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 March 31, 2002 Commission File    Number 0-13118

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

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

390 N. Orange Ave., Suite 2185, Orlando, Florida, 32801
(Address of principal executive offices, Zip Code)

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

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
Common Stock, $.001 par value Outstanding at May 10, 2002
2,230,800

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

Page 1 of 10

I N D E X

PART I. FINANCIAL INFORMATION	Page
	Number
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at March 31, 2002 (unaudited)		3
Condensed Consolidated Statements of Operations — Three months ended March 31, 2002 and 2001 (unaudited)		4
Condensed Consolidated Statements of Cash Flows — Three months ended March 31, 2002 and 2001 (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 6. Exhibits and Reports on Form 8-K		9
SIGNATURE PAGE		10

Page 2 of 10

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

ACTION PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)

					Mar. 31, 2002
ASSETS
CURRENT ASSETS
Cash and cash equivalents					$	130,500
Accounts receivable, net of an allowance for doubtful accounts of $195,600						1,021,200
Inventories, net						1,733,900
Prepaid expenses and other assets						551,800
				TOTAL CURRENT ASSETS		3,437,400
PROPERTY, PLANT AND EQUIPMENT						2,131,800
Less accumulated depreciation and amortization						(1,085,900	)
		NET PROPERTY, PLANT AND EQUIPMENT				1,045,900
EXCESS OF COST OVER FAIR VALUE OF ASSETS ACQUIRED, NET						782,400
OTHER ASSETS						616,000
				TOTAL ASSETS	$	5,881,700
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Current portion of installment notes payable and obligation under capital lease					$	81,500
Borrowings under lines of credit						1,610,200
Other Current Liabilities						552,100
				TOTAL CURRENT LIABILITIES		2,243,800
INSTALLMENT NOTES PAYABLE AND OBLIGATION UNDER CAPITAL LEASE						48,200
MORTGAGE PAYABLE						667,800
DEFERRED INCOME TAXES						8,700
DEFERRED REVENUE						118,800
				TOTAL LIABILITIES		3,087,300
SHAREHOLDERS’ EQUITY
Preferred Stock - 10,000,000 shares authorized, zero shares issued and outstanding						0
Common stock — $.001 par value; 15,000,000 shares authorized;2,230,800 shares issued						2,200
Treasury Stock — $.001 par value; 39,200 shares						40
Additional paid-in capital						3,829,960
Accumulated Deficit						(517,300	)
Stock subscriptions receivable						(520,500	)
			TOTAL SHAREHOLDERS’ EQUITY			2,794,400
	TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY				$	5,881,700

See Accompanying Notes

Page 3 of 10

ITEM 1. Financial Statements (cont.)

ACTION PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

		Three Months Ended March 31st
		2002			2001
NET SALES		$	1,458,100		$	1,657,700
COST OF SALES			846,200			864,900
GROSS PROFIT			611,900			792,800
OPERATING EXPENSES
Selling			771,100			677,000
General and administrative			236,400			260,300
	TOTAL OPERATING EXPENSES		1,007,500			937,300
LOSS FROM OPERATIONS			(395,600	)		(144,500	)
OTHER INCOME (EXPENSE)
Interest expense			(38,200	)		(33,200	)
Other			2,600			(48,900	)
			(35,600	)		(82,100	)
LOSS BEFORE (PROVISION) BENEFIT FOR INCOME TAX			(431,200	)		(226,600	)
(PROVISION) BENEFIT FOR INCOME TAXES			58,800			(15,900	)
NET LOSS			($372,400	)		($242,500	)
LOSS PER SHARE
Basic			($0.17	)		($0.11	)
Diluted			($0.17	)		($0.11	)
Weighted average number of common shares outstanding:
Basic			2,230,800			2,117,700
Diluted			2,230,800			2,117,700

See Accompanying Notes

Page 4 of 10

ITEM 1. Financial Statements (cont.)

ACTION PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

					Three months ended March 31st
					2002			2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss						($372,400	)		($242,500	)
Adjustments to reconcile net loss to net cash used in operating activities
	Depreciation					43,200			36,600
	Amortization					41,500			90,700
	Loss on disposal of asset					56,000			(6,300	)
	Provision for bad debts					23,900			16,000
	Deferred income tax provision					(58,800	)		23,500
Changes in:
	Accounts receivable					254,700			(26,700	)
	Inventories					13,100			30,800
	Prepaid expenses					(66,100	)		(122,700	)
	Other assets					(139,400	)		(84,000	)
	Accounts payable					216,800			(110,500	)
	Accrued expenses					(178,400	)		208,900
	Income taxes payable					0			(67,300	)
	Deferred revenue					(6,200	)		(6,200	)
				NET CASH USED IN OPERATING ACTIVITIES		(172,100	)		(259,700	)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment						(10,900	)		(53,000	)
				NET CASH USED IN INVESTING ACTIVITIES		(10,900	)		(53,000	)
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of Treasury Stock						(39,900	)		0
Collection of stock subscriptions receivable						0			3,000
Repayment of mortgage and capital lease principal						(46,900	)		(20,700	)
Repayment of notes payable to related parties						0			(13,100	)
Proceeds/repayments from borrowings (net)						(82,500	)		169,300
		NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES				(169,300	)		138,500
			NET DECREASE IN CASH AND CASH EQUIVALENTS			(352,300	)		(174,200	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD						482,800			614,700
CASH AND CASH EQUIVALENTS AT END OF PERIOD					$	130,500		$	440,500
Supplemental disclosures — cash paid for:
	Interest				$	38,200		$	33,200
	Income Taxes				$	0		$	64,500

See Accompanying Notes

Page 5 of 10

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, 2002 and the results of its (i) operations for the three month periods ended March 31, 2002 and 2001 and (ii) cash flows for the three month periods ended March 31, 2002 and 2001. 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 and Form 10-KSB/A for the year ended December 31, 2001. The results of operations for the three month period ended March 31, 2002 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.     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. 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 for the twelve month period ending December 31, 2002.

4.     Earnings per share. Common stock equivalents were not included in the computation of diluted earnings per share for the three month periods ending March 31, 2002 and 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 intangible 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

Page 6 of 10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)
5.     New accounting pronouncements (cont.)

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 Company has not transacted any business combinations subsequent to June 30, 2001 and therefore has reported no impact to its financial statements from the provisions of SFAS 141. The provisions of SFAS 142 are effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS 142 beginning January 1, 2002 and has ceased the amortization of goodwill. If these rules had applied to goodwill during the three months ended March 31, 2001, the Company believes amortization expense would have decreased by $9,000. Hereafter all goodwill and any indefinite-lived intangible assets must be tested at least annually for impairment.

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 March 31, 2002 Compared With Three Months Ended March 31, 2001

Net sales during the first quarter ended March 31, 2002 were $1,458,100, compared with net sales of $1,657,700 during the first quarter of March 31, 2001. Management attributes the $199,600 decrease in net sales to the continuing weakness in the retail sector of the economy. The customer segments principally responsible for this decrease are theme parks/attractions and museum stores, two of our non-traditional toy channels. These have been heavily affected by the decline in tourism activity that began during the fourth quarter of 2001.

Gross profit decreased by $180,900 to $611,900 during the first quarter ended March 31, 2002, compared with $792,800 during the first quarter ended March 31, 2001. The gross profit percentage was 42% and 48% during the first quarter of 2002 and 2001 respectively. The majority of the decrease in gross profit is attributable to the previously noted decrease in net sales and lower gross profit percentage. The decrease in gross profit percentage was attributable to; one time costs associated with the consolidation and outsourcing of our Canadian production and warehousing operations for the EarthLore brand. This facility was completely

Page 7 of 10

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

Gross profit (cont.)
decommissioned on March 31, 2002. We expect the reduction in overhead and product costs to start being reflected in our financial results as early as the second quarter of 2002. Additional items impacting the gross profit percentage were higher net shipping costs related to our first quarter 2002 sales incentive program which provided free freight for customer orders above certain dollar amounts and royalty fees for the Thomas and Friends product line which was introduced in the third quarter of 2001.

Selling, general and administrative (SG&A) expenses increased by $70,200 to $1,007,500 for the three month period ended March 31, 2002 from $937,300 for the period ended March 31, 2001. This 7% increase in SG&A expenses is due to compensation costs related to the hiring of marketing staff that is more experienced in implementing our marketing and product development strategies and expenditures made in connection with new product design and sourcing activities for the Kidz Workshop and JAY JAY THE JET PLANE ™ product lines. JAY JAY THE JET PLANE ™, is based on characters from the children’s show which airs on PBS or PBS Kids nationwide. Its major components are a Wooden Adventure System™ with Tarry Town Sound™ and Sky Track™ and a companion die-cast metal collection. The JAY JAY THE JET PLANE ™ brand is a major portion of our current product development activities; during the first quarter March 31, 2002 we have invested over $200,000 in product and packaging design and manufacturing tooling. This line, which is expected to contribute to sales in the second half of 2002, received very favorable reviews at the February 2002 New York Toy Fair.

Interest expense related to current and long-term debt was $38,200 and $33,200 during the first quarter of 2002 and 2001, respectively. The increase of $5,000 is due to higher average balances drawn under our line of credit with Citrus Bank, partially offset by the lower prime rate of interest.

Other income and (expense) are netted for financial statement presentation. During the first quarter of 2002 and 2001, other income and (expense) were $2,600 and ($48,900), respectively. The $51,500 change was mainly attributable to a decrease in unrealized losses on investments.

Income before provision for income taxes and net income. As a result of the foregoing, we had a net loss before taxes of $431,200 and a net loss after taxes of $ 372,400 during the first quarter of 2002, compared with a net loss before taxes of $226,600 and net loss after taxes of $242,500 during the first quarter of 2001.

Financial Condition, Liquidity, and Capital Resources: As of March 31, 2002, the Company had cash and cash equivalents of $130,500, representing a decrease of $352,300 compared to December 31, 2001. Principal sources of liquidity for the first three months of fiscal 2002 were cash flows from collections of accounts receivable of $254,700, increased accounts payable of $216,800 and cash balances. Principal uses of cash in the first three months of fiscal 2002 were an increase of $139,400 in other assets which reflects investments in product development for our new JAY JAY THE JET PLANE brand, a reduction of $178,400 in accrued expenses, $129,400 for repayment of the line of credit, mortgage and capital lease principal and $39,900 for the repurchase of common stock.

At March 31, 2002, we had $1,610,200 of borrowings under our line of credit, an increase of $538,100 from $1,027,100 as of March 31, 2001. The increased borrowings were used for inventory purchases, product development and liabilities assumed in association with the acquisition of assets from Earth Lore Ltd. Our line of credit provides for borrowings up to $2,000,000 at the prime rate and 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 March 31, 2002 we were eligible to borrow $1,700,000 under our line of credit and are in compliance with all financial covenants thereunder.

Page 8 of 10

PART II. OTHER INFORMATION

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.
10.9	Common Stock Repurchase Authorization, dated October 10, 2001, incorporated by reference to Exhibit in the Company’s Current Report on Form 8-K filed October 17, 2001.

B.     Reports on Form 8-K
         None.

Page 9 of 10

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 14, 2002	By:   /s/ Ronald Kaplan Ronald Kaplan Chief Executive Officer (Principal Executive Officer)
Date: May 14, 2002	By:   /s/ Robert L. Burrows Robert L. Burrows Chief Financial Officer (Principal Accounting Officer)

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