         |         | 40,725  |       
|                                                 | Inventories                                                                                        |                             |                            | 33,467  |        |         |         | 25,120  |       
|                                                 | Prepaid royalties                                                                                  |                             |                            | 6,938   |        |         |         | 10,222  |       
|                                                 | Deferred taxes                                                                                     |                             |                            | 3,155   |        |         |         | 2,672   |       
|                                                 | Prepaid expenses and other                                                                         |                             |                            | 2,397   |        |         |         | 1,392   |       
|                                                 |                                                                                                    |                             |                            |         |        |         |         |        
|                                                 |                                                                                                    |                             | Total current assets       |         |        | 176,855 |         |         |        | 144,645 | 
|                                                
|PROPERTY AND EQUIPMENT, net                      |                                                                                                    |                             | 46,378                     |         |        |         | 40,356  |        
|GOODWILL                                         |                                                                                                    |                             | 84,514                     |         |        |         | 76,937  |        
|LICENSES, TRADEMARKS, AND OTHER INTANGIBLES, net |                                                                                                    |                             | 24,000                     |         |        |         | 12,785  |        
|OTHER ASSETS                                     |                                                                                                    |                             | 6,169                      |         |        |         | 4,230   |        
|                                                 |                                                                                                    |                             |                            |         |        |         |         |        
|                                                 |                                                                                                    | $                           | 337,916                    |         |        | $       | 278,953 |        
|                                                 |                                                                                                    |                             |                            |         |        |         |         |        
|LIABILITIES AND SHAREHOLDERS EQUITY             |                                                                                                    |                             |                            |         |        |         |         |        
|CURRENT LIABILITIES:                             |                                                                                                    |                             |                            |         |        |         |         |        
|                                                 | Accounts payable                                                                                   |                             | $                          | 28,958  |        |         | $       | 18,371  |       
|                                                 | Accrued royalties                                                                                  |                             |                            | 15,146  |        |         |         | 16,792  |       
|                                                 | Accrued expenses                                                                                   |                             |                            | 10,545  |        |         |         | 11,281  |       
|                                                 | Income tax payable                                                                                 |                             |                            | 4,265   |        |         |         | 7,474   |       
|                                                 | Current portion of long-term debt                                                                  |                             |                            | 423     |        |         |         | 424     |       
|                                                 |                                                                                                    |                             |                            |         |        |         |         |        
|                                                 |                                                                                                    | Total current liabilities   |                            |         | 59,337 |         |         |         | 54,342 |        
|                                                 |                                                                                                    |                             |                            |         |        |         |         |        
|LONG-TERM LIABILITIES:                           |                                                                                                    |                             |                            |         |        |         |         |        
|                                                 | Deferred taxes                                                                                     |                             |                            | 4,554   |        |         |         | 3,968   |       
|                                                 | 4 3/4% convertible subordinated notes                                                              |                             |                            | 38,935  |        |         |         | 54,933  |       
|                                                 | Other long-term debt                                                                               |                             |                            | 1,425   |        |         |         | 2,063   |       
|                                                 | Other                                                                                              |                             |                            | 1,142   |        |         |         | 742     |       
|                                                 |                                                                                                    |                             |                            |         |        |         |         |        
|                                                 |                                                                                                    | Total long-term liabilities |                            |         | 46,056 |         |         |         | 61,706 |        
|                                                 |                                                                                                    |                             |                            |         |        |         |         |        
|MINORITY INTERESTS                               |                                                                                                    |                             | 3,135                      |         |        |         | 3,079   |        
|                                                
|COMMITMENTS AND CONTINGENCIES                    |                                                                                                    |                             |                            |         |        |         |         |        
|                                                
|SHAREHOLDERS EQUITY:                            |                                                                                                    |                             |                            |         |        |         |         |        
|                                                 | Preferred stock, no par value, 5,000 shares authorized,
no shares issued and outstanding           |                             |                            |        |        |         |         |        |       
|                                                 | Common stock, $.01 par value, 62,500 and 25,000 shares authorized;
17,948 and 17,313 shares issued |                             |                            | 179     |        |         |         | 173     |       
|                                                 | Additional paid-in capital                                                                         |                             |                            | 146,545 |        |         |         | 121,669 |       
|                                                 | Treasury stock, at cost, 80 and 143 shares                                                         |                             |                            | (1,975  | )      |         |         | (1,221  | )     
|                                                 | Accumulated other comprehensive loss                                                               |                             |                            | (4,606  | )      |         |         | (5,625  | )     
|                                                 | Retained earnings                                                                                  |                             |                            | 89,245  |        |         |         | 44,830  |       
|                                                 |                                                                                                    |                             |                            |         |        |         |         |        
|                                                 |                                                                                                    |                             | Total shareholders equity |         |        | 229,388 |         |         |        | 159,826 | 
|                                                 |                                                                                                    |                             |                            |         |        |         |         |        
|                                                 |                                                                                                    | $                           | 337,916                    |         |        | $       | 278,953 |        
|                                                 |                                                                                                    |                             |                            |         |        |         |         |        

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

F-4



---



##### Table of Contents



ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

Years Ended September 30, 2002, 2001 and 2000
(in thousands, except per share data)

|                                                                                                           |                                                |                                          |         |        |        |      |         |        |        |   |         |         |         |  
|---------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ---------------------------------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------- | ------- | -
|                                                                                                           |                                                |                                          |         | 2002   |        | 2001 |         | 2000  
|                                                                                                           |                                                |                                          |         |        |        |      |         |       
|Net sales                                                                                                  |                                                | $                                        | 406,902 |        |        | $    | 323,352 |        |        | $ | 258,105 |        
|Cost of sales                                                                                              |                                                |                                          | 250,810 |        |        |      | 208,375 |        |        |   | 209,102 |        
|                                                                                                           |                                                |                                          |         |        |        |      |         |        |        |   |         |        
|Gross profit                                                                                               |                                                |                                          | 156,092 |        |        |      | 114,977 |        |        |   | 49,003  |        
|                                                                                                           |                                                |                                          |         |        |        |      |         |        |        |   |         |        
|Operating expenses:                                                                                        |                                                |                                          |         |        |        |      |         |        |        |   |         |        
|                                                                                                           | Selling, general and administrative            |                                          |         | 77,214 |        |      |         | 69,456 |        |   |         | 107,942 |        
|                                                                                                           | Amortization of goodwill and trademark         |                                          |         |       |        |      |         | 4,097  |        |   |         | 11,295  |        
|                                                                                                           | Amortization of licenses and other intangibles |                                          |         | 2,797  |        |      |         | 2,060  |        |   |         | 5,458   |        
|                                                                                                           |                                                |                                          |         |        |        |      |         |        |        |   |         |        
|                                                                                                           |                                                | Total operating expenses                 |         |        | 80,011 |      |         |        | 75,613 |   |         |         | 124,695 |  
|                                                                                                           |                                                |                                          |         |        |        |      |         |        |        |   |         |        
|Income (loss) from operations                                                                              |                                                |                                          | 76,081  |        |        |      | 39,364  |        |        |   | (75,692 | )      
|Interest expense                                                                                           |                                                |                                          | (3,029  | )      |        |      | (5,102  | )      |        |   | (6,291  | )      
|Minority interests and other, net                                                                          |                                                |                                          | 862     |        |        |      | (1,040  | )      |        |   | (696    | )      
|                                                                                                           |                                                |                                          |         |        |        |      |         |        |        |   |         |        
|Income (loss) before income taxes and extraordinary items                                                  |                                                |                                          | 73,914  |        |        |      | 33,222  |        |        |   | (82,679 | )      
|Income taxes                                                                                               |                                                |                                          | 28,113  |        |        |      | 10,205  |        |        |   | (24,592 | )      
|                                                                                                           |                                                |                                          |         |        |        |      |         |        |        |   |         |        
|Income (loss) before extraordinary items                                                                   |                                                |                                          | 45,801  |        |        |      | 23,017  |        |        |   | (58,087 | )      
|Extraordinary gain (loss) on extinguishment of debt,
net of $507 and ($5,300) income tax benefit (expense) |                                                |                                          | (854    | )      |        |      | 8,919   |        |        |   |        |        
|                                                                                                           |                                                |                                          |         |        |        |      |         |        |        |   |         |        
|Net income (loss)                                                                                          |                                                |                                          | 44,947  |        |        |      | 31,936  |        |        |   | (58,087 | )      
|Currency translation                                                                                       |                                                |                                          | 1,019   |        |        |      | 1,014   |        |        |   | (5,925  | )      
|                                                                                                           |                                                |                                          |         |        |        |      |         |        |        |   |         |        
|Comprehensive income (loss)                                                                                |                                                | $                                        | 45,966  |        |        | $    | 32,950  |        |        | $ | (64,012 | )      
|                                                                                                           |                                                |                                          |         |        |        |      |         |        |        |   |         |        
|EARNINGS PER COMMON SHARE:                                                                                 |                                                |                                          |         |        |        |      |         |        |        |   |         |        
|                                                                                                           | Basic
                                        |                                          |         |        |        |      |         |        |        |   |         |         |        
|                                                                                                           |                                                | Income (loss) before extraordinary items |         | $      | 2.61   |      |         | $      | 1.41   |   |         | $       | (3.52   | )
|                                                                                                           |                                                | Extraordinary items, net of tax          |         |        | (0.05  | )    |         |        | 0.54   |   |         |         |        |  
|                                                                                                           |                                                |                                          |         |        |        |      |         |        |        |   |         |        
|                                                                                                           |                                                | Net income (loss)                        |         | $      | 2.56   |      |         | $      | 1.95   |   |         | $       | (3.52   | )
|                                                                                                           |                                                |                                          |         |        |        |      |         |        |        |   |         |        
|                                                                                                          
|                                                                                                           | Diluted
                                      |                                          |         |        |        |      |         |        |        |   |         |         |        
|                                                                                                           |                                                | Income (loss) before extraordinary items |         | $      | 2.46   |      |         | $      | 1.37   |   |         | $       | (3.52   | )
|                                                                                                           |                                                | Extraordinary items, net of tax          |         |        | (0.05  | )    |         |        | 0.53   |   |         |         |        |  
|                                                                                                           |                                                |                                          |         |        |        |      |         |        |        |   |         |        
|                                                                                                           |                                                | Net income (loss)                        |         | $      | 2.41   |      |         | $      | 1.90   |   |         | $       | (3.52   | )
|                                                                                                           |                                                |                                          |         |        |        |      |         |        |        |   |         |        

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

F-5



---



##### Table of Contents



ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
For the Years Ended September 30, 2002, 2001 and 2000
(in thousands)

|                                                                  |  |              |        |            |  |          |     |        |  |               |         |          |  |       |        |   |  |             |        |   |  |   |         |   |  |   |         |  
|----------------------------------------------------------------- |  | ------------ | ------ | ---------- |  | -------- | --- | ------ |  | ------------- | ------- | -------- |  | ----- | ------ | - |  | ----------- | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                                                  |  |              |        |            |  |          |     |        |  |               |         |          |  |       |        |   |  | Accumulated |        |   |  |   |         |   |  |  
|                                                                  |  |              |        |            |  |          |     |        |  |               |         |          |  |       |        |   |  | Other       |        |   |  |   |         |   |  |  
|                                                                  |  | Common Stock |        | Additional |  |          |     |        |  | Comprehensive |         |          |  |       |        |   |  |            
|                                                                  |  |              |        | Paid-in    |  | Treasury |     | Income |  | Retained      |         |          |  |      
|                                                                  |  | Shares       |        | Amount     |  | Capital  |     | Stock  |  | (Loss)        |         | Earnings |  | Total
|                                                                  |  |              |        |            |  |          |     |        |  |               |         |          |  |      
|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 |  
|Stock option exercises                                            |  |              | 437    |            |  |          | 4   |        |  |               | 6,465   |          |  |       |       |   |  |             |       |   |  |   |        |   |  |   | 6,469   |  
|Stock option tax benefits                                         |  |              |       |            |  |          |    |        |  |               | 2,864   |          |  |       |       |   |  |             |       |   |  |   |        |   |  |   | 2,864   |  
|Warrant exercises                                                 |  |              | 15     |            |  |          |    |        |  |               | 103     |          |  |       |       |   |  |             |       |   |  |   |        |   |  |   | 103     |  
|Warrant issuances for services and
licenses                       |  |              |       |            |  |          |    |        |  |               | 2,903   |          |  |       |       |   |  |             |       |   |  |   |        |   |  |   | 2,903   |  
|Common stock issuances for employee
stock purchase plan and other |  |              | 4      |            |  |          |    |        |  |               | 46      |          |  |       |       |   |  |             |       |   |  |   |        |   |  |   | 46      |  
|Treasury stock issuances for note
repurchases, 145 shares         |  |              |       |            |  |          |    |        |  |               | 5,638   |          |  |       | 1,284  |   |  |             |       |   |  |   |        |   |  |   | 6,922   |  
|Common stock issuances for note
repurchases                       |  |              | 95     |            |  |          | 2   |        |  |               | 4,514   |          |  |       |       |   |  |             |       |   |  |   |        |   |  |   | 4,516   |  
|Common stock purchases, 83 shares                                 |  |              |       |            |  |          |    |        |  |               |        |          |  |       | (2,038 | ) |  |             |       |   |  |   |        |   |  |   | (2,038  | )
|Shares issued for business acquisitions                           |  |              | 84     |            |  |          |    |        |  |               | 2,343   |          |  |       |       |   |  |             |       |   |  |   |        |   |  |   | 2,343   |  
|Currency translation                                              |  |              |       |            |  |          |    |        |  |               |        |          |  |       |       |   |  |             | 1,019  |   |  |   |        |   |  |   | 1,019   |  
|Cash dividends declared                                           |  |              |       |            |  |          |    |        |  |               |        |          |  |       |       |   |  |             |       |   |  |   | (532    | ) |  |   | (532    | )
|Net income                                                        |  |              |       |            |  |          |    |        |  |               |        |          |  |       |       |   |  |             |       |   |  |   | 44,947  |   |  |   | 44,947  |  
|                                                                  |  |              |        |            |  |          |     |        |  |               |         |          |  |       |        |   |  |             |        |   |  |   |         |   |  |   |         |  
|BALANCE, SEPTEMBER 30, 2002                                       |  |              | 17,948 |            |  | $        | 179 |        |  | $             | 146,545 |          |  | $     | (1,975 | ) |  | $           | (4,606 | ) |  | $ | 89,245  |   |  | $ | 229,388 |  
|                                                                  |  |              |        |            |  |          |     |        |  |               |         |          |  |       |        |   |  |             |        |   |  |   |         |   |  |   |         |  

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

F-6



---



##### Table of Contents



ACTION PERFORMANCE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended September 30, 2002, 2001 and 2000
(in thousands)

|                                                                                                    |                                                                            |                                                          |                                        |         |        |         |         |         |         |         |         |         |        |         |  
|--------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | -------------------------------------------------------- | -------------------------------------- | ------- | ------ | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------ | ------- | -
|                                                                                                    |                                                                            |                                                          |                                        |         | 2002   |         | 2001    |         | 2000   
|                                                                                                    |                                                                            |                                                          |                                        |         |        |         |         |         |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                               |                                                                            |                                                          |                                        |         |        |         |         |         |         |         |         |        
|Net income (loss)                                                                                   |                                                                            | $                                                        | 44,947                                 |         |        | $       | 31,936  |         |         | $       | (58,087 | )      
|Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities 
|                                                                                                    |                                                                            | Deferred income taxes                                    |                                        |         | (133   | )       |         |         | 8,560   |         |         |         | (9,227 | )      
|                                                                                                    |                                                                            | Depreciation and amortization, excluding special
charges |                                        |         | 23,722 |         |         |         | 28,366  |         |         |         | 25,111 |        
|                                                                                                    |                                                                            | Special charges                                          |                                        |         |       |         |         |         |        |         |         |         | 58,988 |        
|                                                                                                    |                                                                            | Extraordinary (gain) loss on extinguishment of debt      |                                        |         | 1,361  |         |         |         | (14,219 | )       |         |         |       |        
|                                                                                                    |                                                                            | (Gain) loss on property and equipment sales              |                                        |         | 566    |         |         |         | 311     |         |         |         | (176   | )      
|                                                                                                    |                                                                            | Stock option tax benefits                                |                                        |         | 2,864  |         |         |         | 1,396   |         |         |         | 19     |        
|                                                                                                    |                                                                            | Minority interest undistributed earnings                 |                                        |         | 57     |         |         |         | 298     |         |         |         | 298    |        
|                                                                                                    | Change in assets and liabilities, net of businesses
acquired and disposed: |                                                          |                                        |         |        |         |         |         |         |         |         |         |       
|                                                                                                    |                                                                            |                                                          | Accounts receivable, net               |         |        | (18,518 | )       |         |         | (19,347 | )       |         |        | 10,920  |  
|                                                                                                    |                                                                            |                                                          | Inventories                            |         |        | (4,522  | )       |         |         | 5,935   |         |         |        | (561    | )
|                                                                                                    |                                                                            |                                                          | Prepaid royalties                      |         |        | 3,285   |         |         |         | (2,960  | )       |         |        | (7,771  | )
|                                                                                                    |                                                                            |                                                          | Other assets                           |         |        | (2,116  | )       |         |         | 699     |         |         |        | (3,531  | )
|                                                                                                    |                                                                            |                                                          | Accounts payable and accrued expenses  |         |        | 5,869   |         |         |         | 1,413   |         |         |        | (2,757  | )
|                                                                                                    |                                                                            |                                                          | Accrued royalties                      |         |        | (1,655  | )       |         |         | 7,069   |         |         |        | (3,502  | )
|                                                                                                    |                                                                            |                                                          | Income tax payable and receivable, net |         |        | (3,366  | )       |         |         | 22,337  |         |         |        | (14,000 | )
|                                                                                                    |                                                                            |                                                          | Other liabilities                      |         |        | (989    | )       |         |         | (581    | )       |         |        | 3,255   |  
|                                                                                                    |                                                                            |                                                          |                                        |         |        |         |         |         |         |         |         |        
|                                                                                                    | Net cash provided by (used in) operating activities                        |                                                          |                                        | 51,372  |        |         |         | 71,213  |         |         |         | (1,021  | )     
|                                                                                                    |                                                                            |                                                          |                                        |         |        |         |         |         |         |         |         |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                               |                                                                            |                                                          |                                        |         |        |         |         |         |         |         |         |        
|Property and equipment purchases                                                                    |                                                                            |                                                          | (25,800                                | )       |        |         | (16,580 | )       |         |         | (25,862 | )      
|Property and equipment sales proceeds                                                               |                                                                            |                                                          | 261                                    |         |        |         | 60      |         |         |         | 1,963   |        
|(Acquisitions) dispositions, net of costs                                                           |                                                                            |                                                          | (19,006                                | )       |        |         | 2,513   |         |         |         | (3,063  | )      
|Notes receivable collected, net                                                                     |                                                                            |                                                          |                                       |         |        |         |        |         |         |         | 1,080   |        
|Other                                                                                               |                                                                            |                                                          | (238                                   | )       |        |         |        |         |         |         |        |        
|                                                                                                    |                                                                            |                                                          |                                        |         |        |         |         |         |         |         |         |        
|                                                                                                    | Net cash used in investing activities                                      |                                                          |                                        | (44,783 | )      |         |         | (14,007 | )       |         |         | (25,882 | )     
|                                                                                                    |                                                                            |                                                          |                                        |         |        |         |         |         |         |         |         |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                               |                                                                            |                                                          |                                        |         |        |         |         |         |         |         |         |        
|Stock option exercise proceeds                                                                      |                                                                            |                                                          | 6,469                                  |         |        |         | 2,989   |         |         |         | 130     |        
|Employee stock purchase plan stock issuance proceeds                                                |                                                                            |                                                          | 46                                     |         |        |         | 30      |         |         |         | 110     |        
|Warrant exercise proceeds                                                                           |                                                                            |                                                          | 103                                    |         |        |         |        |         |         |         |        |        
|Common stock purchases for treasury                                                                 |                                                                            |                                                          | (1,975                                 | )       |        |         | (1,482  | )       |         |         | (6,520  | )      
|Long-term debt repayments, net                                                                      |                                                                            |                                                          | (6,397                                 | )       |        |         | (17,111 | )       |         |         | (2,015  | )      
|                                                                                                    |                                                                            |                                                          |                                        |         |        |         |         |         |         |         |         |        
|                                                                                                    | Net cash used in financing activities                                      |                                                          |                                        | (1,754  | )      |         |         | (15,574 | )       |         |         | (8,295  | )     
|                                                                                                    |                                                                            |                                                          |                                        |         |        |         |         |         |         |         |         |        
|Effect of exchange rate changes on cash and cash
equivalents                                        |                                                                            |                                                          | 236                                    |         |        |         | 124     |         |         |         | (567    | )      
|                                                                                                    |                                                                            |                                                          |                                        |         |        |         |         |         |         |         |         |        
|Net change in cash and cash equivalents                                                             |                                                                            |                                                          | 5,071                                  |         |        |         | 41,756  |         |         |         | (35,765 | )      
|Cash and cash equivalents, beginning of year                                                        |                                                                            |                                                          | 64,514                                 |         |        |         | 22,758  |         |         |         | 58,523  |        
|                                                                                                    |                                                                            |                                                          |                                        |         |        |         |         |         |         |         |         |        
|Cash and cash equivalents, end of year                                                              |                                                                            | $                                                        | 69,585                                 |         |        | $       | 64,514  |         |         | $       | 22,758  |        
|                                                                                                    |                                                                            |                                                          |                                        |         |        |         |         |         |         |         |         |        

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

F-7



---



##### 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 memorabilia. Recent acquisitions have added seasonal gifts,
leather jackets, terry products, and golf gifts. In the United States, Action
is a 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 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 memorabilia. We retain ownership and control over
designs and tooling, however, and maintain close working relationships with
outsourced manufacturers to help assure 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, liabilities,
revenues and expenses, and disclosure of contingent assets and liabilities.
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-8



---



##### 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 collection 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. 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. We recognize trackside sales when the consumer purchases product at
the point of sale. 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 average cost) 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, or considered to be unrecoverable. We
evaluate prepaid royalties regularly and expense prepaids 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.

Long-Lived Assets

We periodically evaluate long-lived 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.

F-9



---



##### Table of Contents



Goodwill and Other Intangibles

Goodwill represents the cost in excess of the fair value of net assets acquired
in business combinations. Licenses, trademarks and other intangibles, which
have definitive lives, are amortized using the straight-line method over their
contractual lives or their estimated useful life if shorter. Goodwill and
intangibles with indefinite lives are subject to an impairment test, based on
fair value, at least annually. We evaluate goodwill and other intangibles for
impairment at least annually, in accordance with SFAS 142. For goodwill, we
first compare the fair value of a reporting unit with its carrying amount,
including goodwill. If the carrying amount of a reporting unit exceeds the
fair value of a reporting unit, additional tests would be used to measure the
amount of impairment loss, if any. We use a present value technique to measure
reporting unit fair value. If the carrying amount of any other intangible
asset exceeds its fair value, we would recognize an impairment loss for the
difference between fair value and the carrying amount.

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).

Stock-Based Compensation

We account for employee stock-based compensation in accordance with Accounting
Principles Board Opinion 25, Accounting for Stock Issued to Employees and
related interpretations (APB No. 25). Common stock options issued under our
plans generally do not result in compensation expense because the exercise
price of the stock options equals the market price of the underlying stock on
the date of grant.

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 and
$3.4 million in 2000.

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

We have completed impairment evaluations of goodwill and of other intangibles,
which include licenses and trademarks and other intangibles, in accordance with
SFAS 142. The reporting units for SFAS 142 are domestic die-cast, domestic
apparel and memorabilia, foreign die-cast, and corporate and other, which are
also our reporting segments. Goodwill and trademarks, which have an indefinite
life, have been allocated to those reporting units as indicated below in
Segment Information. We have made no adjustments to income (loss) to date in
connection with the evaluations.

F-10



---



##### Table of Contents



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 adopted the statement in the first quarter of 2002. Adoption
did not have a material effect on financial position or results of operations.

SFAS No. 145, Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and
Technical Corrections as of April 2002 (SFAS 145), changes the classification
of all gains and losses from extinguishment of debt, which under FASB Statement
No. 4 were required to be classified as an extraordinary item, net of related
income tax effect. Under SFAS No. 145, gains and losses from extinguishment of
debt will now be classified as a component of operations. We intend to adopt
SFAS No. 145 effective October 1, 2002. We will reclassify debt
extinguishments in all periods presented as a component of income before tax
and adjust income taxes accordingly. There will be no net impact on net income
previously reported.

SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities
(SFAS 146), supercedes former guidance addressing the financial accounting and
reporting for costs associated with exit or disposal activities. SFAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured when the liability is incurred (as opposed
to upon the date of an entitys commitment to a plan as provided for under
previous guidance). The provisions of SFAS 146 will be effective for any exit
or disposal activities that are initiated after December 31, 2002.

SPECIAL CHARGES

In 2000 we recorded charges of $17.5 million arising from the decision to
abandon our Internet strategy relating to goracing.com. The goracing.com
network at that time consisted of various motorsports related, e-commerce
enabled Web sites that we developed, operated and maintained. 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
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 Trademark |                   |                                          | 4.5                                 |  
|Amortization of Licenses               |                   |                                          | 3.1                                 |  
|                                       |                   |                                          |                                     |  
|                                       |                   | $                                        | 17.5                                |  
|                                       |                   |                                          |                                     |  

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

F-11



---



##### Table of Contents



As a result of the decision to abandon our Internet strategy and in response to
demand changes, we evaluated our operations and concluded it was necessary to
reorganize the company and refocus on our core strengths. Consequently, in
addition to the goracing.com charges, the 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 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 Trademark |                                      |                      | 1.9                                       |                    
|Minority Interests and Other, Net:     |                                      |                      |                                           |                    
|                                       | Other                                |                      |                                           | 0.4                 |    
|                                       | Equity investments                   |                      |                                           | 2.0                 |    
|                                       |                                      |                      |                                           |                    
|                                       |                                      | $                    | 47.3                                      |                    
|                                       |                                      |                      |                                           |                    

ACQUISITIONS AND DISPOSITIONS

In September 2002, we acquired a producer of premium leather jackets and other
apparel, which will operate as Jeff Hamilton Collection, Inc. (Jeff Hamilton).
A portion of the product is decorated with team logos under licenses with many
of the major sports leagues. The purchase price of $4.5 million in cash,
including payment of certain existing liabilities, and $1.0 million in common
stock was initially allocated $1.0 million to tangible net assets, primarily
inventory, $4.3 million to trademark and $0.2 million to other intangible
assets consisting of backlog, licenses and non-contractual customer
relationships. The purchase price is subject to adjustment based on the final
acquisition balance sheet. Under the terms of the agreement, we will pay
additional consideration of $1.7 million in cash if Jeff Hamilton achieves net
income before income tax targets in 2003 and 2004. Net assets were assigned to
the domestic apparel and memorabilia reporting unit. The business had annual
sales of approximately $10 million in the last year. Revenues since the date
of acquisition totaled $0.8 million in 2002.

F-12



---



##### Table of Contents



In July 2002, we acquired terry and golf product businesses, which will operate
as McArthur Towel and Sports, Inc. (McArthur). McArthur distributes terry and
golf products to specialty retailers and institutions. A portion of the
product is decorated with team logos under licenses with many of the major
sports leagues and college teams. The purchase price of $4.6 million in cash
was initially allocated $2.3 million to tangible net assets, primarily
inventory, $1.9 million to goodwill (which is expected to be deductible for tax
purposes) and $0.4 million to other intangible assets, consisting of backlog,
patent, licenses and non-contractual customer relationships. Net assets were
assigned to the domestic apparel and memorabilia reporting unit. The
businesses had annual sales of approximately $14 million in the last year.
Revenues since the date of acquisition totaled $3.2 million in 2002.

In June 2002, we acquired Trevco Trading Corp. (Trevco). Trevco markets gifts
and ornaments, which are produced overseas, to mass retailers. The initial
cash purchase price of $5.5 million was allocated $0.5 million to tangible net
assets, $2.3 million to goodwill (which is expected to be deductible for tax
purposes) and $2.7 million to other intangible assets, consisting of backlog,
non-contractual customer relationships and a 5-year non-compete agreement. The
intangible assets are being amortized over lives ranging from 3 months to 5
years. Under the terms of the merger agreement, additional consideration was
payable if Trevco achieved revenue and operating income targets for the five
months ended September 30, 2002. As of September 30, 2002, Trevco achieved its
revenue and operating targets and an additional $1.0 million in cash and $1.3
million in stock were accrued to goodwill as additional purchase price. Under
the terms of the merger agreement, we may issue a second round of additional
consideration, either 50 thousand or 75 thousand shares of common stock, if
Trevco achieves revenue and operating income targets in 2004. The additional
consideration will be added to the purchase price if and when the financial
targets are achieved. Trevcos sales fall primarily in our fourth quarter.
Net assets were assigned to the domestic apparel and memorabilia reporting
unit. Revenues since the date of acquisition totaled $8.9 million in 2002.

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 2001, 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 as the foreign apparel and memorabilia segment.

In July 2001, we purchased an 80% ownership interest in Castaway Collectables
LLC (Castaway), a development stage company. We allocated $0.7 million to
goodwill (which is expected to be tax deductible) in the purchase price
allocation. The first shipments of Castaway product occurred in December 2001.
Castaway net assets were assigned to the domestic die-cast reporting unit.

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, excluding apparel,
to Hasbro, quarterly, for five years. The additional consideration added to
the price of the trademark was $1.1 million in 2002 and $0.4 million in 2001.
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. Winners Circle net assets were assigned to
the domestic die-cast reporting unit. In 2002, we began selling mass-market
apparel under the Winners Circle brand.

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. 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.

F-13



---



##### Table of Contents



In November 2002, we entered into a joint venture with TMP International, Inc,
the producer of McFarlane Toys, to produce and market a new series of action
figures based on NASCAR drivers. The joint venture will be constituted as
Action-McFarlane LLC and production will begin in mid 2003.

Pro forma financial information has not been presented as the acquisitions,
both individually and in the aggregate, are not material to our financial
position or results of operations.

SEGMENT INFORMATION

Reportable segments are based on divisions operating geographically, domestic
and abroad, and specializing in either die-cast or apparel and memorabilia.
The domestic die-cast operation is based in Phoenix, Arizona. The domestic
apparel and memorabilia operation is based in Charlotte, North Carolina with a
mass-market retail distribution center and screen-printing facility in Atlanta,
Georgia and warehouse and distribution facilities in Charlotte, North Carolina,
Baraboo, Wisconsin and Los Angeles, California. Trackside operations are
included in the domestic apparel and memorabilia segment. The foreign die-cast
operation is based in Aachen, 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):

|      |                                  |  |                                             |         |          |         |               |         |              |   |        |        |              |        |           |         |   |        |   |       |   |        | 
|----- | -------------------------------- |  | ------------------------------------------- | ------- | -------- | ------- | ------------- | ------- | ------------ | - | ------ | ------ | ------------ | ------ | --------- | ------- | - | ------ | - | ----- | - | ------ | 
|      |                                  |  |                                             |         |          |         |               |         |              |   |        |        | Depreciation |        | Operating |         |   |        |  
|      |                                  |  |                                             |         | External |         | Inter-segment |         | and          |   | Income |        | Net Capital 
|      |                                  |  |                                             |         | Revenues |         | Revenues      |         | Amortization |   | (Loss) |        | Expenditures
|      |                                  |  |                                             |         |          |         |               |         |              |   |        |        |             
|      |                                  |  |                                             |         |          |         |               |         |              |   |        |        | (a)          |        | (a)       |         |   |        |  
|2002: |                                  |  |                                             |         |          |         |               |         |              |   |        |        |              |        |           |         |   |        |   |      
|      | Domestic die-cast                |  | $                                           | 209,481 |          |         | $             | 11,582  |              |   | $      | 10,536 |              |        | $         | 72,290  |   |        | $ | 7,704 |  
|      | Domestic apparel and memorabilia |  |                                             | 164,819 |          |         |               | 7       |              |   |        | 2,769  |              |        |           | 30,671  |   |        |   | 3,724 |  
|      | Foreign die-cast                 |  |                                             | 29,433  |          |         |               |        |              |   |        | 4,494  |              |        |           | 5,515   |   |        |   | 9,696 |  
|      | Corporate and other              |  |                                             | 3,169   |          |         |               |        |              |   |        | 5,923  |              |        |           | (32,186 | ) |        |   | 4,415 |  
|      | Eliminations                     |  |                                             |        |          |         |               | (11,589 | )            |   |        |       |              |        |           | (209    | ) |        |   |      |  
|      |                                  |  |                                             |         |          |         |               |         |              |   |        |        |              |        |           |         |   |        |   |      
|      |                                  |  | Total per consolidated
financial statements |         | $        | 406,902 |               |         | $            |  |        |        | $            | 23,722 |           |         | $ | 76,081 |   |       | $ | 25,539 | 
|      |                                  |  |                                             |         |          |         |               |         |              |   |        |        |              |        |           |         |   |        |   |      
|2001: |                                  |  |                                             |         |          |         |               |         |              |   |        |        |              |        |           |         |   |        |   |      
|      | Domestic die-cast                |  | $                                           | 135,571 |          |         | $             | 9,972   |              |   | $      | 13,568 |              |        | $         | 36,274  |   |        | $ | 8,670 |  
|      | Domestic apparel and memorabilia |  |                                             | 142,954 |          |         |               |        |              |   |        | 5,028  |              |        |           | 23,181  |   |        |   | 386   |  
|      | Foreign die-cast                 |  |                                             | 28,793  |          |         |               | 122     |              |   |        | 3,789  |              |        |           | 6,385   |   |        |   | 6,692 |  
|      | Foreign apparel                  |  |                                             | 11,055  |          |         |               | 190     |              |   |        | 263    |              |        |           | (2,591  | ) |        |   | 257   |  
|      | Corporate and other              |  |                                             | 4,979   |          |         |               |        |              |   |        | 5,718  |              |        |           | (23,059 | ) |        |   | 515   |  
|      | Eliminations                     |  |                                             |        |          |         |               | (10,284 | )            |   |        |       |              |        |           | (826    | ) |        |   |      |  
|      |                                  |  |                                             |         |          |         |               |         |              |   |        |        |              |        |           |         |   |        |   |      
|      |                                  |  | Total per consolidated
financial statements |         | $        | 323,352 |               |         | $            |  |        |        | $            | 28,366 |           |         | $ | 39,364 |   |       | $ | 16,520 | 
|      |                                  |  |                                             |         |          |         |               |         |              |   |        |        |              |        |           |         |   |        |   |      

F-14



---



##### Table of Contents



|      |                                  |                                             |   |          |         |               |   |              |   |        |     |              |        |           |     |         |         |   |   |        |        | 
|----- | -------------------------------- | ------------------------------------------- | - | -------- | ------- | ------------- | - | ------------ | - | ------ | --- | ------------ | ------ | --------- | --- | ------- | ------- | - | - | ------ | ------ | 
|      |                                  |                                             |   |          |         |               |   |              |   |        |     | Depreciation |        | Operating |     |         |         |  
|      |                                  |                                             |   | External |         | Inter-segment |   | and          |   | Income |     | Net Capital 
|      |                                  |                                             |   | Revenues |         | Revenues      |   | Amortization |   | (Loss) |     | Expenditures
|      |                                  |                                             |   |          |         |               |   |              |   |        |     |             
|      |                                  |                                             |   |          |         |               |   |              |   |        | (a) |              |        |           | (a) |         |         |   |   |       
|2000: |                                  |                                             |   |          |         |               |   |              |   |        |     |              |        |           |     |         |         |   |   |       
|      | Domestic die-cast                |                                             | $ | 120,078  |         |               | $ | 5,659        |   |        | $   | 23,110       | (c)    |           | $   | 3,367   | (c)     |   | $ | 15,108 |       
|      | Domestic apparel and memorabilia |                                             |   | 105,292  |         |               |   |             |   |        |     | 4,897        |        |           |     | (2,737  | )(d)    |   |   | 2,748  |       
|      | Foreign die-cast                 |                                             |   | 19,661   |         |               |   |             |   |        |     | 2,668        |        |           |     | 2,054   |         |   |   | 5,776  |       
|      | Foreign apparel                  |                                             |   | 9,816    |         |               |   |             |   |        |     | 228          |        |           |     | (5,108  | )(e)    |   |   | 246    |       
|      | Corporate and other              |                                             |   | 3,258    |         |               |   |             |   |        |     | 12,208       | (f)    |           |     | (73,268 | )(f)    |   |   | 21     |       
|      | Eliminations                     |                                             |   |         |         |               |   | (5,659       | ) |        |     |             |        |           |     |        |         |   |   |       |       
|      |                                  |                                             |   |          |         |               |   |              |   |        |     |              |        |           |     |         |         |   |   |       
|      |                                  | Total per consolidated
financial statements |   | $        | 258,105 |               |   | $            |  |        |     | $            | 43,111 |           |     | $       | (75,692 | ) |   | $      | 23,899 | 
|      |                                  |                                             |   |          |         |               |   |              |   |        |     |              |        |           |     |         |         |   |   |       

|                                 |                                             |   |                     |         |                         |   |           |         |           |   |        |        |  |   |        |        | 
|-------------------------------- | ------------------------------------------- | - | ------------------- | ------- | ----------------------- | - | --------- | ------- | --------- | - | ------ | ------ |  | - | ------ | ------ | 
|                                 |                                             |   | Identifiable Assets |         | Goodwill and Trademarks
|                                 |                                             |   |                     |         |                        
|                                 |                                             |   | Sept. 30,           |         | Sept. 30,               |   | Sept. 30, |         | Sept. 30,
|                                 |                                             |   | 2002                |         | 2001                    |   | 2002      |         | 2001     
|                                 |                                             |   |                     |         |                         |   |           |         |          
|Domestic die-cast (b)            |                                             | $ | 60,744              |         |                         | $ | 52,526    |         |           | $ | 13,769 |        |  | $ | 12,716 |       
|Domestic apparel and
memorabilia |                                             |   | 122,775             |         |                         |   | 92,136    |         |           |   | 61,841 |        |  |   | 51,079 |       
|Foreign die-cast                 |                                             |   | 47,660              |         |                         |   | 40,599    |         |           |   | 15,334 |        |  |   | 14,217 |       
|Corporate and other (g)          |                                             |   | 114,369             |         |                         |   | 95,869    |         |           |   |       |        |  |   |       |       
|Eliminations                     |                                             |   | (7,632              | )       |                         |   | (2,177    | )       |           |   |       |        |  |   |       |       
|                                 |                                             |   |                     |         |                         |   |           |         |           |   |        |        |  |   |        |       
|                                 | Total per consolidated
financial statements |   | $                   | 337,916 |                         |   | $         | 278,953 |           |   | $      | 90,944 |  |   | $      | 78,012 | 
|                                 |                                             |   |                     |         |                         |   |           |         |           |   |        |        |  |   |        |       



---

|(a) |  | Goodwill and trademark ceased amortizing October 1, 2001, with the
adoption of SFAS 142. Deprecation and amortization and operating
income (loss), included goodwill and trademark amortization totaling
$4.1 million ($0.7 million for domestic die-cast, $2.9 million for
domestic apparel and memorabilia, and $0.5 million for foreign
die-cast) for 2001 and totaling $11.3 million ($7.9 million for
domestic die-cast, $3.0 million for domestic apparel and memorabilia,
and $0.4 million for foreign die-cast) for 2000.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Domestic die-cast identifiable assets include the Winners Circle
trademark, purchased from Hasbro in May 2001. As additional
consideration we pay 3% of the related product sales to Hasbro,
quarterly through May 2006. The additional consideration is added to
the cost of the trademark quarterly.                                                                                                                                                                                                                          
|   
|(c) |  | 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.                                                                                                                                                                                                                     
|   
|(d) |  | Domestic apparel and memorabilia operating income (loss) reflects
$7.7 million of inventory write-downs and accounts receivable special
charges.                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(e) |  | Foreign apparel segment operating income (loss) includes $1.4
million of other assets special charges.                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(f) |  | 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.                                                                                                                                       
|   
|(g) |  | Corporate and other assets includes $66.3 million in cash at
September 30, 2002, and $60.9 million in cash at September 30, 2001.                                                                                                                                                                                                                                                                                                                                                                                                

F-15



---



##### Table of Contents



INVENTORIES

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

|                                                                |  |      |        |      |  |   |        | 
|--------------------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                                                                |  | 2002 |        | 2001
|                                                                |  |      |        |     
|Raw Materials (apparel blank stock and undecorated merchandise) |  | $    | 4,304  |      |  | $ | 3,462  | 
|Finished Goods (die-cast collectibles and finished apparel)     |  |      | 29,163 |      |  |   | 21,658 | 
|                                                                |  |      |        |      |  |   |        | 
|                                                                |  | $    | 33,467 |      |  | $ | 25,120 | 
|                                                                |  |      |        |      |  |   |        | 

We depend upon third parties to manufacture all die-cast product and most
apparel and memorabilia. 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 our results of operations.

PROPERTY AND EQUIPMENT



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

|                                          |  |      |         |      |  |                       |         |   |  |            |  | 
|----------------------------------------- |  | ---- | ------- | ---- |  | --------------------- | ------- | - |  | ---------- |  | 
|                                          |  | 2002 |         | 2001 |  | Estimated Useful Life
|                                          |  |      |         |      |  |                      
|Land, building and leasehold improvements |  | $    | 12,938  |      |  | $                     | 8,392   |   |  | 2-25 years
|Tooling                                   |  |      | 96,051  |      |  |                       | 79,269  |   |  | 1-3 years 
|Equipment, software and other             |  |      | 22,815  |      |  |                       | 21,196  |   |  | 3-5 years 
|Trackside trailers and vehicles           |  |      | 9,916   |      |  |                       | 5,231   |   |  | 5 years   
|                                          |  |      |         |      |  |                       |         |   |  |            |  | 
|                                          |  |      | 141,720 |      |  |                       | 114,088 |   |  |            |  | 
|Less   accumulated depreciation          |  |      | (95,342 | )    |  |                       | (73,732 | ) |  |            |  | 
|                                          |  |      |         |      |  |                       |         |   |  |            |  | 
|                                          |  | $    | 46,378  |      |  | $                     | 40,356  |   |  |            |  | 
|                                          |  |      |         |      |  |                       |         |   |  |            |  | 

During 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 2000 (See Special Charges).

GOODWILL AND OTHER INTANGIBLES

Goodwill and trademarks with indefinite lives ceased amortizing effective
October 1, 2001, with the adoption of SFAS 142. Intangibles with definite
lives consist principally of licenses and other intangibles and will continue
amortizing under SFAS 142. Goodwill amortization was $4.1 million and $11.3
million or $2.8 million and $7.3 million, net of tax for 2001 and 2000.
Excluding the impact of goodwill amortization, net income before extraordinary
items and net income for 2001 and 2000, would have been the following (in
thousands, except per share data):

|                                         |           |                                          |        |      |      |      |         |   |       |  
|---------------------------------------- | --------- | ---------------------------------------- | ------ | ---- | ---- | ---- | ------- | - | ----- | -
|                                         |           |                                          |        | 2001 |      | 2000
|                                         |           |                                          |        |      |      |     
|Income (loss) before extraordinary items |           | $                                        | 25,781 |      |      | $    | (50,773 | )
|Net income (loss)                        |           |                                          | 34,700 |      |      |      | (50,773 | )
|Earnings (loss) per common share:        |           |                                          |        |      |      |      |         |  
|                                         | Basic   
|                                         |           | Income (loss) before extraordinary items |        | $    | 1.57 |      |         | $ | (3.07 | )
|                                         |           | Net income (loss)                        |        |      | 2.12 |      |         |   | (3.07 | )
|                                         | Diluted 
|                                         |           | Income (loss) before extraordinary items |        | $    | 1.53 |      |         | $ | (3.07 | )
|                                         |           | Net income (loss)                        |        |      | 2.06 |      |         |   | (3.07 | )

F-16



---



##### Table of Contents



The estimated aggregate intangibles amortization expense expected as of
September 30, 2002, follows (in thousands):

|           |       |   |       |        | 
|---------- | ----- | - | ----- | ------ | 
|Year       |       |   |       |       
|2003       |       | $ | 3,270 |       
|2004       |       |   | 2,910 |       
|2005       |       |   | 2,744 |       
|2006       |       |   | 2,660 |       
|2007       |       |   | 2,486 |       
|Thereafter |       |   | 3,500 |       
|           |       |   |       |       
|           | Total |   | $     | 17,570 | 
|           |       |   |       |       

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

|                                   |                          |                        |         |         |         |           |  |                  |        |        |        |           |   |                  |  |  |  | 
|---------------------------------- | ------------------------ | ---------------------- | ------- | ------- | ------- | --------- |  | ---------------- | ------ | ------ | ------ | --------- | - | ---------------- |  |  |  | 
|                                   |                          |                        |         |         |         |           |  | Weighted Average |        |        |        |           |   | Weighted Average
|                                   |                          |                        |         |         |         |           |  | Amortization     |        |        |        |           |   | Amortization    
|                                   |                          |                        |         | 2002    |         | Period    |  | 2001             |        | Period
|                                   |                          |                        |         |         |         |           |  |                  |        |       
|Intangibles with Indefinite Lives: |                          |                        |         |         |         |           |  |                  |        |        |        |           |   |                  |  | 
|                                   | Carrying
amount        
|                                   |                          | Goodwill               |         | $       | 101,212 |           |  | NA               |        | $      | 93,470 |           |   | 23.6 years      
|                                   |                          | Trademarks             |         |         | 6,451   |           |  | NA               |        |        | 1,095  |           |   | 15.0 years      
|                                   |                          |                        |         |         |         |           |  |                  |        |        |        |           |   |                  |  | 
|                                   |                          |                        | 107,663 |         |         |           |  |                  |        |        | 94,565 |           |   | 23.5 years      
|                                   | Accumulated amortization |                        |         | (16,719 | )       |           |  |                  |        |        |        | (16,553   | ) |                  |  |  | 
|                                   |                          |                        |         |         |         |           |  |                  |        |        |        |           |   |                  |  | 
|                                   |                          |                        | 90,944  |         |         |           |  |                  |        |        | 78,012 |           |   |                  |  | 
|                                   |                          |                        |         |         |         |           |  |                  |        |        |        |           |   |                  |  | 
|Intangibles with Definite Lives:   |                          |                        |         |         |         |           |  |                  |        |        |        |           |   |                  |  | 
|                                   | Carrying amount         
|                                   |                          | Licenses               |         |         | 23,470  |           |  | 9.1 years        |        |        | 18,021 |           |   | 8.9 years       
|                                   |                          | Customer relationships |         |         | 2,239   |           |  | 4.6 years        |        |        |       |           |   | NA              
|                                   |                          | Non-compete agreement  |         |         | 360     |           |  | 5.0 years        |        |        |       |           |   | NA              
|                                   |                          | Patent                 |         |         | 68      |           |  | 4.0 years        |        |        |       |           |   | NA              
|                                   |                          | Backlog                |         |         | 539     |           |  | 0.3 years        |        |        |       |           |   | NA              
|                                   |                          |                        |         |         |         |           |  |                  |        |        |        |           |   |                  |  | 
|                                   |                          |                        | 26,676  |         |         | 8.5 years |  |                  | 18,021 |        |        | 8.9 years
|                                   | Accumulated amortization |                        |         | (9,106  | )       |           |  |                  |        |        |        | (6,311    | ) |                  |  |  | 
|                                   |                          |                        |         |         |         |           |  |                  |        |        |        |           |   |                  |  | 
|                                   |                          |                        | 17,570  |         |         |           |  |                  |        |        | 11,710 |           |   |                  |  | 
|                                   |                          |                        |         |         |         |           |  |                  |        |        |        |           |   |                  |  | 
|                                   |                          | $                      | 108,514 |         |         |           |  |                  |        | $      | 89,722 |           |   |                  |  | 
|                                   |                          |                        |         |         |         |           |  |                  |        |        |        |           |   |                  |  | 

Increases to goodwill as a result of acquisitions aggregated $6.5 million in
2002 and $0.7 million in 2001.

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 purchase discount of 3% are included in
other long-term assets and are being amortized into interest expense using the
effective interest rate method.

F-17



---



##### Table of Contents



During 2002 and 2001, we repurchased Notes with a face value of $16.0 million
and $45.1 million at a pre-tax loss of $1.4 million and pre-tax gain of $13.4
million, respectively. In 2002, the notes were repurchased using $5.7 million
in cash and 145 thousand shares from treasury and 95 thousand newly issued
shares with a market value of $11.4 million. The difference between the
treasury shares $1.3 million cost and $6.9 million market value increased
additional paid in capital. In 2001, the notes were repurchased using $11.1
million in cash and 829 thousand shares from treasury 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 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 items. 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 in 2001.

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

|                                                               |  |      |       |      |  |   |       |  
|-------------------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|                                                               |  | 2002 |       | 2001
|                                                               |  |      |       |     
|Notes payable, secured by property and equipment, 6.0% to 8.4% |  | $    | 1,848 |      |  | $ | 2,487 |  
|Less current portion                                           |  |      | (423  | )    |  |   | (424  | )
|                                                               |  |      |       |      |  |   |       |  
|                                                               |  | $    | 1,425 |      |  | $ | 2,063 |  
|                                                               |  |      |       |      |  |   |       |  

The aggregate future maturities of the
4 3/4% convertible subordinated notes
(the Notes) and other long-term debt at September 30, 2002, follows (in
thousands):

|           |       |       |        |                |  |   |       |       | 
|---------- | ----- | ----- | ------ | -------------- |  | - | ----- | ----- | 
|           |       |       |        |                |  |   | Other
|Year       |       | Notes |        | Long-Term Debt
|           |       |       |        |               
|2003       |       | $     |       |                |  | $ | 423   |      
|2004       |       |       |       |                |  |   | 426   |      
|2005       |       |       | 38,935 |                |  |   | 168   |      
|2006       |       |       |       |                |  |   | 181   |      
|2007       |       |       |       |                |  |   | 195   |      
|Thereafter |       |       |       |                |  |   | 455   |      
|           |       |       |        |                |  |   |       |      
|           | Total |       | $      | 38,935         |  |   | $     | 1,848 | 
|           |       |       |        |                |  |   |       |      

The fair value of the Notes on September 30, 2002, using quoted market prices,
was $35.0 million. The carrying amounts of other long-term debt approximate
fair value based on current market prices for similar debt instruments.

As amended January 2002, the loan and security agreement with Bank One (the
Agreement), provides for borrowings of up to $20.0 million, subject to the
limitation of a calculated borrowing base. The Agreement consists of a $20.0
million revolving line of credit, which currently includes up to $20.0 million
of letters of credit. Prior to the amendment, the Agreement had included a
revolving line of credit of up to $30.0 million. The $10.0 million reduction
in available line of credit reduces commitment fees payable. We have never
borrowed under the Agreement (originally dated September 2000).

The line of credit bears interest at Bank Ones base rate, or LIBOR plus 2.5%.
A commitment fee of 0.5% of the average unused line of credit and 1.5%-2.5% of
the average letters of credit is payable annually on the loan. The Agreement
maturity date was extended from December 2002 to March 2003. Outstanding
letters of credit total $10.6 million at September 30, 2002. The Agreement is
secured principally by inventory, receivables, and equipment and no longer
prohibits the payment of dividends.

Under the agreement, as amended, we are required to meet certain financial
tests principally related to debt coverage, tangible net worth, and funded
indebtedness to EBIDA (earnings before interest, depreciation and
amortization). We were in compliance with the covenants at September 30, 2002.

F-18



---



##### Table of Contents



CREDIT RISK

Sales to our top five customers accounted for 24.8%, 16.0% and 11.5% of sales
in 2002, 2001 and 2000. Sales to our largest customer, Wal-Mart Stores, Inc.
(Wal-Mart), were approximately 11.4% of revenue in 2002. Accounts receivable
from Wal-Mart at September 30, 2002, totaled $15.2 million and $9.2 million of
those receivables were supported by letters of credit. Sales to our second
largest customer Kmart Corporation, and its divisions, (Kmart) were
approximately 3.9% of revenue in 2002. Accounts receivable from Kmart at
September 30, 2002, totaled $5.1 million and $0.6 million of those receivables
were supported by letters of credit issued by K-mart divisions not included in
its bankruptcy filing. Other assets, long-term, at September 30, 2002,
included $1.7 million of pre-bankruptcy receivables from Kmart Corporation, net
of an allowance of $1.0 million.

Cash equivalents consists of $48.5 million of investments in overnight reverse
repurchase agreements and $10.2 million invested in money market funds at
September 30, 2002. 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, 2002, options on 913,189 shares of common stock were
available for grant to key employees, consultants, independent contractors and
non-employee directors under the 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. The
shareholders approved this amendment. 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. At September 30, 2002, the shares reserved for
issuance under the expired 1993 Stock Option Plan, the 1998 Non-Qualified Stock
Option Plan and the 2000 Stock Option Plan totaled 2.7 million shares.

Stock option plan activity and data follows:

|                                                           |  |        |           |          |  |          |       |          |  |        |           |          |  |   |       |  |  |          |           |   |  |   |       | 
|---------------------------------------------------------- |  | ------ | --------- | -------- |  | -------- | ----- | -------- |  | ------ | --------- | -------- |  | - | ----- |  |  | -------- | --------- | - |  | - | ----- | 
|                                                           |  | 2002   |           | 2001     |  | 2000    
|                                                           |  |        |           |          |  |         
|                                                           |  |        |           |          |  | 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                           |  |        | 1,764,029 |          |  | $        | 13.50 |          |  |        | 1,279,775 |          |  | $ | 16.27 |  |  |          | 996,387   |   |  | $ | 21.23 | 
|Granted                                                    |  |        | 507,000   |          |  |          | 39.18 |          |  |        | 1,063,000 |          |  |   | 9.91  |  |  |          | 491,500   |   |  |   | 8.94  | 
|Exercised                                                  |  |        | (437,641  | )        |  |          | 14.76 |          |  |        | (329,232  | )        |  |   | 9.07  |  |  |          | (20,918   | ) |  |   | 6.16  | 
|Canceled                                                   |  |        | (52,672   | )        |  |          | 10.87 |          |  |        | (249,514  | )        |  |   | 18.25 |  |  |          | (187,194  | ) |  |   | 27.48 | 
|                                                           |  |        |           |          |  |          |       |          |  |        |           |          |  |   |       |  |  |          |           |   |  |   |       | 
|Outstanding at end of year                                 |  |        | 1,780,716 |          |  | $        | 20.58 |          |  |        | 1,764,029 |          |  | $ | 13.50 |  |  |          | 1,279,775 |   |  | $ | 16.27 | 
|                                                           |  |        |           |          |  |          |       |          |  |        |           |          |  |   |       |  |  |          |           |   |  |   |       | 
|Outstanding exercisable
at end of year                     |  |        | 626,355   |          |  | $        | 18.18 |          |  |        | 519,016   |          |  | $ | 21.30 |  |  |          | 659,323   |   |  | $ | 17.47 | 
|Options available for
grant at end of year                 |  |        | 913,189   |          |  |          |       |          |  |        | 258,487   |          |  |   |       |  |  |          | 1,020,038 |   |  |   |       | 
|Weighted average fair
value of options granted
in the year |  |        |           |          |  | $        | 15.23 |          |  |        |           |          |  | $ | 5.38  |  |  |          |           |   |  | $ | 7.43  | 

F-19



---



##### Table of Contents



Options outstanding and exercisable by price range as of September 30, 2002,
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$8.77     |  |                     | 577,676   |                     |  |           | 8.2 |             |  | $        | 4.55  |  |  |          | 174,830 |  |  | $ | 5.12  | 
|8.78  17.54    |  |                     | 135,732   |                     |  |           | 6.6 |             |  |          | 9.63  |  |  |          | 65,894  |  |  |   | 9.48  | 
|17.55  26.30   |  |                     | 427,475   |                     |  |           | 6.6 |             |  |          | 21.51 |  |  |          | 220,798 |  |  |   | 22.18 | 
|26.31  35.07   |  |                     | 157,833   |                     |  |           | 4.2 |             |  |          | 27.17 |  |  |          | 122,833 |  |  |   | 26.76 | 
|35.08  43.84   |  |                     | 482,000   |                     |  |           | 9.1 |             |  |          | 39.90 |  |  |          | 42,000  |  |  |   | 40.00 | 
|                |  |                     |           |                     |  |           |     |             |  |          |       |  |  |          |         |  |  |   |       | 
|2.38  43.84    |  |                     | 1,780,716 |                     |  |           | 7.6 |             |  | $        | 20.58 |  |  |          | 626,355 |  |  | $ | 18.18 | 
|                |  |                     |           |                     |  |           |     |             |  |          |       |  |  |          |         |  |  |   |       | 

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:

|                         |  |         |       |         |      |         |       |  |  |  |        |  | 
|------------------------ |  | ------- | ----- | ------- | ---- | ------- | ----- |  |  |  | ------ |  | 
|                         |  |         | 2002  |         | 2001 |         | 2000 
|                         |  |         |       |         |      |         |      
|Volatility               |  |         | 57.2% |         |      |         | 81.0% |  |  |  | 112.6% | 
|Risk-free interest rate  |  |         | 2.6%  |         |      |         | 4.5%  |  |  |  | 5.3%   | 
|Dividend rate            |  |         | 0.7%  |         |      |         | 0.0%  |  |  |  | 0.0%   | 
|Expected life of options |  | 3
years |       | 3 years |      | 6 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 items and per share amounts would have been the following pro
forma amounts (in thousands, except per share data):

|                                              |             |  |      |        |      |  |      |        |  |  |   |         |  
|--------------------------------------------- | ----------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------- | -
|                                              |             |  | 2002 |        | 2001 |  | 2000
|                                              |             |  |      |        |      |  |     
|Net Income (Loss) Before
Extraordinary Items: |             |  |      |        |      |  |      |        |  |  |   |        
|                                              | As Reported |  | $    | 45,801 |      |  | $    | 23,017 |  |  | $ | (58,087 | )
|                                              | Pro Forma   |  | $    | 42,676 |      |  | $    | 20,309 |  |  | $ | (60,597 | )
|Basic EPS:                                    |             |  |      |        |      |  |      |        |  |  |   |        
|                                              | As Reported |  | $    | 2.61   |      |  | $    | 1.41   |  |  | $ | (3.52   | )
|                                              | Pro Forma   |  | $    | 2.43   |      |  | $    | 1.24   |  |  | $ | (3.67   | )
|Diluted EPS:                                  |             |  |      |        |      |  |      |        |  |  |   |        
|                                              | As Reported |  | $    | 2.46   |      |  | $    | 1.37   |  |  | $ | (3.52   | )
|                                              | Pro Forma   |  | $    | 2.29   |      |  | $    | 1.21   |  |  | $ | (3.67   | )

F-20



---



##### Table of Contents



In 2002, we issued warrants to purchase a total of 200 thousand shares of
common stock in connection with license agreements, at an average exercise price of $28.06 per share. The
warrants had a fair market value of $2.2 million as estimated by the
Black-Scholes option pricing method (average assumed volatility 48.51%,
risk-free rate 3.99% and term of 5.0 years). Issuance resulted in increases in
additional paid-in-capital and intangible assets.

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 $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 intangible assets.

A total of 1.8 million 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.
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. Under this program, 80 thousand shares
were purchased at an average price of $24.70 per share. In July 2002, the
Board of Directors approved a one-year program in which we may purchase up to
1.0 million shares of our common stock in the open market or in privately
negotiated transaction. In October 2002, under this program, 110 thousand
shares were purchased at a price of $18.39 per share.

In May 2002, at a special meeting of shareholders, the shareholders approved an
increase in the number of authorized common shares from 25.0 million shares to
62.5 million shares.

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 2002, 2001 and 2000,
employer-matching contributions expensed totaled $158 thousand, $157 thousand,
and $191 thousand.

EARNINGS PER COMMON SHARE

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

F-21



---



##### Table of Contents



|                                                                                                           |  |      |        |      |  |      |        |  |  |   |         |  
|---------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------- | -
|                                                                                                           |  | 2002 |        | 2001 |  | 2000
|                                                                                                           |  |      |        |      |  |     
|NUMERATOR:                                                                                                 |  |      |        |      |  |      |        |  |  |   |         |  
|Basic  income (loss) before extraordinary items                                                           |  | $    | 45,801 |      |  | $    | 23,017 |  |  | $ | (58,087 | )
|Effect
of dilutive 4 3/4%convertible
subordinated notes, tax affected interest                             |  |      | 1,497  |      |  |      |       |  |  |   |        |  
|                                                                                                           |  |      |        |      |  |      |        |  |  |   |         |  
|Diluted  adjusted income (loss) before extraordinary
items and assumed conversions                        |  | $    | 47,298 |      |  | $    | 23,017 |  |  | $ | (58,087 | )
|                                                                                                           |  |      |        |      |  |      |        |  |  |   |         |  
|DENOMINATOR:                                                                                               |  |      |        |      |  |      |        |  |  |   |         |  
|Basic  weighted average shares                                                                            |  |      | 17,565 |      |  |      | 16,373 |  |  |   | 16,515  |  
|Effect of dilutive stock options and warrants                                                              |  |      | 721    |      |  |      | 476    |  |  |   |        |  
|Effect of dilutive 4 3/4%
convertible subordinated notes                                                   |  |      | 945    |      |  |      |       |  |  |   |        |  
|                                                                                                           |  |      |        |      |  |      |        |  |  |   |         |  
|Diluted  adjusted weighted average shares and assumed
conversion of 4 3/4%
convertible subordinated notes |  |      | 19,231 |      |  |      | 16,849 |  |  |   | 16,515  |  
|                                                                                                           |  |      |        |      |  |      |        |  |  |   |         |  

The impact of options and warrants outstanding for the purchase of 482 thousand
shares of common stock at an average price of $39.90 were not included in the
calculation of diluted EPS for 2002 because to do so would be antidilutive.
The options and warrants had exercise prices greater than the average market
price of the common stock in 2002, but could potentially dilute EPS in the
future. The impacts of outstanding 4 3/4% convertible subordinated notes
were not included in the calculation of diluted EPS for 2001 and 2000, because
to do so also would have been antidilutive.

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.

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

|                                    |  |      |    |      |  |      |    |   |  |  |     |   
|----------------------------------- |  | ---- | -- | ---- |  | ---- | -- | - |  |  | --- | --
|                                    |  | 2002 |    | 2001 |  | 2000
|                                    |  |      |    |      |  |     
|Statutory federal rate              |  |      | 35 | %    |  |      | 35 | % |  |  | (35 | )%
|State taxes, net of federal benefit |  |      | 2  |      |  |      | 2  |   |  |  | (2  | ) 
|Foreign incremental rate            |  |      | 1  |      |  |      |   |   |  |  |    |   
|Non-deductible expenses             |  |      |   |      |  |      | 1  |   |  |  | 2   |   
|Valuation allowances                |  |      |   |      |  |      | (2 | ) |  |  | 5   |   
|US benefit of Goodsports closure    |  |      |   |      |  |      | (5 | ) |  |  |    |   
|                                    |  |      |    |      |  |      |    |   |  |  |     |   
|                                    |  |      | 38 | %    |  |      | 31 | % |  |  | (30 | )%
|                                    |  |      |    |      |  |      |    |   |  |  |     |   

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

|             |                                           |   |        |        |   |      |        |        |   |   |         |         |   | 
|------------ | ----------------------------------------- | - | ------ | ------ | - | ---- | ------ | ------ | - | - | ------- | ------- | - | 
|             |                                           |   |        | 2002   |   | 2001 |        | 2000  
|             |                                           |   |        |        |   |      |        |       
|Current:     |                                           |   |        |        |   |      |        |        |   |   |         |        
|             | Federal                                   |   | $      | 26,850 |   |      | $      | 4,557  |   |   | $       | (15,765 | )
|             | State                                     |   |        | 449    |   |      |        | 409    |   |   |         |        |  
|             | Foreign                                   |   |        | 947    |   |      |        | 1,228  |   |   |         | 400     |  
|             |                                           |   |        |        |   |      |        |        |   |   |         |        
|             |                                           |   | 28,246 |        |   |      | 6,194  |        |   |   | (15,365 | )      
|             |                                           |   |        |        |   |      |        |        |   |   |         |        
|Deferred:    |                                           |   |        |        |   |      |        |        |   |   |         |        
|             | Change in net deferred tax liability      |   |        | (133   | ) |      |        | 8,560  |   |   |         | (9,227  | )
|             | Change in estimated income tax
receivable |   |        |       |   |      |        | (4,549 | ) |   |         |        |  
|             |                                           |   |        |        |   |      |        |        |   |   |         |        
|             |                                           |   | (133   | )      |   |      | 4,011  |        |   |   | (9,227  | )      
|             |                                           |   |        |        |   |      |        |        |   |   |         |        
|Income taxes |                                           | $ | 28,113 |        |   | $    | 10,205 |        |   | $ | (24,592 | )      
|             |                                           |   |        |        |   |      |        |        |   |   |         |        

F-22



---



##### Table of Contents



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

|                             |           |                       |                                 |   |       |        |        |   |        |        |  
|---------------------------- | --------- | --------------------- | ------------------------------- | - | ----- | ------ | ------ | - | ------ | ------ | -
|                             |           |                       |                                 |   | 2002  |        | 2001  
|                             |           |                       |                                 |   |       |        |       
|Deferred Tax Assets:         |           |                       |                                 |   |       |        |        |  
|                             | Domestic- |                       |                                 |   |       |        |        |   |       
|                             |           |                       | Inventory cost capitalization   |   | $     | 1,451  |        |   | $      | 800    |  
|                             |           |                       | Reserves and accruals           |   |       | 5,773  |        |   |        | 3,718  |  
|                             |           |                       | Deferred compensation           |   |       | 277    |        |   |        | 320    |  
|                             |           |                       | Intangible asset capitalization |   |       | 881    |        |   |        | 1,239  |  
|                             |           |                       | Capital loss carryforwards      |   |       | 754    |        |   |        | 758    |  
|                             |           |                       | State net operating losses      |   |       | 1,362  |        |   |        | 1,548  |  
|                             |           |                       | Valuation allowance             |   |       | (2,013 | )      |   |        | (2,131 | )
|                             | Foreign-  |                       |                                 |   |       |        |        |   |       
|                             |           | Reserves and accruals |                                 |   | 263   |        |        |   | 217    |       
|                             |           | Net operating losses  |                                 |   | 1,439 |        |        |   | 2,483  |       
|                             |           | Valuation allowance   |                                 |   | (834  | )      |        |   | (1,164 | )     
|                             |           |                       |                                 |   |       |        |        |  
|Net deferred tax assets      |           |                       | 9,353                           |   |       |        | 7,788  |  
|                             |           |                       |                                 |   |       |        |        |  
|Deferred Tax Liabilities:    |           |                       |                                 |   |       |        |        |  
|                             | Domestic- |                       |                                 |   |       |        |        |   |       
|                             |           |                       | Accelerated tax depreciation    |   |       | (1,121 | )      |   |        | (1,829 | )
|                             |           |                       | Accelerated tax amortization    |   |       | (5,317 | )      |   |        | (3,462 | )
|                             |           |                       | Reserves and accruals           |   |       | (184   | )      |   |        | (314   | )
|                             |           |                       | Unrealized gain on investments  |   |       | (34    | )      |   |        |       |  
|                             | Foreign-  |                       |                                 |   |       |        |        |   |       
|                             |           |                       | Accelerated tax depreciation    |   |       | (1,071 | )      |   |        | (897   | )
|                             |           |                       | Accelerated tax amortization    |   |       | (3,014 | )      |   |        | (2,530 | )
|                             |           |                       | Reserves and accruals           |   |       | (11    | )      |   |        | (52    | )
|                             |           |                       |                                 |   |       |        |        |  
|Net deferred tax liabilities |           |                       | (10,752                         | ) |       |        | (9,084 | )
|                             |           |                       |                                 |   |       |        |        |  
|Net deferred tax liability   |           | $                     | (1,399                          | ) |       | $      | (1,296 | )
|                             |           |                       |                                 |   |       |        |        |  

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 2002, we
reduced valuation allowances by $0.4 million because 2002 taxable income was
sufficient to realize state and foreign net operating loss tax assets.
Valuation allowances as of September 30, 2002, include $0.8 million to fully
reserve a foreign tax asset for net operating losses generated by a German
subsidiary, $1.2 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.

Prior to May 2002, undistributed earnings were deemed permanently reinvested.
Beginning in May 2002, United States federal income taxes have been provided on
undistributed earnings of German subsidiaries

F-23



---



##### Table of Contents



SUPPLEMENTAL CASH FLOW INFORMATION

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

|                          |                                                          |  |      |        |      |  |      |         |   |  |   |       | 
|------------------------- | -------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------- | - |  | - | ----- | 
|                          |                                                          |  | 2002 |        | 2001 |  | 2000
|                          |                                                          |  |      |        |      |  |     
|Supplemental disclosures: |                                                          |  |      |        |      |  |      |         |   |  |   |      
|                          | Interest paid                                            |  | $    | 2,705  |      |  | $    | 5,222   |   |  | $ | 6,276 | 
|                          | Income taxes paid (refunded), net                        |  |      | 27,815 |      |  |      | (17,032 | ) |  |   | 2,332 | 
|Non-cash transactions:    |                                                          |  |      |        |      |  |      |         |   |  |   |      
|                          | Common stock issued in acquisitions                      |  |      | 2,343  |      |  |      | 175     |   |  |   |      | 
|                          | Warrants issued in acquisitions                          |  |      |       |      |  |      | 241     |   |  |   |      | 
|                          | Warrants issued for licenses                             |  |      | 2,903  |      |  |      | 1,399   |   |  |   |      | 
|                          | Licenses contributed for minority interest               |  |      |       |      |  |      | 173     |   |  |   |      | 
|                          | Shares issued to repurchase debt                         |  |      | 10,153 |      |  |      | 12,628  |   |  |   |      | 
|                          | Debt and liabilities incurred or assumed in acquisitions |  |      |       |      |  |      |        |   |  |   | 833   | 
|                          | Dividends declared                                       |  |      | 533    |      |  |      |        |   |  |   |      | 

COMMITMENTS AND CONTINGENCIES

Aggregate future minimum guaranteed royalty payments and personal service
agreement payments are as follows as of September 30, 2002 (in thousands):

|           |  |         |         |         |  |          |       | 
|---------- |  | ------- | ------- | ------- |  | -------- | ----- | 
|           |  |         |         |         |  | Personal
|Year       |  | Royalty |         | Service
|           |  |         |         |        
|2003       |  | $       | 16,589  |         |  | $        | 1,563 | 
|2004       |  |         | 20,128  |         |  |          | 1,450 | 
|2005       |  |         | 16,292  |         |  |          | 1,100 | 
|2006       |  |         | 11,795  |         |  |          | 413   | 
|2007       |  |         | 6,908   |         |  |          | 100   | 
|Thereafter |  |         | 29,770  |         |  |          |      | 
|           |  |         |         |         |  |          |       | 
|Total      |  | $       | 101,482 |         |  | $        | 4,626 | 
|           |  |         |         |         |  |          |       | 

Royalties expensed under licenses, including guaranteed minimums, were $67.8
million, $46.2 million and $48.4 million for 2002, 2001 and 2000.

Aggregate future payments and receipts under noncancellable operating leases
and subleases are as follows as of September 30, 2002 (in thousands):

|           |  |          |        |          |  |   |       | 
|---------- |  | -------- | ------ | -------- |  | - | ----- | 
|           |  | Lease    |        | Sublease
|Year       |  | Payments |        | Receipts
|           |  |          |        |         
|2003       |  | $        | 5,916  |          |  | $ | 384   | 
|2004       |  |          | 3,675  |          |  |   | 384   | 
|2005       |  |          | 3,517  |          |  |   | 384   | 
|2006       |  |          | 3,281  |          |  |   | 384   | 
|2007       |  |          | 3,130  |          |  |   | 352   | 
|Thereafter |  |          | 14,298 |          |  |   |      | 
|           |  |          |        |          |  |   |       | 
|Total      |  | $        | 33,817 |          |  | $ | 1,888 | 
|           |  |          |        |          |  |   |       | 

F-24



---



##### Table of Contents



Rent expense recognized for noncancellable operating leases, net of sublease
income, totaled $2.1 million, $2.7 million, and $5.7 million for 2002, 2001
and 2000.

One of our sublessees fell in arrears on lease payments, during 2002. The
subleases with this party include a building lease, which expires October 2009,
and equipment and furniture leases, which expired October 2002. The building
lease has annual lease payments of $1.0 million. We acquired the equipment and
furniture under the subleases in October 2002. During 2002, we have reserved
$3.0 million representing our current estimate of the total potential loss
under these sublease agreements.

Commitments at September 30, 2002, included $3.6 million for property and
equipment and $10.6 million of outstanding letters of credit.

We entered into a contractual agreement providing severance benefits to our
chairman 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, 2002.

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, results
of operations, or cash flows.

RELATED PARTY TRANSACTIONS

In September 2002, we sold a building to an independent third party, which had
been originally purchased from our chairman in 1999 for $2.1 million. This
sale resulted in a $0.4 million loss.

F-25



---



##### Table of Contents



Schedule II

ACTION PERFORMANCE COMPANIES, INC.

VALUATION AND QUALIFYING ACCOUNTS

Years Ended September 30, 2002, 2001 and 2000
(in thousands)

|                                                           |  |                   |       |              |  |                     |       |                 |  |             |       |      |  |   |        |   |  |   |       | 
|---------------------------------------------------------- |  | ----------------- | ----- | ------------ |  | ------------------- | ----- | --------------- |  | ----------- | ----- | ---- |  | - | ------ | - |  | - | ----- | 
|                                                           |  |                   |       |              |  | Additions-Charged   |       | (Charged to) or |  |             |       |      |  |   |        |  
|                                                           |  | Balance at        |       | to costs and |  | credited from other |       | Deductions      |  | Balance at 
|Description                                                |  | beginning of year |       | expenses     |  | accounts            |       | (A)             |  | end of year
|                                                           |  |                   |       |              |  |                     |       |                 |  |            
|Allowance for
doubtful accounts:                           |  |                   |       |              |  |                     |       |                 |  |             |       |      |  |   |        |   |  |   |       | 
|2002                                                       |  | $                 | 2,141 |              |  | $                   | 1,589 |                 |  | $           | (548  | )(B) |  | $ | (1,055 | ) |  | $ | 2,127 | 
|2001                                                       |  |                   | 3,392 |              |  |                     | 768   |                 |  |             | (144  | )(C) |  |   | (1,875 | ) |  |   | 2,141 | 
|2000                                                       |  |                   | 1,421 |              |  |                     | 7,022 |                 |  |             |      |      |  |   | (5,051 | ) |  |   | 3,392 | 
|Other Assets -
Allowance for
doubtful accounts,
long term: |  |                   |       |              |  |                     |       |                 |  |             |       |      |  |   |        |   |  |   |       | 
|2002                                                       |  | $                 |      |              |  | $                   |      |                 |  | $           | 1,030 | (D)  |  | $ |       |   |  | $ | 1,030 | 
|2001                                                       |  |                   |      |              |  |                     |      |                 |  |             |      |      |  |   |       |   |  |   |      | 
|2000                                                       |  |                   |      |              |  |                     |      |                 |  |             |      |      |  |   |       |   |  |   |      | 



|(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 recoveries
of $0.4 million, a reclass of $(1.0) million to allowance for doubtful
accounts, long term (Other Assets), and $0.1 million acquired in the
acquisition of Jeff Hamilton Collection, Inc.
|   
|(C) |  | Amounts indicated as charged to other accounts represent allowance
written off in connection with disposition of the investment in
Goodsports Holdings Pty Ltd.                                                                                              
|   
|(D) |  | Amounts indicated as credited from other accounts represent a $1.0
million reclassification of the allowance for doubtful accounts to
allowance for doubtful accounts, long-term (Other Assets).                                                             

F-26



---



##### Table of Contents



EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                                          
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                          
|Number  |  | Exhibit                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                          
|3.1     |  | First Amended and Restated Articles of Incorporation of Registrant, as amended                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                          
|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)                                   





---



##### Table of Contents



|        |  |                                                                                                                                                                                                             
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                             
|Number  |  | Exhibit                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                             
|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)                                                                      
|        |  |                                                                                                                                                                                                             
|10.67   |  | Second Amendment to Loan and Security Agreement, dated January 31, 2001, by and among Action Performance Companies, Inc., and certain subsidiaries and affiliates, as guarantors, and Bank One, NA. (10)    
|        |  |                                                                                                                                                                                                             
|10.68   |  | First Amended and Restated 2000 Stock Option Plan (11)                                                                                                                                                      
|        |  |                                                                                                                                                                                                             
|10.69   |  | Consent and Third Amendment to Loan and Security Agreement, dated September 2002, by and among Action Performance Companies, Inc., and certain subsidiaries and affiliates, as guarantors, and Bank One, NA.
|        |  |                                                                                                                                                                                                             
|21      |  | List of Subsidiaries of the Registrant                                                                                                                                                                      
|        |  |                                                                                                                                                                                                             
|23.1    |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                       
|        |  |                                                                                                                                                                                                             
|23.2    |  | Statement regarding consent of Arthur Andersen LLP                                                                                                                                                          
|        |  |                                                                                                                                                                                                             
|99.1    |  | Certification of the Chief Executive Officer of the Registrant, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                     
|        |  |                                                                                                                                                                                                             
|99.2    |  | Certification of the Chief Financial Officer of the Registrant, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                     



---

|(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.  
|    
|(10) |  | Incorporated by reference to the Registrants Form 10-Q for the quarter ended December 31, 2001, as filed with the Securities and Exchange Commission on February 13, 2002.
|    
|(11) |  | Incorporated by reference to the Registrants Registration Statement on Form S-8 (Registration No. 333-88114).