SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB/A

(Mark One)

[X] Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2001

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.)

ACTION PRODUCTS INTERNATIONAL, INC.
(Name of Small Business Issuer in Its Charter)

FLORIDA (State or other jurisdiction of incorporation or organization)	59-2095427 (I.R.S. Employer Identification No.)
390 N. ORANGE AVE., SUITE 2185 ORLANDO, FLORIDA (Address of principal executive offices)	32801 (Zip Code)

Issuer’s Telephone Number, including area code: (407) 245-3636

Securities registered under Section 12(b) of the Securities
Exchange Act of 1934:

NONE

Securities registered under Section 12(g) of the Securities
Exchange Act of 1934:

COMMON STOCK, $.001 PAR VALUE

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 [   ]

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

Issuer’s revenues for its most recent fiscal year were $8,171,600.

As of March 28, 2002, the aggregate market value of the voting stock held by non-affiliates, based on the average of the high and the low bid and asked prices reported on such date, was $1,523,000.

As of March 29, 2002, there were 2,236,200 shares of issuer’s common stock outstanding.

Introductory Comment

This amendment to the December 31, 2001 Form 10 KSB Annual Report is being filed for purposes of showing the conformed signature of Moore Stephens Lovelace, P.A. to its Report of Independent Certified Public Accountants dated February 1, 2002. Other than showing the conformed signature of the auditors on their report, there are no changes to the financial statements.

Forward Looking Statements

     In addition to historical information, this Annual Report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. When used in this Annual Report, the words “believe,” “may,” “will,” “should,” “expect,” “anticipate,” “plan”, “continue,” “estimate,” “project” or “intend” and similar expressions identify forward-looking statements regarding events, conditions and financial trends in connection with our future plan of operations, business strategy, operating results and financial position. Current shareholders and prospective investors are cautioned that any forward-looking statements are not guarantees of future performance. Such forward-looking statements by their nature involve substantial risks and uncertainties, certain of which are beyond our control, and actual results for future periods could differ materially from those discussed in this Annual Report, depending on a variety of important factors that include, but are not limited to, those discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors that May Affect Further Results and Market Price of Our Stock” and elsewhere in this Report. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements.

2

SIGNATURES

     Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, Action Products International, Inc. has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ACTION PRODUCTS INTERNATIONAL, INC.

/s/ RONALD S. KAPLAN

Ronald S. Kaplan
Chairman of the Board and Chief Executive Officer
(principal executive officer)

Date: May 3, 2002

     Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

SIGNATURE	TITLE	DATE
/s/ Ronald S. Kaplan Ronald S. Kaplan	Chief Executive Officer and Chairman of the Board (principal executive officer)	May 3, 2002
/s/ Ronald Tuchman Ronald Tuchman	President, Chief Operating Officer and Director	May 3, 2002
/s/ Robert L. Burrows Robert L. Burrows	Chief Financial Officer and Secretary (principal financial officer)	May 3, 2002
/s/ Neil Swartz Neil Swartz	Director	May 3, 2002
/s/ Judith Kaplan Judith Kaplan	Director	May 3, 2002
/s/ Marvin Smollar Marvin Smollar	Director	May 3, 2002

3

ACTION PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2001 and 2000

C O N T E N T S

		Page
		Number
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS			F-1
CONSOLIDATED FINANCIAL STATEMENTS
	Consolidated Balance Sheet		F-2
	Consolidated Statements of Operations		F-3
	Consolidated Statements of Changes in Shareholders’ Equity		F-4
	Consolidated Statements of Cash Flows		F-5
	Notes to Consolidated Financial Statements		F-6

MOORE STEPHENS LOVELACE, P.A.
CERTIFIED PUBLIC ACCOUNTANTS AND MANAGEMENT CONSULTANTS

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
Action Products International, Inc.
Orlando, Florida

We have audited the accompanying consolidated balance sheet of Action Products International, Inc. and subsidiary as of December 31, 2001, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Action Products International, Inc. and subsidiary as of December 31, 2001, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.

/s/ MOORE STEPHENS LOVELACE, P.A. -

MOORE STEPHENS LOVELACE, P.A.
CERTIFIED PUBLIC ACCOUNTANTS

Orlando, Florida
February 1, 2002

F-1

ACTION PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET
December 31, 2001

			ASSETS
CURRENT ASSETS
	Cash and cash equivalents				$	482,800
	Accounts receivable, net of an allowance for doubtful accounts of $242,000					1,299,800
	Inventories, net					1,747,000
	Income taxes refundable					159,300
	Prepaid expenses and other assets					252,200
				TOTAL CURRENT ASSETS		3,941,100
PROPERTY, PLANT AND EQUIPMENT
	Land					67,400
	Building and improvements					1,023,300
	Equipment					910,100
	Furniture and fixtures					192,400
						2,193,200
	Less accumulated depreciation and amortization					(1,059,000	)
				NET PROPERTY, PLANT AND EQUIPMENT		1,134,200
EXCESS OF COST OVER FAIR VALUE OF ASSETS ACQUIRED, net						797,700
OTHER ASSETS						524,400
				TOTAL ASSETS	$	6,397,400
		LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
	Current portion of installment notes payable and obligation under capital lease				$	96,500
	Accounts payable					87,100
	Accrued expenses					325,400
	Accrued payroll and related expenses					32,500
	Current portion of mortgage payable					20,900
	Borrowings under line of credit					1,692,700
	Deferred revenue					25,000
				TOTAL CURRENT LIABILITIES		2,280,100
INSTALLMENT NOTES PAYABLE AND OBLIGATION UNDER CAPITAL LEASE						74,800
MORTGAGE PAYABLE						673,000
DEFERRED INCOME TAXES						37,500
DEFERRED REVENUE						125,000
				TOTAL LIABILITIES		3,190,400
COMMITMENTS AND CONTINGENCIES SHAREHOLDERS’ EQUITY
	Preferred Stock - 10,000,000 authorized; zero shares issued and outstanding					--
	Common stock — $.001 par value; 15,000,000 shares authorized; 2,230,800					2,200
	Additional paid-in capital					3,870,000
	Accumulated deficit					(144,700	)
	Stock subscription receivable					(520,500	)
				TOTAL SHAREHOLDERS’ EQUITY		3,207,000
				TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	6,397,400

The accompanying notes are an integral part of the financial statements.

F-2

ACTION PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2001 and 2000

			2001			2000
NET SALES			$	8,171,600		$	7,764,300
COST OF SALES				4,359,100			4,306,300
		GROSS PROFIT		3,812,500			3,458,000
OPERATING EXPENSES
	Selling			1,545,000			1,257,400
	General and administrative			2,879,700			1,963,400
				4,424,700			3,220,800
		INCOME (LOSS) FROM OPERATIONS		(612,200	)		237,200
OTHER INCOME (EXPENSE)
	Interest expense			(154,700	)		(150,400	)
	Other income (expense), net			149,000			112,600
				(5,700	)		(37,800	)
		INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES		(617,900	)		199,400
PROVISION (BENEFIT) FOR INCOME TAXES				(162,400	)		104,100
NET INCOME (LOSS)			$	(455,500	)	$	95,300
INCOME (LOSS) PER SHARE
	Basic		$	(0.21	)	$	0.05
	Diluted		$	(0.21	)	$	0.03

The accompanying notes are an integral part of the financial statements.

F-3

ACTION PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

	Common Stock						Retained
	$.001 Par Value				Additional			Earnings			Stock			Total
					Paid-In			(Accumulated			Subscription			Shareholders'
	Shares		Amount		Capital			Deficit)			Receivable			Equity
BALANCE — JANUARY 1, 2000		2,025,300	$	2,000	$	3,524,200		$	215,500		$	(534,100	)	$	3,207,600
COLLECTION OF COMMON STOCK SUBSCRIPTIONS		—		—		—			—			10,600			10,600
ISSUANCE OF COMMON SHARES UPON PURCHASE OF SUBSIDIARY		91,100		100		145,900			—			—			146,000
NET INCOME		—		—		—			95,300			—			95,300
BALANCE — DECEMBER 31, 2000		2,116,400		2,100		3,670,100			310,800			(523,500	)		3,459,500
ISSUANCE OF COMMON SHARES		114,400		100		199,900			—			—			200,000
COLLECTION OF STOCK SUBSCRIPTIONS		—		—		—			—			3,000			3,000
NET LOSS		—		—		—			(455,500	)		—			(455,500	)
BALANCE — DECEMBER 31, 2001		2,230,800	$	2,200	$	3,870,000		$	(144,700	)	$	(520,500	)	$	3,207,000

The accompanying notes are an integral part of the financial statements.

F-4

ACTION PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001 and 2000

					2001			2000
CASH FLOWS FROM OPERATING ACTIVITIES
	Net income (loss)				$	(455,500	)	$	95,300
	Adjustments to reconcile net income (loss) to net cash used in operating activities
		Depreciation				180,200			129,100
		Amortization				465,300			205,500
		Provision for bad debts				145,000			22,700
		Deferred income taxes				—			23,500
		Loss on sale of property, plant and equipment				6,300			—
		Changes in:
			Accounts receivable			243,900			(463,300	)
			Inventories			(359,400	)		184,800
			Prepaid expenses			(34,700	)		(29,000	)
			Income taxes refundable			(155,300	)		—
			Other assets			(294,500	)		(209,600	)
			Accounts payable			(446,800	)		(18,800	)
			Accrued expenses and payroll			69,700			(238,100	)
			Income taxes payable			(80,300	)		(20,700	)
			Deferred revenue			(25,000	)		(25,000	)
				NET CASH USED IN OPERATING ACTIVITIES		(741,100	)		(343,600	)
CASH FLOWS FROM INVESTING ACTIVITIES
	Acquisition of property, plant and equipment					(101,100	)		(327,000	)
	Exit and integration costs incurred					(102,300	)		—
	Cash acquired in business combination					—			17,300
				NET CASH USED IN INVESTING ACTIVITIES		(203,400	)		(309,700	)
CASH FLOWS FROM FINANCING ACTIVITIES
	Collection of stock subscriptions receivable					3,000			10,600
	Proceeds from sale of common stock					200,000			—
	Repayment of notes payable and obligation under capital lease					(165,300	)		(17,900	)
	Repayment of mortgage principal					(19,500	)		(23,000	)
	Net change in borrowings under lines of credit					794,400			244,700
				NET CASH USED IN FINANCING ACTIVITIES		812,600			214,400
				NET DECREASE IN CASH		(131,900	)		(438,900	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR						614,700			1,053,600
CASH AND CASH EQUIVALENTS AT END OF YEAR					$	482,800		$	614,700

     The accompanying notes are an integral part of the financial statements.

F-5

ACTION PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2001 and 2000

NOTE 1 — NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Action Products International, Inc. and Subsidiary (the “Company”) is engaged in the design, manufacture and sale of toys, books, and other educational and entertainment products. The Company also sells promotional products. The Company’s products are wholesaled worldwide to educational and leisure industry retailers.

Acquisition of Earth Lore, Ltd. and Basis of Presentation

On September 28, 2000, the Company formed Action Products Canada, Ltd., a wholly owned Canadian subsidiary, for the purpose of acquiring substantially all of the assets including, but not limited to, patents, pending patent applications, trademarks, brand names, customer lists, and inventory and assuming certain liabilities of Earth Lore, Ltd. (“Earth Lore”), a Canadian toy manufacturer located in Winnipeg, Manitoba. The primary reason for this transaction was to obtain Earth Lore’s rights and market share in the “I Dig Dinosaurs” line of toys. These toys are educational and non-violent and compliment the Company’s other product offerings. On October 15, 2000, the acquisition was completed and was accounted for using the purchase method of accounting for business combinations. The purchase price was approximately $978,000 and was comprised of approximately 91,100 unregistered shares of the Company’s common stock valued at $146,000 and the assumption of approximately $832,000 of Earth Lore’s debt and operating liabilities. The Company also incurred approximately $75,300 of transaction related costs. Approximately $505,000 of the purchase price was allocated to tangible and identifiable intangible assets acquired based upon their estimated fair values. The excess of consideration paid, including transaction related costs, were recorded as “excess of cost over fair value of assets acquired” in the Company’s balance sheet.

Subsequent to the acquisition, the Company developed and executed a plan to exit certain Canadian activities and integrate the acquired assets and operations into its facility in Florida. In connection with this plan, the Company incurred incremental exit and integration costs of approximately $295,300. These exit and integration costs, which are not associated with the generation of future revenues and have no future economic benefit, were reflected as additional liabilities in the allocation of the acquisition purchase price. Accordingly, the exit and integration costs have been added to “excess of cost over fair value of assets acquired” in the Company’s balance sheet.

F-6

NOTE 1 — NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The following table is a summary of the components of the acquisition’s exit and integration liabilities included in the purchase price for Earth Lore:

			Net
			(Payment)			Liability
	Exit and		Adjustment			Recorded at
	Integration		of Liability			December 31,
	Liability		During 2001			2001
Involuntary employee terminations	$	161,000	$	(73,000	)	$	88,000
Facility and lease exit costs		71,000		(45,000	)		26,000
Other costs		63,300		15,700			79,000
	$	295,300	$	(102,300	)	$	193,000

The accompanying consolidated financial statements include the results of operations of Action Products International, Inc. for the years ended December 31, 2001 and 2000, its wholly owned foreign subsidiary, Action Products Canada, Ltd., for the year ended December 31, 2001 and the period October 15, 2000 through December 31, 2000. All significant intercompany transactions have been eliminated.

Amortization of the excess of cost over fair value of assets acquired during 2001, was $45,900.

Cash and Cash Equivalents

For financial presentation purposes, the Company considers short-term, highly liquid investments with original maturities of three months or less to be cash equivalents.

Inventories

Inventories, which primarily consist of finished goods purchased for resale, are stated at the lower of cost (determined by the first-in, first-out method) or market. The inventory valuation allowance at December 31, 2001 was approximately $141,000.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the various classes of assets, as follows:

Building	40 Years
Furniture, fixtures and equipment	5 - 7 Years

Leasehold improvements are amortized over the estimated useful lives of the improvements, or the term of the lease, if shorter.

F-7

NOTE 1 — NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Excess of Cost Over Fair Value of Assets Acquired

The cost of acquired companies in excess of the fair value of net assets at acquisition date is recorded as “excess of cost over fair value of assets acquired,” and through December 2001 was amortized over a 15-year period on a straight-line basis. Subsequent to December 2001, the excess of cost over fair value of assets acquired will no longer be amortized but, instead, will be tested at least annually for impairment, in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.”

Prepaid Expenses and Other Assets

Prepaid expenses consists of the following at December 31, 2001:

Contract manufacturer deposits	$	89,800
Trade show deposits		46,400
License fees		25,000
Other		91,000
	$	252,200

Other assets classified as long term consist primarily of costs associated with molds and dies for form-pressed toys and certain product development costs. These assets are amortized on a straight-line basis over their useful lives, as follows:

		Net Book
		Value At
		December 31,
		2001
Molds and dies	5 - 10 Years	$	377,100
Product development costs	2 - 5 Years		90,200
Patents, trademarks and other	15 Years		57,100
		$	524,400

In the event a product is discontinued and the associated costs are not fully amortized, the unamortized portion is charged to expense at the time the product is discontinued.

The Company assesses the recoverability of intangible assets, including excess of cost over fair value of assets acquired, if facts and circumstances suggest that their carrying amount may have been impaired. In making its assessment, the Company gives consideration to the undiscounted cash flows from the use of such assets, the estimated fair value of such assets, and other factors that may affect the recoverability of such assets. If such an assessment indicates that the carrying value of intangible assets may not be recoverable, the carrying value of intangible assets is reduced.

F-8

NOTE 1 — NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Deferred Revenue

In December 1997, the Company entered into an agreement with the purchaser of certain of the Company’s assets associated with its snack food product line. The agreement provides for, among other things, the Company to receive compensation of $250,000 in exchange for ceasing its activities related to the manufacture and sale of freeze-dried snack foods for a period of ten years. The agreement also provides for compensation of $50,000 in exchange for making certain information available to the purchaser during 1998. The Company recorded these amounts as deferred revenue at December 31, 1997 and is amortizing them into income using the straight-line method over the terms specified in the agreement. As of December 31, 2001, deferred revenue related to this agreement was $150,000.

Revenue Recognition

The Company recognizes revenue from the sale of its products when goods are shipped to customers.

Income Taxes

The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in its financial statements or tax returns. Deferred income tax liabilities and assets are determined based on the difference between the financial statement and tax bases of liabilities and assets using enacted tax rates in effect for the year in which the differences are expected to reverse (see Note 6).

Net Income Per Share

Basic earnings per share is based on the weighted average number of common shares outstanding during each year. Diluted earnings per share is based on the sum of the weighted average number of common shares outstanding plus common share equivalents arising out of stock options, warrants and convertible debt. Common share equivalents were not considered in the diluted earnings per share calculation for 2001 because their effect would have been anti-dilutive. As a result, both basic and diluted earnings per share for 2001 were calculated based on 2,203,000 weighted average common shares outstanding during the year.

F-9

NOTE 1 — NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Net Income Per Share (Continued)

The following table is a reconciliation of the numerator and denominator of the basic and diluted earnings per share computations for 2000:

		Year Ended December 31, 2000
		Income		Shares		Per-Share
		(Numerator)		(Denominator)		Amount
Basic EPS
	Net income	$	95,300		2,044,700	$	0.05
Effect of Dilutive Securities
	Common stock options and warrants		—		737,000
Diluted EPS
	Net income plus assumed conversions	$	95,300		2,781,700	$	0.03

Options to purchase 864,000 shares of common stock of the Company at approximately $3.50 per share were outstanding during 2000, but were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market price of the common shares. The options expire from 2001 to 2004.

Foreign Currency Translation and Comprehensive Income

Assets and liabilities denominated in non-U.S. currencies are translated at rates of exchange prevailing on the balance sheet date, and revenues and expenses are translated at average rates of exchange for the fiscal year. Gains or losses on the translation of the financial statements of a non-U.S. operation, where the functional currency is other than the U.S. dollar, are reflected as a separate component of equity. Gains or losses on foreign currency transactions are included in the consolidated statements of earnings. During the years ended December 31, 2001 and 2000, the Company incurred a deminimus loss and gain, respectively, on foreign currency. The Company also has no other accumulated or current items of comprehensive income that are excluded from net income. Accordingly, the Company has not presented a statement of comprehensive income.

Estimates

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

F-10

NOTE 1 — NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Credit Risk and Fair Value of Financial Instruments

Financial instruments which potentially subject the Company to concentrations of credit risk at December 31, 2001 include trade receivables and approximately $444,000 of cash deposited in money market mutual funds. The money market funds are not protected under the FDIC; however, the Company has not experienced any losses in these funds. The Company believes that it is not exposed to any significant credit risk on money market funds. Concentrations of credit risk with respect to trade receivables are limited, in the opinion of management, due to the Company’s large number of customers, their geographical dispersion and credit insurance coverage maintained on most customer accounts.

The carrying values of cash and cash equivalents, mortgage payable, installment notes payable, and the line of credit approximate their fair values.

Reclassifications

In July 2000, the Emerging Issues Task Force issued EITF 00-10, “Accounting for Shipping and Handling Fees and Costs.” The EITF consensus requires amounts billed to customers in sales transactions related to shipping and handling to be classified in sales and associated costs to be classified as cost of sales. The Company adopted the provisions of the EITF consensus during 2001. Previously, the Company was classifying shipping and handling revenue in accordance with the EITF consensus. However, shipping and handling costs had been classified as general and administrative expenses. The 2000 financial statements have been reclassified to conform to the 2001 presentation. These reclassifications have no impact on net income.

NOTE 2 — RELATED-PARTY TRANSACTIONS

During 1998, the conversion features related to approximately $600,000 of certain notes payable to related parties were exchanged for an equivalent number of warrants. The Company has reserved, from its authorized but unissued shares of common stock, 1,036,300 shares for use in the event the warrants are exercised. The warrants are exercisable at $0.579 per share.

The Company had stock subscriptions receivable from related parties of approximately $520,500 and $523,500 as of December 31, 2001 and 2000, respectively.

F-11

NOTE 3 — MORTGAGE PAYABLE

In November 1998, the Company borrowed $750,000 in the form of a mortgage payable, collateralized by its warehouse facility in Ocala, Florida. The mortgage bears interest at 7.5% per annum and is due in 120 monthly payments of principal and interest of approximately $6,100 based on a 20-year amortization. A balloon payment of approximately $513,500 is due in 2009. The mortgage is collateralized by real estate and improvements and contains certain restrictive covenants, which provide that, among other things, the Company maintains a minimum working capital and net worth, debt service coverage and a maximum debt to net worth ratio. At December 31, 2001, the Company was not in compliance with the debt service coverage and debt to net worth covenants. However, the Company has obtained a waiver of non-compliance from the financial institution. The proceeds from this borrowing were used to repay notes payable to related parties of $600,000 and to provide additional permanent working capital. The outstanding principal balance due on the mortgage payable at December 31, 2001, was $693,900.

Maturities on long-term debt and obligations are approximately as follows:

Year Ending
December 31,		Amount
	2002	$	21,000
	2003		22,700
	2004		24,300
	2005		26,400
	2006		28,500
Thereafter			571,000
		$	693,900

Cash paid for interest on the mortgage payable during the years ended December 31, 2001 and 2000, approximated $53,600 and $55,100, respectively.

Cash paid for interest on all borrowing arrangements and lease obligations was approximately $146,900 and $143,900 in 2001 and 2000, respectively.

NOTE 4 — CREDIT LINE

The Company maintains a working capital line of credit with a financial institution. The agreement stipulates, among other things, a borrowing limit of the lesser of $2,000,000 or the sum of 85% of eligible accounts receivable and 50% of eligible inventory, as further defined in the agreement. Borrowings are collateralized by all accounts receivable and inventories. Interest is payable at the financial institution’s prime rate (4.75% at December 31, 2001). The agreement also requires, among other things, that the Company maintain certain financial ratios. The initial term of the agreement expires June 30, 2003. Proceeds from this $2,000,000 line of credit were used to repay outstanding borrowings on the Company’s previous line of credit in the approximate amount of $966,000. At December 31, 2001, the Company had $1,692,700 of borrowings outstanding under the line of credit.

F-12

NOTE 5 — INSTALLMENT NOTES PAYABLE AND OBLIGATION UNDER CAPITAL LEASE

Installment notes payable and obligation under capital lease as of December 31, 2001, are as follows:

Capital lease obligation, payable in monthly installments, excluding sales tax of approximately $10,000, including interest imputed at 9.4%, collateralized by certain tangible equipment, with a net book value of $232,900, maturing October 2003.		$	156,300
Installment note to financial institution, payable in monthly installments of approximately $3,400, plus interest at 11.5%, collateralized by certain tangible property and equipment, maturing during 2002.			15,000
			171,300
	Less: Current portion		(97,000	)
		$	74,300

Maturities on installment notes payable and obligation under capital lease, are approximately as follows:

			Obligations
	Installment		Under
Year Ending	Notes		Capital
December 31,	Payable		Lease		Totals
2002	$	15,000	$	82,000	$	97,000
2003		—		74,300		74,300
	$	15,000	$	156,300	$	171,300

NOTE 6 — Income taxes

The provision for income taxes consists of the following for the years ended December 31, 2001 and 2000:

				2001							2000
	Current			Deferred		Total			Current		Deferred		Total
Foreign	$	(14,800	)	$	—	$	(14,800	)	$	15,100	$	—	$	15,100
Federal		(147,600	)		—		(147,600	)		59,000		20,000		79,000
State		—			—		—			6,000		4,000		10,000
	$	(162,400	)	$	—	$	(162,400	)	$	80,100	$	24,000	$	104,100

F-13

NOTE 6 — Income taxes (Continued)

Significant components of the Company’s deferred tax liabilities and assets at December 31, 2001, are approximately as follows:

Deferred Tax Liabilities
	Amortization		$	(40,300	)
	Depreciation			(28,200	)
		Gross deferred tax liabilities		(68,500	)
Deferred Tax Assets
	Bad debt allowance			68,700
	Inventory reserves			24,400
	State net operating loss carryforward			22,800
		Gross deferred tax assets		115,900
	Valuation allowance			(84,900	)
		Net deferred tax assets		31,000
		Net deferred taxes	$	(37,500	)

During 2001, deferred tax asset valuation allowance increased by $30,400.

The Company has a state net operating loss carryforward of approximately $414,000 that has no expiration date.

A reconciliation of income tax expense (benefit) at the U.S. federal statutory rate to actual income tax expense (benefit) is as follows:

		2001			2000
Federal provision (benefit) expected at statutory rates		$	(210,100	)	$	67,800
Meals and entertainment and auto lease inclusion			4,200			11,000
State income taxes			(22,500	)		7,200
Non-deductible expenses			30,400			4,000
Foreign income taxes			37,000			1,900
Other			(1,400	)		12,200
	Provision (benefit) for income taxes	$	(162,400	)	$	104,100

Income taxes paid in cash were approximately $66,000 and $-0- during the years ended December 31, 2001 and 2000, respectively.

NOTE 7 — INTERNATIONAL SALES

International sales amounted to approximately $1,004,000 and $409,000 in 2001 and 2000, respectively.

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NOTE 8 — shareholders’ equity

Employee Stock Ownership Plan

The Company has an Employee Stock Ownership Plan (the “ESOP”), which covers substantially all employees. The ESOP provides that, among other things, contributions to the ESOP shall be determined by the Board of Directors prior to the end of each year and that the contributions may be paid in cash, Company stock or other property at any time within the limits prescribed by the Internal Revenue Code. At December 31, 2001, the ESOP held approximately 23,000 shares of the Company’s common stock. No shares were contributed in 2001 or 2000.

Stock Options

On May 28, 1996, the Company’s Board of Directors adopted the “1996 Stock Option Plan” (the “SOP”). Under the SOP, the Company has reserved an aggregate of 900,000 shares of common stock for issuance pursuant to options. SOP options are issuable at the discretion of the Board of Directors at exercise prices of not less than the fair market value of the underlying shares on the grant date. During 2001 and 2000, a total of 122,000 and 300,000 options, respectively, were issued under the SOP at a weighted average exercise price of approximately $3.00 and $3.50 per share, respectively. As of December 31, 2001, there were 342,000 SOP options outstanding.

In connection with the acquisition of the business of Earth Lore, Ltd., the Company entered into employment agreements with certain former Earth Lore, Ltd. employees. The employment agreements provide that, among other things, the employees are to receive options to acquire up to 88,777 shares of the Company’s common stock. The options vest in equal annual installments over a three-year period commencing October 2000 and are exercisable at a weighted average exercise price of $3.50.

There was an aggregate of 342,000 stock options outstanding at December 31, 2001. The options expire as follows: 171,000 in 2003 and 171,000 in 2004. In the event of a change in the Company’s control, the options may not be callable by the Company. The following table summarizes the aggregate stock option activity for the years ended December 31, 2001 and 2000:

				Weighted-
	Shares Under			Average
	Option			Exercise Price
Outstanding at December 31, 1999				$	3.50
Grants		300,000		$	3.50
Exercises		—		$	—
Cancellations		(50,000	)	$	3.50
Outstanding at December 31, 2000		864,000		$	3.50
Grants		122,000		$	3.00
Exercises		—		$	—
Cancellations		(644,000	)	$	3.50
Outstanding at December 31, 2001		342,000		$	3.32

Of the 342,000 options outstanding at December 31, 2001, approximately 312,000 are currently exercisable with a weighted-average exercise price of $3.31.

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NOTE 8 — shareholders’ equity (Continued)

Stock Options (Continued)

The weighted-average exercise price for options outstanding at December 31, 2001, was $3.32. The weighted-average term over which the options may be exercised is 2.1 years.

Additionally, the Company has outstanding warrants for the purchase of up to 1,036,300 of its common shares (see Note 2).

Total subscriptions receivable as of December 31, 2001 and 2000, were $520,500 and $523,500 and were receivable from related parties. Payments of stock subscriptions receivable of $3,000 and $10,600 were collected in 2001 and 2000, respectively.

Financial Accounting Standards Board pronouncement FAS No. 123, “Accounting for Stock-Based Compensation,” (“FAS 123”) requires that the Company calculate the value of stock options at the date of grant using an option pricing model. The Company has elected the “pro-forma, disclosure only” option permitted under FAS 123, instead of recording a charge to operations, as shown below:

		2001		2000
Net income (loss)	As reported	$	(455,500)	$	95,300
	Pro forma	$	(510,000)	$	(271,800	)
Income (loss) per share	Basic
	As reported	$	(0.21)	$	0.05
	Pro forma	$	(0.23)	$	(0.12	)
	Diluted
	As reported	$	(0.21)	$	0.03
	Pro forma	$	(0.23)	$	(0.11	)

The Company’s weighted-average assumptions used in the pricing model and resulting fair values are as follows:

	2001			2000
Risk-free rate		5.0	%		7.5	%
Expected option life (in years)		3			4
Expected stock price volatility		95	%		129	%
Grant date value	$	1.11		$	2.16
Dividend yield		0.0	%		0.0	%

Preferred Stock

     The Company’s articles of incorporation authorized the issuance of up to 10,000,000 shares of preferred stock with such rights and preferences as may be determined from the time to time by the Board of Directors. No shares of preferred stock have been issued.

NOTE 9 — EMPLOYEE BENEFIT PLAN

The Company has a 401(k) Employee Benefit Plan (the “Plan”), which covers substantially all employees. Under the terms of the Plan, the Company may make a discretionary contribution to the Plan, as determined annually by the Company’s Board of Directors. The Company charged approximately $14,300 and $16,300 in 2001 and 2000, respectively, to operations for its contributions to the Plan.

F-16

NOTE 10 — other commitments and contingencies

Operating Leases

During 1998, the Company entered into a noncancellable operating lease for office space, which expires in November 2003. In addition, the Company leases certain vehicles under noncancellable operating leases expiring through 2002. Approximate minimum future lease payments due under these operating leases, are as follows:

Year Ending
December 31,	Amount
2002	$	82,100
2003		60,100
	$	142,200

During 2001 and 2000, approximately $123,200 and $71,300, respectively, were charged to operations for rent expense related to the operating leases.

Legal and Regulatory Proceedings

The Company is engaged in various legal and regulatory proceedings incidental to its normal business activities. Such matters are subject to many uncertainties, and outcomes are not currently predictable. Consequently, it is not practical to estimate a range of possible loss from the final disposition of these matters, and losses, if any, could be material with respect to earnings in a given period. However, management is of the opinion that the resolution of these matters will not result in any significant liability to the Company in relation to its financial position or liquidity.

Licensing and Distribution Agreements

The Company entered into licensing agreements related to its Jay Jay the Jet Plane, Thomas The Tank Engine and Space Voyagers product lines. These agreements provide, among other things, for the Company to pay royalties based on a percentage of sales of these products.

In addition, the Company has entered into exclusive distribution agreements related to its Climb@Tron product line. The agreements contain provisions for the exclusive arrangement through December 2002, if certain minimum quantities of products are purchased.

F-17