<PAGE>   1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
--------------------------------------------------------------------------------

FORM 10-Q

/X/  QUARTERLY REPORT Under Section 13 or 15(d) of the Securities
     Exchange Act of 1934

For the quarter ended March 31, 1998

Commission File No. 1-6485
--------------------------------------------------------------------------------
                              or

/ /  TRANSITION REPORT Under Section 13 or 15(d) of the Securities
     Exchange Act of 1934
--------------------------------------------------------------------------------
ACTION INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
--------------------------------------------------------------------------------
Pennsylvania
(State or other jurisdiction of incorporation or organization)
--------------------------------------------------------------------------------
25-0918682
(I.R.S. Employer Identification No.)
--------------------------------------------------------------------------------
330 west 42nd Street, New York, New York                10036-6902
(Address of principal executive offices)                (Zip Code)
--------------------------------------------------------------------------------
Registrant's telephone number, including area code: (212) 594-2580
--------------------------------------------------------------------------------
The number of shares of the Registrant's common stock outstanding at April 15,
1998 was 5,539,458.
--------------------------------------------------------------------------------
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
                                           -----       -----

<PAGE>   2
INDEX

ACTION INDUSTRIES, INC. AND SUBSIDIARIES


Part I.  Financial Information

Item 1.  Financial Statements (Unaudited)

         Consolidated Balance Sheets -
           March 31, 1998, March 31, 1997, 
           and June 30, 1997

         Consolidated Statements of Operations - 
           Nine months and Three Months Ended 
           March 31, 1998 and March 31, 1997

         Consolidated Statements of Shareholders' Equity
           (Capital Deficiency) - Nine months Ended
           March 31, 1998 and March 31, 1997

         Consolidated Statements of Cash Flows -
           Nine months Ended March 31, 1998 and
           March 31, 1997

         Notes to Consolidated Financial Statements


Item 2.  Management's Discussion and Analysis of
           Financial Condition and Results of
           Operations


Part II. Other Information

Item 2.  Changes in Securities

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

Item 6.  Exhibits and Reports on Form 8-K


Signatures
<PAGE>   3
                    ACTION INDUSTRIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                 (In thousands)
                                    UNAUDITED


<TABLE>
<CAPTION>
                                                      March 31,  March 31,   June 30,
                                                        1998       1997       1997
ASSETS
<S>                                                  <C>        <C>        <C>    
CURRENT ASSETS
  CASH AND CASH EQUIVALENTS                          $   109    $   411    $   582
  ACCOUNTS RECEIVABLE
    NET OF ALLOWANCES                                  3,690        937        232
  INVENTORIES                                          1,153         --         --
  NOTES RECEIVABLE                                       675

  OTHER CURRENT ASSETS                                   218        418        100
                                                     -------    -------    -------
     TOTAL CURRENT ASSETS                              5,846      1,766        914
                                                     -------    -------    -------
PROPERTY, PLANT AND
 EQUIPMENT, NET                                          737         44         --
                                                     -------    -------    -------
OTHER ASSETS
  NOTES RECEIVABLE                                     2,145        544       1614 
  INVESTMENT IN SUBSIDIARY                               765
  DEFERRED ACQUISITION COSTS                             922
  INTANGIBLE ASSETS, NET                                 481
  GOODWILL, NET                                        2,970 
  OTHER                                                  255        166        241
                                                     -------    -------    -------
     TOTAL OTHER ASSETS                                7,538        710       1855 
                                                     -------    -------    -------
     TOTAL ASSETS                                    $14,121    $ 2,520    $  2769 
                                                     =======    =======    ======= 

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

CURRENT LIABILITIES
  NOTES PAYABLE AND OTHER
    DEBT CURRENTLY PAYABLE                           $   588    $    --    $   115
  ACCOUNTS PAYABLE                                     2,603      1,776        970
  ACCRUED EXPENSES                                     2,321        442        122
  LOAN PAYABLE, BANK                                   1,356 
  INCOME TAXES PAYABLE                                    --
  OTHER  CURRENT LIABILITIES                             119        326        969
                                                     -------    -------    -------
     TOTAL CURRENT LIABILITIES                         6,987      2,544      2,176 
                                                     -------    -------    -------
OTHER LIABILITIES
  LONG TERM DEBT                                           0        115         --
  CONVERTIBLE NOTES                                    3,900                   500
  NOTES PAYABLE                                          436
  DEFERRED EXPENSES                                    1,347      1,459      1,426 
  OTHER LIABILITIES                                        7
     TOTAL OTHER LIABILITIES                           5,690      1,574      1,926 
                                                     -------    -------    -------
     TOTAL LIABILITIES                                12,677      4,118      4,102 
                                                     -------    -------    -------
STOCKHOLDERS' EQUITY (DEFICIENCY)
  COMMON STOCK, PAR VALUE $.10                           719        719        719
</TABLE>




                                                                  

                                                                  
<PAGE>   4

<TABLE>
<S>                                               <C>            <C>           <C>

PREFERRED STOCK, CLASS A
PREFERRED STOCK, CLASS B

CAPITAL IN EXCESS OF PAR                          25,498         25,498         25,498 

RETAINED EARNINGS  (ACCUM. DEFICIT)              (15,340)       (16,241)       (15,976)

MINORITY INTEREST                                  2,141 
                                                  ------          -----          ----- 
                                                  13,018          9,976         10,241 
                                                  ------          -----          ----- 
LESS TREASURY STOCK,  AT COST                    (11,574)       (11,574)       (11,574)
                                                  ------          -----          ----- 
   TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY)         1,443         (1,598)        (1,333)
                                                  ------          -----          ----- 
   TOTAL LIABILITIES AND
     STOCKHOLDERS' EQUITY (DEFICIENCY)           $14,121         $2,520         $2,769 
                                                  ======          =====          ===== 
</TABLE>

<PAGE>   5
ACTION INDUSTRIES, INC. AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF OPERATIONS    
UNAUDITED                                                                       
                                                                        
                                                                        
(In thousands except per share data)
                                                                        
                                                                        
<TABLE>
<CAPTION>
                                        Nine Months Ended       Three Months Ended 
                                        March        March      March       March
                                        31, 1998     31, 1997   31, 1998    31, 1997
<S>                                     <C>         <C>         <C>        <C>   
NET SALES                               $   --      $ 5,424     $   --     $   --

COSTS AND EXPENSES
Cost of products sold                       --        3,654         --         --
Operating Expenses                       1,212        4,006        637        561
Interest expense                            65          446         11         67
                                        ------      -------     ------     ------ 
                                         1,277        8,106        648        628
                                        ------      -------     ------     ------ 
OTHER INCOME (EXPENSE), NET              1,412          855      1,117        365
                                        ------      -------     ------     ------ 
INCOME (LOSS) BEFORE INCOME TAXES          135       (1,827)       469       (263)

PROVISION FOR INCOME TAXES                  --           --         --         --
                                        ------      -------     ------     ------ 
NET INCOME  (LOSS)                      $  135      $(1,827)    $  469     $ (263)
                                        ======      =======     ======     ====== 



NET INCOME (LOSS) PER SHARE             $  0.02     $ (0.33)    $  0.08    $(0.05)
Weighted average shares outstanding       5,539       5,539       5,539     5,539 
</TABLE>

<PAGE>   6
ACTION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
UNAUDITED

(In thousands except share amounts)

<TABLE>
<CAPTION>
                                                           Nine Months Ended March 31, 1997 and March 31, 1998 
                                                             Capital     Retained
                                        Common Stock        In excess    Earnings   Minority       Treasury Stock
                                      Shares     Amount      of Par     (Deficit)   Interest    Shares        Amount        Total
                                      ------     ------      ------     ---------   --------    ------        ------        -----
<S>                                  <C>         <C>        <C>         <C>         <C>         <C>          <C>         <C>    
Balance - June 30, 1996              7,187,428   $ 719      $25,498      $(14,414)              1,647,970    $(11,574)    $    229

Net Loss                                                                   (1,827)                                        $ (1,827)

Balance - March 31, 1997             7,187,428   $ 719      $25,498      $(16,241)              1,647,970    $(11,574)    $ (1,598)

Net Income                                                                    265                                         $    265

Balance - June 30, 1997              7,187,428   $ 719      $25,498      $(15,976)              1,647,970    $(11,574)    $ (1,333)

Net of Subsidiary equity (deficit)
   in consolidation                                                           501     2,141                               $  2,642 

Net Income                                                                    135                                         $    135

Balance - March 31, 1998             7,187,428   $ 719      $25,498      $(15,340)   $2,141     1,647,970    $(11,574)    $  1,444
</TABLE>


<PAGE>   7
ACTION INDUSTRIES, INC. AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF CASH FLOWS    
UNAUDITED


(In thousands) 

<TABLE>
<CAPTION>
                                                              Nine Months Ended
                                                             March       March
                                                            31, 1998    31, 1998
OPERATING ACTIVITIES:

<S>                                                        <C>           <C>    
Net Income (loss)                                          $   135      $(1,827)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization                                   23          240
Changes in operating assets and liabilities:
Accounts receivable                                         (3,458)       1,832 
Inventories                                                 (1,153)       3,928 
Other current assets                                          (118)         253
Accounts payable and accrued expenses                        3,832       (1,427)
Increase in investment in goodwill                          (2,970)
Deferred acquisition costs                                    (922)
Other assets                                                   (14)             
Other current liabilities                                     (850)
                                                           -------       ------ 
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES            (5,495)       2,999 
                                                           =======       ====== 

INVESTING ACTIVITIES:

Acquisition of property, plant and equipment                  (737)
Investment in affiliates                                      (765)
Purchase of intangible assets                                 (481)
Payments received on notes receivable                                       306
Issuance of notes receivable                                (1,206)
                                                           -------       ------ 
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES            (3,189)         306
                                                           =======       ======
FINANCING ACTIVITIES:

Notes and acceptances payable                                  473       (3,039)
Payment of deferred compensation                               (79)         (95)
Principal payments on long-term obligations                  4,463 
Other, net                                                       7          162
Receipts of funds from bank                                    705
Accumulated deficit                                            501
Increase in minority interest                                2,141 
                                                           -------       ------ 
                                                             8,211       (2,972)
                                                           =======       ======

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS              (473)         333

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD               582           78

CASH AND CASH EQUIVALENTS AT END OF PERIOD                     109          411
</TABLE>

<PAGE>   8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

ACTION INDUSTRIES, INC. AND SUBSIDIARIES

A.        The consolidated financial statements included herein have been
         prepared by the Company, pursuant to the rules and regulations of the
         Securities and Exchange Commission. With the exception of the
         consolidated balance sheet, which was derived from the audited
         financial statements as of June 30, 1997, such statements have not been
         audited. Certain information and footnote disclosures normally included
         in financial statements prepared in accordance with generally accepted
         accounting principles have been condensed or omitted pursuant to such
         rules and regulations. The Company believes that the disclosures are
         adequate to make the information presented not misleading. These
         consolidated financial statements should be read in conjunction with
         the financial statements and the notes thereto included in the
         Company's latest Annual Report on Form 10-K. These financial statements
         should also be read in conjunction with the Company's Form 8-K filed on
         April 6, 1998 and the Company's Form 8-KA dated May 15, 1998. These
         consolidated statements of operations do not contain the results of the
         operations of the Company's majority owned subsidiary, General Vision
         Services, Inc. (GVS) acquired in March 20, 1998. The Company will
         include the results of its GVS subsidiary in its report for the fiscal
         year ending June 30, 1998.

         The following table sets forth the Pro Forma unaudited results of
         operations for the three months ended March 31,1998. It presents the
         consolidated results as if the acquisitions had been consummated as of
         January 1, 1998 and does not purport to be indicative of the results
         that actually would have occurred if GVS had been acquired as of that
         date or of results which may occur in the future of GVS.

                    Pro forma Unaudited Results of Operations


In thousands except for per share data

<TABLE>
<CAPTION>
                                              3 Months Ended March 31, 1998
                                                                                    ADJUSTMENTS      AS
                                              ACTION        GVS         TOTAL      DEBIT  CREDIT  ADJUSTED
<S>                                          <C>          <C>          <C>         <C>    <C>     <C>
NET SALES                                    $   --       $6,210       $6,210                     $6,210

COSTS AND EXPENSES                           
Cost of products sold                            --        2,485        2,485                      2,485
Operating Expenses                              637        3,130        3,767                      3,767
Interest expense                                 11          101          112                        112
                                             ------       ------       ------                     ------
                                                648        5,716        6,364                      6,364

OTHER INCOME (EXPENSE), NET                   1,117           31        1,148                      1,148
                                             ------       ------       ------                     ------
INCOME (LOSS) BEFORE INCOME TAXES               469          525          994                        994
  AND MINORITY INTEREST                                                                           

PROVISION FOR INCOME TAXES                       --           --           --                         --
                                             ------       ------       ------                     ------
INCOME (LOSS) BEFORE MINORITY INTEREST          469          525          994                        994

MINORITY INTEREST IN SUBSIDIARY                                                      257             257

NET INCOME  (LOSS)                           $  469       $  525       $  994                     $  737
                                             ======       ======       ======                     ======

NET INCOME (LOSS) PER SHARE                                                                         0.13
Weighted average shares outstanding                                                                5,539
</TABLE>
<PAGE>   9
B.        The accompanying financial statements reflect all adjustments
         (consisting of normal recurring accruals and estimates) which are, in
         the opinion of management, necessary for a fair presentation.

C.        In October 1996 the Company entered into an agreement to sell its
         inventory and related intellectual property. The Company's
         Powerhouse-related assets were sold on October 18, 1996. The
         Promotional-related assets were sold on February 12, 1997 pursuant to a
         foreclosure sale by Foothill Capital Corp. (Foothill), the Company's
         secured lender. The assets sold represented substantially all of the
         operating assets employed in the Company's business. Trade accounts
         receivable were retained, as were non-operating notes and other
         receivables from prior sales of the Company's headquarters facility and
         certain business units. The Company also retained its substantial
         income tax net operating loss carryforwards.

         Also in October 1996 the Company finalized negotiations and signed a
         new lease arrangement for its headquarters facility. The new lease
         obligates the Company for rent of approximately $100,000 per year for a
         five-year period under an operating lease. This lease agreement, in
         conjunction with the physical departure from the warehouse space in the
         facility, resulted in the elimination as of June 30, 1996 of the
         previously reported capital lease obligation for the facility.

D.        On August 12, 1997 Action and GVS entered into a definitive merger
         agreement which provides for the Company to issue 3,040,000 shares of
         its Common Stock and 3,650,000 shares of a new Class B Redeemable
         Preferred Stock with a par value of $1 per share, in exchange for 100%
         of the outstanding capital stock of GVS. The merger consideration was
         to be adjusted based upon the adjusted negative Net Worth of the
         Company as of the Closing. GVS and the Company have subsequently agreed
         that the adjusted negative net worth of the Company was fixed at
         ($525,012). As a result GVS holders will receive an additional 325,012
         shares of Preferred B stock upon consummation of the merger.

         The proposed merger is subject to a number of closing conditions,
         including approval of the respective shareholders of the Company and
         GVS. In connection with the Company's acquisition of its 50.1% interest
         in GVS holders of more than 80% of GVS shares have agreed to vote in
         favor of the merger. Holders of 11% of the Company's stock have
         executed agreements to vote for the merger. In addition, the Company
         will need additional working capital to meet its existing obligations,
         principally the payment of interest due on the notes issued to the
         investors in its private placement financing. In the event that the
         Company is required to issue additional equity securities, the terms of
         the merger will have to modified to permit such issuances and the
         issuance of additional equity may adversely affect the Company's
         ability to retain the 
<PAGE>   10
         availability of its net operating loss carryforwards. Accordingly, it
         is likely that the terms of merger will be materially altered and there
         can be no assurance that the merger as modified will be approved by the
         shareholders of either company or will be consummated.

         In June 1997, the Company commenced a private placement financing
         transaction that was completed in March, 1998. The Company sold
         Convertible Notes which were convertible into Series A Preferred Stock
         upon completion of the merger with GVS and warrants to purchase common
         stock exercisable at $0.50 per share. The gross proceeds of the
         financing were $3,900,000, approximately $2,697,000 of which was loaned
         to GVS pursuant to the terms of the Merger Agreement. This loan was
         subsequently applied to the purchase price of the GVS shares purchased
         by the Company. The securities issued in the private financing
         transaction have not been registered with the Securities Exchange
         Commission and may not be offered or sold in the United States without
         registration or an applicable exemption from registration. The private
         placement purchasers have been granted certain registration rights with
         respect to the securities purchased by them.

         The American Stock Exchange (AMEX) halted trading in the Company's
         Common Stock on October 21, 1996. The AMEX determined to delist the
         Company's Common Stock in January of 1997. AMEX had granted a period
         for the Company to effect an acquisition to satisfy the criteria for
         AMEX listing, but reinstated its determination to delist in January of
         1998. The Company has exercised its right of appeal in an effort to
         maintain its AMEX listing. The proposed merger with GVS may or may not
         result in the Company qualifying for AMEX listing. On March 24, 1998 a
         hearing was held at the AMEX to consider the Company's appeal and the
         decision of the Hearing Panel is pending. On May 12, 1998 the staff
         determination to delist was affirmed by the AMEX and application has
         been made to the SEC to delist. Accordingly it is anticipated that the
         Action stock will be delisted.

E.        The results of operations for the third fiscal quarter and the nine
         months ended March 31, 1998 are not necessarily indicative of the
         results to be expected for the full year. As a result of the asset
         sales and acquisition of its 50.1% interest in GVS, the Company's
         results for the current periods are not comparable to the results for
         earlier periods. The net income reported by the company for the three
         months ended March 31, 1998 was an extraordinary event related to the
         filing of a claim for a refund due for income taxes paid in earlier
         periods and settlement of certain claims for less than the original
         amount. The reported interest expense is net of amounts paid by GVS
         directly to holders of Convertible Notes. Since the closing of the
         Acquisition on March 31, 1998 GVS is no longer directly obligated to
         pay the interest on the Convertible Notes. As a result the Company's
         future interest obligations on 
<PAGE>   11
         the Convertible Notes will be substantially greater than the amounts
         reported for the nine months and three month periods ending March 31,
         1998.

F.        Inventories consisted primarily of merchandise held for resale.
         Inventories were valued at the lower of first-in, first-out (FIFO) cost
         or market. All inventories used in connection with its Replenishment
         and Promotional businesses were sold or otherwise disposed of in
         connection with the asset sales described above. The reported
         inventories consist entirely of the inventory of the Company's GVS
         subsidiary.

G.        The Company had a credit agreement, which provided for up to $10
         million in committed credit lines through June 30, 1997. In connection
         with the foreclosure sale by Foothill, the credit agreement was
         terminated as of February 12, 1997.

         The Company did not meet the requirements under the restrictive
         covenants of the credit agreement as of December 31, 1996, and was not
         able to meet these covenants subsequently. Foothill's remedies under
         such a default included the right to demand repayment of the
         outstanding loan and interest due, which was done in connection with
         the foreclosure sale of the Company's Promotional-related assets on
         February 12, 1997.

         The Company's GVS subsidiary has a credit agreement that provides for
         revolving credit available based upon 80% of its eligible receivables
         up to a maximum of $1,750,000. At March 31, 1998, the Company's GVS
         subsidiary had borrowed $1,356,000 pursuant to this facility. GVS is
         negotiating an extension of its credit agreement.

H.        No income tax benefits were provided on the income reported in the
         nine-month period ended March 31, 1998 or the loss incurred in the
         nine-month period ended March 31, 1997. No income tax expense was
         recognized during the three month period ended March 31, 1998 as the
         principal source of said income was income tax refunds for taxes paid
         in prior periods.

         Net operating loss carryforwards available to offset future taxable
         income and thereby reduce income taxes payable in the future are
         approximately $47 million, including losses for financial reporting
         purposes which have not yet been reported for income tax reporting
         purposes. These operating losses will not be available to offset future
         taxable income of its subsidiary unless the Company's merger with GVS
         is completed or the Company acquires more than 80% of the stock of GVS.
         Restrictions contained in the Internal Revenue Code may restrict the
         availability significantly. There can be no assurance that the Company
         will generate sufficient revenues or profits that could be offset by
         prior losses or that such loss carryforwards will be available after
         completion of the merger or any alternate transaction.
<PAGE>   12
I.        In September 1997 Action completed negotiations of an agreement which
         settled certain obligations to former officers and their beneficiaries
         under lifetime severance agreements. The agreement provides for Action
         to pay $80,000 in cash, assign an interest in the $2.3 million note
         receivable due to Action in connection with a the 1996 settlement of a
         1991 sale/leaseback transaction, which interest approximates $920,000,
         and assign an interest in the amounts remaining due to Action from the
         sale of its lamp assembly business in 1995, which interest approximates
         $270,000 (both included in Other Assets - Notes Receivable in the
         accompanying balance sheet). Upon assignment of the interests in these
         notes, the obligations are non-recourse to Action. In addition to the
         recognition of the sale/leaseback note to the extent it is utilized to
         satisfy the obligations, the settlement results in a reduction of the
         aggregate amount of the obligations which had been previously recorded
         in the financial statements by approximately $320,000. This agreement
         was reflected in the financial statements as of June 30, 1997. In the
         six-month period ended March 31, 1997 other severance and employment
         obligations were resolved, resulting in the reduction of the previously
         recorded liabilities for such obligations in the amount of $135,000,
         $39,000 of which occurred in the quarter ended March 31, 1997.

J.        On March 20, 1998, the Company acquired approximately 50.1% of the
         issued and outstanding shares of common stock of GVS, in exchange for
         $5.2 million consisting of notes payable to Action of $2.7 million
         representing funds previously advanced to GVS in connection with a
         private placement financing completed in August, 1997, and a $2.5
         million secured Note. The Note is secured by a lien on Action assets
         and a subordinate lien on the GVS stock acquired by Action. GVS is a
         provider of retail vision services primarily in the New York City
         metropolitan area, as well as elsewhere in New York and surrounding
         states, and in Florida. The consideration for the purchase was
         established through arms'-length negotiations between Action and GVS.
         Upon completion of the Acquisition of GVS, the Company was solely
         responsible for payment of the obligations due to the holders of the
         Convertible Notes. The Note Holders have a priority security interest
         in the GVS shares and in the event that Action is not able to meet its
         obligations for the payment of interest the Note Holders may foreclose
         on the GVS shares.

K.        On March 30, 1998 the Board of Directors of the Company authorized the
         formation of two new subsidiaries, General Dental Management, Inc.
         (GDM) and General Vision Management, Inc. (GVM). Each subsidiary
         intends to engage in the business of managing professional practices in
         their respective fields. Effective as of May 1, 1998 GVM entered into a
         Practice Management Agreement (PPM) with respect to four optical stores
         and optometric practices. GDM has not yet begun operations. There can
         be no assurance that the Company will have sufficient 
<PAGE>   13
         working capital to adequately fund these businesses or that financing
         can be obtained for their operations or that the revenues generated
         from these operations will be sufficient to enable the company to meet
         its current obligations including interest due on its Convertible
         Notes.

L.        Also on March 30, 1998 the Board of Directors approved the purchase of
         an option held by GVS to purchase one-half of the issued and
         outstanding shares of General Hearing Services, Inc. (GHS) and a note
         owed by GHS to GVS in consideration for the assignment of a portion of
         the Company's interest in a Note receivable in connection with the
         prior sale of its real property. The Company is negotiating with the
         owners of GHS to acquire the remaining shares and thereby make GHS a
         wholly owned subsidiary of the Company. The company has undertaken a
         due diligence examination of GHS to determine a fair price. There can
         be no assurance that the Company and the owners of GHS will ultimately
         agree on the purchase price and other terms of the acquisition or that
         GHS will generate sufficient revenues and profits to meet its current
         obligations.

M.        On April 1, 1998 the Company defaulted on its outstanding convertible
         subordinated debentures having an aggregate principal balance of
         $115,000. On or about April 17, 1998 certain members of the Board of
         Directors of the Company and GVS management purchased the defaulted
         debentures from the Trustee for the Holders and have subsequently
         tendered the debentures to the Company in exchange for which the
         Company intends to issue 262,857 shares of stock. It is anticipated
         that the stock will be issued during May 1998.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS

FINANCIAL CONDITION

GENERAL

Until February 1997, the principal business of Action Industries, Inc. and its
Subsidiaries (Action or the Company) was the sale of comprehensive
promotional programs to retailers. These programs were designed to provide a
broad range of products, programs, displays and services for retail stores. The
principal product categories were housewares (kitchenware, cleaning aids, food
storage), plastic products for the home, picture frames, toys, stationery,
closet accessories, health and beauty aids and similar products.

In October 1996 Action sold part of its business and operating assets to Mazel
Stores, Inc. (Mazel) and in February 1997 Action's secured lender sold
substantially all of the remaining operating assets to Mazel in a foreclosure
sale.
<PAGE>   14
Later in February 1997 a nonbinding letter of intent was signed providing for
Action to acquire General Vision Services, Inc. (GVS). A definitive merger
agreement was signed in August, 1997, providing for Action to acquire all of the
outstanding capital stock of GVS in exchange for approximately 35% of the
outstanding common stock of Action, and $3,650,000 of a new Series B Preferred
Stock. The amount of Series B Preferred Stock was subsequently increased by
agreement to $3,975,012 as a result of the deterioration of the Company's
financial condition and net worth. The merger is subject to the approval of the
shareholders of both Action and GVS.

GVS markets managed vision care and hearing care plans and offers a full range
of vision care products and services at 22 retail stores in New York City. GVS
sells prescription eyeglasses, contact lenses and related accessories. In
addition, at each store GVS engages one or more licensed optometrists and
opticians who perform eye examinations and assist in the selection and fitting
of eyewear. GVS also operates a production laboratory that supplies its retail
stores with eyewear. GVS markets its services principally to labor unions and
managed care organizations (MCO's). Eligible members of the union or MCO
receive an eye examination and a pair of prescription eyeglasses or contact
lenses for a fixed price, which can range from $50 to $200. Currently GVS has
non-exclusive agreements with approximately 525 unions and six MCO's
representing in excess of 6.5 million members. 0Approximately 375,000 of these
members are customers of GVS. GVS has agreements with 217 independent vision
care providers, to whom it refers eligible members who live in areas in which
GVS does not have a retail store. GVS also markets hearing care plans to MCO's
and supplies and manufactures ophthalmic lenses, frames and other supplies to
its Network through its partly owned unconsolidated subsidiary 21st Century
Optics, Inc.


Background and Reasons for the Acquisition.

Action experienced declining sales in its traditional Promotional business each
year since 1989. Net sales were $134.2 million in 1989, had declined to $84.1
million by 1992, and had declined further to $30.2 million in 1996. Action's
initial response to its declining sales was to implement a restructuring plan in
1990, including various activities intended to return Action to sales growth or
stability and profitability. Action focused on its core Promotional business and
sold or eliminated those noncore business units (including non-promotional
merchandise item sales lines, plastics manufacturing and lamp assembly, and
retail store operations) and assets which were not profitable or were
incompatible with those objectives.

Almost continuous downsizing efforts were made over the years since 1990 to
reduce merchandise inventories and Action's reliance on working capital
borrowings, and to reduce personnel and other operating costs in order to
compensate for the decline in sales. 
<PAGE>   15
While progress was made initially and at other times over the years, Action was
unable to make sufficient progress overall to improve or even maintain its
position in the retail marketplace.

In fiscal year 1996 the decline in sales continued. Action lost significant
business with two of its largest customers, three significant customers went out
of business, export business was lost due to unfavorable currency activity, and
Action was not able to match the number of new stores added to the Powerhouse
business in the prior year.

Despite the steps taken by Action to improve sales and profitability, sales
continued to decline, and losses have been substantial since 1993.

Action's liquidity was significantly impaired as a result of the decline in
sales and the resulting operating losses. Action's credit agreement provided for
secured loans on a revolving basis. At June 30, 1996 outstanding borrowings
under the credit agreement had been $3.0 million. Action did not meet
restrictive covenants in the credit agreement as of June 30, 1996, September 30,
1996 and March 31, 1996 related to minimum levels of net worth and working
capital, current ratio, and the ratio of liabilities to tangible net worth.

The Acquisition

Action had previously warned that if it was unable to complete the merger its
lack of working capital would have forced it to liquidate. The inability to
consummate the merger and deterioration of its financial condition led Action
and GVS to seek an alternative to immediate liquidation. On March 20, 1998
Action purchased a 50.1% interest in the outstanding common stock of GVS in
exchange for $5,198,000 of which $2,698,000 was paid by conversion of the
outstanding Notes from GVS along with a Note in the amount of $2,500,000 (the
GVS Note). The GVS Note is secured by the shares of GVS stock sold to the
Company and a lien on Action's assets. In the event that Action is unable to
fund the unpaid portions of the Note, GVS may be able in a foreclosure to
reacquire all of Action's interest subject to the security interest of note
holders in the private placement financing. The terms of the Stock Purchase
Agreement between GVS and Action do not require that any of GVS' assets would
available to pay any liabilities or obligations of Action or that GVS is
obligated to fund any of Action's current obligations. Accordingly, unless
Action, is able to fund its obligations through its newly formed or future
operations, liquidate other assets or obtain additional financing it may,
nevertheless, be forced to liquidate its remaining assets

The Action Board of Directors is evaluating various proposals for the issuance
of additional debt or equity securities in order to fund all or part of the GVS
Note, including a proposal from certain officers and directors to exchange debt
for Action equity. Any issuance of additional equity securities may have an
adverse affect 
<PAGE>   16
on the Company's ability to utilize its operating loss carryforwards and may
require material modifications to the terms of the merger agreement.

GVS Overview

         GVS was formed in 1984 to acquire all of the shares of General Vision
Services Corp., a chain of thirteen retail optical stores and an eyewear
laboratory located in New York City. GVS has continued to expand since that
time, principally by acquiring independent optical stores and has occasionally
sold such stores and/or a participation in the applicable store profits to the
parties operating them.

         GVS markets vision care and hearing care plans to Managed care
organizations MCO's and provides a range of vision care products and services
through the GVS Network consisting of 22 GVS-operated retail optical stores and
Participating Providers operating approximately 217 retail optical stores
located in New York, New Jersey, Connecticut, Pennsylvania and Florida. GVS
supplies and manufactures ophthalmic lenses, frames and other supplies to its
Network through its partly owned subsidiary 21st Century Optics, Inc.

         GVS markets its products and services principally to labor unions and
union sponsored health, welfare and benefit plans, as well as to HMOs, and
employer sponsored health plans (all of the foregoing, collectively, Health
Plans). The Company was a pioneer in developing group optical programs sold to
managed care administrators of unions and affiliated health plans in the New
York Metropolitan Area and believes that it currently provides such programs to
more labor unions and affiliated health plans than any other optical company in
such locale. GVS has exclusive and preferred provider contracts with MCO's with
combined memberships of over 6 Million lives.

         The vision care products sold through the GVS Network includes
prescription eyeglasses, contact lenses, sunglasses and related accessories
(collectively, eyewear). Each GVS Store is staffed by at least one licensed
optometrist, who performs eye examinations, at least one licensed optician, who
assists patients in selecting and fitting prescription eyewear, and between two
and five sales and reception personnel. GVS' partly owned subsidiary 21st
Century Optics operates a laboratory in Queens, NY that produces the
prescription eyewear sold in all of the GVS Stores, the GVS Network and to other
optical stores and chains.

         GVS also markets hearing care programs to Health Plans, all of which
have contracted with GVS to provide vision care products and services. GVS
provides both vision care and hearing care benefits to approximately 80 Health
Plans or approximately 12% of GVS's customers. The hearing care services which
GVS provides to Health Plans are furnished exclusively by General Hearing
Services, Inc. (GHS), a company formed to acquire substantially all of the
assets of GVS's former Hearing Aid Division in 1996, at GVS Stores and at
certain provider locations. The Company has acquired an 
<PAGE>   17
option to purchase one-half of GHS and is in negotiations to acquire the
remaining shares. In which case GHS will become a wholly owned subsidiary. GVS
derives revenues from its hearing-related operations from periodic and
transaction-based fees for providing administrative and marketing services to
GHS.

Markets

         GVS has developed a strong identification with labor unions and
affiliated plans and the New York Area. In part through the efforts of GVS,
vision care plans have become a standard fringe benefit included in many
collective bargaining contracts in the New York Area. In such instances the
labor organizations provide their members with a plan to provide basic vision
care and the individual members generally pay surcharges for higher quality
frames and lenses.

         GVS currently provides vision care benefits to approximately 530 Health
Plans, of which approximately 525 are labor unions and affiliated Health Plans
which have a combined eligible membership, including family members, of over
2,000,000 individuals, of which approximately 375,000 are active customers of
GVS. In addition, during 1997 GVS entered into agreements to provide vision care
benefits to approximately six New York Area HMOs, including Oxford Health Plans,
Aetna-US Healthcare and Hospital Insurance Plan of NY (HIP). GVS believes that
during the fiscal year ended November 30, 1997, approximately 80% of GVS
customers were members of unions or their families.

         GVS's agreements with Health Plans are annually or biannually
renewable. Building Services Employees Local 32B-J Health Fund represented
approximately 13.0% and 13.5% of GVS's retail sales during the fiscal years
ending November 30, 1996 and 1997, respectively. In addition, GVS derived
additional revenues from surcharge payments by its participants who purchased
eyewear in addition to the basic eyewear package covered by the Health Plans. No
other Health Plans account for more than 10% of GVS' revenue for either of such
fiscal years. The termination of the relationship with Local 32B-J or with a
significant number of Health Plans would have a material adverse effect on GVS.

Vision Care Plans

         GVS has established a One Price vision care program in which Health
Plans can offer a benefit to their participants having a predictable usage and
cost. Under its agreements with Health Plans, GVS generally provides eligible
participants with eyewear and/or an examination at a single price to the Health
Plan for the services rendered. GVS has custom-designed programs in which the
cost to the Health Plans generally range from $50 to $100 per year per eligible
participant. In the basic programs, GVS provides Health Plan participants with
an eye examination and a pair of eyeglasses or contact lenses. The charge paid
by the Health Plan reflects the range of frames and lenses covered by the Health
<PAGE>   18
Plan's One Price program. These vision care programs are typically provided on
a non-exclusive, fee-for-service basis in which GVS is paid, generally within 60
days, after services are rendered to Health Plan members through the GVS
Network. Each participant receives a GVS Vision Card or similar
identification. Upon verification of eligibility by computer from a GVS database
or directly from the Health Plan, the member is entitled to receive an eye
examination and the eyewear available under such Health Plan's program at any of
the locations. The voucher or record card relating to the transaction is
transmitted to the GVS central office and then billed to the Health Plan. The
Health Plan then pays GVS for the product and/or service. Where the services are
rendered by a Participating Provider, GVS collects the contractually scheduled
amount from the Health Plan, retains a portion for its services to the
Participating Provider and the GVS Network and remits the balance of the fees to
the Participating Provider involved. The member pays GVS or the Participating
Providers directly for any eyewear or services not covered by the Health Plan.

         GVS's revenues and profitability may be materially adversely affected
by the current trend in the healthcare industry towards cost containment as
third-party payers seek to negotiate reduced payment schedules unless GVS is
able to offset such payment reductions through cost reductions, increased
volume, introduction of new procedures or otherwise, as to which no assurance
can be given.

         Health Plans that do not provide insured vision care benefits to their
participants can enroll them in a GVS direct pay program at no cost to the
Health Plan. Each direct pay program participant is entitled to obtain an array
of products and services at a contractually specified discount from GVS's retail
prices at GVS Stores and other Participating Providers within the GVS Network.

         Participants may choose to purchase eyewear or services that are not
covered by the One Price vision care program negotiated by their insured
vision care plan with GVS. Under such circumstances, the participant pays GVS a
surcharge equal to the difference between the amount credited by his Health Plan
and GVS's retail price. If the participant purchases eyewear at a Participating
Provider location, any surcharges are retained by the Participating Provider.
During the fiscal year ended November 30, 1997, approximately 50% of GVS's
revenue represents payments from Health Plans and approximately 35% represents
surcharges for products and services not covered by Health Plans.

         GVS does not currently have any material capitation contracts, under
which GVS agrees to provide services to a patient base for a fixed monthly fee
and which is not dependent upon the amount of services actually rendered. It is
possible that such contracts may not generate sufficient cash flow to a health
care provider to cover its costs of performing the services. Management believes
<PAGE>   19
that capitation plans are increasingly prevalent in the healthcare field. It is
therefore possible that GVS may enter into a significant number of such
contracts in the future and no assurance can be given that any such contracts
will be profitable to GVS. Such plans also entail greater regulation and there
can be no assurance that GVS will satisfy the prerequisites to offer capitation
plans and this may have a detrimental effect on its ability to compete
successfully.

Retail Optical Operations

         GVS leases and operates 22 retail optical stores in the New York State.
Each of GVS's stores has on staff one or more licensed opticians, who sell to
and assist customers in the selection and fitting of prescription eyewear and
related accessories, one or more licensed optometrists, who perform eye
examinations and provide related services, and between two and five sales and
reception personnel. Most of the GVS retail stores are located on urban shopping
streets. One store is located in a vertical shopping mall and others are located
in strip shopping centers. The stores are operated under the General Vision
Services names. Although hours vary, based on location and traffic flow, GVS's
Stores are generally open from 9 a.m. to 5 p.m., Monday through Saturday, and
one evening per week. Four of the GVS Stores are operated pursuant to agreements
in which certain individuals certain individuals participate in the profits
generated at such locations. With respect to two of such GVS Stores, the
individual is an officer and director of GVS.

Vision Care Network

         Approximately 60% of the patients serviced by GVS's Network are
serviced at GVS Stores. The remaining patients are serviced by Participating
Providers who serve as subcontractors to GVS to deliver the vision care services
required by the vision care plans. Each Participating Provider in the GVS
Network is an independent owner-operator of a retail optical stores. In New York
State most Participating Providers are small chains of retail stores which
employ licensed opticians and optometrists to provide the vision care services,
whereas in Florida and New Jersey most are independent licensed optometrists and
opticians. The Participating Providers may be classified into two categories:
panel stores and member stores. The panel stores are operated in
substantially the same manner as GVS Stores and have a limited license to use
the General Vision Services or General Vision Express names as part of their
store identification. Each panel store provider is required to maintain computer
links with GVS and to carry a minimum selection of 500 eyeglass frames similar
to GVS Stores. Panel stores are allowed to participate in every GVS vision
program and may not participate in any other vision care plan. GVS collects from
the applicable Health Plans the contractually scheduled amounts relating to the
services rendered and remits approximately 70% of the amount collected to the
Participating Provider. The balance of such gross billings are retained by GVS
as compensation 
<PAGE>   20
for its billing and marketing services and for administering the GVS Network.
The Participating Providers collect and retain all surcharges and are
responsible for all costs of delivering products and services to the patients.
As of March 31, 1998, GVS had provider contracts with a total of 217 locations.
GVS intends to expand the operations of its vision care programs primarily by
adding new Participating Providers to the GVS Network retail optical stores.

         Each Participating Provider is required to be licensed to practice in
the state where they are located; to offer a full price-range selection of
eyewear; to operate during normal business hours; to maintain specified amounts
of professional liability insurance and to conform to the practices and policies
of the GVS vision care plans. GVS uses a number of criteria to determine the
appropriate number of Participating Providers within a geographic area including
population, the number of Health Plan members and their visibility and
accessibility. Management believes that Participating Providers with a retail
optical orientation are more likely to succeed because they are better able to
deliver a high level of services at a lower cost, and have a greater selection
of higher value frames and lenses, to compensate for the relatively low payments
prevalent under the vision care plans.


RESULTS OF OPERATIONS

NINE MONTHS ENDED MARCH 31, 1998 COMPARED WITH NINE MONTHS OF
ENDED MARCH 31, 1997

Net Sales. There were no reported sales for Action during the nine months of
fiscal 1998 ended March 31, 1998. Aggregate net sales for the nine months of
fiscal 1997 were $5,424. The decline in sales is the result of the sale of the
Powerhouse business on October 18, 1996 and the Promotional business on February
12, 1997. No sales were recorded for the Company's GVS subsidiary for period
from the closing of the acquisition of the 50.1% interest through the end of
March 1998.

Operating Expenses. Operating expenses decreased from $1,470,000 in fiscal 1997
to $1,212 in fiscal 1998. The decrease in costs was primarily the result of the
sale of the operating businesses and Action's continuing cost reduction efforts.

Net Interest Expense. The decrease of $381 (85%) in 1998 was due to the payoff
of short-term borrowings at the termination of the Company's credit agreement in
February 1997. The reported interest expense is net of amounts paid by GVS
directly to holders of the Convertible Notes.

Other Income (Expense), Net. The Nine months ended March 31, 1998 included other
income of $1,000 consisting of anticipated receipts 
<PAGE>   21
from the Internal Revenue Service for refunds due. Additionally other income
includes $107 in settlement of severance and other income included recovery of
sales and use taxes paid in prior years ($671, including interest net of charges
in connection with the settlement of an arbitration award to a former sales
agent ($175) and other miscellaneous items.

Income (Loss) Before Income Taxes. The improvement of $1,962,000 reflects the
discontinuance of the Powerhouse and Promotional businesses and the inclusion of
other income described above.

Provision for Income Taxes. No provision for income taxes was provided as net
operating loss carryforwards available to offset taxable income and thereby
reduce future income taxes payable are approximately $47 million, including
losses for financial reporting purposes which have not yet been reported for
income tax reporting purposes due to timing differences.

Net Income (Loss). The improvement of $1,962,000 reflects the combined effect of
all of the above.


THREE MONTH PERIOD ENDED MARCH 31, 1998 COMPARED WITH THREE MONTH PERIOD ENDED
MARCH 31, 1997

Net Sales. There were no reported sales for Action during the three months ended
March 31, 1998 and the three months ended March 31, 1997.

Operating Expenses. Operating Expenses in the third quarter of 1998 include
$329,000 for professional fees related to the filing of a claim for income tax
refunds.

Interest Expenses. The decline in interest expenses is due to the reduction of
debt prior to the third quarter of 1998.

Other Income (Expense), Net. The increase in other income is the result of the
filing of the claim for income tax refunds.

Income (Loss) Before Income Taxes. The improvement is due primarily to the
income tax refund.

Provision for Income Taxes. No provision for income taxes was provided as net
operating loss carryforwards available to offset taxable income and thereby
reduce future income taxes payable are approximately $47 million, including
losses for financial reporting purposes which have not yet been reported for
income tax reporting purposes due to timing differences.

Net Income (Loss). The improvement of $732,000 reflects the combined effect of
all of the above.

LIQUIDITY AND CAPITAL RESOURCES
<PAGE>   22
The major source of cash during the first nine months of fiscal 1998 was the
issuance of additional convertible notes under the private placement financing.
The aggregate amount of the private placement financing was $3,900,000,
including $2,000,000 issued prior to June 30, 1997. Total net proceeds of the
private placement financing were $3,402,000, $2,352,000 of which was loaned to
GVS. Operating losses of Action, repayment of accounts payable and other current
obligations were the primary uses of cash. GVS used its portion of the private
placement financing to fund operating losses, repayment of accounts payable,
repayment of debt including debt to shareholders, other current obligations,
professional fees and other costs relating to the merger, advertising and
promotional expenses, laboratory closing costs, including employee severance
obligations, and investments in partly owned affiliates. Working capital at
March 31, 1998 was a deficit of $490,000, comparable to deficit working capital
of $1,262,000 at June 30, 1997. Action continues to manage the timing of payment
of its obligations to deal with this impaired liquidity. GVS is able to fund its
current operations from existing working capital and bank lines of credit. Cash
and cash equivalents were $109,000 at March 31, 1998, including cash balances of
GVS in the amount of $76,000 held, as compared to $582,000 at June 30, 1997.
Cash balances fluctuate daily, as they are used to meet operating requirements.
Cash balances held by GVS are not available to pay liabilities of Action.

Accounts receivable were $3,690,000 as of March 31, 1998 including $3,005,000
resulting from GVS operations. This amount is increased from $232,000 at June
30, 1997 and $937,000 at March 31, 1997. Receivables at March 31, 1997 represent
settlements of prior business and were collected during the fiscal year ended
June 30, 1997. No sales have been made since January 1997. Receivables at March
31, 1998 include income tax refunds due income taxes paid during prior periods.
The increase in receivables is the result of the GVS receivables and the tax
refund receivable.

Remaining Promotional inventories were sold in the foreclosure sale to Mazel in
February of 1997. Inventories on hand had been $1.1 million at March 31, 1996,
decreased from $2.5 million at September 30, 1996 as a result of the sale of the
Powerhouse inventories to Mazel.

Aggregate borrowings decreased from $1,031,000 at March 31, 1996 to $615,000 at
June 30, 1997. This was the result of the payoff in February 1997 of Action's
short-term borrowings under its credit agreement in connection with the
foreclosure sale of inventories by Foothill. Borrowings were repaid with cash
generated from the sale of inventories and collection of receivables, net of
cash used to fund operating losses incurred. As of March 31, 1998, aggregate
borrowings consisted of $115,000 remaining outstanding under the Company's 9%
Convertible Debentures due April 1, 1998 and $3,900,000 in 10% Convertible Notes
issued in June, July and August, 1997 and March 1998. The Company defaulted on
the outstanding Convertible Debentures on April 1, 1998. The defaulted
<PAGE>   23
debentures have been purchased by members of Action management and Board of
Directors and have been tendered to the Company in exchange for 262,857 shares
of Action common stock.

Action did not meet the requirements under the restrictive covenants of its
credit agreement with Foothill as of June 30, 1996, September 30, 1996 and March
31, 1996. Foothill waived the non-compliance with the covenants, and continued
to provide Action with advances within the borrowing formula and other
limitations, with the understanding that the sale to Mazel would provide funds
to pay off the financing. Foothill's remedies under such a default included the
right to demand repayment of the outstanding loan and interest due, which was
done in February of 1997, as a result of the delays in completing the sale to
Mazel.

In connection with the foreclosure sale by Foothill, Action's credit agreement
was terminated as of February 12, 1997.

Action has negotiated the settlement of certain long-term severance obligations
to satisfy those obligations, in part, by utilizing a partial interest in a
long-term note receivable due to Action as a result of the sale/leaseback of its
headquarters facility several years ago. The note receivable is valued in the
accompanying balance sheet at the amount of those obligations that the partial
interest in the note receivable will offset by agreement. The remainder of the
note receivable has been offset by a valuation allowance.

Action defaulted on its 9% Convertible Subordinated Debentures due April 1, 1998
and the entire sum is now due and owing. Members of the Board of Directors and
managers of both GVS and Action purchased the defaulted Debentures from the
Trustee in order to avoid legal action and a potential bankruptcy filing. The
new holders have agreed to convert their debenture into 262,857 shares of Action
common stock.

Action must obtain additional financing to provide cash resources required to
meet its needs until the closing of the merger can be completed. The ability of
Action to repay its existing obligations and to continue in existence until the
merger with GVS can be consummated is dependent on the realization of Action's
remaining assets as well as the ability to obtain additional financing, and the
ability to coordinate the timing of payment of its remaining obligations with
cash receipts. Unless the merger is consummated and/or additional financing is
obtained, Action cannot continue as a going concern.

For the longer term, if Action is to benefit from the use of its tax net
operating losses it must improve its liquidity through its own operations or the
operations of GVS in the merger. Unless the merger or an alternate transaction
is completed shortly, there can be no assurance that Action's capital resources
will be sufficient to meet its operating needs, in which case material adverse
<PAGE>   24
consequences may result. Such consequences would most likely involve liquidation
of Action and the loss of its interest in GVS.

On May 14, 1998 The Board of Directors approved a private placement of a maximum
150,000 Units consisting of two shares of Action common stock and one common
stock purchase warrant exercisable at $.50 per share. The proceeds of this
placement are to be used principally to pay past due interest on the Convertible
Notes. Certain members of management and the Board of Directors of Action have
individually subscribed to purchase 120,000 of such Units. The aggregate net
proceeds for the sale of the Units subscribed for will be $105,000.

 Action made no capital expenditures in fiscal 1998 or 1997. Action is not
planning any capital expenditures prior to the merger.


               SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS

This 1O-Q, press releases issued by the Company and certain information provided
periodically in writing and orally by the Company's designated officers and
agents contain statements which constitute forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The words expect, '1believe, goal, plan,
1'intend, estimate, and similar expressions and variations thereof used are
intended to specifically identify forward-looking statements. Those statements
appear in a number of places in this l0-Q, particularly Management 5 Discussion
and Analysis of Financial Condition and Results of Operations, and include
statements regarding the intent, belief or current expectations of the Company,
its directors or its officers with respect to, among other things, (i) the
financial prospects of the Company; (ii) potential acquisitions by the Company
and the successful integration of both future acquisitions new businesses; (iii)
the Company's financing plans (iv) the Company's growth strategy and operating
strategy; and (v) the Company's future plans and projections. Prospective
investors are cautioned that any such forward looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those projected in the forward looking
statements as a result of various factors. The factors that might cause such
material differences include, among others, the following: (i) the Company's
ability to avoid future operating and net losses, (ii) any material inability of
the Company to successfully integrate and profitably operate its GVS subsidiary,
(iii) any material inability of the Company to identify consummate and integrate
suitable acquisitions in conjunction with its growth strategy, (iv) any material
inability of the Company to acquire sufficient capital and financing to fund its
growth strategy, (v) any material inability of the Company to expand its managed
care business, renew existing managed care contracts and maintain and expand its
Provider Network, (vi) any material inability to negotiate managed vision and
hearing care contracts with HMOs, 
<PAGE>   25
(vii) any material inability of the Company to successfully and profitably
operate its vision care business, (viii) any material managed practices'
inability to operate profitably, (ix) any changes in state and/or federal
governmental regulations which could materially effect the Company's ability to
operate or materially effect the Company's profitability, (x) any inability of
the Company to maintain or obtain required material licensure in the states in
which it operates and in the states in which it may seek to operate in the
future, (xi) any material inability of the Company to successfully obtain public
and private debt and investment capital to expand its operations, (xii) any
material inability of the Company to meet its debt financing covenants,
restrictions or commitments, including its obligations under the GVS note,
(xiii) any future reductions in the average price earnings multiple within the
Company's industry sector, (xiv) any increased competition in its acquisition of
businesses or in connection with its business and (xv) fluctuations in the
market price of the Company's common stock due to financial results or
announcements by the Company of material events effecting its business. Any such
factors could have a material adverse effect on the Company's results of
operations or financial condition. The Company undertakes no obligation to
publicly update or revise forward-looking statements to reflect events or
circumstances after the date of this l0-Q or to reflect the occurrence of
unanticipated events.


ITEM 2. CHANGES IN SECURITIES

During June, July and August, 1997, the Company issued $3,900,000 principal
amount of its 10% Convertible Notes, convertible into a new Class A Preferred
Stock upon completion of the merger with General Vision Services, Inc.


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

The Company did not submit any matters to a vote of security holders during the
THIRD quarter of fiscal 1998 (quarter ending March 31, 1998).


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

The following documents are filed as part of this report:

(a)   Exhibits: None

(b) Reports on Form 8-K:

The Company filed no reports report on  Form 8-K during the
<PAGE>   26
quarter ended March 31, 1997. The company filed a report on Form 8K on April 4,
1998 announcing its completion of its acquisition of a 50.1% interest in GVS. On
May 15, 1998 the company filed its report on Form 8KA.


SIGNATURES

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


                                          ACTION INDUSTRIES, INC.
                                                (Registrant)



Date: May 14, 1998                        /s/ William J. Rappaport
                                          --------------------------
                                              William J. Rappaport
                                              President and
                                              Chief Executive Officer


Date: May 14, 1998                       /s/  Harry C. Kleinman
                                         --------------------------
                                              Harry C. Kleinman
                                              Chief Operating Officer
                                              (Principal Financial and
                                              Accounting Officer)