##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-QSB

QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

|                                     |  |                                    
|------------------------------------ |  | -----------------------------------
|For Quarter Ended September 30, 2001 |  | Commission File Number      0-13118

ACTION PRODUCTS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

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

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

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 [  ]

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

|                              |  |                                
|----------------------------- |  | -------------------------------
|Class                         |  | Outstanding at November 9, 2001
|Common Stock, $.001 par value |  | 2, 230,900                     

Transitional Small Business Disclosure Format (check one):    YES [  ]           NO [X]

Page 1 of 12



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TABLE OF CONTENTS



|                               |                                                                                                |  |  |  |  |  |  | 
|------------------------------ | ---------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I.  FINANCIAL INFORMATION
|                               | ITEM 1. Financial Statements                                                                  
|                               | CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)                                              
|                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)                                   
|                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)                                   
|                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                          
|                               | ITEM 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
|PART II.  OTHER INFORMATION   
|                               | ITEM 5.  Other Information                                                                    
|                               | ITEM 6.  Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                    



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##### Table of Contents



I N D E X

|                                                                                                                                   |  |    |  |       
|---------------------------------------------------------------------------------------------------------------------------------- |  | -- |  | ------
|                                                                                                                                   |  |    |  | Page  
|                                                                                                                                   |  |    |  | Number
|PART I     FINANCIAL INFORMATION                                                                                                   |  |   
|                                                                                                                                  
|Item 1.      Financial Statements                                                                                                  |  |   
|                                                                                                                                  
|Condensed
Consolidated Balance Sheet at September 30, 2001
(unaudited)                                                             |  | 3 
|                                                                                                                                  
|Condensed Consolidated Statements of Operations  Three months ended
and nine months ended September 30, 2001 and 2000
(unaudited) |  | 4 
|                                                                                                                                  
|Condensed Consolidated Statements of Cash Flows  Nine months ended
September 30, 2001 and 2000 (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 
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|PART II     OTHER INFORMATION                                                                                                      |  |   
|                                                                                                                                  
|Item 5.     Other Information                                                                                                      |  | 10
|                                                                                                                                  
|Item 6.     Exhibits and Reports on Form 8-K                                                                                       |  | 10
|                                                                                                                                  
|SIGNATURE PAGE                                                                                                                     |  | 12

Page 2 of 12



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##### Table of Contents






PART I.    FINANCIAL INFORMATION




ITEM 1.     Financial Statements

ACTION PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY




CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)


|                                                                                                      |                                            |   |                                   |                            |  |                |           | 
|----------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | --------------------------------- | -------------------------- |  | -------------- | --------- | 
|                                                                                                      |                                            |   |                                   |                            |  | Sept. 30, 2001
|                                                                                                      |                                            |   |                                   |                            |  |               
|ASSETS                                                                                               
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|CURRENT ASSETS                                                                                        |                                            |   |                                   |                           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Cash and cash equivalents                                                                             |                                            | $ | 561,100                           |                           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Accounts receivable, net of an allowance for doubtful accounts of $212,100                            |                                            |   | 1,771,900                         |                           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Inventories, net                                                                                      |                                            |   | 2,155,600                         |                           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Prepaid expenses and other assets                                                                     |                                            |   | 381,700                           |                           
|                                                                                                      |                                            |   |                                   |                           
|                                                                                                      |                                            |   |                                   | TOTAL CURRENT ASSETS       |  |                | 4,870,300 | 
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|PROPERTY, PLANT AND EQUIPMENT                                                                         |                                            |   | 2,241,300                         |                           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Less accumulated depreciation and amortization                                                        |                                            |   | (1,082,300                        | )                         
|                                                                                                      |                                            |   |                                   |                           
|                                                                                                      |                                            |   | NET PROPERTY, PLANT AND EQUIPMENT |                            |  | 1,159,000      |          
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|EXCESS OF COST OVER FAIR VALUE OF ASSETS ACQUIRED, NET                                                |                                            |   | 592,300                           |                           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|OTHER ASSETS                                                                                          |                                            |   | 554,000                           |                           
|                                                                                                      |                                            |   |                                   |                           
|                                                                                                      |                                            |   |                                   | TOTAL ASSETS               |  | $              | 7,175,600 | 
|                                                                                                      |                                            |   |                                   |                           
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                  |                                            |   |                                   |                           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|CURRENT LIABILITIES                                                                                   |                                            |   |                                   |                           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Current portion of installment notes payable and
obligation under capital lease                       |                                            | $ | 86,100                            |                           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Borrowings under lines of credit                                                                      |                                            |   | 1,564,500                         |                           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Other Current Liabilities                                                                             |                                            |   | 1,178,300                         |                           
|                                                                                                      |                                            |   |                                   |                           
|                                                                                                      |                                            |   |                                   | TOTAL CURRENT LIABILITIES  |  |                | 2,828,900 | 
|                                                                                                      |                                            |   |                                   |                           
|INSTALLMENT NOTES PAYABLE AND OBLIGATION                                                              |                                            |   |                                   |                           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|UNDER CAPITAL LEASE                                                                                   |                                            |   | 88,700                            |                           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|COMMERCIAL LOANS PAYABLE                                                                              |                                            |   | 108,600                           |                           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|MORTGAGE PAYABLE                                                                                      |                                            |   | 679,900                           |                           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|DEFERRED INCOME TAXES                                                                                 |                                            |   | 56,500                            |                           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|DEFERRED REVENUE                                                                                      |                                            |   | 137,500                           |                           
|                                                                                                      |                                            |   |                                   |                           
|                                                                                                      |                                            |   |                                   | TOTAL LIABILITIES          |  |                | 3,900,100 | 
|                                                                                                      |                                            |   |                                   |                           
|SHAREHOLDERS EQUITY                                                                                  |                                            |   |                                   |                           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Common stock  $.001 par value; 15,000,000 shares authorized; 2,230,900
shares issued and outstanding |                                            |   | 2,200                             |                           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Additional paid-in capital                                                                            |                                            |   | 3,870,000                         |                           
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Accumulated Deficit                                                                                   |                                            |   | (76,200                           | )                         
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Stock subscriptions receivable                                                                        |                                            |   | (520,500                          | )                         
|                                                                                                      |                                            |   |                                   |                           
|                                                                                                      |                                            |   |                                   | TOTAL SHAREHOLDERS EQUITY |  |                | 3,275,500 | 
|                                                                                                      |                                            |   |                                   |                           
|                                                                                                      | TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |   | $                                 | 7,175,600                  | 
|                                                                                                      |                                            |   |                                   |                           

See Accompanying Notes

Page 3 of 12



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##### Table of Contents



ITEM 1.    Financial Statements (cont.)

ACTION PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)


|                                                      |  |                            |           |                           |  |      |           |      |  |   |           |   |  |   |           |  
|----------------------------------------------------- |  | -------------------------- | --------- | ------------------------- |  | ---- | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                      |  | Three Months Ended Sept 30 |           | Nine Months Ended Sept 30
|                                                      |  |                            |           |                          
|                                                      |  | 2001                       |           | 2000                      |  | 2001 |           | 2000
|                                                      |  |                            |           |                           |  |      |           |     
|NET SALES                                             |  | $                          | 2,218,400 |                           |  | $    | 2,313,200 |      |  | $ | 5,489,400 |   |  | $ | 5,834,100 |  
|                                                     
|                                                     
|                                                     
|                                                     
|COST OF SALES                                         |  |                            | 1,208,500 |                           |  |      | 1,284,100 |      |  |   | 2,996,900 |   |  |   | 3,253,900 |  
|                                                      |  |                            |           |                           |  |      |           |      |  |   |           |   |  |   |           |  
|GROSS PROFIT                                          |  |                            | 1,009,900 |                           |  |      | 1,029,100 |      |  |   | 2,492,500 |   |  |   | 2,580,200 |  
|                                                     
|                                                     
|                                                     
|                                                     
|OPERATING EXPENSES                                    |  |                            |           |                           |  |      |           |      |  |   |           |   |  |   |           |  
|                                                     
|                                                     
|                                                     
|                                                     
|Selling                                               |  |                            | 436,700   |                           |  |      | 353,500   |      |  |   | 1,112,300 |   |  |   | 929,700   |  
|                                                     
|                                                     
|                                                     
|                                                     
|General and administrative                            |  |                            | 606,200   |                           |  |      | 520,800   |      |  |   | 1,839,900 |   |  |   | 1,393,600 |  
|                                                      |  |                            |           |                           |  |      |           |      |  |   |           |   |  |   |           |  
|TOTAL OPERATING EXPENSES                              |  |                            | 1,042,900 |                           |  |      | 874,300   |      |  |   | 2,952,200 |   |  |   | 2,323,300 |  
|                                                      |  |                            |           |                           |  |      |           |      |  |   |           |   |  |   |           |  
|INCOME (LOSS) FROM OPERATIONS                         |  |                            | (33,000   | )                         |  |      | 154,800   |      |  |   | (459,700  | ) |  |   | 256,900   |  
|                                                     
|                                                     
|                                                     
|                                                     
|OTHER INCOME (EXPENSE)                                |  |                            |           |                           |  |      |           |      |  |   |           |   |  |   |           |  
|                                                     
|                                                     
|                                                     
|                                                     
|Interest expense                                      |  |                            | (36,200   | )                         |  |      | (40,800   | )    |  |   | (121,900  | ) |  |   | (113,400  | )
|                                                     
|                                                     
|                                                     
|                                                     
|Other                                                 |  |                            | (17,300   | )                         |  |      | 50,600    |      |  |   | 82,900    |   |  |   | 132,500   |  
|                                                      |  |                            |           |                           |  |      |           |      |  |   |           |   |  |   |           |  
|                                                      |  |                            | (53,500   | )                         |  |      | 9,800     |      |  |   | (39,000   | ) |  |   | 19,100    |  
|                                                      |  |                            |           |                           |  |      |           |      |  |   |           |   |  |   |           |  
|INCOME (LOSS) BEFORE PROVISION BENEFIT FOR INCOME TAX |  |                            | (86,500   | )                         |  |      | 164,600   |      |  |   | (498,700  | ) |  |   | 276,000   |  
|                                                     
|                                                     
|                                                     
|                                                     
|PROVISION BENEFIT FOR INCOME TAXES                    |  |                            | (9,800    | )                         |  |      | 47,700    |      |  |   | (111,800  | ) |  |   | 80,100    |  
|                                                      |  |                            |           |                           |  |      |           |      |  |   |           |   |  |   |           |  
|NET INCOME (LOSS)                                     |  | $                          | (76,700   | )                         |  | $    | 116,900   |      |  | $ | (386,900  | ) |  | $ | 195,900   |  
|                                                      |  |                            |           |                           |  |      |           |      |  |   |           |   |  |   |           |  
|INCOME (LOSS) PER SHARE                               |  |                            |           |                           |  |      |           |      |  |   |           |   |  |   |           |  
|                                                     
|                                                     
|                                                     
|                                                     
|Basic                                                 |  | $                          | (0.03     | )                         |  | $    | 0.06      |      |  | $ | (0.18     | ) |  | $ | 0.10      |  
|                                                      |  |                            |           |                           |  |      |           |      |  |   |           |   |  |   |           |  
|Diluted                                               |  | $                          | (0.03     | )                         |  | $    | 0.04      |      |  | $ | (0.18     | ) |  | $ | 0.07      |  
|                                                      |  |                            |           |                           |  |      |           |      |  |   |           |   |  |   |           |  
|Weighted average number of common shares outstanding: |  |                            |           |                           |  |      |           |      |  |   |           |   |  |   |           |  
|                                                     
|                                                     
|                                                     
|                                                     
|Basic                                                 |  |                            | 2,230,900 |                           |  |      | 2,007,400 |      |  |   | 2,193,400 |   |  |   | 2,007,400 |  
|                                                     
|                                                     
|                                                     
|                                                     
|Diluted                                               |  |                            | 2,230,900 |                           |  |      | 2,748,800 |      |  |   | 2,193,400 |   |  |   | 2,748,800 |  

See Accompanying Notes

Page 4 of 12



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##### Table of Contents



ITEM 1.    Financial Statements (cont.)

ACTION PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


|                                                                                    |                               |                                                      |                                       |          |                           |          |           |          |          |          |  
|----------------------------------------------------------------------------------- | ----------------------------- | ---------------------------------------------------- | ------------------------------------- | -------- | ------------------------- | -------- | --------- | -------- | -------- | -------- | -
|                                                                                    |                               |                                                      |                                       |          | Nine Months Ended Sept 30
|                                                                                    |                               |                                                      |                                       |          |                          
|                                                                                    |                               |                                                      |                                       |          | 2001                      |          | 2000     
|                                                                                    |                               |                                                      |                                       |          |                           |          |          
|CASH FLOWS FROM OPERATING ACTIVITIES                                                |                               |                                                      |                                       |          |                           |          |           |         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Net income (loss)                                                                   |                               | $                                                    | (386,900                              | )        |                           | $        | 195,900   |         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Adjustments to reconcile net income (loss) to net
cash used in operating activities |                               |                                                      |                                       |          |                           |          |           |         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Depreciation                  |                                                      |                                       | 132,200  |                           |          |           | 92,900   |         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Amortization                  |                                                      |                                       | 281,500  |                           |          |           | 156,900  |         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Loss on disposal of asset     |                                                      |                                       | 6,300    |                           |          |           | 0        |         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Provision for bad debts       |                                                      |                                       | 115,400  |                           |          |           | 0        |         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Deferred income tax provision |                                                      |                                       | 19,000   |                           |          |           | (500     | )       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Changes in:                                                                         |                               |                                                      |                                       |          |                           |          |           |         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Accounts receivable           |                                                      |                                       | (231,400 | )                         |          |           | (902,800 | )       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Inventories                   |                                                      |                                       | (768,000 | )                         |          |           | 233,000  |         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Prepaid expenses              |                                                      |                                       | (84,100  | )                         |          |           | (103,600 | )       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Other assets                  |                                                      |                                       | (273,800 | )                         |          |           | (71,000  | )       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Accounts payable              |                                                      |                                       | 90,200   |                           |          |           | 50,700   |         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Accrued expenses              |                                                      |                                       | 421,600  |                           |          |           | (123,000 | )       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Income taxes payable          |                                                      |                                       | (87,300  | )                         |          |           | (20,900  | )       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Deferred revenue              |                                                      |                                       | (12,500  | )                         |          |           | (18,700  | )       
|                                                                                    |                               |                                                      |                                       |          |                           |          |           |         
|                                                                                    |                               |                                                      | NET CASH USED IN OPERATING ACTIVITIES |          |                           | (777,800 | )         |          |          | (511,100 | )
|                                                                                    |                               |                                                      |                                       |          |                           |          |           |         
|CASH FLOWS FROM INVESTING ACTIVITIES                                                |                               |                                                      |                                       |          |                           |          |           |         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Acquisition of property, plant and equipment                                        |                               |                                                      | (77,900                               | )        |                           |          | (216,500  | )       
|                                                                                    |                               |                                                      |                                       |          |                           |          |           |         
|                                                                                    |                               |                                                      | NET CASH USED IN INVESTING ACTIVITIES |          |                           | (77,900  | )         |          |          | (216,500 | )
|                                                                                    |                               |                                                      |                                       |          |                           |          |           |         
|CASH FLOWS FROM FINANCING ACTIVITIES                                                |                               |                                                      |                                       |          |                           |          |           |         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Collection of stock subscriptions receivable                                        |                               |                                                      | 203,000                               |          |                           |          | 9,600     |         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Repayment of mortgage and capital lease principal                                   |                               |                                                      | (48,700                               | )        |                           |          | (13,300   | )       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Repayment of notes payable to related parties                                       |                               |                                                      | (18,600                               | )        |                           |          | 0         |         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Proceeds from borrowings (net)                                                      |                               |                                                      | 666,400                               |          |                           |          | 368,400   |         
|                                                                                    |                               |                                                      |                                       |          |                           |          |           |         
|                                                                                    |                               | NET CASH PROVIDED BY FINANCING ACTIVITIES            |                                       |          | 802,100                   |          |           |          | 364,700  |         
|                                                                                    |                               |                                                      |                                       |          |                           |          |           |         
|                                                                                    |                               | NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS |                                       |          | (53,600                   | )        |           |          | (362,900 | )       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                    |                               |                                                      | 614,900                               |          |                           |          | 1,053,600 |         
|                                                                                    |                               |                                                      |                                       |          |                           |          |           |         
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                          |                               | $                                                    | 561,300                               |          |                           | $        | 690,700   |         
|                                                                                    |                               |                                                      |                                       |          |                           |          |           |         
|Supplemental disclosures  cash paid for:                                           |                               |                                                      |                                       |          |                           |          |           |         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Interest                      |                                                      | $                                     | 110,100  |                           |          | $         | 113,400  |         
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Taxes                         |                                                      | $                                     | 66,000   |                           |          | $         | 101,000  |         

See Accompanying Notes

Page 5 of 12



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##### Table of Contents



ACTION PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)


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, 2001 and the results of its (i) operations for the three
and nine month periods ended September 30, 2001 and 2000 and (ii) cash
flows for the nine month periods ended September 30, 2001 and 2000. The
financial information included herein is taken from the books and records
of the Company and has been reviewed by the Companys independent
Certified Public Accountants 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, 2000. The results of
operations for the nine month period ended September 30, 2001 are not
necessarily indicative of the operating results for the full year.

2.     Line of credit.As of March 22, 2001, the Company entered into an
agreement with Citrus Bank, pursuant to which Citrus Bank provides a
revolving line of credit (the Revolver) for up to $2 million at the
Prime lending rate. The borrowings under the Revolver are utilized by
the Company to finance accounts receivable, inventory and other operating
and capital requirements. The Revolver matures June 30, 2003 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. The
Company is currently in compliance with all of the covenants. The
Companys previous line of credit with another financial institution
expired during the first quarter of 2001.

3.     Earnings per share.Common stock equivalents were not included in the
computation of diluted earnings per share for the three and nine month
periods ending September 30, 2001, as their effect would have been
anti-dilutive.

5.      New accounting pronouncements.On July 20, 2001, the Financial
Accounting Standards Board issued Statements of Financial Accounting
Standards No. 141 (SFAS 141), Business Combinations, and No. 142 (SFAS
142), Goodwill and Other Intangible Assets. SFAS 141 addresses
financial accounting and reporting for goodwill and other intangible
assets acquired in a business combination at acquisition. SFAS 141
requires the purchase method of accounting to be used for all business
combinations initiated after June 30, 2001; establishes specific criteria
for the recognition of intangible assets separately from goodwill; and
requires unallocated negative goodwill to be written off immediately as an
extraordinary gain (instead of being deferred and amortized). SFAS 142
addresses financial accounting and reporting for intangible assets
acquired individually or with a group of other assets (but not those
acquired in a business combination) at acquisition. SFAS 142 also
addresses financial accounting and reporting for goodwill and other
tangible assets subsequent to their acquisition. SFAS 142 provides that
goodwill and intangible assets which have indefinite useful lives will not
be amortized but rather will be tested at least annually for impairment.
It also provides that intangible assets that have finite useful lives will
continue to be amortized over their useful lives, but those lives will no
longer be limited to forty years. SFAS 141 is effective for all business
combinations initiated after June 30, 2001 and for all business
combinations accounted for by the purchase method for which the date of
acquisition is after June 30, 2001. The provisions of SFAS 142 are
effective for fiscal years beginning after December 15,
2001. The Company will adopt SFAS 142 beginning January 1, 2002. The
Company is considering the provisions of SFAS No. 141 and No. 142 and at
present has not determined the impact of adopting SFAS 141 and SFAS 142.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)

6.     Reclassification.Certain amounts in the Companys Condensed
Consolidated Financial Statements for the nine months ended September 30,
2000 have been reclassified to conform to the Companys Condensed
Consolidated Financial Statements for the nine months ended September 30,
2001. Amounts related to shipping supplies and freight charges previously
reported as selling, general and administrative expenses have been
reclassified to Cost of Sales in the Condensed Consolidated Statements of
Operations.




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. The
following factors, among others, could cause actual results to differ
materially from those set forth in the forward-looking statements: our
ability to successfully (i) develop our brands and proprietary products
through internal development, licensing and/or mergers and acquisitions,
(ii) access the mass market by entering into licensing agreements with
major retailers and (iii) develop our E-commerce
strategy.


Additional factors include, but are not limited to the following: the size
and growth of the market for our products, competition, pricing pressures,
market acceptance of the our products, the effect of economic conditions,
intellectual property rights, the results of financing efforts, risks in
product development, the ability to identify and consummate acquisition
opportunities, other risks identified in this report and our other
periodic filings with the Securities Exchange Commission.

Results of Operations:

Three Months Ended September 30, 2001 Compared With Three Months Ended September 30, 2000

Net salesdecreased by $94,800 to $2,218,400 during the third quarter
ended September 30, 2001, compared with net sales of $2,313,200 during the
third quarter of 2000. Management attributes the 4% decrease in net sales
to the general slowdown in the economy and the loss of several major
accounts as a result of financial distress precipitated by the slowdown,
which were compounded by the events of September 11th. Net sales for the
two months ended August 31, 2001 increased by $215,000, or 17% from the
same period in 2000. The sales momentum generated in July and August was
temporarily stalled by the events of September 11th, resulting in lower
net sales for the quarter ended September 30, 2001 compared to the same
period in the prior year. Orders and sales significantly increased in
October 2001, thereby positioning us to be able to achieve record sales
for the fourth quarter of 2001. We commenced the marketing of two
promotion programs to bolster our sales efforts in the fourth quarter of
2001. These programs include; a consumer holiday cash rebate promotion for
the I Dig Dinosaurs® excavation activity kits and a special four-point
sales stimulus program that provides retailers with significant discounts
on our entire product line, extended payment terms, and free America the
Beautiful coloring books.

Gross profitpercentage was 46% during the third quarter of 2001, compared
with 45% for the third quarter of 2000. Our focus on cost competitive
sourcing for our products led to the improved performance in spite of the
decrease in net sales. The $19,200 decrease in gross profit from
$1,029,100 to $1,009,900 in the quarters ended September 30, 2000 and
2001, respectively,is attributable to the previously noted decrease in
net sales.

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

Selling, general and administrative (SG&A) expensesincreased by $168,600
to $1,042,900 for the three month period ended September 30, 2001 from
$874,300 for the comparable period in 2000. This 19% increase in SG&A
expenses is due primarily to expenditures made in connection with our
efforts to (i) expand our product offerings, channels of distribution, and
business processes, and (ii) strengthen our capabilities to support
planned future growth, as well as increases in bad debt expense resulting
from the financial distress experienced by certain accounts as previously
noted.

These increased expenses include approximately $25,000 incurred in
connection with the integration of the operations of Action Products
Canada Ltd. in association with the acquisition of assets of Earth Lore
Ltd. and its I Dig Dinosaurs ® line, which occurred during the
fourth-quarter of 2000. Also, we incurred $22,500 in lease and related
expenses for computer software and hardware related to the overhaul and
modernization of the customer relationship management (CRM) and back
office software systems. These expenditures, in addition to other
benefits, will directly improve inventory management, expedite the
processing of customer orders, assist in measuring the effectiveness of
marketing and sales programs and improve the collection of accounts
receivable. Managements decision to reduce staff levels, while at the
same time recruiting staff members with the experience necessary to
enhance product development and marketing as well as our sales efforts,
resulted in a $25,000 net increase in compensation expenses not associated
with the acquisition of assets of Earth Lore Ltd.

Bad debt expense for the three months ended September 30, 2001 increased
$46,000 from the same period in 2000. This expense was attributable to
certain accounts receivable outstanding as of the first quarter of 2001.
To mitigate the future collection risk of our accounts receivable, we
obtained a business credit insurance policy in March 2001 to guarantee the
majority of our accounts receivable through a Standard & Poors rated
insurance company.

Interest expenserelated to current and long-term debt was $36,200 and
$40,800 during the third quarter of 2001 and 2000, respectively. The
decrease of $4,600 is due primarily to significantly lower interest rates
offsetting the effect of higher average balances drawn under our line of
credit with Citrus Bank.

Other income and (expense)are netted for financial statement
presentation. During the third quarter of 2001 and 2000, other income and
(expense) were ($17,300) and $50,600, respectively. The $67,900 decrease
was mainly attributable to a decrease in service charges.

Income before provision for income taxes and net income. As a result of
the foregoing, we had a net loss before taxes of $86,500 and a net loss
after taxes of $76,700 during the third quarter of 2001, compared with a
net income before taxes of $164,600 and net income after taxes of $116,900
during the third quarter of 2000.

Nine Months Ended September 30, 2001 Compared With Nine Months Ended September 30, 2000

Net salesdecreased by $344,700 to $5,489,400 during the nine months ended
September 30, 2001, compared with net sales of $5,834,100 during the
comparable period in 2000. Management attributes the 6% decrease in
net sales to the general slowdown in the economy and the loss of several
major accounts as a result of financial distress precipitated by the
slowdown, which were compounded by the events of September 11th. Net sales
for the eight months ended August 31, 2001 was substantially equal to the
net sales for the same period in 2000. The sales momentum generated in
July and August was temporarily stalled by the events of September 11th,
contributing to the lower net sales for the nine months ended September
30, 2001 compared to the same period in the prior year.

Orders and sales significantly increased in October 2001, which has
positioned us to be able to achieve record sales for the fourth quarter of
2001. We commenced marketing two promotion programs to bolster our sales
efforts in the fourth quarter of 2001. These programs include; a consumer
holiday cash rebate promotion for the

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

Net sales (cont.)

I Dig Dinosaurs® excavation activity kits and a special four-point sales
stimulus program that provides retailers with significant discounts on our
entire product line, extended payment terms, and free America the
Beautiful coloring books.


Gross profitpercentage was 45% during the nine months ended September 30,
2001, compared with 44% for the nine month period of 2000. Our focus on
cost competitive sourcing for our products led to the improved performance
in spite of the decrease in net sales. The $87,700 decrease in gross
profit from $2,580,200 to $2,492,500 in the nine months ended September
30, 2000 and 2001, respectively, is attributable to the previously noted
decrease in net sales.

Selling, general and administrative (SG&A) expensesincreased by $628,900
to $2,952,200 in the nine month period ended September 30, 2001 from
$2,323,300 for the comparable period in 2000. This 27% increase in SG&A
expenses is due primarily to expenditures made in our efforts to (i)
expand our product offerings, channels of distribution and business
processes, (ii) strengthen our capabilities to support planned future
growth, as well as an increase in bad debt expense resulting from the
financial distress experienced by certain accounts as previously noted.

These increased expenses include over $100,000 incurred in connection with
the integration of the operations of
Action Products Canada Ltd. in association with the acquisition of assets
of Earth Lore Ltd. and its I Dig Dinosaurs ® line, which occurred during
the fourth-quarter of 2000. Also, we incurred $70,000 in lease and
related expenses for computer software and hardware related to the
overhaul and modernization of the customer relationship management (CRM)
and back office software systems. These expenditures, in addition to other
benefits, will directly improve inventory management, expedite the
processing of customer orders, assist in measuring the effectiveness of
marketing and sales programs and improve the collection of accounts
receivable. Managements decision to reduce staff levels, while at the
same time recruiting staff members with the experience necessary to
enhance product development and marketing as well as our sales efforts,
resulted in a $65,000 net increase in compensation expenses not associated
with the acquisition of Earth Lore Ltd.

Bad debt expense for the nine months ended September 30, 2001 increased
$81,000 from the same period in 2000. These expenses were attributable to
certain accounts receivable outstanding as of the first quarter of 2001.
To mitigate the future collection risk of our accounts receivable, we
obtained a business credit insurance policy in March 2001 to guarantee the
majority of our accounts receivable through a Standard & Poors rated
insurance company.

Interest expenserelated to current and long-term debt for the nine months
ended September 30, 2001 increased by $8,500 to $121,900, compared with
$113,400 for the same period in 2000. The increase is due
primarily to higher average balances drawn under our line of credit with
Citrus Bank used to fund operations and pay down liabilities assumed
through the acquisition of Earth Lore Ltd.

Other income and (expense)for the nine months ended September 30, 2001
was $82,900, compared to $132,500 for the same period in 2000. The $49,600
decrease was mainly attributable to a decrease in service charges and a
loss on disposal of certain assets.

Income before provision for income taxes and net income. As a result of
the foregoing, we had a net loss before income taxes of $498,700 and a net
loss after taxes of $386,900 for the nine months ended
September 30, 2001, compared with a net income before income taxes of
$276,000 and net income after taxes of $195,900 during the comparable nine
month period in 2000.

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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:

As of September 30, 2001, the Company had cash and cash equivalents of
$561,100, representing a decrease of $53,600 compared to December 31,
2000. Principal sources of liquidity for the first nine months of fiscal
2001 were cash flows from financing activities of $802,100, $666,400 of
which was derived from borrowings under the Citrus Bank line of credit,
$203,000 from the collection of stock subscriptions receivable. An
additional source of liquidity was $511,800 from increased accounts
payable and accrued expenses. Principal uses of cash in the first nine
months of fiscal 2001 were an increase of $768,000 in inventory, an
additional $231,400 in seasonal accounts receivable, an $87,300 reduction
in income taxes payable and $77,900 of property, plant and equipment
purchases.


At September 30, 2001, we had $1,564,500 of borrowings under our line of
credit, an increase of $680,100 from $884,400 as of September 30, 2000.
The increased borrowings were used for inventory purchases and for
liabilities assumed in association with the acquisition of Earth Lore Ltd.
Our line of credit which provides for borrowings up to $2,000,000 matures
June 30, 2003. Under the credit agreement for our line of credit, we are
subject to financial covenants relating to certain asset balances and
financial ratios. As of September 30, 2001 we were eligible to borrow
$1,832,500 under our line of credit and are in compliance with all
financial covenants thereunder. We believe that currently available cash
and cash equivalents, liquid investments, cash flows from operations and
current credit facilities will be sufficient to fund our operations for at
least the next twelve months.




PART II.
      OTHER INFORMATION




ITEM 5.
      Other Information

At a meeting held on October 10, 2001, our Board of Directors authorized
the repurchase of up to $250,000 of our issued and outstanding common
stock. The repurchases will be made from time to time in open market
transactions in such amounts as determined at the discretion of our
management and will be funded out of our working capital.

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ITEM 6.
      Exhibits and Reports on Form 8-K



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

|            |  |                                                                                                                                                                                                                    
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                        
|3.1         |  | Amended Articles of Incorporation, incorporated by reference to
an Exhibit to Definitive Proxy Statement filed May 22, 1998.                                                                                       
|           
|           
|           
|           
|3.2         |  | Amended By-laws, incorporated by reference to an Exhibit to the
Definitive Proxy Statement filed May 22, 1999                                                                                                      
|           
|           
|           
|           
|10.1        |  | Employee Stock Ownership Plan, incorporated by reference to an
Exhibit to the Companys Registration Statement on Form S-18,
dated April 23, 1984, at pages 154-208.                                               
|           
|           
|           
|           
|10.2        |  | Incentive Stock Option Plan, incorporated by reference to an
Exhibit to the Companys Registration Statement on Form S-18
dated September 25, 1984, at pages 210-220.                                              
|           
|           
|           
|           
|10.3        |  | 401(k) Plan dated October 3, 1986, incorporated by reference to
an Exhibit to Form 10- filed August 15, 1987.                                                                                                      
|           
|           
|           
|           
|10.4        |  | Amendment to Employee Stock Ownership Plan dated February 8,
1988, incorporated by reference to an Exhibit to Form 10-K filed
March 31, 1989.                                                                      
|           
|           
|           
|           
|10.5.1      |  | Amendment to Employee Stock Ownership Plan dated March 10, 1989,
incorporated by reference to an Exhibit to Form 10-K filed March
31, 1989.                                                                        
|           
|           
|           
|           
|10.6        |  | Companys 1996 Stock Option Plan incorporated by reference to an
Exhibit to the Companys Registration Statement on Form S-8 filed
on April 20, 1999.                                                              
|           
|           
|           
|           
|10.7        |  | Asset Purchase Agreement between the Company and American Outdoor
Products, Inc. dated December 31, 1997, incorporated by reference
to Exhibit in the Companys Current Report on Form 8-K filed
February 26, 1998.
|           
|           
|           
|           
|10.8        |  | Asset Purchase Agreement between the Company and Earth Lore Ltd.,
dated October 15, 2000, incorporated by reference to Exhibit in
the Companys Current Report on Form 8-K filed November 6, 2000.                 



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

On October 17, 2000, we filed a Current Report on Form 8-K (File No.
000-13118) to announce that our Board of Directors authorized the
repurchase, from time to time in the open market, of up to $250,000 of our
issued and outstanding common stock.

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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: |  | November 9, 2001 |  | By: |  | /s/ Ronald Kaplan                                     
|      |  |                  |  |     |  |                                                       
|      |  |                  |  |     |  | Ronald Kaplan                                         
|     
|     
|     
|     
|      |  |                  |  |     |  | Chief Executive Officer (Principal Executive Officer) 
|     
|     
|     
|     
|     
|Date: |  | November 9, 2001 |  | By: |  | /s/ Robert L. Burrows                                 
|      |  |                  |  |     |  |                                                       
|      |  |                  |  |     |  | Robert L. Burrows                                     
|     
|     
|     
|     
|      |  |                  |  |     |  | Chief Financial Officer (Principal Accounting Officer)

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