3 Table of Contents

ACTIONTable PERFORMANCEof COMPANIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 Contents

OFF-BALANCETable SHEETof ARRANGEMENTS Contents

InTable October 2004, we settled a lawsuit with New Hampshire Speedway, Inc. (NHS), filed in May 2004 against us in the United States District Court for the District of New Hampshire for $0.8 million. The $0.8 million was accrued as of September 30, 2004 and paid in October 2004. Contents

•Table Eliminated over 60% of our NASCAR die-cast SKUs. As a result of focusing our product line on the most popular and profitable SKUs, we have decreased planned capital expenditures; • Reorganized the departments that handle the product design, approval, and production process of die-cast; and • Announced our intent to restructure our wholesale NASCAR die-cast distribution model from a distributor-based model to a direct-to-retail model. We have restricted credit to five of our fifteen distributors and recorded a $2.5 million allowance for doubtful accounts in the first quarter of 2005 to reserve for estimated uncollectible receivables as a result of changing distribution models.Contents

WeTable are also evaluating the profitability of, and synergies among, our various product lines, and may determine to dispose of one or more of them, or to acquire other complimentary businesses, as we move forward with our business plan. Contents

MostTable of the components of our cost of sales are variable in nature. However, certain factors do affect our gross margin, including the following: Contents

WeTable 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. Our accounts receivable are written-off against the allowance once the account is deemed to be uncollectible. This typically occurs once we have exhausted all efforts to collect the account, which includes collection attempts by company employees and outside collection agencies. Contents

WeTable 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 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. Contents

DomesticTable die-cast sales increased $0.1 million, or 0.1%, from the prior year quarter while foreign die-cast sales increased $0.9 million, or 9.5%. The domestic die-cast segment sales increase of $0.1 million is comprised of a $0.5 million increase in our wholesale distribution and promotion revenues, offset by a $0.1 million decrease in our die-cast retail collectors’ catalog club revenues, and a $0.3 million decrease in domestic die-cast wholesale sales to mass-merchant retailers. We expect our domestic die-cast wholesale distribution and promotion revenues and collectors’ catalog club revenues in 2005 to remain comparable to 2004 as we continue to work to improve our die-cast distribution model and reduce the number of die-cast SKUs. Domestic die-cast wholesale sales to mass-merchant retailers consisted of $13.0 million and $4.5 million of Funline and NASCAR die-cast sales in the first quarter of 2004, compared to $13.2 million and $4.6 million of Funline and NASCAR die-cast sales in the first quarter of 2003. We now expect NASCAR die-cast sales to mass-merchant retailers to increase over 2004 and Funline die-cast sales to mass-merchant retailers to total at or below 2004 levels, based on recent merchant feedback. The 9.5% increase in foreign die-cast sales from the prior year first quarter, was primarily the result of the 8.9% change in the euro-to-U.S. dollar exchange rate between the periods. Contents

DaysTable sales outstanding, calculated on quarterly sales, was 52.9 days as of December 31, 2004, compared to 48.9 days as of September 30, 2004, and 69.8 days as of December 31, 2003. The increase from September 30, 2004, reflects the larger portions of revenues coming from retail channels that have longer dating terms and the timing of die-cast shipments. Contents

CautionaryTable Statementof Regarding Forward-Looking Statements Contents

18 Table of Contents

NotTable applicable of Contents

WeTable filed a current report on Form 8-K, dated October 12, 2004, announcing the appointment of David M. Riddiford as Chief Financial Officer, Secretary, Treasurer, and Director. Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended ~~December~~June 3130, ~~2004~~2005

Commission file number 0-21630

ACTION PERFORMANCE COMPANIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

1480 South Hohokam Drive
Tempe, AZ 85281

~~1480~~(Address, ~~South~~including ~~Hohokam~~zip ~~Drive Tempe~~code, ~~AZ 85281~~of principal executive offices)

(602) 337-3700

(Address, including zip code, of executive offices)

(602) 337-3700

(Registrant’s telephone number, including area code)

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. ~~Yesþ~~ ~~Noo~~Yes þ No o

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

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

CLASS		OUTSTANDING AT JANUARY 31, 2005
Common Stock, $0.01 par value		18,559,978 Shares


CLASS Common Stock, $0.01 Par Value		OUTSTANDING AT JULY 31, 2005 18,573,805 Shares

TABLE OF CONTENTS

PART I- FINANCIAL INFORMATION
	ITEM 1. Financial Statements
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
	ITEM 4. CONTROLS AND PROCEDURES
	ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
	ITEM 4. Controls and Procedures
PART II — OTHER INFORMATION
	ITEM 1. Legal Proceedings
	ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
	ITEM 3. Defaults Upon Senior Securities
	ITEM 4. Submissions of Matters to a Vote of Security Holders
	ITEM 5. Other Information
	ITEM 6. Exhibits and Reports on Form 8-K
	ITEM 6. Exhibits
SIGNATURES
EXHIBIT INDEX
Exhibit 31.1
EX-10.77
Exhibit 31.2
EX-31.1
Exhibit 32.1
EX-31.2
Exhibit 32.2
EX-32.1
Exhibit 99.1
EX-32.2
EX-99.1

PART I- FINANCIAL INFORMATION

ITEM 1. Financial Statements

2ACTION PERFORMANCE COMPANIES, INC.

~~Table~~Unaudited ofCondensed ~~Contents~~Consolidated Balance Sheets June 30, 2005 and September 30, 2004 (in thousands, except per share data)

ACTION PERFORMANCE COMPANIES, INC. Unaudited Condensed Consolidated Balance Sheets December 31, 2004 and September 30, 2004 (in thousands, except per share data)


	June 30,			September 30,
	2005			2004
ASSETS
Current Assets:
Cash and cash equivalents	$	6,336		$	12,580
Accounts receivable, net		31,263			47,050
Inventories		46,457			48,514
Prepaid royalties		5,608			2,774
Taxes receivable		1,132			306
Deferred income taxes		9,700			7,006
Prepaid expenses and other		4,140			5,740
Assets to be disposed		13,493			16,971

Total current assets		118,129			140,941

Long-Term Assets:
Property and equipment, net		57,275			64,691
Goodwill		86,180			86,764
Licenses and other intangibles, net		40,931			52,302
Other		2,092			3,196
Assets to be disposed		95			6,389

Total long-term assets		186,573			213,342

	$	304,702		$	354,283

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	15,597		$	28,044
Accrued royalties		10,388			10,002
Accrued expenses		6,270			8,453
Taxes payable		2,312			1,742
Current portion of long-term debt		373			4,009
Liabilities related to assets to be disposed		1,954			1,729

Total current liabilities		36,894			53,979

Long-Term Liabilities:
Long-term debt		3,908			11,882
Deferred income taxes		22,313			24,979
Other		241			298

Total long-term liabilities		26,462			37,159

Commitments and Contingencies
Minority Interests		2,466			2,518
Shareholders’ Equity:
Common stock, $.01 par value, 62,500 shares authorized, 18,764 and 18,560 shares issued		188			186
Additional paid-in capital		160,010			158,429
Treasury stock, at cost, 190 and 190 shares		(3,999	)		(3,999	)
Accumulated other comprehensive loss		(2,409	)		(1,456	)
Retained earnings		85,090			107,467

Total shareholders’ equity		238,880			260,627

	$	304,702		$	354,283

	December 31,			September 30,
	2004			2004
ASSETS
Current Assets:
Cash and cash equivalents	$	12,795		$	12,580
Accounts receivable, net		43,738			51,769
Inventories		53,407			56,947
Prepaid royalties		3,678			2,834
Taxes receivable		3,174			2,126
Deferred income taxes		8,784			8,766
Prepaid expenses and other		4,443			5,920
Total current assets		130,019			140,942
Long-Term Assets:
Property and equipment, net		67,571			64,878
Goodwill		90,536			88,653
Licenses and other intangibles, net		59,213			56,614
Other		3,229			3,196
Total long-term assets		220,549			213,341
	$	350,568		$	354,283
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	27,091		$	28,778
Accrued royalties		9,081			10,702
Accrued expenses		7,485			8,757
Taxes payable		2,612			1,742
Current portion of long-term debt		4,041			4,009
Total current liabilities		50,310			53,988
Long-Term Liabilities:
Long-term debt		10,934			11,882
Deferred income taxes and other		27,015			25,277
Total long-term liabilities		37,949			37,159
Commitments and Contingencies
Minority Interests		2,349			2,509
Shareholders’ Equity:
Common stock, $.01 par value: 62,500 shares authorized; 18,731 and 18,560 shares issued		187			186
Additional paid-in capital		159,802			158,429
Treasury stock, at cost, 190 and 190 shares		(3,999	)		(3,999	)
Accumulated other comprehensive income (loss)		962			(1,456	)
Retained earnings		103,008			107,467
Total shareholders’ equity		259,960			260,627
	$	350,568		$	354,283

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

~~The accompanying notes are an integral part of these consolidated financial statements.~~2

~~Table~~ACTION ofPERFORMANCE ~~Contents~~COMPANIES, INC.

~~ACTION PERFORMANCE COMPANIES, INC.~~ Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) Three and Nine Months Ended ~~December~~June 3130, ~~2004~~2005 and ~~2003~~2004 (in thousands, except per share data)

	2004			2003
	Three Months Ended						Nine Months Ended
Net sales	$	76,054		$	71,207
	2005			2004			2005			2004
Cost of sales		59,602			54,251
Net sales	$	72,693		$	88,334		$	216,050		$	232,662
Gross profit		16,452			16,956
Cost of sales		50,583			58,827			155,999			164,135
Operating expenses:
Gross profit		22,110			29,507			60,051			68,527
Selling, general, and administrative		22,901			19,906
Operating expenses:
Amortization of licenses and other intangibles		878			941
Selling, general, and administrative		21,037			20,307			62,489			57,346
Total operating expenses		23,779			20,847
Amortization of licenses and other intangibles		892			937			2,640			2,715
Loss from operations		(7,327	)		(3,891	)
Impairment losses on trademarks and licenses		12,674			—			12,674			—
Interest expense		(301	)		(431	)
Total operating expenses		34,603			21,244			77,803			60,061
Foreign exchange gains		1,652			829
Operating income (loss)		(12,493	)		8,263			(17,752	)		8,466
Earnings from joint venture		293			564
Interest expense		(303	)		(468	)		(1,000	)		(1,370	)
Other income		143			621
Foreign exchange gains (losses)		(1,122	)		(196	)		(214	)		957
Other expense		(260	)		(433	)
Earnings (losses) from joint venture		(59	)		204			343			966
Loss before income taxes		(5,800	)		(2,741	)
Other income		25			47			106			159
Income taxes		(2,262	)		(1,036	)
Other expense		(540	)		(280	)		(1,309	)		(1,060	)
Net loss		(3,538	)		(1,705	)
Total other expense		(1,999	)		(693	)		(2,074	)		(348	)
Other comprehensive income		2,418			1,405
Income (loss) from continuing operations before income taxes		(14,492	)		7,570			(19,826	)		8,118
Comprehensive loss	$	(1,120	)	$	(300	)
Income taxes		(5,014	)		2,869			(6,012	)		3,042
Loss Per Common Share:
Income (loss) from continuing operations		(9,478	)		4,701			(13,814	)		5,076
Basic	$	(0.19	)	$	(0.09	)
Loss from discontinued operations, net of income taxes		(5,522	)		(868	)		(7,639	)		(1,660	)
Diluted	$	(0.19	)	$	(0.09	)
Net income (loss)		(15,000	)		3,833			(21,453	)		3,416
Other comprehensive income (loss)		(1,784	)		(196	)		(953	)		618
Comprehensive income (loss)	$	(16,784	)	$	3,637		$	(22,406	)	$	4,034
Earnings (loss) per common share:
Basic -
Income (loss) from continuing operations	$	(0.51	)	$	0.26		$	(0.75	)	$	0.28
Loss from discontinued operations		(0.30	)		(0.05	)		(0.41	)		(0.09	)
Net income (loss)	$	(0.81	)	$	0.21		$	(1.16	)	$	0.19
Diluted -
Income (loss) from continuing operations	$	(0.51	)	$	0.26		$	(0.75	)	$	0.27
Loss from discontinued operations		(0.30	)		(0.05	)		(0.41	)		(0.09	)
Net income (loss)	$	(0.81	)	$	0.21		$	(1.16	)	$	0.18
Cash dividends declared, per common share	$	—		$	0.05		$	0.05		$	0.15

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

ACTION PERFORMANCE COMPANIES, INC. ~~Unaudited Condensed Consolidated Statements of Cash Flows Three Months Ended December 31, 2004 and 2003 (in thousands)~~

	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(3,538	)	$	(1,705	)
Adjustments to reconcile net loss to cash provided by (used in) operations-
Depreciation and amortization		7,690			7,566
Provision for doubtful accounts		2,821			204
Other		195			(57	)
Changes in assets and liabilities, net of businesses acquired and disposed-
Accounts receivable		5,427			16,007
Accounts payable and accrued expenses		(4,534	)		(3,835	)
Taxes payable and receivable, net		(405	)		(4,264	)
Inventories		3,910			(8,081	)
Prepaid royalties and accrued royalties		(2,528	)		(6,841	)
Other		254			(2,723	)
Net cash provided by (used in) operating activities		9,292			(3,729	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net		(7,114	)		(7,703	)
Acquisitions of businesses and intangibles, net of costs		(430	)		(251	)
Other		—			(47	)
Net cash used in investing activities		(7,544	)		(8,001	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt repayments		(1,340	)		(320	)
Dividends paid - common shareholders		(919	)		(915	)
Dividends paid - minority interest shareholders		(420	)		(1,003	)
Stock option and other exercise proceeds		712			100
Net cash used in financing activities		(1,967	)		(2,138	)
Effect of exchange rates on cash and cash equivalents		434			157
Net change in cash and cash equivalents		215			(13,711	)
Cash and cash equivalents, beginning of period		12,580			49,462
Cash and cash equivalents, end of period	$	12,795		$	35,751
Supplemental Disclosures:
Interest paid	$	242		$	785
Income taxes paid (refunded), net		(2,371	)		3,830

Unaudited Condensed Consolidated Statements of Cash Flows
Nine Months Ended June 30, 2005 and 2004
(in thousands)

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


	Nine Months Ended June 30,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(21,453	)	$	3,416
Adjustments to reconcile net income (loss) to cash provided by operating activities-
Discontinued operations and related impairment charges		10,552			(3,810	)
Depreciation and amortization		24,612			21,473
Impairment losses on trademark and licenses		12,674			—
Provision for doubtful accounts		2,741			991
Deferred taxes		(6,400	)		690
Other		921			170
Changes in assets and liabilities, net of businesses acquired and disposed-
Accounts receivable		12,967			15,172
Accounts payable and accrued expenses		(10,624	)		(3,264	)
Taxes payable and receivable, net		(199	)		(394	)
Inventories		1,927			(12,173	)
Prepaid royalties and accrued royalties		(2,421	)		1,524
Other		2,487			(4,433	)

Net cash provided by operating activities		27,784			19,362


CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net		(18,787	)		(20,208	)
Acquisition of businesses and intangibles, net of costs		(2,103	)		(2,890	)
Other		675			265

Net cash used in investing activities		(20,215	)		(22,833	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line-of-credit		—			11,700
Long-term debt repayments		(11,636	)		(478	)
Dividends paid — common shareholders		(1,842	)		(2,746	)
Dividends paid — minority interest shareholders		(1,115	)		(1,414	)
Stock option and other exercise proceeds		918			270

Net cash provided by (used in) financing activities		(13,675	)		7,332

Effect of exchange rates on cash and cash equivalents		(138	)		178

Net change in cash and cash equivalents		(6,244	)		4,039
Cash and cash equivalents, beginning of period		12,580			49,462

Cash and cash equivalents, end of period	$	6,336		$	53,501


Supplemental Disclosures:
Interest paid	$	772		$	1,632
Income taxes paid (refunded), net		(1,153	)		4,571

5The accompanying notes are an integral part of these consolidated financial statements.

~~Table of Contents~~4

~~INTERIM~~ACTION ~~FINANCIAL~~PERFORMANCE ~~REPORTING~~COMPANIES, INC.

~~The~~NOTES ~~accompanying~~TO ~~interim~~CONDENSED ~~condensed~~CONSOLIDATED ~~consolidated~~FINANCIAL ~~financial statements for Action Performance~~STATEMENTS ~~Companies,~~JUNE Inc. and subsidiaries have been prepared by management without audit by an independent registered public accounting firm pursuant to the rules and regulations of the Securities and Exchange Commission. In our opinion, all normal and recurring adjustments necessary for a fair statement of financial position and results of operations for the interim periods included herein have been made. Certain information and note disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted from these statements pursuant to such rules and regulations. Accordingly, these financial statements should be read in conjunction with our Form 10-K for the fiscal year ended September 30, ~~2004. The results of operations for the interim periods are not necessarily indicative of the operating results that may be expected for the fiscal year ending September 30,~~ 2005.

~~Certain~~INTERIM ~~prior~~FINANCIAL ~~period amounts have been reclassified to conform to the current year~~REPORTING ~~presentation.~~

~~RECENT~~The ~~ACCOUNTING~~accompanying ~~PRONOUNCEMENTS~~interim condensed consolidated financial statements for Action Performance Companies, Inc. and subsidiaries have been prepared by management without audit by an independent registered public accounting firm pursuant to the rules and regulations of the Securities and Exchange Commission. In our opinion, all normal and recurring adjustments necessary for a fair statement of financial position and results of operations for the interim periods included herein have been made. Certain information and note disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted from these statements pursuant to such rules and regulations. Accordingly, these financial statements should be read in conjunction with our Form 10-K for the fiscal year ended September 30, 2004. The results of operations for the interim periods are not necessarily indicative of the operating results that may be expected for the fiscal year ending September 30, 2005.

InCertain ~~December 2004,~~prior ~~FASB issued~~period ~~SFAS~~amounts ~~No. 123(R),~~have ~~“Share-Based~~been ~~Payment.”~~reclassified ~~FASB No. 123(R) revises FASB Statement No. 123, Accounting for Stock-Based Compensation (SFAS 123) and requires companies~~ to ~~expense~~ ~~the~~conform ~~fair value of employee stock options and other forms of stock-based compensation. We will adopt SFAS 123(R) effective July 1, 2005. We are currently evaluating SFAS 123(R)~~ to ~~determine~~ ~~our transition method and~~ the ~~impact~~current onyear ~~our financial position, results of operations, and cash flows~~presentation.

~~The~~DISCONTINUED ~~American Jobs Creation Act of 2004 (the Act) creates a temporary incentive for U.S.~~OPERATIONS corporations to repatriate accumulated income earned abroad. Beginning in May 2002, U.S. federal income taxes have been provided on undistributed earnings of German subsidiaries. Accordingly, this act has no impact on our financial statements.

~~SHAREHOLDERS~~During the quarter we decided to divest of our McArthur business. McArthur distributes terry and golf products primarily to specialty retailers and institutions. A portion of the product is licensed and bears the logos of professional sports teams. McArthur has historically operated as a stand-alone subsidiary in Baraboo, Wisconsin, and there has been little, if any, mutual benefit between our products and customers and McArthur’s. ~~EQUITY~~In addition, we have determined that for McArthur to produce an acceptable level of cash flow, the stand-alone operations would have to be consolidated with our Charlotte location. Given the risk of disruption to the business, the potential loss of key personnel in such a move, and that the Charlotte facility was in the middle of the “dealer direct” project, we determined that the sale of McArthur represented the best alternative. We are currently in negotiations to sell the McArthur business and based on the current status of these negotiations, anticipate completing the sale in the fourth quarter of fiscal 2005. In connection with our decision and the anticipated sale, we recorded an after-tax loss of $1.7 million in the third quarter to write-down related assets to the lower of the carrying value or fair value less costs to sell. This charge is reflected as a component of discontinued operations. We expect that any future cash expenditures associated with the sale of the McArthur business will be immaterial.

WeDuring ~~currently~~the ~~account~~quarter ~~for~~we ~~stock-based~~decided ~~compensation~~to ~~plans~~discontinue ~~under~~our ~~APB~~Hamilton Noapparel business and Castaway collectible business. ~~25,~~ ~~Accounting~~Hamilton ~~for~~produced ~~Stock~~licensed premium leather jackets and other apparel decorated with ~~Issued~~professional sports team logos, which were marketed primarily to ~~Employees~~specialty fashion and ~~related~~other “upstairs ~~interpretations,~~retail” ~~under~~channels. ~~which~~Castaway nomarketed ~~compensation~~die-cast ~~expense~~boats. ~~has~~Each ~~been~~of these businesses had ~~recognized,~~declining assales ~~all~~for ~~options~~the prior three quarters. We have ~~been~~determined ~~granted~~that ~~with~~each anbusiness ~~exercise~~was ~~price~~outside ~~equal~~of our tocore orNASCAR ~~exceeding~~licensed ~~the~~products ~~fair value~~business, ofand that the ~~common~~additional ~~stock~~investment onnecessary ~~the~~to ~~date~~bring those businesses to an acceptable level of ~~grant~~sales would likely not be recovered. ~~Pursuant~~In toconnection ~~SFAS~~with these ~~123~~decisions, we ~~estimated~~recorded in the ~~fair~~third ~~value~~fiscal quarter an after-tax charge of $3.8 million, primarily related to the write-down of ~~each~~the ~~option~~businesses’ ~~grant~~remaining inventory and the Hamilton trademark. These charges are reflected as a component of ~~the~~discontinued ~~date~~operations. We expect that most of ~~grant~~the ~~using~~inventory relating to these businesses will be sold by the ~~Black-Scholes~~end ~~option~~of ~~pricing~~the ~~method~~fourth ~~using~~quarter of fiscal 2005 and that any future cash expenditures associated with the businesses ~~following~~will ~~assumptions:~~be immaterial.

	Three Months Ended December 31,
	2004			2003 (a)
Volatility		57.8	%	N/A
Risk-free interest rate		3.1	%	N/A
Dividend rate		1.0	%	N/A
Expected life of options	3 years			N/A

McArthur and Hamilton were components of our domestic apparel and memorabilia segment. Castaway was a component of our domestic die-cast segment.

~~(a) There~~All ~~were~~periods nopresented ~~options~~have ~~granted~~been ~~during~~restated to present the ~~three~~operating ~~months~~results ~~ended~~of ~~December 31,~~these ~~2003~~components of our business as discontinued operations.

~~Options~~The ~~generally~~following ~~vest~~table ~~ratably~~presents ~~over~~selected ~~three~~operating ~~years.~~data ~~Options~~for ~~granted~~these tocomponents ~~independent~~for ~~directors generally vest immediately upon grant. Had compensation costs been determined consistent with SFAS 123, utilizing~~ the ~~assumptions~~three ~~detailed above~~ and ~~amortizing the resulting fair value of stock~~nine ~~options~~months ~~granted~~ended ~~over the respective vesting period of the options~~June 30, ~~the~~2005 ~~net loss~~ and ~~per~~2004 ~~share amounts would have been the following pro forma amounts~~ (in thousands~~, except per share data~~):

	Three Months Ended December 31,
	McArthur			Hamilton			Castaway			Total
	2004			2003
Three Months Ended June 30, 2005:
Net Loss as reported:	$	(3,538	)	$	(1,705	)
Net sales	$	3,642		$	(11	)	$	14		$	3,645
Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(787	)		(913	)
Loss on disposal		(2,861	)		—			—			(2,861	)
Pro Forma net loss	$	(4,325	)	$	(2,618	)
Loss before income taxes		(2,597	)		(5,713	)		(373	)		(8,683	)
Basic Loss Per Share:
Loss from discontinued operations, net of tax		(1,652	)		(3,633	)		(237	)		(5,522	)
As Reported	$	(0.19	)	$	(0.09	)
Three Months Ended June 30, 2004:
Pro Forma	$	(0.23	)	$	(0.14	)
Net sales	$	3,172		$	587		$	58		$	3,817
Diluted Loss Per Share:
Income (loss) before income taxes		300			(1,534	)		(101	)		(1,335	)
As Reported	$	(0.19	)	$	(0.09	)
Income (loss) from discontinued operations, net of tax		195			(997	)		(66	)		(868	)
Pro Forma	$	(0.23	)	$	(0.14	)
Nine Months Ended June 30, 2005:
Net sales	$	9,521		$	2,010		$	137		$	11,668
Loss on disposal		(2,861	)		—			—			(2,861	)
Loss before income taxes		(2,701	)		(8,744	)		(566	)		(12,011	)
Loss from discontinued operations, net of tax		(1,718	)		(5,561	)		(360	)		(7,639	)
Nine Months Ended June 30, 2004:
Net sales	$	9,068		$	4,560		$	664		$	14,292
Income (loss) before income taxes		339			(2,730	)		(163	)		(2,554	)
Income (loss) from discontinued operations, net of tax		221			(1,775	)		(106	)		(1,660	)

~~SEGMENT~~The ~~INFORMATION~~assets and liabilities of these components, included in our consolidated balance sheet at June 30, 2005 and September 30, 2004, in assets to be disposed and liabilities related to assets to be disposed were as follows (in thousands):

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 operations are based in Phoenix, Arizona and Los Angeles, California areas. The domestic apparel and memorabilia operation is based in Charlotte, North Carolina with a mass-merchant retail distribution center in Atlanta, Georgia and warehouse and distribution facilities in Charlotte, North Carolina and Baraboo, Wisconsin. Trackside operations are included in the domestic apparel and memorabilia segment. The foreign die-cast operation is based in Aachen, Germany.


	June 30, 2005
	McArthur		Hamilton		Castaway		Total
Accounts receivable, net	$	1,725	$	483	$	197	$	2,405
Inventories		3,228		479		181		3,888
Taxes receivable		983		3,183		206		4,372
Deferred income taxes		494		2,065		—		2,559
Other		180		81		8		269
Property and equipment, net		78		—		—		78
Licenses and other intangibles, net		17		—		—		17

Assets to be disposed	$	6,705	$	6,291	$	592	$	13,588

Accounts payable	$	1,112	$	5	$	2	$	1,119
Accrued royalties		123		442		2		567
Accrued expenses		171		5		92		268

Liabilities related to assets to be disposed	$	1,406	$	452	$	96	$	1,954

~~We evaluate performance and allocate resources based on segment operating income (loss). The~~6 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 allocated as an expense of the domestic segments. Financial information for the reportable segments follows (in thousands):

	Three Months Ended December 31,
						Depreciation		Operating
	External		Inter-segment			and		Income
	Revenues		Revenues			Amortization		(Loss)
2004:
Domestic die-cast	$	33,617	$	770		$	3,812	$	(1,131	)
Domestic apparel and memorabilia		31,310		18			694		(782	)
Foreign die-cast		10,333		—			2,089		1,663
Corporate and other		794		244			1,095		(7,490	)
Eliminations		—		(1,032	)		—		413
Total per consolidated financial statements	$	76,054	$	—		$	7,690	$	(7,327	)
2003 (c):
Domestic die-cast	$	33,571	$	1,147		$	3,677	$	3,454
Domestic apparel and memorabilia		27,639		462			769		(1,564	)
Foreign die-cast		9,437		—			1,920		1,499
Corporate and other		560		320			1,200		(7,006	)
Eliminations		—		(1,929	)		—		(274	)
Total per consolidated financial statements	$	71,207	$	—		$	7,566	$	(3,891	)


	September 30, 2004
	McArthur			Hamilton		Castaway			Total
Accounts receivable, net	$	2,076		$	2,462	$	180		$	4,718
Inventories		3,596			4,514		323			8,433
Taxes receivable (payable)		(236	)		1,930		127			1,821
Deferred income taxes		154			1,605		—			1,759
Other		189			42		9			240
Property and equipment, net		123			65		—			188
Goodwill		1,889			—		—			1,889
Licenses and other intangibles, net		30			4,282		—			4,312

Assets to be disposed	$	7,821		$	14,900	$	639		$	23,360

Accounts payable	$	481		$	247	$	6		$	734
Accrued royalties		195			498		6			699
Accrued expenses		142			71		92			305
Other		—			—		(9	)		(9	)

Liabilities related to assets to be disposed	$	818		$	816	$	95		$	1,729

~~Table~~IMPAIRMENT ~~of Contents~~CHARGES

	Identifiable Assets						Goodwill and Trademarks
	Dec. 31,			Sept. 30,			Dec. 31,		Sept. 30,
	2004			2004			2004		2004
Domestic die-cast (a)	$	115,062		$	114,157		$	49,138	$	45,661
Domestic apparel and memorabilia		117,343			125,319			61,840		61,840
Foreign die-cast		67,233			61,292			21,320		19,438
Corporate and other (b)		59,725			63,680			—		—
Eliminations		(8,795	)		(10,165	)		—		—
Total per consolidated financial statements	$	350,568		$	354,283		$	132,298	$	126,939

During the quarter ended June 30, 2005, we wrote-down our Funline trademarks by $10.0 million and two licenses by $2.7 million. These charges are included in the impairment losses on trademarks and licenses in the consolidated statement of operations as a component of operating expenses.

~~(a)~~Funline’s ~~Domestic~~strategy is to identify various vehicle and motor enthusiast trends, and create die-cast scale ~~identifiable~~products ~~assets~~that ~~include~~exploit ~~the~~those ~~Winner~~trends. Funline’s ~~Circle~~long-term ~~trademark,~~sales ~~purchased~~growth ~~from~~rate ~~Hasbro~~is independent ~~May~~on the ~~2001.~~successful Asidentification ~~additional~~of ~~consideration~~those ~~for~~trends, and the ~~trademark~~ability ~~purchase,~~to wesecure ~~pay~~the 1rights to create products to capture those trends.5% orSince 3%our September 2002 acquisition of ~~certain~~Funline ~~Winner’s~~and ~~Circle~~through ~~product~~the 2004 ~~net~~fiscal year, Funline sales tohad ~~Hasbro~~exhibited strong growth characteristics, ~~quarterly~~but in 2005, ~~through~~sales suffered ~~May~~when ~~2006.~~one ~~The~~of ~~additional~~the ~~consideration~~new islicensed ~~added~~concepts failed to ~~the~~gain ~~cost~~consumer ofappeal. ~~the~~We ~~trademark~~determined ~~quarterly.~~that Funline’s ~~Domestic~~strategy ~~die-cast~~would ~~identifiable~~produce ~~assets~~a ~~also~~future ~~include~~revenue ~~Funline~~stream ~~trademarks.~~with ~~During~~more ~~the~~volatility ~~first~~than ~~quarter~~those of ~~fiscal~~our other ~~2005~~businesses. Accordingly, ~~$2.1~~during ~~million~~our ~~was~~annual ~~accrued~~impairment astesting ~~additional~~in ~~consideration~~accordance ~~payable~~with ~~under~~SFAS 142, we used a higher discount rate in determining the ~~earn-out~~fair ~~provisions~~value of the ~~Funline~~trademarks ~~acquisition~~in ~~agreement.~~order ~~The~~to ~~amount~~account for ~~recorded~~the ~~for~~higher volatility of the ~~Funline~~projected ~~trademarks~~revenue ~~was~~streams. ~~increased~~As byin prior ~~the~~periods, ~~amount~~we determine fair value using a variant of the ~~additional~~income ~~consideration~~approach known as the relief from royalty method. ~~(b)~~Based ~~Corporate~~on ~~and~~this ~~other~~impairment testing, ~~identifiable~~we ~~assets~~determined ~~includes~~the ~~$7.5~~carrying ~~million~~amount inof ~~cash~~the attrademarks ~~December~~exceeded ~~31,~~fair ~~2004,~~value ~~and~~by $810.5 0 million and inrecorded ~~cash~~this atamount ~~September~~as 30an impairment charge, ~~2004.~~which ~~(c)~~is ~~Certain~~included ~~prior~~in ~~period~~the ~~amounts~~domestic ~~have~~die-cast segment. ~~been~~The ~~reclassified~~new tocarrying ~~conform~~value toof the ~~current~~trademarks ~~year~~is ~~presentation~~$23.9 million.

~~EARNINGS~~During ~~PER~~the ~~COMMON~~quarter ~~SHARE~~we ~~(EPS)~~also tested two of our long-term licenses – our Revell license and our license with an NHRA team — for recoverability. Sales of products under each license had fallen from historic levels. We determined during the quarter that sales were unlikely to increase sufficiently to recover the licenses carrying value. The Revell licenses supported a secondary domestic die-cast brand, which is out of favor. Revenue under the NHRA team license has suffered as a result of changes in NHRA sponsorship. The undiscounted net cash flows from projected use of the licenses were less than the carrying value of the licenses. In accordance with SFAS 144, we wrote-down the licenses to their fair value. We determined fair value using a traditional present value technique. The impairment charges as a result of the testing were $2.7 million, and are included in the corporate and other segment.

~~Reconciliations~~RECENT ofACCOUNTING ~~the numerators and denominators in the EPS computations for net loss follow (in~~PRONOUNCEMENTS ~~thousands):~~

	Three Months Ended December 31,
	2004			2003
NUMERATOR:
Basic and diluted — net loss	$	(3,538	)	$	(1,705	)
DENOMINATOR:
Basic and diluted — adjusted weighted average shares		18,408			18,281

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) revises FASB Statement No. 123, Accounting for Stock-Based Compensation (SFAS 123) and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. We will adopt SFAS 123(R) effective October 1, 2005. We have selected the modified prospective method of adoption, under which unvested awards as of October 1, 2005 will be charged to expense over the remaining vesting period of the awards. We are currently evaluating the impact of SFAS 123(R) on our financial position and results of operations.

~~The impact of certain options and warrants outstanding for the purchases of 2.1 million and 1.3~~7 million shares of common stock at an average price of $23.52 and $30.65 were not included in the calculation of diluted EPS for the three months ended December 31, 2004 and 2003, because to do so would be antidilutive. The options and warrants had exercise prices greater than the average market price of the common stock for the three months ended December 31, 2004 and 2003, but could potentially dilute EPS in the future. The impact of outstanding 43/4% convertible subordinated notes were not included in the calculation of diluted EPS for the three months ended December 31, 2003, because to do so would have been antidilutive.

WeThe ~~are~~American ~~not~~Jobs ~~currently~~Creation Act of 2004 (the Act) creates a ~~party~~temporary incentive for U.S. corporations to ~~any~~repatriate ~~off-balance~~accumulated ~~sheet~~income ~~arrangements~~earned ~~and~~abroad. doBeginning ~~not~~in ~~anticipate~~May 2002, ~~being~~U.S. afederal ~~party~~income totaxes ~~any~~have ~~off-balance~~been ~~sheet~~provided ~~arrangements~~on inundistributed earnings of our German subsidiaries. Accordingly, the ~~future~~Act has no impact on our financial statements.

~~JOINT~~STOCK-BASED ~~VENTURE~~COMPENSATION

We ~~have~~currently anaccount ~~investment~~for instock-based acompensation ~~joint~~plans ~~venture,~~under ~~Action-McFarlane~~APB ~~LLC~~No. 25, ~~The~~Accounting ~~joint~~for ~~venture~~Stock Issued ~~distributes~~to Employees and related interpretations, under which no compensation expense has been ~~action~~recognized, ~~figurines~~as ~~based~~all options have been granted with an exercise price equal to or exceeding the fair value of the common stock on ~~NASCAR~~the ~~driver~~date ~~likenesses~~of grant. ~~All~~Pursuant to SFAS 123, we estimated the fair value of each option grant as of the ~~figurines~~date ~~are~~of ~~manufactured~~grant byusing ~~third~~the Black-Scholes option pricing method using ~~parties.~~the ~~Our~~following ~~investment~~assumptions infor the periods ended June 30:


	Three Months Ended						Nine Months Ended
	2005			2004			2005			2004
Volatility		62.6	%		65.1	%		61.1	%		65.2	%
Risk-free interest rate		4.0	%		3.2	%		3.5	%		2.7	%
Dividend rate		0.5	%		1.0	%		0.7	%		1.0	%
Expected life of options	3 years			3 years			3 years			3 years

~~Table~~Options granted to employees generally vest ratably over three years or after one and a half years. Options granted to independent directors generally vest immediately upon grant. Had compensation costs been determined consistent with SFAS 123, utilizing the assumptions detailed above and amortizing the resulting fair value of ~~Contents~~stock options granted over the respective vesting period of the options, the net income (loss) and per share amounts would have been the following pro forma amounts for the periods ended June 30 (in thousands, except per share data):

joint venture, which is included in other long-term assets, was $0.9 million at December 31, 2004, and $0.6 million at September 30, 2004, and earnings on our investment in the joint venture, which is included in other income, were $0.3 million and $0.6 million for the three months ended December 31, 2004 and 2003.


	Three Months Ended						Nine Months Ended
	2005			2004			2005			2004
Net income (loss), as reported	$	(15,000	)	$	3,833		$	(21,453	)	$	3,416
Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(490	)		(1,015	)		(1,962	)		(3,043	)

Pro forma net income (loss)	$	(15,490	)	$	2,818		$	(23,415	)	$	373

Basic earnings (loss) per share:
As reported	$	(0.81	)	$	0.21		$	(1.16	)	$	0.19
Pro forma	$	(0.84	)	$	0.15		$	(1.27	)	$	0.02
Diluted earnings (loss) per share:
As reported	$	(0.81	)	$	0.21		$	(1.16	)	$	0.18
Pro forma	$	(0.84	)	$	0.15		$	(1.27	)	$	0.02

~~SUPPLEMENTAL~~In ~~CASH~~the ~~FLOW~~nine ~~INFORMATION~~months ended June 30, 2005, we issued options to purchase 457 thousand shares of common stock, at an average exercise price of $11.26.

~~During~~DEBT ~~the~~AND ~~quarter ended December 31, 2004, we recorded a $2.5 million allowance for doubtful~~FINANCING ~~accounts to reserve for estimated uncollectible receivables from distributors and recorded a $1.2 million write-down of Jeff Hamilton inventory.~~

~~COMMITMENTS~~In ~~AND~~May 2005, ~~CONTINGENCIES~~we refinanced the $9.3 million outstanding balance of the term loans with the revolving credit facility and amended the agreement to consist of only the $63.3 million revolving credit facility. The $9.3 million balance was subsequently repaid in full later in the quarter, leaving no amounts outstanding on the revolving credit facility at June 30, 2005. Under the amended agreement, we are required to meet a minimum fixed charge coverage ratio of 1.35 to 1.0 for the nine months ended September 30, 2005, and 1.0 to 1.0 for each quarter thereafter. Based on current projections, we expect to be in compliance with our covenants through June 30, 2006, however, we expect our actual fixed charge coverage ratio to be close to the requirement throughout that period and we are close to the

~~In the ordinary course of business, we are subject to certain lawsuits and asserted and unasserted~~8 ~~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.~~

~~During~~minimum ~~December 2004,~~tangible wenet ~~were~~worth ~~served~~that ~~with~~we amust ~~class~~maintain. ~~action~~We ~~securities~~were ~~lawsuit~~in ~~entitled~~compliance ~~“The~~with ~~Cornelia~~those covenants at ~~Crowell~~June 30, ~~GST Trust v~~2005. ~~Action~~If ~~Performance~~we ~~Companies,~~do ~~Inc.,~~not etmaintain ~~al.”,~~compliance ~~which~~with ~~was~~these ~~filed~~covenants, inour ~~the~~business ~~United~~or ~~States~~profitability ~~District~~deteriorates ~~Court~~or ofwe ~~New~~incur ~~Mexico.~~unexpected ~~The~~expenses ~~complaint~~or ~~names~~asset asimpairments, ~~defendants~~it ~~our~~could ~~company~~have ~~and certain of~~a ~~our~~material ~~officers,~~adverse ~~including~~effect aon ~~former~~our ~~officer.~~liquidity ~~The~~and ~~complaint~~financial ~~alleges~~resources, ~~that~~including wean ~~made~~inability ~~false~~to ~~and misleading~~utilize ~~statements concerning~~ our ~~financial~~revolving ~~results~~credit facility and ~~business~~an ~~during~~acceleration of the ~~period~~indebtedness ~~from~~outstanding ~~July 23,~~thereunder. ~~2003 to~~If ~~October 22,~~we ~~2003,~~are ~~resulting~~unable into ~~violations~~utilize ofour ~~Section 10(b)~~revolving ~~and~~credit ~~20(a)~~facility, ofwe ~~the~~may ~~Securities~~be ~~Exchange~~required ~~Act of~~to ~~1934.~~refinance ~~The~~all ~~complaint~~or ~~seeks~~part of ~~unspecified~~our ~~monetary~~existing ~~damages~~debt, ~~and~~sell ~~equitable~~assets, ~~relief.~~borrow Wemore ~~dispute~~money, ~~the claims~~or ~~and~~obtain ~~intend~~other toadditional ~~defend the lawsuit vigorously~~financing.

~~ITEM~~SEGMENT ~~2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~INFORMATION

~~Current~~Reportable ~~Events~~segments are based on divisions operating geographically, domestic and abroad, and specializing in either die-cast or apparel and memorabilia. The domestic die-cast operations are based in Phoenix, Arizona and Los Angeles, California areas. The domestic apparel and memorabilia operation is based in Charlotte, North Carolina, with a mass-merchant retail distribution center in Atlanta, Georgia and warehouse and distribution facility in Charlotte, North Carolina. Trackside operations are included in the domestic apparel and memorabilia segment. The foreign die-cast operation is based in Aachen, Germany.

We ~~have~~evaluate ~~announced~~performance ~~our~~and ~~plans~~allocate toresources ~~improve~~based ~~our~~on segment operating income (loss). The accounting policies of the reportable segments are the same as those used in the consolidated financial ~~performance~~statements. ~~These~~Domestic ~~plans~~licensing ~~include~~costs and certain management costs are not allocated to the domestic operating segments and are included in corporate and other. Intangible licenses are ~~following:~~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 allocated as an expense of the domestic segments. All periods in the tables below have been restated to reflect only continuing operations. Financial information for the reportable segments follows (in thousands):

• Improving the way our die-cast product is marketed and distributed; • Expanding our traditional retail channels; and • Controlling expenditures.


	Three Months Ended June 30,
			Inter-			Depreciation			Operating
	External		segment			and			Income
	Revenues		Revenues			Amortization			(Loss)
2005:
Domestic die-cast	$	27,735	$	879		$	14,179		$	(8,252	)(c)
Domestic apparel and memorabilia		34,880		285			721			4,693
Foreign die-cast		9,430		—			2,390			1,733
Corporate and other		648		476			3,975	(d)		(11,333	) (d)
Eliminations		—		(1,640	)		—			666

Total per consolidated financial statements	$	72,693	$	—		$	21,265		$	(12,493	)


2004:
Domestic die-cast	$	40,741	$	2,869		$	3,185		$	7,604
Domestic apparel and memorabilia		38,145		59			610			6,139
Foreign die-cast		8,698		—			2,222			1,117
Corporate and other		750		236			1,129			(6,399	)
Eliminations		—		(3,164	)		—			(198	)

Total per consolidated financial statements	$	88,334	$	—		$	7,146		$	8,263

~~Significant actions we have taken to date to improve the way our die-cast products are marketed and~~9 ~~distributed include:~~


	Nine Months Ended June 30,
			Inter-			Depreciation			Operating
	External		segment			and			Income
	Revenues		Revenues			Amortization			(Loss)
2005:
Domestic die-cast	$	85,001	$	2,801		$	21,695		$	(8,982	)(c)
Domestic apparel and memorabilia		99,113		773			2,129			10,868
Foreign die-cast		29,530		—			6,798			4,851
Corporate and other		2,406		1,315			6,664	(d)		(25,216	) (d)
Eliminations		—		(4,889	)		—			727

Total per consolidated financial statements	$	216,050	$	—		$	37,286		$	(17,752	)

2004:
Domestic die-cast	$	103,607	$	5,925		$	9,733		$	14,235
Domestic apparel and memorabilia		99,599		536			2,002			9,932
Foreign die-cast		27,135		—			6,264			3,819
Corporate and other		2,321		1,024			3,474			(18,881	)
Eliminations		—		(7,485	)		—			(639	)

Total per consolidated financial statements	$	232,662	$	—		$	21,473		$	8,466


	Identifiable Assets						Goodwill and Trademarks
	June 30,			Sept. 30,			June 30,		Sept. 30,
	2005			2004			2005		2004
Domestic die-cast (a)	$	92,217		$	113,645		$	39,404	$	45,660
Domestic apparel and memorabilia		99,711			106,092			55,669		55,669
Foreign die-cast		59,401			61,292			18,854		19,438
Corporate and other (b)		48,044			60,059			—		—
Assets to be disposed		13,588			23,360			—		—
Eliminations		(8,259	)		(10,165	)		—		—

Total per consolidated financial statements	$	304,702		$	354,283		$	113,927	$	120,767

~~Actions~~(a) ~~taken~~Domestic die-cast identifiable assets include the Winner’s Circle trademark, purchased from Hasbro in May 2001. As additional consideration for the trademark purchase, we pay 1.5% or 3% of certain Winner’s Circle product net sales to ~~control~~Hasbro, ~~expenditures~~quarterly, through May 2006. The additional consideration is added to the cost of the trademark quarterly. Domestic die-cast identifiable assets also include: Funline trademarks. During the first quarter of fiscal 2005, $2.1 million was accrued as additional consideration payable under the earn-out provisions of the Funline acquisition agreement. The amount recorded for the Funline trademarks was increased by the amount of the additional consideration. (b) Corporate and other identifiable assets includes $1.7 million in cash at June 30, 2005, and $8.5 million in cash at September 30, 2004. (c) Domestic die-cast during the quarter ended June 30, 2005, includes an impairment loss on the Funline trademarks of $10.0 million. (d) Corporate and other during the quarter ended June 30, 2005, includes $2.7 million of impairment losses on two licenses. Corporate and other also includes incremental Sarbanes-Oxley implementation costs of $0.6 million in the three months ended June 30, 2005, and $0.9 million in the nine months ended June 30, 2005.

• Reduced the workforce at our Tempe headquarters by approximately 20%; • Closed the Los Angeles location of Jeff Hamilton Collections and consolidated the operations. The Jeff Hamilton product line is now distributed through our other divisions; • Decided not to declare a dividend in the quarter ending March 31, 2005, • Established a policy for capital expenditures to limit annual spending to a level below annual depreciation; and • Initiated plans to open a sourcing office in mainland China to reduce the cost of production.10

~~Overview~~EARNINGS PER COMMON SHARE (EPS)

WeReconciliations ~~are~~of the ~~leading~~numerators ~~designer~~ and ~~marketer~~denominators 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,~~EPS ~~Formula One,~~computations ~~the~~for ~~IRL,~~net ~~IROC,~~income ~~and the World of Outlaws. In Germany, we merchandise Formula One and high-end~~(loss) ~~auto~~from ~~manufacturer~~continuing ~~die-cast~~operations ~~replica~~for ~~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~~periods ~~motorsports~~ended ~~vehicles~~June 30 ~~and~~follows ~~most~~(in ~~apparel and memorabilia, generally utilizing our designs,~~thousands): ~~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 achieve higher levels of sales with limited increases in operating expenses and capital investments. The principal elements of this operating structure include the following:


	Three Months Ended					Nine Months Ended
	2005			2004		2005			2004
NUMERATOR:
Basic and diluted – income (loss) from continuing operations	$	(9,478	)	$	4,701	$	(13,814	)	$	5,076


DENOMINATOR:
Basic – weighted average shares		18,574			18,336		18,516			18,315
Effect of dilutive stock options and warrants		—			270		—			304

Diluted – adjusted weighted average shares		18,574			18,606		18,516			18,619

•The ~~NASCAR~~impact ~~die-cast~~of ~~unit~~certain ~~manufacturing~~options ~~costs~~and ~~are~~warrants ~~largely~~outstanding ~~fixed~~for ~~due~~the topurchases ~~outsourcing~~of ~~under~~1.9 million ~~fixed-price~~and ~~contracts~~2.0 million •shares ~~Royalties~~of ~~are~~common ~~paid~~stock, ~~generally~~at asan aaverage ~~percentage~~price of ~~sales~~$22.59 and $25.83, ~~although~~were ~~often~~not ~~subject~~included in the calculation of diluted EPS for the three months ended June 30, 2005 and 2004, because to ~~guaranteed~~do ~~minimums~~so would be antidilutive. •The ~~Due~~impact toof ~~our~~certain ~~agreements~~options ~~with~~and ~~distributors~~warrants outstanding for the purchases of 1.9 million and ~~QVC~~1.9 million shares of common stock, ~~incremental~~at ~~volume~~an ~~does~~average price of $22.59 and $25.97 were not ~~proportionately~~included ~~increase~~in ~~our~~the ~~operating~~calculation ~~expenses.~~of •diluted ~~Research~~EPS ~~and~~for ~~development~~the isnine ~~limited~~months toended ~~basic~~June 30, ~~design~~2005 and ~~engineering~~2004, because to do so would be antidilutive. •Although ~~Capital~~the ~~expenditures~~options ~~are~~and ~~principally~~warrants ~~limited~~had toexercise ~~tooling~~prices greater than the average market price of the common stock for ~~die-cast.~~the •three ~~Functions,~~or ~~such~~nine asmonths ~~manufacturing~~ended June 30, 2005 and ~~others~~2004, ~~outside~~they could potentially dilute EPS in the future. The impact of our ~~core~~outstanding 43/4% ~~skills~~convertible subordinated notes were not included in the calculation of diluted EPS for the three and nine months ended June 30, ~~are~~2004 ~~generally~~because ~~outsourced~~to do so also would be antidilutive.

~~Revenue~~OFF-BALANCE SHEET ARRANGEMENTS

We ~~derive~~are ~~revenue~~not ~~primarily~~currently ~~from~~a ~~the~~party ~~sale~~to ofany ~~our~~material ~~licensed~~off-balance ~~motorsports~~sheet ~~products.~~arrangements ~~The popularity~~ and ~~performance~~ ofdo ~~drivers~~not ~~and teams under license, the popularity of motorsports in general and NASCAR~~anticipate inbeing ~~particular,~~a ~~the~~party ~~general demand for licensed sports merchandise, and our ability~~ to ~~design, produce,~~any ~~and~~off-balance ~~distribute~~sheet ~~our~~arrangements ~~products~~ in ~~a timely manner influence~~ the ~~level of our net sales~~future.

WeJOINT ~~distribute our products through a broad range of channels, including a network of wholesale~~VENTURE distributors, leading mass-merchant 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 amount 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-merchant 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 title passes to QVC, which occurs when QVC ships product to the consumer. We recognize trackside sales when the consumer

10We have an investment in a joint venture, Action-McFarlane LLC. The joint venture distributes action figurines based on NASCAR driver likenesses. All of the figurines are manufactured by third parties. Our investment in the joint venture, which is included in other long-term assets, was $0.3 million at June 30, 2005, and $0.6 million at September 30, 2004, and earnings (losses) on our investment in the joint venture were $(0.1) million and $0.2 million for the three months ended June 30, 2005 and 2004, and were $0.3 million and $1.0 million for the nine months ended June 30, 2005 and 2004.

~~Table~~COMMITMENTS ofAND ~~Contents~~CONTINGENCIES

~~purchases~~In ~~product at~~ the ~~point~~ordinary ofcourse ~~sale. A portion~~ of ~~the~~business, ~~product~~we ~~sold~~are ~~through~~subject ~~television programming~~to iscertain ~~consignment~~lawsuits ~~product,~~and ~~for~~asserted ~~which~~and ~~sales~~unasserted claims. ~~are~~We ~~recognized~~believe ~~when~~that ~~title~~the ~~passes~~resolution toof ~~QVC,~~any ~~which occurs~~such ~~when~~matters ~~QVC~~will ~~ships~~not ~~the~~have ~~product~~a tomaterial ~~the~~adverse ~~consumer.~~effect on ~~Internet~~our ~~and~~financial ~~other~~position, ~~sales~~results ~~are~~of ~~generally recognized~~operations, ~~when~~or ~~delivered~~cash ~~to the consumer~~flows.

~~Net~~In ~~sales~~October 2004, ~~include~~we ~~sales~~settled ~~net~~a oflawsuit ~~estimated~~with ~~sales~~New ~~returns,~~Hampshire ~~discounts~~Speedway, ~~advertising~~Inc., ~~and~~filed ~~other allowances.~~in ~~Advertising~~May 2004 ~~allowances~~against us ~~are~~in ~~amounts~~the ~~paid~~United ~~primarily~~States toDistrict ~~mass-merchant~~Court ~~retailers~~for ~~in connection~~the ~~with~~District ~~promoting~~of ~~and~~New ~~selling~~Hampshire ~~our~~for ~~product~~$0.8 million. ~~These~~The $0.8 million ~~amounts~~was ~~are~~accrued ~~recorded~~ as aof ~~reduction~~September 30, ~~from sales~~2004 ~~when~~and ~~revenue~~paid isin ~~recognized~~October 2004.

~~Cost~~During ofDecember 2004, ~~Sales~~we were served with a class action securities lawsuit entitled “The Cornelia Crowell, GST Trust v. Action Performance Companies, Inc., et al.”, which was filed in the United States District Court of New Mexico. The complaint names as defendants our Company and certain of our current and former officers. The

~~Cost of sales includes product cost, shipping and freight forwarding costs paid to third parties,~~11 depreciation of tooling and dies, royalties to third party licensors, product testing and sample expense, and fees paid to QVC for shipping and handling. We incur costs to screen print or embroider certain inventory, which are also included in cost of sales, although most of our product is procured in its finished state. Substantial portions of our die-cast products are manufactured under an exclusive agreement with Early Light, a third-party 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.

•complaint ~~product~~alleges ~~mix,~~that •we ~~our~~made ~~ability~~false toand ~~price~~misleading statements concerning our ~~product~~financial ~~appropriately,~~results •and ~~the~~business ~~effect~~during ~~of amortizing~~ the ~~fixed~~period ~~cost~~from ~~components~~July 23, of2003 ~~cost of sales~~to October 22, ~~primarily depreciation of tooling and dies~~2003, ~~over~~resulting ~~varying~~in ~~levels~~violations of ~~net~~Section ~~sales,~~10(b) •and ~~the~~20(a) ~~type~~ of ~~freight~~the ~~charges,~~Securities •Exchange ~~additional~~Act of ~~charges~~1934. ~~related~~The tocomplaint ~~lower~~seeks ~~than~~unspecified ~~minimum~~monetary ~~order~~damages ~~quantities~~ and ~~cancellation~~equitable ofrelief. ~~specific~~We ~~purchase~~dispute ~~orders,~~the claims and •intend ~~the~~to ~~impact~~defend ofthe ~~minimum~~lawsuit ~~guarantees~~vigorously.

~~Gross~~ITEM ~~Margin~~2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

~~Our~~Current ~~gross margins may not be comparable to those of other entities, since some entities include all~~Events handling and warehousing costs in cost of sales and others exclude a portion of such costs from gross margin, including them instead in line items such as selling, general, and administrative expenses.

~~Selling~~On August 1, ~~General~~2005, we announced that Herb Baum will join us in the role of Executive Chairman. Mr. Baum has been an independent Director since 2001, and ~~Administrative~~the ~~Expenses~~Former Chairman, President, and Chief Executive Officer of the Dial Corporation, which develops and markets a diversified line of consumer products under various major brand names. Mr. Baum’s previous experience includes President and Chief Operating Officer of Hasbro Inc., a multi-billion dollar designer and manufacturer of toys, games, and interactive software, Chairman and Chief Executive Officer of Quaker State Corporation, and President of Campbell Soup Company-North and South America. Mr. Baum serves on the boards of directors of America West Holdings Corporation, Meredith Corporation, Playtex Products, Inc., and Pepsi Americas, Inc., all public companies.

~~Selling,~~We ~~general,~~have ~~and~~announced administrative expenses include salaries and benefits, use and occupancy expenses, creative services costs, advertising and promotion costs, sponsorship costs, and other general and administrative expenses. Included are the salaries, benefits and other costs of our ~~procurement,~~ ~~receiving,~~plans ~~and warehouse personnel. Selling, general, and administrative expenses include internal handling costs, incurred~~ to ~~store,~~improve ~~move, and prepare~~ our ~~products~~financial ~~for shipment~~performance. ~~The~~ ~~majority~~These ofplans ~~these~~include ~~costs are fixed and, as a result, incremental sales volume generally results~~the ~~in a decline in selling, general, and administrative expenses as a percentage of net sales.~~following:

11 • Improving the way our die-cast product is marketed and distributed; • Controlling expenditures; and • Expanding our traditional retail channels.

~~Table~~Significant ofactions ~~Contents~~we have taken to date to improve the way our die-cast products are marketed and distributed include:

~~Seasonality~~ • Eliminated over 60% of our NASCAR die-cast SKUs. As a result of focusing our product line on the most popular and profitable SKUs, we believe that we will realize the following benefits.

~~Because~~o ~~the~~Reduced ~~auto-racing~~future ~~season~~capital isexpenditures ~~concentrated~~to ~~between~~support the ~~months~~business. ofo ~~February~~Better ~~and~~utilization ~~November,~~of ~~the second~~those ~~and~~future ~~third~~capital ~~calendar~~expenditures. ~~quarters~~o ofA ~~each~~simplified ~~year (our third~~ and ~~fourth~~more ~~fiscal~~efficient ~~quarters)~~approval ~~are historically~~and ~~characterized~~production ~~by higher sales~~process.

~~Application~~We recognized approximately $0.5 million in the nine months ended June 30, 2005 of additional ~~Critical~~depreciation ~~Accounting~~on ~~Policies~~tooling for those SKUs that were either discontinued outright or will be eliminated in various stages during the remainder of the year. We expect to recognize approximately $0.3 million of additional depreciation expense in the fourth quarter of fiscal 2005 associated with this tooling.

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, goodwill and other 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.

	•		Reorganized the departments that handle the product design, approval, and production process of die-cast.

	•		Announced our plan to restructure our wholesale NASCAR die-cast distribution model from a distributor-based model to a direct-to-retail model. We announced that our existing Charlotte, North Carolina operations, which currently manages wholesale apparel operations, would also handle fulfillment for wholesale NASCAR die-cast and apparel effective October 1, 2005. We will also add a call center at that facility for order processing and customer service. We believe the benefits of bringing in-house our distribution are as follows:

~~The~~o ~~following~~A ~~critical~~significantly ~~accounting~~lower ~~policies~~cost ~~require~~profile for the business. These lower costs should allow us to ~~make~~invest ~~significant~~in ~~judgments~~both retail level marketing and ~~estimates used~~sales inefforts to improve the ~~preparation~~longer-term volume potential of the business, as well as improve the profitability of the business. o Allow us to communicate and deal directly with the retailer of our ~~financial~~products ~~statements~~to improve our speed to market, as well as recognize consumer trends, preferences, and buying habits sooner. o We have restricted credit to seven of our fifteen distributors and recorded a $2.5 million allowance for doubtful accounts in the first quarter of 2005 to reserve for estimated uncollectible receivables

~~Allowance for Doubtful Accounts~~12

~~Inventory~~ as a result of changing distribution models.

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

~~Royalties~~ • Reduced the workforce at our Tempe headquarters by approximately 20%. In addition, we anticipate selling our 12.5% fractional ownership in a corporate aircraft in August of 2005, from which we will receive proceeds of approximately $0.8 million. • Decided not to declare a dividend in the quarter ended June 30, 2005. The evaluation of paying dividends will be made on a quarter-by-quarter basis, although at the current time we do not anticipate paying a dividend for the foreseeable future. • Established a policy for capital expenditures to limit future annual spending to a level below annual depreciation. • Initiated plans to close the Los Angeles location of Funline and consolidate its administrative functions in Phoenix and Atlanta. We expect this consolidation to take place by January 2006 and be complete during that quarter. Annual savings are expected to approximate $2.5 to $3.0 million. • Initiated plans to open a sourcing office in mainland China to reduce the cost of production.

~~Our~~Plans ~~license agreements generally require payments of royalties to drivers, sponsors, teams,~~ and ~~other~~ ~~parties.~~actions ~~Contracts generally provide for royalties~~ to beexpand ~~calculated~~our astraditional aretail ~~specified percentage~~channels ~~of sales. Some contracts, however, provide for guaranteed minimum royalty payments.~~include: Royalties payable calculated using the contract percentage rates are recognized as cost of sales when the related sales are recognized. To the extent we project that royalties payable under a contract, calculated using the contract percentage rate, will be lower than guaranteed minimums during the guarantee period, we recognize additional cost of sales over the guarantee period, generally a calendar year. Guarantees advanced under the 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 prepaid royalties to cost of sales to the extent projected to be unrecoverable through sales.

Goodwill and Other Intangibles

	•		Consolidating procurement, marketing, sales, and distribution functions of our Winner’s Circle die-cast and Funline brands to better leverage the combined size of these two businesses. Recruiting for individuals with sales and/or marketing expertise to help realize the potential of these two businesses. During the third quarter of 2005, we announced the hiring of Mike Smith as our new Vice President of Mass Sales. Mr. Smith has 30 years of experience in selling to Mass customers with such companies as Fisher Price, Champion Sportswear, and Rauch Industries.

	•		Consolidating our mass apparel and novelty logistics and distribution function in our facility in Atlanta, Georgia. Such consolidation is currently underway and is expected to be substantially complete by the end of the fourth quarter.

We ~~evaluate~~are ~~goodwill~~also ~~and~~evaluating ~~other~~the ~~intangibles~~profitability ~~for impairment annually~~of, and ~~when~~synergies ~~impairment indicators arise~~among, inour ~~accordance~~various ~~with~~product ~~SFAS 142~~lines, ~~Goodwill~~ and may ~~Other~~determine ~~Intangible~~to ~~Assets.~~dispose ~~For~~of ~~goodwill,~~one weor ~~first compare~~more ~~the fair value~~ of athem, ~~reporting~~or ~~unit~~to ~~with~~acquire ~~its~~other ~~carrying~~complimentary ~~amount~~businesses, ~~including goodwill. If the~~as ~~carrying~~we ~~amount~~move offorward awith ~~reporting~~our ~~unit~~business ~~exceeds~~plan. ~~the~~Plans ~~fair~~and ~~value~~actions oftaken ain ~~reporting~~this ~~unit,~~regard ~~additional tests~~include: ~~would be used to measure the amount of impairment loss, if any. We~~

	•		We are in negotiations to sell our McArthur towel subsidiary and believe that such sale will occur in the fourth quarter of 2005. McArthur has historically operated as a stand-alone subsidiary in Baraboo, Wisconsin, and there has been little, if any, mutual benefit between our products and customers and McArthur’s. In addition, we have determined that for McArthur to produce an acceptable level of cash flow, the stand-alone operations would have to be consolidated with our Charlotte location. Given the risk of disruption to the business, the potential loss of key personnel in such a move, and that the Charlotte facility was in the middle of the “dealer direct” project, we determined that the sale of McArthur represented the best alternative.

	•		We have decided to discontinue two businesses: Hamilton and Castaway. Each of these businesses have had declining sales for the prior three quarters, and we have determined that each business was outside of our core NASCAR licensed products business, and that the additional investment necessary to bring those businesses to an acceptable level of sales would likely not be recovered.

~~Table of Contents~~Overview

~~use~~We aare ~~present~~the ~~value~~leading ~~technique~~designer toand ~~measure~~marketer ~~reporting~~of ~~unit~~licensed ~~fair~~motorsports ~~value.~~products Ifrelated ~~the~~to ~~carrying amount of any~~NASCAR, ~~other~~including ~~intangible~~die-cast ~~asset~~scaled ~~exceeds~~replicas ~~its~~of ~~fair~~motorsports ~~value~~vehicles, weapparel, ~~would~~and ~~recognize~~memorabilia. anWe ~~impairment~~currently have ~~loss~~exclusive ~~for~~license ~~the difference~~agreements ~~between~~with ~~fair~~many ~~value~~of ~~and~~ the ~~carrying~~most ~~amount~~recognized names in NASCAR. We ~~have~~also ~~not~~design and ~~recognized~~sell ~~any~~products ~~impairment losses~~relating to ~~date.~~other Ifmotorsports, ~~events~~including ~~occur~~racing ~~and~~sanctioned ~~circumstances~~by ~~change~~the NHRA, ~~causing~~Formula One, the ~~fair~~IRL, ~~value~~IROC, ofand athe ~~reporting unit~~World toof ~~fall~~Outlaws. ~~below~~In ~~its~~Germany, ~~carrying~~we ~~amount,~~merchandise ~~impairment~~Formula ~~losses~~One ~~may~~and behigh-end auto ~~recognized~~manufacturer indie-cast ~~the~~replica ~~future~~vehicles. We work

~~Deferred Tax Assets~~13

~~Stock-Based~~closely ~~Compensation~~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 ~~currently~~have ~~account~~structured ~~for~~our ~~employee~~operations ~~stock-based compensation in accordance~~ with Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees” and related interpretations (APB No. 25). Under APB No. 25, common stock options issued under our plans generally do not result in compensation expense because the ~~exercise~~goal ~~price~~ of ~~the~~achieving ~~stock~~higher ~~options~~levels ~~equals~~of ~~the~~sales ~~market~~with ~~price of the~~limited ~~underlying~~increases ~~stock~~in onoperating ~~the~~expenses ~~date~~and ofcapital ~~grant~~investments. ~~Were~~The weprincipal ~~required~~elements toof ~~record~~this ~~compensation expense for these~~operating ~~options,~~structure include the ~~charge to earnings might be significant (See Shareholders’ Equity Note).~~following:

~~Results~~• NASCAR die-cast unit manufacturing costs are largely fixed due to outsourcing under fixed-price contracts. • Royalties are paid generally as a percentage of ~~Operations~~ sales, although often subject to guaranteed minimums. • 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.

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

	Three Months Ended
	2004			2003
Net sales		100.0	%		100.0	%
Cost of sales		78.4			76.2
Gross profit		21.6			23.8
Selling, general, and administrative expenses		30.1			28.0
Amortization of licenses and other intangibles		1.2			1.3
Loss from operations		(9.7	)		(5.5	)
Interest expense		(0.4	)		(0.6	)
Foreign exchange gains		2.2			1.2
Earnings from joint venture		0.4			0.8
Other income		0.2			0.9
Other expense		(0.3	)		(0.7	)
Loss before income taxes		(7.6	)		(3.9	)
Income taxes		3.0			1.5
Net loss		(4.6	)%		(2.4	)%

We derive revenue primarily 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.

13We have historically distributed our products through a broad range of channels, including a network of wholesale distributors, leading mass-merchant 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 amount 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-merchant 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 title passes to QVC, which occurs 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 title passes to QVC, which occurs when QVC ships the product to the consumer. Internet and other sales are generally recognized when delivered to the consumer.

~~Table~~Net sales include sales net of ~~Contents~~estimated sales returns, discounts, advertising, and other allowances. Advertising allowances are amounts paid primarily to mass-merchant retailers in connection with promoting and selling our product. These amounts are recorded as a reduction from sales when revenue is recognized.

~~The~~Cost ~~following table sets forth net sales by channel~~ of ~~distribution for the periods ended December~~Sales ~~31 (in thousands):~~

	Three Months Ended
	2004		2003
Domestic Die-cast:
Wholesale distribution and promotion	$	12,308	$	11,831
Wholesale to mass-merchant retailers		17,538		17,836
Retail through collector’s catalog club		3,771		3,904
Total domestic die-cast		33,617		33,571
Foreign Die-cast — wholesale distribution and promotion		10,333		9,437
Total die-cast		43,950		43,008
Domestic Apparel and Memorabilia:
Wholesale distribution and promotion		13,669		13,253
Wholesale to mass-merchant retailers		9,022		8,290
Total apparel and memorabilia:		22,691		21,543
Domestic Apparel and Memorabilia — Retail at Trackside		8,619		6,096
Royalties and Other		794		560
Net Sales	$	76,054	$	71,207

Cost of sales includes product cost, shipping and freight forwarding costs paid to third parties, depreciation of tooling and dies, royalties to third party licensors, product testing and sample expense, and fees paid to QVC for shipping and handling. We incur costs to screen print or embroider certain inventory, which are also included in cost of sales, although most of our product is procured in its finished state. Substantial portions of our die-cast products are manufactured under an exclusive agreement with Early Light, a third-party 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.

~~Three~~Most ~~Months~~of ~~Ended~~the ~~December 31,~~components ~~2004~~of our cost of sales are variable in nature. However, ~~Compared~~certain ~~with~~factors ~~Three~~do affect ~~Months~~our ~~Ended~~gross ~~December 31~~margin, ~~2003~~including the following:

~~Net sales increased $4.8 million, or 6.8%, to $76.1 million for the three months ended December 31,~~14 ~~2004, compared to $71.2 million in the prior year quarter.~~

~~Domestic~~• ~~apparel~~product ~~and~~mix; ~~memorabilia~~• ~~segment~~our ability to price our product appropriately; • the effect of amortizing the fixed cost components of cost of sales, ~~exclusive~~primarily depreciation of ~~trackside,~~tooling ~~increased~~and ~~$1.1 million~~dies, ~~or 5.3%,~~over tovarying ~~$22.7 million~~levels inof net sales; • the ~~quarter~~type ~~ended~~of ~~December 31,~~freight ~~2004,~~charges; ~~compared~~• additional charges related to ~~$21.5 million~~lower inthan minimum order quantities and cancellation of specific purchase orders; and • the ~~quarter~~ ~~ended~~impact ~~December 31,~~of ~~2003~~minimum royalty guarantees.

~~Trackside~~Gross ~~sales increased $0.9 million, or 14.1%, after considering the impact of the timing of the~~Margin fall Talladega Superspeedway race ($1.7 million of 2005 sales), which occurred in October 2004 and September 2003. Trackside sales increased year over year, at all but one of the seven races during the first quarter.

~~The~~Our ~~2.2%~~gross ~~decline~~margins inmay ~~gross~~not ~~profit,~~be comparable to ~~21.6%~~those of ~~net~~other ~~sales~~entities, insince ~~the~~some ~~first~~entities ~~quarter~~include ofall handling ~~2005,~~and ~~from~~warehousing ~~23.8%~~costs in ~~the~~ ~~first~~cost ~~quarter~~of sales and others exclude a portion of ~~2004,~~such ~~was~~costs ~~impacted~~from gross bymargin, ~~changes~~including them instead in ~~segment~~line ~~gross~~items ~~margins~~such as ~~follows:~~selling, general, and administrative expenses.

14Selling, General, and Administrative Expenses

~~Table~~Selling, general, and administrative expenses include salaries and benefits, use and occupancy expenses, creative services costs, advertising and promotion costs, sponsorship costs, and other general and administrative expenses. Included are the salaries, benefits and other costs of ~~Contents~~our procurement, receiving, and warehouse personnel. Selling, general, and administrative expenses include internal handling costs, incurred to store, move, and prepare our products for shipment. 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 and incremental volume decreases have the opposite effect.

							Weighted
	% of			Gross			Gross
	Net			Margin			Margin
	Sales			Decline			Decline
Domestic die-cast		45.7	%		(5.6	)%		(2.5	)%
Domestic apparel and memorabilia		41.6			(2.7	)		(1.1	)
Foreign die-cast		13.6			2.1			0.3
Corporate and other		(0.9	)					1.1
Consolidated Total		100.0	%					(2.2	)%

Seasonality

~~Domestic~~Because ~~die~~the auto-~~cast~~racing ~~gross~~season ~~margins~~is ~~declined~~concentrated ~~5.6%~~between asthe amonths ~~result~~ of ~~lower~~February ~~gross~~and ~~margins~~November, ~~on Funline product sales. Results included write-downs of one Funline product line to net realizable value in~~ the ~~first~~second ~~quarter of 2005~~ and ~~lower~~third ~~margins~~calendar onquarters ~~other~~of ~~Funline~~each ~~product~~year ~~lines.~~(our ~~Domestic~~third ~~apparel~~ and ~~memorabilia~~ ~~margins~~fourth ~~declined~~fiscal ~~2.7%~~quarters) ~~as a result of first quarter write-downs of Jeff Hamilton~~are ~~inventory~~historically ofcharacterized ~~$1.2 million, offset~~ by ~~other~~higher ~~margin improvements~~sales. ~~The 2.1% increase in foreign~~ ~~die-cast gross margins was principally a result of lower tooling charges as a percentage of revenue, in part as a result of changes in the euro-to-dollar exchange rate.~~

~~Selling,~~Application ~~general, and administrative expenses were $22.9 million, or 30.1%~~ of ~~net~~Critical ~~sales,~~Accounting ~~in the~~Policies three months ended December 31, 2004, compared to $19.9 million, or 28.0% of net sales, in the three months ended December 31, 2003. The increase was $3.0 million, or 15.1%, from the prior year quarter. Selling, general, and administrative expenses in the first quarter of 2005 included a $2.5 million provision for doubtful accounts for distributor receivables, a $0.4 million severance expense for our former Chief Financial Officer compared to the first quarter of 2004, which included the $0.9 million settlement of litigation with Dover International Speedway. The remaining net increase in selling, general and administrative expenses was primarily due to incremental operating costs associated with the increase in trackside sales.

~~Interest~~Our ~~expense~~discussion and analysis of ~~$0.3 million~~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 ~~three~~United ~~months~~States. ~~ended~~During ~~December 31,~~preparation ~~2004~~of these financial statements, ~~was~~we ~~$0.1 million~~are required ~~lower~~to ~~than~~make ~~interest~~estimates ~~expense~~and injudgments that affect the ~~comparable~~reported ~~prior~~amounts ~~year~~of ~~period~~assets, asliabilities, arevenue and ~~result~~expenses, and related disclosure of ~~convertible~~contingent assets and liabilities. On an on-going basis, ~~subordinated~~we ~~note~~evaluate ~~repurchases~~our estimates, including those related to bad debts, inventories, fixed assets, goodwill and other 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.

~~Foreign~~The ~~currency~~following ~~gains~~critical ~~were~~accounting ~~$1.7 million~~policies ~~for~~require ~~the~~us ~~three months ended December 31, 2004, versus a foreign currency gain of $0.8 million for the three months ended December 31, 2003. Changes in the euro-~~to~~-U.S.~~ ~~dollar~~make ~~exchange~~significant ~~rate~~judgments ~~resulted in translation gains of $1.7 million~~ and ~~$1.3 million~~estimates ~~for~~used ~~the three months ended December 31, 2004 and 2003. These gains resulted from translation of German advances payable, which are denominated~~ in ~~U.S. dollars. In~~ the ~~three~~preparation ~~months ended December 31, 2003, these translation gains were offset by a loss~~ of ~~$0.5 million~~our onfinancial ~~a forward exchange contract~~statements.

~~The~~Allowance ~~effective tax rate of 39%~~ for ~~the~~Doubtful ~~three months ended December 31, 2004 was higher than the~~Accounts 37.8% effective tax rate for the three months ended December 31, 2003, primarily due to the impact of nondeductible expenses on lower projected pre-tax income and foreign subsidiary income comprising a larger portion of projected total taxable income in 2005 then 2004. Our foreign subsidiary is subject to higher tax rates than our domestic operations.

~~Liquidity~~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 ~~Capital~~considering ~~Resources~~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. Our accounts receivable are written-off against the allowance once the account is deemed to be uncollectible. This typically

~~Working capital decreased $7.3 million to $79.7 million at December 31, 2004, from $87.0 million at~~15 September 30, 2004. Cash increased $0.2 million to $12.8 million at December 31, 2004, from $12.6 million at September 30. Cash increased as a result of decreases in accounts receivable, net of allowances ($8.2 million) and decreases in inventories ($3.9 million). The increase in cash was offset by reductions in cash used for net property and equipment expenditures ($7.1 million), payments for acquisitions of businesses and intangibles ($0.4 million), dividends to common and minority interest shareholders ($1.3 million), increases in other current assets, and decreases in other current liabilities.

15occurs once we have exhausted all efforts to collect the account, which includes collection attempts by company employees and outside collection agencies.

~~Table of Contents~~Inventory

~~Inventories~~We atwrite ~~December 31,~~down ~~2004,~~our ~~decreased~~inventory ~~$3.5 million~~for ~~from~~estimated ~~amounts~~obsolescence ator ~~September 30,~~unmarketable ~~2004.~~inventory ~~Of this~~in ~~decrease,~~an ~~$1.5 million~~amount ~~was attributable~~ equal to athe ~~reduction~~difference ofbetween ~~Jeff~~the ~~Hamilton~~cost of inventory ~~levels~~ and ~~$1.2 million~~ ~~was~~the ~~attributable~~estimated tomarket avalue ~~write-down~~based ofupon assumptions ~~Jeff~~about ~~Hamilton~~future ~~inventory~~demand toand ~~net~~market ~~realizable value~~conditions. ~~During~~ ~~the~~If ~~first~~actual ~~quarter~~market ofconditions ~~2005,~~are ~~we closed our Jeff Hamilton operations in California. Jeff~~less ~~Hamilton~~favorable ~~trademarked~~than ~~product~~those isprojected, ~~now~~additional ~~distributed~~inventory ~~through~~write-downs ~~our~~may ~~other~~be ~~divisions~~required.

~~Except for Funline and collectors’ catalog club die-cast, we generally produce domestic and foreign~~Royalties die-cast based upon orders received from customers. The timing of receiving orders is directly related to the timing of the completion of product program approvals and is not necessarily indicative of product demand or future sales. We produce Funline die-cast for inventory based on customer-projected orders. We receive Funline customer orders weekly, which are fulfilled in the following week. We report as backlog orders received from customers, which for Funline, is limited to the weekly orders.

~~Apparel~~Our ~~and~~license ~~memorabilia~~agreements ~~product,~~generally ~~except~~require ~~Trevco~~payments ~~product~~of royalties to drivers, issponsors, teams, and other parties. Contracts generally ~~ordered~~provide ~~from~~for ~~stock~~royalties ~~inventory~~to be calculated as a specified percentage of sales. Some contracts, however, provide for guaranteed minimum royalty payments. ~~Trevco~~Royalties ~~products~~payable calculated using the contract percentage rates are ~~seasonal~~recognized inas ~~nature~~cost ~~and~~of ~~orders~~sales when the related sales are ~~received~~recognized. inTo ~~our~~the ~~second~~extent ~~and~~we ~~third~~project ~~fiscal~~that royalties payable under a ~~quarters~~contract, ~~and~~calculated ~~shipped~~using inthe ~~our~~contract percentage rate, will be lower than guaranteed minimums during the guarantee period, we recognize additional cost of sales over the guarantee period, generally a calendar year. Guarantees advanced under the license agreements are carried as prepaid royalties until earned by the third ~~and~~party, ~~fourth~~or ~~fiscal~~considered ~~quarters~~to be unrecoverable. We evaluate prepaid royalties regularly and expense prepaid royalties to cost of sales to the extent projected to be unrecoverable through sales.

~~Domestic~~Goodwill and ~~foreign~~Other ~~die-cast backlog, including Funline product, was $42 million and $43 million~~Intangibles at December 31, 2004 and 2003. Apparel and memorabilia backlog was approximately $24 million and $12 million at December 31, 2004 and 2003. Backlog on any date in a given year is not necessarily indicative of future sales.

~~Capital~~We ~~expenditures~~evaluate ~~related~~goodwill ~~principally~~and toother ~~ongoing~~intangibles ~~investments~~for impairment annually, and when impairment indicators arise, in ~~tooling~~accordance ~~were~~with $7SFAS 142, Goodwill and Other Intangible Assets.~~1 million~~ ~~for~~For goodwill, we first compare the ~~three~~fair ~~months~~value ~~ended~~of ~~December 31~~a reporting unit with its carrying amount, ~~2004~~including goodwill. If the carrying amount of a reporting unit exceeds the fair value of a reporting unit, ~~and~~additional ~~included~~tests would ~~$3.4 million~~be ~~applicable~~used to ~~foreign~~measure the amount of impairment loss, if any. We use a present value technique ~~operations~~to ~~and~~measure $2reporting unit fair value.~~8 million~~ If the carrying amount of any other intangible asset exceeds its fair value, we would recognize an impairment loss for ~~Funline~~the ~~capital~~difference ~~expenditures~~between fair value and the carrying amount. ~~Capital~~If ~~expenditures~~events ~~for~~occur ~~2005~~and ~~are~~circumstances change, causing the fair value of a reporting ~~expected~~unit to ~~total~~fall ~~approximately~~below ~~$21 million~~its carrying amount, impairment losses may be recognized in the future.

~~During~~Deferred ~~the~~Tax ~~first quarter of 2005, the results of Funline’s operations were sufficient to meet~~Assets earn-out targets established in the Funline acquisition agreement. As a result, we issued 40 thousand shares of our common stock with a value of $0.4 million at December 31, 2004 and accrued $1.7 million as additional consideration payable in cash. The additional consideration increased the amount recorded for the Funline trademarks at December 31, 2004.

OnWe ~~June 30,~~estimate ~~2004,~~our weactual ~~entered~~current ~~into~~tax anexposure ~~amended~~together ~~loan~~with ~~and~~the ~~security~~temporary ~~agreement.~~differences ~~The~~that ~~amended agreement~~have ~~increased~~resulted ~~available borrowings~~ from ~~$35.0 million~~the todiffering ~~$75.0 million.~~treatment ~~The agreement consisted~~ of ~~a $63.3 million,~~items ~~four-year~~dictated ~~revolving~~by ~~credit~~generally ~~facility,~~accepted ~~which~~accounting isprinciples versus ~~subject~~U.S. toand aGerman ~~borrowing~~tax ~~base calculation,~~laws. aThese ~~four-year~~temporary ~~term~~differences ~~loan~~result ofin ~~$1.7 million~~deferred ~~(Term~~tax ~~Loan~~assets A) and liabilities. aOn ~~three~~an on-~~year~~going ~~term~~basis, ~~loan~~we ~~of $10.0 million~~assess ~~(Term~~the ~~Loan~~likelihood ~~B).~~that Asour ~~the~~deferred ~~term~~tax ~~loans~~assets ~~are~~will ~~repaid,~~be recovered ~~the~~from ~~available~~future ~~revolving~~taxable ~~credit~~income ~~facility will~~or ~~increase~~loss bycarrybacks. anIf ~~equivalent~~we ~~amount,~~were ~~subject~~ to believe the ~~borrowing~~recovery ~~base~~was less ~~calculation.~~than ~~The~~likely, ~~agreement provides~~we ~~for~~would ~~issuance~~establish ofa upvaluation toallowance ~~$30.0 million~~against ofthe ~~letters~~deferred oftax ~~credit,~~asset toand charge the ~~extent~~amount ~~not~~as ~~utilized~~an ~~for borrowings.~~income ~~Outstanding~~tax ~~letters~~expense ofin ~~credit~~the ~~totaled~~period ~~$15.3 million~~in atwhich ~~December 31,~~such ~~2004~~a determination was made.

~~Repayment~~Stock-Based ~~of borrowings under this facility is secured by a first lien on substantially all of our~~Compensation ~~assets. We are required to meet certain financial tests related to minimum tangible net worth and minimum fixed charge coverage ratio.~~

We ~~did~~currently ~~not~~account ~~meet~~for ~~the~~employee ~~agreements’~~stock-based ~~required~~compensation ~~minimum~~in ~~fixed~~accordance ~~charge~~with ~~coverage~~Accounting ~~ratio of 1.15 for the nine~~Principles ~~months~~Board ~~ended~~Opinion ~~December 31~~25, ~~2004,~~“Accounting ~~however,~~for ~~the~~Stock ~~agreement~~Issued ~~was~~to ~~amended~~Employees” inand ~~February 2005~~related tointerpretations ~~eliminate that~~(APB ~~test~~No. 25). Under ~~the~~APB ~~amended agreement~~No. 25, wecommon ~~will~~stock beoptions ~~required~~issued tounder ~~meet~~our aplans ~~minimum~~generally ~~fixed~~do ~~charge~~not result in ~~coverage~~compensation ~~ratio~~expense ~~for~~because the ~~three~~exercise ~~months~~price ~~ended~~of ~~March 31,~~the ~~2005,~~stock ofoptions ~~0.80~~equals ~~and~~the amarket ~~minimum~~price ~~fixed~~of ~~coverage~~the ~~ratio~~underlying ofstock ~~1.50~~on ~~for~~ the ~~six~~date ~~months~~of ~~ended~~grant. ~~June 30,~~When ~~2005~~we ~~and~~adopt ~~the~~SFAS ~~nine~~123(R), ~~months~~effective ~~ended September~~October 301, 2005~~. Based on current projections~~, we will ~~expect~~record tocompensation beexpense infor ~~compliance~~these ~~with~~options ~~our~~and ~~covenants~~the ~~through December 31, 2005, however, we expect our actual fixed~~ charge ~~coverage~~to ~~ratio~~earnings tomight be ~~close~~significant (See toStock ~~the~~Based ~~requirement throughout~~Compensation ~~that period~~Note).

16Results of Operations

~~Table~~Discussions of ~~Contents~~results of operations below focus on results from continuing operations unless otherwise stated.

~~As of December 31, 2004, results of the other covenant calculations were as follows:~~16

Financial Covenant	Period	Requirement	Actual
Minimum tangible net worth	As of December 31, 2004	> $105.2 million	$108.3 million
Limitation on capital	October 1, 2004 to
expenditures	September 30, 2005	< $35.0 million	$7.1 million

AsThe ~~amended,~~following ~~until~~table ~~December 31,~~sets ~~2005,~~forth ~~our~~the ~~credit~~percentage ~~facility~~of ~~bears~~net ~~interest~~sales atrepresented ~~2.25%~~by orcertain ~~prime~~expense ~~plus 0.00%, Term Loan A bears interest at LIBOR plus 2.50% or prime plus 0.50%,~~ and ~~Term Loan B bear~~ ~~interest~~revenue atitems ~~LIBOR~~for ~~plus 3.25% or prime plus 1.00%. After December 31, 2005,~~ the ~~revolving~~periods ~~credit facility~~ended bears interest at LIBOR plus 1.75% – 2.50% or prime plus 0.00% – 0.25% (5.25% at December 31, 2004), and the term loans bear interest at LIBOR plus 2.00% – 3.50% or prime plus 0.00% – 1.25% (Term Loan A 5.75% and Term Loan B 6.25% at DecemberJune ~~31, 2004), depending on our fixed coverage~~30: ~~ratio, as defined. We pay a commitment fee of 0.375% of the average unused revolving credit facility and a fee of 1.0% of the average undrawn letters of credit.~~

Based on our current forecast and historical results, we believe that we have adequate credit availability and cash flow from operations to fund our operating needs for the foreseeable future. We do not currently anticipate a change in our capital structure or the use of off-balance sheet financing arrangements.


	Three Months Ended						Nine Months Ended
	2005			2004			2005			2004
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		69.6			66.6			72.2			70.5

Gross profit		30.4			33.4			27.8			29.5
Selling, general, and administrative expenses		28.9			23.0			28.9			24.7
Amortization of licenses and other intangibles		1.2			1.1			1.2			1.2
Impairment losses on trademark and licenses		17.5			—			5.9			—

Operating income (loss)		(17.2	)		9.3			(8.2	)		3.6
Interest expense		(0.4	)		(0.5	)		(0.5	)		(0.6	)
Foreign exchange gains (losses)		(1.5	)		(0.2	)		(0.1	)		0.4
Earnings (losses) from joint venture		(0.1	)		0.2			0.2			0.4
Other income		—			—			—			0.1
Other expense		(0.7	)		(0.2	)		(0.6	)		(0.4	)

Income (loss) from continuing operations before income taxes		(19.9	)		8.6			(9.2	)		3.5
Income taxes		(6.9	)		3.3			(2.8	)		1.3

Income (loss) from continuing operations		(13.0	)		5.3			(6.4	)		2.2
Loss from discontinued operations, net of income taxes		(7.6	)		(1.0	)		(3.5	)		(0.7	)

Net income (loss)		(20.6	)%		4.3	%		(9.9	)%		1.5	%

InThe ~~September 2002,~~following wetable ~~initiated~~sets anforth ~~ongoing~~net ~~quarterly~~sales ~~dividend~~by ~~policy~~channel ~~with an initial dividend~~ of ~~$0.03~~ ~~per~~distribution ~~share.~~for Athe ~~summary~~periods ofended ~~dividends paid on common stock after September~~June 30~~, 2004, follows~~ (in ~~thousands,~~ ~~except per share data~~thousands):

Amount	Rate Per Share		Declaration Date		Record Date	Paid
	Three Months Ended					Nine Months Ended
$919	$	0.05	August 19, 2004		September 17, 2004	October 18, 2004
	2005		2004			2005		2004
$921	$	0.05	November 12, 2004		December 17, 2004	January 5, 2005
Domestic Die-cast:
Wholesale distribution and promotion	$	19,234	$	25,651		$	43,264	$	48,973
Wholesale to mass-merchant retailers		4,492		9,389			29,859		40,884
Retail through collector’s catalog club		4,009		5,701			11,878		13,750
Total domestic die-cast		27,735		40,741			85,001		103,607
Foreign Die-cast — wholesale distribution and promotion		9,430		8,698			29,530		27,135
Total die-cast		37,165		49,439			114,531		130,742
Domestic Apparel and Memorabilia:
Wholesale distribution and promotion		9,278		14,705			32,769		39,520
Wholesale to mass-merchant retailers		6,887		6,745			28,646		26,462
Total apparel and memorabilia		16,165		21,450			61,415		65,982
Retail at Trackside		18,715		16,695			37,698		33,617
Royalties and Other		648		750			2,406		2,321
Net Sales	$	72,693	$	88,334		$	216,050	$	232,662

~~Under our amended loan and security agreement, we are required to obtain written consent prior to~~17 declaring dividends on our common stock. We do not intend to have a dividend declared in the quarter ending March 31, 2005. The evaluation of paying a dividend will be made on a quarter-by-quarter basis.

~~This~~Three ~~Quarterly~~Months ~~Report~~Ended ~~on Form~~June ~~10-Q contains forward-looking statements. The words “believe~~30,~~” “expect,”~~ ~~“anticipate~~2005,” ~~“forecast”,~~Compared ~~“plan”~~with ~~and~~Three ~~“project”~~Months ~~and~~Ended ~~similar expressions identify forward-looking statements~~June 30, ~~which speak only as of the date the statement was made. All such~~2004 statements are within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may include, but are not limited to, projections of sales; capital expenditures and backlog; plans for future operations; financing needs or plans and liquidity; the impact of changes in interest rates; the impact of changes in currency exchange rates; plans relating to our products; the expected outcome of legal proceedings against us; the sufficiency of our capital resources to support our operating strategy; and the impact of new accounting principles, as well as assumptions relating to the foregoing.

~~Actual~~Net ~~events~~sales ~~and~~decreased ~~results may differ materially from those expressed in forward-looking statements due to a number of factors~~$15.6 million, ~~Risks~~or ~~identified in Exhibit 99~~17.17%, to ~~this Quarterly Report on Form~~$72.7 ~~10-Q and~~million ~~in our Annual Report on Form 10-K~~ for the ~~year~~three months ended ~~September~~June 30, ~~2004, including those under~~ ~~the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” describe factors~~2005, ~~among~~compared ~~others, that could contribute~~ to ~~or cause such differences~~$88.3 million ~~These~~in ~~factors may~~the ~~also~~prior ~~affect~~year ~~our business generally and as a result, our stock may fluctuate dramatically~~quarter.

~~ITEM~~Domestic die-cast sales decreased $13.0 million, or 31.9%, from the prior year quarter while foreign die-cast sales increased $0.7 million, or 8.4%. The domestic die-cast segment sales decrease of $13.0 million is comprised of a $6.4 million decrease in our wholesale distribution and promotion revenues and a $4.9 million decrease in domestic die-cast wholesale sales to mass-merchant retailers. We expect domestic die-cast wholesale distribution and promotion revenues in 2005 to fall below 2004 levels as we continue to work to improve our die-cast distribution model and reduce the number of die-cast SKUs. Domestic die-cast wholesale sales to mass-merchant retailers consisted of $3.7 million ~~QUANTITATIVE~~of ~~AND~~Funline ~~QUALITATIVE~~sales ~~DISCLOSURES~~and ~~ABOUT~~$0.8 million ~~MARKET~~of ~~RISK~~NASCAR sales in the third quarter of 2005, compared to $6.5 million of Funline sales and $2.9 million of NASCAR sales in the third quarter of 2004. We do not expect sales to mass-merchant retailers for the remainder of 2005 to increase over 2004. The 8.4% increase in foreign die-cast sales from the prior year third quarter, was partly the result of the 4.6% change in the euro-to-U.S. dollar exchange rate between the periods.

~~There~~Domestic ~~has~~apparel ~~been~~and nomemorabilia ~~significant~~segment ~~change~~sales, inexclusive ~~our~~of ~~exposure~~trackside, todecreased ~~market risk since year-end~~$5.3 million, ~~Our exposure~~or to24.6%, ~~market risk is limited~~ to ~~interest~~$16.2 million ~~rate risk associated with our credit instruments and foreign currency exchange rate risk associated with operations~~ in ~~Germany.~~the ~~Our~~quarter ~~debt~~ended isJune 30, ~~comprised~~2005, ofcompared ~~fixed interest~~to ~~rate and variable interest rate debt~~$21.5 million ~~A 100 basis point change~~ in the ~~variable interest~~ ~~rates~~quarter ~~(which~~ended ~~fluctuate with either LIBOR or prime~~June 30, ~~at our discretion) would~~2004.

17Trackside sales increased $2.0 million, or 12.1% in the quarter ended June 30, 2005. This increase was due to 13 events occurring in the quarter ended June 30, 2005, compared to 11 events in the quarter ended June 30, 2004. After adjusting for the number of races, sales were down in the quarter as a result of a venue change in this year’s quarter versus the prior year period. At similar venues during the quarter sales were comparable. Meaningful comparisons of year-to-year trackside sales for a given quarter are difficult to make due to differences in the current year’s race schedule and race venues to those in the prior year. We consider the comparison of trackside sales for the nine months ended June 30, 2005 more meaningful, as many of the quarter-to-quarter differences between the current year and prior year are normalized.

~~Table~~The 3.0% decline in gross profit, to 30.4% of ~~Contents~~net sales in the third quarter of 2005, from 33.4% in the third quarter of 2004, was impacted by changes in segment gross margins as follows:

change our annual interest expense $0.1 million, if our variable rate debt remains at December 31, 2004, levels. The functional currency for our foreign operations is the euro. As such, changes in exchange rates between the euro and the U.S. dollar could affect our future earnings. An 8% change in the euro exchange rate would have changed the net income from that operation in the twelve months ended December 31, 2004 by $0.1 million.


							Weighted
				Gross			Gross
	% of			Margin			Margin
	Net			Increase			Increase
	Sales			(Decrease)			(Decrease)
Domestic die-cast		39.9	%		(9.0	)%		(3.6	)%
Domestic apparel and memorabilia		49.7			1.3			0.7
Foreign die-cast		13.0			3.7			0.5
Corporate and other		(2.6	)					(0.6	)

Consolidated Total		100.0	%					(3.0	)%

~~During~~The ~~2004~~domestic wedie-cast ~~used~~gross amargin ~~derivative~~decline ~~as part~~ of ~~our~~9.0% ~~risk~~was ~~management~~comprised ~~strategy~~of ~~related~~the to3.4% aweighted ~~portion~~impact of ~~our~~NASCAR ~~exposure~~die-cast tomargin ~~currency~~declines ~~fluctuations~~and onthe ~~intercompany~~5.6% ~~advances~~weighted toimpact ~~our~~of ~~German~~Funline ~~subsidiary, denominated~~die-cast inmargin ~~dollars,~~declines. Domestic ~~for~~die-cast ~~which~~margins ~~the~~declined ~~euro~~due ~~exchange~~to ~~rate~~the ~~gain~~impact orof ~~loss~~lower issales ~~included~~on inrelatively ~~operations.~~fixed tooling ~~These~~depreciation. ~~advances~~Results ~~totaled~~included ~~$16.4 million~~write-downs atof ~~December 31,~~inventory ~~2004.~~of Inone ~~the~~Funline ~~three~~product ~~months~~line ~~ended~~to ~~December 31,~~net ~~2004,~~realizable avalue ~~1% change~~ in the ~~euro~~third ~~exchange~~quarter ~~rate~~of ~~would~~2005 ~~have~~and ~~resulted~~lower inmargins aon ~~$0.1 million~~other ~~change~~Funline inproduct ~~net income~~lines. WeIn addition, ~~had~~the ~~entered~~impact ~~into~~of ~~foreign~~lower ~~currency~~sales ~~forward~~on ~~contracts~~relatively ~~designed~~fixed totooling ~~partially~~depreciation ~~offset~~has ~~the~~depressed margins. ~~effect~~Funline ~~changes~~margins inare ~~the~~expected ~~euro~~to ~~exchange~~remain ~~rate~~low ~~have~~as onthey ~~earnings~~sell ~~related~~inventory tobuilt ~~these~~in ~~advances.~~anticipation ~~These~~of ~~forward~~higher ~~contracts~~sales ~~did~~volumes. ~~not~~The ~~qualify~~3.7% ~~for~~increase ~~hedge~~in ~~accounting~~foreign ~~and~~die-cast ~~were~~gross ~~recorded~~margins onwas ~~the~~principally ~~balance~~a ~~sheet~~result ~~at fair~~of ~~value.~~lower ~~Changes~~product incosts ~~fair~~as ~~value~~a ~~were~~percentage ~~recorded~~of ~~each period in foreign exchange gains (losses)~~revenue.

~~ITEM~~Selling, 4general, and administrative expenses were $21.0 million, ~~CONTROLS~~or ~~AND~~28.9% ~~PROCEDURES~~of net sales, in the three months ended June 30, 2005, compared to $20.3 million, or 23.0% of net sales, in the three months ended June 30, 2004. The

~~We have evaluated, with the participation of our Chief Executive Officer and Chief Financial~~18 Officer, the effectiveness of our disclosure controls and procedures as of December 31, 2004. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have each concluded that our disclosure controls and procedures are effective to ensure that we record, process, summarize, and report information required to be disclosed by us in our quarterly reports filed under the Securities Exchange Act within the time periods specified by the Securities and Exchange Commission’s rules and forms. During the quarterly period covered by this report, there have not been any changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

~~Table~~increase was $0.7 million, or 3.6%, from the prior year quarter. Selling, general, and administrative expenses in the quarter ended June 30, 2005, included $0.9 million incremental trackside related costs, $0.6 million incremental Sarbanes-Oxley implementation costs, $0.2 million more depreciation of ~~Contents~~a fractional interest in a corporate aircraft, and $0.2 million additional use and occupancy costs. Offsetting those increases were $1.0 million lower bad debt expense for distributor receivables and a $0.2 million decrease in commissions as result of lower Funline sales. Trackside related costs increased as a result of increased sales volume, higher fuel costs, and increased track fees as a percentage of sales. We expect to sell the fractional interest in the corporate aircraft in August of 2005 for $0.8 million. Savings from headcount reductions made in the second quarter were offset by costs associated with preparing for our implementation of our dealer direct model. We anticipate incurring approximately $0.4 million in the fourth quarter of fiscal 2005 in incremental Sarbanes-Oxley implementation costs.

~~PART~~Interest IIexpense —of ~~OTHER~~$0.3 million ~~INFORMATION~~in the three months ended June 30, 2005, was $0.2 million lower than interest expense in the comparable prior year period, as a result of convertible subordinated note repurchases.

~~ITEM~~Foreign currency losses were $1.1 million ~~Legal~~and ~~Proceedings~~$0.2 million for the three months ended June 30, 2005 and 2004. Changes in the euro-to-U.S. dollar exchange rate resulted in translation losses of $1.1 million and $0.4 million for the three months ended June 30, 2005 and 2004. These losses resulted from translation of German advances payable, which are denominated in U.S. dollars. In the three months ended June 30, 2004, these translation losses were offset by a gain of $0.2 million on a forward exchange contract.

InThe ~~October 2004,~~effective wetax ~~settled~~rate aof ~~lawsuit~~34.6% ~~with~~for ~~New~~the ~~Hampshire~~three ~~Speedway,~~months ~~Inc.~~ended ~~(NHS)~~June 30, ~~filed~~2005 inwas ~~May 2004~~lower than the 37.9% ~~against~~effective ustax inrate for the ~~United~~three ~~States~~months ~~District~~ended ~~Court~~June 30, ~~for~~2004. During the ~~District~~quarter we changed our estimate of ~~New~~the ~~Hampshire~~annual ~~for~~effective $0rate on loss from continuing operations to 30.~~8 million~~3%. The $030.~~8 million~~3% estimated ~~was~~2005 ~~accrued~~effective rate is lower than the 2004 effective rate of 66.4% primarily as a result of ~~September 30,~~the ~~2004~~change in mix of foreign and ~~paid~~domestic inpre-tax ~~October~~income (loss) ~~2004~~as well as the impact of nondeductible expenses on lower projected pre-tax income (loss). Our German subsidiary is subject to higher tax rates than our domestic subsidiaries.

~~During~~Nine ~~December 2004,~~Months weEnded ~~were served with a class action securities lawsuit entitled “The Cornelia Crowell~~June 30, ~~GST Trust v. Action Performance Companies~~2005, ~~Inc.,~~Compared etwith ~~al.”,~~Nine ~~which~~Months ~~was~~Ended filed in the United States District Court of New Mexico. The complaint names as defendants our Company and certain of our officers, including a former officer. The complaint alleges that we made false and misleading statements concerning our financial results and business during the period from JulyJune 2330, ~~2003 to~~2004 October 22, 2003, resulting in violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint seeks unspecified monetary damages and equitable relief. We dispute the claims and intend to defend the lawsuit vigorously.

~~ITEM~~Net 2sales decreased $16.6 million, ~~Unregistered~~or ~~Sales~~7.1%, ofto ~~Equity~~$216.1 million ~~Securities~~for ~~and~~the ~~Use~~nine ofmonths ~~Proceeds~~ended June 30, 2005, compared to $232.7 million in the prior year period.

~~Effective~~Domestic ~~December~~die-cast sales decreased $18.6 31million, ~~2004~~or 18.0%, wefrom ~~issued~~the 40prior ~~thousand~~year ~~shares~~period while foreign die-cast sales increased $2.4 million, or 8.8%. The domestic die-cast segment sales decrease of $18.6 million ~~Action~~is ~~Performance~~comprised ~~common~~of ~~stock~~a $5.7 million decrease in our wholesale distribution and promotion ~~connection~~revenues, ~~with~~a $1.9 million decrease in our ~~previous~~die-cast ~~acquisition~~retail ofcollectors’ ~~Funline~~catalog club revenues, and a $11.0 million ~~The~~decrease ~~issuance~~in ofdomestic ~~these~~die-cast ~~shares~~wholesale ~~represented~~sales to mass-merchant retailers. We expect ~~additional~~domestic ~~consideration~~die-cast wholesale distribution and promotion revenues in 2005 to fall below 2004 levels as ~~the~~we ~~result~~continue ofto ~~meeting~~work ~~earn~~to improve our die-~~out~~cast ~~targets~~distribution ~~established~~model inand reduce the ~~Funline acquisition~~number ~~agreement~~of die-cast SKUs. ~~The~~Domestic ~~value~~die-cast ofwholesale ~~the~~sales ~~shares~~to ~~issued~~mass-merchant ~~was~~retailers consisted of $023.40 million of Funline sales and $6.8 million ~~This~~of ~~transaction~~NASCAR ~~was~~sales in the nine months ended June 30, 2005, compared to ~~exempt~~$30.1 million ~~from~~of ~~registration~~Funline ~~under~~sales ~~Section~~and $10.8 ~~4(2)~~million of NASCAR die-cast sales in the ~~Securities~~nine ~~Act~~months ofended June 30, ~~1933~~2004. We ~~have~~do ~~filed~~not ~~a registration~~expect ~~statement~~sales ~~with~~to mass-merchant retailers for the ~~Securities~~remainder ~~and~~of ~~Exchange~~2005 ~~Commission~~to increase ~~for~~over ~~these~~2004. ~~shares~~The 8.8% ~~This registration~~increase ~~statement~~in foreign die-cast sales from the prior year period was partly ~~filed~~the onresult ~~January 15,~~of ~~2004~~the ~~and~~5.8% ~~became~~change ~~effective~~in onthe ~~February 3,~~euro-to-U.S. ~~2004~~dollar exchange rate between the periods.

~~ITEM~~Domestic 3apparel and memorabilia segment sales, exclusive of trackside, decreased $4.6 million, ~~Defaults~~or 6.9%, ~~Upon~~to ~~Senior~~$61.4 million ~~Securities~~in the nine months ended June 30, 2005, compared to $66.0 million in the nine months ended June 30, 2004.

~~Not~~Trackside ~~applicable~~sales increased $2.4 million, or 7.2%, after considering the impact of the timing of the fall Talladega Superspeedway race ($1.7 million of 2005 sales), which occurred in October 2004 and September 2003. On a like number of races basis, and comparing Phoenix race results to the results from last year’s Rockingham race (the second Phoenix race in the Nextel cup series replaced the Rockingham race) sales increased approximately 4.2%. Meaningful comparisons of year-to-year trackside sales are difficult to make due to differences in the current year’s race schedule and race venues to those in the prior year.

~~ITEM 4. Submissions of Matters to a Vote of Security Holders~~19

~~ITEM~~The 51.7% ~~Other~~decline ~~Information~~in gross profit, to 27.8% of net sales in the nine months ended June 30, 2005, from 29.5% in the nine months ended June 30, 2004, was impacted by changes in segment gross margins as follows:

Not applicable


							Weighted
				Gross			Gross
	% of			Margin			Margin
	Net			Increase			Increase
	Sales			(Decrease)			(Decrease)
Domestic die-cast		41.1	%		(6.8	)%		(2.8	)%
Domestic apparel and memorabilia		47.7			0.3			0.2
Foreign die-cast		13.7			2.1			0.3
Corporate and other		(2.5	)					0.6

Consolidated Total		100.0	%					(1.7	)%

~~ITEM~~The domestic die-cast gross margin decline of 6.8% ~~Exhibits~~was primarily the result of lower gross margins on Funline product sales. Results included write-downs of certain Funline product lines to net realizable value in the first nine months of 2005 and ~~Reports~~lower margins on ~~Form~~other 8Funline product lines. In addition the impact of lower sales on relatively fixed tooling depreciation has depressed margins. Funline margins are expected to remain low as they sell inventory built in anticipation of higher sales volumes. The 2.1% increase in foreign die-Kcast gross margins was principally a result of lower product costs as a percentage of revenue.

(Selling, general, and administrative expenses were $62.5 million, or 28.9% of net sales, in the nine months ended June 30, 2005, compared to $57.3 million, or 24.7% of net sales, in the nine months ended June 30, 2004. The increase was $5.2 million, or 9.0%, from the prior year period. Selling, general, and administrative expenses in the nine months ended June 30, 2005, included a) $1.8 million ~~Exhibits~~increase in bad debt expense for distributor receivables, $0.8 million incremental trackside related costs, a $0.4 million severance expense for our former Chief Financial Officer, $0.9 million incremental Sarbanes-Oxley implementation costs, $0.7 million more depreciation of a fractional interest in a corporate aircraft, $0.6 million additional salaries and $0.9 million additional use, and occupancy costs. Those increases were offset by $0.4 million lower personal service agreement costs and a $0.5 million decrease in commissions as result of lower Funline sales. Trackside related costs increased as a result of increased sales volume, higher fuel costs, and increased track fees as a percentage of sales. We expect to sell the fractional interest in the corporate aircraft in August of 2005 for $0.8 million. Savings from headcount reductions made in the second quarter were offset by severance costs and additional costs associated with preparing for our implementation of our dealer direct model. We anticipate incurring approximately $0.4 million in the fourth quarter in incremental Sarbanes-Oxley implementation costs.

	10.77	Second Amendment to Amended and Restated Credit Agreement, dated February 8, 2005, by and among Action Performance Companies, Inc. and certain subsidiaries and affiliates, as guarantors, and Bank One, NA.
	31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended
	31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended
	32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Interest expense of $1.0 million in the nine months ended June 30, 2005, was $0.4 million lower than interest expense in the comparable prior year period, as a result of convertible subordinated note repurchases.

19Foreign currency losses were $0.2 million for the nine months ended June 30, 2005, versus a foreign currency gain of $1.0 million for the nine months ended June 30, 2004. Changes in the euro-to-U.S. dollar exchange rate resulted in translation gains and losses that resulted from German advances payable, which are denominated in U.S. dollars. In the nine months ended June 30, 2004, these translation gains were offset by a loss of $0.1 million on a forward exchange contract.

~~Table~~The effective tax rate of ~~Contents~~30.3% for the nine months ended June 30, 2005, was lower than the 37.5% effective tax rate for the nine months ended June 30, 2004. The 30.3% estimated 2005 effective rate is lower than the 2004 effective rate of 66.4% primarily as a result of the change in mix of foreign and domestic pre-tax income (loss) as well as the impact of nondeductible expenses on lower projected pre-tax income (loss). Our German subsidiary is subject to higher tax rates than our domestic subsidiaries.

~~99.1~~Liquidity ~~Private~~and ~~Securities~~Capital ~~Litigation Reform Act of 1995 Safe Harbor Compliance Statement for Forward-Looking Statements~~Resources

~~(b)~~Working ~~Reports~~capital, onexclusive ~~Form~~of ~~8-K~~assets -to be disposed and related liabilities decreased $2.0 million to $69.7 million at June 30, 2005, from $71.7 million at September 30, 2004. Cash decreased $6.2 million to $6.3 million at

~~We filed a current report on Form 8-K, dated October 8, 2004, announcing the resignation of~~20 ~~R. David Martin as Chief Financial Officer, Secretary, Treasurer, and Director.~~

(State of Incorporation)

(I.R.S. Employer Identification No.)

WeJune 30, ~~filed~~2005, from $12.6 million at September 30, 2004. Cash decreased as a ~~current~~result ~~report~~of oncash ~~Form~~used for net property and equipment expenditures ($18.8-K million), ~~dated~~payments ~~November~~for acquisitions of businesses and intangibles ($2.1 12million), ~~2004,~~dividends ~~reporting~~to ~~that~~common ~~our~~and ~~board of~~minority ~~directors~~interest ~~declared~~shareholders a($3.0 million) ~~quarterly~~and ~~dividend~~repayments of ~~five~~long-term ~~cents~~debt ($011.056 million). ~~per~~This decrease ~~share~~in ofcash ~~common~~was ~~stock~~offset by increases in cash provided from operations ($27.8 million).

WeDays ~~filed~~sales aoutstanding, ~~current~~calculated ~~report~~ on ~~Form~~quarterly ~~8-K~~sales, ~~dated~~was ~~November~~39.1 15days as of June 30, ~~2004~~2005, ~~reporting~~compared to ~~that~~46.0 days weas ~~issued~~of ~~a press~~September 30, ~~release~~2004, ~~announcing~~and ~~our~~46.4 days ~~fourth~~as ~~quarter~~of ~~and~~June 30, ~~twelve~~2004. ~~months~~The ~~ended~~decrease from September 30, 2004, reflects the smaller portion of revenues coming from mass-retail channels, ~~results~~which have longer dating terms.

20Inventories at June 30, 2005, decreased $2.1 million from September 30, 2004. Of this decrease, $2.0 million was attributable to a reduction of Funline inventory levels as management continues to reduce inventory built in anticipation of sales, which have not materialized.

~~Table~~Except for Funline and collectors’ catalog club die-cast, we generally produce domestic and foreign die-cast based upon orders received from customers. The timing of ~~Contents~~receiving orders is directly related to the timing of the completion of product program approvals and is not necessarily indicative of product demand or future sales. We produce Funline die-cast for inventory based on customer-projected orders. We receive Funline customer orders weekly, which are fulfilled in the following week. We report as backlog orders received from customers, which for Funline, is limited to the weekly orders.

~~SIGNATURES~~Apparel and memorabilia product, except Trevco product, is generally ordered from stock inventory. Trevco products are seasonal in nature and orders are received in our second and third fiscal quarters and shipped in our third and fourth fiscal quarters.

~~Pursuant~~Domestic toand ~~the~~foreign ~~requirements~~die-cast ofbacklog, ~~the~~including ~~Securities~~Funline ~~Exchange~~product, ~~Act~~was of$55.7 million ~~1934~~and $55.6 million at June 30, ~~the~~2005 ~~registrant~~and ~~has~~2004. ~~duly~~Apparel and memorabilia backlog was approximately $29.2 million ~~caused~~and ~~this~~$29.3 million ~~report~~at toJune 30, be2005 ~~signed~~and 2004. Backlog on ~~its~~any ~~behalf~~date byin ~~the~~a ~~undersigned,~~given ~~thereunto~~year ~~duly~~is ~~authorized~~not necessarily indicative of future sales.

~~ACTION~~Capital ~~PERFORMANCE~~expenditures ~~COMPANIES~~related principally to ongoing investments in tooling were $18.8 million for the nine months ended June 30, ~~INC~~2005, and included $6.8 million applicable to foreign operations and $4.7 million for Funline capital expenditures. Capital expenditures for 2005 are expected to total approximately $21 million.

Signature	Capacity	Date
/s/ Fred W. Wagenhals	Chairman of the Board, President, and	February 9, 2005
	Chief Executive Officer
Fred W. Wagenhals	(Principal Executive Officer)
/s/ David M. Riddiford	Chief Financial Officer, Secretary, and Treasurer	February 9, 2005
	(Principal Financial and Accounting Officer)
David M. Riddiford

During the first quarter of 2005, the results of Funline’s operations were sufficient to meet earn-out targets established in the Funline acquisition agreement. As a result, we issued 40 thousand shares of our common stock with a value of $0.4 million at December 31, 2004 and paid $1.7 million as additional consideration in the second quarter. The additional consideration increased the amount recorded for the Funline trademarks at December 31, 2004.

21On June 30, 2004, we entered into an amended loan and security agreement. The amended agreement increased available borrowings from $35.0 million to $75.0 million. The agreement consisted of a $63.3 million, four-year revolving credit facility, which is subject to a borrowing base calculation, a four-year term loan of $1.7 million and a three-year term loan of $10.0 million. In May 2005, we refinanced the $9.3 million outstanding balance of the term loans with the revolving credit facility and amended the agreement to consist of only the $63.3 million revolving credit facility. The $9.3 million balance was subsequently repaid in full later in the quarter, leaving no amounts outstanding on the revolving credit facility at June 30, 2005. The agreement provides for issuance of up to $30.0 million of letters of credit, to the extent not utilized for borrowings. Outstanding letters of credit totaled $12.0 million at June 30, 2005.

~~Table~~Repayment of ~~Contents~~borrowings under this facility is secured by a first lien on substantially all of our assets. We are required to meet certain financial tests related to minimum tangible net worth and minimum fixed charge coverage ratio.

~~EXHIBIT~~Under ~~INDEX~~the amended agreement, we will be required to meet a minimum fixed charge coverage ratio of 1.35 to 1.0 for the nine months ended September 30, 2005, and 1.0 to 1.0 for each quarter thereafter. Based on current projections, we expect to be in compliance with our covenants through June 30, 2006, however, we expect our actual fixed charge coverage ratio to be close to the requirement throughout that period and we are close to the minimum tangible net worth that we must maintain. We were in compliance with those covenants at June 30, 2005.

10.77	Second Amendment to Amended and Restated Credit Agreement, dated February 8, 2005, by and among Action Performance Companies, Inc. and certain subsidiaries and affiliates, as guarantors, and Bank One, NA.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1	Private Securities Litigation Reform Act of 1995 Safe Harbor Compliance Statement for Forward-Looking Statements

As of June 30, 2005, results of the other covenant calculations were as follows:


Financial Covenant	Period	Requirement	Actual
Minimum tangible net worth	As of June 30, 2005	> $105.2 million	$110.6 million
Minimum fixed charge coverage ratio	January 1, 2005 – June 30, 2005	> 0.81	0.93
Limitation on capital expenditures	October 1, 2004 to September 30, 2005	< $35.0 million	$18.8 million

As amended, until September 30, 2005, our credit facility bears interest at LIBOR plus 2.50% or prime plus 0.25% (6.25% at June 30, 2005). After September 30, 2005, the revolving credit facility bears interest at LIBOR plus 2.00% — 2.75% or prime plus 0.25% — 0.50% depending on our fixed coverage ratio, as defined. Interest on the term loans, prior to refinancing, was approximately 1% higher. We pay a commitment fee of 0.375% of the average unused revolving credit facility and a fee of 1.0% of the average undrawn letters of credit.

Based on our current forecast and historical results, we believe that we have adequate credit availability and cash flow from operations to fund our operating needs through June 30, 2006. As discussed above, however, we expect our fixed charge coverage ratio to be close to the minimum requirement during the next year and we are close to the minimum tangible net worth that we must maintain. If we do not maintain compliance with these covenants, our business or profitability deteriorates or we incur unexpected expenses or asset impairments, it could have a material adverse effect on our liquidity and financial resources, including an inability to utilize our revolving credit facility and an acceleration of the indebtedness outstanding thereunder. If we are unable to utilize our revolving credit facility, we may be required to refinance all or part of our existing debt, sell assets, borrow more money or obtain other additional financing. We cannot guarantee that we would be able to do so on terms acceptable to us, if at all.

In September 2002, we initiated a quarterly dividend policy with an initial dividend of $0.03 per share. A summary of dividends paid on common stock after September 30, 2004, follows (in thousands, except per share data):


Amount	Rate Per Share		Declaration Date	Record Date	Paid
$919	$	0.05	August 19, 2004	September 17, 2004	October 18, 2004
$924	$	0.05	November 12, 2004	December 17, 2004	January 5, 2005

Under our amended loan and security agreement, we are required to obtain written consent prior to declaring dividends on our common stock. We have not declared a dividend since November 12, 2004. The evaluation of paying dividends will be made on a quarter-by-quarter basis, although at the current time we do not anticipate paying a dividend for the foreseeable future.

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. The words “believe,” “expect,” “anticipate,” “forecast”, “plan” and “project” and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. All such statements are within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may include, but are not limited to, projections of sales, capital expenditures, backlog, and other expenses; plans for future operations; financing needs or plans and liquidity; the impact of changes in interest rates; the magnitude and timing of benefits relating to our restructuring; the impact of changes in currency exchange rates; plans and estimates relating to the acquisition or disposition of product lines, including the McArthur, Hamilton and Castaway businesses; plans relating to our products; our plans and intentions with respect to off-balance sheet arrangements; the expected outcome of legal proceedings against us; the sufficiency of our capital resources to support our operating strategy; and the impact of new accounting principles, as well as assumptions relating to the foregoing.

Actual events and results may differ materially from those expressed in forward-looking statements due to a number of factors. Risks identified in Exhibit 99.1 to this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended September 30, 2004, including those under the caption “Business – Risk Factors” describe factors, among others, that could contribute to or cause such differences. These factors may also affect our business generally and as a result, the price of our stock may fluctuate dramatically.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Since September 30, 2004, we have repaid all our variable interest rate debt. There have been no other significant changes in our exposure to market risk since year-end. Our exposure to market risk is limited to interest rate risk associated with our credit instruments and foreign currency exchange rate risk associated with operations in Germany. As of June 30, 2005, our debt is comprised of fixed interest rate debt. The functional currency for our foreign operations is the euro. As such, changes in exchange rates between the euro and the U.S. dollar could affect our future earnings. A 5.8% change in the euro exchange rate would have changed the net income from that operation in the twelve months ended June 30, 2005, by $0.1 million.

During 2004 we used a derivative as part of our risk management strategy related to a portion of our exposure to currency fluctuations on intercompany advances to our German subsidiary, denominated in dollars, for which the euro exchange rate gain or loss is included in operations. These advances totaled $16.2 million at June 30, 2005. In the nine months ended June 30, 2005, a 1% change in the euro exchange rate would have resulted in a $0.1 million change in net income. We had entered into foreign currency forward contracts designed to partially offset the effect changes in the euro exchange rate have on earnings related to these advances. These forward contracts did not qualify for hedge accounting and were recorded on the balance sheet at fair value. Changes in fair value were recorded each period in foreign exchange gains (losses).

ITEM 4. Controls and Procedures

We have evaluated, with the participation of our principal executive and financial officers, the effectiveness of our disclosure controls and procedures as of June 30, 2005. Based on this evaluation, our principal executive and financial officers, have each concluded that our disclosure controls and procedures are effective to ensure that we record, process, summarize, and report information required to be disclosed by us in our reports filed under the Securities Exchange Act within the time periods specified by the Securities and Exchange Commission’s rules and forms. During the quarterly period covered by this report, there have not been any changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. Legal Proceedings

In October 2004, we settled a lawsuit with New Hampshire Speedway, Inc, filed in May 2004 against us in the United States District Court for the District of New Hampshire for $0.8 million. The $0.8 million was accrued as of September 30, 2004 and paid in October 2004.

During December 2004, we were served with a class action securities lawsuit entitled “The Cornelia Crowell, GST Trust v. Action Performance Companies, Inc., et al.”, which was filed in the United States District Court of New Mexico. The complaint names as defendants our Company and certain of our current and former officers. The complaint alleges that we made false and misleading statements concerning our financial results and business during the period from July 23, 2003 to October 22, 2003, resulting in violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint seeks unspecified monetary damages and equitable relief. We dispute the claims and intend to defend the lawsuit vigorously.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable

ITEM 3. Defaults Upon Senior Securities

Not applicable

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

Not applicable

ITEM 5. Other Information

Not applicable

ITEM 6. Exhibits

	10.1		Change of Control Agreement/Severance Agreement between David M. Riddiford and Action Performance Companies, Inc. (1)

	10.2		Change of Control Agreement/Severance Agreement between Melodee L. Volosin and Action Performance Companies, Inc. (1)

	10.3		First Amendment to Employment Agreement between Fred W. Wagenhals and Action Performance Companies, Inc. (1)

	31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

	31.2		Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer

	32.1		Section 1350 Certification of Chief Executive Officer

	32.2		Section 1350 Certification of Chief Financial Officer

	99.1		Private Securities Litigation Reform Act of 1995 Safe Harbor Compliance Statement for Forward-Looking Statements


(1)		Incorporated by reference to the Registrant’s Form 8-K dated June 2, 2005, as filed with the Securities and Exchange Commission on June 6, 2005.

SIGNATURES

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

ACTION PERFORMANCE COMPANIES, INC.


Signature	Capacity	Date

/s/ Fred W. Wagenhals Fred W. Wagenhals	Chairman of the Board, President, and Chief Executive Officer (Duly Authorized Officer)	August 9, 2005

/s/ David M. Riddiford David M. Riddiford	Chief Financial Officer, Secretary, and Treasurer (Principal Financial and Accounting Officer)	August 9, 2005

Filing Compare · ACTION PERFORMANCE COMPANIES INC