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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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Form 10-QSB



(Mark One)



|x | Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------



For the quarter ended September 30, 2003



or



| ̈ | Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------



For the transition period from  to



000-13118

(Commission File No.)



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ACTION PRODUCTS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)



|Florida                                                       |  | 59-2095427                       
|------------------------------------------------------------- |  | ---------------------------------
|(State or other jurisdiction ofincorporation or organization) |  | (IRS Employer Identification No.)



390 N. Orange Ave.,
Suite 2185, Orlando, Florida, 32801

(Address of principal executive offices, Zip Code)



Registrants telephone number, including area code (407) 481-8007



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Check 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 ̈



State the number of shares outstanding of each of the registrants classes of common equity, as of the latest
practicable date.



|Class                         |  | Outstanding at October 23, 2003
|----------------------------- |  | -------------------------------
|Common Stock, $.001 par value |  | 3,448,600                      



Transitional Small
Business Disclosure Format (check one):  YES ̈NO  x



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I N D E X



|                                                                                                                             |  | PageNumber
|---------------------------------------------------------------------------------------------------------------------------- |  | ----------
|PART I. FINANCIAL INFORMATION                                                                                                |  |           
|                                                                                                                             | 
|Item 1. Financial Statements                                                                                                 |  |           
|                                                                                                                             | 
|Condensed Consolidated Balance Sheet at September 30, 2003 (unaudited)                                                       |  | 3         
|                                                                                                                             | 
|Condensed Consolidated Statements of Operations - Three months and Nine months ended September 30, 2003 and 2002 (unaudited) |  | 4         
|                                                                                                                             | 
|Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2003 and 2002 (unaudited)                  |  | 5         
|                                                                                                                             | 
|Notes to unaudited Condensed Consolidated Financial Statements                                                               |  | 6         
|                                                                                                                             | 
|Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations                                |  | 7         
|                                                                                                                             | 
|Item 3.
Controls and Procedures                                                                                              |  | 10        
|                                                                                                                             | 
|PART II. OTHER INFORMATION                                                                                                   |  |           
|                                                                                                                             | 
|Item 6.
Exhibits and Reports on Form 8-K                                                                                     |  | 10        
|                                                                                                                             | 
|SIGNATURE PAGE                                                                                                               |  | 12        



2



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PART I. FINANCIAL INFORMATION



ITEM 1. Financial Statements



ACTION PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY



CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)



|                                                                                      |  | Sept. 30, 2003 |           
|------------------------------------------------------------------------------------- |  | -------------- | ----------
|ASSETS                                                                                |  |                |           
|CURRENT ASSETS                                                                        |  |                |           
|Cash and cash equivalents                                                             |  | $              | 567,500   
|Accounts receivable, net of an allowance for doubtful accounts of $133,000            |  |                | 2,018,200 
|Inventories, net                                                                      |  |                | 1,182,000 
|Prepaid expenses and other assets                                                     |  |                | 287,700   
|                                                                                      |  |                |           
|TOTAL CURRENT ASSETS                                                                  |  |                | 4,055,400 
|PROPERTY, PLANT AND EQUIPMENT                                                         |  |                | 2,158,400 
|Less accumulated depreciation and amortization                                        |  |                | (1,240,700
|                                                                                      |  |                |           
|NET PROPERTY, PLANT AND EQUIPMENT                                                     |  |                | 917,700   
|GOODWILL                                                                              |  |                | 782,400   
|OTHER ASSETS                                                                          |  |                | 744,000   
|                                                                                      |  |                |           
|TOTAL ASSETS                                                                          |  | $              | 6,499,500 
|                                                                                      |  |                |           
|LIABILITIES AND SHAREHOLDERS EQUITY                                                  |  |                |           
|CURRENT LIABILITIES                                                                   |  |                |           
|Current portion of obligation under capital lease                                     |  | $              | 89,300    
|Accounts payable                                                                      |  |                | 501,300   
|Accrued expenses, payroll and related expenses                                        |  |                | 623,500   
|Current portion of mortgage payable                                                   |  |                | 24,000    
|Borrowings under line of credit                                                       |  |                | 1,078,800 
|Other current liabilities                                                             |  |                | 28,700    
|                                                                                      |  |                |           
|TOTAL CURRENT LIABILITIES                                                             |  |                | 2,345,600 
|                                                                                      |  |                |           
|OBLIGATION UNDER CAPITAL LEASE                                                        |  |                | 23,100    
|MORTGAGE PAYABLE                                                                      |  |                | 631,900   
|DEFERRED REVENUE                                                                      |  |                | 81,300    
|OTHER                                                                                 |  |                | 14,400    
|                                                                                      |  |                |           
|TOTAL LIABILITIES                                                                     |  |                | 3,096,300 
|                                                                                      |  |                |           
|SHAREHOLDERS EQUITY                                                                  |  |                |           
|Preferred stock - 10,000,000 shares authorized, zero shares issued and outstanding    |  |                |          
|Common stock - $.001 par value; 15,000,000 shares authorized; 3,520,000 shares issued |  |                | 3,500     
|Treasury stock - $.001 par value; 172,800 shares, at par value                        |  |                | (200      
|Additional paid-in capital                                                            |  |                | 4,789,700 
|Accumulated deficit                                                                   |  |                | (1,389,800
|                                                                                      |  |                |           
|TOTAL SHAREHOLDERS EQUITY                                                            |  |                | 3,403,200 
|                                                                                      |  |                |           
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                            |  | $              | 6,499,500 
|                                                                                      |  |                |           



See Accompanying Notes



3



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ITEM 1. Financial Statements (cont.)



ACTION PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)



|                                                           |  | Three Months Ended Sept. 30th |           |   | Nine Months Ended Sept. 30th |  
|---------------------------------------------------------- |  | ----------------------------- | --------- | - | ---------------------------- | -
|                                                           |  | 2003                          |           |   | 2002                         |  
|NET SALES                                                  |  | $                             | 2,724,000 |   |                              | $
|COST OF SALES                                              |  |                               | 1,630,600 |   |                              |  
|                                                           |  |                               |           |   |                              |  
|GROSS PROFIT                                               |  |                               | 1,093,400 |   |                              |  
|OPERATING EXPENSES                                         |  |                               |           |   |                              |  
|Selling                                                    |  |                               | 349,700   |   |                              |  
|General and administrative                                 |  |                               | 553,600   |   |                              |  
|                                                           |  |                               |           |   |                              |  
|TOTAL OPERATING EXPENSES                                   |  |                               | 903,300   |   |                              |  
|                                                           |  |                               |           |   |                              |  
|INCOME (LOSS) FROM OPERATIONS                              |  |                               | 190,100   |   |                              |  
|OTHER INCOME (EXPENSE)                                     |  |                               |           |   |                              |  
|Interest expense                                           |  |                               | (32,200   | ) |                              |  
|Other                                                      |  |                               | 6,900     |   |                              |  
|                                                           |  |                               |           |   |                              |  
|                                                           |  |                               | (25,300   | ) |                              |  
|                                                           |  |                               |           |   |                              |  
|INCOME (LOSS) BEFORE BENEFIT (PROVISION) FROM INCOME TAXES |  |                               | 164,800   |   |                              |  
|BENEFIT (PROVISION) FROM INCOME TAXES                      |  |                               | 0         |   |                              |  
|                                                           |  |                               |           |   |                              |  
|NET INCOME (LOSS)                                          |  | $                             | 164,800   |   |                              | $
|                                                           |  |                               |           |   |                              |  
|INCOME (LOSS) PER SHARE                                    |  |                               |           |   |                              |  
|Basic                                                      |  | $                             | 0.05      |   |                              | $
|Diluted                                                    |  | $                             | 0.04      |   |                              | $
|                                                           |  |                               |           |  
|Weighted average number of common shares outstanding:      |  |                               |           |   |                              |  
|Basic                                                      |  |                               | 3,158,400 |   |                              |  
|Diluted                                                    |  |                               | 4,163,020 |   |                              |  



See Accompanying Notes



4



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ITEM 1. Financial Statements (cont.)



ACTION PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)



|                                                                                    |  | Nine Months Ended Sept. 30th |           
|----------------------------------------------------------------------------------- |  | ---------------------------- | ----------
|                                                                                    |  | 2003                         |           
|CASH FLOWS FROM OPERATING ACTIVITIES                                                |  |                              |           
|Net income (loss)                                                                   |  | $                            | 60,900    
|Adjustments to reconcile net income (loss) to net cash used in operating activities |  |                              |           
|Depreciation                                                                        |  |                              | 108,600   
|Amortization                                                                        |  |                              | 240,700   
|Loss on disposal of property plant and equipment                                    |  |                              |          
|Warrant issued for services                                                         |  |                              | 16,600    
|Provision for bad debts                                                             |  |                              | 47,000    
|Deferred income tax provision                                                       |  |                              |          
|Changes in:                                                                         |  |                              |           
|Accounts receivable                                                                 |  |                              | (1,268,800
|Inventories                                                                         |  |                              | (29,400   
|Prepaid expenses                                                                    |  |                              | (7,900    
|Other assets                                                                        |  |                              | (185,800  
|Accounts payable                                                                    |  |                              | 147,600   
|Accrued expenses, payroll and related expenses                                      |  |                              | 518,300   
|Income taxes receivable                                                             |  |                              |          
|Deferred revenue                                                                    |  |                              | (18,700   
|                                                                                    |  |                              |           
|NET CASH USED IN OPERATING ACTIVITIES                                               |  |                              | (370,900  
|                                                                                    |  |                              |           
|CASH FLOWS FROM INVESTING ACTIVITIES                                                |  |                              |           
|Acquisition of property, plant and equipment                                        |  |                              | (35,400   
|                                                                                    |  |                              |           
|NET CASH USED IN INVESTING ACTIVITIES                                               |  |                              | (35,400   
|                                                                                    |  |                              |           
|CASH FLOWS FROM FINANCING ACTIVITIES                                                |  |                              |           
|Purchase of treasury stock                                                          |  |                              | (141,300  
|Net proceeds from common stock options and warrants exercise                        |  |                              | 465,600   
|Repayment of notes payable and obligation under capital lease                       |  |                              | (77,000   
|Net change in borrowings under line of credit                                       |  |                              | 163,100   
|                                                                                    |  |                              |           
|NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                 |  |                              | 410,400   
|                                                                                    |  |                              |           
|NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS                                |  |                              | 4,100     
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                    |  |                              | 563,400   
|                                                                                    |  |                              |           
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                          |  | $                            | 567,500   
|                                                                                    |  |                              |           
|Supplemental disclosures - cash paid for:                                           |  |                              |           
|Interest                                                                            |  | $                            | 87,500    
|Income Taxes                                                                        |  |                              |          



See Accompanying Notes



5



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ACTION PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS



|1. | Condensed consolidated financial statements.In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all
normal recurring adjustments necessary to present fairly the financial position of Action Products International, Inc. and its subsidiary, Action Products Canada Ltd. (collectively, the Company), at September 30, 2003 and the results of
its (i) operations for the three month and nine month periods ended September 30, 2003 and 2002 and (ii) cash flows for the nine month periods ended September 30, 2003 and 2002. The financial information included herein is taken from the books and
records of the Company and is unaudited.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed financial statements should be read
in conjunction with the audited financial statements and notes thereto included in the Companys annual report on Form 10-KSB for the year ended December 31, 2002. The results of operations for the nine month period ended September 30, 2003 are
not necessarily indicative of the operating results for the full year.



|2. | Line of credit.In June 2003, the Company entered into an agreement with a financial institution, to renew an existing revolving line of credit (the
Revolver) for up to $2 million at Prime plus 1⁄2%. The borrowings under the Revolver are collateralized by inventory and accounts receivable. The Company utilizes the Revolver to finance accounts receivable, inventory and other
operating and capital requirements. The renewed Revolver matures June 30, 2005 and contains covenants relating to the financial condition of the Company. If the Company fails to maintain compliance with the financial covenants contained in the
Revolver, the maturity date could be accelerated.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. | Mortgage Payable.In November 1998, the Company borrowed $750,000 in the form of a mortgage payable. The mortgage is collateralized by real estate and improvements
comprising the Companys 35,000 sq. ft. product distribution center. The mortgage contains certain restrictive covenants, which provide that, among other things, the Company maintain a minimum working capital, net worth, debt service coverage
and a maximum debt to net worth ratio. If the Company fails to maintain compliance with the financial covenants contained in the note, the maturity date could be accelerated. At December 31, 2002, the Company was not in compliance with the debt
service coverage and debt to net worth covenants. However, the Company has obtained a waiver of non-compliance from the financial institution for the twelve month period ending December 31, 2003.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. | Earnings per share. Common stock equivalents were not included in the computation of diluted earnings per share for the three month and nine month periods ending
September 30, 2002, as their effect would have been anti-dilutive. The average number of common stock equivalents that were excluded from the calculation for the three month and nine month periods ending September 30, 2002 totaled 1,056,300.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. | Common Stock and Equity Securities. During the nine month period ended September 30, 2003, the Company repurchased 126,700 of its common shares, at a cost of $141,300.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



On April 24, 2003 the Company announced a
warrant distribution to all shareholders of record as of June 12, 2003. Shareholders were issued one warrant for each share of common stock owned as of the record date. Each warrant entitles the holder to purchase one common share at an exercise
price of $2.00 and expires June 11, 2004. As of June 30, 2003 approximately 3,272,100 warrants had been issued. As of October 23, 2003, total warrants exercised were 287,300.



In May 2003, the Company issued a warrant for services which entitles the holder to purchase 60,000 shares common stock at
an exercise price of $2.00 per share. The Company used the Black-Scholes valuation model to estimate the fair value of these warrants. The estimated fair value of $16,600 has been recorded in general and administrative expense. The warrant was
exercised in September 2003.



6



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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)



Common Stock and Equity Securities (cont.)



In August 2003 two Directors were granted a total of 150,000 options at an
exercise price of $3.00 each under the Companys stock option plan.



At September 30, 2003, the Company has one stock-based employee compensation plan. The Company accounts for the plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued
to Employees and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price not less than the market value of the underlying common stock on the date of
grant. The effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation is shown below:



|                        |  |             |  | Three MonthsEnded Sept. 30th2003 |         |   | Nine MonthsEnded Sept. 30th2003 |  
|----------------------- |  | ----------- |  | -------------------------------- | ------- | - | ------------------------------- | -
|Net income (loss)       |  | As reported |  | $                                | 164,800 |   |                                 | $
|                        |  | Pro forma   |  | $                                | (43,100 | ) |                                 | $
|                        |  |             | 
|Income (loss) per share |  | Basic       |  |                                  |         |   |                                 |  
|                        |  | As reported |  | $                                | 0.05    |   |                                 | $
|                        |  | Pro forma   |  | $                                | (0.01   | ) |                                 | $
|                        |  | Diluted     |  |                                  |         |   |                                 |  
|                        |  | As reported |  | $                                | 0.04    |   |                                 | $
|                        |  | Pro forma   |  | $                                | (0.01   | ) |                                 | $



|6. | Reclassifications.Certain amounts from the prior period have been reclassified to conform to the current period presentation.
|-- | -----------------------------------------------------------------------------------------------------------------------------



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



Forward-looking Statements:



Forward-looking statements in this Form 10-QSB including, without limitation, statements relating to our plans, strategies, objectives, expectations, intentions and
adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements made in this report, other than statements of historical fact, are forward-looking statements. These
forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or
implied by the forward-looking statements. Our ability to successfully develop our brands and proprietary products through internal development, licensing and/or mergers and acquisitions, could cause actual results to differ materially from those
set forth in the forward-looking statements. Additional factors that could cause actual results to differ materially from those set forth in the forward-looking statements include, but are not limited to, the following:



| |  |  | the size and growth of the market for our products,
| | - |  | ---------------------------------------------------



| |  |  | competition,
| | - |  | ------------



| |  |  | pricing pressures,
| | - |  | ------------------



| |  |  | market acceptance of our products,
| | - |  | ----------------------------------



| |  |  | the effect of economic conditions,
| | - |  | ----------------------------------



| |  |  | intellectual property rights,
| | - |  | -----------------------------



| |  |  | the results of financing efforts,
| | - |  | ---------------------------------



7



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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)



Forward-looking Statements (cont.)



| |  |  | risks in product development, and
| | - |  | ---------------------------------



| |  |  | other risks identified in this report and our other periodic filings with the Securities and Exchange Commission.
| | - |  | -----------------------------------------------------------------------------------------------------------------



Results of Operations:



Three Months Ended September 30, 2003 Compared With Three Months Ended September 30, 2002



Net salesfor the three months ended September 30, 2003 were $2,724,000, compared
with net sales of $1,944,900 for the three months ended September 30, 2002. Management attributes the $779,100 or 40% increase in net sales to an approximately $1.2 million increase in sales of our Jay Jay the Jet Plane brand which was released in
October 2002. Sales of Jay Jay products to a single major customer accounted for approximately $0.8 million of the total.



Gross profitincreased by $330,300 to $1,093,400 for the three months ended September 30, 2003, compared with $763,100 for the three months ended September 30,
2002. The gross profit percentage improved to 40% from 39% for the three month periods ended September 30, 2003 and 2002 respectively. The increase in gross profit is mainly attributable to the increase in sales discussed above. The increase in
gross profit percentage compared to the same period in 2002, was mainly attributable to increased profit margins on newer items, fewer sales discounts and lower freight costs.



Selling, general and administrative (SG&A) expenses increased by $92,800 to $903,300 for the three month period ended September
30, 2003 from $810,500 for the three month period ended September 30, 2002. This 11% increase in SG&A expenses is due primarily to increases in:



| |  | Sales commissions of $16,400 resulting from increased sales
| | - | -----------------------------------------------------------



| |  | Advertising and promotion of $23,600 resulting from increased merchandising promotion and trade show participation
| | - | ------------------------------------------------------------------------------------------------------------------



| |  | Professional services and printing of $16,400 resulting principally from contract staffing and expanded public relations activities and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------



| |  | Doubtful accounts expense of $58,400
| | - | ------------------------------------



These increases were partially offset by a $48,400 decrease in compensation expense.



Interest expense related to current and long-term debt was $32,200 and $33,500 for the three month periods ended September 30, 2003
and 2002, respectively. The decrease of $1,300 is due to lower borrowings under our line of credit, combined with a lower rate of interest.



Other income and (expense) during the three month periods ended September 30, 2003 and 2002 was $6,900 and ($2,800), respectively. The $9,700 change was mainly
attributable to an increase in service charges.



Provision for income
taxes was zero for the three months ended September 30, 2003 and September 30, 2002 as a result of utilization of a portion of prior net operating losses of $1.1 million.



Net incomeas a result of the foregoing was $164,800 for the three months ended September 30, 2003, compared with a net loss of
$83,700 for the three months ended September 30, 2002.



8



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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)



Nine Months Ended September 30, 2003 Compared With Nine Months Ended
September 30, 2002



Net salesfor the nine months ended
September 30, 2003 were $6,374,800, compared with net sales of $4,882,700 for the nine months ended September 30, 2002. Management attributes the $1,492,100 or 31% increase in net sales to an approximately $2.7 million increase in sales of our Jay
Jay the Jet Plane brand which was released in October 2002. Sales of Jay Jay products to a single major customer accounted for approximately $2.1 million of the total.



Gross profitincreased by $685,900 to $2,637,200 for the nine months ended September 30, 2003, compared with $1,951,300 for the nine
months ended September 30, 2002. The gross profit percentage improved to 41% from 40% for the nine month periods ended September 30, 2003 and 2002 respectively. The increase in gross profit is mainly attributable to the increase in sales discussed
above. The increase in gross profit percentage compared to the same period in 2002, was mainly attributable to lower product and freight costs.



Selling, general and administrative (SG&A) expenses decreased by $233,300 to $2,497,100 for the nine month period ended September 30, 2003 from $2,730,400 for
the nine month period ended September 30, 2002. This 9% decrease in SG&A expenses is due primarily to a decrease in compensation costs of $350,200 due to reductions in staffing and a decrease in travel and entertainment expenses of $37,500
resulting from improved airfare costs and reduced international travel. These decreases were partially offset by:



| |  |  | increases of $48,100 in advertising and sales promotion resulting from increased merchandising promotion and marketing communication programs,
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Professional services of $16,400 resulting principally from contract staffing and expanded public relations activities and
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | Doubtful accounts expense of $56,800.
| | - |  | -------------------------------------



Interest expense related to current and long-term debt was $87,500 and $107,400 for the nine month periods ended September 30, 2003 and 2002, respectively. The
decrease of $19,900 is due to lower borrowings under our line of credit, combined with a lower rate of interest.



Other income and (expense) during the nine month periods ended September 30, 2003 and 2002 was $8,300 and $13,000, respectively. The $4,700 change was mainly
attributable to a decrease in service charges.



Provision for income
taxes was zero for the nine months ended September 30, 2003 compared with a benefit of $37,700 for the nine months ended September 30, 2002 as a result of utilization of a portion of prior net operating losses of $1.1 million.



Net incomeas a result of the foregoing was $60,900 for the nine months ended
September 30, 2003, compared with a net loss of $835,800 for the nine months ended September 30, 2002.



Financial Condition, Liquidity, and Capital Resources:



As of September 30, 2003, we had cash and cash equivalents of $567,500 representing an increase of $4,100 compared to December 31, 2002.



After taking account of non-cash items and other adjustments, our cash requirements for operations for the nine months ended September 30,
2003 were $370,900. The principal source of cash from operating activities for the nine months ended September 30, 2003 was an increase in accrued expenses of $518,300 due to deferred payment terms for royalty and sales commission expenses and an
increase in accounts payable of $147,600 due to a seasonal increase in inventory purchases. Principal uses of cash from operating activities in the first nine months of fiscal 2003 were: an increase of $1,268,800 in accounts receivable resulting
principally from increased sales and an increase of $185,800 in other assets related to the purchase of molds and tools for the production of new Jay Jay the Jet Plane items. The principal use of cash from investing activities was a $30,900
refurbishment of our warehouse building.



9



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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (Continued)



Financial Condition, Liquidity, and Capital Resources (cont.)



To meet a portion of our operating cash requirements, we increased our
borrowing under our line of credit by $163,100 and received $465,600 in net proceeds from common stock options and warrants. After applying $141,300 to the repurchase of common stock and $77,000 to repayment of mortgage and capital lease principal,
this left net cash from financing activities of $410,400.



At September 30,
2003, borrowing under our line of credit was $1,078,800, a decrease of $455,600 from $1,534,400 as of September 30, 2002. Our line of credit provides for borrowings up to $2,000,000 at the prime rate plus 1⁄2% and matures June 30, 2005. Under the
line of credit agreement, we are subject to financial covenants relating to certain asset balances and financial ratios. As of September 30, 2003 we were eligible to borrow $2,000,000 under our line of credit and were in compliance with our
financial covenants.



ITEM 3. Controls and Procedures



As of the end of
the period covered by this report, our company conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of our disclosure controls and procedures (as defined in Rules
13a-15(e) of the Exchange Act). Based on this evaluation, our chief executive officer and chief financial officer concluded that our companys disclosure controls and procedures are effective to ensure that information required to be disclosed
by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.



There was no change in our internal controls which are included within disclosure controls
and procedures during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls.



PART II. OTHER INFORMATION



ITEM 6. Exhibits and Reports on Form 8-K



|A. | Exhibits
|-- | --------



|Exhibit No. |  | Description                                                           
|----------- |  | ----------------------------------------------------------------------
|31.1        |  | Chief Executive Officer - Sarbanes-Oxley Act Section 302 Certification
|31.2        |  | Chief Financial Officer - Sarbanes-Oxley Act Section 302 Certification
|32.1        |  | Chief Executive Officer - Sarbanes-Oxley Act Section 906 Certification
|32.2        |  | Chief Financial Officer - Sarbanes-Oxley Act Section 906 Certification



|B. | Reports on Form 8-K
|-- | -------------------



| | - | Form 8-K dated August 27, 2003 was filed on September 11, 2003 announcing a non-exclusive warrant solicitation agreement.
| | - | -------------------------------------------------------------------------------------------------------------------------



| | - | Form 8-K dated August 30, 2003 was filed on October 15, 2003 announcing a non-exclusive warrant solicitation agreement.
| | - | -----------------------------------------------------------------------------------------------------------------------



| | - | Form 8-K dated October 5, 2003 was filed on October 23, 2003 announcing a non-exclusive warrant solicitation agreement.
| | - | -----------------------------------------------------------------------------------------------------------------------



| | - | Form 8-K dated October 7, 2003 was filed on October 8, 2003 setting forth third-quarter and nine month, 2003 revenues.
| | - | ----------------------------------------------------------------------------------------------------------------------



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ITEM 6. Exhibits and Reports on Form 8-K (cont.)



| | - | Form 8-K dated October 20, 2003 was filed on October 20, 2003 announcing an anticipated increase in net profit for the quarter ending September 30, 2003 compared to the quarter
ended June 30, 2003.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES



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



|      |  |                  |  | ACTION PRODUCTS INTERNATIONAL, INC.
|----- |  | ---------------- |  | -----------------------------------
|      |  |                  |  |                                    
|Date: |  | October 28, 2003 |  |                                    
|      |  |                  |  |                                    
|      |  |                  |  |                                    
|      |  |                  |  |                                    



|      |  |                  |  | 
|----- |  | ---------------- |  | 
|Date: |  | October 28, 2003 |  | 
|      |  |                  |  | 
|      |  |                  |  | 
|      |  |                  |  | 



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