UNITED STATES ~~SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549~~

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

(Mark One)

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

For the Fiscal Year Ended February 1, 2003

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

For the transition period from to

Commission File Number: 0-22834

~~/x/~~SUCCESSORIES, ~~ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~INC.

~~For~~(Exact ~~the~~name ~~Fiscal~~of registrant ~~Year~~as ~~Ended~~specified ~~February 3,~~in ~~2001~~ its charter)

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

ILLINOIS		36-3760230
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2520 Diehl Road Aurora, Illinois		60504
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (630) 820-7200

For the transition period from to

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

Title of Each Class		Name of Each Exchange on Which Registered
None		None

Securities registered pursuant to Section 12(g) of the Act:
$.01 par value Common Stock*
(Title of class)

Indicate ~~Commission~~by ~~File~~check ~~Number:~~mark ~~0-22834~~ 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.

~~SUCCESSORIES, INC. (Exact name of registrant as specified in its charter)~~ Yes ý No o

ILLINOIS (State or other jurisdiction of incorporation or organization)		36-3760230 (I.R.S. Employer Identification No.)
2520 Diehl Road Aurora, Illinois (Address of principal executive offices)		60504 (Zip Code)

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

Indicate by check mark whether ~~Registrant's~~the ~~telephone~~registrant ~~number,~~is ~~including~~an ~~area~~accelerated ~~code:~~filer (~~630) 820~~as defined in Rule 12b-~~7200~~ 2 of the Exchange Act)

~~Securities registered pursuant to Section 12(b) of the Act:~~ Yes o No ý

Title of Each Class		Name of Each Exchange on Which Registered
None		None

The aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant on August 2, 2002, the last business day of the registrant’s most recently completed second fiscal quarter, based upon the last reported sale price on that date on the Nasdaq National Market of $0.90 per share, was approximately $8,775,656.

~~Securities~~Registrant ~~registered~~had ~~pursuant~~9,910,984 shares ~~to Section 12(g)~~ of ~~the~~its ~~Act: $.01 par value~~ Common Stock ~~(Title~~outstanding as of ~~class)~~April 30, 2003.

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

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

The aggregate market value of the Registrant's Common Stock held by non-affiliates of the Registrant on 6,108,036, based upon the last reported sale price on that date on the Nasdaq National Market of $1.69 per share, was approximately $10,322,580.

Registrant had 9,181,196 shares of its Common Stock, outstanding as of March 31, 2001.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement for its 2001 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission within 120 days of February 3, 2001, are incorporated by reference into Part III hereof. None

~~SUCCESSORIES, INC.~~* Including ~~FORM~~rights ~~10-K FISCAL~~related ~~YEAR ENDED FEBRUARY 3, 2001~~ thereto

SUCCESSORIES, INC.

FORM 10-K

FISCAL YEAR ENDED FEBRUARY 1, 2003

TABLE OF CONTENTS

			Page
PART I
PART I
Item 1.	Business
Item 1.		Business	2
Item 2.	Properties
Item 2.		Properties	6
Item 3.	Legal Proceedings
Item 3.		Legal Proceedings	6
Item 4.	Submission of Matters to a Vote of Security Holders
Item 4.		Submission of Matters to a Vote of Security Holders	7
PART II
		Executive Officers of the Registrant	8
Item 5.	Market for the Registrant’s Common Equity and Related Stockholder Matters
PART II
Item 6.	Selected Financial Data
Item 5.		Market for the Registrant's Common Equity and Related Stockholder Matters	10
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 6.		Selected Financial Data	11
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk
Item 7.		Management's Discussion and Analysis of Financial Condition and Results of Operations	11
Item 8.	Financial Statements and Supplementary Data
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk	17
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 8.		Financial Statements and Supplementary Data	17
PART III
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	17
Item 10.	Directors and Executive Officers of the Registrant
PART III
Item 11.	Executive Compensation
Item 10.		Directors and Executive Officers of the Registrant	18
Item 12.	Security Ownership of Certain Beneficial Owners and Management
Item 11.		Executive Compensation	18
Item 13.	Certain Relationships and Related Transactions
Item 12.		Security Ownership of Certain Beneficial Owners and Management	18
Item 14.	Controls and Procedures
Item 13.		Certain Relationships and Related Transactions	18
PART IV
PART IV
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K
Item 14.		Exhibits, Financial Statement Schedules and Reports on Form 8-K	19
Index to Financial Statements and Financial Statement Schedule
		Index to Financial Statements and Financial Statement Schedule	F-1

PART I

Item 1. Business

~~General~~ Overview

Successories, Inc., an Illinois corporation, ("“Successories"” or the "“Company"”) designs, manufactures and markets a diverse range of motivational and self-improvement products, ~~many~~most of which are the Company'’s own proprietary designs. The Company'’s products include distinctive lines of wall decor, desktop accessories, books and stationery, and personalized gifts and awards. Successories’ ~~In addition, the Company sells other motivational products supplied by third parties. Company~~ personnel create proprietary art work and designs that can be used in conjunction with a wide variety of products. The Company will also customize its products to fulfill customers'’ special needs.

The Company'’s products are ~~marketed~~currently marketed primarily under its Successories trade name through direct marketing (catalog, electronic commerce and telemarketing), joint venture retail ~~(Company-owned~~ stores), sales to franchisees, and wholesale distribution channels. The Company'’s products are marketed primarily to businesses.

The operating subsidiaries (the "“Subsidiaries"”) of the Company commenced operations in 1985. In October 1990, Primus Development Group II Ltd. ("“Primus"”) acquired in excess of 90% of the stock of the Subsidiaries through a share exchange. The Company was formed in October 1990 as a wholly-owned subsidiary of Primus and, in February 1992, Primus merged into the Company. In March 1991 and April 1993, the Company acquired the remaining outstanding stock of the Subsidiaries through share exchanges.

Products

A majority of the Company'’s sales are derived from proprietary products that have either been internally developed or designed, or individually customized. The ~~artwork~~ artwork used in the Company'’s products is obtained from third parties through licensing rights. All products are designed to have a positive motivational or self-improvement theme that can be used by businesses and institutions to reinforce important work themes to motivate and recognize employees, and as gifts at meetings and conventions. The Company'’s products also appeal to many individuals for both personal and professional motivation and for gifts.

The Company'’s proprietary wall decor product line includes dramatic photography and other art developed, designed or customized in-house, and printed on high-quality coated paper stock with various motivational captions. Company designers give each grouping of wall decor products a unique, uniform overall appearance, consistent visual themes, a range of predominant colors, and distinctive border design and lettering, thereby providing each grouping with a distinctive trade dress. Framed art comes ~~either~~ with anvarious ~~aluminum~~framing ~~frame~~and ~~with~~matting ~~an electroplated high-gloss black finish or a wood frame~~options. High-quality tempered glass is used for safety reasons and to protect against damage. The Company'’s wall decor includes framed and unframed lithographs in various sizes ranging ~~from~~ from 16-inch by 20-inch to 20-inch by 36-inch. The Company'’s merchandise is categorized into the product "“groupings" ” that convey a specific theme and trade dress.

The Company markets smaller versions (5-inch by 7-inch to 69-inch by 1211-inch) of its wall decor as well as other products designed to be placed on desktops and countertops. All desktop accessories contain motivational words and/or images.

All books and stationery sold by the Company are specifically selected for their motivational or inspirational content and include those published by the Company as well as by third parties. The Company markets collections of motivational or inspirational quotations and educational books for sales, customer service, human resource and ~~educators.~~education personnel.

The Company offers a wide variety of customized products to its customers. In-house custom capabilities include hot-stamping, silk screening, and engraving for logos and personalized messages. Etched brass and crystal products are also available. Some of the products with customized features include employee awards, promotional items and corporate gifts.

The Company ~~offers~~has afour ~~wide~~reportable ~~variety~~segments: Direct ofMarketing, ~~customized~~100% ~~products~~Company-owned toretail stores ~~its~~- ~~customers.~~See ~~In-house~~Note ~~custom~~3 ~~capabilities~~to ~~include~~the ~~hot-stamping,~~Consolidated ~~screen-printing,~~Financial ~~and~~Statements ~~engraving~~“Discontinued Operations,” ~~for~~sales ~~logos~~to Franchisees, and ~~personalized messages.~~other ~~Etched~~segments (Wholesale, ~~brass~~Contract Framing and ~~crystal~~Joint ~~products~~Venture ~~are also available~~Retail Stores). See ~~Some~~Note of13 to the ~~products~~Company’s consolidated ~~with~~financial ~~customized~~statements ~~features~~included ~~include~~in ~~employee~~this ~~awards,~~report ~~promotional~~for ~~items~~certain ~~and~~financial information ~~corporate~~regarding ~~gifts.~~these segments.

While retail stores typically carry many of the Company's proprietary products, they also carry a variety of non-proprietary products purchased from outside vendors.

The Company tries to expand its product line by offering new items with each new catalog version and by creating new product lines that are distinctive in appearance from existing lines.

Sales and Marketing

The Company currently generates revenue through direct marketing, ~~Company-owned~~joint venture retail stores, franchise stores, wholesale distribution, list rental and licensing agreements. Customers are categorized as follows:

• corporate buyers including executives, sales managers, human resource managers and production managers of larger corporations

• management personnel

• teachers and administrative staff in educational organizations

• entrepreneurial buyers including small business owners, home office businesses and sales professionals

• consumers who are primarily purchasing the Company’s products for themselves or as a gift

The Company believes that the optimal way to reach its diverse customer base is to market its products through several distribution channels. In addition, the Company believes that its different distribution channels provide numerous benefits in cross-marketing.

The Company'’s revenue base is comprised of a wide range of customers including Fortune 500 companies, mid-sized and small businesses, corporate management personnel, governmental and ~~retail~~institutional, and retail customers. No individual customer accounted for more than 10% of the Company'’s net sales during the fiscal year ended February 3 1, ~~2001~~2003. The Company emphasizes customer service to achieve its goal of producing a high level of customer satisfaction.

The Company emphasizes customer service to achieve its goal of producing a high level of customer satisfaction.

Direct Marketing

Through the use of its catalogs, the Company targets sales managers, ~~executives~~business ~~of businesses~~executives, meeting planners, human resource managers, corporate training managers and educators who have purchased or shown a willingness to purchase the Company'’s products in the past. In addition, the Company is constantly prospecting for new customers by mailing its catalogs to prospective customers who have favorable demographic profiles or purchasing patterns. The Company maintains a large proprietary in-house database. Building on this foundation, the Company maintains an ongoing prospecting effort by testing various mailing lists and evaluating the ~~recipient's~~recipients’ responsiveness to the Company'’s product offerings. A group of corporate sales representatives handle larger corporate accounts ~~through telemarketing~~.

The Company'’s Successories catalog features the entire line of the Company’s proprietary products and some third-party products. The two types of catalogs currently being mailed are a 64/72-page version mailed to existing customers and catalog requesters, and a 40-page version mailed to ~~individuals~~prospective oncustomers ~~rented~~whose ~~lists~~names have ~~with~~been ~~the~~obtained ~~objective~~from torented ~~acquire them~~mailing ~~as new customers~~lists. When ~~the~~a prospective customer makes ~~the~~an initial purchase, they are subsequently sent a 64/72-page catalog using selection criteria based on purchase history. The Company also mails a separate 48-page recognition awards catalog offering a wide range of proprietary awards and gifts that can be engraved or personalized, a specialized 40-page educational catalog for school administrators, and a 24/32-page clearance catalog. During the fiscal year ended February 1, 2003, the Company mailed approximately 14 million Successories catalogs.

The Company has an interactive Internet website, www.successories.com. Visitors to the website are able to view product offerings and place orders for products featured in the Company’s catalogs. Customer interest in the website has steadily increased. Internet orders during the fiscal year ended February 1, 2003 increased 14.5% in

~~history.~~comparison ~~The~~to ~~Company~~the ~~also~~prior ~~mails~~fiscal ayear. The ~~separate~~Company ~~32-page~~believes ~~recognition~~the ~~awards~~Internet ~~catalog~~offers ~~offering~~ a ~~wide~~significant ~~range~~marketing ~~of proprietary awards~~ and ~~gifts that can be engraved or personalized, and an annual 40-page~~ ~~clearance~~sales ~~catalog~~opportunity. Successories products ~~During~~are ~~the~~also ~~fiscal~~marketed ~~year~~through ~~ended February 3, 2001,~~ the ~~Company~~Skymall ~~mailed~~catalogs ~~approximately~~circulated ~~16 million~~on ~~Successories catalogs~~various airlines.

In December 1999, the Company re-launched its interactive Internet website, www.successories.com, which featured increased product offering and enhanced navigational performance. Visitors to the website are also able to view product offerings and place orders for products featured in the Company's catalogs. Customer interest in the website has steadily increased. Internet orders during the fiscal year ended February 3, 2001 increased five-fold in comparison to the prior fiscal year. The Company believes the Internet offers a significant marketing and sales opportunity.

Successories products are also marketed through the Skymall catalogs circulated in the airlines.

Retail

The Company-owned retail locations ~~consist~~consisted of stores and temporary locations located in shopping malls. The Company'’s stores were introduced in early 1991. As of February 3 1, ~~2001~~2003, the Company ~~owned~~closed all aof ~~total~~its of100% 25Company-owned ~~retail~~stores ~~locations,~~- ~~including~~See 21Note ~~stores~~3 ~~and~~to 4the ~~temporary~~Consolidated ~~locations.~~Financial Statements “Discontinued Operations.” The following table shows the number of Company-owned retail and joint venture locations that were opened, closed, converted from franchise, converted to franchise, and in operation for each of the last three fiscal years.

Fiscal Year Ended	Opened	Closed	Converted tofrom Franchise	InConverted ~~Operation~~to ~~at End of Fiscal Year~~Franchise	In Operation at End of Fiscal Year
February 3, 2001	2	2	0	25
February 1, 2003	0	22	0	0	2	*
January 29, 2000	1	9	3	25
February 2, 2002	0	4	3	0	24
January 30, 1999	7	8	6	36
February 3, 2001	2	2	0	0	25

*As of February 3 1, ~~2001~~2003, the Company's ~~retail~~has ~~locations~~2 ~~are~~joint venture ~~located~~retail stores in ~~Canada~~Minnesota and Texas. The joint venture retail stores typically carry many of the ~~following~~Company’s proprietary ~~states:~~products and also a variety of non-proprietary products purchased from outside vendors.

Arizona Massachusetts New York California Michigan Pennsylvania Florida Minnesota Texas Maryland New Mexico Virginia

As of February 3, 2001, the Company has 3 joint venture stores in Minnesota and Texas.

Wholesale

The Company sells products to a number of wholesale customers. Wholesale customers include other direct marketing distributors and adistributors ~~distributor~~ who ~~has acquired~~have acquired distribution rights for the Company'’s products in the United Kingdom. and South Africa.

The Company also licenses some of its proprietary designs to third parties for use in their products for which the Company receives licensing revenue. These third parties generally market office supply products.

Franchise

As of February 3 1, ~~2001~~2003, there were 5023 franchised retail stores. The following table shows the number of franchised stores that were opened, closed, ~~and~~converted to Company-owned, converted from Company-owned and in operation for each of the last three fiscal years.

Fiscal Year Ended	Opened	Closed	InConverted ~~Operation~~to ~~at End of Fiscal Year~~Company-Owned	Converted from Company-Owned	In Operation at End of Fiscal Year
February 3, 2001	6	14	50
February 1, 2003	0	12	0	0	23
January 29, 2000	15	6	58
February 2, 2002	2	14	3	0	35
January 30, 1999	13	7	49
February 3, 2001	6	14	0	0	50

The franchisee purchases for resale Company manufactured products or products from third- parties that are subject to Company approval. Due to the proprietary nature of most of the ~~company'~~ Company’s products, the Company is the only available source for many products sold by franchisees. Product sales to franchisees are typically made at a discount from retail or at product cost plus a certain percentage.

All franchisees ~~are~~must ~~subject to~~ comply with Company-established operational policies and procedures relating to, among other things, quality of service, training, design and decor of stores, and trademark usage. The Company retains the right to receive an assignment of leasehold interest if the franchisee fails to comply with the Company'’s operational policies and procedures or upon expiration of the franchise agreement. The Company reviews all proposed franchise store locations and reserves the right to review the lease terms. The Company provides franchisees with training which focuses on the various aspects of store management, including marketing fundamentals, and product knowledge.

Franchisees currently pay a monthly royalty to the Company of 2% of franchise gross sales. The franchise agreements have an initial term of five years with a renewal option for three additional successive terms of five years each. The agreements also provide the Company with the right to purchase the franchisee's store assets upon termination or expiration of the franchise agreement, and a right of first refusal if the franchise is to be sold. The franchisee must obtain the Company's approval in all instances prior to the sale of a franchised store. The franchise agreement is granted for the operation of a single retail store at a specified location. The Company reserves certain rights to sell products through other channels of distribution distinct from that of a franchised retail business. 4

Franchisees currently pay a monthly royalty to the Company of 2% of franchise gross sales. The Company temporarily suspended the 2% royalty fee, from July 2002 through January 2003, in order to assist the franchisees in weathering the current difficult retail and economic climate. The franchise agreements have an initial term of five years with a renewal option for three additional successive terms of five years each. The agreements also provide the Company with the right to purchase the franchisee’s store assets upon termination or expiration of the franchise agreement, and a right of first refusal if the franchise is to be sold. The franchisee must obtain the Company’s approval in all instances prior to the sale of a franchised store. The franchise agreement is granted for the operation of a single retail store at a specified location. The Company reserves certain rights to sell products through other channels of distribution distinct from that of a franchised retail business.

Manufacturing, Order Fulfillment and Distribution

The Company'’s manufacturing operations consist primarily of framing, product-engraving, and hot-stamping and silk screening. The Company mounts and ~~assembles~~ assembles its framed wall and desk decor in-house and has developed a special packaging system designed to reduce the risk of breakage in shipping. The Company uses the services of third party vendors to manufacture some of the motivational products, primarily desktop accessories, books and stationery.

Generally, the Company'’s catalog customers may choose to have their orders sent via ground shipment (7 - 10 days), economy (4 - 6 days), express (2 - 3 days) or next day shipment. The Company'’s manufacturing operations and order fulfillment capabilities enable it to accommodate last-minute orders for a variety of products, and to produce samples of products for existing and potential customers. These capabilities further enable the Company to produce and test products before inclusion in the ~~distribution~~ distribution channels.

The Company depends upon outside suppliers for many items such as mugs, stationery and components for framing, all of which are readily available from a number of suppliers. In In addition, the Company outsources its film work and printing, although its creative staff works closely with outside film houses and printers to assure that all work is done to the Company'’s specifications and satisfaction.

Seasonality

See Item 7, "“Management'’s Discussion and Analysis of Financial Condition and Results of Operations— - Seasonality." ”

Competition

The industry supplying motivational, self-improvement and custom awards is highly competitive and fragmented. The Company competes principally on the basis of product exclusivity, selection, quality, name recognition and price of its products. The Company believes that the proprietary products it offers provide a competitive advantage in its merchandising offering.

Trademarks and Service Marks

The Company owns a federal registration for the service mark "“Successories"” in ~~Class~~ International Classes 16 and 42 on the Principal Register of the United States Patent and Trademark Office ("“PTO"”). The Company believes the use of the service mark Successories is important in establishing and maintaining its reputation and is committed to protecting this service mark by vigorously challenging any unauthorized use.

Although many of the quotations and other art work used by the Company are in the public domain and are not individually protectable under copyright and trademark laws, the Company ~~continually~~ continually endeavors to protect its products by giving ~~the~~its products a distinctive trade dress.

Employees

As of February 3 1, ~~2001~~2003, the Company employed ~~314~~ 148 persons, of whom ~~239~~136 were employed full time. Of this total, ~~192~~134 were employed at the corporate headquarters in marketing, manufacturing, order fulfillment and administrative capacities, and 14 ~~122~~ were field personnel, store managers or store personnel. In ~~The~~addition, the Company isuses ~~not~~contracted labor ~~a party~~ to ~~any~~meet ~~collective bargaining~~its ~~agreements~~seasonal ~~and has not experienced a strike or work stoppage~~demands. The Company ~~believes~~is ~~that~~not ~~its~~a ~~employee~~party ~~relations~~to ~~are~~any ~~good.~~collective bargaining

agreements and has not experienced a strike or work stoppage. The Company believes that its employee relations are good.

Available Information

The Company’s Internet address is www.successories.com. The Company makes available at this address, free of charge, its annual report on Form 10-K, its annual reports to shareholders, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13 (a) or 15 (d) of the Exchange Act as soon as reasonably practicable after such material is electronically filed, or furnished to, the SEC.

Item 2. Properties

The Company leases its corporate office and manufacturing/warehouse facility in Aurora, Illinois, under the terms of a lease agreement which expires in July 2009. The lease is for approximately 20,000 square feet of office space and 110,000 square feet of manufacturing/warehouse space.

The Company leases ~~all~~both 25the ~~Company-owned~~joint venture retail stores from ~~various~~ property owners under terms typical to enclosed shopping malls. Lease terms ~~generally~~for ~~vary~~the ~~from~~joint venture ~~five~~stores torun ~~ten~~through ~~years~~January ~~for stores~~31, 2005 and ~~six~~October ~~months~~31, ~~to one year for temporary store locations~~2009. None of the Company'’s store leases are individually material to the operations of the Company.

Item 3. Legal Proceedings

InThe ~~May 1998,~~Company ~~Wascher~~was ~~Corporation~~named ~~("Wascher"),~~as a ~~franchisee~~defendant ofin ~~the~~a ~~Company,~~case filed by aPyramid ~~Demand~~Company ~~for~~of ~~Arbitration~~Buffalo ~~dated~~(“Plaintiff”). ~~May 26,~~Pyramid ~~1998~~Company ~~with~~of ~~the~~Buffalo ~~American~~v ~~Arbitration~~Successories, ~~Association~~Inc. (~~Case~~Index No. 51 2002-~~114-00227-98~~8509)~~. Wascher~~ ~~alleged~~was ~~the~~filed ~~following~~in ~~causes~~the State of ~~action~~New ~~against~~York Supreme ~~the~~Court ~~Company:~~in ~~breach~~the ofCounty ~~contract, breach~~ of ~~good~~Erie ~~faith~~on ~~and~~August ~~fair dealing~~15, ~~common~~2002. Plaintiff ~~law~~alleged ~~fraud,~~that ~~unfair~~the ~~competition,~~Company ~~Robinson-Patman~~entered into ~~Act~~a ~~violation, tortuous~~lease ~~interference~~agreement ofwith ~~contract~~Plaintiff and ~~violation~~was ofin default under the ~~Wisconsin~~lease agreement ~~Fair~~due ~~Dealership~~to ~~Act.~~failure ~~Wascher~~to ~~alleged~~pay ~~and~~rent. Plaintiff sought anthe ~~award~~sum ~~in an amount in excess~~ of $~~250~~9,~~000~~415.27 ~~plus~~as ~~costs, disbursements~~ and ~~attorney's fees,~~for anpast ~~award~~due ofrents; ~~both~~all rents ~~treble~~that ~~and~~may ~~punitive~~accrue; ~~damages,~~ and such other ~~relief deemed just~~ and ~~equitable.~~further ~~Wascher,~~relief ~~through~~as ~~its~~seems ~~attorney,~~just ~~sent a letter dated January 18, 2001, to the American~~and ~~Arbitration~~proper ~~Association, indicating its willingness~~ to ~~dismiss~~ the ~~matter without prejudice if the Company concurred~~Court. The ~~Company~~parties settled ~~stated~~the ~~that~~matter itby ~~would~~entering ~~not~~into ~~object~~a toTermination ~~the~~and ~~dismissal.~~Release ~~The~~Agreement ~~American~~dated ~~Arbitration~~January ~~Association advised the parties that effective April 27~~31, ~~2001 the matter was dismissed without prejudice~~2003.

The Company was named as a defendant in a case filed by EKLECCO L.L.C. (“Plaintiff”). EKLECCO L.L.C. v Successories, Inc. (Index No. 2002-5591) was filed in the State of New York Supreme Court in the County of Erie on August 14, 2002. Plaintiff alleged that the Company entered into a lease agreement with Plaintiff and was in default under the lease agreement due to failure to pay rent. Plaintiff sought the sum of $11,513.47 as and for past due rents; all rents that may accrue; and such other and further relief as seems just and proper to the Court. The parties settled the matter by entering into a Termination and Release Agreement dated January 31, 2003.

The Company was named as a defendant in a case filed by Pyramid Crossgates Company (“Plaintiff”). Pyramid Crossgates Company v Successories, Inc. (Index No. 2002-5653) was filed in the State of New York Supreme Court in the County of Erie on August 14, 2002. Plaintiff alleged that the Company entered into a lease agreement with Plaintiff and was in default under the lease agreement due to failure to pay rent. Plaintiff sought the sum of $10,992.96 as and for past due rents; all rents that may accrue; and such other and further relief as seems just and proper to the Court. The parties settled the matter by entering into a Termination and Release Agreement dated January 31, 2003.

The Company was named as a defendant in a case filed by Scottsdale Fashion Square Partnership (“Plaintiff”). Scottsdale Fashion Square Partnership v Celex Group, Inc. (now Successories, Inc.) (No. CV2002-016540) was filed in the Superior Court of the State of Arizona in the County of Maricopa. Plaintiff alleged that the Company entered into a lease agreement with Plaintiff and was in default under the lease agreement due to failure to pay rent. Plaintiff sought an order for immediate possession of the premises and all fixtures, trade fixtures, and tenant improvements; a writ of restitution; the sum of $17,231.46 for unpaid rent, accrued interest and late charges; interest on unpaid rent and late charges at the rate of 18% per annum; all rents that accrue with interest at the rate of 18% per annum, late charges at the rate of 5%, plus applicable rental tax thereon at the rate of 1.9%, court costs with interest thereon at the rate of 10% per annum; and such other further relief as the Court deemed just and proper. The

~~Except~~parties assettled ~~noted above, there were no other material pending legal proceedings against~~ the matter ~~Company.~~by ~~The~~entering ~~Company~~into ~~is,~~a ~~however,~~Mutual ~~involved~~Release ~~in routine litigation arising in the ordinary course of its business~~ and, ~~while~~Cancellation ~~the results~~ of ~~the~~Lease ~~proceedings~~Agreement dated ~~cannot~~November ~~be predicted with certainty~~8, ~~the Company believes that the final outcome of any such matters will not have a materially adverse effect on the Company's consolidated financial position or results of operations~~2002.

Except as noted above, there are no other material pending legal proceedings against the Company. The Company is, however, at times involved in routine litigation arising in the ordinary course of its business and, while the results of such proceedings cannot be predicted with certainty, the Company believes that the final outcome of such matters will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Executive Officers of the Registrant

Name	Age	Principal Occupation for Last Five Years
Arnold M. Anderson	56	Director since October 1999; prior thereto, Director and Chairman of the Board since November 1998; prior thereto, Chief Executive Officer, Chairman of the Board and Director since June 1998; prior thereto, Chairman of the Board and Director since May 1997; prior thereto, Chief Executive Officer, Chairman of the Board and Director since June 1995; prior thereto, Chief Executive Officer, President, Chairman of the Board and Director for the Company and its predecessor (Primus) since October 1990; prior thereto, Chairman and President of the Subsidiaries.
Gary J. Rovansek	58	President, Chief Executive Officer and Director since April 2001; prior thereto, President, Chief Executive Officer, Chief Operating Officer and Director since October 1999, prior thereto, President and Chief Operating Officer since November 1998; prior thereto, President and Director of J.C. Whitney & Co.(direct marketer of after-market automotive products) since February 1994; prior thereto, President of the Horticultural Division of Foster & Gallagher, Inc. (direct marketer of horticulture products) since 1993; prior thereto, President of Reliable Corporation (direct marketer of office products) since 1988.
John C. Carroll	52	Senior Vice President, Chief Financial Officer and Chief Operating Officer since April 2001; prior thereto, Senior Vice President and Chief Financial Officer since April 2000; prior thereto, Vice President Finance and Operations of D&B Auto Radio, Inc. (remanufacturer and distributor of after-market automotive electronics) since November 1993; prior thereto, Chief Operating Officer and Treasurer of Universal Financial Products (distributor of computer equipment) since February 1989.
Michael H. McKee	47	Senior Vice President and Creative Director since October 1999; prior thereto, Senior Vice President and Creative Director, and Director since October 1990; prior thereto, Creative Director of Product Development and Advertising for the Subsidiaries.
John F. Halpin	47	Senior Vice President, Direct Marketing Division since September 1996; prior thereto, Vice President of Marketing for Foster & Gallagher, Inc. (direct marketer of horticulture products) since January 1985.
Kenneth R. Taylor	49	Senior Vice President, Operations since April 2001; prior thereto, Vice President, Operations since September 1998; prior thereto, Director of Manufacturing since May 1997; prior thereto, Director of Operations for Echo Star, Inc. (telecommunications distributor) since 1996; prior thereto, Director of Quality for Josten, Inc. (award recognition distributor) since 1992.

James W. Brintnall		43		Senior Vice President, Marketing and Merchandising since March 2000; prior thereto, Vice President of Brand Strategy and Product Development since May 1999; prior thereto, Vice President of Research and Development since June 1994.
Gregory J. Nowak		40		Vice President, General Counsel and Corporate Secretary since October 1998; prior thereto, Vice President and Associate Counsel of Scudder Kemper Investments, Inc. (investment manager) since 1995; prior thereto, Counsel to Kemper Corporation (financial services) since 1992.

PART II

Item 5. Market for Registrant'’s Common Equity and Related Stockholder Matters

The Company'’s common stock is quoted on the ~~Nasdaq~~Over ~~National~~The Counter ~~Market~~Bulletin Board (OTCBB, under the symbol "SCES.OB"). The following table sets forth the high and low bid prices for the Company'’s common stock as reported by the Nasdaq National Market ~~for~~through August 2, 2002 and subsequently by the OTCBB, for the applicable periods shown.

		High	~~High~~		Low	~~Low~~
Fiscal Year Ended February 3, 2001
Fiscal Year Ended February 1, 2003
First Quarter	~~First Quarter~~	$	$1.23	~~2.375~~	$	$0.50	~~0.031~~
Second Quarter	~~Second Quarter~~	1.05		~~2.063~~	0.33		~~1.500~~
Third Quarter	~~Third Quarter~~	0.90		~~2.188~~	0.10		~~0.250~~
Fourth Quarter	~~Fourth Quarter~~	0.35		~~1.969~~	0.14		~~1.188~~
Fiscal Year Ended January 29, 2000
Fiscal Year Ended February 2, 2002
First Quarter	~~First Quarter~~	$	$2.35	~~3.125~~	$	$1.06	~~2.000~~
Second Quarter	~~Second Quarter~~	2.00		~~3.375~~	1.41		~~2.125~~
Third Quarter	~~Third Quarter~~	1.41		~~3.000~~	0.36		~~2.000~~
Fourth Quarter	~~Fourth Quarter~~	1.00		~~3.000~~	0.21		~~1.750~~

The above noted high and low bid prices do not necessarily represent actual sale prices for the Company'’s common stock.

As of March 31, ~~2001~~2003, the number of holders of record of the Company'’s common stock was approximately ~~569~~545, and there were approximately ~~479~~396 beneficial owners of the Company'’s common stock.

The Company has never declared or paid any cash dividends on its common stock. The Company currently intends to retain its earnings to finance future growth and therefore has no present intention of paying cash dividends on its common stock in the foreseeable future. Under the Company'’s current credit facility with The Provident Bank, the payment of cash dividends on common and preferred stock by the Company is prohibited, except, cash dividends on preferred stock are allowed under certain conditions.

10On April 25, 2002, the Company received notification from NASDAQ with regards to the Company’s noncompliance with the listing requirements under NASDAQ Marketplace Rules 4450(a)(2) and 4450(a)(5) (the “Rules”), respectively. For 30 consecutive trading days, the Company’s common stock did not maintain a minimum market value of publicly held shares (“MVPHS”) of at least $5,000,000 and a minimum bid price per share of at least $1.00 as required for continued inclusion on the NASDAQ National Market under the Rules. In accordance with the Rules, the Company was provided 90 calendar days, or until July 24, 2002 to become compliant. At July 24, 2002, the Company was not in compliance with the NASDAQ rules and accordingly the Company’s common stock was delisted at the opening of business on August 2, 2002. Beginning on August 2, 2002, the Company’s stock is quoted on OTC Bulletin Board.

Item 6. Selected Financial Data

Set forth below is selected consolidated financial data for the Company as of and for each of the last five fiscal periods. Certain prior year amounts have been reclassified to conform with the current year presentation.

		Fiscal Year Ended	~~Fiscal Year Ended~~
			February 3, 2001			January 29, 2000			January 30, 1999			January 31, 1998			February 1, 1997
		February 1, 2003			February 2, 2002			February 3, 2001			January 29, 2000			January 30, 1999
		(In thousands, except share and per share data)	~~(In thousands, except share and per share data)~~
Statement of Operations Data:
Net product sales	~~Net product sales~~	$	$32,134	~~52,061~~	$	$34,996	~~51,702~~	$	$44,830	~~52,864~~	$	$41,083	~~56,821~~	$	$39,700	~~56,032~~
	Income (loss) from operations		$	2,456		$	467		$	(5,777	)	$	2,014		$	(697	)
(Loss) income from continuing operations		$	(2,277	)	$	(8,546	)	$	218		$	981		$	(4,833	)
	Net income (loss)		$	430		$	(1,127	)	$	(7,336	)	$	87		$	262
Net (loss) income		$	(5,103	)	$	(10,804	)	$	430		$	(1,127	)	$	(7,336	)
Preferred stock dividends and accretion	~~Preferred stock dividends and accretion~~	$	$218	~~223~~	$	$220	~~101~~	$	$223	—	$	$101	~~741~~	$	$—	~~1,126~~
	Income (loss) available to common stockholders		$	207		$	(1,228	)	$	(7,336	)	$	(654	)	$	(864	)
(Loss) income available to common stockholders		$	(5,321	)	$	(11,024	)	$	207		$	(1,228	)	$	(7,336	)
	Income (loss) per share—basic and diluted		$	0.03		$	(0.18	)	$	(1.08	)	$	(0.10	)	$	(0.16	)
(Loss) income per share – basic and diluted		$	(0.56	)	$	(1.19	)	$	0.03		$	(0.18	)	$	(1.08	)
Weighted-average number of common shares outstanding	~~Weighted-average number of common shares outstanding~~	9,490,127		~~7,664,215~~	9,241,355		~~6,927,668~~	7,664,215		~~6,768,929~~	6,927,668		~~6,283,662~~	6,768,929		~~5,321,179~~
Balance Sheet Data:
Total assets	~~Total assets~~	$	$10,725	~~28,791~~	$	$15,961	~~31,029~~	$	$28,791	~~35,308~~	$	$31,029	~~41,099~~	$	$35,308	~~33,724~~
Total liabilities	~~Total liabilities~~	$	$3,490	~~3,182~~	$	$3,296	~~6,010~~	$	$3,182	~~8,243~~	$	$6,010	~~6,091~~	$	$8,243	~~11,136~~
Total debt	~~Total debt~~	$	$1,131	~~3,610~~	$	$1,483	~~7,605~~	$	$3,610	~~11,821~~	$	$7,605	~~12,653~~	$	$11,821	~~6,309~~
	Total stockholder's equity		$	21,999		$	17,414		$	15,244		$	22,305		$	16,279
Total stockholder’s equity		$	6,104		$	11,182		$	21,999		$	17,414		$	15,244
Cash Flow Data:
	Net increase (decrease) in cash		$	1,529		$	(376	)	$	(136	)	$	578		$	(57	)
Net (decrease) increase in cash		$	(13	)	$	(1,866	)	$	1,529		$	(376	)	$	(136	)

Item 7. Management'’s Discussion and Analysis of Financial Condition and Results of Operations

Recent Developments

On February 13, 2003, the Company announced that it had entered into a definitive merger agreement with S.I. Acquisition LLC, an Illinois limited liability company formed principally for the benefit of Jack Miller, the Company’s Chairman, members of his family and Howard I. Bernstein, a Board Member of the Company. The merger agreement provides that, at the closing of the merger, each outstanding share of the Company’s common stock will convert into the right to receive $0.30, and each outstanding share of the Company’s Series B preferred stock will convert into the right to receive $15 (the stated value of each share of Series B preferred stock) plus all accrued and unpaid dividends in cash (other than Company Series B convertible preferred stock owned by S.I. Acquisition). As a result of the merger, the Company will become a privately held company and its common stock will no longer be quoted on the OTCBB. Accordingly upon closing, the registration of the Company’s common stock under the Securities Exchange Act of 1934, as amended, will terminate. After the merger, the Company will continue to operate from its headquarters in Aurora, Illinois. The Company may terminate the merger agreement if it receives an acquisition proposal that is superior to the current transaction. Upon such termination, the Company would reimburse S.I. Acquisition for its expenses, not to exceed $150,000. The closing of the merger is subject to various conditions, including shareholder approval. The Company will solicit shareholder approval by means of a proxy statement. Preliminary proxy materials were filed with the Securities and Exchange Commission (SEC) on March 7, 2003. The Company is in the process of responding to comments from the SEC and anticipates filing and mailing definitive proxy materials to shareholders in the second quarter of 2003. There can be no assurance that the merger will be consummated.

The following discussion should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements and Notes thereto included elsewhere in this Report.

Successories ~~(the~~ ~~"Company")~~ designs, manufactures and markets a diverse range of motivational and self-improvement products, ~~many~~most of which are the Company'’s own proprietary designs. The Company'’s products include distinctive lines of wall decor, desktop accessories, books and stationery, and personalized gifts and awards. In addition, the Company sells other motivational products supplied by third parties. In-house designers create proprietary art work and designs that can be used in conjunction with a wide variety of products. The Company will also customize products to fulfill customers' special needs.

The Company's products are marketed primarily under its Successories trade name through direct marketing (catalog, electronic commerce and telemarketing), retail channel (Company-owned stores), sales to franchisees and wholesale distribution. Although the Company utilizes multiple distribution channels for its products, the Company's products have similar purposes and uses in each channel of distribution. The profitability varies among products and distribution channels. The Company utilizes its facilities interchangeably for each distribution channel. Furthermore, the marketing channels are directed at a single customer base located primarily in North America. 9

11lines of wall decor, desktop accessories, books and stationery, and personalized gifts and awards. Successories’ personnel create proprietary art work and designs that can be used in conjunction with a wide variety of products. The Company will also customize products to fulfill customers’ special needs.

The Company’s products are marketed primarily under ~~For~~its ~~the~~Successories trade ~~fiscal~~name ~~years~~through ~~ended~~direct ~~February 3~~marketing (catalog, ~~2001~~electronic commerce and telemarketing), ~~January 29~~retail channel (100% Company-owned stores) -See Note 3 to the Consolidated Financial Statements “Discontinued Operations,” ~~2000~~sales to franchisees and ~~January~~wholesale distribution. ~~30,~~ Although ~~1999,~~the ~~net~~Company ~~product~~utilizes ~~sales~~multiple distribution channels for its products, the ~~various~~Company’s products have similar purposes and uses in each channel of distribution. The profitability varies among products and distribution channels. The Company utilizes its facilities interchangeably for each distribution channel. Furthermore, asthe marketing channels are directed at a ~~percentage~~customer ofbase located primarily in North ~~total~~America. In ~~net~~addition, ~~product~~starting ~~sales~~in fiscal 2000, ~~were~~the asCompany ~~follows:~~generated revenue from providing framing services to outside corporate businesses on a contract fee basis.

	Fiscal Year Ended February 3, 2001		Fiscal Year Ended January 29, 2000		Fiscal Year Ended January 30, 1999
Direct marketing—Successories	64.6	%	55.9	%	48.7	%
Direct marketing—Golf	0.2	%	2.9	%	6.4	%
Retail Company-owned stores	21.9	%	25.9	%	30.9	%
Wholesale	0.9	%	1.7	%	3.4	%
Sales to franchisees	12.4	%	13.6	%	10.6	%

During the year ended February 1, 2003, the Company closed all of its retail 100% Company-owned stores – See Note 3 to the Consolidated Financial Statements “Discontinued Operations.” The results of operations and costs incurred through the year ended February 1, 2003 associated with the Company’s plan to close the 100% owned retail stores have been reflected as discontinued operations in the accompanying consolidated financial statements. At the end of the first quarter in fiscal 2002, the Company discontinued contract-framing services for third party products, which accounted for a loss of $79,000 on $873,000 of net sales in fiscal 2001. Any future contract framing services shall be limited primarily to large and multiple unit production runs.

The ~~gross~~ ~~profit~~Company ~~margins~~will ~~for~~continue ~~direct~~its ~~marketing~~primary ~~and~~focus ~~retail~~on ~~vary~~sales growth ~~due to differences~~ in ~~product~~the ~~mix~~direct ~~and~~marketing ~~volume~~channel, ~~discounts~~support ~~taken~~of byits ~~customers~~current ~~based~~franchises ~~on order size. The gross profit margin~~and ~~for~~joint ~~wholesale~~venture ~~distribution~~retail ~~sales~~stores, and ~~sales~~servicing toits ~~franchisees~~current iswholesale ~~lower than other channels since these sales are generally made at a significant discount from retail price~~business customers.

~~As previously~~For ~~announced,~~ the ~~Company~~fiscal ~~has~~years ~~suspended~~ended ~~its~~February ~~efforts~~1, to2003, ~~sell~~February 2, ~~the~~2002, ~~remaining Company-owned retail stores~~ and isFebruary ~~focused~~3, on2001, ~~developing~~net aproduct ~~new~~sales ~~model~~for ~~targeted~~the tovarious ~~reach businesses~~distribution ~~residing~~channels, inas a ~~store's~~percentage ~~community.~~of ~~While~~total ~~testing~~net ~~this~~product ~~new retail model~~sales, ~~the~~were ~~Company~~as ~~will not be adding new franchisees to the system.~~ follows:

	Fiscal Year Ended February 1, 2003		Fiscal Year Ended February 2, 2002		Fiscal Year Ended February 3, 2001

Direct marketing	73.0	%	64.8	%	63.0	%
Retail 100% Company-owned stores	13.9	%	17.3	%	15.9	%
Sales to franchisees	6.9	%	9.9	%	12.1	%
Other segments	6.2	%	8.0	%	9.0	%

The gross profit margins for the direct marketing and retail channels vary due to differences in product mix and volume discounts based on order size. The gross profit margin for sales to the franchisee channel is lower than the direct marketing and retail channels since these sales are generally made at a significant discount from retail price.

Critical Accounting Policies

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

During the year ended February 1, 2003 and February 2, 2002, based on the Company’s financial performance in the past few years and the challenging economic environment that has negatively impacted the Company’s operating results, the Company’s management determined that the valuation allowance should be increased to fully reserve the deferred tax asset. The valuation of the deferred taxes is a significant estimate. See Note 11 to the Consolidated Financial Statements, for further information.

The allowance for doubtful accounts related to accounts and notes receivable is estimated by management, and is based on specific information about customer accounts, past loss experience and general economic conditions.

Results of Operations

The following table sets forth the results of operations for the last three fiscal years and the change from the previous year, as taken from the Company'’s consolidated statements of operations. The Company'’s fiscal year ~~2000 consisted of the 53 weeks ended February 3, 2001. The Company's~~ 2002

consisted of the 52 weeks ended February 1, 2003. The Company’s fiscal year 2001 consisted of the 52 weeks ended February 2, 2002. The Company’s fiscal year 2000 consisted of the 53 weeks ended February 3, 2001. Information for the fiscal years ended February 2, 2002 and February 3, 2001 has been adjusted to reflect the classification of the 100% Company-Owned retail stores as discontinued operations.

	Fiscal Years Ended
	February 1, 2003					February 2, 2002					Increase (Decrease)
	Amount			%		Amount			%		Amount			%
	(Dollars in thousands)
Net product sales	$	32,134		100.0	%	$	34,996		100.0	%	$	(2,862	)	(8.2	)%
Cost of goods sold	15,774			49.1		18,048			51.6		(2,274		)	(12.6	)
Gross profit on product sales	16,360			50.9		16,948			48.4		(588		)	(3.5	)
Fees, royalties and other income	969			3.0		1,059			3.0		(90		)	(8.5	)
Gross margin	17,329			53.9		18,007			51.4		(678		)	(3.8	)
Operating expenses	19,487			60.6		21,379			61.0		(1,892		)	(8.8	)
Loss from continuing operations before other expenses and taxes	(2,158		)	(6.7	)	(3,372		)	(9.6	)	1,214			36.0
Interest and other expenses	(221		)	(0.7	)	(301		)	(0.9	)	(80		)	(26.6	)
Loss from continuing operations before income taxes	(2,379		)	(7.4	)	(3,673		)	(10.5	)	1,294			35.2
Income tax expense (benefit)	(102		)	(0.3	)	4,873			13.9		(4,975		)	(102.1	)
Loss from continuing operations	(2,277		)	(7.1	)	(8,546		)	(24.4	)	6,269			73.3
Loss from discontinued operations	(2,826		)	(8.8	)	(2,039		)	(5.9	)	(787		)	(38.6	)
Extraordinary Loss	—			—		(219		)	(0.6	)	219			100.0	%
Net loss	$	(5,103	)	(15.9	)%	$	(10,804	)	(30.9	)%	$	5,701		52.8	%

	Fiscal Years Ended										Increase (Decrease)
	February 2, 2002					February 3, 2001
	Amount			%		Amount			%		Amount			%
	(Dollars in thousands)
Net product sales	$	34,996		100.0	%	$	44,830		100.0	%	$	(9,834	)	(21.9	)%
Cost of goods sold	18,048			51.6		21,226			47.3		(3,178		)	(15.0	)
Gross profit on product sales	16,948			48.4		23,604			52.7		(6,656		)	(28.2	)
Fees, royalties and other income	1,059			3.0		1,288			2.9		(229		)	(17.8	)
Gross margin	18,007			51.4		24,892			55.6		(6,885		)	(27.6	)
Operating expenses	21,379			61.0		22,648			50.6		(1,269		)	(5.6	)
(Loss) income from continuing operations before other expenses and taxes	(3,372		)	(9.6	)	2,244			5.0		(5,616		)	(250.3	)
Interest and other expenses	(301		)	(0.9	)	(1,725		)	(3.8	)	(1,424		)	(82.6	)
(Loss) income from continuing operations before income taxes	(3,673		)	(10.5	)	519			1.2		(4,192		)	(807.7	)
Income tax expense (benefit)	4,873			13.9		301			0.7		4,572			1,518.9
(Loss) income from continuing operations	(8,546		)	(24.4	)	218			0.5		(8,764		)	(4,020.2	)
(Loss) income from discontinued operations	(2,039		)	(5.9	)	212			0.5		(2,251		)	(1,061.8	)
Extraordinary loss	(219		)	(0.6	)	—			—		(219		)	(100.0	)%
Net loss	$	(10,804	)	(30.9	)%	$	430		1.0	%	$	(11,234	)	(2,612.6	)%

Year Ended February 1, 2003 (Fiscal 2002), Compared to Year Ended February 2, 2002
(Fiscal 2001)

Net product sales were $32,134,000 for year ended February 1, 2003, compared to $34,996,000 for the prior year ended February 2, 2002. The $2,862,000 or 8.2% decrease in net sales is comprised of direct marketing Successories of $172,000 or 0.6%, sales to franchisees of $1,632,000 or 38.8%, and other channels of $1,058,000 or 31.5%.

The overall direct marketing sales in fiscal 2002 were comparable to fiscal 2001. The total catalogs mailed in fiscal 2002 and fiscal 2001 were approximately 14 million. However, catalog circulation strategy in fiscal 2002 was refined to increase customer catalog circulation and reduce prospect catalog circulation. The prospect catalog circulation was reduced in the first half of the year in fiscal 2002 due to lower response rates experienced in 2001. The refined catalog circulation strategy resulted in a positive impact to the operating profit of the direct marketing channel as a result of improved return on the catalog advertising costs. In the last half of the year in fiscal 2002, the Company started to experience better response rates than the prior year for prospect catalogs and as a result increased catalog circulation beginning in third quarter 2002. Internet sales, which are included in the direct marketing channel, increased by 14.5% from year to year. Internet sales represented 27.5% of the total direct marketing channel sales in the current year and were 23.9% in the prior year. The Internet continues to be a significant marketing and sales opportunity for the Company. The decrease in sales to franchisees can be primarily attributed to 12 fewer stores in operation in the current year in comparison to prior year. The decrease in net sales in the other channels from year to year can be primarily attributed to the Company’s decision made in the first quarter 2002 to discontinue contract framing services for third party products, and two fewer joint venture retail stores in operation in the current year.

Gross margin decreased in the current year to $17,329,000 from $18,007,000 in prior year. The decrease in gross margin can be attributed to a decline in sales offset by improvement in gross profit, as a percentage of sales, from year to year. The gross profit, as a percentage of net sales, improved to 50.9% in the current year from 48.4% in the prior year. The improvement in gross profit can be attributed to change in channel sales mix, lower material costs and improved manufacturing labor productivity; offset by negative impact of product discounting in the current year to encourage consumer spending and higher fixed product costs per unit due to lower units sales volume in fiscal 2002.

Operating expenses decreased in the current year to $19,487,000 from $21,379,000 in prior year. In fiscal 2002, the operating expenses included additional charges of $882,000 related to bad debt reserves for franchisees related receivables, corporate personnel severance, and legal and consulting costs related to strategic alternatives. In the second quarter of fiscal 2002, the Company instituted a workforce reduction, in efforts to streamline operating expenses, which is expected to provide annualized payroll expense savings of approximately $1,000,000 going forward. In fiscal 2001, the operating expenses included additional charges of $883,000 related to bad debt reserves for franchisees related receivables, discontinuance of a warehouse management system enhancement project and corporate personnel severance. The operating expenses decreased from year to year as a result of lower variable operating expenses with decline in sales volume, and continued management efforts to reduce corporate administrative expenses.

In the current fiscal year 2002 a net income tax benefit of $102,000 was recorded for the income tax refund claims approved and received from amended state returns for previous years. During fiscal 2002 and fiscal 2001, based on the Company’s financial performance in the past few years and the current challenging economic environment, the Company’s management increased the valuation allowance associated with the deferred tax assets due to the reduced likelihood that all the benefits of the deferred tax asset related to the net operating loss (NOL) carryforwards would be fully utilized before they expire. In fiscal 2002 and fiscal 2001, the valuation allowance was increased to fully reserve for the deferred tax assets. The Company recorded an income tax expense of $4,873,000 in fiscal 2001 to increase the valuation allowance associated with the deferred tax asset.

In the second quarter 2002, the Company decided to take immediate steps to close all of its 100% owned retail stores and as a result began negotiating early lease terminations with the various landlords. At year-end February 1, 2003, all of the 100% Company-owned retail stores were closed. In accordance with FASB No. 144, the Company has reflected separately the results of operations of the 100% owned retail stores as discontinued operations.

In the current year, the Company had a net loss of $5,103,000, in comparison to a net loss of $10,804,000 in the prior year. The decrease in net loss is primarily due to improved operating results from continuing operations

~~fiscal~~before income taxes in the current year ~~1999~~and ~~consisted~~income oftax expense incurred in the 52prior ~~weeks~~year. The ~~ended~~improved operating ~~January 29~~results from continuing operations, ~~2000.~~in ~~The~~spite of lower sales volume, can be attributed to improved gross margin, the Company'’s ~~fiscal~~efforts ~~year~~to ~~1998~~streamline operating ~~consisted~~expenses and utilization of cost-effective marketing strategies to improve the 52operating ~~weeks~~results ~~ended~~of ~~January 30,~~the ~~1999~~Company.

	Fiscal Years Ended
	February 3, 2001			January 29, 2000					Increase (Decrease)
	Amount		%	Amount			%		Amount			%
	(Dollars in thousands)
Net product sales	$	52,061	100.0	$	51,702		100.0		$	359		0.7
Cost of goods sold		23,405	45.0		23,536		45.5			(131	)	(0.6	)
Gross profit on product sales		28,656	55.0		28,166		54.5			490		1.7
Contract framing		355	0.7		—		—			355		100.0
Fees, royalties and other income		1,288	2.5		1,175		2.3			113		9.6
Gross margin		30,299	58.2		29,341		56.8			958		3.3
Operating expenses		27,843	53.5		28,874		55.9			(1,031	)	(3.6	)
Income from operations		2,456	4.7		467		0.9			1,989		425.9
Interest and other expenses		1,725	3.3		1,534		3.0			191		12.5
Income (loss) before income taxes		731	1.4		(1,067	)	(2.1	)		1,798		168.5
Income tax expense		301	0.6		60		0.1			241		401.7
Net income (loss)	$	430	0.8	$	(1,127	)	(2.2	)	$	1,557		138.2

Year Ended February 2, 2002 (Fiscal 2001), Compared to Year Ended February 3, 2001
(Fiscal 2000)

	Fiscal Years Ended
	January 29, 2000					January 30, 1999					Increase (Decrease)
	Amount			%		Amount			%		Amount			%
	(Dollars in thousands)
Net product sales	$	51,702		100.0		$	52,864		100.0		$	(1,162	)	(2.2	)
Cost of goods sold		23,536		45.5			24,728		46.8			(1,192	)	(4.8	)
Gross profit on product sales		28,166		54.5			28,136		53.2			30		0.1
Fees, royalties and other income		1,175		2.3			1,624		3.1			(449	)	(27.6	)
Gross margin		29,341		56.8			29,760		56.3			(419	)	(1.4	)
Operating expenses		28,874		55.9			34,235		64.8			(5,361	)	(15.7	)
Asset impairment charge		—		—			1,302		2.5			(1,302	)	(100.0	)
Income (loss) from operations		467		0.9			(5,777	)	(11.0	)		6,244		108.1
Interest and other expenses		1,534		3.0			1,499		2.8			35		2.3
Loss before income taxes		(1,067	)	(2.1	)		(7,276	)	(13.8	)		6,209		85.3
Income tax expense		60		0.1			60		0.1			—		—
Net (loss) income	$	(1,127	)	(2.2	)	$	(7,336	)	(13.9	)	$	6,209		84.6

Net product sales were $34,996,000 for year ended February 2, 2002, compared to $44,830,000 for the prior year ended February 3, 2001. The $9,834,000 or 21.9% decrease in net sales is comprised of direct marketing of $6,187,000 or 18.4%, sales to franchisees of $2,265,000 or 35.0%, and other channels of $1,382,000 or 29.1%.

In ~~Year~~the ~~Ended~~fiscal ~~February~~year 2001, the decrease in net product sales across the channels can be primarily attributed to the challenging economic business environment. Direct marketing sales starting in the second quarter of fiscal 2001 were further impacted by a planned reduction in prospect catalog circulation in light of lower response rates experienced as a result of the economic slow-down. The Company’s direct marketing efforts focused on aggressively targeting opportunities in niche markets and refining marketing strategies focused on increasing sales from its existing customer base and acquiring new customers. 3 Internet sales, which are included in the direct marketing channel, increased to 23.9% in fiscal 2001 ~~(Fiscal~~compared to 17.9% in fiscal 2000),. The ~~Compared~~sales to ~~Year~~franchisees ~~Ended~~were ~~January 29~~impacted by fewer stores in operation in fiscal 2001 – 35 in fiscal 2001 versus 50 in the prior year. The decrease in sales from other channels is primarily due to loss of sales in contract framing and fewer joint venture stores in operation, compared to the prior year. The decline in sales in contract framing was due to a major customer in fiscal 2000 ~~(Fiscal 1999)~~ who was no longer in business in fiscal 2001.

~~Net~~Gross ~~product~~margin ~~sales~~decreased ~~were~~in fiscal 2001 to $5218,~~061~~007,000 ~~for~~from ~~the year ended February 3, 2001, compared to~~ $5124,~~702~~892,000 ~~for~~in ~~the~~fiscal ~~prior~~2000. The ~~year~~decrease ~~ended~~in ~~January 29,~~gross ~~2000.~~margin ~~The~~can be ~~$359,000~~primarily orattributed ~~0.7%~~to ~~increase~~a decrease in sales isvolume ~~comprised~~and ofa andecline ~~increase~~in gross profit, as a percentage of $4net sales,~~719,000~~ orto 1648.34% in ~~direct~~fiscal ~~marketing-Successories~~2001 ~~and~~from ~~$306,000~~52.7% orin fiscal 32000.1% The decline in gross ~~comparable~~profit ~~retail~~percentage ~~Company-owned~~can ~~store~~be ~~sales~~attributed ~~(same~~to ~~store~~increased ~~sales)~~promotional discounting undertaken in fiscal 2001 to encourage consumer spending. In addition, ~~offset~~the bygross profit percentage was lower as a ~~decrease~~result of ~~$2,329,000~~higher orfixed ~~68.0%~~production ~~in non-comparable~~costs ~~retail~~per ~~Company-owned~~unit ~~store~~resulting from lower units sales, ~~$1,375,000~~volume orbeing ~~92.6%~~generated through the manufacturing facility in fiscal ~~direct~~2001. The ~~marketing-golf,~~decline ~~$564~~in fees,~~000~~ royalties orand ~~8.0%~~other income in ~~sales~~fiscal to2001 ~~franchisees~~was ~~and~~also ~~$398,000~~negatively orimpacted ~~45.3%~~by inthe challenging ~~wholesale~~economic ~~sales~~environment.

Operating expenses decreased in fiscal 2001 to $21,379,000 from $22,648,000 in the prior year. The operating expenses for fiscal 2001 included additional charges of $883,000. The additional charges related to bad debt reserves for franchisee related receivables; discontinuance of a warehouse management system enhancement project due to lower than anticipated production volumes; and severance payments related to the reduction in workforce instituted during the third quarter. The variable operating expenses decreased from year to year with the decline in net product sales. The operating expenses excluding additional charges, as a percentage of net sales, increased in fiscal 2001 to 58.6% from 50.6% in fiscal 2000 as a result of fixed operating expenses being spread over a lower sales volume base.

In the fiscal year 2001, the Company recorded an income tax expense of $4,873,000 to increase the valuation allowance to fully reserve for the deferred tax asset balance. As a result of the challenging economic environment which negatively impacted the operating results for fiscal 2001, the Company’s management has taken a conservative approach due to the reduced likelihood that all the benefits of the deferred tax asset related to the net operating loss (NOL) carryforwards and other temporary differences would be fully utilized before they expire.

In the fiscal year 2001, the Company recorded an extraordinary loss of $219,000 related to early debt extinguishment. As a result of pre-payment of the term loan and fixed rate loan with the Company’s bank, the Company recorded an additional expense to write-off the unamortized debt discount associated with the term loan and fixed rate loan.

In fiscal year 2001, the Company had a net loss of $10,804,000 in comparison to a net income of $430,000 in the prior fiscal year 2000. The decline in net income in the current year can be primarily attributed to the decline in gross margin and additional charges recorded to operating expenses as a result of decline in sales volume due to economic downturn, a significant loss incurred in discontinuing operations, income tax expense recorded to increase

~~The~~the ~~16.3%~~valuation ~~increase in direct marketing-Successories sales was attributable to an increase in catalog circulation by approximately 10%,~~allowance anassociated ~~increase~~with inthe ~~customer~~deferred ~~catalog~~tax ~~page count~~asset, and ~~continued~~extraordinary ~~improvements~~loss inrecorded ~~merchandising,~~for ~~creative presentation and circulation strategy. Internet sales, which are included above, were 17.9% of~~ the ~~total~~early ~~direct~~extinguishment marketing-Successories sales. Internet orders grew five-fold in fiscal 2000. The non-comparable retail Company-owned store sales declined due to 11 fewer stores in operation in fiscal 2000. The Company converted some of ~~the Company-owned retail stores to franchised stores~~debt, ~~and~~offset ~~closed some of the under-performing stores in fiscal 1999. Sales to franchisees decreased~~ by 8%a due to 8 fewer stores in operation in fiscal 2000 in comparison to fiscal 1999, and in fiscal 1999 there were non-recurring initial sales related to the conversion of retail Company-owned stores to franchised stores. The decrease in ~~direct~~interest ~~marketing-golf~~expense ~~and~~due ~~wholesale sales can be attributed~~ to ~~the planned discontinuation of the golf catalog and~~ ~~reduction~~lower inoutstanding ~~the~~debt ~~scope of wholesale business with the office supply companies~~balance. The Company's focus in fiscal 2000 was on growing it's core motivational products business through the direct marketing-Successories, retail Company-owned stores and sales to franchisees distribution channels.

Gross margin increased in fiscal 2000 to $30,299,000 from $29,341,000 in fiscal 1999. The increase in gross margin can be primarily attributed to the increase in net product sales, contract framing net income, list rental income and licensing revenue. Contract framing, undertaken in earnest in fiscal 2000, consists of framing third-party products on a fee basis primarily during the Company's seasonally slower production periods.

Operating expenses, excluding certain exit costs incurred in fiscal 1999, were slightly down in fiscal 2000 even though net product sales increased from fiscal 1999. The exit costs of $961,000 incurred in fiscal 1999 were primarily related to the under-performing retail store closings, and exiting costs associated with the golf and Europe catalog business and wholesale activity with office supply companies. Comparable operating expenses in fiscal 2000 were $27,843,000 or 53.5% (as a percentage of net product sales), in comparison to $27,913,000 or 54.0% (as a percentage of net product sales) in fiscal 1999.

In fiscal 2000 the Company achieved a pre-tax net income of $731,000, in comparison to a net loss of $1,067,000 in fiscal 1999. The improvement in the operating results can be primarily attributed to the streamlining of the operations by focussing on the Company's most profitable distribution channels and core motivational products business. In addition, cash interest expense decreased by $505,000 or 40.1% in fiscal 2000 in comparison to fiscal 1999, due to lower outstanding debt balance. The outstanding debt balance decreased by $3,995,000 in fiscal 2000 in comparison to fiscal 1999. Income tax expense for fiscal 2000 increased by $241,000 in comparison to fiscal 1999, however, it is primarily a non-cash expense as a result of the Company being able to utilize approximately $1.4 million of its net operating loss carryforwards.

Year Ended January 29, 2000 (Fiscal 1999), Compared to Year Ended January 30, 1999 (Fiscal 1998)

Net product sales were $51,702,000 for the year ended January 29, 2000, compared to $52,864,000 for the corresponding year ended January 30, 1999. The $1,162,000, or 2.2% decrease in sales was comprised of wholesale sales of $934,000, or 51.5%, retail Company-owned store sales of $2,924,000, or 17.9%, and direct marketing—golf sales of $1,887,000, or 56.0%, offset by an increase in direct marketing—Successories sales of $3,161,000, or 12.2%, and franchise sales of $1,422,000 or 25.3%.

The Company's net product sales decreased in fiscal 1999 by 2.2% compared to fiscal 1998, as planned. Net product sales from the two core channels, direct marketing Successories and franchise sales, reflected a strong growth of 14.6% in fiscal 1999, compared to fiscal 1998. The increase in direct marketing Successories sales can be attributed to planned increases in circulation of catalogs, introduction of the clearance catalog, and increase in page count of the catalogs in fiscal 1999. The

increase in franchise sales was due to the new product offerings, increase in franchise stores (fiscal 1999—58 stores and fiscal 1998—49 stores), and higher sales volume in fiscal 1999. Sales in other channels, direct marketing golf, retail Company-owned stores and wholesale, decreased by 26.7% in fiscal 1999 in comparison to fiscal 1998. The decrease in direct marketing golf sales was due to planned reductions in circulation of the golf catalogs. The overall decrease in retail Company-owned store sales was due to fewer stores in operation in the current year compared to the prior year (fiscal 1999—25 stores and fiscal 1998—36 stores). The comparable same store sales for the retail Company-owned stores in fiscal 1999 were flat compared to fiscal 1998. The decrease in wholesale channel sales can be attributed to planned reduction in the scope of business in fiscal 1999.

Gross profit on product sales in fiscal 1999 of $28,166,000 was comparable to $28,136,000 in fiscal 1998, even though net product sales declined by $1,162,000 in fiscal 1999. The improvement in gross profit on product sales can be attributed to a higher gross profit, as a percentage of net product sales, in fiscal 1999. The improvement in gross profit is primarily due to the change in net product sales mix from the various distribution channels in fiscal 1999 compared to fiscal 1998, which impacted the overall gross profit as it varies amongst the various channels, and improvement in gross profit due to the decrease in promotional discounts. Gross profit on net product sales, as a percentage of net sales, was 54.5% in fiscal 1999 versus 53.2% in fiscal 1998.

Operating expenses decreased in fiscal 1999 to $28,874,000 from $34,235,000 in fiscal 1998. The 15.7% decrease can be primarily attributed to a decrease in expenses related to the Company's golf catalog business, due to fewer retail Company-owned stores in operation, and a reduction in corporate and administrative expenses as a result of focusing on the two core distribution channels, offset by additional expenses of $961,000 incurred as a result of planned retail store closings, exiting costs associated with the golf and Europe catalog businesses, and exiting its wholesale activity with the office supply companies.

During fiscal 1998, the Company recorded an asset impairment charge of $1,302,000 related to goodwill associated with the acquisition of British Links Golf Classics, Inc.

The net loss in fiscal 1999 of $1,127,000 versus the net loss of $7,336,000 in fiscal 1998 is primarily due to a decrease in operating expenses in fiscal 1999 and the asset impairment charge recognized in fiscal 1998. As a percentage of net product sales, the net loss for fiscal 1999 was 2.2% versus 13.9% in fiscal 1998.

Liquidity and Capital Resources

The Company'’s ongoing cash requirements are for working capital, capital expenditures and debt service. The Company expects to rely on cash generated from its operations, supplemented by borrowings available on the revolving credit loan, to fund it'’s cash requirements.

Operating ~~activities~~ activities provided cash of $2,~~182~~107,000, $1929,~~648,~~000 and $31,~~113~~261,000 in fiscal ~~2000~~2002, fiscal 2001 ~~1999~~ and fiscal ~~1998~~2000, respectively. The increase ~~improvement~~ in cash flow from operating activities in fiscal ~~2000~~2002 in comparison to fiscal ~~1999~~2001 can be ~~primarily~~ attributed primarily to ~~improved~~the improvement in operating results, in ~~offset~~the bycurrent ~~reduction~~year and the net change in asset and liability balances from year to year. As a result of decline in net sales, accounts receivable and inventory balances decreased, and accounts payable. and accrued expenses balances increased with extending payment terms. The decrease in cash flow from operating activities in fiscal ~~1999~~2001 in comparison to fiscal ~~1998~~2000 iscan be ~~the~~primarily ~~result~~attributed ofto ~~significant~~a reduction in ~~accounts~~cash ~~payable~~flow ~~and~~from nooperating ~~reduction~~results, offset by a decrease in accounts receivable and inventory, ~~offset~~and byan ~~reduction~~increase in ~~inventory~~accounts payable ~~levels~~ and ~~improved~~accrued ~~operating results~~expenses.

Investing activities used cash of $~~355~~5,000, $~~431~~211,000 and $2337,~~078,~~000 in fiscal ~~2000~~2002, fiscal ~~1999~~2001 and fiscal ~~1998~~ 2000, respectively. The principal use of cash was capital expenditures. In The ~~fiscal~~principal ~~2000~~source ~~the~~of ~~Company~~cash ~~expended~~was ~~funds~~proceeds ~~primarily~~from ~~for~~notes ~~the~~receivable ~~Internet~~issued ~~website~~in connection ~~development,~~with ~~new~~sale ~~manufacturing~~of property and ~~distribution~~equipment. In ~~software~~fiscal ~~implementation~~2002, tothe beCompany ~~completed~~expended infunds ~~2001~~for Internet website development, and equipment ~~upgrades~~replacement and ~~replacements~~ upgrades. In ~~Capital~~fiscal ~~expenditures~~2001, ~~have~~the ~~declined~~Company inexpended ~~fiscal~~funds ~~2000~~primarily ~~and~~for ~~fiscal~~Internet website ~~1999~~development, infixed ~~comparison~~assets toupgrades, ~~fiscal~~and ~~1998.~~equipment replacements and upgrades. In fiscal ~~1998~~2000, the Company expended funds primarily for athe Internet website development, new ~~point~~distribution software (subsequently not implemented and costs written-~~of-sale~~off ~~system~~in ~~for~~fiscal 2001), and equipment replacement and upgrades. Currently, the Company~~-owned~~’s ~~retail~~credit ~~stores~~facility ~~and~~limits annual capital expenditures to $1 million.

15Financing activities used cash of $522,000, $2,342,000 and $298,000 in fiscal 2002, fiscal 2001 and fiscal 2000, respectively. The principal uses of cash were scheduled repayments and pre-payments on the outstanding bank debt. The principal sources of cash were borrowings on the revolver and proceeds from the sale of common stock issuance in fiscal 2000. In fiscal 2001, the Company prepaid the entire outstanding bank term loan and fixed rate loan balance, which had payment terms through June 2003. In fiscal 2000, the Company had $3,956,000 in proceeds from issuance of common stock. As noted, the above equity infusion was used to prepay certain debt and improve the overall liabilities to equity position of the Company.

The credit facility with The Provident Bank (the ~~upgrades~~"Bank") also contains, among other provisions, requirements for maintaining certain earnings levels and financial ratios, limits on capital expenditures and additional indebtedness, and use of proceeds from certain equity offerings. As of February 1, 2003, the Company was in compliance with all the debt covenant requirements of the credit facility agreement. The current credit facility expires on June 1, 2003, but the bank has agreed to extend the term of the credit facility to June 30, 2003. The bank has not given indication that they intend to renew the credit facility agreement. The Company continues discussions with various financing sources for funding alternatives to its ~~computer~~current ~~system~~credit facility, and ~~equipment~~to date has not been able to ~~address~~secure alternate financing. The Company is currently in discussions with two banks to obtain a credit facility in the ~~year~~event ~~2000~~the ~~compliance~~pending ~~needs~~merger transaction with S.I. ~~Currently~~Acquisition LLC closes. In each case, the banks are requiring a personal guarantee or pledge of assets from the Company'’s ~~credit~~Chairman ~~facility~~of ~~limits~~the Board, Jack Miller. In the event the merger transaction does not close and the Company is unable to secure additional bank borrowings or alternative sources of capital, ~~expenditures~~the Company will have liquidity issues that raise substantial doubt about the Company’s ability to ~~$1 million~~continue to operate as a going concern and may consider filing for protection under the United States bankruptcy laws. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue to operate as a going concern.

~~Financing activities~~See ~~used~~Note ~~cash~~7 ~~of $298,000, $1,593,000 and $1,171,000~~ in ~~fiscal 2000, fiscal 1999 and fiscal 1998, respectively. The principal uses of cash were scheduled repayments and pre-payments on~~ the ~~outstanding~~Notes ~~bank~~to ~~debt. The principal sources of cash were proceeds from~~ the ~~sale~~Consolidated ofFinancial Statements ~~common stock issuance~~ in ~~fiscal~~Part ~~2000~~IV ~~and~~of ~~preferred~~this ~~stock~~document ~~issuance in fiscal 1999. The above noted equity infusions have helped the Company lower its outstanding debt levels and related interest expense, increase the working capital available~~ for ~~investing in~~ the ~~growth~~current ofterms ~~the~~under ~~business, and improve~~ the ~~overall~~credit facility ~~liabilities~~agreement towith ~~equity~~The ~~positioning~~Provident ~~of the Company~~Bank.

~~On June 20,~~The ~~1997,~~Company ~~the~~believes ~~Company~~that internally ~~entered~~generated ~~into~~funds aand the credit facility ~~agreement~~ with The Provident Bank ~~(the "Bank"). Per the agreement, as amended most recently on August 28,~~will ~~2000,~~be ~~the~~sufficient facility is comprised of a $7.5 million term loan and a revolving credit loan. The revolving credit loan provides for maximum borrowings of $9 million through May 1, 2000 and for each succeeding July 1 through December 31; the maximum borrowings at all other times is $6 million. Borrowings under the revolving credit loan are limited to ~~85%~~meet ~~of eligible~~its ~~receivables~~current ~~plus~~operating ~~57% of eligible inventory~~needs, asfund ~~defined,~~debt ~~provided~~service ~~that from February through April eligible inventory is limited to $5 million through the year 2000~~ and ~~$3 million~~anticipated incapital ~~years~~expenditures ~~thereafter. In addition, from August 2000~~ through ~~February 2001,~~June ~~the borrowing base was further reduced by $1~~30,~~500,000~~ ("Holdback") and in February 2001 was released when the amount of the Holdback was applied to the scheduled payments of principal on the term loan for the remainder of 2001. A commitment fee of 0.5% is payable on the daily unused amount of the maximum revolving credit commitment. The facility expires in June 2003~~, and borrowings under the facility are secured by substantially all the assets of the Company~~. At The interest rates on the term loan and revolving credit loan borrowings generally fluctuate based on the margin ratio, as defined, from a minimum of prime plus 0.50% to a maximum of prime plus 3.00% on the term loan, and a minimum of prime to a maximum of prime plus 3.00% on the revolving credit loan. Interest is payable monthly. The interest rate on the term loan was 8.75% and revolving credit loan was 8.25% at February 3, ~~2001. The term loan is payable in quarterly installments of $312,500 through June~~ 1, ~~2000~~2003, ~~and $375,000 thereafter. Prepayments on~~ the ~~loans are required in certain cases including, among others, equity offerings and asset dispositions. As of February 3, 2001,~~ available borrowings on the revolving credit loan were $61,~~000~~460,000. ~~In addition, in July 1997, the agreement for the credit facility was amended to include an additional $500,000 fixed rate loan. The loan bears interest at 12% and is due in June 2003.~~

Subsequent to fiscal 2000, in February 2001 the Company pre-paid the entire outstanding Bank term loan and fixed rate loan balance in the amount of $3,590,000. The above noted loans had payment terms through June 2003. 14

The credit facility also contains, among other provisions, requirements for maintaining certain earnings levels and financial ratios, limits on capital expenditures and additional indebtedness, and restrictions on the payment of dividends and use of proceeds from certain equity offerings. At February 3, 2001, the Company was in compliance with the debt covenant requirements of the credit facility agreement.

See Note 6 in the Notes to the Consolidated Financial Statements in Part IV of this document.

The Company believes that internally generated funds and the credit facility will be sufficient to meet its current operating needs, fund debt service and anticipated capital expenditures for the next year.

Seasonality

The Company'’s business is subject to seasonal variations in demand. Historically, a significant portion of the Company'’s sales and net income have been realized during the period from October through January. The effects of seasonality are greater in the Company’s retail operations and sales to franchisees than the other segments of its business. Most operating expenses are incurred evenly throughout the year, although some selling and administrative expenses are variable depending on sales, and direct marketing catalog advertising expenses as a percentage of sales are higher in the first calendar quarter due to more prospecting. The Company’s operating results may also vary depending upon such factors as catalog mailings, and the timing of new product introductions and promotions by the Company. The Company’s cash requirements generally reach a seasonal peak in the second half of the fiscal year to finance increased inventory levels needed to meet the third and fourth quarter sales demand.

through January. The effects of seasonality are greater in the Company's retail operations than the other segments of its business. Most operating expenses are incurred evenly throughout the year, although some selling and administrative expenses are variable depending on sales, and direct marketing catalog advertising expenses as a percentage of sales are higher in the first calendar quarter. The Company's quarterly operating results may also vary depending upon such factors as catalog mailings, and the timing of new product introductions and promotions by the Company. The Company's cash requirements generally reach a seasonal peak in the second half of the fiscal year to finance increased inventory levels needed to meet the third and fourth quarter sales demand.

Inflation

The Company does not believe that inflation has had a material impact on its operations. during the last fiscal year.

Disclosure Regarding Forward-Looking Statements

This Form 10-K report contains forward-looking statements which the Company believes are within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be deemed to include, among other things, statements relating to anticipated financial performance, the management team, management'’s long-term performance goals, channels, programs to reduce ~~the Company's~~ costs and enhance asset utilization, ~~the~~banking ~~Company's~~arrangement ~~generation~~and ofterms, ~~funds~~realization ~~sufficient~~of todeferred ~~meet~~tax assets, ~~its~~filing ~~current~~for ~~operating~~protection ~~needs~~under ~~and~~the toUnited ~~fund~~States ~~anticipated~~bankruptcy ~~capital expenditures~~laws, ~~realization of deferred tax assets,~~ as well as statements relating to the Company'’s operational and growth strategies. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be accurate, and ~~actual~~ actual results could differ materially from those addressed in forward-looking statements contained in this Form 10-K report. Potential risks and uncertainties include such factors as the financial strength of the economy, and the retail and catalog industries in general, changes in consumer confidence, the level of consumer spending on motivational-type products, the competitive pricing environment within the markets that the Company distributes its products, the level of the Company’s success in continuing to control costs and the Company’s ability to increase certain margins through economies of scale. Additional risks and uncertainties include the Company’s ability to develop and introduce successful new products, generate funds or obtain outside sources of capital sufficient to meet its current operating and capital needs, as well as consummate the proposed merger. Investors are also directed to consider other risks and uncertainties discussed in the Company’s public announcements, reports to shareholders and documents filed by the Company with the Securities and Exchange Commission, including but not limited to Reports on Forms 10-K, 8-K and 10-Q. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date on this report.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

The Company is subject to market risk associated with adverse changes in interest ~~rate~~rates and foreign currency exchange rates, but does not hold any market risk sensitive instruments for trading purposes. The Company uses ~~both fixed and~~ variable rate debt, as described in Note 6 7 of the Notes to Consolidated Financial Statements included herein. At ~~Principal~~February 1, 2003, principal exposed to interest rate risk is limited to $31,~~090~~131,000 in variable rate debt. The variable rate debt level varies periodically and the maximum borrowings available under the credit facility at February 1, 2003 was $2,591,000. The impact of 1% change in interest rates on the variable rate debt is approximately $3111,000. The Company'’s exposure to foreign ~~currency~~ currency exchange rate risk relates primarily to the financial position and results of operations in Canada. The Company'’s exposure to foreign currency exchange rate risk is difficult to estimate due to to factors such as balance sheet accounts, and the existing economic uncertainty and future economic conditions in the international marketplace. The Company does not expect significant impact from foreign currency exchange rate risk. The Company’s Canadian operations annual sales are approximately $2,000,000.

Item 8. Financial Statements and Supplementary Data

See the Index to Financial Statements and Financial Statement Schedules on page F-1. Such Financial Statements and Schedules are incorporated herein by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

1716

PART III

Item 10. Directors and Executive Officers of the Registrant

~~Information~~The ~~regarding~~names, ~~the~~ages ~~Company's~~and ~~Directors~~certain ~~will~~background beinformation ~~included under~~ of the ~~caption,~~persons ~~"Election~~serving ofas ~~Directors," in~~ the ~~Company's~~Board ~~Proxy Statement for its 2001 Annual Meeting~~ of ~~shareholders,~~Directors ~~which will be filed with the Securities~~ and ~~Exchange~~Executive ~~Commission~~Officers ~~within 120 days after February 3, 2001, and is incorporated herein by reference. Information regarding the Company's executive officers~~ of the Company isare ~~included~~set ~~under~~forth ~~a separate caption in Part I hereof, and is incorporated herein by reference~~below.

Directors and Executive Officers:	Age	Director Term Expires	Director Since	Principal Occupation for Last Five Years
Arnold M. Anderson	58	2004	1990	Director since October 1999; prior thereto Director and Chairman of the Board since November 1998; prior thereto, Chairman of the Board, Director and Chief Executive Officer since June 1998; prior thereto, Chairman of the Board and Director of the Company since May 1997; prior thereto, Chief Executive Officer, Chairman of the Board and Director since June 1995; prior thereto, Chief Executive Officer, President, Chairman of the Board and Director of the Company and its predecessor since October 1990; prior thereto, Chairman and President of the predecessors to the Company’s subsidiaries.

John C. Carroll	54	N/A	N/A	Interim President and Chief Executive Officer, Chief Operating Officer and Chief Financial Officer since February 2003; prior thereto, Senior Vice President, Chief Operating Officer and Chief Financial Officer since April 2001; prior thereto, Senior Vice President and Chief Financial Officer since April 2000; prior thereto, Vice President Finance and Operations of D&B Auto Radio, Inc. (remanufacturer and distributor of after-market automotive electronics) since November 1993.

Howard I. Bernstein(2)(3)	73	2005	1999	Director and President of Howard I. Bernstein, LTD, a consulting firm specializing in finance, mergers and acquisitions, since 1987. Director of J. H. Chapman Group, LTD. and J. H. Chapman Group, LLC.

Larry A. Hodges(2)(5)	54	2005	2000	President and Chief Executive Officer of Mrs. Fields Original Cookies, Inc., a premium snack-food provider, since March 1994, and a Director since April 1993. Director of Ameristar Casinos, Inc. and Coinstar, Inc.

Donald J. Hoff	55	N/A	N/A	Vice President of Marketing/Merchandising/ Advertising since February 2003; prior to that, Director of Marketing Communications for Harcourt Supplemental Publishing (publisher of supplemental materials for the pre-K through 8 education market) since July 2002; prior to that, Director of Marketing for Comark, Inc. (A privately held reseller of computer hardware, software and services to businesses, government and education) since November 1991.

Michael H. McKee	49	N/A	N/A	Senior Vice President and Creative Director since October 1999; prior thereto, Senior Vice President and Creative Director, and Director since October 1990; prior thereto, Creative Director of Product Development and Advertising for the Subsidiaries.

Jack Miller(1)(4)	74	2004	1999	Chairman of the Board of the Company since October 1999; prior thereto, Founder, President and Chief Executive Officer of Quill Corporation from June 1956 to January 31, 2000.

R. Scott Morrison, Jr.(3)(4)	63	2003	1999	Real estate developer and owner, operator and investor in various hotel products and real estate entities since 1988. Co-founder of and an investor in the Extended Stay America national hotel chain.

Leslie Nathanson Juris(2)(5)	56	2003	2000	Founding partner of RNW Consulting, Inc., a consulting firm specializing in implementing strategy and managing complex organizational change. Prior to January 1, 1999, managing director of RNW Consulting, Inc., a position held for more than the past five years.

Gregory J. Nowak	42	N/A	N/A	Vice President, General Counsel and Corporate Secretary since October 1998; prior thereto, Vice President and Associate Counsel of Scudder Kemper Investments, Inc. (investment manager) since 1995.

(1) Member of the Executive Committee.

(2) Member of the Audit Committee.

(3) Member of the Compensation and Stock Option Committee.

(4) Member of the Director Nominating Committee.

(5) Member of the Special Committee

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16 of the Securities Exchange Act of 1934 requires the Company's directors, its executive officers, and any persons holding more than 10% of the Company's Common Stock to report their initial ownership of the Company's Common Stock and any subsequent changes in that ownership to the Securities and Exchange Commission. Specific due dates for these reports have been established, and the Company is required to disclose any failure to file such reports by the applicable due dates during the fiscal year ended February 1, 2003. To the best of the Company's knowledge, all of these filing requirements were timely satisfied.

Item 11. Executive Compensation

~~Information regarding the Executive Compensation will be included under the caption, "Compensation and Other Transactions with Management," in the Company's~~COMPENSATION ~~Proxy~~AND ~~Statement~~OTHER ~~for~~TRANSACTIONS ~~its~~WITH ~~2001 Annual Meeting of shareholders, which will be filed with the Securities and Exchange Commission within 120 days after February 3, 2001, and is incorporated herein by reference.~~ MANAGEMENT

Summary Compensation Table

The following table includes, for each of the fiscal years ended February 1, 2003, February 2, 2002 and February 3, 2001, individual compensation for services to the Company and its subsidiaries paid or awarded to, or earned by: (i) the Chief Executive Officer of the Company at February 1, 2003; and (ii) the four most highly compensated executive officers of the Company (collectively, the “Named Executive Officers”) who served as such during the fiscal year ended February 1, 2003. The fiscal year ended February 3, 2001 had 53 weeks compared to 52 weeks for the fiscal years ended February 1, 2003 and February 2, 2002.

Name and Principal Positions	Year		Annual Compensation				Long Term Compensation Awards
Name and Principal Positions	Year		Salary ($)		Bonus ($)	Other Annual Compensation ($)	Securities Underlying Options (#)*		All Other Compensation ($)
Gary J. Rovansek	2003	(1)	225,000		—	—	—		2,200	(3)
President and Chief Executive	2002		238,462	(2)	—	—	—		2,425	(3)
Officer	2001		229,328		45,224	—	55,000	(4)	2,660	(3)

Arnold M. Anderson	2003		141,346	(5)	—	—	—		1,413	(8)
Founder and	2002		200,481	(6)	—	—	—		1,875	(8)
Chairman Emeritus	2001		229,328		45,224	—	5,000	(7)	12,100	(8)

Michael H. McKee	2003		223,076	(9)	—	—	—		231	(10)
Senior Vice President	2002		200,000		—	—	—		615	(10)
and Creative Director	2001		193,077		30,224	—	5,000	(7)	6,200	(10)

John C. Carroll	2003	(11)	175,000		—	—	—		2,100	(14)
Senior Vice President,	2002		175,000		—	—	—		1,050	(14)
Chief Operating and	2001		134,981	(12)	31,396	—	35,000	(13)	—
Chief Financial Officer

John F. Halpin	2003	(15)	145,000		—	—	—		1,665	(14)
Senior Vice President,	2002		145,000		—	—	—		1,515	(14)
Direct Marketing	2001		137,789		26,999	—	5,000	(7)	1,585	(14)
Division

* Option awards earned in a particular fiscal year were actually granted in the subsequent fiscal year.

(1) Mr. Rovansek resigned from the Company effective February 13, 2003.

(2) Mr. Rovansek, on a temporary basis, voluntarily reduced his per annum salary by $25,000 effective August 13, 2001.

(3) Represents matching contributions to the Company’s 401(k) plan for the benefit of the executive officer of $2,200, $1,865 and $2,100 for 2003, 2002 and 2001 respectively; and club membership fees of $0, $560 and $560 for 2003, 2002 and 2001, respectively.

(4) Includes options to purchase 25,000 shares of Common Stock each granted on July 25, 2000 and March 30, 2001, and options to purchase 5,000 shares of Common Stock granted on April 5, 2001, pursuant to the Company’s Stock Option Plan; such options vest and become exercisable in five cumulative annual

increments of 20% of the initial grant, commencing July 25, 2001, March 30, 2002 and April 1, 2002, respectively, and expiring July 25, 2010, March 30, 2011 and April 1, 2011, respectively.

(5) Mr. Anderson’s base salary was reduced to $125,000 effective October 1, 2002.

(6) Mr. Anderson’s base salary was reduced to $150,000 effective October 1, 2001. Includes vacation accrual pay-out of $25,761.

(7) Represents options granted on April 5, 2001 pursuant to the Company’s Stock Option Plan; such options vest and become exercisable in five cumulative annual increments of 20% of the initial grant, commencing April 1, 2002 and expiring on April 1, 2011.

(8) Represents (i) forgiveness of $10,000 in principal on a Second Amended and Restated Promissory Note dated December 9, 1999 for 2001, and (ii) matching contributions to the Company’s 401(k) plan for the benefit of the executive officer of $1,413, $1,875 and $2,100 for 2003, 2002 and 2001, respectively.

(9) Includes vacation accrual pay out of $23,076.

(10) Represents (i) forgiveness of $5000 in principal on an Amended and Restated Promissory Note dated December 9, 1999 for 2001, and (ii) matching contributions to the Company’s 401(k) plan made by the Company for the benefit of the executive officer of $231, $615 and $1,200 for 2003, 2002 and 2001, respectively.

(11) Mr. Carroll was appointed the additional title of Interim President and Chief Executive Officer on February 13, 2003.

(12) Represents amounts paid to Mr. Carroll since he became employed by the Company on April 6, 2000.

(13) Represents options to purchase 30,000 shares granted April 6, 2000 pursuant to the Company’s Stock Option Plan; such options vest and become exercisable in five cumulative annual increments of 20% of the initial grant, commencing April 6, 2001 and expiring April 6, 2010; and 5,000 options granted April 5, 2001; such options vest and become exercisable in five annual increments of 20% of the initial grant, commencing April 1, 2002 and expiring April 1, 2011.

(14) Represents matching contributions to the Company’s 401(k) plan made by the Company for the benefit of the executive officer.

(15) Mr. Halpin's employment was terminated on February 21, 2003.

Option Grants in Last Fiscal Year

No options were granted to the Named Executive Officers during the fiscal year ended February 1, 2003.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Value

	Shares Acquired on Exercise (#)	Value Realized ($)	Number of Securities Underlying Unexercised Options at February 1, 2003 (#)		Value of Unexercised In-the-Money Options at February 1, 2003($)(1)
	Shares Acquired on Exercise (#)	Value Realized ($)	Exercisable	Unexercisable	Exercisable	Unexercisable
Gary J. Rovansek	—	—	116,000	39,000	—	—
Arnold M. Anderson	—	—	276,000	4,000	—	—
Michael H. McKee	—	—	144,500	38,000	—	—
John C. Carroll	—	—	13,000	22,000	—	—
John F. Halpin	—	—	46,142	11,000	—	—

(1) Value is based on the difference between the exercise price and fair market value at January 31, 2003, the last day during the fiscal year for which market prices are available ($0.15 per share as quoted on the Over The Counter Bulletin Board), multiplied by the number of shares underlying the option.

Director Compensation

Each non-employee director receives cash compensation in the amount of $1,000 plus travel-related expenses for each meeting attended in person and $500 for each meeting attended via telephone. In addition, each non-employee director receives an annual grant of shares of the Company’s Common Stock pursuant to its Stock Option Plan equal in value to a total of $20,000, paid in quarterly installments, at a price equal to the trailing 10-day average closing price of the Company’s Common Stock prior to the end of the quarter for which such shares are issued. In addition, non-employee directors receive $500 plus reimbursement for travel-related expenses for attending each meeting of committees of the Board on which they serve.

Employment Agreements

In March 1996, the Company entered into an employment agreement with Arnold M. Anderson which provided that he would receive a minimum base salary of $200,000 per year annually for three years plus the opportunity to earn a bonus each year. Effective December 6, 1998, Mr. Anderson’s base salary increased to $225,000. In addition, the employment agreement provided that commencing in the fiscal year ended February 1, 1997, Mr. Anderson and the Board of Directors shall agree each fiscal year upon the specific performance standards and criteria that would be used to determine how the bonus is actually earned and shall agree upon the amount of the actual bonus opportunity for such fiscal year. In October 2001, the Company entered into a new three year employment agreement with Mr. Anderson which provides that he will receive an annual base salary of $150,000 in year one and $125,000 in each of years two and three. Mr. Anderson is not entitled to any bonus, stock options or paid vacation under the agreement.

The employment agreement for Mr. Andersen provides that there shall be no extensions of the term of employment. Under the terms of the agreement, if the Company terminates the employment of Mr. Anderson, other than for “just cause,” or if Mr. Anderson terminates his employment for “good reason,” the Company shall pay to Mr. Anderson the remainder of his base salary during the remainder of his term of employment. “Just cause” includes (a) an act of fraud or dishonesty by the employee; (b) a felony committed by the employee; (c) a material breach or threatened breach by the employee of any provision of the employment agreement that has not been cured; (d) failure by employee, after a notice to cure, to make timely on his promissory note with the Company; and (e) any activity engaged in by the employee to commit or incur any liability on behalf of the Company and such activity is not specifically allowed under the employment agreement. “Good reason” shall mean (a) a reduction in employee’s minimum base salary or (b) a material reduction in employee’s benefits or a material breach of the Company’s obligations under the employment agreement.

In October 1998, the Company entered into an employment agreement with Gary J. Rovansek which provided that he would receive a minimum base salary of $225,000 per year annually for three years plus the opportunity to earn a bonus each year. Effective February 1, 2001, Mr. Rovansek’s base salary increased to $250,000. Mr. Rovansek, on a temporary basis, voluntarily reduced his per annum salary by $25,000 to $225,000 effective August 13, 2001. In addition, the employment agreement provided that within 30 days after the commencement of each fiscal year, Mr. Rovansek and the Board of Directors shall agree upon the specific performance standards and criteria that will be used to determine how the bonus is actually earned and shall agree upon the amount of the actual bonus opportunity for such fiscal year. Pursuant to the agreed upon formula, Mr. Rovansek received no bonus for the fiscal year ended February 1, 2003.

The Company notified Mr. Rovansek on November 21, 2002 that the Company would not renew the employment agreement, which was scheduled to terminate in November, 2003. In February, 2003, the Company and Gary J. Rovansek entered into a separation agreement and general release effective February 13, 2003, the date Mr. Rovansek resigned from his employment with the Company in all capacities. Except to the extent specifically referenced therein, the separation agreement superseded the employment agreement and a change in control agreement previously entered into by the parties. Pursuant to this separation agreement, Mr. Rovansek received a lump sum (subject to withholding for applicable taxes and 401(k) and medical and dental insurance contributions) equal to $240,720.80, which constituted the sum of Mr. Rovansek’s regular base salary through November 30, 2003, plus payment for accrued but unused vacation. Further, upon the earlier of a (i) change in control (as defined in that change in control agreement dated August 20, 2002 between the Company and Mr. Rovansek) or (ii) November 30, 2003, the Company shall pay Mr. Rovansek $96,428. The term “change in control” means any transaction or series or combination of transactions whereby, directly or indirectly, control of, or a material interest in, the Company or any material portion of its businesses or assets is transferred for consideration, including, without limitation, a sale or exchange of capital stock or assets, a merger or consolidation, a tender or exchange offer, a leveraged buy-out, the formation of a joint venture, minority investment or partnership, or any similar transaction.

In June 1999, the Company entered into an employment agreement with Michael H. McKee, which provided that Mr. McKee will receive a minimum base salary of $150,000 per year annually for three years plus the opportunity to earn a bonus each year. Effective April 18, 2000, Mr. McKee’s base salary increased to $200,000. In addition, the employment agreement provides that Mr. McKee shall be eligible to participate in the bonus plans made available generally to the Chief Executive Officer, Chief Operating Officer and senior executives of the Company. Pursuant to the agreed upon formula, Mr. McKee received no bonus for the fiscal year ended February 1, 2003.

The employment agreement for Mr. McKee provides that unless either party, at least one year prior to the conclusion of the term of employment, provides written notice to the other party of that party’s intention not to renew the employment agreement, the term of employment is automatically extended for one additional year. There is no limit on the number of extensions of the term of employment. Pursuant to this notice provision, the Company informed Mr. McKee that his employment agreement, which currently expires on June 1, 2003, will not be extended. Under the terms of the agreement, if the Company terminates the employment of the officer, other than for “just cause,” or if the officer terminates his employment for “good reason,” the Company shall pay to Mr. McKee the remainder of his base salary during the remainder of his term of employment, or for a period of 24 months, whichever is less. “Just cause” includes (a) an act of fraud or dishonesty by the employee; (b) a felony committed by

the employee; and (c) a material breach by the employee of his employment agreement. “Good reason” includes (a) the assignment to the employee of duties inconsistent with his position; (b) a reduction in his minimum base salary or benefits or breach of the Company’s obligations under the employment agreement; (c) subsequent to a change in control, the failure by the Company to obtain from its successor the assumption of the employment agreement; and (d) subsequent to a change in control, any purported termination of the officer’s employment not effected pursuant to the notice provisions of the agreement.

In August 2002, the Company and Mr. McKee entered into a change in control agreement, which provides that Mr. McKee shall receive $150,000 within five days of a change in control as defined therein. The $150,000 amount shall be reduced by (i) any debt owed to the Company by Mr. McKee and (ii) any third party debt owed by Mr. McKee which the Company has granted. This agreement is effective until the later of (i) June 1, 2003 or (ii) the date of a change in control provided, the negotiations for such change in control began before June 1, 2003. (The term change in control has the same meaning as in the former change of control agreement between the Company and Mr. Rovansek, please see definition above).

Compensation and Stock Option Committee Interlocks and Insider Participation

On April 6, 1993, the Company established a Compensation Committee of the Board for purposes of making certain executive compensation decisions. On May 21, 1996, the Stock Option Committee was combined with the Compensation Committee to form the Compensation and Stock Option Committee. Messrs. Bernstein and Morrison are members of the Compensation and Stock Option Committee. At the request of the Compensation and Stock Option Committee, the President of the Company has and will confer with the Committee and make recommendations for the salaries and bonuses of the executive officers. No relationship exists between the Company and any member of the Compensation and Stock Option Committee requiring disclosure under this section for the Company's last fiscal year.

Item 12. Security Ownership of Certain Beneficial Owners and Management

~~Information regarding the above will be included under the caption, "Security Ownership," in the Company's Proxy Statement for its 2001 Annual Meeting of~~EQUITY ~~shareholders,~~COMPENSATION ~~which~~PLAN ~~will be filed with the Securities and Exchange Commission within 120 days after February 3, 2001, and is incorporated herein by reference.~~ INFORMATION

	Number of Securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-Average exercise price of outstanding options, warrants and rights	Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in column (a))
Plan Category	(a)	(b)	(c)
Equity Compensation Plans Approved by Security Holders	1,278,460	$ 4.71	1,079,215
Equity Compensation Plans not Approved by Security Holders	645,464	2.62	N/A
Total	1,923,924	4.01	N/A

SECURITY OWNERSHIP

As of February 28, 2003, Successories had an aggregate of 11,059,580 outstanding voting securities consisting of 9,910,984 shares of common stock, 503,092 shares of Series A convertible preferred stock, par value $.01 per share, which are convertible into 503,092 shares of common stock, and 101,667 shares of Series B convertible preferred stock, par value $.01 per share, which are convertible into 645,504 shares of common stock. The following table sets forth information of all persons known to be the beneficial owner of more than 5% of Successories outstanding voting securities as of February 28, 2003.

Beneficial Owner	Number of Shares Owned and Nature of Beneficial Ownership(1)		Percent of Class
Jack Miller	3,954,577	(2)(6)	35.7	%
Arnold M. Anderson	705,890	(3)	6.2	%
Corbin & Company	1,063,850	(4)	9.6	%
R. Scott Morrison, Jr.	612,541	(5)	5.5	%

(1) Nature of beneficial ownership is direct unless otherwise indicated by footnote. Beneficial ownership as shown in the table arises from sole voting and investment power unless otherwise indicated by footnote. Unless otherwise indicated, share references are to Successories common stock.

(2) S.I. Acquisition LLC, of which Jack Miller is indirectly the sole manager, owns (i) 2,799,565 shares; (ii) 503,092 shares of Series A convertible preferred stock, par value $.01 per share, of Successories, which as of February 28, 2003 are convertible Into 503,092 shares of Successories common stock; and (iii) 100,000 shares of Series B convertible preferred stock, par value $.01 per share, of Successories, which as of February 28, 2003 are convertible into 634,920 shares of Successories common stock. Includes 17,000 shares subject to immediately exercisable options. The address of The Jack Miller Limited Partnership #1 is 485 Half Day Road, Suite 200, Buffalo Grove, Illinois 60089.

(3) Includes 277,000 shares subject to immediately exercisable options; 80,290 shares held by Peggy Anderson (his spouse); 133,600 shares held in trust by Peggy Anderson as trustee, as to which Mr. Anderson has sole voting and investment power; and 2,400 shares held in the name of his son, Blayke Anderson. Mr. Anderson’s address is c/o Successories, Inc., 2520 Diehl Road, Aurora, Illinois 60504.

(4) According to a Schedule 13G/A dated December 31, 2002 and filed with the Securities and Exchange Commission (the “SEC”), Corbin & Company, a registered investment advisor, had shared voting and shared dispositive power over 1,063,850 shares. The address of Corbin & Company is 6300 Ridglea Place, Suite 1111, Fort Worth, Texas 76116.

(5) Includes 355,025 shares held in trust by Mr. Morrison as trustee, as to which Mr. Morrison has sole voting and investment power; 165,516 shares held by Mr. Morrison as trustee for a family limited partnership; 75,000 shares held in Trust by Norma A. Morrison (his spouse) and 17,000 shares subject to immediately exercisable options. Mr. Morrison’s address is c/o Morrison Properties, 243 N.E. Fifth Avenue, Delray Beach, Florida 33483.

(6) On February 13, 2003, the Company entered into a definitive merger agreement with S.I. Acquisition LLC, an Illinois limited liability company formed principally for the benefit of Jack Miller, the Company's Chairman, members of his family and Howard I. Bernstein, a director of the Company. See "Certain Relationships and Related Transactions."

The following table sets forth, as of February 28, 2003, information with respect to the shares of our common stock beneficially owned by: (i) each director; (ii) the Interim Chief Executive Officer; (iii) the other most highly compensated executive officers; and (iv) all directors and executive officers as a group.

Beneficial Owner	Number of Shares Owned and Nature of Beneficial Ownership(1)		Percent of Class
Arnold M. Anderson	705,890	(2)	6.2	%
Howard I. Bernstein	13,000	(3)	*
John C. Carroll	20,000	(4)	*
Larry A. Hodges	73,516	(5)	*
Donald J. Hoff	0		*
Leslie Nathanson Juris	78,516	(6)	*
Michael H. McKee	183,092	(7)	1.6	%
Jack Miller	3,954,577	(8)	35.7	%
R. Scott Morrison, Jr.	612,541	(9)	5.5	%
All of the directors and executive officers as a group (11 persons)	5,641,132	(10)	49.1	%

* Percentage represents less than 1%.

(2) See note 3 to the previous security ownership table.

(3) Comprised of 13,000 shares owned by the Howard I. Bernstein Declaration of Trust dated 4/28/87 subject to immediately exercisable options. Excludes 82,474 shares of series A convertible preferred stock, par value $0.01 per share of Successories and 152,378 shares of Successories common stock, all of which shares were contributed by the Howard I. Bernstein Declaration of Trust dated 4/28/87 to S.I. Acquisition LLC.

(4) Includes 20,000 shares subject to immediately exercisable options.

(5) Includes 13,000 shares subject to immediately exercisable options.

(6) Includes 60,516 shares held by Leslie Nathanson Juris; 5,000 shares held in trust by Leslie Nathanson Juris and 13,000 shares subject to immediately exercisable options.

(7) Includes 8,844 shares held by Michael H. McKee; 25,918 shares held by Michael McKee and Cassandra McKee (his spouse) as joint tenants; 330 shares held by Cassandra McKee; 500 shares held by Cassandra McKee as custodian and 147,500 shares subject to immediately exercisable options.

(8) See notes 2 and 6 to the previous security ownership table.

(9) See note 5 to the previous security ownership table.

(10) Includes 541,500 shares subject to options exercisable within 60 days.

Item 13. Certain Relationships and Related Transactions

~~Information~~All ~~regarding~~transactions between the ~~above~~Company ~~will~~and beits ~~included~~officers, directors, ~~under~~and ~~the~~principal ~~caption,~~shareholders ~~"Compensation~~are ~~and~~required ~~Other~~to ~~Transactions~~be ~~with~~approved ~~Management,"~~by ina majority of the ~~Company's~~independent ~~Proxy~~and ~~Statement~~disinterested ~~for its~~non-employee ~~2001~~directors ~~Annual~~of ~~Meeting~~the ofCompany’s ~~shareholders,~~Board ~~which~~and ~~will~~must be ~~filed~~on ~~with~~terms ~~the~~no ~~Securities~~less ~~and~~favorable ~~Exchange~~to ~~Commission~~the ~~within~~Company ~~120 days~~than ~~after~~could ~~February 3,~~be obtained ~~2001,~~from ~~and~~unaffiliated isthird ~~incorporated herein by reference~~parties.

18During the fiscal year ended February 3, 2001, Michael H. McKee, an officer of the Company, executed a $140,000 Promissory Note on behalf of LaSalle Bank National Association. The Company guaranteed payment of the indebtedness to LaSalle Bank National Association. The guarantee includes the payment of (a) all principal, (b) all interest, (c) all late charges, (d) all loan fees and loan charges, and (e) all collection costs and expenses relating to the promissory note or any collateral for the promissory note. The current principal balance on this Promissory Note is $102,000.

On December 9, 1999, Mr. McKee executed an Amended and Restated Promissory Note to the Company in the principal amount of $25,000 plus interest due on June 30, 2003, and payable in annual installments, provided that the payment of the principal in such annual installments shall be forgiven if the Company meets specified annual target earnings. Mr. McKee’s Amended and Restated Promissory Note replaced a Promissory Note executed to the Company dated June 5, 1997. No amount of principal due under the note in fiscal 2002 was forgiven. The current principal balance on this Amended and Restated Promissory Note is $15,000.

On December 9, 1999, Mr. Anderson, an officer and director of the Company, executed a Second Amended and Restated Promissory Note to the Company in the principal amount of $107,625 plus interest due on June 30, 2003, and payable in annual installments, provided that the payment of the principal in such annual installments shall be forgiven if the Company meets specified annual target earnings. Mr. Anderson’s Second Amended and Restated Promissory Note replaces an Amended and Restated Promissory Note executed to the Company dated September 3, 1998, and is secured by a pledge of certain shares of common stock of the Company held by Mr. Anderson. No amount of principal due under the note in fiscal 2002 was forgiven. The current principal balance on this second Amended and Restated Promissory is $87,625.

On February 13, 2003, the Company entered into a definitive merger agreement with S.I. Acquisition LLC, an Illinois limited liability company formed principally for the benefit of Jack Miller, the Company's Chairman, members of his family and Howard I. Bernstein, a director of the Company. A special committee comprised solely of independent directors of the Company was formed to analyze, consider and negotiate the terms of the merger and to make a recommendation to the entire board of directors as to whether or not to adopt the merger agreement. Except for shares owned by S.I. Acquisition LLC and shares subject to validly asserted dissenters' rights, upon completion of the merger, each outstanding share of common stock will be converted into the right to receive $0.30 in cash, and each outstanding share of Series B convertible preferred stock will be converted into the right to receive $15.00 plus all accrued and unpaid dividends in cash. After careful consideration, each director of the board, the disinterested directors and the special committee of independent directors unanimously approved the merger agreement and recommended that the shareholders of the Company vote for the adoption of the merger agreement and approval of the merger.

Item 14. Controls and Procedures

Within 90 days prior to the date of filing this annual report, the Company’s Chief Executive Officer (Interim) and Chief Financial Officer carried out an evaluation under his supervision, with the participation of other members of management as he deemed appropriate, of the effectiveness of the design and the operation of the Company’s disclosure controls and procedures as contemplated by Exchange Act Rule 13a-15. Based upon, and as of the date of that evaluation, the Chief Executive Officer Interim and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective, in all material respects, in timely alerting him to material information relating to the Company (and its consolidated subsidiaries) required to be included in the periodic reports the Company is required to file and submit to the SEC under the Exchange Act.

There have been no significant changes to the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date that the internal controls were most recently evaluated. There were no significant deficiencies or material weaknesses identified in that evaluation and, therefore, no corrective actions were taken.

PART IV

Item 14 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)	1.	See Index to Financial Statements and Financial Statement Schedules on page F-1.	~~See Index to Financial Statements and Financial Statement Schedules on page F-1.~~
	2.	2.See Index to Financial Statements and Financial Statement Schedules on page F-1	~~See Index to Financial Statements and Financial Statement Schedules on page F-1~~
	3.	3See Index to Exhibits immediately following the Signature page.	~~See Index to Exhibits immediately following the Signature page.~~
(b)	On February 18, 2003, the Company filed form 8-K, Item 5 – Other Events, with the Securities and Exchange Commission to report an agreement and plan of merger with S.I. Acquisition LLC dated February 13, 2003	~~No reports on form 8-K were filed with the Securities and Exchange Commission during the last quarter of period covered by this Report.~~
(c)	See Index to Financial Statements and Financial Statement Schedules on page F-1.	~~See Index to Financial Statements and Financial Statement Schedules on page F-1.~~

1926

Index to Financial Statements and Financial Statement Schedules

			Page
(1)	Financial Statements:
(1)		Financial Statements:
	Reports of Independent Accountants
		Report of Independent Accountants	F-2 & F-3
	Consolidated Balance Sheets
		Consolidated Balance Sheets	F-4
	Consolidated Statements of Operations
		Consolidated Statements of Operations	F-5
	Consolidated Statements of Stockholders’ Equity
		Consolidated Statements of Stockholders' Equity	F-6
	Consolidated Statements of Cash Flows
		Consolidated Statements of Cash Flows	F-8
	Notes to Consolidated Financial Statements
		Notes to Consolidated Financial Statements	F-9
(2)	Financial Statement Schedule:
(2)		Financial Statement Schedule:
	Schedule II - Valuation and Qualifying Accounts
		Schedule II—Valuation and Qualifying Accounts	F-26

All other financial schedules called for under Regulation S-X are not submitted because they are not applicable, or not required, or because the required information is not material or is included in the consolidated financial statements or notes thereto.

F–-1

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and the Stockholders of ~~Successories, Inc.~~

~~We have audited the accompanying consolidated balance sheet of~~ Successories, Inc. (an Illinois corporation) as of February 3, 2001, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. Our audit also included the financial statement schedules listed in the Index at Item 8, Financial Statements and Supplementary Data—page F-26. These financial statements and the financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audit.

We ~~conducted~~ ~~our~~have ~~audit~~audited inthe accompanying ~~accordance~~consolidated ~~with~~balance ~~auditing~~sheets ~~standards~~of ~~generally~~Successories, ~~accepted~~Inc. in(an ~~the~~Illinois corporation) ~~United~~as ~~States.~~of ~~Those~~February ~~standards~~1, ~~require~~2003 ~~that~~and weFebruary ~~plan~~2, 2002, and ~~perform~~ the ~~audit~~related consolidated tostatements ~~obtain~~of ~~reasonable assurance~~operations, ~~about~~stockholders’ ~~whether~~equity ~~the~~and ~~financial~~cash ~~statements~~flows ~~are~~for each ~~free~~ of ~~material~~the ~~misstatement.~~three Anfiscal ~~audit~~years ~~includes~~in ~~examining,~~the onperiod aended ~~test~~February ~~basis~~1, ~~evidence~~2003. Our ~~supporting~~audits also included the ~~amounts~~financial statement ~~and~~schedules ~~disclosures~~listed in the ~~financial statements.~~Index Anat ~~audit~~Item ~~also~~8, ~~includes~~Financial ~~assessing~~Statements ~~the~~and Supplementary ~~accounting~~Data ~~principles~~– ~~used~~page ~~and~~F-26. These financial ~~significant~~statements ~~estimates~~and ~~made~~the byfinancial ~~management,~~statement asschedules ~~well~~are asthe responsibility ~~evaluating~~of the ~~overall~~Company’s ~~financial~~management. Our ~~statement~~responsibility ~~presentation.~~is Weto ~~believe that~~express ~~our~~an ~~audit~~opinion ~~provides~~on athese ~~reasonable~~financial statements ~~basis~~and ~~for~~financial statement schedules based on our ~~opinion~~audits.

~~In our~~We ~~opinion,~~conducted ~~the~~our ~~financial~~audits in ~~statements~~accordance ~~referred~~with toauditing ~~above~~standards ~~present~~generally ~~fairly,~~accepted in ~~all material respects,~~ the ~~financial~~United ~~position~~ States of ~~Successories, Inc~~America. Those asstandards ofrequire that ~~February 3,~~we ~~2001~~ plan and perform the ~~results~~audit ofto ~~its~~obtain ~~operations~~reasonable ~~and~~assurance ~~its~~about ~~cash~~whether the ~~flows~~financial ~~for~~statements ~~the~~are ~~year~~free ~~then~~of ~~ended~~material inmisstatement. An ~~conformity~~audit ~~with~~includes ~~accounting~~examining, ~~principles~~on ~~generally~~a ~~accepted~~test basis, inevidence supporting the ~~United~~amounts ~~States.~~and ~~Also,~~disclosures in ~~our~~the ~~opinion, such~~ financial ~~statement~~statements. An ~~schedules,~~audit ~~when~~also ~~considered~~includes assessing inthe ~~relation~~accounting toprinciples ~~the~~used ~~basic~~and ~~consolidated~~significant ~~financial~~estimates ~~statements~~made ~~taken~~by management, as awell ~~whole,~~as ~~present~~evaluating ~~fairly~~the inoverall ~~all~~financial ~~material~~statement presentation. We ~~respects~~believe ~~the~~that ~~information~~our audits ~~set~~provide ~~forth~~a ~~therein.~~reasonable basis for our opinion.

~~Crowe~~In our opinion, the ~~Chizek~~financial statements referred to above present fairly, in all material respects, the financial position of Successories, Inc. as of February 1, 2003 and ~~Company~~February 2, ~~LLP~~2002, and the results of its operations and its cash flows for each of the three fiscal years in the period ended February 1, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

~~Oak~~The accompanying ~~Brook~~financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 20 to the financial statements, ~~Illinois~~the Company has suffered recurring losses ~~March~~from operations and has liquidity issues that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 20,. The ~~2001~~financial statements do not include any adjustments that might result from the outcome of this uncertainty.

F–2

	Crowe Chizek and Company LLC
Oak Brook, Illinois
April 2, 2003, except for Note 7 as
to which the date is April 25, 2003

~~REPORT OF INDEPENDENT ACCOUNTANTS~~ F-2

~~To the Board of Directors and the Stockholders of Successories~~SUCCESSORIES, ~~Inc~~ INC.

~~We have~~CONSOLIDATED ~~audited~~BALANCE the accompanying consolidated balance sheet of Successories, Inc. (an Illinois corporation) and subsidiaries as of January 29, 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the two fiscal years in the period ended January 29, 2000. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. SHEETS

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

	February 1, 2003			February 2, 2002
ASSETS
Current assets:
Cash and cash equivalents	$	589,000		$	602,000
Accounts and notes receivable, net	1,913,000			2,445,000
Inventories, net	3,278,000			5,005,000
Prepaid catalog expenses	1,320,000			1,683,000
Other prepaid expenses	665,000			857,000
Total current assets	7,765,000			10,592,000
Restricted cash	250,000			250,000
Property and equipment, net	1,993,000			3,914,000
Notes receivable	—			17,000
Deferred financing costs and debt discount, net	43,000			181,000
Intangibles and other assets, net	674,000			1,007,000
TOTAL ASSETS	$	10,725,000		$	15,961,000

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Revolving line of credit	$	1,131,000		$	1,483,000
Accounts payable	1,792,000			1,488,000
Accrued expenses and deferred income taxes	1,692,000			1,761,000
Total current liabilities	4,615,000			4,732,000
Minority interest	6,000			47,000

Stockholders’ equity:
Convertible preferred stock, $.01 par value; 1,000,000 shares authorized; 503,092 of Series A and 101,667 of Series B shares issued and outstanding; liquidation value $.01 per share plus accrued dividends	6,000			6,000
Common stock, $.01 par value; 20,000,000 shares authorized 9,750,729 and 9,313,884 shares issued and outstanding, respectively	98,000			93,000
Common stock warrants	2,324,000			2,324,000
Notes receivable from stockholders	(115,000		)	(118,000		)
Additional paid-in capital	33,556,000			33,321,000
Accumulated deficit	(29,701,000		)	(24,380,000		)
Accumulated other comprehensive loss	(64,000		)	(64,000		)
Total stockholders’ equity	6,104,000			11,182,000

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	10,725,000		$	15,961,000

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Successories, Inc. and subsidiaries as of January 29, 2000, and the results of its operations and its cash flows for each of the two fiscal years in the period ended January 29, 2000, in conformity with accounting principles generally accepted in the United States.

Our audits were made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The schedule on Page F-26 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the consolidated financial statements taken as a whole.

Arthur Andersen LLP Chicago, Illinois March 24, 2000 (except with respect to the matters discussed in Note 6, as to which the date is April 6, 2000)

F–3

SUCCESSORIES, INC. CONSOLIDATED BALANCE SHEETS

		February 3, 2001			January 29, 2000
ASSETS
Current assets:
	Cash and cash equivalents	$	2,468,000		$	939,000
	Accounts and notes receivable, net		3,515,000			3,430,000
	Inventories, net		7,056,000			7,998,000
	Prepaid catalog expenses		1,908,000			1,539,000
	Deferred income taxes and other prepaid expenses		568,000			215,000
Total current assets			15,515,000			14,121,000
Restricted cash			250,000			300,000
Property and equipment, net			6,350,000			7,933,000
Notes receivable			252,000			295,000
Deferred financing costs and debt discount, net			528,000			1,285,000
Deferred income taxes, net			4,626,000			5,541,000
Intangibles and other assets, net			1,270,000			1,554,000
TOTAL ASSETS		$	28,791,000		$	31,029,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Current portion of long-term debt	$	3,597,000		$	3,544,000
	Accounts payable		865,000			3,789,000
	Accrued expenses and deferred income taxes		2,216,000			2,174,000
Total current liabilities			6,678,000			9,507,000
Long-term debt, net of current portion			13,000			4,061,000
Total liabilities			6,691,000			13,568,000
Minority interest			101,000			47,000
Stockholders' equity:
	Convertible preferred stock, $.01 par value; 1,000,000 shares authorized; 503,092 of Series A and 101,667 of Series B shares issued and outstanding		6,000			6,000
	Common stock, $.01 par value; 20,000,000 shares authorized; 9,181,196 and 6,933,213 shares issued and outstanding, respectively		92,000			69,000
	Common stock warrants		2,324,000			2,291,000
	Notes receivable from stockholders		(148,000	)		(165,000	)
	Additional paid-in capital		33,136,000			28,840,000
	Accumulated deficit		(13,356,000	)		(13,563,000	)
	Accumulated other comprehensive loss		(55,000	)		(64,000	)
Total stockholders' equity			21,999,000			17,414,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	28,791,000		$	31,029,000

The accompanying notes are an integral part of these statements.

F–4-3

SUCCESSORIES, INC. ~~CONSOLIDATED STATEMENTS OF OPERATIONS~~

		Year Ended February 3, 2001			Year Ended January 29, 2000			Year Ended January 30, 1999
Net product sales		$	52,061,000		$	51,702,000		$	52,864,000
Cost of goods sold			23,405,000			23,536,000			24,728,000
Gross profit on product sales			28,656,000			28,166,000			28,136,000
Contract framing			355,000			—			—
Fees, royalties and other income			1,288,000			1,175,000			1,624,000
Gross margin			30,299,000			29,341,000			29,760,000
Operating expenses			27,843,000			28,874,000			34,235,000
Asset impairment charge			—			—			1,302,000
Income (loss) from operations			2,456,000			467,000			(5,777,000	)
Other income (expense):
	Interest income		40,000			50,000			35,000
	Minority interest		(356,000	)		(218,000	)		(100,000	)
	Interest expense		(1,382,000	)		(1,451,000	)		(1,359,000	)
	Other, net		(27,000	)		85,000			(75,000	)
Total other expense			(1,725,000	)		(1,534,000	)		(1,499,000	)
Income (loss) before income taxes			731,000			(1,067,000	)		(7,276,000	)
Income tax expense			301,000			60,000			60,000
Net income (loss)			430,000			(1,127,000	)		(7,336,000	)
Dividend to preferred stockholders			223,000			101,000			—
Net income (loss) available to common stockholders		$	207,000		$	(1,228,000	)	$	(7,336,000	)
Foreign currency translation adjustment			9,000			—			9,000
Comprehensive income (loss)		$	439,000		$	(1,127,000	)	$	(7,327,000	)
Net income (loss) per share:
	Basic and diluted	$	0.03		$	(0.18	)	$	(1.08	)

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended February 1, 2003			Year Ended February 2, 2002			Year Ended February 3, 2001
Net product sales	$	32,134,000		$	34,996,000		$	44,830,000
Cost of goods sold	15,774,000			18,048,000			21,226,000

Gross profit on product sales	16,360,000			16,948,000			23,604,000

Fees, royalties and other income	969,000			1,059,000			1,288,000

Gross margin	17,329,000			18,007,000			24,892,000

Operating expenses	19,487,000			21,379,000			22,648,000

(Loss) income from continuing operations before other expense and income tax	(2,158,000		)	(3,372,000		)	2,244,000
Other income (expense):
Interest expense	(242,000		)	(269,000		)	(1,382,000		)
Minority interests in subsidiaries	(50,000		)	(159,000		)	(356,000		)
Interest income	57,000			108,000			40,000
Other, net	14,000			19,000			(27,000		)

Total other expense	(221,000		)	(301,000		)	(1,725,000		)

(Loss) income from continuing operations before income tax	(2,379,000		)	(3,673,000		)	519,000

Income tax (benefit) expense	(102,000		)	4,873,000			301,000

(Loss) income from continuing operations	(2,277,000		)	(8,546,000		)	218,000
(Loss) income from discontinued operations	(2,826,000		)	(2,039,000		)	212,000
(Loss) income before extraordinary item	(5,103,000		)	(10,585,000		)	430,000
Extraordinary loss on early extinguishment of debt	—			(219,000		)	—
Net (loss) income	(5,103,000		)	(10,804,000		)	430,000

Dividend to preferred shareholders	(218,000		)	(220,000		)	(223,000		)

(Loss) income available to common stockholders	$	(5,321,000	)	$	(11,024,000	)	$	207,000
Foreign currency translation adjustment	—			(9,000		)	9,000

Comprehensive (loss) income	$	(5,103,000	)	$	(10,813,000	)	$	439,000

(Loss) income per share (basic and diluted):
(Loss) income from continuing operations	$	(0.26	)	$	(0.95	)	$	0.00
(Loss) income from discontinued operations	$	(0.30	)	$	(0.22	)	$	0.03
Extraordinary loss on early extinguishment of debt	$	—		$	(0.02	)	—
Net (loss) income	$	(0.56	)	$	(1.19	)	$	0.03

The accompanying notes are an integral part of these statements.

F–5-4

SUCCESSORIES, INC. ~~CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY~~

		Convertible Preferred Stock
					Common Stock
								Common Stock Warrants		Notes Receivable From Stockholders			Additional Paid-In Capital		Accumulated Deficit
		Shares	Amount		Shares	Amount
Balance at January 31, 1998		—		—	6,758,577	$	68,000	$	1,584,000	$	(273,000	)	$	25,998,000	$	(4,999,000	)
Net loss		—		—	—		—		—		—			—		(7,336,000	)
Foreign currency translation adjustment		—		—	—		—		—		—			—		—
Stock warrants issuance and revaluation		—		—	—		—		204,000		—			—		—
Common stock transactions:
	Sales of common shares and exercise of stock options	—		—	154,716		1,000		—		—			61,000		—
Balance at January 30, 1999		—		—	6,913,293	$	69,000	$	1,788,000	$	(273,000	)	$	26,059,000	$	(12,335,000	)
Net loss		—		—	—		—		—		—			—		(1,127,000	)
Stock warrants issuance and revaluation		—		—	—		—		503,000		—			—		—
Notes receivable payments and writeoffs		—		—	—		—		—		108,000			—		—
Common stock transactions:
	Sales of common shares	—		—	19,920		—		—		—			42,000		—
Preferred stock transactions:
	Sale of Series A shares	503,092		5,000	—		—		—		—			1,215,000		—
	Sale of Series B shares	101,667		1,000	—		—		—		—			1,524,000		—
	Preferred stock dividends	—		—	—		—		—		—			—		(101,000	)
Balance at January 29, 2000		604,759	$	6,000	6,933,213	$	69,000	$	2,291,000	$	(165,000	)	$	28,840,000	$	(13,563,000	)
Net Income		—		—	—		—		—		—			—		430,000
Foreign currency translation adjustment		—		—	—		—		—		—			—		—
Stock warrants revaluation		—		—	—		—		33,000		—			—		—
Notes receivable payments and writeoffs		—		—	—		—		—		17,000			—		—
Common stock transactions:
	Sales of common shares	—		—	2,066,206		21,000		—		—			3,976,000		—
	Preferred stock dividends issuance	—		—	181,777		2,000		—		—			320,000		—
Preferred stock transactions:
	Preferred stock dividends	—		—	—		—		—		—			—		(223,000	)
Balance at February 3, 2001		604,759	$	6,000	9,181,196	$	92,000	$	2,324,000	$	(148,000	)	$	33,136,000	$	(13,356,000	)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

							Common Stock Warrants		Notes Receivable From Stockholders			Additional Paid-In Capital		Accumulated Deficit
	Convertible Preferred Stock
	Convertible Preferred Stock			Common Stock
	Shares	Amount		Shares	Amount

Balance at January 29, 2000	604,759	$	6,000	6,933,213	$	69,000	$	2,291,000	$	(165,000	)	$	28,840,000	$	(13,563,000	)

Net income	—	—		—	—		—		—			—		430,000
Foreign currency translation adjustment	—	—		—	—		—		—			—		—
Stock warrants revaluation	—	—		—	—		33,000		—			—		—
Notes receivable payments and write-offs	—	—		—	—		—		17,000			—		—
Common stock transactions:
Sales of common shares	—	—		2,066,206	21,000		—		—			3,976,000		—
Common stock issued in lieu of preferred stock dividends	—	—		181,777	2,000		—		—			320,000		—
Preferred stock transactions:
Preferred stock dividends	—	—		—	—		—		—			—		(223,000		)

Balance at February 3, 2001	604,759	$	6,000	9,181,196	$	92,000	$	2,324,000	$	(148,000	)	$	33,136,000	$	(13,356,000	)

Net loss	—	—		—	—		—		—			—		(10,804,000		)
Foreign currency translation adjustment	—	—		—	—		—		—			—		—
Notes receivable payments and write-offs	—	—		—	—		—		30,000			—		—
Common stock transactions:
Sales of common shares	—	—		18,691	—		—		—			22,000		—
Common stock issued in lieu of preferred stock dividends	—	—		113,997	1,000		—		—			163,000		—
Preferred stock transactions:
Preferred stock dividends	—	—		—	—		—		—			—		(220,000		)

Balance at February 2, 2002	604,759	$	6,000	9,313,884	$	93,000	$	2,324,000	$	(118,000	)	$	33,321,000	$	(24,380,000	)

Net loss	—	—		—	—		—		—			—		(5,103,000		)
Note receivable issued June 6, 2002	—	—		—	—		—		(12,000		)	—		—
Notes receivable payments	—	—		—	—		—		15,000			—		—
Common stock transactions:
Common stock issued in conjunctionwith Board of Directors’ fees	—	—		142,325	2,000		—		—			74,000		—
Common stock issued in lieu of preferred stock dividends	—	—		294,520	3,000		—		—			161,000		—
Preferred stock transactions:
Preferred stock dividends	—	—		—	—		—		—			—		(218,000		)

Balance at February 1, 2003	604,759	$	6,000	9,750,729	$	98,000	$	2,324,000	$	(115,000	)	$	33,556,000	$	(29,701,000	)

The accompanying notes are an integral part of these statements.

F–6-5

SUCCESSORIES, INC. ~~CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY~~

		Accumulated Other Comprehensive Loss			Total Stockholders' Equity
Balance at January 31, 1998		$	(73,000	)	$	22,305,000
Net loss			—			(7,336,000	)
Foreign currency translation adjustment			9,000			9,000
Stock warrants issuance and revaluation			—			204,000
Common stock transactions:
	Sales of common shares and exercise of stock options		—			62,000
Balance at January 30, 1999		$	(64,000	)	$	15,244,000
Net loss			—			(1,127,000	)
Stock warrants issuance and revaluation			—			503,000
Notes receivable payments and writeoffs			—			108,000
Common stock transactions:
	Sales of common shares		—			42,000
Preferred stock transactions:
	Sale of Series A shares		—			1,220,000
	Sale of Series B shares		—			1,525,000
	Preferred stock dividends		—			(101,000	)
Balance at January 29, 2000		$	(64,000	)	$	17,414,000
Net income			—			430,000
Foreign currency translation adjustment			9,000			9,000
Stock warrants revaluation			—			33,000
Notes receivable payments and writeoffs			—			17,000
Common stock transactions:
	Sales of common shares		—			3,997,000
	Preferred stock dividends issuance		—			322,000
Preferred stock transactions:
	Preferred stock dividends		—			(223,000	)
Balance at February 3, 2001		$	(55,000	)	$	21,999,000

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Accumulated Other Comprehensive Loss			Total Stockholders’ Equity

Balance at January 29, 2000	$	(64,000	)	$	17,414,000

Net income	—			430,000
Foreign currency translation adjustment	9,000			9,000
Stock warrants revaluation	—			33,000
Notes receivable payments and writeoffs	—			17,000
Common stock transactions:
Sales of common shares	—			3,997,000
Common stock issued in lieu of preferred stock dividends	—			322,000
Preferred stock transactions:
Preferred stock dividends	—			(223,000		)

Balance at February 3, 2001	$	(55,000	)	$	21,999,000

Net loss	—			(10,804,000		)
Foreign currency translation adjustment	(9,000		)	(9,000		)
Notes receivable payments and writeoffs	—			30,000
Common stock transactions:
Sales of common shares	—			22,000
Common stock issued in lieu of preferred stock dividends	—			164,000
Preferred stock transactions:
Preferred stock dividends	—			(220,000		)

Balance at February 2, 2002	$	(64,000	)	$	11,182,000

Net loss	—			(5,103,000		)
Note receivable issued June 6, 2002	—			(12,000		)
Notes receivable payments	—			15,000
Common stock transactions:
Common stock issued in conjunction with Board of Directors’ fees	—			76,000
Common stock issued in lieu of preferred stock dividends	—			164,000
Preferred stock transactions:
Preferred stock dividends	—			(218,000		)

Balance at February 1, 2003	$	(64,000	)	$	6,104,000

The accompanying notes are an integral part of these statements.

F–7-6

SUCCESSORIES, INC. ~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

				Year Ended February 3, 2001			Year Ended January 29, 2000			Year Ended January 30, 1999
Cash flows from operating activities:
	Net income (loss)			$	430,000		$	(1,127,000	)	$	(7,336,000	)
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		Depreciation and amortization			2,840,000			3,307,000			2,913,000
		Deferred income tax			326,000			—			140,000
		Amortization of debt discount			790,000			259,000			114,000
		Minority interests in subsidiaries			356,000			218,000			100,000
		Asset impairment charge			—			—			1,302,000
		(Gain) Loss on disposal of property and equipment			—			(104,000	)		69,000
					4,742,000			2,553,000			(2,698,000	)
		Changes in operating assets and liabilities:
			Accounts and notes receivable		(183,000	)		20,000			4,013,000
			Inventories		942,000			2,620,000			(869,000	)
			Prepaid catalog expenses		(369,000	)		(472,000	)		372,000
			Other prepaid expenses		(106,000	)		57,000			353,000
			Accounts payable		(2,924,000	)		(2,569,000	)		1,818,000
			Accrued expenses		483,000			(100,000	)		454,000
			Other assets		(403,000	)		(461,000	)		(330,000	)
Net cash provided by operating activities					2,182,000			1,648,000			3,113,000
Cash flows from investing activities:
	Proceeds from notes receivable issued in connection with sale of property and equipment				141,000			74,000			85,000
	Proceeds from sale of property and equipment				—			282,000			35,000
	Reduction in restricted cash				50,000			—			—
	Purchases of property and equipment				(546,000	)		(787,000	)		(2,198,000	)
Net cash used in investing activities					(355,000	)		(431,000	)		(2,078,000	)
Cash flows from financing activities:
	Proceeds from issuing common stock				3,997,000			42,000			62,000
	Proceeds from issuing Series A and B preferred stock				—			2,745,000			—
	Proceeds from notes receivable issued to stockholders				2,000			58,000			—
	Net (repayments) borrowings on revolving credit loan				(2,119,000	)		(2,755,000	)		427,000
	Repayments of long-term debt				(1,876,000	)		(1,461,000	)		(1,259,000	)
	Payments of minority interests in subsidiaries				(302,000	)		(222,000	)		(401,000	)
Net cash used in financing activities					(298,000	)		(1,593,000	)		(1,171,000	)
Net increase (decrease) in cash					1,529,000			(376,000	)		(136,000	)
Cash and cash equivalents, beginning of period					939,000			1,315,000			1,451,000
Cash and cash equivalents, end of period				$	2,468,000		$	939,000		$	1,315,000

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended February 1, 2003			Year Ended February 2, 2002			Year Ended February 3, 2001
Cash flows from operating activities:
Net (loss) income	$	(5,103,000	)	$	(10,804,000	)	$	430,000
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization	1,782,000			2,245,000			2,277,000
Deferred income tax	—			4,873,000			326,000
Amortization of debt discount	139,000			128,000			790,000
Minority interests in subsidiaries	50,000			159,000			356,000
Board of Directors’ Fees	100,000			—			—
(Loss) income from discontinued operations	2,826,000			2,039,000			(212,000		)
Extraordinary Loss on early extinguishment of debt	—			219,000			—
	(206,000		)	(1,141,000		)	3,967,000
Changes in operating assets and liabilities:
Accounts and notes receivable	488,000			1,246,000			(188,000		)
Inventories	1,106,000			1,799,000			732,000
Prepaid catalog expenses	364,000			225,000			(369,000		)
Other prepaid expenses	(114,000		)	(267,000		)	(98,000		)
Accounts payable	557,000			370,000			(2,905,000		)
Accrued expenses	203,000			(915,000		)	525,000
Other assets	(291,000		)	(388,000		)	(403,000		)
Net cash provided by operating activities	2,107,000			929,000			1,261,000

Cash flows from investing activities:
Proceeds from notes receivable issued in connection with sale of property and equipment	39,000			58,000			141,000
Reduction in restricted cash	—			—			50,000
Purchases of property and equipment	(44,000		)	(269,000		)	(528,000		)
Net cash used in investing activities	(5,000		)	(211,000		)	(337,000		)

Cash flows from financing activities:
Proceeds from issuing common stock	—			22,000			3,997,000
Preferred stock dividends	(55,000		)	(55,000		)	—
Notes receivable issued to stockholders	(13,000		)	—			—
Proceeds from notes receivable issued to stockholders	15,000			30,000			2,000
Net (repayments) borrowings on revolving credit loan	(352,000		)	1,483,000			(2,119,000		)
Repayments of long-term debt	—			(3,610,000		)	(1,876,000		)
Distributions to joint venture partners	(117,000		)	(212,000		)	(302,000		)
Net cash used in financing activities	(522,000		)	(2,342,000		)	(298,000		)

Net cash provided by (used in) continuing operations	1,580,000			(1,624,000		)	626,000
Net cash provided by (used in) discontinued operations	(1,593,000		)	(242,000		)	903,000

Net (decrease) increase in cash	(13,000		)	(1,866,000		)	1,529,000

Cash and cash equivalents, beginning of period	$	602,000		2,468,000			939,000

Cash and cash equivalents, end of period	$	589,000		602,000			2,468,000

The accompanying notes are an integral part of these statements.

F–8-7

SUCCESSORIES, INC. ~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. DESCRIPTION OF THE BUSINESS

Successories, Inc. and its subsidiaries (collectively the "“Company"”) design, manufacture, and market a diverse range of motivational and self-improvement products, many of which are the Company'’s own proprietary designs. The Company considers itself a single line of business with products that are marketed primarily under the Successories trade name through direct marketing (catalog, electronic commerce and telemarketing), retail (100% Company-owned stores) - See Note 3 to the Consolidated Financial Statements “Discontinued Operations,” sales to franchisees and wholesale distribution channels. The Company operates atwo joint ~~chain~~venture ~~of Successories~~ retail stores ~~located~~ in the United States ~~and Canada~~. The Company also operates a franchising program whereby it ~~sells~~franchisees ~~franchises~~are granted the right to market the Company'’s products under the Successories trademark.

The franchisee purchases for resale Company manufactured products or products from others that are subject to Company approval. Due to the proprietary nature of most of the Company'’s products, the Company is the only available source for many products sold by franchisees. The franchise agreements have an initial term of five years with a renewal option for three additional successive terms of five years each. Franchisees pay a royalty to the Company of 2% of franchised retail stores gross sales. The Company temporarily suspended the 2% royalty fee from July 2002 through January 2003 in order to assist the franchisees in weathering the current difficult retail and economic climate. At February 3, ~~2001~~1, 2003 there were two 25joint ~~Company-owned~~venture retail stores and 50 23 franchised retail stores. At ~~And,~~February ~~at January 29~~2, ~~2000,~~2002 there were 25 24 Company-owned retail stores ~~and~~(including 58joint venture retail stores) and 35 franchised retail stores.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fiscal Year End

The Company'’s fiscal year ends on the Saturday closest to January 31. The year ended February 3 1, ~~2001~~2003 consisted of 5352 weeks. The ~~years~~year ended ~~January 29,~~ ~~2000~~February ~~and January 30~~2, ~~1999~~2002 consisted of 52 weeks. The year ended February 3, 2001 consisted of 53 weeks.

Principles of Consolidation

The consolidated financial statements include the accounts of Successories, Inc. and all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The financial results of franchised stores have not been reflected in the Company'’s consolidated financial statements.

Restricted Cash

Restricted cash consists of a certificate of deposit in conjunction with the standby letter of credit, see Note 17 for further information. The maturity of the certificate of deposit is twelve months and stated at cost, which approximates fair value.

Revenue Recognition

Net product sales include retail, direct marketing, franchise and wholesale activities. Retail sales at the Company-owned stores are recognized at the point of sale, net of returns and allowances. Direct marketing, franchise and wholesale sales are recognized at the time orders are shipped to customers, net of returns and allowances. The Company'’s ~~agreements~~ agreements generally require franchisees and licensees to remit continuing royalty and licensing fees on gross revenues derived from proprietary product sales. The Company recognizes these fees as revenue when actually earned.

F–9-8

Accounts and Notes Receivable

A portion of the Company’s sales are made through the extension of credit. Accounts receivable from credit sales are generally unsecured. Notes receivable are primarily from franchisees, and are generally supported by a personal guarantee. The payments on the promissory notes started in July 1998 and continue through March 2005. The interest rates on the promissory notes range from 7% to 12%. The allowance for doubtful accounts is estimated by management and is based on specific information about customer accounts, past loss experience and general economic conditions. An account is charged by management when deemed uncollectable although collection efforts may continue.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method and includes material, labor and overhead costs.

Prepaid Catalog Expenses

Prepaid catalog expenses consist primarily of unamortized mail order catalog expenses for the Company'’s products. The cost of such direct response advertising is charged to expense over the period that the related catalog sales are expected, not to exceed twelve months. The amortization period is based upon the Company'’s historical patterns of catalog response. All other advertising costs are expensed as incurred.

Catalog ~~related~~ related advertising expense was $87,~~706~~816,000, $78,~~783~~398,000 and $8,~~072~~706,000 for the years ended February 3 1, ~~2001~~2003, ~~January 29~~February 2, ~~2000~~2002 and ~~January 30~~February 3, ~~1999~~2001, respectively, which is included in operating expenses on the accompanying consolidated statements of operations.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is provided for on a straight-line basis over the estimated useful lives of the related assets, ranging from 3 to 10 years. Leasehold improvements are amortized on a straight-line basis over the lesser of the useful life of the improvement or the term of the lease. Major renewals and betterments are capitalized, and maintenance and repair costs are charged to expense as incurred. Gains or losses resulting from sales or retirements are recorded as incurred, at which time related costs and accumulated depreciation are written-off.

Depreciation expense was $21,~~129~~968,000, $2,~~536~~639,000 and $2,~~139~~129,000 for the years ended February 3 1, ~~2001~~2003, February ~~January 29~~2, ~~2000~~2002 and ~~January 30~~February 3, ~~1999~~2001, respectively, which is included in cost of goods sold, discontinued operations and operating expenses in the accompanying consolidated statements of operations.

Deferred Financing Costs and Debt Discount

Costs incurred in connection with obtaining financing are capitalized and amortized over the term of the related debt. In addition, stock warrants issued in conjunction with the credit facility were assigned a fair value using the Black-Scholes option pricing model and are being amortized over the term of the related debt. Amortization expense was $~~790~~139,000, $~~356~~128,000 and $~~196~~790,000 for the years ended February 3 1, ~~2001~~2003, ~~January 29~~February 2, ~~2000~~2002 and ~~January 30~~February 3, ~~1999~~2001, respectively, which is included in interest expense in the accompanying consolidated statements of operations.

F-9

Intangible Assets

Intangible assets consist of new product development costs, ~~goodwill and~~ distribution rights., ~~Such~~and ~~assets are being amortized on a straight-line basis~~goodwill. New product development costs ~~consists~~consist of external costs incurred in development of products and includes licensing costs, which are amortized over athe ~~period~~shorter of 3 years. or the term of the licensing agreement. Goodwill relates to certain 100% Company-owned stores, which ~~represents~~ represents the cost of purchased businesses in excess of the fair value of net assets acquired~~, is being amortized over 15 years~~. ~~Distribution rights are being amortized over a period of 5 years.~~ The Company reviews the realizability of the intangible assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. During Tothe ~~date~~year ended February 1, no2003, ~~such~~the Company ~~events~~decided orto ~~changes~~close all of its 100% Company-owned retail stores. As a result, the Company recorded an ~~have~~impairment ~~occurred~~charge of $101,000 ~~except~~to aswrite ~~disclosed~~off inthe ~~Note 9~~value of goodwill related to 100% Company-owned retail stores. The net ~~Accumulated~~book value of goodwill was $0 and $121,000 at February 1, 2003 and February 2, 2002, respectively. Accumulated amortization amounted to $4860,~~238,~~000 and $35,~~527~~006,000 at February 3 1, ~~2001~~2003 and ~~January 29~~February 2, ~~2000~~2002, respectively. Amortization expense was $~~711~~690,000, $~~771~~768,000 and $~~774~~711,000 for the years ended February 3, ~~2001~~1, 2003, ~~January 29~~February 2, ~~2000~~2002 and ~~January 30~~February 3, ~~1999~~2001, respectively.

F–10

Accounts Payable

Checks ~~outstanding~~issued in excess of the bank balance of approximately $0606,000 and $~~894~~163,000, are included in accounts payable as of February 3 1, ~~2001~~2003 and ~~January 29~~February 2, ~~2000~~2002, respectively.

Income Taxes

The Company provides for deferred income taxes under the asset and liability method of accounting. This method requires the recognition of deferred income taxes based on the future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities, by applying enacted statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Store Opening and Closing Costs

Costs associated with the opening of new stores are expensed as incurred. Estimated costs associated with the closing of under-performing Company-owned stores are recognized inwhen ~~the~~they ~~period~~are ~~a decision has been reached to close the store~~incurred.

Stock-Based Compensation

The Company accounts for stock-based compensation with employees in accordance with Accounting Principles Board Opinion No. 25, "“Accounting for Stock Issued to Employees," ” under which no compensation cost for stock options is recognized for stock option awards granted at or above fair market value. The Company complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123, "“Accounting for Stock-Based Compensation"” (SFAS 123) and Statement of Financial Accounting Standards No. 148 “Accounting for Stock Based Compensation Transition and Disclosure.”

The Company accounts for stock-based compensation arrangements with non-employees in accordance with SFAS 123. SFAS 123 established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. Under the fair value-based method, compensation cost is measured at the grant date based on the value of the award, which is calculated using an option pricing model, and is recognized over the service period which is usually the vesting period.

F-10

The following table illustrates the effect on net income (loss) and earnings (loss) per share if expense was measured using the fair value recognition provisions described above:

	Fiscal Year Ended
	February 1, 2003			February 2, 2002			February 3, 2001

Net income (loss)
As reported	$	(5,103,000	)	$	(10,804,000	)	$	430,000
Pro forma	(5,214,000		)	(11,065,000		)	35,000

Basic and diluted (loss) income per share before extraordinary item
As reported	(0.56		)	(1.17		)	0.03
Pro forma	(0.57		)	(1.17		)	—

Basic and diluted net (loss) income per share
As reported	(0.56		)	(1.19		)	0.03
Pro forma	(0.57		)	(1.20		)	—

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

	Fiscal Year Ended
	February 1, 2003	February 2, 2002		February 3, 2001

Stock Options

Dividend Yield	—	—		—
Volatility	—	93.7	%	71.0	%
Risk-Free Interest	—	5.0	%	6.1	%
Expected term (years)	—	10		10

Stock Warrants

Dividend Yield	—	—		—
Volatility	—	—		68.4	%
Risk-Free Interest	—	—		6.5	%
Expected term (years)	—	—		5.3

The weighted average fair value of options granted in the three years ended February 1, 2003 were $0, $1.79 and $1.55 per share, respectively. The pro forma effects of applying SFAS 123 are not indicative of future amounts.

Income (Loss) Per Share

The Company computes income (loss) per share in accordance with Statement of Financial Accounting Standards No. 128, "“Earnings Per Share." ” Basic income (loss) per share is computed by dividing the net income (loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted income (loss) per share is similar to basic income (loss) per ~~share except the diluted computation gives effect to all dilutive potential common shares that were outstanding during the period.~~

F-11

share except the diluted computation gives effect to all dilutive potential common shares that were outstanding during the period.

Comprehensive Income (Loss)

The Company reports comprehensive income (loss) in accordance with Statement of Financial Accounting Standards No. 130, "“Reporting Comprehensive Income" ” (SFAS 130), which establishes rules for the reporting and display of comprehensive income (loss) and its components.

Foreign Currency Translation

One of the Company'’s subsidiaries has operations in Canada. The assets and liabilities of this subsidiary are reported in local currency and translated at the current exchange rate in effect at the balance sheet date, with gains or losses resulting from such translation included in stockholders'’ equity. Revenues and expenses are translated at the average exchange rate in effect at the time the underlying transaction occurred, with gains or losses resulting from such translation included in stockholder’s equity. Realized currency gains or losses on transactions are included in the results of operations.

F–11

Revenues and expenses are translated at the average exchange rate in effect at the time the underlying transaction occurred, with gains or losses resulting from such translation included in stockholder's equity. Realized currency gains or losses on transactions are included in the results of operations.

Financial Instruments

The carrying amounts for current assets and current liabilities approximate their fair value due to their short-term maturity periods. ~~The carrying amount of long-term debt reasonably approximates its fair value as the stated interest rates approximate current market interest rates of debt with similar terms.~~

Use of Estimates

The preparation of the financial statements in conformity with ~~generally~~accounting principles generally accepted ~~accounting~~in ~~principles~~the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The valuation of the deferred taxes is a significant estimate.

Reclassifications

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

NOTE 3. DISCONTINUED ~~ACCOUNTS AND NOTES RECEIVABLE~~ OPERATIONS

On May 7, 2002 in the process of reviewing its strategic options, the Company decided to take immediate steps to develop and implement a plan to close all of its 100% owned retail stores. The 100% owned retail store segment, which has not been as profitable as the other segments in the past few years, reported an operating loss of $(2,826,000) and $(2,039,000) for the years ended February 1, 2003 and February 2, 2002, respectively.

As a result, in the second quarter ended August 3, 2002, the Company started negotiating early lease terminations and evaluating asset impairment charges related to the 100% owned retail stores. At February 1, 2003, all the 100% Company-owned retail stores were closed. The results of operations and costs associated with the Company’s closing the 100% owned retail stores have been reflected as discontinued operations in the accompanying consolidated financial statements.

(Loss) income from discontinued operations is comprised of the following:

F-12

	Fiscal Year Ended
	February 1, 2003			February 2, 2002			February 3, 2001
Net sales	$	5,197,000		$	7,325,000		$	8,500,000
Operating (loss) income	$	(1,278,000	)	$	(1,509,000	)	$	212,000
Asset impairment charges	607,000			530,000			—
Lease termination costs	941,000			—			—
(Loss) income from discontinued operations	$	(2,826,000	)	$	(2,039,000	)	$	212,000

As of February 1, 2003 and February 2, 2002, the assets of discontinued operations were $5,000 and $1,891,000, and the liabilities were $79,000 and $706,000, respectively. The assets and liabilities of the discontinued operations have been included in the accompanying consolidated balance sheet.

NOTE 4. ACCOUNTS AND NOTES RECEIVABLE

Accounts and notes receivable consist of the following:

	February 3, 2001			January 29, 2000
	February 1, 2003			February 2, 2002
Accounts receivable	$	32,~~939~~238,000		$	32,~~722~~651,000
Notes receivable	157,000	~~411,000~~		262,000	~~552,000~~
		4,350,000			4,274,000
	2,395,000			2,913,000
Less allowance for doubtful accounts and sales returns	(482,000	~~(583,000~~	)	(451,000	~~(549,000~~	)
		3,767,000			3,725,000
	1,913,000			2,462,000
Less current portion	(1,913,000	~~(3,515,000~~	)	(2,445,000	~~(3,430,000~~	)
Noncurrent portion	$	~~252,000~~—		$	~~295~~17,000

~~A portion~~NOTE ~~of the Company's sales are made through the extension of credit~~5. Accounts receivable from credit sales are generally unsecured. Notes receivable are primarily from franchisees, and are generally secured by a personal guarantee and the assets of the franchised operations. The payments on the promissory notes started in July 1998 and continue through March 2003. The interest rates on the promissory notes range from 7% to 12%. INVENTORIES

For the year ended January 29, 2000, the Company converted three of its company-owned retail stores to franchised stores. The aggregate price for the sale of the stores net assets and inventory was $515,000, of which $395,000 was paid in cash and the balance of $120,000 was financed with promissory notes.

F–12

NOTE 4. INVENTORIES

Inventories are comprised of the following:

	February 3, 2001			January 29, 2000
	February 1, 2003			February 2, 2002
Finished goods	$	52,~~461~~400,000		$	53,~~835~~825,000
Raw materials	1,285,000	~~2,092,000~~		1,763,000	~~2,487,000~~
		7,553,000			8,322,000
	3,685,000			5,588,000
Less reserve for obsolescence	(407,000	~~(497,000~~	)	(583,000	~~(324,000~~	)
	$	73,~~056~~278,000		$	75,~~998~~005,000

NOTE 56. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

	February 3, 2001			January 29, 2000
	February 1, 2003			February 2, 2002
Leasehold improvements	$	73,~~634~~741,000		$	75,~~611~~589,000
Machinery and equipment	5,291,000	~~8,028,000~~		5,422,000	~~7,631,000~~
Furniture and fixtures	2,219,000	~~4,104,000~~		2,531,000	~~4,100,000~~
Vehicles		19,000			19,000
Construction in progress	—			25,000
Construction in progress		122,000			—
	11,251,000			13,567,000
		19,907,000			19,361,000
Less accumulated depreciation and amortization	(9,258,000		)	(9,653,000		)
Less accumulated depreciation and amortization		(13,557,000	)		(11,428,000	)
	$	1,993,000		$	3,914,000
	$	6,350,000		$	7,933,000

~~NOTE 6. DEBT~~ F-13

~~Debt~~NOTE ~~is comprised of the following:~~ 7. DEBT

		February 3, 2001			January 29, 2000
Bank borrowings:
	Term loan	$	3,090,000		$	4,914,000
	Revolving credit loan		—			2,119,000
	Fixed rate loan		500,000			500,000
	Capital lease obligations		20,000			72,000
			3,610,000			7,605,000
Less current portion			(3,597,000	)		(3,544,000	)
Long-term debt		$	13,000		$	4,061,000

On June 20, 1997, the Company entered into a credit facility agreement with The Provident Bank (the “Bank”), amended most recently on April 25, 2003, which is comprised of a revolving credit loan, term loan and fixed rate loan. In conjunction with the credit facility agreement, warrants to purchase 150,000 shares of the Company’s common stock were issued to the bank as part of this agreement. Initially these warrants had exercise prices ranging from $6.19 to $9.73 and expiration dates in June 2001; however, the exercise prices were subsequently adjusted to $2.00 and the expiration dates were extended to June 2005. The revolving credit loan provides for maximum borrowings of $3,500,000 through January 1, 2003 and $3,000,000 thereafter, and the borrowing base is limited to 80% of eligible receivables plus 45% of eligible inventory. A commitment fee of 0.25% is payable on the daily unused amount of the maximum revolving credit commitment. The facility expires on June 1, 2003, and all borrowings under the facility are secured by substantially all the assets of the Company. The interest rate on the revolving credit loan is prime plus 2.00%. Interest is payable monthly. The interest rate on the outstanding revolving credit loan was 6.25% at February 1, 2003. Amounts outstanding under the revolving credit loan were $1,131,000 and $1,483,000 at February 1, 2003 and February 2, 2002, respectively. As of February 1, 2003, available borrowings on the revolving credit loan were $1,460,000. No amounts were outstanding under the term loan or fixed rate loan at February 1, 2003 or February 2, 2002.

On ~~June 20~~ April 25, ~~1997~~2003, the Company ~~entered~~obtained ~~into~~an aamendment ~~credit~~to ~~facility agreement with The Provident Bank (~~the ~~"Bank").~~credit ~~Per~~facility ~~the~~to ~~agreement,~~extend ~~as amended most recently on August 28, 2000,~~ the credit facility isexpiration ~~comprised~~from ofJune ~~a $7.5 million term loan and a revolving credit loan. The revolving credit loan provides for maximum borrowings of $9 million through May~~ 1, ~~2000~~ ~~and~~2003 ~~for~~to ~~each~~June ~~succeeding~~30, ~~July 1 through December 31~~2003. The ~~maximum~~bank ~~borrowings~~has atnot ~~all~~given ~~other~~indication ~~times~~that ~~is $6 million. Borrowings under the revolving credit loan are limited to 85% of~~they ~~eligible~~intend ~~receivables plus 57% of eligible inventory, as defined, provided that from February through April eligible inventory is limited~~ to ~~$5 million~~renew ~~through~~ the ~~year~~agreement. See ~~2000 and~~Note ~~$3 million~~20 infor ~~years thereafter. In addition, from August 2000 through February 2001, the borrowing base is~~ further ~~reduced~~information byon ~~$1,500,000~~Management ~~("Holdback") and in February 2001 shall be released if the amount of Holdback is applied to the scheduled payments of principal of the term loan~~ Plans.

~~F–13~~During the year ended February 2, 2002, the Company pre-paid the entire outstanding Bank term loan and fixed rate loan balance in the amount of $3,590,000. The above noted loans had payment terms through June 2003. The company recorded an extraordinary loss of $219,000 related to the early debt extinguishment in the current year. The extraordinary loss represents the write-off of the unamortized debt discount associated with the term and fixed rate loan.

~~for~~The ~~the remainder of 2001. A commitment fee of 0.5% is payable on the daily unused amount of the maximum revolving~~ credit ~~commitment. The~~ facility agreement ~~expires~~contains, inamong ~~June 2003~~other provisions, ~~and~~requirements ~~borrowings~~for ~~under the~~maintaining ~~facility~~certain ~~are~~earnings ~~secured~~levels ~~by substantially all the assets of the Company. The interest rates on the term loan~~ and ~~revolving~~financial ~~credit loan borrowings generally fluctuate based on the margin ratio~~ratios, aslimits ~~defined, from a minimum of prime plus 0.50% to a maximum of prime plus 3.00%~~ on ~~the~~capital ~~term loan, and a minimum of prime to a maximum of prime plus 3.00% on the revolving credit loan. Interest is payable monthly.~~expenditures ~~The interest rate on the term loan was 8.75%~~ and ~~revolving~~additional ~~credit loan was 8.25% at February 3~~indebtedness, ~~2001.~~and ~~The~~use ~~term loan is payable in quarterly installments~~ of ~~$312,500~~proceeds ~~through~~from ~~June 1, 2000, and $375,000 thereafter. Prepayments on the loans are required in~~ certain ~~cases including, among others,~~ equity offerings ~~and asset dispositions~~. As of February 3, ~~2001~~1, ~~available borrowings on the revolving credit loan were $6~~2003,~~000,000.~~ ~~On June 20, 1997, warrants to purchase 150,000 shares of~~ the Company's ~~common~~was ~~stock~~in ~~were~~compliance ~~issued~~with toall the ~~Bank~~debt ascovenant ~~part~~requirements of ~~this agreement. Initially these warrants had exercise prices ranging from $6.19 to $9.73 and expiration dates in June 2001; however,~~ the ~~exercise prices were subsequently adjusted to $2.00 and the expiration dates were extended to~~credit ~~June 2005.~~facility agreement.

~~In July 1997, the agreement for the credit facility was amended to include an additional $500,000 fixed rate loan.~~ The ~~loan~~weighted ~~bears~~ average interest atrates ~~12%~~on ~~and~~borrowings isoutstanding ~~due~~as inof ~~June 2003. Warrants~~February ~~to purchase an additional 72~~1,~~464~~ ~~shares~~2003 ~~of the Company's common stock were issued to the Bank in connection with this amendment~~ and ~~initially~~February ~~had an exercise price of $6.90 and an expiration~~2, ~~date~~2002 ofwere ~~July 2003; however, the exercise price was subsequently adjusted to $2~~7.008% and ~~the expiration date was extended to July 2005~~7.04%, respectively.

~~In conjunction~~NOTE ~~with the April 28, 1999 amendment, warrants to purchase an additional 300,000 shares of the Company's common stock were issued to the Bank at an exercise price of $2~~8.50 COMMON ~~that expire in July 2005. Subsequently with the April 6, 2000 amendment, the exercise price of the warrants were reduced to $2.00.~~ STOCK

~~The~~During the year ended ~~credit~~February ~~facility~~3, ~~agreement~~2001, ~~contains~~on October 3, ~~among~~2000, ~~other~~the ~~provisions~~Company issued 2,041,581 ~~requirements~~shares ~~for~~of common ~~maintaining~~stock ~~certain~~to ~~earnings~~its ~~levels~~existing ~~and~~stockholders ~~financial~~at ~~ratios~~a price of $2.00 per share, pursuant ~~limits~~to onthe ~~capital~~rights ~~expenditures~~offering ~~and~~as described in the form S-3 registration ~~additional~~statement ~~indebtedness,~~filed ~~and~~with ~~use~~the ofSecurities ~~proceeds~~and ~~from~~Exchange ~~certain~~Commission ~~equity~~on ~~offerings~~August 23, 2000. The Atnet ~~February~~ proceeds of the offering were $3,956,000. The ~~2001~~Company used the net ~~Company~~proceeds ~~was~~from inthe ~~compliance~~offering ~~with~~to make a partial prepayment on the ~~debt~~term ~~covenant~~loan ~~requirements~~in the amount of $375,000 and the ~~credit~~remaining ~~facility~~funds were used to pay-down the ~~agreement~~revolver.

~~During the~~The ~~year~~above ~~ended~~noted ~~February 3,~~offering includes ~~2001,~~proceeds ~~pursuant~~from to the ~~terms~~sale of ~~the Bank credit agreement, $3,956,000 of the net proceeds from the~~ common stock ~~offering were used~~ to ~~make a prepayment on~~ the ~~term~~Company’s ~~loan~~Chairman in of the ~~amount~~Board of ~~$375~~Directors,~~000~~ directors and ~~the~~executive ~~remaining~~officers, ~~funds~~in an aggregate amount of $3,~~581~~544,000 ~~was applied against the revolving credit loan~~. ~~For further information on the common stock offering by the Company, see Note 7.~~

~~During the~~NOTE year ended January 29, 2000, pursuant to the terms of the Bank credit agreement, $2,745,000 of proceeds from the sale of convertible preferred stock by the Company were used to make a prepayment on the three quarterly installments through December 1, 1999 on the term loan in the amount of $1,000,000 and $1,745,000 was applied against the revolving credit loan9. CONVERTIBLE ~~For~~PREFERRED ~~further information on the sale of convertible preferred stock by the Company, see Note 8.~~ STOCK

~~For~~ During the year ended January 29, 2000, the Company ~~obtained~~authorized anand ~~amendment~~issued to503,092 ~~the~~shares ~~credit~~of ~~facility,~~Series ~~dated~~A ~~April 6,~~convertible preferred ~~2000~~stock to a group of investors, pursuant to ~~waive~~Regulation ~~certain~~D ~~financial~~of ~~covenants.~~the Securities Act of 1933. The ~~financial~~Series A ~~covenants~~preferred ~~waived~~stock ~~were~~has ~~the~~a ~~earnings~~par ~~before~~value ~~interest~~of $0.01 per share and a purchase price of $2.425 per share. On October 18, ~~taxes~~1999, the ~~depreciation~~Company authorized and ~~amortization~~issued ~~("EBITDA")~~101,667 ~~interest~~shares ~~coverage~~of ~~ratio~~Series ~~and~~B ~~fixed~~convertible preferred ~~charge~~stock ~~coverage~~to ~~ratio.~~a Ingroup ~~addition~~of investors, pursuant to Regulation D of the Securities ~~amendment~~Act ~~adjusted~~of 1933. The Series B ~~certain~~preferred ~~financial~~stock ~~covenants~~has a par value of $0.01 per share and ~~limitations~~a ~~prospectively~~purchase price of $15 per share. The total proceeds of $2,745,000 from the sale of

~~The weighted average interest rates on borrowings outstanding as of February 3, 2001 and January 29, 2000 were 10.59% and 10.58%, respectively.~~ F-14

~~F–14~~Series A and Series B preferred stock is comprised of $1,975,000 from the Company’s Chairman of the Board of Directors, a director and an executive officer, and $770,000 from outside investors. Dividends on the preferred stock accrue and are payable annually in either cash or common stock, at the Company’s or majority of the preferred stockholders discretion, at the rate of 8% per annum, commencing on the date of issuance. Accrued and unpaid dividends shall be paid on (1) April 30, July 31, October 31 and January 31 of each year commencing on July 31, 2000 for Series A preferred stock and October 31, 2000 for Series B preferred stock, to the holders of record as they appear on the books and records of the Company 10 days preceding each payment date, and (2) the date certificates representing common stock of the Company are required to be delivered following any conversion of Series A and Series B convertible preferred stock. Holders of the preferred stock have the right to convert their shares, in whole or in part, into the Company’s common stock. Each preferred share of Series A and Series B may be converted, at any time at the option of the holder thereof, into a certain number of the Company’s common stock as is determined by dividing the stated value of Series A and Series B preferred stock by the applicable conversion price. The conversion price initially shall mean, with respect to the Series A preferred stock, an amount equal to $2.425 per share and, with respect to the Series B preferred stock, an amount equal to $2.3625 per share; provided that each such initial conversion price shall be subject to adjustment per the stated terms in the agreement. The above mentioned issuance of preferred stock also has certain other rights including pre-emptive rights, voting rights, board representation, registration rights and liquidation preference. At any time commencing one year after the date of issuance of the preferred stock, the holders of a majority of the preferred stock may require the Company to file a registration statement covering the conversion of such preferred stock to common stock.

During the year ended ~~Aggregate~~February ~~future~~3, ~~maturities~~2001, ~~and~~the ~~prepayment~~shareholders of ~~debt~~the ~~are~~Series asA ~~follows:~~and Series B convertible preferred stock consented to waive any adjustment to the conversion price resulting from the common stock rights offering in October 2000. For further information on the common stock offering, see Note 8.

Fiscal year ending:
	February 2, 2002	$	3,597,000
	February 1, 2003		13,000
		$	3,610,000

NOTE 10. IMPAIRMENT CHARGE

~~Subsequent~~ Pursuant to ~~fiscal~~SFAS ~~2000~~No. 144, “Accounting infor ~~February 2001~~ the ~~Company~~Impairment ~~pre~~or Disposal of Long-~~paid~~Lived Assets, the ~~entire~~Company evaluated ~~outstanding~~the ~~Bank~~realizability ~~term~~of ~~loan~~assets related to company owned retail stores and ~~fixed~~estimated ~~rate~~the ~~loan~~fair ~~balance~~value inbased on the ~~amount~~anticipated cash flows from these retail locations. In addition, the Company discontinued the planned implementation of a warehouse management enhancement project due to lower than anticipated production volumes. As a result, the Company recorded impairment charges of approximately $3607,~~590~~000 and $530,000. ~~The~~in ~~above~~the ~~noted~~fiscal year ended ~~loans~~February ~~had~~1, ~~payment~~2003 ~~terms~~and ~~through~~February ~~June 2003.~~2, 2002, which is included in the operating expenses and loss from discontinued operations in the accompanying consolidated statements of operations.

NOTE ~~Capital~~11. INCOME ~~Leases~~ TAXES

The Company acquired certain equipment under lease arrangements which are being accounted for as capital leases for accounting purposes. Equipment under such leases has been recorded as property and equipment with a cost of approximately $961,000 as of both February 3, 2001 and January 29, 2000, and accumulated amortization of $961,000 at those dates, respectively. Amortization expense was $0, $76,000 and $149,000, for the years ended February 3, 2001, January 29, 2000 and January 30, 1999, respectively.

The future minimum lease payments for all capital leases in effect as of February 3, 2001 are as follows:

Fiscal year ending:
	February 2, 2002	$	10,000
	February 1, 2003		10,000
	January 31, 2004		9,000
Total minimum lease payments			29,000
Less amount representing interest			(9,000	)
Present value of net minimum lease payments		$	20,000

NOTE 7. COMMON STOCK

On October 3, 2000 the Company issued approximately 2,041,581 shares of common stock to its existing stockholders at a price of $2.00 per share, pursuant to the rights offering as described in form S-3 registration statement filed with the Securities and Exchange Commission on August 23, 2000. The net proceeds of the offering were $3,956,000. The Company used the net proceeds from the offering to make a prepayment on the term loan in the amount of $375,000 and the remaining funds were used to pay-down the revolver.

The above noted offering includes proceeds from the sale of common stock to the Company's Chairman of the Board of Directors, directors and executive officers, in an aggregate amount of $3,544,000.

NOTE 8. CONVERTIBLE PREFERRED STOCK

On May 28, 1999, the Company authorized and issued 503,092 shares of Series A convertible preferred stock to a group of investors, pursuant to Regulation D of the Securities Act of 1933. The Series A preferred stock has a par value of $0.01 per share and a purchase price of $2.425 per share. On October 18, 1999, the Company authorized and issued 101,667 shares of Series B convertible preferred stock to a group of investors, pursuant to Regulation D of the Securities Act of 1933. The Series B preferred stock has a par value of $0.01 per share and a purchase price of $15 per share. The

F–15

total proceeds of $2,745,000 from the sale of Series A and Series B preferred stock is comprised of $1,975,000 from the Company's Chairman of the board of Directors, a director and an executive officer, and $770,000 from outside investors. Dividends on the preferred stock accrue and are payable quarterly in either cash or common stock, at the Company's discretion, at the rate of 8% per annum, commencing on the date of issuance. Accrued and unpaid dividends shall be paid on (1) April 30, July 31, October 31 and January 31 of each year commencing on July 31, 2000 for Series A preferred stock and October 31, 2000 for Series B preferred stock, to the holders of record as they appear on the books and records of the Company 10 days preceding each payment date, and (2) the date certificates representing common stock of the Company are required to be delivered following any conversion of Series A and Series B convertible preferred stock. Holders of the preferred stock have the right to convert their shares, in whole or in part, into the Company's common stock. Each preferred share of Series A and Series B may be converted, at any time at the option of the holder thereof, into a certain number of the Company's common stock as is determined by dividing the stated value of Series A and Series B preferred stock by the applicable conversion price. The conversion price initially shall mean, with respect to the Series A preferred stock, an amount equal to $2.425 per share and, with respect to the Series B preferred stock, an amount equal to $2.3625 per share; provided that each such initial conversion price shall be subject to adjustment per the stated terms in the agreement. The above mentioned issuance of preferred stock also has certain other rights including pre-emptive rights, voting rights, board representation, registration rights and liquidation preference. At any time commencing one year after the date of issuance of the preferred stock, the holders of a majority of the preferred stock may require the Company to file a registration statement covering the conversion of such preferred stock to common stock.

During the current year ended February 3, 2001, the shareholders of the Series A and Series B convertible preferred stock consented to waive any adjustment to the conversion price resulting from the common stock rights offering in October 2000. For further information on the common stock offering, see Note 7.

NOTE 9. ASSET IMPAIRMENT CHARGE

In October 1996, the Company acquired the stock of British Links Golf Classics, Inc., (British Links) a catalog company specializing in golf-related wall decor, gifts and other collectibles for approximately $1.4 million. Substantially all of the purchase price was allocated to goodwill. Subsequently, pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company evaluated the realizability of the intangibles related to its British Links business. As the anticipated consumer demand for golf gifts developed more slowly than originally expected, the Company's future growth focus is on its core motivational products business, and plans to sell the golf catalog business to a strategic buyer have yet to materialize, the Company determined that the estimated future value of cash flows related to British Links is below the carrying value of the related goodwill. Given that the value of future cash flows is uncertain due to market conditions, during the year ended January 30, 1999 the Company recorded an asset impairment charge of approximately $1.3 million, which represents the unamortized carrying value of the goodwill for British Links.

F–16

NOTE 10. INCOME TAXES

The provision for income taxes consists of the following:

			Year Ended February 3, 2001			Year Ended January 29, 2000			Year Ended January 30, 1999
		Year Ended February 1, 2003			Year Ended February 2, 2002			Year Ended February 3, 2001
Current:
Federal	~~Federal~~	$	$—	~~30,000~~	$	$—	—	$	$30,000	—
State	~~State~~	(102,000		~~30,000~~)	—		~~60,000~~	30,000		~~25,000~~
	Foreign			—			—			(105,000	)
Deferred		(1,795,000		)	(2,101,000		)	241,000
Deferred				241,000			—			140,000
Deferred – Valuation allowance		1,795,000			6,974,000			—
		$	$(102,000	~~301,000~~)	$	$4,873,000	~~60,000~~	$	$301,000	~~60,000~~

A ~~reconciliation~~ reconciliation between the federal statutory rate and the Company'’s effective tax rate is as follows:

	Year Ended February 3, 2001		Year Ended January 29, 2000		Year Ended January 30, 1999
	Year Ended February 1, 2003		Year Ended February 2, 2002		Year Ended February 3, 2001
Federal statutory rate	(34.0	)%	34.0	%	34.0	%
State taxes, net of federal tax benefit	5(3.0	)	5.0		5.0
Valuation allowance and other, net	235.20		~~(33~~46.43	)	~~(38~~2.2	)
	41.2	%	5.6	%	0.8	%
	(2.0	)%	85.3	%	41.2	%

F-15

Deferred income taxes result from temporary differences in the recognition of revenues and expense for financial and income tax reporting purposes. The components of the net deferred tax asset are comprised of the following:

			February 3, 2001			January 29, 2000
		February 1, 2003			February 2, 2002
Deferred income tax assets (liabilities), current:
Accounts receivable	~~Accounts receivable~~	$	$188,000	~~220,000~~	$	$176,000	~~78,000~~
Inventories	~~Inventories~~	151,000		~~177,000~~	202,000		~~151,000~~
	Loss carryforwards			600,000			—
Prepaid advertising and new product development		(705,000		)	(886,000		)
	Prepaid advertising and new product development			(1,002,000	)		(759,000	)
Other, primarily accruals		190,000			196,000
	Other, primarily accruals			252,000			188,000
		(176,000		)	(312,000		)
				247,000			(342,000	)
Deferred income tax assets (liabilities), non-current:
Deferred income tax assets (liabilities), non-current:
Depreciation and amortization		848,000			1,514,000
	Depreciation and amortization			1,365,000			1,039,000
Loss carryforwards		11,073,000			8,748,000
	Loss carryforwards			6,237,000			7,478,000
Valuation allowance		(11,745,000		)	(9,950,000		)
	Valuation allowance			(2,976,000	)		(2,976,000	)
		176,000			312,000
				4,626,000			5,541,000
Deferred income taxes assets (liabilities) – total		$	—		$	—
Deferred income taxes assets (liabilities)—total			$	4,873,000		$	5,199,000

~~Realization of~~During the ~~net~~year ended ~~deferred~~February ~~tax~~1, ~~asset~~2003 isand ~~largely~~February ~~dependent~~2, ~~upon~~2002, based on the Company’s ~~generating~~financial performance ~~sufficient~~in ~~taxable~~the ~~income~~past ~~prior~~few toyears and the ~~expiration~~challenging ofeconomic environment that has negatively impacted the ~~net~~Company’s operating ~~loss carryforwards. However~~results, the ~~amount~~Company’s management ofdetermined ~~such~~that ~~realization~~the ~~could~~valuation ~~change~~allowance inassociated with the ~~near~~deferred tax ~~term~~asset ifshould ~~estimates~~be ofincreased. The ~~future~~valuation allowance ~~taxable~~was ~~income~~increased ~~during~~to ~~the~~fully ~~carryforward~~reserve ~~period~~for ~~are~~the ~~increased~~deferred ortax ~~decreased.~~asset Todue to the reduced ~~extent~~likelihood of whether all the benefits of net operating loss (NOL) carryforwards and ~~existing~~other ~~deductible~~ temporary differences ~~are~~would ~~not~~be ~~offset~~fully byutilized ~~existing~~before they ~~taxable~~expire. For ~~temporary~~the ~~differences~~year ~~reversing~~ended February ~~within~~1, ~~the~~2003 ~~carryforward~~and ~~period~~February 2, 2002, the ~~remaining~~Company ~~loss~~recognized ~~carryforwards~~an ~~are~~income tax ~~expected~~expense toof be$0 ~~realized~~and by$4,873,000, ~~achieving~~respectively, ~~future~~to ~~profitable~~increase ~~operations.~~the ~~The~~valuation ~~realization~~allowance associated ofwith the ~~net~~ deferred tax asset ~~is not assured,~~ .

~~F–17~~Realization of the net deferred tax asset is largely dependent upon the Company generating sufficient taxable income prior to the expiration of the net operating loss carryforwards.

The Company has ~~however~~approximately $28,390,000 ~~management~~of ~~believes~~tax ~~that~~net itoperating isloss ~~more~~carryforwards ~~likely~~as ~~than~~of February ~~not~~1, ~~that~~2003, ~~the~~which ~~net~~are ~~deferred~~available ~~tax~~to ~~asset~~reduce ~~will~~future betaxable ~~realized.~~income and expire as follows:

The Company has approximately $17,532,000 of tax net operating loss carryforwards as of February 3, 2001, which are available to reduce future taxable income and expire as follows:

2010	$	10,560,000
2011	1,496,000
2019	4,401,000
2020	914,000
2022	4,471,000
2023	6,548,000
Total	$	28,390,000

2010	$	10,183,000
2011		1,496,000
2019		4,401,000
2020		1,429,000
2021		23,000
Total	$	17,532,000

F-16

NOTE 1112. ~~INCOME~~ (LOSS) INCOME PER SHARE

Effective January 31, 1998, the Company adopted Statement of Financial Accounting Standards No. 128, "“Earnings Per Share." ” The computations of basic and diluted ~~income~~ (loss) income per share are as follows:

			Year Ended February 3, 2001			Year Ended January 29, 2000			Year Ended January 30, 1999
		Year Ended February 1, 2003			Year Ended February 2, 2002			Year Ended February 3, 2001
Numerator for basic and diluted income/(loss) per share:
Numerator for (loss) income from continuing operations per share:
	Net income/(loss)		$	430,000		$	(1,127,000	)	$	(7,336,000	)
(Loss) income from continuing operations		$	(2,277,000	)	$	(8,546,000	)	$	218,000
	Less: Preferred stock dividends			223,000			101,000			—
Preferred stock dividends		(218,000		)	(220,000		)	(223,000		)
Numerator for basic and diluted income/(loss) per share			$	207,000		$	(1,228,000	)	$	(7,336,000	)
Numerator for loss from continuing operations per share		$	(2,495,000	)	$	(8,766,000	)	$	(5,000	)
Denominator for basic and diluted income/(loss) per share:
Numerator for (loss) income from discontinued operations per share		$	(2,826,000	)	$	(2,039,000	)	$	212,000
	Weighted average common stock shares			7,664,215			6,927,668			6,768,929
Numerator for extraordinary loss on early extinguishment of debt		$	—		$	(219,000	)	$	—
Income/(loss) per share:
Numerator for net (loss) income per share:
	Basic and diluted income/(loss) per share		$	0.03		$	(0.18	)	$	(1.08	)
Net (loss) income		$	(5,103,000	)	$	(10,804,000	)	$	430,000
Preferred stock dividends		(218,000		)	(220,000		)	(223,000		)
Numerator for net (loss) income per share		$	(5,321,000	)	$	(11,024,000	)	$	207,000
Denominator for loss per share:
Weighted average common stock shares		9,490,127			9,241,355			7,664,215
Basic and diluted loss per share:
(Loss) income from continuing operations		$	(0.26	)	$	(0.95	)	$	0.00
(Loss) income from discontinued operations		$	(0.30	)	$	(0.22	)	$	0.03
Extraordinary loss on early Extinguishment of debt		$	—		$	(0.02	)	$	—
Net (loss) income		$	(0.56	)	$	(1.19	)	$	0.03

The ~~diluted~~ diluted computations for the years ended February 3 1, ~~2001~~2003, ~~January 29~~February 2, ~~2000~~2002 and February ~~January 30~~3, ~~1999~~2001, did not assume the exercise of stock options and warrants, nor the conversion of preferred stock due to their antidilutive effect on ~~income~~ (loss) income per share. At February 3, ~~2001~~1, 2003, there were options to purchase 1,~~134~~401,460 shares of stock, warrants to purchase 522,464 shares of stock and preferred stock convertible into 1,148,595 shares of stock outstanding. See Note 6 15 for further information on stock options and warrants, ~~Note 15 for further information on stock options~~ and Note 8 ~~for~~9 for details on convertible preferred stock.

NOTE 12. RELATED PARTY TRANSACTIONS

During the year ended February 3, 2001, the Company received proceeds from the sale of common stock to the Company's Chairman of the Board of Directors, directors and executive officers, in an aggregate amount of $3,544,000. For further information on the sale of common stock by the Company, see Note 7.

During the year ended January 29, 2000, the Company received proceeds from the sale of convertible preferred stock to the Company's Chairman of the Board of Directors, a director and an executive officer, in an aggregate amount of $1,975,000. For further information on the sale of convertible preferred stock by the Company, see Note 8.

F–18

During the year ended January 29, 2000 and January 30, 1999, shareholders of the Company provided consulting services related to tax and financial, and legal matters. Fees paid for tax and financial services were $48,000 and $179,000 for the years ended January 29, 2000 and January 30, 1999, respectively. Fees paid for legal services were $129,000 and $103,000 for the years ended January 29, 2000 and January 30, 1999, respectively.

NOTE 13. SEGMENT AND RELATED INFORMATION

The Company has adopted SFAS No. 131, "“Disclosures About Segments of an Enterprise and Related Information." ” This Statement establishes standards for the way public business enterprises report information about operating segments in annual financial statements and in interim financial reports issued to shareholders.

The Company'’s reportable segments are the various distribution channels used to market its products. The Company'’s products have similar purposes and uses in each channel of distribution, but profitability varies among the channels. The Company considers itself a single line of business with products that are marketed through direct marketing (catalog, electronic commerce and telemarketing), retail (100% Company- owned stores) - See Note 3 to the Consolidated Financial Statements “Discontinued Operations,” wholesale, ~~and~~ sales to franchisees channels and joint venture retail stores. In addition, ~~The~~the Company ~~has~~generates ~~five~~revenue ~~reportable~~from ~~segments—Direct~~providing ~~Marketing—Successories,~~framing ~~Direct~~services to ~~Marketing—Golf,~~outside ~~Retail~~corporate businesses on a contract fee basis. The Company~~-owned~~ ~~stores,~~has ~~Wholesale~~four ~~and~~reportable ~~Sales~~segments to– ~~Franchisees.~~Direct Marketing -

The accounting policies of the reportable segments are the same as those described in Note 2 of Notes to Consolidated Financial Statements. The Company evaluates the performance of its operating segments based on income (loss) before other income (expense) and income taxes. F-17

~~F–19~~Successories, Retail Company-owned stores - See Note 3 to the Consolidated Financial Statements “Discontinued Operations,” Sales to Franchisees, and other segments (Wholesale, Contract Framing and Joint Venture Retail Stores).

~~Summarized~~The ~~financial~~accounting ~~information~~policies of ~~concerning~~ the ~~Company's~~ reportable segments isare ~~shown~~the same as those described in ~~the~~Note ~~following~~2 ~~table~~of Notes to Consolidated Financial Statements. The ~~"Other"~~Company ~~row~~evaluates ~~includes~~the ~~corporate~~performance ~~related~~of its ~~items~~operating ~~not~~segments ~~allocated~~based toon income (loss) before other income (expense), ~~reportable~~income ~~segments.~~taxes and extraordinary items.

			Net Sales		Segment Profit (Loss)			Total Assets		Capital Expenditures		Depreciation and Amortization
Year Ended February 3, 2001:
Direct Marketing Successories			$	33,620,000	$	5,895,000		$	4,035,000	$	139,000	$	287,000
Direct Marketing Golf				110,000		71,000			215,000		—		—
Retail Company-owned stores				11,383,000		572,000			3,861,000		20,000		662,000
Wholesale				482,000		325,000			3,000		—		—
Sales to Franchisees				6,466,000		1,487,000			1,370,000		—		29,000
Other				—		(7,920,000	)		19,307,000		387,000		1,862,000
	CONSOLIDATED		$	52,061,000	$	430,000		$	28,791,000	$	546,000	$	2,840,000
Year Ended January 29, 2000:
Direct Marketing Successories			$	28,901,000	$	5,645,000		$	3,275,000	$	100,000	$	274,000
Direct Marketing Golf				1,485,000		(133,000	)		495,000		—		—
Retail Company-owned stores				13,406,000		32,000			4,697,000		120,000		1,152,000
Wholesale				880,000		(305,000	)		118,000		—		—
Sales to Franchisees				7,030,000		1,778,000			1,572,000		—		20,000
Other				—		(8,144,000	)		20,872,000		567,000		1,861,000
	CONSOLIDATED		$	51,702,000	$	(1,127,000	)	$	31,029,000	$	787,000	$	3,307,000
Year Ended January 30, 1999:
Direct Marketing Successories			$	25,740,000	$	4,327,000		$	2,066,000	$	—	$	224,000
Direct Marketing Golf				3,372,000		(2,479,000	)		764,000		—		88,000
Retail Company-owned stores				16,330,000		(824,000	)		6,527,000		1,245,000		763,000
Wholesale				1,814,000		(236,000	)		1,079,000		—		—
Sales to Franchisees				5,608,000		1,373,000			1,456,000		—		19,000
Other				—		(9,497,000	)		22,678,000		953,000		1,819,000
		CONSOLIDATED	$	52,864,000	$	(7,336,000	)	$	34,570,000	$	2,198,000	$	2,913,000

Summarized financial information concerning the Company’s reportable segments is shown in the following table. Certain prior year amounts have been reclassified to conform with the current year presentation for the discontinued operations. The “Corporate” row includes corporate related items not allocated to reportable segments.

	Net Sales		Segment Profit (Loss)			Total Assets		Capital Expenditures		Depreciation and Amortization

Year Ended February 1, 2003:
Direct Marketing Successories	$	27,261,000	$	2,967,000		$	2,579,000	$	12,000	$	268,000
Sales to Franchisees	2,569,000		227,000			518,000		—		11,000
Other Segments	2,304,000		496,000			757,000		8,000		36,000
Corporate	—		(5,967,000		)	6,866,000		24,000		1,467,000
CONTINUING OPERATIONS	$	32,134,000	$	(2,277,000	)	$	10,720,000	$	44,000	$	1,782,000
Retail 100% owned Stores	$	5,197,000	$	(2,826,000	)	$	5,000	$	3,000	$	876,000

Year Ended February 2, 2002:
Direct Marketing Successories	$	27,433,000	$	2,339,000		$	7,160,000	$	78,000	$	266,000
Sales to Franchisees	4,201,000		310,000			938,000		—		10,000
Other Segments	3,362,000		198,000			581,000		—		46,000
Corporate	—		(11,393,000		)	5,391,000		191,000		1,923,000
CONTINUING OPERATIONS	$	34,996,000	$	(8,546,000	)	$	14,070,000	$	269,000	$	2,245,000
Retail 100% owned Stores	$	7,325,000	$	(2,039,000	)	$	1,891,000	$	60,000	$	1,162,000

Year Ended February 3, 2001:
Direct Marketing Successories	$	33,620,000	$	5,895,000		$	4,035,000	$	139,000	$	287,000
Sales to Franchisees	6,466,000		1,487,000			1,370,000		—		29,000
Other Segments	4,744,000		1,111,000			1,339,000		2,000		99,000
Corporate	—		(8,275,000		)	19,307,000		387,000		1,862,000
CONTINUING OPERATIONS	$	44,830,000	$	218,000		$	26,051,000	$	528,000	$	2,277,000
Retail 100% owned Stores	$	8,500,000	$	212,000		$	2,740,000	$	18,000	$	563,000

The Company utilizes its facilities and majority of its assets interchangeably among each distribution channel. Assets that relate specifically to a reportable segment have been included in the above table. Assets identified to the reportable segments are primarily cash, receivables, inventory, prepaid catalogs, property and equipment, and intangibles.

The following table presents the details for ~~"Other" segment profit (loss)~~Corporate:

	Year Ended February 3, 2001			Year Ended January 29, 2000		Year Ended January 30, 1999
	Year Ended February 1, 2003			Year Ended February 2, 2002		Year Ended February 3, 2001
Other expense (income):
Corporate administrative expenses	$	4,381,000		$	4,077,000	$	4,387,000
Contract framing	$	(355,000	)	$	—	$	—
Unallocated depreciation and amortization expense	1,467,000			1,923,000		1,862,000
Corporate administrative expenses		4,387,000			4,689,000		6,119,000
Interest expense and other	221,000			301,000		1,725,000
Depreciation and amortization expense		1,862,000			1,861,000		1,819,000
Income tax expense (benefit)	(102,000		)	4,873,000		301,000
Interest expense and other		1,725,000			1,534,000		1,499,000
Extraordinary loss on early debt extinguishment	—			219,000		—
Income tax expense		301,000			60,000		60,000
	$	5,967,000		$	11,393,000	$	8,275,000
	$	7,920,000		$	8,144,000	$	9,497,000

F~~–20~~-18

Corporate administrative expenses are primarily charges for those functions not specifically attributable to any specific segment; these functions include the product development, merchandising, information systems, accounting, legal, human resource and executive departments. Included in the expenses associated with these functions are payroll and related costs, professional fees, information system maintenance costs, office occupancy costs, and property and casualty insurance.

The Company'’s operations are principally in North America. No single foreign country or geographic area is significant to the consolidated operations. Long-lived assets are all located in North America.

The Company'’s products include distinctive lines of wall decor, desktop accessories, books and stationery, personalized gifts and awards. In addition, the Company sells ~~other~~ other motivational products supplied by third parties.

For the fiscal years ended February 3 1, ~~2001~~2003, ~~January 29~~February 2, ~~2000~~2002 and ~~January 30,~~February ~~1999~~3, 2001 net product sales by product categories were as follows:

		Year Ended February 3, 2001		Year Ended January 29, 2000		Year Ended January 30, 1999
		Year Ended February 1, 2003		Year Ended February 2, 2002		Year Ended February 3, 2001
Wall Décor		44

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