##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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Form 10-QSB



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(Mark One)

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



For the quarter ended March 31, 2005



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)



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



1101 North Keller
Rd., Suite E, Orlando, Florida, 32810

(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 issuers classes of common stock, as of last practicable date.



|                              |  |                            
|----------------------------- |  | ---------------------------
|Class                         |  | Outstanding at May 10, 2005
|Common Stock, $.001 par value |  | 4,870,000                  



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



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##### Table of Contents

INDEX



|                                                                                                        |  |                                                                                       |  |           
|------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | ----------
|                                                                                                        |  |                                                                                       |  | PageNumber
|PART I.
FINANCIAL INFORMATION                                                                           |  |                                                                                      
|                                                                                                        |  |                                                                                      
|Item 1.                                                                                                 |  | Financial Statements                                                                  |  |           
|                                                                                                        | 
|Condensed Consolidated Balance Sheet at March 31, 2005 (unaudited)                                      |  | 3                                                                                    
|                                                                                                        | 
|Condensed Consolidated Statements of Operations - Three monthsended March 31, 2005 and 2004 (unaudited) |  | 4                                                                                    
|                                                                                                        | 
|Condensed Consolidated Statements of Cash Flows - Three monthsended March 31, 2005 and 2004 (unaudited) |  | 5                                                                                    
|                                                                                                        | 
|Notes to Condensed Consolidated Financial Statements (unaudited)                                        |  | 6                                                                                    
|                                                                                                        |  |                                                                                      
|Item 2.                                                                                                 |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 7         
|                                                                                                        |  |                                                                                      
|Item 3.                                                                                                 |  | Controls and Procedures                                                               |  | 9         
|                                                                                                        | 
|PART II.
OTHER INFORMATION                                                                              |  |                                                                                      
|                                                                                                        |  |                                                                                      
|Item 2.                                                                                                 |  | Changes in Securities                                                                 |  | 10        
|                                                                                                        |  |                                                                                      
|Item 5.                                                                                                 |  | Other Information                                                                     |  | 10        
|                                                                                                        |  |                                                                                      
|Item 6.                                                                                                 |  | Exhibits and Reports on Form 8-K                                                      |  | 10        
|                                                                                                        | 
|SIGNATURE PAGE                                                                                          |  | 11                                                                                   



Page 2 of 13



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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)



|                                                                                      |  |               |            |  
|------------------------------------------------------------------------------------- |  | ------------- | ---------- | -
|                                                                                      |  | March 31,2005 |           
|ASSETS                                                                                |  |               |            |  
|CURRENT ASSETS                                                                        |  |               |            |  
|Cash and cash equivalents                                                             |  | $             | 76,400     |  
|Investment securities                                                                 |  |               | 153,400    |  
|Accounts receivable, net of an allowance for doubtful accounts of $155,900            |  |               | 2,278,800  |  
|Inventories, net                                                                      |  |               | 1,577,000  |  
|Prepaid expenses and other assets                                                     |  |               | 372,800    |  
|                                                                                      |  |               |            |  
|TOTAL CURRENT ASSETS                                                                  |  |               | 4,458,400  |  
|                                                                                      | 
|PROPERTY, PLANT AND EQUIPMENT                                                         |  |               | 3,380,500  |  
|Less accumulated depreciation and amortization                                        |  |               | (2,087,500 | )
|                                                                                      |  |               |            |  
|NET PROPERTY, PLANT AND EQUIPMENT                                                     |  |               | 1,293,000  |  
|GOODWILL                                                                              |  |               | 1,381,900  |  
|OTHER ASSETS                                                                          |  |               | 128,200    |  
|                                                                                      |  |               |            |  
|TOTAL ASSETS                                                                          |  | $             | 7,261,500  |  
|                                                                                      |  |               |            |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                  |  |               |            |  
|CURRENT LIABILITIES                                                                   |  |               |            |  
|Accounts payable                                                                      |  |               | 108,400    |  
|Accrued expenses, payroll and related expenses                                        |  |               | 540,800    |  
|Current portion of mortgage payable                                                   |  |               | 46,300     |  
|Borrowings under line of credit                                                       |  |               | 438,600    |  
|Other current liabilities                                                             |  |               | 49,000     |  
|                                                                                      |  |               |            |  
|TOTAL CURRENT LIABILITIES                                                             |  |               | 1,183,100  |  
|                                                                                      |  |               |            |  
|MORTGAGE PAYABLE                                                                      |  |               | 326,100    |  
|DEFERRED REVENUE                                                                      |  |               | 43,800     |  
|                                                                                      |  |               |            |  
|TOTAL LIABILITIES                                                                     |  |               | 1,553,000  |  
|                                                                                      |  |               |            |  
|SHAREHOLDERS EQUITY                                                                  |  |               |            |  
|Preferred Stock - 10,000,000 shares authorized, zero shares issued and outstanding    |  |               |           |  
|Common stock - $.001 par value; 15,000,000 shares authorized; 5,010,500 shares issued |  |               | 5,000      |  
|Treasury Stock - $.001 par value; 185,700 shares                                      |  |               | (200       | )
|Additional paid-in capital                                                            |  |               | 7,759,000  |  
|Accumulated deficit                                                                   |  |               | (2,055,300 | )
|                                                                                      |  |               |            |  
|TOTAL SHAREHOLDERS EQUITY                                                            |  |               | 5,708,500  |  
|                                                                                      |  |               |            |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                            |  | $             | 7,261,500  |  
|                                                                                      |  |               |            |  



See Accompanying Notes



Page 3 of 13



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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 March 31 |          
|                                                      |  | 2005                        |           |   | 2004 |  
|NET SALES                                             |  | $                           | 1,955,600 |   |      | $ | 1,762,800 |  
|                                                      |  |                            
|COST OF SALES                                         |  |                             | 868,600   |   |      |   | 871,200   |  
|                                                      |  |                             |           |   |      |   |           |  
|GROSS PROFIT                                          |  |                             | 1,087,000 |   |      |   | 891,600   |  
|                                                      |  |                            
|OPERATING EXPENSES                                    |  |                             |           |   |      |   |           |  
|Selling                                               |  |                             | 492,300   |   |      |   | 530,000   |  
|General and administrative                            |  |                             | 624,400   |   |      |   | 552,200   |  
|                                                      |  |                             |           |   |      |   |           |  
|TOTAL OPERATING EXPENSES                              |  |                             | 1,116,700 |   |      |   | 1,082,200 |  
|                                                      |  |                             |           |   |      |   |           |  
|LOSS FROM OPERATIONS                                  |  |                             | (29,700   | ) |      |   | (190,600  | )
|                                                      |  |                            
|OTHER INCOME (EXPENSE)                                |  |                             |           |   |      |   |           |  
|Interest expense                                      |  |                             | (14,300   | ) |      |   | (14,500   | )
|Other, net                                            |  |                             | 30,900    |   |      |   | 16,300    |  
|                                                      |  |                             |           |   |      |   |           |  
|                                                      |  |                             | 16,600    |   |      |   | 1,800     |  
|                                                      |  |                             |           |   |      |   |           |  
|LOSS BEFORE INCOME TAXES                              |  |                             | (13,100   | ) |      |   | (188,800  | )
|                                                      |  |                            
|INCOME TAXES                                          |  |                             |          |   |      |   |          |  
|                                                      |  |                             |           |   |      |   |           |  
|NET LOSS                                              |  | $                           | (13,100   | ) |      | $ | (188,800  | )
|                                                      |  |                             |           |   |      |   |           |  
|LOSS PER SHARE                                        |  |                             |           |   |      |   |           |  
|Basic and Diluted                                     |  | $                           | (0.00     | ) |      | $ | (0.05     | )
|                                                      |  |                             |           |   |      |   |           |  
|Weighted average number of common shares outstanding: |  |                             |           |   |      |   |           |  
|Basic and Diluted                                     |  |                             | 4,699,200 |   |      |   | 3,699,400 |  



See Accompanying Notes



Page 4 of 13



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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)



|                                                                           |  |                             |            |   |      |   |          |  
|-------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ---- | - | -------- | -
|                                                                           |  | Three Months Ended March 31 |           
|                                                                           |  | 2005                        |            |   | 2004 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                       |  |                             |            |   |      |   |          |  
|Net Loss                                                                   |  | $                           | (13,100    | ) |      | $ | (188,800 | )
|Adjustments to reconcile net loss to net cash used in operating activities |  |                             |            |   |      |   |          |  
|Depreciation                                                               |  |                             | 68,000     |   |      |   | 73,500   |  
|Amortization                                                               |  |                             | 16,300     |   |      |   | 31,100   |  
|Warrant issued for services                                                |  |                             |           |   |      |   | 50,800   |  
|Changes in:                                                                |  |                             |            |   |      |   |          |  
|Accounts receivable, net                                                   |  |                             | 242,800    |   |      |   | (452,200 | )
|Inventories                                                                |  |                             | (33,300    | ) |      |   | (113,500 | )
|Prepaid expenses                                                           |  |                             | (160,500   | ) |      |   | (128,200 | )
|Other assets                                                               |  |                             | (800       | ) |      |   | (6,800   | )
|Accounts payable                                                           |  |                             | 20,500     |   |      |   | 86,700   |  
|Accrued expenses, payroll and related expenses                             |  |                             | (36,100    | ) |      |   | (22,700  | )
|Deferred revenue                                                           |  |                             | (6,200     | ) |      |   | (6,200   | )
|                                                                           |  |                             |            |   |      |   |          |  
|NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                        |  |                             | 97,600     |   |      |   | (676,300 | )
|                                                                           |  |                             |            |   |      |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                       |  |                             |            |   |      |   |          |  
|Purchase of investment securities                                          |  |                             | (13,500    | ) |      |   |         |  
|Proceeds form the sale of investment securities                            |  |                             |           |   |      |   | 9,600    |  
|Acquisition of property, plant and equipment                               |  |                             | (101,400   | ) |      |   | (9,500   | )
|                                                                           |  |                             |            |   |      |   |          |  
|NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                        |  |                             | (114,900   | ) |      |   | 100      |  
|                                                                           |  |                             |            |   |      |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                       |  |                             |            |   |      |   |          |  
|Purchase of treasury stock                                                 |  |                             | (16,700    | ) |      |   |         |  
|Proceeds from notes payable                                                |  |                             |           |   |      |   | 495,000  |  
|Repayment of mortgage principal                                            |  |                             | (102,800   | ) |      |   | (26,700  | )
|Repayment of notes payable and obligation under capital lease              |  |                             |           |   |      |   | (21,900  | )
|Net proceeds from common stock options and warrant exercises               |  |                             | 621,900    |   |      |   | 307,800  |  
|Net change in borrowings under line of credit                              |  |                             | (1,130,500 | ) |      |   | (453,600 | )
|                                                                           |  |                             |            |   |      |   |          |  
|NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                        |  |                             | (628,100   | ) |      |   | 300,600  |  
|                                                                           |  |                             |            |   |      |   |          |  
|NET (DECREASE) IN CASH AND CASH EQUIVALENTS                                |  |                             | (645,400   | ) |      |   | (375,600 | )
|                                                                           |  |                            
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                           |  |                             | 721,800    |   |      |   | 750,100  |  
|                                                                           |  |                             |            |   |      |   |          |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                 |  | $                           | 76,400     |   |      | $ | 374,500  |  
|                                                                           |  |                             |            |   |      |   |          |  
|Supplemental disclosures - cash paid for:                                  |  |                             |            |   |      |   |          |  
|Interest                                                                   |  | $                           | 14,300     |   |      | $ | 14,500   |  
|Income Taxes                                                               |  |                             |           |   |      |   |         |  



See Accompanying Notes



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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 March 31, 2005 and the results of its (i)
operations for the three month periods ended March 31, 2005 and 2004 and (ii) cash flows for the three month periods ended March 31, 2005 and 2004. 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, 2004. The results of operations for the three-month period ended March 31, 2005 are not necessarily indicative of the operating
results for the full year. Through March 31, 2005, the Company has been able to meet its obligations as they come due; however, it is at least reasonably possible that if the Company continues to incur losses and negative cash flows, it will have to
obtain additional sources of debt or equity financing to maintain its liquidity. There can be no assurance that such financing will be available or available on terms acceptable to the Company, if needed.



|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. The Company is currently in compliance with all of the covenants.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|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 and
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 March 31, 2005, the Company was in compliance with all covenants.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. | Earnings (loss) per share. Common stock equivalents were not included in the computation of diluted earnings (loss) per share for the three-month periods ended March
31, 2005 and 2004, as their effect would have been anti-dilutive.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. | Common Stock and Equity Securities. On March 30, 2004, we announced that our Board of Directors had authorized a program for repurchases of up to 150,000 of our outstanding
common shares. The repurchased shares will be held in the treasury. The Company repurchased 6,000 common shares during the first quarter of 2005.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



During the three months ended March 31, 2005, changes in shareholders equity were as follows:



| |  |  | The Company issued 257,900 shares of common stock in connection with the exercise of warrants and received proceeds of approximately $611,900
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company issued 4,000 shares of common stock in connection with the exercise of options for proceeds of approximately $10,000 and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company repurchased 6,000 shares of common stock for its treasury for approximately $16,700.
| | - |  | -------------------------------------------------------------------------------------------------



Page 6 of 13



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##### Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Common Stock and Equity Securities (cont.)



At March 31, 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 (loss) 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 Mar. 31st2005 |         |   | Three MonthsEnded March 31st2004 |  
|Net loss       |  | As reported     |  | $                               | (13,100 | ) |                                  | $ | (188,800 | )
|               |  | Pro forma       |  | $                               | (13,100 | ) |                                  | $ | (214,500 | )
|               |  |                 | 
|Loss per share |  | Basic & Diluted |  |                                 |         |   |                                  |   |          |  
|               |  | As reported     |  | $                               | (0.00   | ) |                                  | $ | (.05     | )
|               |  | Pro forma       |  | $                               | (0.00   | ) |                                  | $ | (.06     | )



|6. | Other Commitments.On March 29th, 2004,
the Company entered into an operating lease for 19,000 square feet of additional warehouse space. The lease commencing April 1, 2004 is for a one-year term, with monthly payments of $8,550. The lease was terminated in first quarter, 2005.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On February 16, 2005 Action Products
International, Inc. (the Company) entered into an exclusive License Agreement (the Agreement) with Taffy Entertainment, LLC, to develop and distribute various lines of soft toys based on the new preschool entertainment series
ToddWorld®.



Plans for distribution include specialty toy
stores, gift and bookstores, and other notable outlets for quality childrens products. The term of the Agreement is for four years expiring on February 28, 2009, with a two-year extension through February 28, 2011 subject to the Company
meeting certain minimum sales objectives and royalty requirements during the initial term.



|7. | 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. 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
develop our brands and proprietary products through internal development, licensing and/or mergers and acquisitions. Additional factors include, but are not limited, the size and growth of the market for our products,



Page 7 of 13



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##### Table of Contents

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



competition, pricing pressures, market acceptance of our products, the effect of economic
conditions, intellectual property rights, the results of financing efforts, 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 March 31, 2005 Compared With Three Months Ended March 31, 2004



The following should be read in conjunction with our consolidated financial
statements and the related notes thereto included elsewhere herein. The following table sets forth, as a percentage of sales, certain items appearing in our consolidated statements of operations.



|                                   |  |                              |    |  |                              |   
|---------------------------------- |  | ---------------------------- | -- |  | ---------------------------- | --
|                                   |  | Quarter Ended March 31, 2005 |    |  | Quarter Ended March 31, 2004 |   
|Net Sales                          |  | 100                          | %  |  | 100                          | % 
|Cost of Sales                      |  | 44                           | %  |  | 49                           | % 
|Gross Profit                       |  | 56                           | %  |  | 51                           | % 
|Selling Expense                    |  | 25                           | %  |  | 30                           | % 
|General and Administrative Expense |  | 32                           | %  |  | 32                           | % 
|Total Operating Expense            |  | 57                           | %  |  | 62                           | % 
|Loss from Operations               |  | (1                           | )% |  | (11                          | )%
|Other Income (Expense)             |  | 1                            | %  |  |                             |   
|Loss before income taxes           |  | (0                           | )% |  | (11                          | )%
|Taxes                              |  |                             |    |  |                             |   
|Net Loss                           |  | (0                           | )% |  | (11                          | )%



Net salesfor
the three months ended March 31, 2005 were $1,955,600, compared with net sales of $1,762,800 for the three months ended March 31, 2004. Management attributes the $192,800 or 11% increase in net sales to sales of Curiosity Kits products acquired in
the second quarter of 2004 partially offset by decreases in the Companys Masters and Play & Store brands.



Gross profitincreased by $195,400 to $1,087,000 for the three months ended March 31, 2005, compared with $891,600 for the three months ended March
31, 2004. The gross profit percentage increased from 51% to 56% for the three-month periods ended March 31, 2005 and 2004 respectively. The increase in gross profit percentage was mainly attributable to a decrease in importation freight costs and
lower product costs. The increase in gross profit is attributable to the increase in sales discussed above.



Selling, general and administrative (SG&A) expenses increased by $34,500 to $1,116,700 for the three-month period ended March 31, 2005 from
$1,082,200 for the three-month period ended March 31, 2004. This 3% increase in SG&A expenses is due primarily to a compensation increase due principally to staffing additions in marketing, sales and warehouse operations



Interest expense related to current and long-term debt was $14,300 and
$14,500 for the three-month periods ended March 31, 2005 and 2004, respectively.



Other income and (expense), net during the three-month periods ended March 31, 2005 and 2004 was $30,900 and $16,300, respectively. The $14,600 change was mainly attributable to gains from investments.



Loss before income taxes and net loss, as a result of
the foregoing, was $13,100 for the three months ended March 31, 2005, compared with $188,800 for the three months ended March 31, 2004.



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##### Table of Contents

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



Financial Condition, Liquidity, and Capital Resources:



As of March 31, 2005, we had cash and cash equivalents of $76,400,
representing a decrease of $645,400 compared to December 31, 2004.



After taking account of non-cash items and other adjustments, our cash generated from operations for the three months ended March 31, 2005 were $97,600. The principal source of cash from operating activities for the three months ended March
31, 2005 was from collections of accounts receivable of $242,800. Principal uses of cash from operating activities in the first three months of fiscal 2005 were:



| |  |  | a $160,500 increase in prepaid expenses due mainly to trade show and licensing fees and
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | a decrease in accrued expenses of $36,100.
| | - |  | ------------------------------------------



The principle uses of cash from investing activities were $13,500 for the purchase of investment securities and $101,400 for additional tooling and
warehousing equipment.



To meet a portion of our operating cash
requirements, we received net proceeds of $621,900 from common stock option and warrant exercises. After applying $1,130,500 to decrease borrowing under our line of credit, $102,800 to repayment of mortgage principal and $16,700 to the purchase of
treasury stock, this resulted in net cash utilized for financing activities of $628,100.



At March 31, 2005, borrowing under our line of credit was $438,600, an increase of $232,000 from $206,600 as of March 31, 2004. 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 March 31, 2005 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.





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##### Table of Contents

PART II. OTHER INFORMATION



ITEM 2. Changes in Securities



Repurchase of Securities



We
repurchased 6,000 of our common shares during the first quarter of 2005. In the first quarter of 2004, our Board of Directors had authorized a program for repurchases of up to 150,000 common shares.



Repurchases of Common Shares



|                                     |  |                                     |  |                                  |      |                                                                                    |       |                                                                                                                     |        
|------------------------------------ |  | ----------------------------------- |  | -------------------------------- | ---- | ---------------------------------------------------------------------------------- | ----- | ------------------------------------------------------------------------------------------------------------------- | -------
|                                     |  | Totalnumber ofcommonsharespurchased |  | Averageprice paidper commonshare |      | Total number ofcommon sharespurchased as partof publiclyannounced plans orprograms |       | Maximum number (or approximate dollar value) of common shares that may yet be purchased under the plans or programs
|January 1, 2005  January 31, 2005   |  |                                    |  |                                  |     |                                                                                    |      |                                                                                                                     | 143,100
|February 1, 2005  February 28, 2005 |  |                                    |  |                                  |     |                                                                                    |      |                                                                                                                     | 143,100
|March 1, 2005  March 31, 2005       |  | 6,000                               |  | $                                | 2.78 |                                                                                    | 6,000 |                                                                                                                     | 137,100
|                                     |  |                                     |  |                                  |      |                                                                                    |       |                                                                                                                     |        
|Total                                |  | 6,000                               |  | $                                | 2.78 |                                                                                    | 6,000 |                                                                                                                     |        
|                                     |  |                                     |  |                                  |      |                                                                                    |       |                                                                                                                     |        



ITEM 5. Other Information



| | (a) | None.
| | --- | -----



| | (b) | None.
| | --- | -----



ITEM 6. Exhibits and Reports on Form 8-K



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



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



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



| |  |  | Form 8-K dated January 12, 2005 filed on January 13, 2005 announcing on anticipated increase in sales for fourth quarter and fiscal year ended December 31, 2004.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Form 8-K dated January 18, 2005 was filed on January 19, 2005 setting forth the Companys, fourth-quarter 2004 profitability.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | Form 8-K dated February 15, 2005 was filed on February 17, 2005 setting forth the Company profitability for the twelve months ended December 31, 2004.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Form 8-K dated February 16, 2005 was filed on February 23,2005 announcing the signing of a licensing agreement with Taffy Entertainment.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Form 8-K dated March 25, 2005 was filed on March 28, 2005 announcing the resignation of the Companys Chief Financial Officer.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

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: May 12, 2005 |  | By:                                 |  | /s/ RONALD S. KAPLAN                                  
|                   |  |                                     |  | Ronald Kaplan                                         
|                   |  |                                     |  | Chief Executive Officer (Principal Executive Officer) 
|                   |  |                                     |  | Chief Financial Officer (Principal Accounting Officer)



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