10KSB

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-KSB

(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, 2002
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) 481-8007

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 there is no disclosure of delinquent filers in response 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 $6,429,300.

As of March 14, 2003, 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 $1,064,500.

As of March 14, 2003, there were 3,104,800 shares of issuer’s common stock outstanding.

Transitional Small Business Disclosure Format Yes [   ] No [X]

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TABLE OF CONTENTS

		Page
	PART I
ITEM 1	DESCRIPTION OF BUSINESS		3
ITEM 2	DESCRIPTION OF PROPERTY		10
ITEM 3	LEGAL PROCEEDINGS		11
ITEM 4	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		11
	PART II
ITEM 5	MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS		11
ITEM 6	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION     AND RESULTS OF OPERATIONS		12
ITEM 7	FINANCIAL STATEMENTS		22
ITEM 8	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON     ACCOUNTING AND FINANCIAL DISCLOSURE		22
	PART III
ITEM 9	DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
	COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT		22
ITEM 10	EXECUTIVE COMPENSATION		24
ITEM 11	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND     MANAGEMENT AND RELATED STOCKHOLDER MATTERS		26
ITEM 12	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS		27
ITEM 13	EXHIBITS AND REPORTS ON FORM 8-K		27
ITEM 14	CONTROLS AND PROCEDURES		29

Introductory Comment

     Throughout this Annual Report on Form 10-KSB, the terms “we,” “us,” “our,” “Action Products” and “our company” refer to Action Products International, Inc., a Florida corporation, and, unless the context indicates otherwise, includes our wholly-owned subsidiary, Action Products Canada, Ltd.

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.

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

Overview

     Action Products International, Inc. (NASDAQ: APII) is a brand-focused, educational toy company, we design, manufacture and market a diversified portfolio of educational and non-violent brands of toy products, to various retailing channels such as toy stores, specialty retailers, education outlets, museums, and attractions in the United States and throughout the world. We were originally incorporated, and began our operations, in New York in 1977, and relocated and re-incorporated in Florida in 1980 as a distributor of education oriented toys and children’s books, stationery and souvenirs, supplying museum gift shops. Under new executive leadership a new business model was developed and implemented around our toy and publishing businesses. From 1997 through 2002 we successfully developed or acquired and brought to market a core portfolio of proprietary branded product lines to replace sales of divested non-core lines. Our first internally-developed proprietary toy brand, Space Voyagers®, generated approximately $1.0 million in its first full year on the market. During the past three fiscal years, we have continued to develop other new proprietary products through internal development, licensing and acquisition. In October 2002 we began shipping our newest brand, Jay Jay The Jet Plane™, based on a PBS television show, videos and children’s books of the same name. Our business model is based on the expansion of core brands, while developing new brands through internal product development, favorable licensing agreements and prudent acquisitions. Our growth strategy is based on diversifying distribution channels, while creating and increasing brand equity.

     We sell our educational toy product lines under the umbrella name “Action Products™.” Our marketing and promotion communications focus on our individual brands such as, Space Voyagers®, Climb@tron™, I DIG DINOSAURS®, Woodkits™, Drop Zone Extreme®, Play & Store™ and Jay Jay The Jet Plane™. Products include action figures, play-sets, activity kits and various other toys with a strategic emphasis on non-violent and educational and fun topics such as Space, dinosaurs, science, and nature.

     The EarthLore® I DIG DINOSAURS® brand acquired in October 2000 continues to grow in popularity and contributed over $1.5 million to net sales in 2002. The introduction of the new Jay Jay The Jet Plane™ brand in the fourth quarter 2002 added another $0.4 million in net sales. Our other brands including Drop Zone Extreme™, Space Voyagers® and Play & Store™ contributed the remaining $4.5 million net sales in 2002.

     In addition to the development of internal brands, we actively pursue prudent acquisition opportunities and licensing arrangements. On October 2000, we acquired certain assets of Earth Lore Ltd., an award-winning, privately held Canada-based maker of popular educational excavation kits for children. The acquisition provided us with an appropriate product line extension, and channels of distribution that complemented our existing bases. In 2001, we acquired a license agreement with the developers of the PBS children’s show Jay Jay The Jet Plane™ to develop and launch our new Wooden Adventure System™ based on the episodes, videos and books of this popular children’s series. We launched this product line in the fourth quarter 2002 to popular reception from trade and consumers.

Industry Overview

   Market Opportunity

     The principal market for our products are consumers who purchase through retail specialty toy stores or the toy departments of national and regional retail chains, museum gift and education stores, and, to a lesser extent, through catalogs or over the Internet. We currently compete primarily in the preschool and elementary school categories in the United States and international consumer markets. We believe we are well positioned to continue to grow faster than the markets we participate in and to capture a significant share of these markets.

     We believe two major trends are driving increased spending on educational products and redefining our markets. First, parents are concerned about the education of their children including the important influence

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of safe and positive play. This concern is influenced by a number of factors, including the growing pressures for children to excel in an increasingly knowledge-based society. Second, the increasing emphasis in the United States and internationally on generating interest in, and encouraging appreciation of, science and our world. We believe that these trends provide us a significant market opportunity.

     The NPD Group estimates the U.S. toy industry had (excluding video games) aggregate retail sales in 2002 of $20.3 billion. Our product lines are targeted at the action figure, building sets, learning and exploration, and arts and crafts categories which comprised $4.6 billion of the total. Those categories grew a combined one (1) percent from 2001 to 2002 in spite of an overall 3 percent decline in total industry sales for the same period. Worldwide toy sales were $54.7 billion in 2000 according to NPD Worldwide. Several of our product lines including I Dig™, Climb@Tron™ and Space Voyagers® appeal to international customers. We expect our foreign sales which totaled approximately $0.5 million in 2002 to grow in the future

   Our Market Position

     We believe we are well positioned to capitalize on the increased emphasis on education and the trend towards encouraging children’s interest in positive play and their world surroundings. We believe our innovative products meet this increasingly important market need. Unlike promotional toys, our products emphasize quality and a healthy alternative for consumers looking for solutions to negative influences of less positive play patterns.

Our Business Strategy

     Our goal is to become the leading provider of educational, non-violent toys for ages 2-10 through specialty retailers in the U.S. and international markets by:

     Strengthening our distribution channels. We have the potential of reaching a significantly greater number of toy retailers than we have achieved to date. At year end of 2002 market penetration, particularly in the specialty toy retail channel, was less than 50 percent of the total of approximately 2,500 outlets. During the latter part of 2002, management implemented several changes in our sales organization intended to upgrade our capabilities to better implement our sales strategies and programs targeted to increase penetration in the retail store channel. Sales programs now include a loyalty program for independent toy retailers (using freight and payment dating incentives); cost efficient merchandising, easy to try brand assortments, and a dealer communication program to better position APII and APII brands with retail dealers. Plans are underway to better train dealers and their retail sales staff on the attributes of our brands. These programs are designed to assist with two core distribution objectives. First to increase dealer support for our brands thereby increasing market penetration, and second to increase sell-through for our dealers. Additionally we believe we are not limited to traditional toy and other large discount retailers for distribution of our products. We plan to increase distribution of our products through independent specialty toy retailers, museums, zoos and attractions, the education industry suppliers, as well as select national and regional retail chains.

     Increasing our product offerings to our target markets. We will introduce and ship new products this year in our key core brands such as Jay Jay The Jet Plane™, Space Voyagers® and Climb@Tron™. We will continue to enhance our products and lines through the design, development and acquisition of new product offerings of educational/non-violent toys in the preschool and elementary school categories.

      We will also identify suitable acquisition candidates, with established brands, which we believe will benefit our dealers and consumers resulting from the synergies of combined sales and supply chain management.

     Expanding our presence in international markets. We have already successfully marketed several of our products in international markets but we have only recently begun to focus on this area. Our international net sales were approximately $0.5 million in 2002. We expect our sales from international markets to grow and to constitute a growing portion of our sales in the future. We plan to penetrate international consumer markets by using a combination of direct sales to retailers and distribution arrangements. For example, we have an established distribution relationship in the U.K., over a $2 billion toy market in 2000 according to NPD, and an established sales experience with major retailers in Canada. We will continue to develop these existing channels and selectively add new ones to increase our international sales potential.

     Expanding our products and sales through acquisitions. We executed an acquisition in late 2000 with the purchase of the Earth Lore, Ltd. assets. We will continue to evaluate acquisition opportunities that have

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the potential for significant cost synergies and provide our dealers complementary product lines that can be readily merged into our current supply, sales and distribution process.

Our Products

     Our products consist of toys and activity kits for children packaged and marketed under a diversified portfolio of brands. This mitigates the risks associated with single brand strategies and builds influence with our distribution channels as a provider of multiple best selling product lines designed to create long term sales streams for us and our retail dealers. We realize not all brands share equivalent sales, distribution or longevity potential, however we believe creating brand equity amongst a core of diversified brands is important to our long term success and in the best interest of our shareholders. Following are descriptions of several of our key brands:

   Jay Jay The Jet Plane™

     Based on the animated series currently airing on PBS and PBS Kids networks, the Jay Jay The Jet Plane Wooden Adventure System™ comprised of characters and accessories is designed specifically for children ages 3 to 6, using high quality wood. Wood play systems, some based on preschool properties such as Thomas & Friends™ and Bob The Builder™ have become a staple for children’s toy dealers throughout the World. Created in America, Jay Jay The Jet Plane is most often likened to the UK based “Thomas“property. Industry estimates indicate the sale of Thomas & Friends wood toys generate over $50 million for its manufacturer. As such, we believe there is good potential for our line of Jay Jay The Jet Plane Wooden Adventure System toys. The television reach for Jay Jay The Jet Plane is expanding internationally. We believe the international market for our Jay Jay toys will mirror the carriage of the television and video content on a country by country basis. We are still in the launch phase of this important product line with significant new product introductions planned throughout 2003 to 2005.

   Climb@Tron™

     Robots that climb up, down, around, and even upside down smooth surfaces like windows, mirrors and cabinets using powerful suction cups and vacuum technology and auto reverse action keep Climb@Tron going even after bumping into barriers.

   Kidz Workshop™

     Our Kidz Workshop line includes:

• Learn Along Tools™ that promote imaginative positive role playing, and

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• Award winning EZ Build Projects™ that promote confidence-building, fun-to-assemble where one tool does it all; Kidz Workshop fits the bill for children of all ages. EZ Build Projects are winners of Dr. Toy’s 10 Best Socially Responsible Toys and 2002 100 Best Children’s Products awards.

   I Dig™ Excavation Adventures

     Our I DIG™ Excavation Adventures let children become modern day dinosaur hunters and archaeologists. Using steel tools, children dig through dust free “rock” to unearth replica dinosaur bones and Egyptian artifacts.

   Space Voyagers®

     Our Space Voyagers® line combines vehicles from the space programs of the past, present, and near future. This line of astronaut action figures and accessories is designed to appeal to both children and parents on two levels. The products are physically designed, decorated and packaged to appeal to the child’s sense of “cool” state-of-the-art figure based play with scenarios of risk and heroism. The absence of violence and the inherently educational attributes of space travel, science and discovery appeal to educated consumers.

Licensing

     We began the strategic use of licensed intellectual properties in 1998. In April, 2000, we signed a licensing agreement with Apollo Astronaut Buzz Aldrin to further develop and promote the Space Voyagers® brand. This license strengthens the brand’s exclusive market position as “the most authentic Space toys on Earth™”. The agreement expires in 2005 and is automatically renewable for five additional years.

     In December 2001 we signed a licensing agreement with Porchlight Entertainment for the rights to market certain toy lines including a Wooden Adventure System™ and diecast metal collection under the Jay Jay

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The Jet Plane™ name. The popularity of this PBS children’s cartoon made for a very successful launch of the product in the third quarter of 2002.

     In November 2002 we agreed not to extend our relationship with Thomas the Tank Engine™ past the current contract date of December 2002. The terms of the agreement allow us to sell off any remaining inventory through June 2003.

     We will continue to selectively seek out appropriate licensing agreements that support our objective to develop exclusive quality brands with long term sales growth potential.

Manufacturing, Logistics and Other Operations

     Our manufacturing and operations strategy is designed to maximize the use of outsourced services and to concentrate our internal resources on product development, sales and marketing. We believe our outsourcing strategy also enhances the scalability of our manufacturing efforts. We use several OEM contract manufacturers to source components and build finished products to our specifications. We currently use approximately 18 contract manufacturers located in Hong Kong and China to build our finished products, which are selected based on their technical and production capabilities and are matched to particular products to achieve cost and quality efficiencies.

     During 2002 our largest single manufacturer supplied 18% of our products and our top three manufacturers combined supplied a total of 40% of our products.

     Based on our net sales in 2002, major retailers and international distributors took title to approximately 15% of our products directly from our manufacturing facilities. However, the majority of our products are shipped directly to our warehouse in Ocala, Florida and are later shipped to meet the demands of our major U.S. retailers and our smaller retailers and distributors throughout the U.S.

Marketing, Sales and Advertising

     We exhibit our product lines at toy, gift and related industry trade shows. Our most important trade show is the American International Toy Fair held in New York City in February. At the 2002 Toy Fair, we introduced the newly licensed Jay Jay The Jet Plane Wooden Adventure System™, Kidz Workshop™ plus expanded I Dig™, and Drop Zone Extreme™ product lines.

     We sell our product lines through a network of manufacturer representative firms and a small internal, direct-sales department. Our direct sales department includes a team that focuses on selling to our original customer base in the attraction and museum categories. Our sales department also has a customer service team that manages and supports our retailers and the manufacturer representative firms with marketing collateral, product information, order processing and selected customer presentations.

     We capitalize on strategic marketing campaigns, point of purchase displays and creative package design to build brand equity and promote product sell-through. We partner with our retail customers nationally to sponsor I Dig Dinosaurs Play Days, featuring a dinosaur dig site allowing groups of children to participate in a live product demonstration. We also continued our in-store Woodkits Fixture Program, placing new merchandise racks in retail outlets throughout the U.S. and Canada. Retailers ordering a prescribed assortment and quantity of wood kit products are eligible for this program.

     Trade advertising remained a core marketing tool in 2002. We placed ads throughout the year in trade publications including Playthings, The Toy Book, Specialty Retailer, the Museum Store magazine, and publications of the American Specialty Toy Retailers Association (ASTRA). Through a cross marketing arrangement our Jay Jay The Jet Plane Wooden Adventure System™ is advertised to consumers in Jay Jay story books published by the Price Stern Sloan division of Penguin Putnam Publishing. Other cross marketing arrangements are under discussion on Jay Jay and other brands.

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Sales and Distribution

     We service customers in all fifty U.S. states and the District of Columbia, and export to a number of foreign countries including the United Kingdom, Spain, Canada and Japan.

     Our management focuses its efforts on growing our customer base by increasing our penetration and presence in new and existing distribution channels. Museum stores and attractions throughout the U.S. and around the world served as our primary customer base since the inception of our company. While this niche provided us with a solid foundation for growth, we have successfully expanded our distribution to national toy stores, specialty retailers and other available retail outlets. Certain specialty retailers emulate the mass-market retailers with multiple-outlet volume buying, which results in reduced processing costs per order. We have a well diversified customer base including some of the major toy retailers in the U.S. and Canada. These large customers which include FAO Inc., TJ Max, Marshall’s, Ross Stores, Toys “R” Us, Target Stores, Disney, Hammacher Schlemmer and Sears (Canada), accounted for slightly less than 40% of our net sales in 2002.

     Our sales team seeks to work in conjunction with store buyers from our key retailers to forecast demand for our products, develop the store floor footprint, secure retail shelf space for our products and agree upon pricing components, including cooperative advertising allowances. The large retail chains generally provide us with a preliminary forecast of their expected purchases of our products. While these and subsequent forecasts are not contractually binding, they provide important feedback that we use in our planning process throughout the year. We work closely with our key retailers during the year to establish and revise our expected demand forecasts and plan our production and delivery needs accordingly. Most retailers issue purchase orders to us as they need product. Based on these purchase orders, we prepare shipments for delivery through various methods. For large retail chains, we generally deliver our products directly to these retailers’ warehouses from our manufacturing factories. For our smaller retailers, we generally ship our products to our warehouse in Florida, and from there to the retailers’ respective locations. We sell to smaller volume retail stores through a combination of sales representatives and direct salespeople.

     Our distribution strategy is focused on the specialty retail and selected mass market channels. This includes selectively differentiating the products we distribute through each channel to address the divergent pricing, packaging and merchandising requirements of customers in the specialty and mass market channels.

International Operations, Sales and Manufacturing

     On September 28, 2000, we 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. (“EarthLore”), 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 complement our other product offerings. On October 15, 2000, the acquisition was completed and was accounted for using the purchase method of accounting for business combinations. Following completion of the acquisition we implemented a plan to exit certain Canadian production and distribution activities by integrating the acquired assets and distribution activities into our facility in Florida. Production of the EarthLore products was successfully transferred at the end of December 2001, to a cost effective and reliable foreign source with a successful track record manufacturing other products in our line.

     Overall revenues from our international sales represented approximately $0.5 million or 8% of our total revenues in 2002. Over 18% of international sales were made in Canada. Revenues from other international customers still represent a limited percentage of our total revenues.

     Although we have formal international distributor relationships/agreements for The United Kingdom, we also sell to other international accounts and distributors on a direct basis without formal exclusive distribution arrangements.

     In general, international sales are subject to inherent risks including, but not limited to, transportation delays and interruptions, political and economic disruptions, the imposition of tariffs and import and export

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controls, changes in government policies, cultural differences affecting product demands and the burdens of complying with a variety of foreign laws. Our products are produced by approximately 20 outside manufacturing companies in the U.S., Hong Kong and China, and are imported directly by us as finished goods. Though we did experience some delays in shipment this fall due to a prolonged work stoppage at 28 west-coast shipping ports, the effect was mainly a delay in sales and over the long term will not have a materially adverse effect on the business. We do not expect this event to reoccur any time soon, nor do we expect to be impacted by any of the other risks listed above. There are no assurances that such events will not occur in the future and possibly result in increases in costs and delays of, or interference with, product deliveries resulting in losses of sales and goodwill. We experience minimal currency risk because these foreign sourcing transactions are conducted using U.S. dollars.

     The implementation of the General Agreement on Tariffs and Trade in 1996 reduced or eliminated customs duties on many products we import. We believe that the capacity of our facilities and the supply of completed products we purchase from unaffiliated manufacturers are adequate to meet the foreseeable demand for the product lines we market. Over a period of time, our reliance on external sources of manufacturing can be shifted to alternative sources of supply should such change be necessary. However, if we were prevented from obtaining products from a substantial number of our current Far East suppliers due to political, labor or other factors beyond our control, our operations would be disrupted while alternative sources of products were secured. The imposition of trade sanctions by the U.S. against a class of products imported by us could significantly increase the cost of importing our products into the U.S.

Competition

     Our business is highly competitive and we compete with various toy manufacturers, importers and distributors, such as DSI, Inc. and Learning Curve International, Inc. Our ability to compete successfully is based upon our core competencies, including our experience in conceptualizing and developing quality toys that are themed as non-violent and educational, our unique ability to perform a wide range of specialized “same day” shipment on most domestic orders and outstanding customer service. Our manufacturer representative firms and in-house sales professionals maintain regular and close contact with direct customers. Our reputation, customer service and unique brand offerings enable us to build and maintain customer loyalty.

Intellectual Property

     Our products are sold and protected under trademarks, service marks, trade names and copyrights, and a number of those products are produced using a patented method. We consider our intellectual property rights to be important assets in that they provide product recognition and protection. Our products are also protected in as many other countries as allowed by trademark, copyright and patent laws to the extent that such protection is available and meaningful. We believe our rights to these properties are adequately protected, but we cannot assure you that our rights can be successfully asserted in the future or that such rights will not be invalidated, circumvented or challenged.

Government Regulation

     Our toys are subject to the provisions of the Consumer Product Safety Act, the Federal Hazardous Substances Act and the Flammable Fabrics Act, and all of the regulations promulgated hereunder. The Consumer Product Safety Act and the Federal Hazardous Substances Act enable the Consumer Product Safety Commission (CPSC) to exclude from the market consumer products that fail to comply with applicable product safety regulations or otherwise create a substantial risk of injury, and articles that contain excessive amounts of a banned hazardous substance. The Flammable Fabrics Act enables the CPSC to regulate and enforce flammability standards for fabrics used in consumer products. The CPSC may also require the repurchase by the manufacturer of articles that are banned. Similar laws exist in some states and cities and in various international markets.

     Our products are rated according to the; American Society of Testing and Materials (ASTM) safety protocol adopted by the United States and the EN-71 safety protocol adopted by the European Community. In addition, we expect to certify our products according to the Japanese Toy Association safety criteria for

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consumer products. We also voluntarily comply with certain standards established by the ASTM. Although compliance with this much stricter standard is completely at the discretion of the manufacturer, it is our firm policy that our toys meet this superior level of safety. We also maintain a quality control program to ensure product safety compliance with the various federal, state and international requirements. Our membership in the Toy Manufacturer’s Association provides an important resource to remain informed of the latest safety guidelines.

     Notwithstanding the foregoing, there can be no assurance that all of our products are or will be hazard free. Any material product recall could have an adverse effect on us, depending on the product, and could affect sales of our other products.

Personnel

     As of December 31, 2002, we had 21 full-time employees worldwide, including 2 executive officers, 6 sales and customer support personnel, 9 marketing, development, and distribution personnel and 4 administrative personnel. We also offer our employees a benefits package that includes health and life insurance plans, an employee stock ownership plan, a 401(k) plan and an employee-contributed IRC Section 125 health plan. Employees are required to sign a non-compete agreement prohibiting direct competition with us for at least a one-year period following termination of their employment. None of our employees are represented by a labor union or are subject to a collective bargaining agreement.

ITEM 2. DESCRIPTION OF PROPERTY

     Our corporate headquarters are located in Orlando, Florida, where we lease a 3,000 square foot suite in the downtown Orlando business district, staffed by executive, sales, marketing, product development, importing and graphics personnel. The five year lease expires November, 2003, lease payments due for the remainder of the term are approximately $64,000. If we do not renew this lease, we believe that alternative space is available on comparable terms and relocation costs would not be material.

     In addition, we own a distribution facility in Ocala, Florida. The Ocala facility, which we have owned for over twenty years and houses our distribution center, is comprised of a 35,000 square foot mixed use building and 2.5 acres of land. This facility which is situated in an industrial park comprised of similar facilities is expected to be sufficient to meet our current warehousing and distribution needs.

     The property is encumbered by a mortgage, the principal balance of which, as of December 31, 2002, was $673,000 and may be prepaid at any time without penalty. 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 2008.

     The mortgage is collateralized by real estate and improvements and contains certain restrictive covenants, which provide that, among other things, we maintain a minimum working capital and net worth, debt service coverage and a maximum debt to net worth ratio. At December 31, 2002, the Company was not in compliance with the debt service coverage and debt to net worth covenants. However, the Company has obtained a waiver of non-compliance from the financial institution for the twelve month period ending December 31, 2003.

     There are no current plans to renovate or expand the facility. We follow a course of regular repair and maintenance to the structure and fixtures that keep the facility in good operating condition. In addition we maintain sufficient insurance to effect the replacement or repair of the facility.

     We transitioned the production operations in December 2001 and vacated the leased Canadian facility at the end of March 2002 as part of our operational consolidation and outsourcing of production.

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ITEM 3. LEGAL PROCEEDINGS

     We have filed a complaint against certain parties related to various causes of action involving breaches of confidentiality related to our attempted acquisition of assets of a toy manufacturer. We are also party to certain other legal proceedings, none of which, individually or in the aggregate, are deemed to be material to our financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of shareholders during the fourth quarter of our fiscal year ended December 31, 2002.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

     Our common stock is traded on the Nasdaq SmallCap Market under the symbol “APII.” The following table represents the range of the high and the low bid quotations, as reported by the Nasdaq Trading and Market Services, for each fiscal quarter for the last two fiscal years ended December 31, 2001 and 2002. These quotations represent prices between dealers, may not include retail mark-ups, mark-downs or commissions, and may not necessarily represent actual transactions.

Fiscal Quarter Ended	Low		High
March 31, 2001	$	1.09	$	2.75
June 30, 2001	$	1.25	$	2.10
September 30, 2001	$	0.75	$	1.65
December 31, 2001	$	0.51	$	1.03
March 31, 2002	$	0.69	$	1.96
June 30, 2002	$	1.19	$	1.64
September 30, 2002	$	0.93	$	1.60
December 31, 2002	$	0.87	$	2.48

     On March 14, 2003, the closing price of our common stock was $1.20 and we had approximately 575 record owners of our common stock.

Dividends and Dividend Policy

     We previously distributed shares of common stock and warrants as dividends, but have not paid any cash dividends on our common stock during the last two fiscal years and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain any future earnings for reinvestment in our business. Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will be dependent on our financial condition, results of operations, capital requirements and other relevant factors.

Recent Sales of Unregistered Securities

     In November 2002, we sold to Ronald Kaplan, our Chairman and Chief Executive Officer, and Elissa Paykin, Ronald Kaplan’s sister and daughter of Warren Kaplan and Judith Kaplan, two of our directors, a total of 1,036,300 shares of common stock at $0.579 per share pursuant to the exercise of previously issued warrants.

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     The shares were issued in a private placement, exempt from registration under the Securities Act of 1933, by virtue of Section 4(2) under the Act and are subject to the applicable resale restrictions. We received total proceeds of $600,000 from the exercise of the warrants.

ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion and analysis of our consolidated financial condition and results of operations for the fiscal years ended December 31, 2002 and 2001 should be read in conjunction with our consolidated financial statements included elsewhere in this Annual Report.

     When used in conjunction in the following discussions, the words “believes,” “anticipates,” “intends,” “expects,” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause results to differ materially from those projected, including, but not limited to, those set forth in “Factors that May Affect Future Results and Market Price of Our Stock” of this Item 6.

General Overview

     In 1999, we shifted our focus from being a distributor of other manufacturers’ toys and published products towards the development, establishment and distribution of our own proprietary brands and products. Our strategy is to continue broadening our collection of brands through internal development, licensing and acquisitions. Proprietary brands allow us to better control costs, maintain margins and secure favorable relationships with the most prominent sales and retail organizations in the toy industry.

     We develop brands by introducing new products based on market research and extending our strongest product lines. In 2001, we developed a broad line of themed educational toys with the name Play & Store™ to fill, what we believe to be, an overlooked niche in the specialty toy industry and we improved the line further with new products in 2002. We also introduced a Wooden Adventure System™ with the Jay Jay The Jet Plane™ name under a license agreement with Porchlight Entertainment. Our product development objective is to develop a solid diversified portfolio of proprietary brands to drive top line revenues.

     To augment the growth of our brands through internal development and licensing, we plan to enhance our portfolio of proprietary brands through the acquisition of related companies, product lines and exclusive distribution rights. In October 2000, we made such an acquisition with the purchase of certain assets of Earth Lore Ltd, a developer of industry leading toy excavation kits. This acquisition provided us with a proven brand that complemented our existing products and opened new channels of distribution for our entire product offering. We will continue to pursue this type of acquisition to expand our brand portfolio and sales channels.

Critical Accounting Policies and Estimates

     We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. As such, management is required to make certain estimates, judgments and assumptions that they believe are reasonable based on the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the periods presented. The significant accounting policies which management believes are the most critical to aid in fully understanding and evaluating our reported financial results include Revenue Recognition, Inventory Valuation and Recoverability of Goodwill and Intangible Assets.

   Revenue Recognition

     We recognize revenue upon shipment of our products provided that there are no significant post-delivery obligations to the customer and collection is reasonably assured, which generally occurs upon shipment, either from our U.S. distribution facility or directly from our third-party manufacturers. Net sales represent gross sales less negotiated price allowances based primarily on volume purchasing levels and actual allowances for defective products.

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   Inventory Valuation

     Inventory is valued at the lower of cost (determined by the first-in, first-out method) or market. Based upon a consideration of quantities on hand, actual and anticipated sales volume, anticipated product selling price and product lines planned to be discontinued, slow-moving and obsolete inventory is written down to its net realizable value. Failure to accurately predict and respond to consumer demand could result in us underproducing popular items or overproducing less popular items. Management estimates are monitored on a quarterly basis and a further adjustment to reduce inventory to its net realizable value is recorded when deemed necessary.

   Intangible Assets

     The cost of acquired companies in excess of the fair value of net assets at acquisition date is recorded as “goodwill,” and through December 2001 was amortized over a 15-year period on a straight-line basis. Subsequent to December 2001, goodwill is no longer amortized but, instead, is tested at least annually for impairment, in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”. Management believes, based on the testing performed during 2002, that goodwill is not impaired.

     We assess the recoverability of other intangible assets 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.

Results of Operations

     Year Ended December 31, 2002 Compared With Year Ended December 31, 2001

     Net sales decreased by $1,742,300 or 21% to $6,429,300 in fiscal 2002 from $8,171,600 in fiscal 2001. This decrease in annual sales, our first in over six years, is a result of a decrease in sales of our Climb@Tron™ line and continued weakness in the retail market. The markets principally affected by the slower economy were the museum, theme park, specialty gift and international customer segments. Sales in our core toy retail channels grew slightly compared to the 2001 levels. Another contributing factor was the delay into October of the launch of Jay Jay The Jet Plane ™, due to the aforementioned west coast shipping port work stoppage.

     Gross profit decreased by $1,398,600 or 37% to $2,413,900 in fiscal 2002 from $3,812,500 in fiscal 2001. As a percentage of sales, gross profit decreased to 38% in fiscal 2002, compared to 47% in fiscal 2001. The decrease in gross profit is attributable principally to the decrease in sales discussed above. The decrease in gross profit percentage was attributable to; sales promotions using free and discounted freight incentives to stimulate specialty retailer orders; royalties for licensed products and a higher proportion of sales to chain and discount retailers with special pricing terms.

     Selling, general and administrative (SG&A) expenses were $3,640,400 and $4,424,700 in fiscal 2002 and 2001, respectively. The $784,300 or 18% decrease in SG&A expenses is due primarily to the following:

• Advertising and promotion decrease of $116,000 due to lower catalog printing costs, tradeshow and advertising expenses

• Compensation decrease of $182,000 due to reductions in staffing

• Doubtful accounts expense decrease of $322,000 due to credit insurance coverage and improved credit and collections procedures; and

• Facility, commission and professional fees decrease of $110,000

     Interest expense related to current and long-term debt was $119,100 and $154,700 in fiscal 2002 and 2001, respectively. The $35,600 decrease is due primarily to lower balances carried on the line of credit and lower interest rates during fiscal 2002.

     Other income/(expense) was $20,200 and $149,000 in fiscal 2002 and 2001 respectively. The

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decrease was primarily attributable to a decrease in interest and service charge income and a one time adjustment for integration expenses in 2001.

     Net Loss in fiscal 2002, as a result of the foregoing, was $1,305,900 or $0.57 per share compared to a net loss of $455,500 or $0.21 per share in fiscal 2001.

Liquidity and Capital Resources

     As of December 31, 2002, current assets were $2,792,300 compared to current liabilities of $1,508,200 for a current ratio of approximately 1.85 to 1 compared to 1.73 to 1 as of December 31, 2001.

     We had cash and cash equivalents of $563,400 and $482,800 in fiscal year 2002 and 2001 respectively, representing an $80,600 increase.

     We had net cash flows used in operations of $138,400 in fiscal 2002 compared to net cash flows used in operations of $741,100 in fiscal 2001, representing a decrease of $602,700. Principal sources of liquidity from operating activities for the fiscal year 2002 were; a refund of prior year federal income tax payments resulting from allowable net operating loss carry backs of $150,300; decrease in inventory balances of $594,400 resulting from prudent inventory purchase practices; and decrease in accounts receivable and an increase in accounts payable of $476,000 and $266,500 respectively due to lower sales and scheduled inventory purchases. Principal uses of cash from operating activities for the fiscal year 2002 were: an increase of $532,100 in other assets due mainly to product development costs associated with the launch of Jay Jay The Jet Plane ™ which will decrease in future periods and a reduction of $189,300 in accrued expenses reflecting payment of costs associated with the decommissioning of the Canadian production facility.

     Principal sources of cash from investing and financing activities during fiscal 2002 were: proceeds from the exercise of common stock warrants of $600,000 related to 1,036,300 warrants issued in 1998 to related parties in exchange for the settlement of notes payable; and the collection of stock subscriptions receivable in their entirety of $520,500. Principal uses of cash from investing and financing activities during fiscal 2002 were: $776,900 for repayment of line of credit borrowings; purchase of treasury stock for $47,300; and repayment of mortgage principal and capital lease obligations of $52,200.

     At December 31, 2002, we had $915,800 of borrowings under our line of credit (“the Revolver”), a decrease of $776,900 from $1,692,700 as of December 31, 2001. The high balance in 2001 was due primarily to the purchase of inventories and payment of liabilities assumed in association with the acquisition of Earth Lore Ltd. Under the credit agreement for the Revolver, we are subject to financial covenants related to the maintenance of certain asset balances and financial ratios. The borrowing limit under the Revolver is $2,000,000. The eligible borrowing balance at December 31, 2002 was $1,265,300. Interest is payable monthly at the financial institution’s prime rate (4.25% as of December 31, 2002). The Revolver matures on June 30, 2003 at which time we intend to extend the credit agreement.

     We extend credit to our customers, generally on terms which require payment within 30 days. Some customers participate in an accounts receivable dating program, pursuant to which payments for products are delayed for up to 90 days. We believe this is consistent with normal practices in the industry. As we have expanded our customer base to include more mass-market and specialty retailers, the risk of larger uncollectable accounts receivable has increased. To mitigate this risk, effective March 1, 2001, we obtained a business credit insurance policy to cover the majority of our accounts receivable through a Standard & Poors rated insurance company.

     We also had, at December 31, 2002, a capital lease obligation in the amount of $176,300 payable in monthly installments, collateralized by certain tangible equipment. The lease will mature and be fully paid in December 2004.

     As of December 31, 2002, $673,000 of long-term debt consisted of a mortgage payable to a commercial bank. The mortgage is collateralized by real estate and improvements, amortized assuming a twenty-year term, with ten years of monthly principal and interest payments, then a balloon payment due in 2008.

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     Other long-term liabilities were comprised of deferred revenue associated with a non-compete agreement, and deferred income taxes.

     During 2002, we recorded depreciation and amortization of approximately $414,100 compared to $645,500 for fiscal 2001. The decrease in depreciation and amortization is mainly attributable to the outsourcing of the Canadian facility. In addition, we invested $25,100 and $101,100 in the acquisition of new property and equipment in 2002 and 2001, respectively.

     Shareholders’ equity at December 31, 2002 decreased by $205,900 to $3,001,100 compared to $3,207,000 at December 31, 2001, due primarily to the net loss, which was partially offset by the equity infusion from the exercise of common stock warrants and repayment of stock subscriptions receivable in the fourth quarter 2002.

     We believe that currently available cash and cash equivalents, liquid investments, cash flows from operations and current credit facilities will be sufficient to fund our operations for at least the next 12 months. However our actual experience may differ from these expectations. Factors that may lead to a difference include, but are not limited to, the matters discussed as well as future events that might have the effect of reducing our available cash balance (such as unexpected material operating losses or increased capital or other expenditures as well as increases in inventory or accounts receivable) or future events that may reduce or eliminate the availability of external financing resources. Our failure to comply with covenants in our credit agreements could result in significant negative consequences.

     The following table summarizes our outstanding borrowings and long-term contractual obligations at December 31, 2002, and the effects these obligations are expected to have on our liquidity and cash flow in future periods.

			Payments Due by Period
Contractual			On or prior to		January 1, 2004 to		January 1, 2005 to
Obligations	Total		12/31/03		December 31, 2004		December 31, 2008
Credit Facility*	$	915,800	$	915,800		—		—
Mortgage		673,000		22,800		24,500		625,700
Long-Term Debt		176,300		85,800		90,500		—
Total Contractual
Cash Obligations	$	1,765,100	$	1,024,400	$	115,000	$	625,700

* Credit facility matures on June 30, 2003

Liquidity Considerations and Management’s Planned Actions

     We have formulated certain planned actions and taken various steps toward mitigating the effect of the accumulated deficit at December 31, 2002 as well as attaining profitable operations and improving our cash flows. The plans and steps taken include, among other things, the following:

• We anticipate improving our working capital position through the infusion of additional equity investment.

• We implemented a cost containment program in 2002. We anticipate $0.7 million in annual savings by reducing selling, general and administrative expenses.

• In November 2002, members of the Kaplan family paid to us $520,500 to pay off all outstanding subscription receivables and exercised outstanding warrants resulting in proceeds of approximately $600,000.

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Seasonality and Quarterly Results of Operations

     Our business is subject to significant seasonal fluctuations. Historically the substantial majority of our net sales and net income are realized during the third and fourth calendar quarters. In addition, our quarterly results of operations have fluctuated significantly in the past, and can be expected to continue to fluctuate significantly in the future, as a result of many factors, including: seasonal influences on our sales, such as:

• the holiday shopping season;

• unpredictable consumer preferences and spending trends;

• the need to increase inventories in advance of our primary selling season; and

• timing of introductions of new products.

     The following table sets forth selected unaudited quarterly statement of operations information for 2001 and 2002. The unaudited quarterly information includes all normal recurring adjustments that management considers necessary for a fair presentation of the information shown. We have been unprofitable in the last two years with the majority of the losses occurring in the first and second quarters when less than 50 percent of our sales are recognized. We expect that we will continue to incur losses during the first and second quarters of each year for the foreseeable future. Because of the seasonality of our business and other factors, results for any interim period are not necessarily indicative of the results that may be achieved for the full fiscal year.

Fiscal Year Ended December 31, 2001
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total
Net sales	$	1,657,700		$	1,613,300		$	2,218,400		$	2,682,200		$	8,171,600
Gross profit		792,800			689,700			1,009,900			1,320,100			3,812,500
Income (loss)
from Operations		(144,500	)		(282,200	)		(33,000	)		(152,500	)		(612,200	)
Net income (loss)	$	(242,500	)	$	(67,700	)	$	(76,700	)	$	(68,600	)	$	(455,500	)

Fiscal Year Ended December 31, 2002
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total
Net sales	$	1,458,100		$	1,479,600		$	1,944,900		$	1,546,700		$	6,429,300
Gross profit		611,900			576,200			763,100			462,700			2,413,900
Income (loss)
from Operations		(395,600	)		(336,200	)		(47,400	)		(447,300	)		(1,226,500	)
Net income (loss)	$	(372,400	)	$	(379,700	)	$	(83,700	)	$	(470,100	)	$	(1,305,900	)

Recently Issued Accounting Pronouncements

     In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123 (“SFAS No. 148”). This statement amends SFAS No. 123, Accounting for Stock Based Compensation (“SFAS No. 123”) to provide alternative methods of voluntarily transitioning to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require disclosure of the method used to account for stock-based employee compensation and the effect of the method on reported results in both annual and interim financial statements. The disclosure provisions will be effective for the us beginning with our year ended December 31, 2003.

     We have elected the “pro-forma, disclosure only” option permitted under FAS 123, instead of recording a charge to operations, as shown below:

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		2002			2001
Net income (loss)	As reported	$	(1,305,900	)	$	(455,500	)
	Pro forma	$	(1,490,300	)	$	(510,000	)

Factors that May Affect Future Results and Market Price of Our Stock

     We face a number of substantial risks. Our business, financial condition or results of operations could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and they should be considered in connection with the other information contained in this Annual Report on Form 10-KSB.

   Factors Associated with our Business

     We incurred significant net losses in fiscal 2002 and 2001. If we continue to incur net losses, our ability to satisfy our cash requirements may be more difficult. We incurred net losses of approximately $1.3 million and $0.5 million in fiscal 2002 and 2001. There can be no assurance that we will return to profitability in the future. If we fail to generate operating income and net income, we could have difficulty meeting our working capital requirements.

     We have substantial cash requirements and may require additional sources of funds. Additional sources of funds may not be available or available on reasonable terms. We have substantial cash requirements in connection with our operations and debt service obligations. In addition, new product development, which is key to the success of our business, is cash intensive. If the cash we generate from our operations or from our other sources is not available when needed or is insufficient to satisfy our requirements, we may require additional sources of funds.

     Our credit facility matures in June 2003. While we intend to renew that credit facility, we cannot assure you that we will be able to do so on acceptable terms or at all. We also cannot assure you that any other required additional sources of funds would be available or available on reasonable terms. If we do not generate sufficient amounts of capital to meet our cash requirements at the times and on the terms required by us, our business will be adversely affected.

     Changing consumer preferences may negatively impact our product lines. As a result of changing consumer preferences, many toys are successfully marketed for only one or two years, if at all. We cannot assure you that any of our current successful products or product lines will continue to be popular with consumers for any significant period of time, or that new products and product lines will achieve an acceptable degree of market acceptance, or that if such acceptance is achieved, it will be maintained for any significant period of time. Our success is dependent upon our ability to enhance existing product lines and develop new products and product lines. The failure of our new products and product lines to achieve and sustain market acceptance and to produce acceptable margins could have a material adverse effect on our financial condition and results of operations.

     Our customers’ inventory management systems may cause us to produce excess inventory that may become obsolete and increase our inventory carrying costs. Most of our largest retail customers utilize an inventory management system to track sales of products and rely on reorders being rapidly filled by us and other suppliers, rather than maintaining large product inventories. These types of systems put pressure on suppliers like us to promptly fill customer orders and also shift some of the inventory risk from the retailer to suppliers. Production of excess inventory by us to meet anticipated retailer demand could result in our carrying obsolete inventory and increasing our inventory carrying costs. Similarly, if we fail to predict consumer demand for a product, we may not be able to deliver an adequate supply of products on a timely basis and will, as a result, lose sales opportunities.

     Returns and mark downs could impact our revenues. As is customary in the toy industry, we have historically permitted, on a minimum basis, certain customers to return slow-moving items for credit. We expect

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that we will continue to make such accommodations in the future. Any significant increase in the amount of returns could have a material adverse effect on our financial condition and results of operations.

     There are risks related to our acquisition strategy. We may, from time to time, evaluate and pursue acquisition opportunities on terms management considers favorable. A successful acquisition involves an assessment of the business condition and prospects of the acquisition target, which includes factors beyond our control. This assessment is necessarily inexact and its accuracy is inherently uncertain. In connection with such an assessment, we perform a review we believe to be generally consistent with industry practices. This review, however, will not reveal all existing or potential problems, nor will it permit us to become sufficiently familiar with the acquisition target to assess fully its deficiencies. We cannot assure you that any such acquisition would be successful or that the operations of the acquisition target could be successfully integrated with our operations. Any unsuccessful acquisition could have a material adverse effect on our financial condition and results of operations.

     We are dependent on contracts with manufacturers, most of which are short-term. We conduct substantially all of our manufacturing operations through contract manufacturers, many of which are located in the People’s Republic of China (PRC), Hong Kong, Singapore and Taiwan. We generally do not have long-term contracts with our manufacturers. Foreign manufacturing is subject to a number of risks including, but not limited to:

• transportation delays and interruptions,

• political and economic disruptions,

• the impositions of tariffs and import and export controls, and

• changes in governmental policies.

     While we have not experienced any material adverse effects due to such risks to date, we cannot assure you that such events will not occur in the future and possibly result in increases in costs and delays of, or interferences with, product deliveries resulting in losses of sales and goodwill.

     We are dependent on intellectual property rights and cannot ensure that we will be able to successfully protect such rights. We rely on a combination of trademark, copyright, patent and other proprietary rights laws to protect our rights to valuable intellectual property related to our brands. We also rely on license and other agreements to establish ownership rights and to maintain confidentiality. We cannot assure you that such intellectual property rights can be successfully asserted in the future or that they will not be invalidated, circumvented or challenged. In addition, laws of certain foreign countries in which our products are sold, or in which we operate, do not protect intellectual property rights to the same extent as the laws of the U.S. The failure to protect our proprietary information and any successful intellectual property challenges or infringement proceedings against us could have a material adverse affect on our business, financial condition or results of operations.

There are specific risks associated with international sales. We have sold products to customers in the United Kingdom, Canada, Korea, Japan, Spain, Australia and New Zealand. We expect to augment our presence in international markets. Accordingly, our business, and our ability to expand our operations internationally, is subject to various risks inherent in international business activities. We may have difficulty in safeguarding our intellectual property in countries where intellectual property laws are not well developed or are poorly enforced. General economic conditions and political conditions of various countries may be subject to severe fluctuations at any time. Such fluctuations could hinder our performance under contracts in those countries or could hinder our ability to collect for product and services delivered in those countries. Unexpected changes in foreign regulatory requirements could also make it difficult or too costly for us to conduct business internationally.

     In addition, although we have normally been successful in stipulating that our foreign customers pay in U.S. dollars, any payment provisions involving foreign currencies may result in less revenue than expected due to foreign currency rate fluctuations. Other risks associated with international operations include:

• import and export licensing requirements,

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• trade restrictions,

• changes in tariff rates,

• overlapping tax structures,

• transportation delays,

• currency fluctuations,

• potentially adverse tax consequences, and

• compliance with a variety of foreign laws and regulations.

     Any of the foregoing factors could have a material adverse effect on our ability to expand our international sales. Increased exposure to international markets creates new areas with which we may not be familiar and could place us in competition with new vendors. We cannot assure you that we will be successful in our efforts to compete in these international markets.

     We face potential liability from product safety claims. Products that have been or may be developed or sold by us may expose us to potential liability from personal injury or property damage claims by end-users of such products. We have never been and are not presently a defendant in any product liability lawsuit; however, we cannot assure you that such a suit will not be brought against us in the future. We currently maintain product liability insurance coverage in the amount of $1.0 million per occurrence, with a $2.0 million excess umbrella policy. We cannot assure you that we will be able to maintain such coverage or obtain additional coverage on acceptable terms, or that such insurance will provide adequate coverage against all potential claims. Moreover, even if we maintain adequate insurance, any successful claim could materially and adversely affect our reputation and prospects, and divert management’s time and attention. The U.S. Consumer Products Safety Commission, or CPSC, has the authority under certain federal laws and regulations to protect consumers from hazardous goods. The CPSC may exclude from the market goods it determines are hazardous, and may require a manufacturer to repurchase such goods under certain circumstances. Some state, local and foreign governments have similar laws and regulations. In the event that such laws or regulations change or we are found in the future to have violated any such law or regulation, the sale of the relevant product could be prohibited and we could be required to repurchase such products.

     We may become subject to burdensome governmental regulation. In the U.S., we are subject to the provisions of, among other laws, the Federal Consumer Product Safety Act and the Federal Hazardous Substances Act. These acts empower the CPSC to protect the public against unreasonable risks of injury associated with consumer products, including toys and other articles. The CPSC has the authority to exclude from the market articles, which are found to be hazardous and can require a manufacturer to repair or repurchase such toys under certain circumstances. Any such determination by the CPSC is subject to court review. Violations of these acts may also result in civil and criminal penalties. Similar laws exist in some states and cities in the U.S. and in many jurisdictions throughout the world. We maintain a quality control program, including the retention of independent testing laboratories, to ensure compliance with applicable laws. We believe we are currently in substantial compliance with these laws. In general, we have not experienced difficulty complying with such regulations, and compliance has not had an adverse effect on our business.

     There are risks related to our customers’ payment terms. The majority of our customers receive trade terms to which payments for products are delayed for up to 30 days and some receive up to 90 days, pursuant to various sales promotion programs. To reduce our exposure to uncollectible accounts receivable, in March 2001 we secured a business credit insurance policy to guarantee the majority of our accounts receivable. Although we have secured such a policy, the insolvency or business failure of one or more of our customers with large accounts receivable could have a material adverse affect on our future sales.

     Seasonality may affect our results of operations. Our sales have historically been seasonal in nature, reflecting peak sales in the third and fourth quarters and slower sales in the first and second quarters.

Risks associated with investing in us

     We expect our stock price to be volatile. The market price of the shares of our common stock has been, and will likely continue to be, subject to wide fluctuations in response to several factors, such as

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• actual or anticipated variations in our results of operations,

• new services or product introductions by us or our competitors,

• changes in financial estimates by securities analysts, and

• conditions and trends in the consumer toy industry.

     The stock markets generally, and the Nasdaq SmallCap Market in particular, have experienced extreme price and volume fluctuations that have particularly affected the market prices of equity securities of many companies and that often have been unrelated or disproportionate to the operating performance of those companies. These market fluctuations, as well as general economic, political and market conditions such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock.

     If our common stock is delisted from Nasdaq, liquidity in our common stock will likely be adversely affected. Our common stock is listed for trading on the Nasdaq SmallCap Market. In order to continue to be listed on Nasdaq, however, we must meet certain criteria, including one of the following:

• maintaining $2,500,000 in shareholders’ equity,

• having a market capitalization of at least $35,000,000, or

• generating net income of $500,000.

     In addition, the minimum bid price of our common stock must be at least $1.00 per share and the market value of the public float must be at least $1,000,000. On March 14, 2003, our bid price was $1.15. As of December 31, 2002, we had shareholders’ equity of $3.0 million and did not satisfy the requirements for market capitalization or net income. The failure to meet Nasdaq’s maintenance criteria may result in the delisting of our common stock from Nasdaq, and trading, if any, in our securities would thereafter be conducted in the non-Nasdaq over-the-counter market. As a result of such delisting, you could find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, our securities.

     If our common stock is delisted from Nasdaq, our common stock may become subject to the penny stock rules. Broker-dealer practices in connection with transactions in “penny stocks” are regulated by certain rules adopted by the Securities and Exchange Commission. Penny stocks generally are equity securities with a price of less than $5.00 other than securities registered on certain national securities exchanges or quoted on Nasdaq provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. The rules require that, prior to a transaction in a penny stock not otherwise exempt from the rules, the broker-dealer must:

• deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market,

• provide the customer with current bid and offer quotations for the penny stock,

• disclose the compensation of the broker-dealer and its salesperson in connection with the transaction,

• provide the customer monthly account statements showing the market value of each penny stock held in the customer’s account, and

• make a special written determination that the penny stock is a suitable investment for the customer and receive the customer’s written agreement to the transaction.

     These disclosure requirements may have the effect of reducing the liquidity of penny stocks. If our securities are subject to the penny stock rules, you may find it more difficult to sell your shares of our common stock.

     Our officers and directors control a large percentage of outstanding stock and may be able to exercise significant control. Our current officers and directors beneficially own approximately 65% of our common stock on a fully diluted basis. As a result, current management will be able to exercise significant influence over all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions.

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     We have implemented anti-takeover provisions that could prevent an acquisition of us at a premium price. Certain provisions of our articles of incorporation and bylaws may be deemed to have anti-takeover effects and may delay, defer or prevent a take-over attempt of us. We are subject to the “affiliated transactions” and “control share acquisition” provisions of the Florida Business Corporation Act. These provisions require, subject to certain exceptions, that an “affiliated transaction” be approved by the holders of two-thirds of the voting shares other than those beneficially owned by an “interested shareholder” or by a majority of disinterested directors. Voting rights must also be conferred on “control shares” acquired in specific control share acquisitions. Lastly, our articles of incorporation authorize the issuance of up to 10,000,000 shares of preferred stock with such rights and preferences as may be determined form time to time by our board, of which all shares remain without designation and available for issuance. We include such preferred stock in our capitalization in order to enhance our financial flexibility. However, the issuance of large blocks of preferred stock may have a dilutive effect with respect to existing holders of our common stock.

     We depend on key personnel. Our success largely depends on a number of key employees. The loss of services of one or more of these employees could have a material adverse effect on our business. We are especially dependent upon the efforts and abilities of certain of our senior management, particularly Ronald S. Kaplan, our Chairman and Chief Executive Officer. Currently, we do not maintain key man life insurance on Mr. Kaplan or any other executive officer. We believe that our future success will also depend, in part, upon our ability to attract, retain and motivate qualified personnel. We cannot assure you, however, that we will be successful in attracting and retaining such personnel.

     We do not plan to pay cash dividends. We expect that we will retain all available earnings generated by our operations for the development and growth of our business. Accordingly, we do not anticipate paying any cash dividends on our common stock.

     The issuance of additional shares of common stock or the exercise of outstanding options and warrants will dilute the interests of our shareholders. As of March 14, 2003, we had 3,104,800 shares of our common stock outstanding. Our board has the ability, without further shareholder approval, to issue up to 11,895,200 additional shares of common stock. Such issuance may result in a reduction of the book value or market price of our outstanding common shares. Issuance of additional common stock will reduce the proportionate ownership and voting power of the then existing shareholders. Further, if all our outstanding options and warrants are exercised, we will have approximately 3,637,100 shares outstanding. Thus, the percentage of shares owned by all existing shareholders will be reduced proportionately as options and warrants are exercised.

Additional Information

     We are subject to the informational requirements of the Exchange Act and, in accordance with the rules and regulations of the Securities and Exchange Commission; we file reports, proxy statements and other information. You may inspect such reports, proxy statements and other information at public reference facilities of the Commission at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C. 20549; Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; 7 World Trade Center, New York, New York, 10048; and 5670 Wilshire Boulevard, Los Angeles, California 90036. Copies of such material can be obtained from the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549, at prescribed rates. For further information, the SEC maintains a website that contains reports, proxy and information statements, and other information regarding reporting companies at http://www.sec.gov or call (800) SEC-0330.

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ITEM 7. FINANCIAL STATEMENTS

     The financial statements required by this item are set forth on pages F-1 to F-18 and are incorporated herein by this reference.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     None.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Officers and Directors

     The following table sets forth the names, positions and ages of our executive officers and directors. Directors are elected at the annual meeting of shareholders and serve for one year or until their successors are elected and qualify. Officers are elected by our Board of Directors and their terms of office are at the discretion of our Board, except to the extent governed by employment contract.

Name	Age		Title
Ronald S. Kaplan		37	Chairman of the Board and President/
			Chief Executive Officer, Chair of Nominating Committee (1)
Robert L. Burrows		48	Chief Financial Officer and Secretary/Treasurer
Neil Swartz		41	Director (2)
Judith Kaplan		64	Director (1)
Warren Kaplan		65	Director
Scott Runkel		55	Director, Chair of Audit Committee (2)

(1)	Member of Nominating Committee
(2)	Member of Audit Committee

     Our Board of Directors held four meeting(s) during its fiscal year ended December 31, 2002 and took action one time by written consent.

Committees of the Board of Directors

     Our Board of Directors has established an Audit Committee and a Nominating Committee. The independent members of the Audit Committee are Neil Swartz and Scott Runkel, with Mr. Runkel serving as the chairman of such committee. The members of the Nominating Committee are Ronald Kaplan and Judith Kaplan, with Mr. Ronald Kaplan serving as the chairman of such committee. The functions of the Audit Committee are to annually recommend to our Board the appointment of independent public accountants, discuss and review the scope and fees of the prospective annual audit, review the results thereof with the independent public accountants, review and approve non-audit services of the independent public accountants, review compliance with existing major accounting and financial policies relative to the adequacy of our internal accounting controls, review compliance with federal and state laws relating to accounting practices and review and approve transactions, if any, with affiliated parties. The functions of our Nominating Committee are; the review of qualifications of potential nominees for election to the Board of Directors and recommending the nominees to the Board for such election. Shareholders may make nominations for the election of directors by delivering notice in writing to the Secretary in accordance with the instructions contained in Article XVII of our Bylaws.

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Background of Management

     Set forth below is a brief description of the background of each of our executive officers and directors, based on the information provided to us by them.

     Ronald S. Kaplan, Chairman of the Board and Chief Executive Officer. Ronald Kaplan has served as our Chairman of the Board and President/Chief Executive Officer since January 1996. He is the son of our founders and two of our directors Judith Kaplan and Warren Kaplan.

     Prior to joining our Company, Mr. Kaplan’s professional experience includes retail store operations and service in the United States Army where held a secret clearance level. Prior to becoming CEO he managed Logo America an apparel and promotional products sales and manufacturing business.

     Robert L. Burrows, Chief Financial Officer and Secretary. Robert L. Burrows has served as our Chief Financial Officer and Secretary since July, 2001. Mr. Burrows is a graduate of the University of Virginia with a Bachelor of Science degree in accounting and finance. He also holds an MBA from the Rollins College — Crummer School of Business. Prior to joining our company he held various accounting and finance positions with General Electric and Lockheed Martin. From 1991 through 1996 he held various financial and operational positions, including Division Vice President of HBO & Company a leading developer and marketer of healthcare software systems. From 1996 through 1998 he served as Chief Operating Officer for Quadramed Corp. a publicly held Nasdaq listed company and CEDCO Publishing a privately held gift and stationery book publisher. From 1999 through 2001 he served as Chief Financial Officer of Lawgic Publishing a venture funded internet application service provider of intelligent legal software.

     Neil Swartz, Director. Mr. Swartz founded MCG Partners, Inc., a merchant banking firm based in Boca Raton, Florida in early 1999 and serves as Chairman. Mr. Swartz served as the Chairman, President and Chief Executive Officer of a software company, which he took public on the Nasdaq Small Cap Market, from 1989 to 1998. He is a CPA and received his B.S. degree in accounting from Northeastern University.

     Judith Kaplan, Founder and Director. Judith Kaplan, currently a Director, served as our Chairperson of the Board since our inception in 1980 until December 31, 1995. Ms. Kaplan also served in various other executive capacities over the years, namely, President (‘80-’87), Secretary (‘80-’97), Chief Executive Officer (‘80-’95), Chief Financial Officer (‘80-’98) and Treasurer (‘80-’91). She is the mother of Ronald Kaplan and wife of Warren Kaplan.

     Warren Kaplan, Founder and Director. Warren Kaplan, currently a Director since December 2002, served as our president for many years prior to 1996 before becoming a Managing Partner of Kaplan Asset Management. Mr. Kaplan has over 40 years experience in investment banking, asset management and business operations. He holds a BBA from CUNY. He is married to Judith Kaplan.

     Scott Runkel, Director. Scott Runkel is the Chief Financial Officer of Gencor Industries Inc. (GCRX) a $70 million leading manufacturer of heavy machinery used for the production of highway construction materials, based in Orlando, Florida. Mr. Runkel has over 30 years experience as a financial executive. Previously Mr. Runkel was an Audit Partner and Director of Entrepreneurial Services at Ernst & Young. He was also a partner and co-founder of Curry & Runkel Financial Services, a firm specializing in financing and consulting for privately owned businesses. He received his B.A. degree in accounting from the University of Wisconsin-Oshkosh, and is a CPA. Mr. Runkel chairs the company’s audit committee.

Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own more than ten percent of our outstanding common stock to file with the Commission and Nasdaq initial reports of ownership and reports of changes in ownership of common stock. Such persons are required by the Commission’s regulations to furnish us with copies of all such reports they file. To our knowledge, based solely on a review of the copies of such reports furnished to us, all Section 16(a) filing requirements applicable to officers, directors and greater than ten percent beneficial owners were current with the exception of Form 4 filings for two officers regarding the grant of stock options in December 2002. The Form 4 filings have subsequently been submitted.

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ITEM 10. EXECUTIVE COMPENSATION:

     The following table sets forth the aggregate compensation paid to Ronald S. Kaplan, Ronald Tuchman and Robert Burrows (the “Named Executive Officer”) by the Company. Except as set forth in the table below, no bonuses or other compensation was paid during the 2002, 2001, or 2000 fiscal years.

Summary Compensation Table
Annual Compensation

							Other Annual
					Annual		Compensation
Name and Principal Position	Year		Salary ($)		Bonus ($)		($)(1)
Ronald Kaplan, CEO		2002	$	130,000	$	—	$	6,000
		2001	$	130,000	$	—	$	6,000
		2000	$	105,000	$	—	$	6,000
Ronald Tuchman, President2		2002	$	93,500	$	—	$	5,500
		2001	$	113,500	$	—	$	5,000
Robert Burrows, CFO3		2002	$	110,000	$	—	$	—
		2001	$	50,800	$	—	$	—

(1)	Includes value of use of automobile
(2)	Mr. Tuchman relinquished his position as President in July 2002 and resigned as an Officer and Director February 2003
(3)	Mr. Burrows became CFO in July 2001

     Ronald Kaplan was promoted to Chief Executive Officer and Chairman of the Board of Directors as of January 1, 1996. As of July 2002, Mr. Kaplan reacquired his position as President from Ronald Tuchman. As of March 2003, Mr. Kaplan’s annual salary is $130,000 plus the use of an automobile. Mr. Burrows’ annual salary is $110,000.

Option/SAR Grants in Last Fiscal Year

     The following table sets forth information concerning stock options granted to each of the executives named in the Summary Compensation Table for the fiscal year ending December 31, 2002:

			Percentage of Total
	Number of Shares		Options Granted to
	Underlying Options		Employees During			Average Exercise
Name	Granted		Fiscal Year			Price Per Share		Expiration Date
Ronald Kaplan		150,000		35.6	%	$	2.50		12/2004
Ronald Tuchman		—		—			—		—
Robert Burrows		75,000		17.8	%	$	2.50		(1	)

(1) Options expire in equal installments in December 2004, 2005 and 2006.

Aggregated Option/SAR Exercises and Year End Option/SAR Values in Last Fiscal Year

     The following table sets forth the aggregate of options exercised in the year ended December 31, 2002 and the value of options held at December 31, 2002.

24

Option/Warrant Exercises/Option/Warrant Values

						Number of Securities		Value of Unexercised In-
	Shares					Underlying Unexercised		the-money
	Acquired					Options/Warrants at		Options/Warrants At
	on		Value			Fiscal Year End		Fiscal Year End
Name	Exercise (#)		Realized ($)			Exercisable/Un-exercisable		Exercisable/Un-exercisable
Ronald S. Kaplan		829,000	$	556,300	(1)		150,000/0		$0/$0
Robert Burrows		0	$	0			25,000/50,000		$0/$0

⁽¹⁾ The dollar value was calculated by determining the difference between the fair market value at fiscal year-end of the common stock underlying the options/warrants and the exercise prices of the options/warrants. The last sale price of a share of the Company’s common stock on December 31, 2002 as reported by Nasdaq was $1.25. The unexercised options are out-of-the-money.

Long-Term Incentive Plans

     As of December 31, 2002, we did not maintain any long term incentive plans.

Compensation of Directors

     Directors who are full-time employees receive no additional compensation for services rendered as members of our Board or any committee thereof. Directors who are not full-time employees receive $2,500 per year, $500 for each Board meeting attended in person, and $250 for each Board meeting attended telephonically. In addition, from time to time, we may grant incentive stock options with an exercise price greater than the market value of the underlying stock to the directors for services rendered while serving on the Board. In the past, outside directors were granted options to purchase 10,000 shares under our stock option plan for each year of service on the Board, at exercise prices above the market value of the shares as listed at the time of the grant.

Employee Contracts, Termination Agreements, Changes in Control

     We do not have an employment agreement with any of the executive officers named in the Summary Compensation Table. We had an employment agreement with Ronald Tuchman which was terminated by mutual agreement in February 2003. We have no agreements, plans or arrangements with respect to any of the executive officers named in the Summary Compensation Table for our change in control or as a result of such officer’s resignation retirement or termination.

Other

Employee Stock Ownership Plan

     On April 23, 1984, the Company adopted an Employee Stock Ownership Plan (“ESOP”). The ESOP qualifies for special tax benefits under the Internal Revenue Code. Under the ESOP, we, at the discretion of our Board of Directors, may make an annual contribution to a trust that purchases our stock from us for the benefit of employees who have completed at least 1,000 hours of work during the fiscal year. Employer contributions under the ESOP are allocated to each employee’s account on a pro-rata basis according to the total compensation paid to, and the number of years of service by, all eligible employees. An employee becomes 100% vested in the ESOP following 5 years of plan eligibility. As of December 31, 2002, there were 13,841 shares of common stock held by our ESOP trust.

401(k) Plan

     Effective October 3, 1986, we adopted a Voluntary 401(k) Plan. All employees are eligible for the

25

plan. Previously, employees who have worked for us for 18 months are currently eligible for a 34% match of their subsequent contributions; however, this policy was suspended as of January 1, 2003. Benefits are determined annually. The lowest 66% of paid employees may contribute the lesser of 15% of their salary or the applicable maximum allowed by the Internal Revenue Code. The top 1/3 of employees cannot contribute a percentage greater than 15% of their compensation or 150% of the average contribution of the lowest 66% of paid employees to the applicable maximum allowed by the Internal Revenue Code. Employer contributions vest within three months and all contributions are held in individual employee accounts with an outside financial institution.

Stock Option Plan

     To increase the officers’, key employees’ and consultants’ interest in our company and to align more closely their interests with the interests of our shareholders, the Board of Directors, adopted a stock option plan called the “1996 Stock Option Plan” (the “Plan”) on May 28, 1996. The Plan was subsequently ratified by a majority vote of the Company’s shareholders.

     Under the Plan, we have reserved an aggregate of 900,000 shares of Common Stock for issuance pursuant to options granted under the Plan (“Plan Options”). Plan Options are either options qualifying as incentive stock options (“Incentive Options”) or options that do not qualify (“Non-Qualified Options”). Any Incentive Option granted under the Plan must provide for an exercise price of not less than 100% of the fair market value of the underlying shares on the date of such grant. The exercise price of Non-Qualified Options shall be determined by the Board of Directors but shall in no event be less than 75% of the fair market value of the underlying shares on the date of the grant. As of December 31, 2002, there were 622,300 Incentive Options existing under the plan. As of December 31, 2002, a total of 112,000 Non-Qualified Options have been issued.

Repricing of Options/SARs

     In December 2002 new options were granted to a majority of employees whose previous option grants had expired in November 2001. Options that had not yet expired, held by the remaining minority of employees, were terminated. This group was then granted new options on the same basis as our other employees.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                  STOCKHOLDER MATTERS

     The following table sets forth information with respect to the number of shares of Common Stock beneficially owned by (i) each director of the Company, (ii) the executive officer named in the Summary Compensation Table, (iii) all directors and officers as a group and (iv) each shareholder known by the Company to be a beneficial owner of more than 5% of the Company’s common stock as of March 14, 2003. Except as otherwise indicated, each of the shareholders listed below has sole voting and investment power over the shares beneficially owned and the address of each beneficial owner is c/o Action Products International, Inc., 390 North Orange Ave., 21st Floor, Orlando, Florida 32801. As of March 14, 2003, there were issued and outstanding 3,104,800 shares of Common Stock.

Table of Beneficial Ownership

	Amount and Nature of
	Beneficial			Percent
Name	Ownership			of Class
Ronald S. Kaplan		1,252,317	(1)		34.4	%
Robert Burrows		28,000	(2)		2.1	%
Judith Kaplan		837,390	(3)		23.0	%
Warren Kaplan		837,390	(4)		23.0	%
Elissa Paykin		237.254	(5)		6.5	%
Neil Swartz		10,000	(6)		<1	%
Scott Runkel		5,000	(7)		<1	%

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	Amount and Nature of
	Beneficial			Percent
Name	Ownership			of Class
All Directors and Executive Officers and Beneficial Owners as a Group (7 persons)		2,369,961	(8)		65.2	%

1	Includes immediately exercisable options to purchase 150,000 shares at $2.00, $2.50 and $3.00 per share.
2	Includes immediately exercisable options to purchase 25,000 shares at $2.00 per share. Excludes unexercisable options to purchase an additional 25,000 shares at $2.50 per share and 25,000 shares at $3.00 per share.
3	Includes 13,841 shares held as Trustee of our Employee Stock Ownership Plan Trust and 411,212 shares. Ms. Kaplan disclaims beneficial ownership in all 412,337 of her husband’s shares.
4	Includes 13,841 shares held as Trustee of our Employee Stock Ownership Plan Trust and 412,337 shares. Mr. Kaplan disclaims beneficial ownership in all 411,212 of his wife’s shares.
5	Elissa Paykin is the daughter of Judith and Warren Kaplan.
6	Includes immediately exercisable options to purchase 10,000 shares at $1.25 per share.
7	Includes immediately exercisable options to purchase 5,000 shares at $1.88 per share. Excludes unexercisable options to purchase an additional 5,000 shares at $1.88 per share.
8	Includes immediately exercisable options to purchase 190,000 shares.

Change in Control Arrangements

     There are no arrangements that may result in our change in control.

Securities Authorized for Issuance under Equity Compensation Plans

     The following table contains information regarding securities authorized and available for issuance under our equity compensation plans for employees, officers, directors and consultants. We have two such plans — our 1996 Stock Option Plan and our 1984 Stock Ownership Plan. These two plans are described under “Executive Compensation — Other” above.

Equity Compensation Plan Information

	Number of
	securities to be
	issued upon		Weighted average
	exercise of		exercise price of		Number of
	outstanding		outstanding		securities
	options, warrants		options, warrants		remaining available
Plan category	and rights		and rights		for future issuance
Equity compensation plans approved by security holders- 1996 Stock Option Plan		532,300	$	2.67		367,700
Equity compensation plans not approved by security holders- 1984 ESOP		13,800		N/A		0
Total		546,100		N/A		367,700

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:

Equity Investment during 2002

     On November 26, 2002, we issued a press release concerning the cash infusion by the Kaplan family, our founders, of over $1,100,000 which was part of our plan to bring us back into compliance with the stockholders’ equity requirement for continued listing on the Nasdaq SmallCap Market. The cash infusion was a combination of $600,000 from the exercise of outstanding warrants and a $520,500 payment of stock subscriptions receivable.

     In 1998, Ronald S. Kaplan redeemed the conversion features of a $600,000 loan due him from our company in exchange for warrants exercisable for shares of our common stock under substantially the same terms as the conversion feature. Once alternative financing was arranged with a financial institution, the loan was satisfied. In November 2002, we sold to Ronald Kaplan, our Chairman and Chief Executive Officer, and Elissa Paykin, Ronald Kaplan’s sister and daughter of Warren Kaplan and Judith Kaplan, two of our directors, a total of 1,036,300 shares of common stock at $0.579 per share pursuant to the exercise of the above-referenced warrants. We received total proceeds of $600,000 from the exercise of the warrants.

     In the fourth quarter of 2002, the Kaplan family paid in full approximately $520,500 in stock subscriptions receivable owed to us by Warren Kaplan, Judith Kaplan, Ron Kaplan and Elissa Paykin.

Separation Agreements

     On February 7, 2003, Ronald Tuchman, a director and our former president, entered into an agreement to terminate his employment with us. Under the terms of the agreement, Mr. Tuchman relinquished all stock options and any future compensation. Mr. Tuchman received $128,000 payment from us for the repurchase of 114,300 shares of our common stock Mr. Tuchman originally acquired at the outset of his employment with us in 2001.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

Exhibits

     Set forth below is a list of the exhibits to this Annual Report on Form 10-KSB.

Number	Description
3.1	Amended Articles of Incorporation (1)
3.2	Amended Bylaws (1)
10.1	Employee Stock Ownership Plan (2)
10.2	Incentive Stock Option Plan (3)
10.3	401(k) Plan (4)
10.4	Amendment to Employee Stock Ownership Plan, dated February 8, 1988 (5)
10.5	Amendment to Employee Stock Ownership Plan, dated March 10, 1989 (5)
10.6	1996 Stock Option Plan (6)
10.7	Asset Purchase Agreement, dated December 31, 1999, between Action Products International, Inc. and American Outdoor Products, Inc. (7)
10.8	Asset Purchase Agreement, dated October 15, 2000, between Action Products International, Inc. and Earth Lore, Ltd. (8)

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Number	Description
10.9	License Agreement dated December 17, 2001, by and between Action Products International, Inc. and Porchlight Entertainment, Inc. *
10.10	Separation Agreement dated February 7, 2003, by and between Action Products International, Inc. and Ronald O. Tuchman *
21.1	List of subsidiaries(9)
23.1	Consent of Moore Stephens Lovelace, P.A.*
99.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*	Filed herewith
(1)	Incorporated by reference to our Definitive Proxy Statement, filed May 22, 1998, File No. 0-13118.
(2)	Incorporated by reference to our Registration Statement on Form S-18, filed April, 1984, File No. 002-93512.
(3)	Incorporated by reference to our Registration Statement on Form S-18, filed September 27, 1984, File No. 002-93512-A.
(4)	Incorporated by reference to our Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996, filed August 17, 1987, File No. 0-13118.
(5)	Incorporated by reference to our Annual Report on Form 10-KSB for the fiscal year ended December 31 1988, filed March 31, 1989, File No. 0-13118.
(6)	Incorporated by reference to our Annual Report on Form 10-KSB for the fiscal year ended December 31 2000, filed April 2, 2001, File No. 0-13118.
(7)	Incorporated by reference to our Current Report on Form 8-K, filed February 26, 1998, File No. 0-13118.
(8)	Incorporated by reference to our Current Report on Form 8-K, filed November 6, 2000, File No. 0-13118.
(9)	Incorporated by reference to our Annual Report on Form 10-KSB for the fiscal year ended December 31 2000, filed April 2, 2001, File No. 0-13118.

Reports on Form 8-K

     A Form 8-K dated October 17, 2001 was filed on October 17, 2001 pertaining to our stock repurchase program.

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ITEM 14. CONTROLS AND PROCEDURES

     Within 90 days of the filing date of this report, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

     There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in the preceding paragraph.

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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: March 24, 2003

     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)	March 24, 2003
/s/ ROBERT L. BURROWS Robert L. Burrows	Chief Financial Officer and Secretary (principal financial officer and principal accounting officer)	March 24, 2003
/s/ NEIL SWARTZ Neil Swartz	Director	March 24, 2003
/s/ SCOTT RUNKEL Scott Runkel	Director	March 24, 2003
/s/ JUDITH KAPLAN Judith Kaplan	Director	March 24, 2003
/s/ WARREN KAPLAN Warren Kaplan	Director	March 24, 2003

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Action Products International, Inc.
And Subsidiary

CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2002 and 2001

31

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

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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, 2002, 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, 2002. 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, 2002, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2002 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
January 30, 2003, except for Note 11,
as to which the date is March 12, 2003

F-1

ACTION PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET

					December 31, 2002
		ASSETS
CURRENT ASSETS
Cash and cash equivalents					$	563,400
Accounts receivable, net of an allowance for doubtful accounts of $96,300						795,800
Inventories, net						1,152,600
Prepaid expenses and other assets						280,500
				TOTAL CURRENT ASSETS		2,792,300
PROPERTY, PLANT AND EQUIPMENT						2,153,900
Less accumulated depreciation and amortization						(1,163,000	)
				NET PROPERTY, PLANT AND EQUIPMENT		990,900
GOODWILL						782,400
OTHER ASSETS						798,800
				TOTAL ASSETS	$	5,364,400
			LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Current portion of obligation under capital lease					$	85,800
Accounts payable						353,600
Accrued expenses, payroll and related expenses						105,200
Current portion of mortgage payable						22,800
Borrowings under line of credit						915,800
Other Current Liabilities						25,000
				TOTAL CURRENT LIABILITIES		1,508,200
OBLIGATION UNDER CAPITAL LEASE						90,500
MORTGAGE PAYABLE						650,200
DEFERRED INCOME TAXES						14,400
DEFERRED REVENUE						100,000
				TOTAL LIABILITIES		2,363,300
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY
Preferred Stock — 10,000,000 shares authorized, zero shares issued and outstanding						—
Common stock — $.001 par value; 15,000,000 shares authorized; 3,267,100 shares issued						3,200
Treasury Stock — $.001 par value; 46,100 shares						—
Additional paid-in capital						4,448,500
Accumulated Deficit						(1,450,600	)
				TOTAL SHAREHOLDERS’ EQUITY		3,001,100
	TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY				$	5,364,400

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
	2002			2001
NET SALES	$	6,429,300		$	8,171,600
COST OF SALES		4,015,400			4,359,100
GROSS PROFIT		2,413,900			3,812,500
OPERATING EXPENSES
Selling		1,260,100			1,545,000
General and administrative		2,380,300			2,879,700
TOTAL OPERATING EXPENSES		3,640,400			4,424,700
LOSS FROM OPERATIONS		(1,226,500	)		(612,200	)
OTHER INCOME (EXPENSE)
Interest expense		(119,100	)		(154,700	)
Other		20,200			149,000
		(98,900	)		(5,700	)
LOSS BEFORE BENEFIT FROM INCOME TAXES		(1,325,400	)		(617,900	)
BENEFIT FROM INCOME TAXES		19,500			162,400
NET LOSS	$	(1,305,900	)	$	(455,500	)
LOSS PER SHARE
Basic and Diluted	$	(0.57	)	$	(0.21	)
Weighted average number of common shares outstanding:
Basic and Diluted		2,295,900			2,203,000

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, 2001		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
TREASURY STOCK (Repurchase of Common Shares)		(46,100	)		—		(47,300	)		—			—			(47,300	)
ISSUANCE OF COMMON SHARES		1,036,300			1,000		599,000			—			—			600,000
ISSUANCE OF STOCK OPTIONS FOR SERVICES		—			—		26,800			—			—			26,800
COLLECTION OF STOCK SUBSCRIPTIONS		—			—		—			—			520,500			520,500
NET LOSS		—			—		—			(1,305,900	)		—			(1,305,900	)
BALANCE — DECEMBER 31, 2002		3,221,000		$	3,200	$	4,448,500		$	(1,450,600	)	$	—		$	3,001,100

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

F-4

ACTION PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

					Year Ended			Year Ended
					2002			2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss					$	(1,305,900	)	$	(455,500	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation					120,300			180,200
	Amortization					293,800			465,300
	Loss on disposal of property plant and equipment					—			6,300
	Provision for bad debts					28,000			145,000
	Deferred income tax provision					(23,100	)		—
Changes in:
	Accounts receivable					476,000			243,900
	Inventories					594,400			(359,400	)
	Prepaid expenses					16,900			(34,700	)
	Other assets					(532,100	)		(294,500	)
	Accounts payable					266,500			(446,800	)
	Accrued expenses, payroll and related expenses					(189,300	)		69,700
	Income taxes receivable/ (payable)					141,100			(235,600	)
	Deferred revenue					(25,000	)		(25,000	)
				NET CASH USED IN OPERATING ACTIVITIES		(138,400	)		(741,100	)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment						(25,100	)		(101,100	)
Exit and integration costs incurred						—			(102,300	)
				NET CASH USED IN INVESTING ACTIVITIES		(25,100	)		(203,400	)
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of Treasury Stock						(47,300	)		—
Collection of stock subscriptions receivable						520,500			3,000
Proceeds from Issuance of Common Stock						600,000			200,000
Repayment of mortgage principal						(21,000	)		(19,500	)
Repayment of notes payable and obligation under capital lease						(31,200	)		(165,300	)
Net change in borrowings under line of credit						(776,900	)		794,400
				NET CASH PROVIDED BY FINANCING ACTIVITIES		244,100			812,600
			NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS			80,600			(131,900	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR						482,800			614,700
CASH AND CASH EQUIVALENTS AT END OF YEAR					$	563,400		$	482,800
Supplemental disclosures — cash paid for:
		Interest			$	138,700		$	146,900
		Income Taxes			$	0		$	66,000

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, 2002 and 2001

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

Subsequent to the acquisition of Earth Lore, Ltd. (“Earth Lore”) in October 2000, 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 “goodwill” in the Company’s balance sheet.

The following table is a summary of the components of the acquisition’s exit and integration liabilities, which were satisfied as of December 31, 2002, included in the purchase price for Earth Lore:

	Exit and
	Integration
	Liability
Involuntary employee terminations	$	161,000
Facility and lease exit costs		71,000
Other costs		63,300
	$	295,300

The accompanying consolidated financial statements include the results of operations of Action Products International, Inc. and its wholly-owned foreign subsidiary, Action Products Canada, Ltd., for the years ended December 31, 2002 and 2001. All significant intercompany transactions have been eliminated.

F-6

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

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, 2002 was $107,400.

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.

Property, plant and equipment consists of the following at December 31, 2002:

Land	$	67,400
Building improvements		1,024,400
Equipment		873,100
Furniture and fixtures		189,000
	$	2,153,900

Goodwill

The cost of acquired companies in excess of the fair value of net assets at acquisition date is recorded as “goodwill,” and through December 2001 was amortized over a 15-year period on a straight-line basis. Subsequent to December 2001, goodwill is no longer amortized but, instead, is tested at least annually for impairment, in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Management believes, based on the testing performed during 2002, that goodwill is not impaired.

F-7

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

Goodwill and related amortization for 2002 and 2001 is as follows:

		2002			2001
Reported net loss		$	(1,305,900	)	$	(455,500	)
Add back: Goodwill amortization			—			45,900
		$	(1,305,900	)	$	(409,600	)
Adjusted loss per share:
	Basic and diluted	$	(0.57	)	$	(0.19	)

Prepaid Expenses and Other Assets

Prepaid expenses and other assets consist of the following at December 31, 2002:

Contract manufacturer deposits	$	64,500
Trade show deposits		51,500
License fees		27,900
Other		136,600
	$	280,500

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,
		2002
Molds and dies	5-10 Years	$	483,200
Product development costs	2-5 Years		221,700
Patents and trademarks	15 Years		23,900
Other			70,000
		$	798,800

The gross carrying amount and accumulated amortization of patents and trademarks at December 31, 2002 are $41,700 and $17,800, respectively. Related amortization expense for 2002 was $2,500. Amortization expense for each of the next five years is estimated to be approximately $2,500 per year.

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 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 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, 2002, deferred revenue related to this agreement was $125,000.

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 2002 and 2001 because their effect would have been anti-dilutive. As a result, both basic and diluted earnings per share for 2002 and 2001 were calculated based on 2,295,900 and 2,203,000, respectively, weighted average common shares outstanding during the year.

F-9

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

Foreign Currency Translation and Comprehensive Income

During the years ended December 31, 2002 and 2001, the Company incurred a deminimus loss 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 accounting principles generally accepted in the United States of America 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.

Credit Risk and Fair Value of Financial Instruments

Financial instruments which potentially subject the Company to concentrations of credit risk at December 31, 2002 include trade receivables and $553,200 of cash deposited in a money market mutual fund. The money market fund is 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, and the line of credit approximate their fair values.

New Accounting Pronouncements

In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”, effective for the Company in 2003. This standard requires entities to record the fair value of a liability for an asset retirement obligation when it is incurred by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful lives of the assets.

F-10

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

New Accounting Pronouncements (Continued)

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, that refines criteria for assets classified as held for sale, further refines rules regarding impairment of long-lived assets and changes the reporting of discontinued operations. SFAS No. 144 is effective for the Company in 2003.

SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, was issued in June 2002. It is effective for all such activities initiated after December 31, 2002. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized at fair value only when incurred.

In December 2002, the FASB issued SFAS No. 148, “Stock-Based Compensation -Transition and Disclosure”, an amendment of SFAS No. 123, “Accounting for Stock-Based Compensation”. The transition guidance and annual disclosure provisions are effective for the Company beginning in 2003. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require more prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results.

Management believes that the adoption of SFAS Nos. 143, 144, 146, and 148 will have no significant impact on the results of operations or financial position of the Company.

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 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 were exercisable at $0.579 per share, and were exercised in their entirety during the fourth quarter of 2002.

The Company’s stock subscription receivable from related parties of $520,500 as of December 31, 2001 was collected in its entirety during the fourth quarter of 2002.

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 2008. 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, 2002, the Company was not in compliance with the debt service coverage and debt to net worth covenants. However, the Company has obtained a waiver of non-compliance from the financial institution. The proceeds from this borrowing were used in 1998 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, 2002, was $673,000.

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

Year Ending
December 31,		Amount
	2003	$	22,800
	2004		24,500
	2005		26,400
	2006		28,500
	2007		30,700
Thereafter			540,100
		$	673,000

Cash paid for interest on the mortgage payable during the years ended December 31, 2002 and 2001, approximated $52,100 and $53,600, respectively.

Cash paid for interest on all borrowing arrangements and lease obligations was $119,100 and $146,900 in 2002 and 2001, 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 (4.25% at December 31, 2002). The agreement also requires, among other things, that the Company maintain certain financial ratios. The initial term of the agreement expires June 30, 2003. At December 31, 2002, the Company had $915,800 of borrowings outstanding under the line of credit.

F-12

NOTE 5 — OBLIGATION UNDER CAPITAL LEASE

Obligation under capital lease as of December 31, 2002, is as follows:

Capital lease obligation, payable in monthly installments, excluding sales tax of $11,200, including interest imputed at 5.5%, collateralized by certain tangible equipment, with a net book value of $206,000, maturing December 2004	$	176,300
Less: Current portion		(85,800	)
	$	90,500

NOTE 6 — INCOME TAXES

The provision (benefit) for income taxes consists of the following for the years ended December 31, 2002 and 2001:

	2002									2001
	Current			Deferred			Total			Current			Deferred		Total
Foreign	$	—		$	—		$	—		$	(14,800	)	$	—	$	(14,800	)
Federal		(24,700	)		(19,700	)		(44,400	)		(147,600	)		—		(147,600	)
State		28,300			(3,400	)		24,900			—			—		—
	$	3,600		$	(23,100	)	$	(19,500	)	$	(162,400	)	$	—	$	(162,400	)

Significant components of the Company’s deferred tax liabilities and assets at December 31, 2002, are approximately as follows:

Deferred Tax Liabilities
	Amortization		$	(58,000	)
	Depreciation			(25,500	)
		Gross deferred tax liabilities		(83,500	)
	Deferred Tax Assets
	Bad debt allowance			28,700
	Inventory reserves			40,400
	Capital loss carryforward			17,700
	Federal net operating loss carryforward			172,100
	State net operating loss carryforward			89,500
		Gross deferred tax assets		348,400
	Valuation allowance			(279,300	)
		Net deferred tax assets		69,100
		Net deferred taxes	$	(14,400	)

During 2002, deferred tax asset valuation allowance increased by $194,400.

The Company has a federal net operating loss carryforward of approximately $1,147,000 that expires in 2017.

The Company has a state net operating loss carryforward of approximately $1,628,000 that has no expiration date.

F-13

NOTE 6 — INCOME TAXES (Continued)

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

		2002			2001
Federal provision (benefit) expected at statutory rates		$	(451,100	)	$	(210,000	)
Losses for which no benefit is recorded			449,200			—
State income taxes, net of federal income tax benefit			(48,200	)		(22,500	)
Foreign income tax items			55,100			37,000
Non-deductible expenses, effect of graduated rates and other			(24,500	)		33,100
	Provision (benefit) for income taxes	$	(19,500	)	$	(162,400	)

Income taxes paid in cash were approximately $-0- and $66,000 during the years ended December 31, 2002 and 2001, respectively.

NOTE 7 — INTERNATIONAL SALES

International sales amounted to $517,500 and $1,004,000 in 2002 and 2001, respectively.

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, 2002, the ESOP held 13,800 shares of the Company’s common stock. No shares were contributed in 2002 or 2001.

Stock Options and Warrants

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 2002 and 2001, a total of 511,500 and 122,000 options, respectively, were issued under the SOP at a weighted average exercise price of approximately $2.36 and $3.00 per share, respectively. As of December 31, 2002, there were 622,300 SOP options outstanding.

F-14

NOTE 8 — SHAREHOLDERS’ EQUITY (Continued)

Stock Options and Warrants (Continued)

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 622,300 stock options outstanding at December 31, 2002. The options expire as follows: 2,000 in 2003, 292,700 in 2004, 73,300 in 2005, 152,100 in 2006 and 102,200 in 2007. 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, 2002 and 2001:

					Weighted-
		Number of			Average
		Options			Exercise Price
Outstanding at December 31, 2000			863,800		$	3.50
	Grants		122,000		$	3.00
	Cancellations		(644,000	)	$	3.50
Outstanding at December 31, 2001			341,800		$	3.32
	Grants		511,500		$	2.36
	Cancellations		(231,000	)	$	3.24
Outstanding at December 31, 2002			622,300		$	2.54
Shares exercisable at December 31, 2002			428,850		$	2.47

The range of exercise prices for options outstanding at December 31, 2002 was $1.25 to $4.53. The following tables summarize information about options outstanding at December 31, 2002:

	Outstanding Options
			Weighted
			Average
			Remaining		Weighted
	Number		Contractual		Average
Range of Exercise Prices	of Shares		Life (in years)		Exercise Price
$1.25 - $2.00		220,500		2.9	$	1.81
$2.01 - $3.00		328,500		2.7	$	2.74
$3.01 - $4.00		55,500		2.5	$	3.62
$4.01 - $4.53		17,800		3.2	$	4.53
		622,300			$	2.54

F-15

NOTE 8 — SHAREHOLDERS’ EQUITY (Continued)

Stock Options and Warrants (Continued)

	Exercisable Options
			Weighted
	Number		Average
Range of Exercise Prices	of Shares		Exercise Price
$1.25 - $2.00		183,300	$	1.80
$2.01 - $3.00		190,000	$	2.73
$3.01 - $4.00		43,700	$	3.60
$4.01 - $4.53		11,850	$	4.53
		428,850	$	2.47

During September 2002, the Company issued 300,000 warrants to an investment banking, brokerage and advisory firm at an exercise price of $1.50. The warrant agreement provides that the warrants are not exercisable until the Company has registered the related shares or received an exemption from registration. The warrants are not exercisable at December 31, 2002. See Note 11 for further discussion regarding these warrants.

Total subscriptions receivable as of December 31, 2001, were $520,500 and were receivable from related parties. Payments of stock subscriptions receivable of $520,500 and $3,000 were collected in 2002 and 2001, 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:

			2002			2001
Net income (loss)	As reported		$	(1,305,900	)	$	(455,500	)
	Pro forma		$	(1,490,300	)	$	(510,000	)
Income (loss) per share	Basic
		As reported	$	(0.57	)	$	(0.21	)
		Pro forma	$	(0.65	)	$	(0.23	)
	Diluted
		As reported	$	(0.57	)	$	(0.21	)
		Pro forma	$	(0.65	)	$	(0.23	)

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

	2002			2001
Risk-free rate		1.6	%		5.0	%
Expected option life (in years)		2.5			3
Expected stock price volatility		98	%		95	%
Dividend yield		0.0	%		0.0	%
Weighted average grant date value	$	0.60		$	1.11

F-16

NOTE 8 — SHAREHOLDERS’ EQUITY (Continued)

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 time to time by the Board of Directors. No shares of preferred stock have been issued.

Treasury Stock

Treasury stock is reflected at par value, and consists of 46,100 shares of common stock at December 31, 2002.

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 $15,300 and $14,300 in 2002 and 2001, respectively, to operations for its contributions to the Plan. The matching plan was suspended as of January 1, 2003.

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. During 2002 and 2001, $80,500 and $123,200, respectively, were charged to operations for rent expense related to operating leases. Future operating lease payments for 2003 approximate $63,800.

Legal and Regulatory Proceedings

The Company is engaged in various legal and regulatory proceedings incidental to its normal business activities, none of which, individually or in the aggregate, are deemed to be material to its financial condition.

F-17

NOTE 10 — OTHER COMMITMENTS AND CONTINGENCIES (Continued)

Licensing and Distribution Agreements

The Company has 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.

The Company elected not to renew the Thomas license which expired on December 31, 2002. The agreement allows the Company to sell off any remaining inventory through June 30, 2003.

In addition, the Company has entered into exclusive distribution agreements related to its Climb@Tron product line. The agreements contained provisions for the exclusive arrangement through December 2002, if certain minimum quantities of products were purchased. As of December 31, 2002, the Company elected not to renew the exclusive arrangement.

NOTE 11 — SUBSEQUENT EVENTS

On February 7, 2003, the Company entered into an agreement to terminate the employment relationship with its former Chief Operating Officer. In exchange for relinquishing all claims and future compensation, the Company agreed to pay $128,000 for the repurchase of 114,286 shares acquired by the Chief Operating Officer at the inception of his employment in 2001.

On February 24, 2003, a redemption notice at Par Value of $.001 per share was issued for 300,000 warrants issued in September 2002 as part of an investment banking agreement.

On March 12, 2003, the Company executed a settlement agreement related to a claim by an individual alleging a diminution of publicity rights. As part of the settlement, the individual released the Company from all claims in exchange for cash payment to which the Company agreed to contribute approximately $20,000.

F-18 EX-10.9 3 g81473exv10w9.txt EX-10.9 MERCHANDISING LISCENCE AGREEMENT EXHIBIT 10.9 JAY JAY THE JET PLANE MERCHANDISING LICENSE AGREEMENT ------------------------------- Agreement No: 016 This Merchandising License Agreement (the "Agreement") is made as of the 17th day of December, 2001 (the "Effective Date"), between the following parties (referred to collectively herein as the "Parties" and individually as a "Party"): PORCHLIGHT ENTERTAINMENT, INC. ("Agent" or "PorchLight"), a Delaware corporation having a place of business at 11777 Mississippi Avenue, Los Angeles, CA 90025, JAY JAY THE JET PLANE PRODUCTIONS, INC. ("JJPP"), a Nevada corporation having a place of business at 11777 Mississippi Avenue, Los Angeles, CA 90025, and KIDQUEST, INC., dba WonderWings.com Entertainment ("WonderWings"), a Texas corporation having a place of business at 11910 Greenville Avenue, #101, Dallas, TX 75243, on the one hand, and ACTION PRODUCTS INTERNATIONAL, INC. ("Licensee"), a Florida corporation having its place of business at 390 N. Orange Avenue, 21st Floor, Orlando, Florida 32801, on the other hand. WHEREAS, in separate agreements between Agent, JJPP and WonderWings (herein referred to as the "Representation/Option agreements"), Agent has been granted certain rights, including interalia, the right to license or otherwise exploit throughout the world certain merchandising rights in and to a certain property entitled "Jay Jay The Jet Plane" (the "Property") and (a) the trademark rights therein of WonderWings; and (b) the joint and individual copyright rights therein of JJPP and WonderWings, and their respective affiliates and subsidiaries (JJPP and WonderWings shall be referred to herein collectively in their respective capacities as rights holders as "Licensor"); and WHEREAS, Licensee desires a license to utilize the Property in connection with the manufacture, marketing, sale and distribution of certain products in a certain territory, and Agent, with the consent and approval of Licensor, desires to grant such license to Licensee upon the terms and conditions set forth herein. NOW THEREFORE, in consideration of the mutual promises contained herein, the Parties hereby agree as follows: 1. GRANT OF LICENSE: Subject to the terms and conditions set forth herein, Agent, with the consent and approval of Licensor, hereby grants to Licensee, and Licensee hereby accepts, this license to utilize the Property as specifically set forth in Schedule "B", solely and only in connection with the manufacture, marketing, sale and distribution of the product(s) identified in Schedule "A" as the Licensed Product(s), during the Licensed Period and in the Licensed Territory and designated 1 Distribution Channels defined herein. Agent and Licensor (as applicable and agreed upon between Agent and Licensor in the Representation/Option agreements), specifically reserve all rights not granted to Licensee under this Agreement including, without limitation, the right to grant other licenses for use of the Property in any manner whatsoever as well as the rights set forth herein below in the Exclusions. 2. LICENSED TERRITORY AND DISTRIBUTION CHANNELS: The Licensed Territory shall mean the country or countries set forth in Schedule "A" as its or their political boundaries exist on the date of this Agreement and the Distribution Channels shall mean the channels of retail distribution designated in Schedule "A". Licensee acknowledges that this license extends only to the Licensed Territory and Distribution Channels specified in Schedule "A" and Licensee agrees that it will not solicit, make, or authorize any use, direct or indirect, of the Licensed Products and the Property outside the Licensed Territory and designated Distribution Channels without Agent's specific written approval and it will not knowingly sell or distribute the Licensed Products to persons or entities (herein "customers") who intend or are likely to resell the Licensed Products outside of the Licensed Territory and designated Distribution Channels nor, will Licensee advertise or maintain stock of the Licensed Products or open a new branch or office outside of the Licensed Territory for the purpose of selling or otherwise distributing the Licensed Products outside of the Licensed Territory. Licensee shall be required to advise all customers of the obligation to sell the Licensed Products only within the Licensed Territory and designated Distribution Channels and Licensee shall use its best efforts to ensure that its customers comply therewith. 3. LICENSED PERIOD: The Licensed Period shall mean the Initial Term and Renewal Term if applicable, commencing and ending on the dates set forth in Schedule "A" attached hereto unless sooner terminated in accordance with the terms and conditions of this Agreement. 4. EXCLUSIONS: Licensee acknowledges that the rights granted herein do not include the right to, and Licensee warrants and represents that it will not, use the Property or the Licensed Products for, an endorsement of any product or service unless specifically authorized herein and Licensee shall not make or authorize any use, direct or indirect, of the Property in connection with any other products, goods or services other than the Licensed Products. Additionally, Licensee specifically acknowledges that the rights granted herein to Licensee do not include the right to manufacture, market, sell, distribute or otherwise exploit the Licensed Products in connection with any: giveaway, premium, promotion (other than in-store play dates wherein Licensee will furnish retailers in the Territory and Distribution Channels with Licensed Products for in-store play promotions to promote the sale of the Licensed Products by such retailer), direct mail/direct response and catalog shopping other than Licensee's own catalog, electronic shopping and E-Commerce including television and computer/Internet shopping for Licensee's direct to consumer sales, fan club, amusement and theme parks, live stage show, in-theater sale or other channels of distribution which are not specifically included in the Distribution Channels set forth in Schedule "A". Additionally, Licensee will not sell the Licensed Products to 2 jobbers, wholesalers, distributors, retail stores, merchants or any other entities whose sales or distribution will be made for publicity purposes, combination sales, premiums, giveaways or similar methods of merchandising or means of distribution set forth herein above. All of the aforementioned rights, methods of merchandising and means of distribution ("Exclusions") are expressly retained and reserved by Agent and/or Licensor (to the extent agreed upon by Agent and Licensor in the Representation/Option agreements), and any and all such Exclusions may be exercised by Agent and/or Licensor, as applicable, and/or their designee concurrently with the rights licensed to Licensee hereunder without regard to the extent to which any such Exclusions may be competitive with Licensee or the rights granted to Licensee herein. However, Agent and Licensor acknowledge and agree that except with respect to the Pilot Wings, should Agent and/or Licensor intend to use articles within the definition of the Licensed Products set forth in Schedule "A" as give-aways, premium and/or promotional items for the Property, Agent and Licensor shall use their best efforts to ensure that Licensee shall be given an opportunity to supply the Licensed Products for such give-aways, premiums and/or promotions provided, Agent and/or Licensor are in control of choosing a source for such give-aways, premiums and/or promotions, and to the extent that Licensee is able to supply the Licensed Products for such give-aways, premiums and/or promotions in a timely manner and at a competitive price. Notwithstanding the foregoing, the Parties hereto acknowledge and agree that should Agent and Licensor be in control of the source of the articles to be supplied for such give-away, premiums and/or promotions, and should the articles to be used therefore be of the same exact type and size as the Licensed Products produced by Licensee hereunder, Licensee shall have the right (except with respect to the Pilot Wings) to supply such items for Agent's and/or Licensor's use at Licensee's best selling price (based on the Domestic or F.O.B. selling price as applicable) or at such lower selling price to be agreed upon between the Parties. Licensee acknowledges that Agent and Licensor have not granted Licensee any rights herein to supply the Pilot Wings for any give-away, premium and/or promotion or to sell Pilot Wings separately. 5. PAYMENT: In consideration for the rights granted herein, on behalf of Agent and Licensor, Licensee shall pay in accordance with Paragraph 5(c), the following compensation: (a) Guaranteed Minimum Compensation: Licensee shall pay as a guaranteed minimum payment ("Guaranteed Minimum Payment") for the Licensed Period, the amount specified in Schedule "A". Such amount shall be payable in accordance with the Payment Schedule(s) for the Guaranteed Minimum Payment(s) set forth in Schedule "A". No portion of the Guaranteed Minimum Payment(s) shall be returnable or refundable to Licensee, however, the Percentage Compensation/Royalties due during the Initial Term shall be offset against the Guaranteed Minimum Payment for the Initial Term already paid by Licensee as an advance ("Advance") for such Term as provided in Schedule "A" and likewise, any Percentage Compensation/Royalties due during the Renewal Term if applicable, shall be offset against the additional Guaranteed Minimum Payment for the Renewal Term paid by Licensee. The Parties acknowledge and agree that the Percentage 3 Compensation/Royalties paid during the Initial Term may not be offset against the Guaranteed Minimum Payment due for the Renewal Term. (b) Percentage Compensation/Royalties: Licensee shall pay, on a calendar quarterly basis (the "Royalty Period"), within forty-five (45) days after the end of each calendar quarter during the Licensed Period, the percentage compensation/royalty amount ("Percentage Compensation/Royalties") specified in Schedule "A" on all Net Sales of the Licensed Products at the established gross price of the Licensed Products or any higher selling price if applicable, less only deductions for actual, verifiable returns of damaged Licensed Products actually credited to a customer and normal trade discounts actually given to a customer provided all such deductions and discounts shall not exceed a total of fourteen percent (14%) of the gross sales for the period. As used in this Agreement, the term "Net Sales" shall mean the gross number of Licensed Products sold by or on behalf of Licensee or any directly or indirectly related, affiliated, associated, parent or subsidiary companies ("Affiliated Entity") less only Licensed Products distributed free of charge to Agent and Licensor as required herein below in paragraph 8. as samples and for copyright/trademark purposes, or in the normal course of business as samples, provided that Licensee does not receive compensation of any type for such samples and the distribution of such samples is limited to a reasonable number for the purposes of stimulating sales and orders of the Licensed Products. For purposes of this Agreement, a Licensed Product shall be considered "sold" upon the date when such Licensed Product is billed, invoiced, shipped/distributed, or paid for, whichever event occurs first and except as provided above, the Percentage Compensation/Royalties shall be payable by Licensee on the distribution of all Licensed Products whether distributed to third parties, to an Affiliated Entity or otherwise, whether or not billed. No deductions from the gross selling price shall be permitted for trade or cash discounts or other discounts, whether or not similar to the foregoing, advertising allowances, uncollectable accounts or bad debts and no deductions for returns shall be allowed on the basis of an accrual or reserve system, except as specifically permitted herein. Additionally, no costs incurred in the manufacture, distribution, shipping, sale, exploitation, promotion or advertisement of the Licensed Products shall be deducted from the amount payable hereunder. In the event that Licensee sells and/or distributes the Licensed Products to an entity in any way related to Licensee or in a manner other than in an arms length transaction, the Percentage Compensation/Royalties payable on such sales and/or distribution shall be calculated based on the higher of the amount charged by Licensee or the amount charged by such other entity in connection with the sales and/or distribution of the Licensed Products by such other entity, whichever is greater. Notwithstanding the foregoing, Licensee acknowledges and agrees that the Percentage Compensation/Royalties payable hereunder in connection with sales to, or by, an Affiliated Entity shall not be less that the Percentage Compensation/Royalties based upon the price generally charged to the trade by Licensee in an arms-length transaction. (c) Any and all payments payable in accordance with this Agreement (including, but not limited to the Guaranteed Minimum Payment(s) and Percentage 4 Compensation/Royalties set forth above) shall be paid in United States currency (US$) and such payments shall be made at Licensee's expense by bank check to Jay Jay the Jet Plane Productions, Inc. or by wire transfer to the account of Jay Jay the Jet Plane Productions, Inc. (Collection Account) at City National Bank (Account No. [101-184-161]; ABA Routing No. 122016066) at 400 N. Roxbury Drive, Beverly Hills, CA 90210 and such payments shall be made simultaneously with the rendition of quarterly accounting statements referred to in Paragraph 6 below. No payments due hereunder shall be considered paid by Licensee until such payments are actually received by Jay Jay the Jet Plane Productions, Inc. (d) Taxes, Duties, Levies, VAT and Restricted Sums: (i) Licensee shall pay all taxes, duties, levies, handling charges and other fees (other than Agent's and Licensor's direct net income taxes) due under any law now or hereafter in effect, imposed, levied or based upon the license, delivery, shipment, import, export, manufacture or Licensee's possession, use or sale of the products licensed hereunder or upon the grant of this license or the exercise thereof or based upon or measured by the license fees or payment thereof or any part thereof. (ii) Licensee hereby declares that, should the applicable authorities in the Licensed Territory require that Value Added Taxes ("VAT") or Goods and Services Taxes ("GST") or other similar taxes are to be levied on payments hereunder, Licensee will be solely responsible for payment of said VAT and GST levies. 6. ACCOUNTING: (a) Licensee will, not later than the forty-fifth (45th) day following the end of each calendar quarter during the Licensed Period and any extension thereof, and thereafter for so long as any sales and/or distribution of the Licensed Products are made by Licensee under Paragraph 16, or otherwise, furnish to Agent at the address set forth above, a full, complete and accurate accounting statement showing the item number, description, gross selling price and the quantity of the Licensed Products distributed and/or sold by Licensee during the calendar quarter and any deductions therefrom in the form attached hereto as Exhibit "1" or such other form provided or approved by Agent. On all accounting statements rendered hereunder Licensee may retain a five percent (5%) reserve against allowed returns as permitted herein, provided that Licensee shall include a statement clearly indicating the amount of any reserve held, and the amount of any allowable returns made. Additionally, any amount held as a reserve against allowed returns shall be held only until the next accounting is rendered and only for actual allowable returns as permitted in Paragraph 5(b) above, and provided the subsequent statement shall clearly indicate how such reserve has been applied and/or liquidated and Licensee shall provide copies of all related invoices with such statements. If any reserves are insufficient to cover actual allowed returns for a related accounting period, resulting in an overpayment of Percentage Compensation/Royalties, the same may be deducted from sums due 5 hereunder during the subsequent reporting period, however, in no event will Agent or Licensor be required to refund or return any sums paid hereunder by Licensee. Upon request, Licensee shall submit to Agent a written explanation of any reserve held and upon expiration or termination of this Agreement such reserve shall be fully liquidated within thirty (30) days and any remaining reserve shall be immediately remitted to Agent as provided in Paragraph 5(c). All accounting statements will be furnished as required herein whether or not any of the Licensed Products have been sold during the calendar quarter and will be certified to be accurate by a duly authorized officer of Licensee. Copies of all statements to Agent shall also be sent to WonderWings at the address set forth above. (b) Agent's receipt of statements or the receipt or acceptance of any payments (or the cashing of any checks paid hereunder) will not prevent Agent and/or Licensor from thereafter questioning or disputing the correctness of any such statements and/or payments. Licensee agrees that any inconsistencies or mistakes discovered in the statements and/or payments will be promptly rectified and the appropriate payments made by Licensee. Interest at the rate of one and one-half percent (1 1/2%) per month (but in no event more than the maximum amount permitted by law in the Licensed Territory), shall accrue on the amount of any late payments due hereunder, from the date upon which the payment was due until the date payment is actually received as provided herein above in Paragraph 5(c). Time is of the essence with respect to all statements and payments due under this Agreement and in the event that Agent and/or Licensor shall be required to incur any legal expenses or other expenses of debt collection by reason of Licensee's failure to render any statements and/or payments due hereunder, in addition to and without prejudice to any other rights of Agent and Licensor (including such rights of termination as set forth herein below in Paragraph 15), Licensee shall indemnify and pay Agent and Licensor for any and all reasonable legal fees and expenses of debt collection which may have been incurred by Agent and/or Licensor in securing a remedy to Licensee's failure as aforesaid. 7. BOOKS AND RECORDS: Licensee will keep at its principal place of business, full, complete and accurate books of account and records covering all transactions relating to the subject matter and terms of this Agreement. Agent's and/or Licensor's duly authorized representative(s) shall have the right to examine and make copies of such books of account and records and other documents and material in Licensee's possession or under its control with respect to the subject matter and terms of this Agreement. The duly appointed representatives of Agent and/or Licensor shall have free and full access thereto for such purpose and for the purpose of making extracts therefrom at all reasonable business hours and with five (5) days notice to Licensee. In the event that a discrepancy or a deficiency in payment of five percent (5%) or more shall be discovered, Licensee shall pay the costs of such examination in addition to immediately paying all deficiencies in Percentage Compensation/Royalties and any other sums found to be due with interest thereon. Agent and/or Licensor shall have the right to challenge any statement rendered by Licensee, and Licensee shall preserve such books of account, records, documents and material, for a period of three (3) years after the expiration or earlier termination of this Agreement and Agent and/or 6 Licensor may examine said books of account and records during such three (3) year period. Notwithstanding the foregoing, Agent and Licensor acknowledge and agree that no more than one (1) examination of Licensee's books and records shall be conducted per year. 8. QUALITY; SAMPLES: (a) Licensee acknowledges that if the Licensed Products or any packaging or advertising relating thereto were of inferior quality in design, material, workmanship or content, the substantial goodwill in the Property, would be impaired. Accordingly, Licensee agrees that the Licensed Products shall be of high standard and quality so as to maintain the integrity, prestige and reputation of the Property and the name of Agent and Licensor. (b) Licensor shall have absolute approval, exercisable in its sole discretion, over all uses of the Property, the Licensed Products, and all packaging, advertising and related materials. (i) In that regard, Licensee shall, before it manufactures or publishes any particular Licensed Product, furnish to Agent free of cost, for Agent's and Licensor's review and Agent's written approval on behalf of Licensor, two (2) samples of the concept art, text, final art and pre-production samples of each of the Licensed Products in the: 1) conceptual; 2) final artwork; and 3) pre-production stage together with conceptual, final artwork and pre-production samples of the cartons and containers, tags, labels, wrapping material, packaging and galley proofs, if any, for the Licensed Products or intended for display to the consumer, as well as advertising or promotional material for use in any media in connection with the Licensed Product ("Collateral Materials"). Licensee may not manufacture, use or advertise any Licensed Product or any of the Collateral Materials until it has received written approval therefore from Agent. (ii) Additionally, after the manufacture of all such Licensed Products, but prior to the sale or distribution of such Licensed Products, Licensee shall furnish to Agent, free of cost, for Agent's written approval on behalf of Licensor, twelve (12) finished samples of each of the Licensed Products together with all Collateral Materials. Licensee may not distribute any Licensed Product or any of the Collateral Materials until it has received written approval of the finished samples and Collateral Materials from Agent. (c) Licensee acknowledges and agrees that Agent's written approval of each of the Licensed Products and Collateral Materials in each of the stages required above, may be granted or withheld as Licensor, in its sole discretion, may instruct Agent to assure the quality of the merchandise and reputation of the Property. If Agent has not indicated its approval in writing of any submission within ten (10) business days after the date of submission thereof, Agent and Licensor shall be deemed to have disapproved same. Once Licensed Products and Collateral Materials have been approved by Agent on behalf of Licensor, Licensee shall not depart in the 7 manufacture of such Licensed Product in any manner from the characteristics of the approved Licensed Product without first obtaining Agent's written consent on behalf of Licensor for any such changes in accordance herewith. Licensee shall, at all times, have in place appropriate procedures to promptly recall any Licensed Products which fail to conform to the approved samples or which may be defective. Notwithstanding the foregoing, the Parties mutually agree to make best reasonable efforts to ensure timely implementation of the approval process. (d) (i) All rights granted hereunder are conditioned upon Licensee's compliance with all marketing, advertising, manufacture and sales provisions and laws in each and every country or territory in the Licensed Territory applicable to the rights granted herein. In that regard, Licensee acknowledges and agrees that Licensee shall have the sole and complete responsibility for ensuring that all of the Licensed Products and the Collateral Materials will be produced, manufactured, sold, distributed, marketed and advertised in full compliance and in accordance with all applicable and relevant laws, codes, rules, standards and regulations applicable in the Licensed Territory (including, but not limited to, consumer product safety standards and laws, health, workplace and labor standards and laws, environmental protection standards and laws, customs and importation laws and all other standards and laws governing the production, manufacture and sale of goods in the Licensed Territory. Licensee shall pretest all proposed and approved Licensed Products and shall cause truthful labeling regarding care, maintenance and use to be affixed to the Licensed Products, packaging or hangtags therefore, as appropriate. Licensee shall immediately notify Agent of all complaints coming to Licensee's attention from any consumer, customer, or governmental body relevant to any of the Licensed Products and shall regularly keep Agent advised by notice of the status and resolution thereof. Licensee shall resolve all such complaints as expeditiously as possible. (ii) Licensee further acknowledges and agrees that Agent's approval of the Licensed Products and Collateral Materials as provided above shall not constitute a waiver of any of Agent's and/or Licensor's rights or of Licensee's duties under this Agreement. Licensee hereby acknowledges that neither Agent nor Licensor are competent to determine whether any of the Licensed Products are fit for the use normally and reasonably intended or safe for sale and/or distribution to the public at large. Accordingly, all approval rights set forth herein relate to aspects of quality and not to determination of the safety of the Licensed Products, and any approval of the Licensed Products shall in no way detract from the Licensee's obligations to comply with statutory or other safety guidelines applicable in the Licensed Territory nor shall such approval be deemed approval of Licensee's creation and/or use of any verbiage, copy, mark, artwork, design or other material which is not owned or controlled by Agent and/or Licensor (hereinafter referred to as "Ancillary Material"). Such Ancillary Material shall be used at Licensee's own risk and Licensee shall take any and all precautions deemed appropriate to ensure that such Ancillary Material is wholly original with or fully cleared by Licensee and that the use by Licensee of Ancillary Material does not infringe the rights of any third parties. Licensee shall fully indemnify, hold harmless and defend Agent and Licensor, and their 8 officers, directors, agents, and employees against any claims, suits, losses or damages (including reasonable attorney's fees) arising out of such use of Ancillary Material by Licensee. (e) Licensee shall permit Agent and/or Licensor or their representative, at all reasonable business hours and upon at least five (5) business days written notice, to enter Licensee's premises for the purpose of inspecting the Licensed Products or the method of manufacture thereof prior to and during the sale and distribution of such Licensed Products and in the event that License shall appoint a sub-contractor to manufacture any of the Licensed Products or a part thereof as provided in Paragraph 26, Licensee shall make similar arrangements for inspection of any process performed by a sub-contractor. 9. GOODWILL AND PROTECTION: (a) WonderWings owns the trademark rights in and to the Property and JJPP and WonderWings own certain joint and individual copyrights in and to the Property which together comprise all of the copyrights in the Property and JJPP and WonderWings have granted to Agent the right to license such trademark rights and copyrights in and to the Property and JJPP and WonderWings specifically acknowledge their approval and consent of the grant of this license to Licensee on the terms and conditions set forth herein. (b) Licensee recognizes the great value of the goodwill associated with the Property and acknowledges that as between Licensor and Licensee, all rights therein (including trademark and copyright) and goodwill attached thereto belongs exclusively to Licensor, that the Property has secondary meanings in the minds of the public and that all use of the Property will inure to the benefit of Licensor. Licensee agrees that it will not, during the Licensed Period or thereafter, attack Licensor's property rights, in and to the Property. (c) As between Licensor and Licensee, Licensor shall be deemed to be the owner of all materials created for the Licensed Products hereunder which bears, utilizes, refers to, or in any way becomes associated with, or is derivative of the Property, including but not limited to all artwork therefore. Licensee agrees that any such materials created and furnished by Licensee or its employees or by a third-party assisting Licensee in the creation of such materials, shall be-considered "works made for hire", as that phrase is used in Sections 101 and 201 of the U.S. Copyright Revision Act of 1976 and such materials may be freely used by Agent, Licensor, and their designees. If any such materials or elements shall not be deemed a "work made for hire", Licensee hereby assigns and transfers to Licensor or its designee, all rights, including copyright, moral rights, title and interest in and to all such materials and elements and Licensee shall sign any documents, acknowledgments and instruments, or obtain the signature on such documents, acknowledgments and instrument of any third-parties assisting Licensee in the creation of such materials, which may be required to effectuate the rights of Licensor in and to such materials, and Licensee undertakes to cooperate in effectuating the foregoing. 9 (d) Licensee shall not, during the Licensed Period or any time thereafter, dispute or contest, nor cause or assist or aid others in disputing or contesting, Licensor's right and title to the Property, or any other rights of Licensor in and to the subject matter of this Agreement or Agent's rights to license the Property as provided herein, or disclose the terms of this Agreement to any person without the prior written consent of Agent and Licensor. Licensee will fully cooperate with and assist Licensor, in preventing or prosecuting any infringement of the rights of Licensor in the Property. Licensee will notify Agent in writing of any manufacture, sale, distribution or advertisement which it believes may constitute an infringement upon Licensor's rights. Licensee shall not commence any action or proceeding against any person or enter into a settlement relating to the Property or Licensor's rights without Agent's and/or Licensor's prior written consent. In the event that an infringement or violation of the Property shall be materially and negatively impacting on Licensee's sales of the Licensed Products, Agent and Licensor shall consider in good faith, the advisability of any such action, however, Licensee shall not have any rights against Agent or Licensor for damages or otherwise for failure to act in, or settle, any action or proceeding relating to alleged infringements or violations of the Property or Licensor's rights nor shall any such act or failure to act by Agent or Licensor affect the validity or enforceability of this Agreement. (e) Agent and Licensor shall have the right, but shall not be under any obligation to use the Property and/or the name of Licensee so as to give the Property, or any of the Parties and their respective programs full and favorable prominence and publicity. However, neither Agent nor Licensor shall be under any obligation whatsoever to use the Property or any part thereof in any medium. 10. TRADEMARK LICENSE: (a) As between Licensor and Licensee, Licensee acknowledges that WonderWings is and shall remain the sole owner of all trademarks related to the Property, and that Licensor is and shall remain the owner of all copyrights, and other rights associated with the Property, and in all artwork, packaging, copy, literary text, advertising and promotional material of any sort which utilize the Property, including all such materials, creations and/or modifications to the Property developed by Licensee, (collectively, the "Copyrighted Materials") and the goodwill pertaining to all of the foregoing. Licensee shall not at any time register or apply to register for Licensee's benefit any trademarks, logos, marks, or names which are identical or confusingly similar to the Property. (b) Subject to the terms and conditions of this Agreement, Licensee is hereby granted the non-exclusive right and license in the Territory to use the trademarks and servicemarks depicted on the attached Schedule "B" and Schedule "C" including PorchLight's, JJPP's and WonderWings' logos as set forth therein during the Licensed Period, however, such trademarks, servicemarks and logos may be used by Licensee only in connection with the manufacture, marketing, sale and distribution of the Licensed Products and Collateral Materials, subject to Agent's 10 written approval of all such materials. Licensee agrees not to associate any other characters or properties of any other entity, including Licensee, with the Property or its trademarks either on the Licensed Products or in their packaging, advertising, promotional or display materials or other Collateral Materials so as to promote such other characters or properties or to create the impression that any trademark or property rights in the Property are related to any such rights of such other entity. However, Licensee may use its own trademarks and other identifying materials in such manner as to identify Licensee as the actual source of the manufactured products subject always to Agent's approval as provided hereinabove in Paragraph 8. (c) Licensee shall also reference the following websites on all packaging and tags: PorchLight.com, WonderWings.com and pbskids.org/jayjay or such other names and URL/website addresses as Agent shall advise Licensee in writing. (d) All rights in said trademarks and servicemarks other than those specifically granted herein are reserved to Licensor for its own use and benefit, subject to the rights of Agent to license and exploit such trademarks and servicemarks (as such rights are possessed by Agent and specifically agreed upon by Agent and Licensor in the Representation/Option agreements). Licensee acknowledges that it will not acquire any rights in said trademarks and servicemarks as a result of Licensee's creation and/or use thereof and that all right to use said trademarks and servicemarks which arises as a result of Licensee's creation and/or use shall inure to the benefit of Licensor and Licensee will execute any documents, acknowledgments and instruments required to effectuate the foregoing, and Licensee undertakes to cooperate in effectuating such recordation. (e) Licensee will at no time use or authorize the use of any trademark, trade name or other designation identical with or confusingly or colorably similar to Licensor's trademarks or servicemarks. (f) Except as otherwise provided in Paragraph 16, upon the expiration or earlier termination of the Licensed Period of this Agreement, all rights to use the trademark and servicemarks in and to the Property shall automatically revert to Licensor, subject to the rights of Agent to license and exploit such trademarks and servicemarks (as such rights are possessed by Agent and specifically agreed upon by Agent and Licensor in the Representation/Option agreements), and Licensee shall immediately discontinue all use of said trademarks and servicemarks. (g) (i) In the event that Agent or Licensor shall advise Licensee that in order for use of trademarks to be valid, a direct license from the trademark owner of record is required in favor of the trademark user, Licensee shall enter into such direct license or agreement with the trademark owner of record, with respect to the licensed trademarks. Licensee undertakes in addition, to execute such further documents, acknowledgments and instruments as are necessary for the purposes of effectuating recordation of Licensee as a user of said trademark, in such jurisdictions where required and in accordance with the requirements of the specific jurisdictions 11 concerned, and Licensee undertakes to cooperate with Agent and the trademark owner of record in effectuating such recordation. (ii) Upon termination of Licensee's right to use the licensed trademarks in the aforesaid jurisdictions, Licensee undertakes to cooperate in the cancellation of the aforesaid recordation, and further undertakes to execute any and all documents as are necessary for that purpose. 11. COPYRIGHT AND TRADEMARK NOTICES: (a) Licensee shall place or cause to be imprinted on all Licensed Products and Collateral Materials as and where appropriate, the complete copyright notice in the following form: "(c) [or Copyright] (Date) Jay Jay the Jet Plane Productions, Inc. and WonderWings.com Entertainment. All Rights Reserved", or in such other name or form as Agent shall advise Licensee in writing. (b) Licensee shall also place or cause to be imprinted on all Licensed Products and Packaging, where appropriate, the appropriate trademark or servicemark notice, either "TM", "SM" or (R), as Agent shall direct. (c) Licensee agrees that it shall use no markings, legends or notices on and in connection with the Licensed Products and Collateral Materials without first obtaining Agent's prior written approval. (d) Licensee, at its expense, will from time to time during the Licensed Period, submit to Agent, upon request from Agent, a reasonable number of additional free samples of the finished Licensed Products and Collateral Materials and all other materials, bearing copyrights and trademarks or servicemarks of Licensor in order to assure Agent that these provisions are being fulfilled, and for Licensor's copyright, and trademark registration, however, Licensee acknowledges that neither Licensor nor Agent have any obligation to apply for and/or obtain such registration. In the event that Licensor elects to undertake such registration, Licensee will provide such other materials and documentation as Licensor, or Agent on behalf of Licensor, may request to effectuate such registration. Copyrights and trademarks in all such material, and any new versions, translations and rearrangements of such material shall be owned by JJPP and/or WonderWings, as applicable. If, as a result of its exploitation of the Licensed Products, Licensee acquires any trade rights, moral rights, equities, titles or other rights therein, Licensee shall immediately assign and transfer same as directed by Licensor, or Agent on behalf of Licensor, without additional consideration, other than the consideration of this Agreement. Notwithstanding the foregoing, Agent and Licensor acknowledge that Licensor has applied for trademark protection for Jay Jay The Jet Plane in International Trademark Class 28 for the Licensed Territory granted herein. (e) Upon request from Agent or Licensor, Licensee agrees to assist in procuring and maintaining the rights of Licensor in the Property (including trademark and copyright) at no cost to Licensee. Licensee agrees that it shall notify 12 Agent in writing of all those jurisdictions and those Licensed Products (specifying the International Classification of Goods and Services category) in which it intends to distribute, ship or sell Licensed Products as soon as such information is available to Licensee. Upon written request therefor, Licensee agrees to execute and/or deliver to Agent in such form as Agent may reasonably request, all instruments necessary to effectuate Licensor's copyright and, where applicable, trademark protection or to record Licensee as a registered user of any trademarks, where applicable, or to cancel such registration. If Licensee fails to execute any such instruments within ten (10) business days following Agent's request therefor, Licensee hereby appoints Agent as its attorney-in-fact, which such appointment shall be deemed a power coupled with an interest, to do so on Licensee's behalf and such appointment shall be irrevocable for the purposes set forth herein. Licensee acknowledges that only Licensor may file and prosecute trademark and copyright applications regarding any trademarks and/or copyrightable material used by Licensee of the Property in such jurisdictions within the Licensed Territory as Licensor may, from time to time, deem advisable. Licensor shall control absolutely all infringement litigation brought against third parties involving or affecting the Property and Licensor may, at its sole discretion, add Licensee as a party thereto at no cost or expense to Licensee unless otherwise specifically agreed to in writing between the Parties. 12. PURCHASES: Agent and Licensor may purchase Licensed Products from Licensee at Licensee's lowest domestic selling price or, if such Licensed Products are purchased by Agent or Licensor on an F.O.B. basis, at Licensee's lowest F.O.B selling price, for such Licensed Product and Licensee shall include any such sales to Agent and/or Licensor in its quarterly accounting statements and Licensee shall pay a royalty at the royalty rate set forth herein on all such sales to Agent and/or Licensor. Agent and/or Licensor may use such Licensed Products for give-aways, premiums and/or promotional purposes, and may sell such Licensed Products in any territory including the Licensed Territory via the Jay Jay Fan Club and websites operated or owned in part by Agent and/or Licensor. 13. ADVERTISING: Licensee shall not offer for sale, advertise or publicize any Licensed Products via television, radio, newspapers, magazines or any other media without Agent's prior written approval which such approval shall not be unreasonably withheld and Licensee shall advise Agent of the general use and contemplated placement for such advertising and publicity and when reasonably possible, the approximate dates for such use. 14. PARTIES' OBLIGATIONS: (a) Licensee shall produce, manufacture, distribute and sell the Licensed Products in an ethical manner and in accordance with the provisions and the intent of this Agreement, and shall not engage in unfair or anti-competitive business practices. The Licensed Products shall be produced, manufactured, distributed, sold, packaged, labeled and advertised in accordance with all applicable federal, state and local laws, treaties and governmental orders and regulations in the Licensed Territory. 13 (b) Licensee shall not encumber or cause to be encumbered in any manner, the Licensed Products, or cause or permit any expenses to be charged to Agent or Licensor without Agent's and Licensor's prior approval in writing in each instance. (c) Licensee shall exercise its best efforts to manufacture and ship quantities of the Licensed Products to meet the market demand for the Licensed Products and shall diligently and timely fulfill all orders and make and maintain adequate arrangements for the distribution of the Licensed Products throughout the Licensed Territory in the Distribution Channels and continuously offer the Licensed Products for sale throughout the Licensed Territory and Distribution Channels in accordance with the applicable Marketing Date and Distribution Date set forth in Schedule "A" to achieve the highest sales reasonably attainable. (d) (i) Licensee shall be required to submit a prototype for each of the Licensed Products in the minimum number of required SKUs set forth in Schedule "A" within seven (7) months of the Effective Date of this Agreement and Licensee shall be required to begin manufacturing the approved prototypes within two (2) months after Licensee receives Agent's written approval therefore. In the event Licensee shall fail to submit a prototype for each of the Licensed Products in the minimum number of required SKUs within such period, or should Licensee fail to begin manufacturing the approved Licensed Product within the time period specified, Agent, at its sole option and in its absolute discretion, shall have the right to terminate this Agreement as to that Licensed Product by giving Licensee written notice thereof to take effect thirty days after the date of such notice if Licensee fails to submit such prototype or fails to begin manufacturing the Licensed Product, as applicable, within said thirty day period unless such failure is a result of Agent's failure to timely provide Licensee with a style guide, or if Agent or Licensor fails to perform any of their obligations hereunder, in a timely manner, which such failure affects the development of the prototype or the manufacture of the Licensed Products. (ii) Licensee shall begin commercial distribution of each Licensed Product in the minimum number of required SKUs set forth in Schedule "A" hereof by the Distribution Date specified in Schedule "A". In the event Licensee shall fail to begin commercial distribution by such Distribution Date, Agent, at its sole option and in its absolute discretion, shall have the right to terminate this Agreement as to that Licensed Product by giving Licensee written notice thereof to take effect thirty days after the date of such notice if Licensee fails to begin commercial distribution of such Licensed Product within said thirty day period unless such failure is a result of Agent's failure to provide Licensee with reasons for disapproval of the prototype, in a timely manner, after a written request therefore from Licensee, or if Agent or Licensor fails to perform any of their obligations hereunder, in a timely manner, which such failure affects the timely commencement of the initial distribution of any such Licensed Product. (iii) Additionally, after such Distribution Date, should Licensee fail to continue to offer for sale any of the Licensed Products for a period of 14 ninety (90) days or, if the Licensed Products are seasonal in nature, during the normal selling season for such Licensed Products, Agent, at its sole option and in its absolute discretion, shall have the right to terminate this Agreement as to that Licensed Product by giving Licensee written notice thereof to take effect thirty days after the date of such notice if Licensee fails to sell and distribute such Licensed Product within said thirty day period. (e) As a condition of this Agreement, Agent or Licensor shall be required to provide Licensee with a style guide for the Property prior to, or promptly after all Parties' execution of this Agreement and such style guide shall be provided at no cost to Licensee. Additionally, upon request from Licensee, Agent shall provide Licensee with a reasonable number of high resolution computer generated graphic images for the Property, to the extent any such images are available. In the event that any costs and expenses shall be incurred by Agent and Licensor in connection with supplying Licensee with such high resolution computer generated graphic images, Licensee shall bear the costs and expenses thereof, however, Agent and Licensor will not incur any cost or expenses in connection with this provision without receiving specific written approval of Licensee. 15. TERMINATION OF LICENSE: (a) Events of Default: (i) Licensee Bankruptcy: If Licensee files a petition in bankruptcy, or is adjudicated as bankrupt, or if a petition in bankruptcy is filed against Licensee by a third party and is not dismissed within sixty (60) days thereafter, or if Licensee becomes insolvent, or makes an assignment for the benefit of its creditors, or if Licensee files or has filed against it a petition for the adoption of an arrangement pursuant to any bankruptcy law, discontinues its business, or if a receiver is appointed for Licensee or its business, such occurrence shall constitute an event of default under this Agreement (an "Event of Default") and the license herein granted shall, without notice, terminate automatically. Further, and without limitation to the foregoing, to the extent permissible under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code"), and to the extent that this provision does not conflict with any other provisions set forth in this Agreement or any laws or regulations applicable hereto, if Licensor is a debtor-in-possession under Chapter 11 of Title 11 of the Bankruptcy Code, or if a trustee is appointed for Licensor under any Chapter of the Bankruptcy Code, and this Agreement is rejected under Section 365 of the Bankruptcy Code, Licensee may elect to retain its rights under this Agreement as provided in Section 365 (n) of the Bankruptcy Code for the balance of the then in effect Term of this Agreement provided all payments due in connection with this Agreement are promptly paid as required hereunder and in such event, upon written request of Licensee to Licensor, Licensor will not interfere with the rights of Licensee provided in this Agreement to continue to use the Property, trademarks, copyrights and other intellectual property of Licensor, provided such use is strictly in accordance with and pursuant to the terms of this Agreement. 15 (ii) Failure to Manufacture, Market or Distribute: Licensee's failure to commence in good faith the marketing of the Licensed Products by the date set forth in Schedule "A" (the "Marketing Date"), or if Licensee fails to meet the Distribution Date set forth in Schedule "A" for the shipping and sale of the Licensed Products, and to continue during the Licensed Period to distribute and sell commercially reasonable quantities of the minimum number of required SKUs of the Licensed Products as set forth in Schedule "A" in the Distribution Channels in all parts of the Licensed Territory, will result in immediate damage to Agent and Licensor and shall constitute an Event of Default under this Agreement. (iii) Licensee's Violation of Agreement: The violation by Licensee of any other material obligations or conditions or the violation of Licensee's representations and warranties under this Agreement, whether such breach pertains to a default or failure to make proper and timely payment of any and all sums due hereunder or otherwise, shall also constitute an Event of Default hereunder. (b) Notice of Event of Default and Cure: Upon the occurrence of an Event of Default hereunder as set forth in Paragraphs 15(a)(ii) and (iii) above, (but not in the case of a bankruptcy as set forth in Paragraph 15(a)(i) above, in which event termination of this Agreement shall be automatic), Agent shall have the right (but not the obligation) to terminate this Agreement. In the event Agent elects to terminate this Agreement, Agent shall serve upon Licensee a written notice of such election. (i) Licensee shall thereupon have a period of thirty days after receipt of such notice within which to remedy the breach except with respect to any and all payments due hereunder, Licensee shall have a period of fifteen (15) business days after receipt of notice to remedy any failure to make payment of sums due hereunder. (ii) If Licensee fails to duly remedy the same, then upon the expiration of the thirty day period or fifteen (15) business day period with respect to payments, as applicable, this Agreement and the license herein granted shall in all respects cease and terminate, and Licensee shall have no further rights hereunder. (iii) Notwithstanding such termination, all rights of Agent and/or Licensor arising out of this Agreement or in connection therewith or existing prior thereto shall nevertheless continue in full force and effect, including but not limited to Agent's and/or Licensor's right to sue for damages caused to it by Licensee's default and the right hereunder to receive earned but unpaid Compensation/Royalties or other sums due from Licensee pursuant to Paragraph 5. (iv) Upon any termination under this Paragraph 15, neither Licensee nor its receiver, representative, trustees, agents, administrators, successors and/or assigns shall have any right to sell, exploit or in any way deal with or in any Licensed Products or Collateral Materials hereunder except with and pursuant to Agent's consent and instructions in writing. 16 (c) Effect of Termination or Expiration: (i) Upon expiration or earlier termination of this Agreement, all rights granted to Licensee hereunder shall revert to Agent and/or Licensor (as specifically agreed upon by Agent and Licensor in the Representation/Option agreements), and except as provided in Paragraph 16, Licensee shall not use or refer to the Property or any characters, names, titles or other elements in connection with the manufacture, sale or distribution of products of Licensee, which in Agent's or Licensor's opinion are similar to the Property. (ii) Upon expiration or earlier termination of this Agreement, Licensee will cease manufacture and sale of the Licensed Products except as expressly permitted herein and Licensee will turn over to Agent all artwork and other materials provided hereunder and all molds and other materials which reproduce the Licensed Products or otherwise utilize the Property shall be destroyed or, at Licensee's option, Licensee may retain such molds provided that all use and reference to the Property shall be removed therefrom, including all names, logos, images, trademarks and characteristic elements of the Property, and Licensee shall provide Agent with satisfactory evidence of such destruction or proof of removal. (iii) Licensee's failure to cease the manufacture, distribution, sale or advertisement for sale of the Licensed Products upon the expiration or earlier termination of this Agreement except as provided in Paragraph 16, will result in immediate and irreparable damage to Agent and Licensor. Licensee acknowledges that no adequate remedy at law exists for such failure and Licensee agrees that Agent and/or Licensor shall be entitled to an injunction or other equitable relief to prevent a breach of this Agreement by Licensee. (iv) If this Agreement is terminated, all unpaid Percentage Compensation/Royalties, and the unpaid Guaranteed Minimum Payment(s) due hereunder shall be immediately due and payable in accordance with Paragraph 5(c) within ten (10) days after the effective date of termination. (v) On a date at least sixty (60) days prior to expiration of this Agreement or, if applicable, within ten (10) days after the effective date of any earlier termination, Licensee shall account to Agent in a statement, sworn to by an authorized officer of Licensee, indicating the number and description of the Licensed Products on hand and/or in process of manufacture. Agent may, at its option, conduct a physical inventory of Licensee to verify such statement of remaining inventory. If Licensee shall refuse to permit Agent to conduct such physical inventory, Licensee shall forfeit its right to dispose of such inventory in accordance with Paragraph 16 below. Licensee acknowledges and agrees that during the last three (3) months of the Licensed Period, Licensee will not manufacture any more quantities of the Licensed Products than it genuinely anticipates selling during the balance of the Licensed Period (based upon prior sales of such Licensed Products during the preceding six (6) months of the Licensed Period) in the normal course of business and without any special promotional activities. 17 (vi) Nothing in this Paragraph 15 shall be construed to limit Agent's and Licensor's rights or remedies. 16. DISPOSAL UPON EXPIRATION: Upon expiration of the Licensed Period, Licensee shall have the non-exclusive right, pursuant to the provisions hereof, for a period of not more than the Sell-Off Period set forth in Schedule "A", to dispose of all unsold Licensed Products manufactured by it or in the process of manufacture during the one hundred eighty (180) days prior to expiration; provided that Licensee has provided Agent with all accountings and has paid all compensation accrued to such time (including, but not limited to, the Guaranteed Minimum Payment(s) and Percentage Compensation/Royalties). During the Sell-Off Period, Licensee shall be required to account to and pay as provided in Paragraph 5(c), the Percentage Compensation/Royalties set forth in Schedule "A" on all Net Sales of the Licensed Products during the Sell-Off Period. Licensee shall deliver a report to Licensor in the form required in Paragraph 6 and shall make payment of all sums shown to be due therein on a monthly basis during the Sell-Off Period and Licensee shall provide Agent with a final accounting and any unpaid sums shown to be due on such final accounting within thirty (30) days following the end of the Sell-Off Period. Licensee shall comply with all terms and conditions herein with respect to sales, distribution and use of the Property during said Sell-Off Period. It is specifically understood that Licensee shall not sell or dispose of any such Licensed Products in job lots at reduced prices or other than as is customary in the ordinary course of business; and provided further that Licensee shall not sell or dispose of any Licensed Products if this Agreement was terminated for any reason by Agent and/or Licensor, including but not limited to, any reason set forth in Paragraph 15. Following the Sell-Off Period, all remaining Licensed Products shall either be returned to Agent or destroyed (and Licensee shall deliver a certificate of destruction promptly thereafter) at Licensee's sole cost and expense. 17. FORCE MAJEURE: Licensee shall be released from its obligations under this Agreement in the event that governmental regulations, act of God, war, riot, fire, strike or other labor dispute, epidemic or other causes beyond the control of Licensee, render performance by Licensee impossible. In such force majeure event, all future Percentage Compensation/Royalties payable in accordance with the provisions of this Agreement shall continue to be payable as provided herein, however, all Royalty amounts which may be due with respect to sales already made by Licensee of the Licensed Products shall become immediately due and payable and no portion of the Minimum Guaranteed Payment(s) shall be repayable or returnable to Licensee. If such event shall continue for a period in excess of two (2) months, Agent shall have the right to terminate this Agreement by giving Licensee ten (10) days prior written notice. In the event of such termination, the provisions of Paragraph 16 shall apply. 18. INSURANCE: Licensee shall obtain and maintain at its sole cost and expense for the life of the Licensed Product standard commercial general and product liability insurance, the form of which must be acceptable to Agent, from a qualified insurance company, naming PorchLight, JJPP and WonderWings, as additional named 18 insureds, which policy shall provide protection against any and all claims, demands and causes of action arising out of any defects or failure to perform, alleged or otherwise, in the Licensed Product(s) or any material used in connection therewith or any use thereof including for product liability and personal injury, and for breach of contract, copyright and trademark infringement, advertising, libel, slander, or other form of defamation, invasion, infringement of or interference with the rights of privacy or publicity, whether under statutory or common law, caused by Licensee or the Licensed Products. The amount of coverage shall be a minimum of One Million U.S. Dollars (US$1,000,000.00) combined single limit for each single occurrence for bodily injury and property damage and Three Million U.S. Dollars (US$3,000,000.00) in the aggregate with a deductible no greater than $10,000. Said policy shall provide for thirty (30) days notice to Agent from the insurer by registered or certified mail, return receipt requested, in the event of any modification, cancellation or termination of said policy. Licensee shall furnish to Agent a certified copy of said policy providing such coverage within ten (10) days after the effective date of this Agreement and in no event shall Licensee manufacture, distribute or sell the Licensed Products prior to the receipt by Agent of such evidence of insurance. 19. INDEMNITY: (a) Licensee will at all times indemnify, defend and hold harmless PorchLight, JJPP and WonderWings and their respective officers, directors, employees, agents and representatives from and against any and all claims, damages, litigation, judgments, costs and expenses caused by or arising out of any (i) breach of any representation, warranty, obligation or covenant of Licensee contained herein, (ii) misuse of the Property by Licensee in connection with the Licensed Products or otherwise or (iii) alleged defects in or other claim relating to the Licensed Products. However, PorchLight, JJPP and WonderWings, may, at their election, individually or collectively, defend any such action, by their respective counsel and at Licensee's expense in which they are a named party or which may affect the ownership or rights in and to the Property or trademarks and copyrights related thereto. Licensee will cause its counsel to cooperate fully with PorchLight, JJPP and/or WonderWings and their counsel in the defense of such action. No Party hereto shall admit any liability or compromise or settle any suit, pertaining to any other Party without first obtaining such other Party or Parties consent in writing, which such consent shall not be unreasonably withheld. (b) Licensor represents and warrants that it has all rights necessary to grant the rights hereunder to Licensee. Additionally, Licensor and Agent represent and warrant that they have not licensed rights to any other entity which would in any way prohibit Licensee's exercise of any rights granted hereunder to Licensee. Licensor will at all times indemnify, and hold harmless, Licensee and its officers, directors, employees, agents and representatives from and against any and all claims, damages, litigation, judgments, costs and expenses arising as a result of any claim brought by a third party that the Property infringes upon or violates the rights of such third party and Licensor and/or Agent, jointly or individually, as applicable, will at all times indemnify, and hold harmless, Licensee and its officers, directors, employees, 19 agents and representative from and against any and all claims brought by a third party arising as a result of a breach of Licensor's and/or Agent's representations, warranties and covenants made under this Agreement. Licensee shall promptly notify Agent in writing upon Licensee's acquiring knowledge of any such claim or action, and PorchLight, JJPP and WonderWings shall, individually or collectively, undertake the defense or settlement of such claim or action. 20. NO JOINT VENTURE: Licensee shall not have the power to bind or obligate any of the other Parties, individually or collectively, in any manner whatsoever. Nothing herein contained shall be construed to constitute the Parties as partners or joint venturers, nor shall any similar relationship be deemed to exist between them. 21. NO ASSIGNMENT: The license hereby granted is and shall be personal to Licensee, and shall not be assignable by any act of Licensee or by operation of law. Licensee shall have no right to grant any sub-licenses. Any attempt by Licensee to grant a sub-license or to assign, mortgage or part with possession or control of this license or of any of its rights hereunder shall constitute a material breach of this Agreement. This Agreement shall inure to the benefit of and shall be binding upon Agent's and Licensor's successors and assigns and may at Agent's and Licensor's election be assigned. 22. WAIVER; MODIFICATION: No waiver or modification of any of the terms of this Agreement shall be valid unless in writing. No waiver by any of the Parties of a breach hereof or a default hereunder shall be deemed a waiver by such Party of the same or any other breach or default or a waiver by such Party of its right to enforce any such breach or default in the future. Should any provision of this Agreement be found to be invalid or unenforceable by a court of competent jurisdiction, then such provision shall be deemed severed from this Agreement or enforceable only to the extent permitted by law and any such invalidity or unenforceability shall not affect the validity or enforceability of any of the other provisions of this Agreement and all remaining provisions shall survive and be fully enforceable. 23. REMEDIES: The Parties recognize the unique and special nature and value of the use of the Property and agree that it is extremely difficult and impractical to ascertain the extent of the detriment to Agent and Licensor which would be caused in the event of any use of the Property contrary to the terms of this Agreement. The Parties further acknowledge that Agent and Licensor will have no adequate remedy at law in the event Licensee uses the Property in any way not permitted hereunder including, without limitation, use of the Property or sale of Licensed Products after the Licensed Period, and that Agent and Licensor shall be entitled to equitable relief by way of temporary and permanent injunction, and such other and further relief at law or equity as any arbitrator or court of competent jurisdiction may deem just and proper, in addition to any and all other remedies provided for herein. Notwithstanding the foregoing, Licensee agrees that its sole remedy in the event of a breach of this Agreement by Agent and/or Licensor shall be an action at law against such Party or Parties, as applicable, for damages, and in no event shall Licensee be entitled to 20 equitable relief against Agent and/or Licensor or to enjoin the production, distribution or any exploitation of the Property or the Licensed Products. 24. ARBITRATION: Any dispute between the Parties arising under or related to this Agreement, other than to protect Licensor's copyright and trademark rights in and to the Property, to secure compliance with or involving a continuance of this Agreement, to prevent a violation or threatened violation thereof or to prevent unauthorized or improper use of the Property, shall be resolved exclusively by arbitration, which shall be held in Los Angeles, California and conducted in accordance with the Commercial Rules of the American Arbitration Association then in effect. The Parties hereto agree that they will abide by and perform any award rendered in such an arbitration conducted pursuant hereto, and any judgment upon the award rendered shall be final, binding and non-appealable and may be entered in any court having jurisdiction. Each Party shall bear its own expenses of the arbitration, except that the arbitrator's fees and costs shall be borne equally by the Parties and the arbitrator shall have the power to award costs and expenses, including attorneys' fees, to the prevailing Party. 25. ENFORCEMENT OF RIGHTS: Any and all rights granted to Licensee pursuant to the terms of this Agreement may be enforced by either or both of Agent and/or Licensor, at any time and from time to time, to the extent such rights are possessed by such Party. Licensee acknowledges and agrees that should Licensee receive notice from Licensor or Agent that Agent's rights have expired or been terminated, Licensee shall continue abiding by all of the terms and conditions contained herein directly with Licensor and all statements and payments to be made hereunder shall be made as directed by Licensor. 26. MANUFACTURE OF MERCHANDISE: Licensee shall provide Agent with a list of all third parties who will be engaged to provide services in connection with the manufacture of merchandise relating to the Property. Licensee shall also insure that each such manufacture executes an agreement in the form attached hereto as Exhibit "2" or such other form approved by Agent, pursuant to which the manufacturer: (a) acknowledges WonderWings' trademark and JJPP's and WonderWings' copyright rights in the Property and the merchandise, and (b) represents and warrants that it will sell merchandise in connection with the Property only to Licensee and that it will use the Property only as directed by Licensee, Licensor or Agent and upon notification of expiration or termination of this License Agreement or, when Licensee ceases to require the manufacture of the Licensed Products, whichever is earlier, it will immediately cease manufacturing the Licensed Products and destroy or deliver to Licensee, as advised, any devices used to reproduce the Property of any 21 elements thereof. Notwithstanding the foregoing, Licensee acknowledges and agrees that any act of such manufacturer appointed by Licensee shall be deemed the acts of Licensee for all purposes and such manufacturer's failure to fully and properly account to Licensee shall not relieve Licensee of any liability resulting therefrom. 27. NOTICES: Notices by any Party to the other shall be given by telefax, with confirmed delivery, and by registered or certified mail, return receipt requested, or by other reputable overnight mail/delivery services (such as Federal Express or United Parcel Service) with proof of delivery, all charges prepaid. All statements, payments and notices hereunder shall be given at the respective addresses of the Parties as set forth on the first page of this Agreement unless written notice of a change of address is given. Notices shall be deemed given the date the notice is sent as provided above, except that notices of change of address shall be effective when received. Copies of all notices to Agent and JJPP shall be sent to Agent at 11777 Mississippi Avenue, Los Angeles, CA 90025, Attention: Business Affairs, Tel.: 310-477-8400, Fax: 310-477-5555; and to WonderWings at P. O. Box 823006, Dallas, TX 75382, Tel.: 972-235-4400, Fax: 972-235-9994, with a copy to Frederick Fierst, Esq., at Fierst & Pucci LLP, Suite 4, 64 Gothic Street, Northampton, MA 01060-3018, Tel.: 413-584-8067, Fax: 413-585-0787; and to Licensee at the address set forth in Schedule "A". 28. JURISDICTION; ATTORNEYS' FEES: This Agreement shall be governed by and construed in accordance with the laws of the State of California and the United States. It is hereby agreed that any matter arising under this Agreement (subject to the arbitration provisions hereof) and including, without limitation, any suit to enforce an award under the arbitration provisions hereof, must be finally adjudged or determined in any court or courts of the State of California or of the United States of America, in Los Angeles County, California, and the Parties hereto hereby submit generally, exclusively, irrevocably and unconditionally to the jurisdiction and venue of such courts and of any of them in respect of any such matter and consent to service of process by any means authorized by California law. In the event that any legal action or any other proceeding is commenced to enforce any provision of this Agreement or as a result of a breach, default or misrepresentation in connection with any provision of this Agreement, the successful or prevailing party shall be entitled, in addition to any other relief to which said party may be entitled, to recover actual attorneys' fees and costs incurred in such action or proceeding. 29. ENTIRE AGREEMENT: This Agreement (including Schedule "A," Schedule "B," Schedule "C", Exhibit "1" and Exhibit "2") constitutes the entire understanding between the Parties and shall not be modified or amended unless in writing signed by all Parties. By signing in the spaces provided below, the Parties have agreed to all of the terms and conditions contained in this Agreement and the attached Schedules and Exhibits 22 incorporated herein by reference as part of this Agreement. Subject to full execution of this Agreement by all Parties set forth below, this Agreement shall be effective upon the Effective Date first written above. PORCHLIGHT ENTERTAINMENT, INC. BY: /S/WILLIAM BAUMANN --------------------- WILLIAM T. BAUMANN ITS: EXECUTIVE VP, COO & CFO JAY JAY THE JET PLANE PRODUCTIONS, INC. BY: /S/WILLIAM BAUMANN ------------------ WILLIAM T. BAUMANN ITS: EXECUTIVE VP, COO & CFO KIDQUEST, INC. DBA WONDERWINGS.COM ENTERTAINMENT BY: /S/ DAVID MICHEL ---------------- ITS: CEO ACTION PRODUCTS INTERNATIONAL, INC. BY: /S/ RONALD S. KAPLAN -------------------- ITS: CEO 23 JAY JAY THE JET PLANE MERCHANDISE LICENSE AGREEMENT SCHEDULE "A" 1. LICENSED PRODUCTS: Licensed Products shall include only the following: (1) Wooden Sky-Track Adventure System consisting of Wooden Character Vehicles, Wooden Destination Play Boards, Wooden Buildings, 3-Dimensional Sky Track and Wooden Play Table components as defined below: Wooden Character Vehicles - Approximate size: 3-3.5" in length. The primary material from which these Character Vehicles will be constructed will be wood. Specifically, wood will be used for the fuselage and wings of the airplanes. Plastic will only be used for rendering character faces, and as needed for minimal minor trim that cannot be fabricated from wood. All of the Wooden Character Vehicles will be compatible with the Sky-Track Adventure System. Each may have additional features to be approved by Agent and Licensor on a case by case basis, such as implanted electronic components, which interact with other products in the Sky-Track Adventure System. Ultimately to include all 9 recurring character/vehicles, with a minimum of 5 different character/vehicle SKUs to be produced and marketed in the first year of the Initial Term, with the additional character/vehicles and new custom variations to be introduced by Licensee during the balance of the Initial Term. Wooden Destination Play Boards - Approximate size: 16x16" square or 16x32" square. The Wooden Destination Play Boards are to consist of flat wooden boards with full-color artwork. In addition, these will include 3-dimensional play elements to make up the "scenery" of the various story locations, and each will feature story-appropriate electronic and mechanical functions, to be approved by Agent and Licensor on a case by case basis, that will interact with the Wooden Character Vehicles. These 3-Dimensional "scenery" will be constructed of wood when feasible with a minimal amount of plastic materials for trim. Each of the Destination Play Boards will combine to create extended play surfaces. At least 5 initial SKUs of the Destination Play Boards will be produced and marketed in the first year of the Initial Term and will together make up the 48x32" play surface for use with the Play Table described below. Wooden Buildings - Size: Various but in scale with the Wooden Destination Play Boards. The Wooden Buildings will be made primarily of wood, with minimal plastic and metal decorative elements as necessary to achieve accurate and durable reproductions (for example, the "donut" atop the Donut Shop). The Buildings will be designed as replicas of buildings shown in the Jay Jay The Jet Plane television series, such as the Tarrytown Airport hangars and the Donut Shop and Hardware Store in Tarrytown village and will be sized in scale for use with the Wooden Destination Play Boards. A minimum of 6 initial SKUs of the Wooden Buildings will be produced and marketed in the first year of the Initial Term with the additional Buildings to be introduced by Licensee during the balance of the Initial Term. 24 3-Dimensional Sky Track - Size: Various but in scale with the Wooden Destination Play Boards. These will assemble to create 3-dimensional flight paths for the Wooden Character Vehicles to follow, to simulate the appearance of flight. As this system is intended to suggest imaginative flight it is necessary to fabricate these components out of a multiplicity of materials as approved by Agent and Licensor, including plastic provided use of such Sky Track is designed only for the Sky Track Adventure System. Wooden Play Table - Size: 48X32" square, 18-24" high. The Wooden Play Table is intended to serve as a surface for assembling the Destination Play Boards, Buildings, and Sky-Track into a complete play environment which demonstrates all of the features of the Sky-Track Adventure System. Materials are not yet determined, but will likely be wood, Formica, and/or composites, with metal hardware as approved by Agent and Licensor. Wooden Play Table to be produced and marketed during the first year of the Initial Term. Not to conflict with furniture items. (2) Die Cast Metal Vehicles as defined below: Approximate size: 2.5-3.5" in length. The vehicle body to be fabricated from die cast metal. Plastic will be used only for the chassis and wheels and for rendering character faces. Such design is consistent with industry standards for die cast metal vehicles, particularly those depicting characters. These will include free-moving or mechanically actuated wheels, propellers, and other elements as appropriate and approved by Agent and Licensor. Ultimately to include all nine recurring character/vehicles, with a minimum of 5 different character/vehicle SKUs to be produced and marketed during the first year of the Initial Term, with the additional character/vehicles and new custom variations to be introduced during the balance of the Initial Term. (3) Bead "Coasters" as defined below: Wooden bases with coated metal wire and diminimus plastic trim to depict Jay Jay The Jet Plane characters and sky elements (sun, clouds, etc.) moving through 3-dimensional space along rigid guide-wires. Ultimately 2-3 SKUs will be produced during the Initial Term at varying size/price points, with a minimum of 1 SKU to be produced and marketed during the first year of the Initial Term. (4) Character Carry-All as defined below: Carry case with individual, non-removable storage compartments to hold wooden or die-cast metal character vehicles as well as additional play elements from the Wooden Sky-Track Adventure System. May be constructed of vinyl, fabric, or a mixture thereof, in only 1 SKU to be produced and marketed during the first year of the Initial Term. Not to conflict with hand-held luggage or luggage on wheels. (5) Pilot Wings as defined below: Plastic "pilot" wings, which may be included with the Character Carry-All, Wooden Character Vehicles or with the other Licensed Products. Pilot Wings may not be sold separately. 2. LICENSED TERRITORY: United States, its territories and possessions and Canada. 3. DISTRIBUTION CHANNELS: 25 Licensee's rights are specifically limited to sales and distribution through the following retail channels of distribution: Specialty Toy Stores to include, without limitation, but by way of example of such category: Imaginarium, Right Start, Zany Brainy, FAO Schwarz, and Leaning Express; Airport Shops to include, without limitation, but by way of example of such category: WH Smith, Host Marriott and Paradies Shops; Book Stores to include, without limitation, but by way of example of such category: Barnes and Noble, Borders, Waldenbooks, B. Dalton, Books A Million and Independent "Mom and Pop" type Book/Gift Stores; Craft Stores to include, without limitation, but by way of example of such category: Michaels, Pearl Paint and Joanne's; Mid-Tier and Upper-Tier Department Stores such as JC Penney, Sears and May Co. and other similar Mid-Tier and Upper-Tier Department Stores; Museum Shops; and Catalogs including, without limitation: Lilly's Kids and J.C. Penney's catalogs, provided that all such catalogs sales and distribution are designed for and limited to the Territory granted herein. Additionally, QVC/Television Home Shopping, Internet Sales, Aviation Attractions, Rainforest Cafe outlets, Theme Parks such as Six Flags, Mass Market Retail Stores and Brand Name Discounters, such as Target, TJ Maxx, Marshall's, Ross Stores, Toys R Us and Kay Bee Toys shall be subject to Agent's written approval on a case by case basis. 4. LICENSED PERIOD: Initial Term: The period commencing on December 1, 2001 and expiring on December 31, 2004, subject to the full execution of this Agreement. Renewal Term: Provided that Licensee is fully performing its obligations as set forth herein and is not in breach of any of the terms and conditions of this Agreement, Licensee shall have the right to extend the Agreement for an additional one (1) year period (herein the "Renewal Term"), provided that, Licensee shall give written notice to Agent of its election to extend the Initial Term no later than ninety (90) days prior to the expiration of the Initial Term and further provided that Licensee shall pay an additional sum of Seventy Five Thousand Dollars ($75,000) as and for an additional Guaranteed Minimum Payment for the Renewal Term which such additional sum shall be payable in accordance with the Payment Schedule for the Guaranteed Minimum Payment for the Renewal Term set forth below. In the event that Licensee shall elect to extend the Initial Term for the Renewal Term in accordance with the provisions set forth herein, the Initial Term and Renewal Term shall be collectively referred to in this Agreement as the Licensed Period. 5. PAYMENT: GUARANTEED MINIMUM PAYMENT FOR THE INITIAL TERM: ONE HUNDRED THOUSAND DOLLARS ($100,000) PAYABLE AS AN ADVANCE ("ADVANCE") AS FOLLOWS: PAYMENT SCHEDULE FOR GUARANTEED MINIMUM PAYMENT/ADVANCE FOR THE INITIAL TERM: TWENTY FIVE THOUSAND DOLLARS ($25,000) due upon execution of the Agreement; 26 TWENTY FIVE THOUSAND DOLLARS ($25,000) due on or before June 30, 2002; FIFTEEN THOUSAND DOLLARS ($15,000) due on or before December 31, 2002 SEVENTEEN THOUSAND FIVE HUNDRED DOLLARS ($17,500) due on or before December 31, 2003; and SEVENTEEN THOUSAND FIVE HUNDRED DOLLARS ($17,500) due on or before September 30, 2004. GUARANTEED MINIMUM PAYMENT FOR THE RENEWAL TERM: SEVENTY FIVE THOUSAND DOLLARS ($75,000) PAYABLE AS AN ADVANCE FOR THE RENEWAL TERM AS FOLLOWS: PAYMENT SCHEDULE FOR THE ADDITIONAL GUARANTEED MINIMUM PAYMENT FOR THE RENEWAL TERM: THIRTY SEVEN THOUSAND FIVE HUNDRED DOLLARS ($37,500) due on January 1, 2005; and THIRTY SEVEN THOUSAND FIVE HUNDRED DOLLARS ($37,500) due on or before July 1, 2005. THE PARTIES ACKNOWLEDGE AND AGREE THAT THE ADDITIONAL GUARANTEED MINIMUM PAYMENT FOR THE RENEWAL TERM SHALL ONLY BE PAYABLE IN THE EVENT THAT LICENSEE SHALL ELECT TO EXTEND THE INITIAL TERM FOR THE RENEWAL TERM AS SET FORTH ABOVE. PERCENTAGE COMPENSATION/ROYALTY: Ten percent (10%) Domestic; or Twelve percent (12%) F.O.B. Hong Kong, as applicable. 6. MARKETING DATE AND DISTRIBUTION DATE: The Licensed Products shall be marketed and previewed at the 2002 Toy Fair held in New York on or before February 28, 2002 (the "Marketing Date") and distributed on or before September 30, 2002 (the "Distribution Date") for a Fall 2002 Launch. 7. EXCLUSIVITY: NON-EXCLUSIVE. Subject to the terms and conditions set forth in the Agreement to which this Schedule "A" is incorporated by reference and attached to and made a part thereof, Licensee shall have the non-exclusive right to manufacture, sell and distribute the Licensed Products (see "1" above) in the Licensed Territory (see "2" above) and in the designated Distribution Channels (see "3" above) during the Licensed Period (see "4" above) set forth in this Schedule "A". 8. SELL-OFF PERIOD: Ninety (90) days. 27 9. ADDRESS FOR NOTICES TO LICENSEE: Name: Action Products International, Inc. Address: 390 N. Orange Avenue, 21st Floor Orlando, Florida 32801 Tel.: (407) 481-8007 Fax: (407) 481-2781 Attn: Ron Kaplan 28 SCHEDULE "B" PROPERTY The name(s), design(s), artwork, logo(s), copyright(s) and trademark(s) appearing in the animated television series entitled "Jay Jay The Jet Plane" (herein the "Series"), including the following animated characters as they appear in said Series: Jay Jay Snuffy Old Oscar Tracy Savannah Big Jake Herky Revvin' Evan Tuffy 29 SCHEDULE "C" TRADEMARK AND LOGOS (TO BE USED ON ALL PRODUCT PACKAGING AND ADVERTISING) [PORCHLIGHT ENTERTAINMENT GRAPHIC OMITTED] [WINDERWINGS.COM ENTERTAINMENT GRAPHIC OMITTED] [MODERN CARTOONS GRAPHIC OMITTED] [JAY JAY THE JET PLANE GRAPHIC OMITTED] Trademark footnote: The mark set forth above, "Jay Jay The Jet Plane", is owned by KIDQUEST, INC., d/b/a WonderWings.com Entertainment which has granted to PorchLight Entertainment, Inc., as agent, the right to license such mark. 30 EXHIBIT "1" LICENSEE REPORT FORM (PAGE 1 OF 2) ROYALTY REPORT SUMMARY STATEMENT - -------------------------------------------------------------------------------- Licensee Name: - -------------------------------------------------------------------------------- Date: - -------------------------------------------------------------------------------- Agreement Number: - -------------------------------------------------------------------------------- Property: - -------------------------------------------------------------------------------- Quarter (circle one) 1st, 2nd, 3rd, 4th, 200[ ] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PRE-PAID ADVANCE (IF APPLICABLE): $[ ] Total Net Sales Dollars: $[ ] (from Detailed Royalty Report) Royalty Rate: (from Detailed Royalty Report) [ %] TOTAL ROYALTY AMOUNT DUE: $[ ] (from Detailed Royalty Report) LESS UNRECOUPED BALANCE OF ADVANCE FROM PRIOR STATEMENT (IF APPLICABLE): $[ ] - -------------------------------------------------------------------------------- BALANCE DUE/(UNRECOUPED BALANCE): $[ ] - -------------------------------------------------------------------------------- Please make payments by check or wire transfer to: Jay Jay The Jet Plane Productions, Inc. Certification: We have examined this report and certify it to be a true and accurate statement as reflected by our books and records for the quarter concerned. Authorized Licensee Signature: --------------------------- Printed Licensee Signature/Title: ------------------------ Date Signed: ---------------------- 31 LICENSEE REPORT FORM (PAGE 2 OF 2) DETAILED ROYALTY REPORT

- ------------------------------------------------------------------------------------------------------------------------------------ LICENSEE NAME: - ------------------------------------------------------------------------------------------------------------------------------------ DATE: - ------------------------------------------------------------------------------------------------------------------------------------ AGREEMENT NUMBER: - ------------------------------------------------------------------------------------------------------------------------------------ PROPERTY: - ------------------------------------------------------------------------------------------------------------------------------------ PERIOD COVERED: 1ST QTR/2ND QTR/3RD QTR/4TH QTR 200[ ] (PLEASE CIRCLE ONE) FROM: TO: - ------------------------------------------------------------------------------------------------------------------------------------ TERRITORY: (PLEASE LIST ALL COUNTRIES WITHIN THE TERRITORY SEPARATELY) - ------------------------------------------------------------------------------------------------------------------------------------ LICENSEE INFORMATION - ------------------------------------------------------------------------------------------------------------------------------------ ADDRESS: - ------------------------------------------------------------------------------------------------------------------------------------ CITY/STATE/ZIP: - ------------------------------------------------------------------------------------------------------------------------------------ TELEPHONE NUMBER: - ------------------------------------------------------------------------------------------------------------------------------------ FAX NUMBER: - ------------------------------------------------------------------------------------------------------------------------------------ ATTENTION: - ------------------------------------------------------------------------------------------------------------------------------------ LICENSED PRODUCTS SKU Number ------------------------------------------------------------------------------------------------- Description Total Units Total Units Gross Sales Allowable Net Sales Manufactured Ship/Distributed (Units) Returns* (Units) During Qtr During Qtr (Units) - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ TOTAL AMOUNT ----------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------------------ LICENSEE NAME: - ------------------------------------------------------------------------------------------------------------------------------------ DATE: - ------------------------------------------------------------------------------------------------------------------------------------ AGREEMENT NUMBER: - ------------------------------------------------------------------------------------------------------------------------------------ PROPERTY: - ------------------------------------------------------------------------------------------------------------------------------------ PERIOD COVERED: 1ST QTR/2ND QTR/3RD QTR/4TH QTR 200[ ] (PLEASE CIRCLE ONE) FROM: TO: - ------------------------------------------------------------------------------------------------------------------------------------ TERRITORY: (PLEASE LIST ALL COUNTRIES WITHIN THE TERRITORY SEPARATELY) - ------------------------------------------------------------------------------------------------------------------------------------ LICENSEE INFORMATION - ------------------------------------------------------------------------------------------------------------------------------------ ADDRESS: - ------------------------------------------------------------------------------------------------------------------------------------ CITY/STATE/ZIP: - ------------------------------------------------------------------------------------------------------------------------------------ TELEPHONE NUMBER: - ------------------------------------------------------------------------------------------------------------------------------------ FAX NUMBER: - ------------------------------------------------------------------------------------------------------------------------------------ ATTENTION: - ------------------------------------------------------------------------------------------------------------------------------------ LICENSED PRODUCTS SKU Number ------------------------------------------------------------------------------------------------------------------------- Unit Selling Gross Sales Allowable Net Sales Royalty Royalty Price ($) Returns* ($) Rate Amount Due ($) ($) (%) ($) - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL AMOUNT ----------------------------------------------------------------------------------------------------------------

* Please provide copies of relevant invoices for verification of allowable returns, if applicable. EXHIBIT "2" MANUFACTURER'S AGREEMENT Dated: ------------------------------ To: PorchLight Entertainment, Inc. 11777 Mississippi Avenue Los Angeles, CA 90025 Re: Merchandising License Agreement dated __________, 200_ between PORCHLIGHT ENTERTAINMENT, INC. ("Agent" or "PorchLight"), JAY JAY THE JET PLANE PRODUCTIONS, INC. ("JJJP"), and KIDQUEST, INC., dba WonderWings.com Entertainment ("WonderWings") on the one hand, and ___________________________________________ ("Licensee"), on the other hand. This letter will serve as notice to you that we, ______________________________ (the "Manufacturer"), located at: ________________________________________, have been engaged by the above-referenced Licensee to manufacture _______________________________________________ (the "Licensed Products"), utilizing the Jay Jay The Jet Plane(TM) Property (the "Property"), in accordance with the terms and conditions of the Merchandising License Agreement referenced above (herein referred to as the "Agreement") and we are cognizant of, and agree to the terms and conditions set forth in said Agreement as they relate to our function as the Manufacturer. We hereby acknowledge WonderWings' trademarks in and to the Property and the copyrights of JJJP and WonderWings (JJJP and WonderWings shall be referred to collectively herein as the "Licensor") and Licensor's respective rights and ownership thereof and the right of Agent to license said Property. We agree that we will not claim any rights or ownership in and to the Property or in any parts thereof and we will not use any trademark, copyright, servicemarks or trade name which is identical to or confusingly similar to the Property or any part thereof. Further, we acknowledge and agree that all copyrights in any literary, artistic or musical work made by us or on our behalf for the purposes of manufacturing the Licensed Products which incorporate the Property or any part thereof, shall inure to the benefit of Licensor and we shall take such steps that may be necessary to assign all such copyrights to Licensor. We understand and agree that the Manufacturer has no right to use the Property and the licensed material, trademarks, copyrights or servicemarks thereof except as specifically authorized in writing by Licensee, Licensor or Agent in connection with the manufacture of the Licensed Products, and Manufacturer may not sublicense, subcontract or in any way transfer the rights hereunder or dispose of, sell or distribute the Licensed Products or licensed material to any person or entity other than Licensee. Manufacturer further acknowledges and agrees that upon notice from Licensee, Licensor or Agent of expiration or termination of the aforementioned Agreement or, when Licensee ceases to require the manufacture of the Licensed Products, which ever is earlier, Manufacturer will deliver to Licensee, or if otherwise advised, to Licensor or Agent, any artwork, molds, patterns, plates, designs or other devices used to reproduce the name or any likeness, design or other elements of the Property and we will immediately cease any further manufacture of Licensed Products or any part thereof. We agree to supply Agent, at Agent's request, but not more frequently than quarterly, with a statement detailing all items manufactured and/or supplied to Licensee in connection with the Property and/or the Licensed Products and we hereby acknowledge that Agent and/or Licensor, or their representative(s) shall have the right to examine the books and records of Manufacturer as they relate to the Licensed Products as well as the right of Agent and/or Licensor, or their representative(s) to visit the plant or plants where the Licensed Products are manufactured and where the containers, packaging material and the like are printed or produced in order to determine whether the Manufacturer and Licensee are in compliance with the terms herein and in the aforementioned Agreement. We further agree that we will look solely to Licensee for any payments and/or compensation or other sums with respect to the manufacture, shipment and/or supply of the Licensed Products or any part thereof and that we will have no claim against Licensor or Agent with respect to such payments or any other matters in connection with the Licensed Products or the Property. We understand that our engagement as Manufacturer for the Licensee is subject to our agreement to the foregoing terms and Agent and/or Licensor shall be entitled to invoke any remedy permitted by law for violation of this Manufacturer's Agreement. Manufacturer's appointment shall also be subject to Licensor's and Agent's approval which will not be deemed granted unless and until this Manufacturer's Agreement is executed below by all parties. Read and Agreed to: By: ------------------------- Manufacturer By: ------------------------- Licensee Approved: By: and ---------------------------, -------------------------- Licensor By: --------------------------- Agent EX-10.10 4 g81473exv10w10.txt EX-10.10 TUCHMAN SEPARATION AGREEMENT EXHIBIT 10.10 SEPARATION AGREEMENT This Separation Agreement ("Agreement") is made and entered into by and among Action Products International, Inc. ("APII"), a Florida corporation, with its principal offices at 390 North Orange Avenue, Suite 2185, Orlando, Florida 32801 and Ronald E. Tuchman ("Tuchman"), an individual residing at 566 Wayne Drive, River Vale, New Jersey 07675. WHEREAS, Tuchman accepted employment as President and Chief Operating Officer of APII under an Employment Agreement with an effective date of January 29, 2001, as amended, including the Amendment to Employment Agreement dated as of July 1, 2002 (the "Employment Agreement"), and subsequently began employment with APII; and WHEREAS, pursuant to Section 3(c) of the Employment Agreement, APII agreed to grant Tuchman the right to purchase up to 130,000 shares of APII's common stock, par value $0.001 per share, pursuant to, and subject to the terms of, a Stock Option Agreement dated February, 2001 (the "Non-Plan Stock Option Agreement"); and WHEREAS, APII granted to Tuchman the right to purchase up to 70,000 shares of APII's common stock, par value $0.001 per share, under the 1996 Stock Option Plan (the "Plan Stock Option Agreement") (the Non-Plan Stock Option Agreement and Plan Stock Option Agreement are collectively referred to herein as the "Stock Option Agreements"); and WHEREAS, pursuant to Section 4 of the Employment Agreement, APII and Tuchman executed a Subscription Agreement (the "Subscription Agreement") dated February 2001, under which Tuchman acquired 114,286 shares of APII's common stock, par value $0.001 per share from APII at a purchase price of $1.75 per share for an aggregate purchase price of $200,000; and WHEREAS, APII and Tuchman desire, among other matters contained herein, to terminate both the employment relationship and the Employment Agreement, upon mutually acceptable terms and to settle any and all differences, claims and potential claims arising out of, among other matters, (i) Tuchman's employment and termination of employment with APII, (ii) termination of the Employment Agreement, (iii) termination of APII's obligations under the Stock Option Agreements and any other options or warrants issued or granted to Tuchman, and (iv) termination of the parties executory obligations under the Subscription Agreement. NOW THEREFORE, in consideration of the mutual promises and other consideration contained herein and intending to be legally bound, the parties agree as follows: 1. SEPARATION. (A) Tuchman hereby resigns, effective on the date hereof, from any and all positions, officerships, and directorships he holds with APII or any of its subsidiaries or affiliates. Simultaneous with the execution and delivery hereof, Tuchman has delivered to APII his written resignation in the form attached hereto as Exhibit "A". (B) Tuchman has returned to APII any of the following that he has in his possession: records and business documents, whether on computer or hard copy, and other materials (including but not limited to computer disks and tapes, computer programs and software, office keys, APII credit cards, business cards (which business cards Tuchman has either returned to API or destroyed), correspondence, files, customer lists, technical information, customer information, pricing information, sources of supply, vendor information, business strategies, sales and purchasing records and copies thereof) (collectively, the "APII Records") provided by APII and/or its predecessors, subsidiaries or affiliates and/or obtained as a result of his employment with, or in any of his capacities with, or rendering of services for, APII and/or its predecessors, subsidiaries or affiliates, and/or created by Tuchman while employed by and/or rendering services to or for APII and/or its predecessors, subsidiaries or affiliates. Tuchman acknowledges that all such APII Records are the property of APII. In addition, Tuchman shall promptly return in good condition, normal wear and tear excepted, any and all computer equipment and accessories belonging to and/or leased by APII and/or its predecessors, subsidiaries or affiliates. 2. TERMINATION OF EMPLOYMENT AGREEMENT. The parties hereby mutually agree that the Employment Agreement is terminated in its entirety as of the date of this Agreement, and that Tuchman waives any claim he has or may have under the Employment Agreement for any payment of salary or accrued vacation time, receipt of other benefits, reimbursement for any expenses or automobile allowance; provided, however, that nothing herein shall restrict Tuchman's right to elect to continue health benefits in accordance with the Consolidated Omnibus Budget Reconciliation Act of 1986 ("COBRA"). 3. TERMINATION OF STOCK OPTION AGREEMENTS. The parties hereby mutually agree that the Stock Option Agreements, and any other rights to acquire any capital stock of APII issued or granted, or discussed or contemplated, to Tuchman, are terminated in their entirety as of the date of this Agreement. 4. TERMINATION OF SUBSCRIPTION AGREEMENT. The parties hereby mutually agree that Articles IV and V of the Subscription Agreement are terminated as of the date of this Agreement. 5. RIGHTS OF INTELLECTUAL PROPERTY. Tuchman acknowledges and agrees that all patents, licenses, copyrights, tradenames, trademarks, service marks, planning, marketing and/or creative policies, advertising campaigns, media campaigns, and budgets, practices, concepts, strategies, and methods of operation (excluding such budgets, practices, concepts, strategies, and methods of operation that are standard practices in the toy industries), financial or business projections, designs, logos, slogans and business plans developed or created by Tuchman in the course and scope of his employment with APII and/or any of its subsidiaries or affiliates, either individually or in collaboration with others, was and is deemed works for hire and the sole and absolute property of APII. Tuchman agrees that, at APII's request and expense, he will take all steps necessary to secure the rights thereto to APII by patent, copyright or otherwise. 6. REPRESENTATIONS AND WARRANTIES. (A) As an inducement for APII to enter into this Agreement, Tuchman represents and warrants to APII that (i) during his employment with APII, he has not committed material breach of any restrictive covenant in Section 10 of the Employment Agreement, (ii) that he has not assigned or attempted to assign any right or interest in any claim against APII or any of its affiliates or subsidiaries to any other person and that no other person has an interest in such rights 2 or claims, whether such claim arises under the Employment Agreement, Stock Option Agreements, Subscription Agreement, or otherwise, and he has not used or disclosed his knowledge of APII's business affairs to aide others in competition with APII. (B) As an inducement for Tuchman to enter into this Agreement, APII represents and warrants to Tuchman that (i) APII is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Florida; (ii) APII has the requisite corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder; (iii) the execution, delivery and performance of this Agreement by APII and the consummation of the transactions contemplated hereby have been duly and validly authorized by all requisite corporate action, and no other corporate proceedings on the part of APII is necessary to authorize the execution, delivery or performance of this Agreement; and (iv) APII has adequate capital under the Florida Business Corporation Act to purchase the Redemption Shares under Paragraph 7. 7. STOCK REPURCHASE. Provided Tuchman has not revoked this Agreement, and has delivered written confirmation that he has not revoked this Agreement, pursuant to Paragraph 17(c) herein, on the seventh (7th) business day after the date of this Agreement (the "Redemption Date"), APII shall purchase from Tuchman, and Tuchman sell to APII, 114,286 shares of APII common stock, par value $0.001 per share, which Tuchman acquired from APII pursuant to the Subscription Agreement, (the "Redemption Shares") for a total purchase price of One Hundred Twenty Eight Thousand Dollars ($128,000.00) (the "Redemption Price"). On the Redemption Date, (i) Tuchman shall deliver to APII the certificate(s) evidencing the Redemption Shares, with medallion guaranteed stock powers, endorsed in blank, which, Tuchman represents and warrants to APII are free and clear of any liens or claims and, and (ii) APII shall deliver to Tuchman the Redemption Price by wire transfer to such account as designated by Tuchman. 8. NON-DISPARAGEMENT. (A) Tuchman shall not communicate, directly or indirectly, any negative or disparaging comments or information about APII or any of the current officers, directors, managers, supervisors, executives, employees or representatives of APII ("APII Agents") or any of APII's subsidiaries and affiliates concerning the reputation or status of APII's or APII's Agents' professional abilities or APII's, or any of APII's subsidiary's or affiliate's business or financial condition. In addition, Tuchman shall inform his affiliates, agents and representatives ("Tuchman Agents") to comply with these same terms with respect to APII and the APII Agents, and shall use reasonable efforts to cause them to comply with such terms, where he has actual knowledge of their failure to do so." (B) APII shall not communicate, directly or indirectly, any negative or disparaging comments or information about Tuchman or any of the Tuchman Agents concerning the reputation or status of Tuchman's or the Tuchman Agents' professional abilities or the business or financial condition of any of Tuchman, the Tuchman Agents, or any business in which Tuchman is currently, or in the future, involved. In addition, APII shall inform the APII Agents to comply with these same terms with respect to Tuchman, the Tuchman Agents, and any other business in which Tuchman is involved, and shall use reasonable efforts to cause them to comply with such terms, where APII has actual knowledge of their failure to do so." 3 (C) Notwithstanding the foregoing, nothing contained in subparagraphs (a) and (b) immediately preceding shall be applicable with respect to any statements made by a party, where compelled by law to make any such statements, provided that such statements are true." (D) In addition to all other remedies, any party that has been damaged by any statements prohibited by the provisions of this Paragraph 8, shall be entitled to a temporary and permanent injunction without the necessity of showing any actual damage, or posting bond. 9. CONFIDENTIALITY OF SEPARATION AGREEMENT. (A) Tuchman agrees not to disclose to anyone, either directly or indirectly, any information whatsoever regarding the existence or substance of this Agreement or the matters which have resulted in it, including those pertaining to Tuchman's separation from APII. (B) APII agrees not to disclose to anyone, either directly or indirectly, any information whatsoever regarding the existence or substance of this Agreement or the matters which have resulted in it, including those pertaining to Tuchman's separation from APII. If contacted by an outside party, APII will use its best efforts to have all such inquiries referred to Ronald S. Kaplan (APII's Chief Executive Officer), or any successor Chief Executive Officer of APII if Mr. Kaplan is not available, who shall be instructed to respond that Tuchman's termination was by mutual agreement and on an amicable basis and to confirm Tuchman's position and period of employment. (C) If either party is requested or becomes legally compelled or is required by any law, regulation or order, or by a regulatory body to make any disclosure that is prohibited or otherwise constrained by this Paragraph 9, such party will provide the other party with prompt notice of such request so that it may seek an appropriate protective order or other appropriate remedy. Subject to the foregoing, such party may furnish that portion (and only that portion) of such information that, in the written opinion of its counsel, the other party is legally compelled or is otherwise required to disclose. For purposes of APII's public disclosure obligations under Federal and state securities laws, the Rules and Regulation of the Securities and Exchange Commission and the Nasdaq Stock Market, APII may disclose such information about this Agreement as, in the opinion of counsel for APII, is necessary to comply with such laws, rules and regulations. 10. TUCHMAN'S RELEASE OF ALL CLAIMS. Tuchman, on behalf of himself, his agents, executors, legatees, devisees, administrators, successors, and assigns, does hereby irrevocably, forever and unconditionally release and forever discharge (i) APII, and (ii) each of its current executive officers and directors, and (iii) each of its past, present and future shareholders, agents, directors, officers, executives, employees, representatives, attorneys in each of their capacity as such, and (iv) their predecessors, successors, affiliates, insurers, heirs, executors, administrators and assigns, and all persons acting by, through, under or in concert with any of them (collectively referred to herein as the "APII Released Parties"), of and from any and all actions, causes of action, suits, debts, judgments, charges and expenses (including attorneys' and paralegal fees and costs at all levels of dispute resolution), of any nature whatsoever, asserted or unasserted, known or unknown, ("Claims"), which Tuchman ever had, now has, or hereafter may have against any of the APII Released Parties; including, without limitation, any Claims in any way arising out of or 4 related to Tuchman's employment and/or other capacity and/or service as a director and/or otherwise with APII and/or any of its subsidiary and/or affiliated entities and/or the termination of his employment and/or other capacities and/or services with APII and/or its subsidiary and affiliated entities, regardless of whether any or all of such Claims arises under any state, federal or foreign statute, ordinance, regulation, order or common law. The Claims released by Tuchman include, but are not limited to, those under the Age Discrimination in Employment Act ("ADEA"), 29 U.S.C. Section 621 et seq.; Title VII of the Civil Rights Act of 1964 ("Title VII"), 42 U.S.C. Section 2000e et seq.; the Americans with Disabilities Act of 1990 ("ADA") 42 U.S.C. Section 12101 et seq.; the Family and Medical Leave Act of 1993 ("FMLA"), 29 U.S.C. Section 2601 et seq.; and the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. Section 1001 et seq. and under any state law of a similar nature; and as any or all of the foregoing are or may be amended, or any other federal, state local or foreign statute, rule or ordinance and any other claims in law or equity. In further expansion of the foregoing releases, Tuchman releases the APII Released Parties of and from any and all Claims based on constructive discharge, express, implied or quasi-contract, and breach of the implied covenant of good faith and fair dealing. In still further expansion of the foregoing releases, Tuchman releases the APII Released Parties of and from any and all Claims for fraud of any kind. Expanding the foregoing releases further still, Tuchman releases the APII Released Parties of and from any and all Claims for wrongful discharge of any kind (including in violation of public policy and constructive discharge), infliction of emotional distress, whether intentional or negligent, defamation, negligence, conspiracy, any and all other common law torts and discrimination on any basis prohibited by statute, public policy or otherwise. 11. APII'S RELEASE OF ALL CLAIMS. APII, on behalf of itself and its subsidiaries, successors and assigns, does hereby irrevocably, forever and unconditionally release and forever discharge Tuchman and each of his successors, heirs, executors, administrators and assigns, and all persons acting by, through, under or in concert with any of them (collectively referred to herein as the "Tuchman Released Parties"), of and from any and all Claims, which APII ever had, now has, or hereafter may have against any of the Tuchman Released Parties; including, without limitation, any Claims in any way arising out of or related to Tuchman's employment and/or other capacity and/or service as a director and/or otherwise with APII and/or any of its subsidiary and/or affiliated entities and/or the termination of his employment and/or other capacities and/or services with APII and/or its subsidiary and affiliated entities, regardless of whether any or all of such Claims arises under any state, federal or foreign statute, ordinance, regulation, order or common law. In still further expansion of the foregoing releases, APII releases the Tuchman Released Parties of and from any and all Claims for fraud of any kind. 12. CLAIMS RELEASED CONSTRUED BROADLY. Tuchman and APII intend that the provisions of this Agreement regarding the Claims being released by the parties under the provisions of this Agreement shall be construed as broadly as possible. However, nothing contained in this Agreement is intended to waive any claims or rights based on this Agreement or a breach of this Agreement, or based on conduct or any event that occurs after the effective date of this Agreement. 13. ASSUMPTION OF RISK OF CHANGE IN FACTS. Each of the parties understands that the facts under which either of them gives this release herein may prove to be different than now known or 5 believed by him or it, and each of them accepts and assumes the risk thereof and agrees that the party's respective release shall remain in full force and effect and not subject to modification, termination or rescission by reason of any difference in facts. 14. COVENANT NOT TO SUE. (A) Neither Tuchman nor any person or entity on Tuchman's behalf has or shall commence, maintain or prosecute any lawsuit, complaint, action or proceeding of any kind against any of the APII Released Parties with respect to any act, omission or other matter in connection with any of the Claims released under Paragraph 10 occurring up to and including the effective date of this Agreement. The foregoing notwithstanding, this covenant not to sue does not extend to any claim for breach of this Agreement. (B) Neither APII nor any person or entity on APII's behalf has or shall commence, maintain or prosecute any lawsuit, complaint, action or proceeding of any kind against any of the Tuchman Released Parties with respect to any act, omission or other matter in connection with any of the Claims released under Paragraph 11 occurring up to and including the effective date of this Agreement. The foregoing notwithstanding, this covenant not to sue does not extend to any claim for breach of this Agreement. 15. RESTRICTION ON COMPETING ACTIVITIES. (A) Tuchman shall not, until the first anniversary of the date of this Agreement, directly or indirectly, alone or in conjunction with others, through subsidiaries or affiliates, joint ventures or other business arrangements: (i) develop, aid, consult, own, manage, operate, join, control, finance or participate in the ownership, management, operation, control or financing of, or be connected as an officer, director, employee, consultant or otherwise with, any business or enterprise located anywhere in the world, engaged in any business that designs, develops, markets, manufactures, distributes or sells anything substantially similar or directly competitive to the following products, as such products are described in the attached catalogs: - I Dig Excavation Kits -- using toys pre-embedded in sand-like, clay, plaster or other material and sold as an activity toy/kit for excavating; - Jay Jay the Jet Plane - a wooden play system that includes airplanes, buildings and accessories, used in conjunction with a wooden play system centered on airplanes; or other toys using the Jay Jay the Jet Plane brand; - Space Voyagers, Ocean Voyagers, et al, - a line of authentic, educational non-violent action figures, vehicles and accessories based on science and nature exploration activities; - EZ Build - wooden construction projects for children; - Play & Store - a line of packaged toys marketing the convenience of container packaging as the unique selling proposition, where the container is the common value added; - Climbatron - remote control or mechanical (including wind-up) toys that scale vertical surfaces; and 6 - Drop Zone - parachute toys using parachute material. Nothing under this Section 15(a)(i) shall prohibit Tuchman from employment (as an employee, consultant or otherwise) or being a shareholder or director with any retailer that currently carries any product that is similar or directly competitive to the APII products set forth on the list above. (ii) solicit any officers or employees of APII to terminate their relationships with or to take any action that would have a material adverse effect on the business of APII; (iii) induce or attempt to induce any customers, suppliers or distributors of APII to terminate their relationships with or to take any action that would have a material adverse effect on the business of APII; (iv) collude with Pablo Savetman and/or Timothy Young, former APII employees, in the inducement to profit from advantageous and privileged access to APII confidential information during employment; or (v) contact employees of APII (other than Ronald S. Kaplan (or any successor chief executive officer) or other employees solely for administrative purposes), during business hours, for any reason. It is expressly agreed that the limitation under Paragraph 15(a)(i) is not intended to restrict or prohibit the ownership by Tuchman of stock or other securities of a publicly-held corporation in which the Tuchman does not possess beneficial ownership of five (5%) percent or more of the voting capital stock of corporation or participate in any management or advisory capacity. (B) In the event that any of the provisions contained in this Paragraph 15 relating to the period of restriction or the scope of such restrictions shall be determined by a court of competent jurisdiction to exceed the maximum periods of time which such court determines to be enforceable, or to exceed the enforceable scope of such provisions, the period or scope of such restriction, as the case may be, shall, for purposes of this Agreement, be deemed to be the maximum time period or maximum scope which such court would deem valid and enforceable; and (C) In addition to all other remedies, APII shall be entitled to a temporary and permanent injunction without the necessity of showing any actual damage and or a decree for specific performance of this Paragraph 15. 16. CONFIDENTIAL INFORMATION. During Tuchman's employment and other service with APII and/or its subsidiary or affiliated entities, he has had access to confidential and other information proprietary to APII and/or its subsidiary or affiliated entities, including but not limited to trade secrets, operations, customer information, customer prospects, vendor information, sources of supply, strategic plans, inventions, business plans, formulas processes, designs, methods, techniques, know-how, systems, software programs, works of authorship, plans, proposals, information about products including product costs or sale prices, manufacturer and supplier lists, compensation information, and other proprietary information (the "Confidential Information"). Tuchman has not and shall not at any time disclose to any person or entity the Confidential Information acquired during or in connection with his employment with or in rendering services to 7 APII and/or any of its subsidiaries and affiliates without prior written permission from APII. Tuchman shall keep secret the Confidential Information and all matters that have been entrusted to him and shall not use or attempt to use any of the Confidential Information in any manner that may injure or cause loss or may be calculated to injure or cause loss, whether directly or indirectly, to APII and/or its subsidiaries and affiliates. The above restrictions shall not apply to: (i) information that at the time of disclosure is in the public domain through no fault of Tuchman; (ii) information received from a third party outside of APII that was disclosed without a breach of any confidentiality obligation; (iii) information approved for release by written authorization of APII; (iv) information that may be required to be disclosed by law or by an order of any court, agency or proceeding, provided that Tuchman shall provide APII with notice of any such required disclosure once Tuchman has knowledge of it and will provide all reasonable assistance requested by APII to obtain an appropriate protective order with respect to such information; or (v) information known by Tuchman prior to the commencement of his relationship with APII or developed independently by Tuchman prior to the period of his relationship with APII, provided that no Confidential Information is used by Tuchman. 17. KNOWING AND VOLUNTARY AGREEMENT. (A) Tuchman acknowledges that he has carefully read and understands all of the provisions and effects of this Agreement; that he is voluntarily and knowingly entering into this Agreement free of coercion or duress; and that in agreeing to sign this Agreement, he has not, except for representations, promises, statements, or explanations made herein or in an exhibit attached hereto, relied on any representations, promises, agreements, statements or explanations made by APII or its attorneys concerning the terms or effects of this Agreement in connection with his decisions to execute the same. (B) TUCHMAN REPRESENTS AND WARRANTS THAT HE HAS HAD A FULL AND COMPLETE OPPORTUNITY TO REVIEW THIS AGREEMENT AND THAT HE HAS BEEN STRONGLY ADVISED TO SEEK LEGAL COUNSEL PRIOR TO SIGNING THIS AGREEMENT. TUCHMAN ACKNOWLEDGES THAT HE HAS THE RIGHT TO CONSIDER THIS AGREEMENT FOR TWENTY-ONE (21) DAYS PRIOR TO SIGNING AND RETURNING IT TO RONALD S. KAPLAN, CHIEF EXECUTIVE OFFICER, ACTION PRODUCTS INTERNATIONAL, INC., 390 NORTH ORANGE AVENUE, SUITE 2185, ORLANDO, FLORIDA 32801. TUCHMAN REPRESENTS THAT, IF HE SIGNED THIS AGREEMENT PRIOR TO THE EXPIRATION OF THE TWENTY-ONE (21) DAY PERIOD, HE HAS FREELY AND VOLUNTARILY WAIVED HIS RIGHT TO CONSIDER THIS AGREEMENT FOR SUCH PERIOD. (C) TUCHMAN ALSO ACKNOWLEDGES THAT HE IS AWARE OF AND HAS BEEN ADVISED OF HIS RIGHT TO REVOKE THIS AGREEMENT FOR A PERIOD OF SEVEN (7) DAYS AFTER HE SIGNS THIS AGREEMENT BY NOTIFYING, IN WRITING, RONALD S. KAPLAN, BY FACSIMILE TO (419) 781-3805, BY 5 P.M., NEW YORK TIME, ON OR BEFORE THE SEVENTH (7TH) DAY AFTER HE SIGNS AND RETURNS THE AGREEMENT. (D) THIS AGREEMENT WILL NOT BECOME EFFECTIVE UNTIL THE SEVEN-DAY REVOCATION PERIOD HAS EXPIRED AND TUCHMAN HAS NOT OTHERWISE REVOKED THIS AGREEMENT IN ACCORDANCE 8 WITH PARAGRAPH 17(C). APII SHALL HAVE NO OBLIGATIONS UNDER THIS AGREEMENT UNTIL THIS AGREEMENT HAS BECOME EFFECTIVE. 18. APPLICABLE LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Florida, without regard for its conflicts of laws principles. 19. INDEMNIFICATION. (A) DIRECTORS AND OFFICERS INDEMNITY. APII shall, to the extent not covered by its directors' and officers' insurance policy then in effect, and to the full extent permitted by law and by APII's articles of incorporation and by-laws, indemnify Tuchman and hold him harmless for any acts or decisions made by him while performing his duties as a director, officer and employee, during the term of his employment and services as a director of APII; provided that Tuchman acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of APII and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. (B) INDEMNIFICATION OF APII. (i) Tuchman agrees to indemnify, defend and hold harmless APII and its shareholders, officers, directors, affiliates, agents and employees (each an "APII Indemnified Party") from and against and in respect of any and all losses, damages, claims, liabilities, actions, suits, proceedings and costs and expenses of defense thereof, including reasonable attorneys' fees (a "Loss"), suffered or incurred by any such party by reason of or arising out of any breach of any representation, warranty, covenant or agreement of Tuchman set forth in this Agreement. (ii) An APII Indemnified Party shall give to Tuchman prompt written notice of any claim, suit or demand which such APII Indemnified Party believes will give rise to a claim for indemnification under Paragraph 19(b)(i); provided, however, that the failure of such APII Indemnified Party to give such prompt written notice shall not affect the liability of Tuchman hereunder, except to the extent that the rights of Tuchman to defend himself or to cure or mitigate the damages are actually prejudiced thereby. Thereafter, such APII Indemnified Party shall furnish to Tuchman, in reasonable detail, such information as it may have with respect to such claim, action, suit or proceeding, including copies of any summons, complaint or other pleading which may have been served upon it or any written claim, demand, invoice, billing or other document evidencing or asserting the same. Provided Tuchman, within ten (10) days after receipt of such written notice from such APII Indemnified Party, shall acknowledge in writing to such APII Indemnified Party, Tuchman's assumption of responsibility for defense and indemnification with respect to such claim, action, suit or proceeding, Tuchman shall have the right to assume defense of such claim, action, suit or proceedings through counsel selected by Tuchman at Tuchman's expense, and to contest or compromise such claim, action, suit or proceeding. Upon such assumption of defense by Tuchman, such APII Indemnified Party shall cooperate with Tuchman in Tuchman's conduct of such defense to the extent reasonably requested by Tuchman and at Tuchman's expense. So long as Tuchman is defending such claim, action, suit or proceeding, such APII Indemnified Party shall not settle or compromise the same without Tuchman's prior written consent, which consent shall not be unreasonably withheld. Without the 9 prior written consent of APII and such APII Indemnified Party, Tuchman shall not be entitled to settle any claim, action, suit or proceedings the defense of which has been assumed by Tuchman if such settlement might have a material adverse effect or impose any material condition or limitation on the business, operations, prospects or condition (financial or otherwise) conducted by APII. (C) INDEMNIFICATION OF TUCHMAN. (i) APII agrees to indemnify, defend and hold harmless Tuchman and his successors, heirs and assigns (each a "Tuchman Indemnified Party") from and against and in respect of any and all Losses suffered or incurred by any such party by reason of or arising out of any breach of any representation, warranty, covenant or agreement of APII set forth in this Agreement. (ii) A Tuchman Indemnified Party shall give to APII prompt written notice of any claim, suit or demand which such Tuchman Indemnified Party believes will give rise to a claim for indemnification under Paragraph 19(c)(i); provided, however, that the failure of such Tuchman Indemnified Party to give such prompt written notice shall not affect the liability of APII hereunder, except to the extent that the rights of APII to defend itself or to cure or mitigate the damages are actually prejudiced thereby. Thereafter, such Tuchman Indemnified Party shall furnish to APII, in reasonable detail, such information as it may have with respect to such claim, action, suit or proceeding, including copies of any summons, complaint or other pleading which may have been served upon it or any written claim, demand, invoice, billing or other document evidencing or asserting the same. Provided APII, within ten (10) days after receipt of such written notice from such Tuchman Indemnified Party, shall acknowledge in writing to such Tuchman Indemnified Party APII's assumption of responsibility for defense and indemnification with respect to such claim, action, suit or proceeding, APII shall have the right to assume defense of such claim, action, suit or proceedings through counsel selected by APII at APII's expense, and to contest or compromise such claim, action, suit or proceeding. Upon such assumption of defense by APII, such Tuchman Indemnified Party shall cooperate with APII in APII's conduct of such defense to the extent reasonably requested by APII and at APII's expense. So long as APII is defending such claim, action, suit or proceeding, such Tuchman Indemnified Party shall not settle or compromise the same without APII's prior written consent which consent shall not be unreasonably withheld. 20. CHANGE, MODIFICATION AND WAIVER. No change or modification of this Agreement shall be valid unless it is in writing and signed by Tuchman and an authorized officer of APII. No waiver of any provision of this Agreement shall be valid unless it is in writing and signed by the party against whom the waiver is sought to be enforced (in the case of APII, by an authorized officer of APII). The failure of a party to insist upon strict performance of any provision of this Agreement in any one or more instances shall not be construed as a waiver or relinquishment of the right to insist upon strict compliance with such provision in the future. 21. INTEGRATION. This Agreement and its exhibits constitutes the entire agreement between APII and Tuchman concerning the subject matters hereof and supercedes all prior representations, promises and agreements, whether oral or written, implied or otherwise with respect thereto. 10 22. BINDING AGREEMENT. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective officers, directors, agents, representatives, employees, servants, affiliates, attorneys, heirs, successors, assigns, or other representatives, if any. 23. SEVERABILITY. Any provision of this Agreement which is adjudged to be prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without affecting the validity or enforceability of the remainder of this Agreement. 24. ATTORNEYS' FEES. In the event an action is brought by either party for breach of by, or to enforce this Agreement, including Paragraph 15, against, the other party, including arbitration, the prevailing party shall receive his or its reasonable attorneys and paralegal fees and costs at all levels of dispute resolution involved as determined by the court or arbitrators, as the case may be. 25. JURISDICTION OF DISPUTES; WAIVER OF JURY TRIAL. In the event any party to this Agreement commences any litigation, proceeding or other legal action in connection with or relating to this Agreement or any matters described or contemplated herein, with respect to any of the matters described or contemplated herein or therein, the parties to this Agreement hereby (a) agree under all circumstances absolutely and irrevocably to institute any litigation, proceeding or other legal action in a court of competent jurisdiction located within the County of Orange, Florida, whether a state or federal court; (b) agree that in the event of any such litigation, proceeding or action, such parties will consent and submit to personal jurisdiction in such court; (c) agree to waive to the full extent permitted by law any objection that they may now or hereafter have to the venue of any such litigation, proceeding or action in any such court or that any such litigation, proceeding or action was brought in an inconvenient forum; (d) agree as an alternative method of service to service of process in any legal proceeding by mailing of copies thereof to such party at its address set forth herein for communications to such party; (e) agree that any service made as provided herein shall be effective and binding service in every respect; and (f) agree that nothing herein shall affect the rights of any party to effect service of process in any other manner permitted by law. EACH PARTY HERETO WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY DISPUTE IN CONNECTION WITH OR RELATING TO THIS AGREEMENT OR ANY MATTERS DESCRIBED OR CONTEMPLATED HEREIN OR THEREIN, AND AGREE TO TAKE ANY AND ALL ACTION NECESSARY OR APPROPRIATE TO EFFECT SUCH WAIVER. 26. NOTICES. All notices, requests, demands and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given when delivered to the recipient by (i) hand, (ii) mailed, first class certified mail, return receipt, with postage paid, or (iii) a nationally recognized overnight courier service: If to APII, to: Action Products International, Inc. 390 North Orange Avenue, Suite 2185 Orlando, Florida 32801 Attn: Ronald S. Kaplan with a copy to: Raice Paykin & Krieg, LLP 11 185 Madison Avenue, 10th Floor New York, New York 10016 Attn: James G. Smith, Esq. If to Tuchman, to: Ronald E. Tuchman 566 Wayne Drive River Vale, New Jersey 07675 With a copy to: Foreht, Last, Ladau, Miller and Katz, LLP 228 East 45th Street, 17th Floor New York, NY 10017 Attn: Scott M. Miller, Esq. 27. COUNTERPARTS AND FACSIMILE SIGNATURES. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. Execution and delivery of this Agreement by exchange of facsimile copies bearing the facsimile signature of a party hereto shall constitute a valid and binding execution and delivery of this Agreement by such party. Such facsimile copies shall constitute enforceable original documents. [remainder of page internationally left blank] 12 IN WITNESS WHEREOF, the parties have agreed to, and executed, this Agreement, effective as of the last date written below. EXECUTIVE: /s/ RONALD E. TUCHMAN - --------------------- Ronald E. Tuchman Dated: February 7, 2003 APII: Action Products International, Inc. By: /s/ RONALD S. KAPLAN -------------------- Ronald S. Kaplan, Chief Executive Officer Dated: February 7, 2003 13 EXHIBIT "A" Form of Letter of Resignation February 7, 2003 Ronald S. Kaplan Action Products International, Inc. 390 N. Orange Ave., Suite 2815 Orlando, FL 32801 Dear Ron, Effective with this notice of February 7, 2003, I hereby resign as an officer and director of Action Products International, Inc. I wish you and the organization success in the future. Sincerely, Ronald Tuchman 14 EX-23.1 5 g81473exv23w1.txt EX-23.1 MOORE STEPHENS LOVELACE CONSENT EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement of Action Products International, Inc. on Form S-8 for the registration of 900,000 shares of its common stock is usable pursuant to its 1996 Stock Option Plan (SEC File Number 333-76675) and in the related prospectus of our report dated January 30, 2003, except for Note 11, as to which the date is March 12, 2003, with respect to the consolidated statements of Action Products International, Inc. and subsidiary included in this Annual Report on Form 10-KSB for the year ended December 31, 2002. /s/ MOORE STEPHENS LOVELACE, P.A. - - ----------------------------------- MOORE STEPHENS LOVELACE, P.A. CERTIFIED PUBLIC ACOUNTANTS Orlando, Florida March 21, 2003 EX-99.1 6 g81473exv99w1.txt EX-99.1 CEO CERTIFICATION Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Ronald S. Kaplan, Chief Executive Officer of Action Products International, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: - the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and - the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company for the periods presented therein. /s/ RONALD S. KAPLAN -------------------- Ronald S. Kaplan Chief Executive Officer Date: March 21, 2003 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-99.2 7 g81473exv99w2.txt EX-99.2 CFO CERTIFICATION Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Robert L. Burrows, Chief Financial Officer of Action Products International, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: - the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and - the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company for the periods presented therein. /s/ ROBERT L. BURROWS --------------------- Robert L. Burrows Chief Financial Officer Date: March 21, 2003 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.9

                                  EXHIBIT 10.9

                             JAY JAY THE JET PLANE

                        MERCHANDISING LICENSE AGREEMENT
                        -------------------------------
                               Agreement No: 016

         This Merchandising License Agreement (the "Agreement") is made as of
the 17th day of December, 2001 (the "Effective Date"), between the following
parties (referred to collectively herein as the "Parties" and individually as a
"Party"):

PORCHLIGHT ENTERTAINMENT, INC. ("Agent" or "PorchLight"), a Delaware
corporation having a place of business at 11777 Mississippi Avenue, Los
Angeles, CA 90025, JAY JAY THE JET PLANE PRODUCTIONS, INC. ("JJPP"), a Nevada
corporation having a place of business at 11777 Mississippi Avenue, Los
Angeles, CA 90025, and KIDQUEST, INC., dba WonderWings.com Entertainment
("WonderWings"), a Texas corporation having a place of business at 11910
Greenville Avenue, #101, Dallas, TX 75243, on the one hand, and

ACTION PRODUCTS INTERNATIONAL, INC. ("Licensee"), a Florida corporation having
its place of business at 390 N. Orange Avenue, 21st Floor, Orlando, Florida
32801, on the other hand.

WHEREAS, in separate agreements between Agent, JJPP and WonderWings (herein
referred to as the "Representation/Option agreements"), Agent has been granted
certain rights, including interalia, the right to license or otherwise exploit
throughout the world certain merchandising rights in and to a certain property
entitled "Jay Jay The Jet Plane" (the "Property") and (a) the trademark rights
therein of WonderWings; and (b) the joint and individual copyright rights
therein of JJPP and WonderWings, and their respective affiliates and
subsidiaries (JJPP and WonderWings shall be referred to herein collectively in
their respective capacities as rights holders as "Licensor"); and

WHEREAS, Licensee desires a license to utilize the Property in connection with
the manufacture, marketing, sale and distribution of certain products in a
certain territory, and Agent, with the consent and approval of Licensor,
desires to grant such license to Licensee upon the terms and conditions set
forth herein.

NOW THEREFORE, in consideration of the mutual promises contained herein, the
Parties hereby agree as follows:

         1. GRANT OF LICENSE: Subject to the terms and conditions set forth
herein, Agent, with the consent and approval of Licensor, hereby grants to
Licensee, and Licensee hereby accepts, this license to utilize the Property as
specifically set forth in Schedule "B", solely and only in connection with the
manufacture, marketing, sale and distribution of the product(s) identified in
Schedule "A" as the Licensed Product(s), during the Licensed Period and in the
Licensed Territory and designated


                                       1


Distribution Channels defined herein. Agent and Licensor (as applicable and
agreed upon between Agent and Licensor in the Representation/Option
agreements), specifically reserve all rights not granted to Licensee under this
Agreement including, without limitation, the right to grant other licenses for
use of the Property in any manner whatsoever as well as the rights set forth
herein below in the Exclusions.

         2. LICENSED TERRITORY AND DISTRIBUTION CHANNELS: The Licensed
Territory shall mean the country or countries set forth in Schedule "A" as its
or their political boundaries exist on the date of this Agreement and the
Distribution Channels shall mean the channels of retail distribution designated
in Schedule "A". Licensee acknowledges that this license extends only to the
Licensed Territory and Distribution Channels specified in Schedule "A" and
Licensee agrees that it will not solicit, make, or authorize any use, direct or
indirect, of the Licensed Products and the Property outside the Licensed
Territory and designated Distribution Channels without Agent's specific written
approval and it will not knowingly sell or distribute the Licensed Products to
persons or entities (herein "customers") who intend or are likely to resell the
Licensed Products outside of the Licensed Territory and designated Distribution
Channels nor, will Licensee advertise or maintain stock of the Licensed
Products or open a new branch or office outside of the Licensed Territory for
the purpose of selling or otherwise distributing the Licensed Products outside
of the Licensed Territory. Licensee shall be required to advise all customers
of the obligation to sell the Licensed Products only within the Licensed
Territory and designated Distribution Channels and Licensee shall use its best
efforts to ensure that its customers comply therewith.

         3. LICENSED PERIOD: The Licensed Period shall mean the Initial Term
and Renewal Term if applicable, commencing and ending on the dates set forth in
Schedule "A" attached hereto unless sooner terminated in accordance with the
terms and conditions of this Agreement.

         4. EXCLUSIONS: Licensee acknowledges that the rights granted herein do
not include the right to, and Licensee warrants and represents that it will
not, use the Property or the Licensed Products for, an endorsement of any
product or service unless specifically authorized herein and Licensee shall not
make or authorize any use, direct or indirect, of the Property in connection
with any other products, goods or services other than the Licensed Products.
Additionally, Licensee specifically acknowledges that the rights granted herein
to Licensee do not include the right to manufacture, market, sell, distribute
or otherwise exploit the Licensed Products in connection with any: giveaway,
premium, promotion (other than in-store play dates wherein Licensee will
furnish retailers in the Territory and Distribution Channels with Licensed
Products for in-store play promotions to promote the sale of the Licensed
Products by such retailer), direct mail/direct response and catalog shopping
other than Licensee's own catalog, electronic shopping and E-Commerce including
television and computer/Internet shopping for Licensee's direct to consumer
sales, fan club, amusement and theme parks, live stage show, in-theater sale or
other channels of distribution which are not specifically included in the
Distribution Channels set forth in Schedule "A". Additionally, Licensee will
not sell the Licensed Products to


                                       2


jobbers, wholesalers, distributors, retail stores, merchants or any other
entities whose sales or distribution will be made for publicity purposes,
combination sales, premiums, giveaways or similar methods of merchandising or
means of distribution set forth herein above. All of the aforementioned rights,
methods of merchandising and means of distribution ("Exclusions") are expressly
retained and reserved by Agent and/or Licensor (to the extent agreed upon by
Agent and Licensor in the Representation/Option agreements), and any and all
such Exclusions may be exercised by Agent and/or Licensor, as applicable,
and/or their designee concurrently with the rights licensed to Licensee
hereunder without regard to the extent to which any such Exclusions may be
competitive with Licensee or the rights granted to Licensee herein. However,
Agent and Licensor acknowledge and agree that except with respect to the Pilot
Wings, should Agent and/or Licensor intend to use articles within the
definition of the Licensed Products set forth in Schedule "A" as give-aways,
premium and/or promotional items for the Property, Agent and Licensor shall use
their best efforts to ensure that Licensee shall be given an opportunity to
supply the Licensed Products for such give-aways, premiums and/or promotions
provided, Agent and/or Licensor are in control of choosing a source for such
give-aways, premiums and/or promotions, and to the extent that Licensee is able
to supply the Licensed Products for such give-aways, premiums and/or promotions
in a timely manner and at a competitive price. Notwithstanding the foregoing,
the Parties hereto acknowledge and agree that should Agent and Licensor be in
control of the source of the articles to be supplied for such give-away,
premiums and/or promotions, and should the articles to be used therefore be of
the same exact type and size as the Licensed Products produced by Licensee
hereunder, Licensee shall have the right (except with respect to the Pilot
Wings) to supply such items for Agent's and/or Licensor's use at Licensee's
best selling price (based on the Domestic or F.O.B. selling price as
applicable) or at such lower selling price to be agreed upon between the
Parties. Licensee acknowledges that Agent and Licensor have not granted
Licensee any rights herein to supply the Pilot Wings for any give-away, premium
and/or promotion or to sell Pilot Wings separately.

         5. PAYMENT: In consideration for the rights granted herein, on behalf
of Agent and Licensor, Licensee shall pay in accordance with Paragraph 5(c),
the following compensation:

                  (a) Guaranteed Minimum Compensation: Licensee shall pay as a
guaranteed minimum payment ("Guaranteed Minimum Payment") for the Licensed
Period, the amount specified in Schedule "A". Such amount shall be payable in
accordance with the Payment Schedule(s) for the Guaranteed Minimum Payment(s)
set forth in Schedule "A". No portion of the Guaranteed Minimum Payment(s)
shall be returnable or refundable to Licensee, however, the Percentage
Compensation/Royalties due during the Initial Term shall be offset against the
Guaranteed Minimum Payment for the Initial Term already paid by Licensee as an
advance ("Advance") for such Term as provided in Schedule "A" and likewise, any
Percentage Compensation/Royalties due during the Renewal Term if applicable,
shall be offset against the additional Guaranteed Minimum Payment for the
Renewal Term paid by Licensee. The Parties acknowledge and agree that the
Percentage


                                       3


Compensation/Royalties paid during the Initial Term may not be offset against
the Guaranteed Minimum Payment due for the Renewal Term.

                  (b) Percentage Compensation/Royalties: Licensee shall pay, on
a calendar quarterly basis (the "Royalty Period"), within forty-five (45) days
after the end of each calendar quarter during the Licensed Period, the
percentage compensation/royalty amount ("Percentage Compensation/Royalties")
specified in Schedule "A" on all Net Sales of the Licensed Products at the
established gross price of the Licensed Products or any higher selling price if
applicable, less only deductions for actual, verifiable returns of damaged
Licensed Products actually credited to a customer and normal trade discounts
actually given to a customer provided all such deductions and discounts shall
not exceed a total of fourteen percent (14%) of the gross sales for the period.
As used in this Agreement, the term "Net Sales" shall mean the gross number of
Licensed Products sold by or on behalf of Licensee or any directly or
indirectly related, affiliated, associated, parent or subsidiary companies
("Affiliated Entity") less only Licensed Products distributed free of charge to
Agent and Licensor as required herein below in paragraph 8. as samples and for
copyright/trademark purposes, or in the normal course of business as samples,
provided that Licensee does not receive compensation of any type for such
samples and the distribution of such samples is limited to a reasonable number
for the purposes of stimulating sales and orders of the Licensed Products. For
purposes of this Agreement, a Licensed Product shall be considered "sold" upon
the date when such Licensed Product is billed, invoiced, shipped/distributed,
or paid for, whichever event occurs first and except as provided above, the
Percentage Compensation/Royalties shall be payable by Licensee on the
distribution of all Licensed Products whether distributed to third parties, to
an Affiliated Entity or otherwise, whether or not billed. No deductions from
the gross selling price shall be permitted for trade or cash discounts or other
discounts, whether or not similar to the foregoing, advertising allowances,
uncollectable accounts or bad debts and no deductions for returns shall be
allowed on the basis of an accrual or reserve system, except as specifically
permitted herein. Additionally, no costs incurred in the manufacture,
distribution, shipping, sale, exploitation, promotion or advertisement of the
Licensed Products shall be deducted from the amount payable hereunder. In the
event that Licensee sells and/or distributes the Licensed Products to an entity
in any way related to Licensee or in a manner other than in an arms length
transaction, the Percentage Compensation/Royalties payable on such sales and/or
distribution shall be calculated based on the higher of the amount charged by
Licensee or the amount charged by such other entity in connection with the
sales and/or distribution of the Licensed Products by such other entity,
whichever is greater. Notwithstanding the foregoing, Licensee acknowledges and
agrees that the Percentage Compensation/Royalties payable hereunder in
connection with sales to, or by, an Affiliated Entity shall not be less that
the Percentage Compensation/Royalties based upon the price generally charged to
the trade by Licensee in an arms-length transaction.

                  (c) Any and all payments payable in accordance with this
Agreement (including, but not limited to the Guaranteed Minimum Payment(s) and
Percentage


                                       4


Compensation/Royalties set forth above) shall be paid in United States currency
(US$) and such payments shall be made at Licensee's expense by bank check to
Jay Jay the Jet Plane Productions, Inc. or by wire transfer to the account of
Jay Jay the Jet Plane Productions, Inc. (Collection Account) at City National
Bank (Account No. [101-184-161]; ABA Routing No. 122016066) at 400 N. Roxbury
Drive, Beverly Hills, CA 90210 and such payments shall be made simultaneously
with the rendition of quarterly accounting statements referred to in Paragraph
6 below. No payments due hereunder shall be considered paid by Licensee until
such payments are actually received by Jay Jay the Jet Plane Productions, Inc.

                  (d) Taxes, Duties, Levies, VAT and Restricted Sums:

                           (i) Licensee shall pay all taxes, duties, levies,
handling charges and other fees (other than Agent's and Licensor's direct net
income taxes) due under any law now or hereafter in effect, imposed, levied or
based upon the license, delivery, shipment, import, export, manufacture or
Licensee's possession, use or sale of the products licensed hereunder or upon
the grant of this license or the exercise thereof or based upon or measured by
the license fees or payment thereof or any part thereof.

                           (ii) Licensee hereby declares that, should the
applicable authorities in the Licensed Territory require that Value Added Taxes
("VAT") or Goods and Services Taxes ("GST") or other similar taxes are to be
levied on payments hereunder, Licensee will be solely responsible for payment
of said VAT and GST levies.

                  6. ACCOUNTING:

                           (a) Licensee will, not later than the forty-fifth
(45th) day following the end of each calendar quarter during the Licensed
Period and any extension thereof, and thereafter for so long as any sales
and/or distribution of the Licensed Products are made by Licensee under
Paragraph 16, or otherwise, furnish to Agent at the address set forth above, a
full, complete and accurate accounting statement showing the item number,
description, gross selling price and the quantity of the Licensed Products
distributed and/or sold by Licensee during the calendar quarter and any
deductions therefrom in the form attached hereto as Exhibit "1" or such other
form provided or approved by Agent. On all accounting statements rendered
hereunder Licensee may retain a five percent (5%) reserve against allowed
returns as permitted herein, provided that Licensee shall include a statement
clearly indicating the amount of any reserve held, and the amount of any
allowable returns made. Additionally, any amount held as a reserve against
allowed returns shall be held only until the next accounting is rendered and
only for actual allowable returns as permitted in Paragraph 5(b) above, and
provided the subsequent statement shall clearly indicate how such reserve has
been applied and/or liquidated and Licensee shall provide copies of all related
invoices with such statements. If any reserves are insufficient to cover actual
allowed returns for a related accounting period, resulting in an overpayment of
Percentage Compensation/Royalties, the same may be deducted from sums due

                                       5


hereunder during the subsequent reporting period, however, in no event will
Agent or Licensor be required to refund or return any sums paid hereunder by
Licensee. Upon request, Licensee shall submit to Agent a written explanation of
any reserve held and upon expiration or termination of this Agreement such
reserve shall be fully liquidated within thirty (30) days and any remaining
reserve shall be immediately remitted to Agent as provided in Paragraph 5(c).
All accounting statements will be furnished as required herein whether or not
any of the Licensed Products have been sold during the calendar quarter and
will be certified to be accurate by a duly authorized officer of Licensee.
Copies of all statements to Agent shall also be sent to WonderWings at the
address set forth above.

                  (b) Agent's receipt of statements or the receipt or
acceptance of any payments (or the cashing of any checks paid hereunder) will
not prevent Agent and/or Licensor from thereafter questioning or disputing the
correctness of any such statements and/or payments. Licensee agrees that any
inconsistencies or mistakes discovered in the statements and/or payments will
be promptly rectified and the appropriate payments made by Licensee. Interest
at the rate of one and one-half percent (1 1/2%) per month (but in no event
more than the maximum amount permitted by law in the Licensed Territory), shall
accrue on the amount of any late payments due hereunder, from the date upon
which the payment was due until the date payment is actually received as
provided herein above in Paragraph 5(c). Time is of the essence with respect to
all statements and payments due under this Agreement and in the event that
Agent and/or Licensor shall be required to incur any legal expenses or other
expenses of debt collection by reason of Licensee's failure to render any
statements and/or payments due hereunder, in addition to and without prejudice
to any other rights of Agent and Licensor (including such rights of termination
as set forth herein below in Paragraph 15), Licensee shall indemnify and pay
Agent and Licensor for any and all reasonable legal fees and expenses of debt
collection which may have been incurred by Agent and/or Licensor in securing a
remedy to Licensee's failure as aforesaid.

         7. BOOKS AND RECORDS: Licensee will keep at its principal place of
business, full, complete and accurate books of account and records covering all
transactions relating to the subject matter and terms of this Agreement.
Agent's and/or Licensor's duly authorized representative(s) shall have the
right to examine and make copies of such books of account and records and other
documents and material in Licensee's possession or under its control with
respect to the subject matter and terms of this Agreement. The duly appointed
representatives of Agent and/or Licensor shall have free and full access
thereto for such purpose and for the purpose of making extracts therefrom at
all reasonable business hours and with five (5) days notice to Licensee. In the
event that a discrepancy or a deficiency in payment of five percent (5%) or
more shall be discovered, Licensee shall pay the costs of such examination in
addition to immediately paying all deficiencies in Percentage
Compensation/Royalties and any other sums found to be due with interest
thereon. Agent and/or Licensor shall have the right to challenge any statement
rendered by Licensee, and Licensee shall preserve such books of account,
records, documents and material, for a period of three (3) years after the
expiration or earlier termination of this Agreement and Agent and/or


                                       6


Licensor may examine said books of account and records during such three (3)
year period. Notwithstanding the foregoing, Agent and Licensor acknowledge and
agree that no more than one (1) examination of Licensee's books and records
shall be conducted per year.

         8. QUALITY; SAMPLES:

                  (a) Licensee acknowledges that if the Licensed Products or
any packaging or advertising relating thereto were of inferior quality in
design, material, workmanship or content, the substantial goodwill in the
Property, would be impaired. Accordingly, Licensee agrees that the Licensed
Products shall be of high standard and quality so as to maintain the integrity,
prestige and reputation of the Property and the name of Agent and Licensor.

                  (b) Licensor shall have absolute approval, exercisable in its
sole discretion, over all uses of the Property, the Licensed Products, and all
packaging, advertising and related materials.

                           (i) In that regard, Licensee shall, before it
manufactures or publishes any particular Licensed Product, furnish to Agent
free of cost, for Agent's and Licensor's review and Agent's written approval on
behalf of Licensor, two (2) samples of the concept art, text, final art and
pre-production samples of each of the Licensed Products in the: 1) conceptual;
2) final artwork; and 3) pre-production stage together with conceptual, final
artwork and pre-production samples of the cartons and containers, tags, labels,
wrapping material, packaging and galley proofs, if any, for the Licensed
Products or intended for display to the consumer, as well as advertising or
promotional material for use in any media in connection with the Licensed
Product ("Collateral Materials"). Licensee may not manufacture, use or
advertise any Licensed Product or any of the Collateral Materials until it has
received written approval therefore from Agent.

                           (ii) Additionally, after the manufacture of all such
Licensed Products, but prior to the sale or distribution of such Licensed
Products, Licensee shall furnish to Agent, free of cost, for Agent's written
approval on behalf of Licensor, twelve (12) finished samples of each of the
Licensed Products together with all Collateral Materials. Licensee may not
distribute any Licensed Product or any of the Collateral Materials until it has
received written approval of the finished samples and Collateral Materials from
Agent.

                  (c) Licensee acknowledges and agrees that Agent's written
approval of each of the Licensed Products and Collateral Materials in each of
the stages required above, may be granted or withheld as Licensor, in its sole
discretion, may instruct Agent to assure the quality of the merchandise and
reputation of the Property. If Agent has not indicated its approval in writing
of any submission within ten (10) business days after the date of submission
thereof, Agent and Licensor shall be deemed to have disapproved same. Once
Licensed Products and Collateral Materials have been approved by Agent on
behalf of Licensor, Licensee shall not depart in the


                                       7


manufacture of such Licensed Product in any manner from the characteristics of
the approved Licensed Product without first obtaining Agent's written consent on
behalf of Licensor for any such changes in accordance herewith. Licensee shall,
at all times, have in place appropriate procedures to promptly recall any
Licensed Products which fail to conform to the approved samples or which may be
defective. Notwithstanding the foregoing, the Parties mutually agree to make
best reasonable efforts to ensure timely implementation of the approval process.

                  (d) (i) All rights granted hereunder are conditioned upon
Licensee's compliance with all marketing, advertising, manufacture and sales
provisions and laws in each and every country or territory in the Licensed
Territory applicable to the rights granted herein. In that regard, Licensee
acknowledges and agrees that Licensee shall have the sole and complete
responsibility for ensuring that all of the Licensed Products and the
Collateral Materials will be produced, manufactured, sold, distributed,
marketed and advertised in full compliance and in accordance with all
applicable and relevant laws, codes, rules, standards and regulations
applicable in the Licensed Territory (including, but not limited to, consumer
product safety standards and laws, health, workplace and labor standards and
laws, environmental protection standards and laws, customs and importation laws
and all other standards and laws governing the production, manufacture and sale
of goods in the Licensed Territory. Licensee shall pretest all proposed and
approved Licensed Products and shall cause truthful labeling regarding care,
maintenance and use to be affixed to the Licensed Products, packaging or
hangtags therefore, as appropriate. Licensee shall immediately notify Agent of
all complaints coming to Licensee's attention from any consumer, customer, or
governmental body relevant to any of the Licensed Products and shall regularly
keep Agent advised by notice of the status and resolution thereof. Licensee
shall resolve all such complaints as expeditiously as possible.

                           (ii) Licensee further acknowledges and agrees that
Agent's approval of the Licensed Products and Collateral Materials as provided
above shall not constitute a waiver of any of Agent's and/or Licensor's rights
or of Licensee's duties under this Agreement. Licensee hereby acknowledges that
neither Agent nor Licensor are competent to determine whether any of the
Licensed Products are fit for the use normally and reasonably intended or safe
for sale and/or distribution to the public at large. Accordingly, all approval
rights set forth herein relate to aspects of quality and not to determination
of the safety of the Licensed Products, and any approval of the Licensed
Products shall in no way detract from the Licensee's obligations to comply with
statutory or other safety guidelines applicable in the Licensed Territory nor
shall such approval be deemed approval of Licensee's creation and/or use of any
verbiage, copy, mark, artwork, design or other material which is not owned or
controlled by Agent and/or Licensor (hereinafter referred to as "Ancillary
Material"). Such Ancillary Material shall be used at Licensee's own risk and
Licensee shall take any and all precautions deemed appropriate to ensure that
such Ancillary Material is wholly original with or fully cleared by Licensee
and that the use by Licensee of Ancillary Material does not infringe the rights
of any third parties. Licensee shall fully indemnify, hold harmless and defend
Agent and Licensor, and their


                                       8


officers, directors, agents, and employees against any claims, suits, losses or
damages (including reasonable attorney's fees) arising out of such use of
Ancillary Material by Licensee.

                  (e) Licensee shall permit Agent and/or Licensor or their
representative, at all reasonable business hours and upon at least five (5)
business days written notice, to enter Licensee's premises for the purpose of
inspecting the Licensed Products or the method of manufacture thereof prior to
and during the sale and distribution of such Licensed Products and in the event
that License shall appoint a sub-contractor to manufacture any of the Licensed
Products or a part thereof as provided in Paragraph 26, Licensee shall make
similar arrangements for inspection of any process performed by a
sub-contractor.

         9. GOODWILL AND PROTECTION:

                  (a) WonderWings owns the trademark rights in and to the
Property and JJPP and WonderWings own certain joint and individual copyrights
in and to the Property which together comprise all of the copyrights in the
Property and JJPP and WonderWings have granted to Agent the right to license
such trademark rights and copyrights in and to the Property and JJPP and
WonderWings specifically acknowledge their approval and consent of the grant of
this license to Licensee on the terms and conditions set forth herein.

                  (b) Licensee recognizes the great value of the goodwill
associated with the Property and acknowledges that as between Licensor and
Licensee, all rights therein (including trademark and copyright) and goodwill
attached thereto belongs exclusively to Licensor, that the Property has
secondary meanings in the minds of the public and that all use of the Property
will inure to the benefit of Licensor. Licensee agrees that it will not, during
the Licensed Period or thereafter, attack Licensor's property rights, in and to
the Property.

                  (c) As between Licensor and Licensee, Licensor shall be
deemed to be the owner of all materials created for the Licensed Products
hereunder which bears, utilizes, refers to, or in any way becomes associated
with, or is derivative of the Property, including but not limited to all
artwork therefore. Licensee agrees that any such materials created and
furnished by Licensee or its employees or by a third-party assisting Licensee
in the creation of such materials, shall be-considered "works made for hire",
as that phrase is used in Sections 101 and 201 of the U.S. Copyright Revision
Act of 1976 and such materials may be freely used by Agent, Licensor, and their
designees. If any such materials or elements shall not be deemed a "work made
for hire", Licensee hereby assigns and transfers to Licensor or its designee,
all rights, including copyright, moral rights, title and interest in and to all
such materials and elements and Licensee shall sign any documents,
acknowledgments and instruments, or obtain the signature on such documents,
acknowledgments and instrument of any third-parties assisting Licensee in the
creation of such materials, which may be required to effectuate the rights of
Licensor in and to such materials, and Licensee undertakes to cooperate in
effectuating the foregoing.


                                       9


                  (d) Licensee shall not, during the Licensed Period or any
time thereafter, dispute or contest, nor cause or assist or aid others in
disputing or contesting, Licensor's right and title to the Property, or any
other rights of Licensor in and to the subject matter of this Agreement or
Agent's rights to license the Property as provided herein, or disclose the
terms of this Agreement to any person without the prior written consent of
Agent and Licensor. Licensee will fully cooperate with and assist Licensor, in
preventing or prosecuting any infringement of the rights of Licensor in the
Property. Licensee will notify Agent in writing of any manufacture, sale,
distribution or advertisement which it believes may constitute an infringement
upon Licensor's rights. Licensee shall not commence any action or proceeding
against any person or enter into a settlement relating to the Property or
Licensor's rights without Agent's and/or Licensor's prior written consent. In
the event that an infringement or violation of the Property shall be materially
and negatively impacting on Licensee's sales of the Licensed Products, Agent
and Licensor shall consider in good faith, the advisability of any such action,
however, Licensee shall not have any rights against Agent or Licensor for
damages or otherwise for failure to act in, or settle, any action or proceeding
relating to alleged infringements or violations of the Property or Licensor's
rights nor shall any such act or failure to act by Agent or Licensor affect the
validity or enforceability of this Agreement.

                  (e) Agent and Licensor shall have the right, but shall not be
under any obligation to use the Property and/or the name of Licensee so as to
give the Property, or any of the Parties and their respective programs full and
favorable prominence and publicity. However, neither Agent nor Licensor shall
be under any obligation whatsoever to use the Property or any part thereof in
any medium.

         10. TRADEMARK LICENSE:

                  (a) As between Licensor and Licensee, Licensee acknowledges
that WonderWings is and shall remain the sole owner of all trademarks related
to the Property, and that Licensor is and shall remain the owner of all
copyrights, and other rights associated with the Property, and in all artwork,
packaging, copy, literary text, advertising and promotional material of any
sort which utilize the Property, including all such materials, creations and/or
modifications to the Property developed by Licensee, (collectively, the
"Copyrighted Materials") and the goodwill pertaining to all of the foregoing.
Licensee shall not at any time register or apply to register for Licensee's
benefit any trademarks, logos, marks, or names which are identical or
confusingly similar to the Property.

                  (b) Subject to the terms and conditions of this Agreement,
Licensee is hereby granted the non-exclusive right and license in the Territory
to use the trademarks and servicemarks depicted on the attached Schedule "B"
and Schedule "C" including PorchLight's, JJPP's and WonderWings' logos as set
forth therein during the Licensed Period, however, such trademarks,
servicemarks and logos may be used by Licensee only in connection with the
manufacture, marketing, sale and distribution of the Licensed Products and
Collateral Materials, subject to Agent's


                                      10


written approval of all such materials. Licensee agrees not to associate any
other characters or properties of any other entity, including Licensee, with
the Property or its trademarks either on the Licensed Products or in their
packaging, advertising, promotional or display materials or other Collateral
Materials so as to promote such other characters or properties or to create the
impression that any trademark or property rights in the Property are related to
any such rights of such other entity. However, Licensee may use its own
trademarks and other identifying materials in such manner as to identify
Licensee as the actual source of the manufactured products subject always to
Agent's approval as provided hereinabove in Paragraph 8.

                  (c) Licensee shall also reference the following websites on
all packaging and tags: PorchLight.com, WonderWings.com and pbskids.org/jayjay
or such other names and URL/website addresses as Agent shall advise Licensee in
writing.

                  (d) All rights in said trademarks and servicemarks other than
those specifically granted herein are reserved to Licensor for its own use and
benefit, subject to the rights of Agent to license and exploit such trademarks
and servicemarks (as such rights are possessed by Agent and specifically agreed
upon by Agent and Licensor in the Representation/Option agreements). Licensee
acknowledges that it will not acquire any rights in said trademarks and
servicemarks as a result of Licensee's creation and/or use thereof and that all
right to use said trademarks and servicemarks which arises as a result of
Licensee's creation and/or use shall inure to the benefit of Licensor and
Licensee will execute any documents, acknowledgments and instruments required
to effectuate the foregoing, and Licensee undertakes to cooperate in
effectuating such recordation.

                  (e) Licensee will at no time use or authorize the use of any
trademark, trade name or other designation identical with or confusingly or
colorably similar to Licensor's trademarks or servicemarks.

                  (f) Except as otherwise provided in Paragraph 16, upon the
expiration or earlier termination of the Licensed Period of this Agreement, all
rights to use the trademark and servicemarks in and to the Property shall
automatically revert to Licensor, subject to the rights of Agent to license and
exploit such trademarks and servicemarks (as such rights are possessed by Agent
and specifically agreed upon by Agent and Licensor in the Representation/Option
agreements), and Licensee shall immediately discontinue all use of said
trademarks and servicemarks.

                  (g) (i) In the event that Agent or Licensor shall advise
Licensee that in order for use of trademarks to be valid, a direct license from
the trademark owner of record is required in favor of the trademark user,
Licensee shall enter into such direct license or agreement with the trademark
owner of record, with respect to the licensed trademarks. Licensee undertakes
in addition, to execute such further documents, acknowledgments and instruments
as are necessary for the purposes of effectuating recordation of Licensee as a
user of said trademark, in such jurisdictions where required and in accordance
with the requirements of the specific jurisdictions


                                      11


concerned, and Licensee undertakes to cooperate with Agent and the trademark
owner of record in effectuating such recordation.

                           (ii) Upon termination of Licensee's right to use the
licensed trademarks in the aforesaid jurisdictions, Licensee undertakes to
cooperate in the cancellation of the aforesaid recordation, and further
undertakes to execute any and all documents as are necessary for that purpose.

         11. COPYRIGHT AND TRADEMARK NOTICES:

                  (a) Licensee shall place or cause to be imprinted on all
Licensed Products and Collateral Materials as and where appropriate, the
complete copyright notice in the following form: "(c) [or Copyright] (Date) Jay
Jay the Jet Plane Productions, Inc. and WonderWings.com Entertainment. All
Rights Reserved", or in such other name or form as Agent shall advise Licensee
in writing.

                  (b) Licensee shall also place or cause to be imprinted on all
Licensed Products and Packaging, where appropriate, the appropriate trademark
or servicemark notice, either "TM", "SM" or (R), as Agent shall direct.

                  (c) Licensee agrees that it shall use no markings, legends or
notices on and in connection with the Licensed Products and Collateral
Materials without first obtaining Agent's prior written approval.

                  (d) Licensee, at its expense, will from time to time during
the Licensed Period, submit to Agent, upon request from Agent, a reasonable
number of additional free samples of the finished Licensed Products and
Collateral Materials and all other materials, bearing copyrights and trademarks
or servicemarks of Licensor in order to assure Agent that these provisions are
being fulfilled, and for Licensor's copyright, and trademark registration,
however, Licensee acknowledges that neither Licensor nor Agent have any
obligation to apply for and/or obtain such registration. In the event that
Licensor elects to undertake such registration, Licensee will provide such
other materials and documentation as Licensor, or Agent on behalf of Licensor,
may request to effectuate such registration. Copyrights and trademarks in all
such material, and any new versions, translations and rearrangements of such
material shall be owned by JJPP and/or WonderWings, as applicable. If, as a
result of its exploitation of the Licensed Products, Licensee acquires any
trade rights, moral rights, equities, titles or other rights therein, Licensee
shall immediately assign and transfer same as directed by Licensor, or Agent on
behalf of Licensor, without additional consideration, other than the
consideration of this Agreement. Notwithstanding the foregoing, Agent and
Licensor acknowledge that Licensor has applied for trademark protection for Jay
Jay The Jet Plane in International Trademark Class 28 for the Licensed
Territory granted herein.

                  (e) Upon request from Agent or Licensor, Licensee agrees to
assist in procuring and maintaining the rights of Licensor in the Property
(including trademark and copyright) at no cost to Licensee. Licensee agrees
that it shall notify


                                      12


Agent in writing of all those jurisdictions and those Licensed Products
(specifying the International Classification of Goods and Services category) in
which it intends to distribute, ship or sell Licensed Products as soon as such
information is available to Licensee. Upon written request therefor, Licensee
agrees to execute and/or deliver to Agent in such form as Agent may reasonably
request, all instruments necessary to effectuate Licensor's copyright and,
where applicable, trademark protection or to record Licensee as a registered
user of any trademarks, where applicable, or to cancel such registration. If
Licensee fails to execute any such instruments within ten (10) business days
following Agent's request therefor, Licensee hereby appoints Agent as its
attorney-in-fact, which such appointment shall be deemed a power coupled with
an interest, to do so on Licensee's behalf and such appointment shall be
irrevocable for the purposes set forth herein. Licensee acknowledges that only
Licensor may file and prosecute trademark and copyright applications regarding
any trademarks and/or copyrightable material used by Licensee of the Property
in such jurisdictions within the Licensed Territory as Licensor may, from time
to time, deem advisable. Licensor shall control absolutely all infringement
litigation brought against third parties involving or affecting the Property
and Licensor may, at its sole discretion, add Licensee as a party thereto at no
cost or expense to Licensee unless otherwise specifically agreed to in writing
between the Parties.

         12. PURCHASES: Agent and Licensor may purchase Licensed Products from
Licensee at Licensee's lowest domestic selling price or, if such Licensed
Products are purchased by Agent or Licensor on an F.O.B. basis, at Licensee's
lowest F.O.B selling price, for such Licensed Product and Licensee shall
include any such sales to Agent and/or Licensor in its quarterly accounting
statements and Licensee shall pay a royalty at the royalty rate set forth
herein on all such sales to Agent and/or Licensor. Agent and/or Licensor may
use such Licensed Products for give-aways, premiums and/or promotional
purposes, and may sell such Licensed Products in any territory including the
Licensed Territory via the Jay Jay Fan Club and websites operated or owned in
part by Agent and/or Licensor.

         13. ADVERTISING: Licensee shall not offer for sale, advertise or
publicize any Licensed Products via television, radio, newspapers, magazines or
any other media without Agent's prior written approval which such approval
shall not be unreasonably withheld and Licensee shall advise Agent of the
general use and contemplated placement for such advertising and publicity and
when reasonably possible, the approximate dates for such use.

         14. PARTIES' OBLIGATIONS:

                  (a) Licensee shall produce, manufacture, distribute and sell
the Licensed Products in an ethical manner and in accordance with the
provisions and the intent of this Agreement, and shall not engage in unfair or
anti-competitive business practices. The Licensed Products shall be produced,
manufactured, distributed, sold, packaged, labeled and advertised in accordance
with all applicable federal, state and local laws, treaties and governmental
orders and regulations in the Licensed Territory.


                                      13


                  (b) Licensee shall not encumber or cause to be encumbered in
any manner, the Licensed Products, or cause or permit any expenses to be
charged to Agent or Licensor without Agent's and Licensor's prior approval in
writing in each instance.

                  (c) Licensee shall exercise its best efforts to manufacture
and ship quantities of the Licensed Products to meet the market demand for the
Licensed Products and shall diligently and timely fulfill all orders and make
and maintain adequate arrangements for the distribution of the Licensed
Products throughout the Licensed Territory in the Distribution Channels and
continuously offer the Licensed Products for sale throughout the Licensed
Territory and Distribution Channels in accordance with the applicable Marketing
Date and Distribution Date set forth in Schedule "A" to achieve the highest
sales reasonably attainable.

                  (d)      (i) Licensee shall be required to submit a prototype
for each of the Licensed Products in the minimum number of required SKUs set
forth in Schedule "A" within seven (7) months of the Effective Date of this
Agreement and Licensee shall be required to begin manufacturing the approved
prototypes within two (2) months after Licensee receives Agent's written
approval therefore. In the event Licensee shall fail to submit a prototype for
each of the Licensed Products in the minimum number of required SKUs within
such period, or should Licensee fail to begin manufacturing the approved
Licensed Product within the time period specified, Agent, at its sole option
and in its absolute discretion, shall have the right to terminate this
Agreement as to that Licensed Product by giving Licensee written notice thereof
to take effect thirty days after the date of such notice if Licensee fails to
submit such prototype or fails to begin manufacturing the Licensed Product, as
applicable, within said thirty day period unless such failure is a result of
Agent's failure to timely provide Licensee with a style guide, or if Agent or
Licensor fails to perform any of their obligations hereunder, in a timely
manner, which such failure affects the development of the prototype or the
manufacture of the Licensed Products.

                           (ii)     Licensee shall begin commercial
distribution of each Licensed Product in the minimum number of required SKUs
set forth in Schedule "A" hereof by the Distribution Date specified in Schedule
"A". In the event Licensee shall fail to begin commercial distribution by such
Distribution Date, Agent, at its sole option and in its absolute discretion,
shall have the right to terminate this Agreement as to that Licensed Product by
giving Licensee written notice thereof to take effect thirty days after the
date of such notice if Licensee fails to begin commercial distribution of such
Licensed Product within said thirty day period unless such failure is a result
of Agent's failure to provide Licensee with reasons for disapproval of the
prototype, in a timely manner, after a written request therefore from Licensee,
or if Agent or Licensor fails to perform any of their obligations hereunder, in
a timely manner, which such failure affects the timely commencement of the
initial distribution of any such Licensed Product.

                           (iii)    Additionally, after such Distribution Date,
should Licensee fail to continue to offer for sale any of the Licensed Products
for a period of


                                      14


ninety (90) days or, if the Licensed Products are seasonal in nature, during
the normal selling season for such Licensed Products, Agent, at its sole option
and in its absolute discretion, shall have the right to terminate this
Agreement as to that Licensed Product by giving Licensee written notice thereof
to take effect thirty days after the date of such notice if Licensee fails to
sell and distribute such Licensed Product within said thirty day period.

                  (e) As a condition of this Agreement, Agent or Licensor shall
be required to provide Licensee with a style guide for the Property prior to,
or promptly after all Parties' execution of this Agreement and such style guide
shall be provided at no cost to Licensee. Additionally, upon request from
Licensee, Agent shall provide Licensee with a reasonable number of high
resolution computer generated graphic images for the Property, to the extent
any such images are available. In the event that any costs and expenses shall
be incurred by Agent and Licensor in connection with supplying Licensee with
such high resolution computer generated graphic images, Licensee shall bear the
costs and expenses thereof, however, Agent and Licensor will not incur any cost
or expenses in connection with this provision without receiving specific
written approval of Licensee.

         15. TERMINATION OF LICENSE:

                  (a) Events of Default:

                           (i) Licensee Bankruptcy: If Licensee files a
petition in bankruptcy, or is adjudicated as bankrupt, or if a petition in
bankruptcy is filed against Licensee by a third party and is not dismissed
within sixty (60) days thereafter, or if Licensee becomes insolvent, or makes
an assignment for the benefit of its creditors, or if Licensee files or has
filed against it a petition for the adoption of an arrangement pursuant to any
bankruptcy law, discontinues its business, or if a receiver is appointed for
Licensee or its business, such occurrence shall constitute an event of default
under this Agreement (an "Event of Default") and the license herein granted
shall, without notice, terminate automatically. Further, and without limitation
to the foregoing, to the extent permissible under Chapter 11 of Title 11 of the
United States Code (the "Bankruptcy Code"), and to the extent that this
provision does not conflict with any other provisions set forth in this
Agreement or any laws or regulations applicable hereto, if Licensor is a
debtor-in-possession under Chapter 11 of Title 11 of the Bankruptcy Code, or if
a trustee is appointed for Licensor under any Chapter of the Bankruptcy Code,
and this Agreement is rejected under Section 365 of the Bankruptcy Code,
Licensee may elect to retain its rights under this Agreement as provided in
Section 365 (n) of the Bankruptcy Code for the balance of the then in effect
Term of this Agreement provided all payments due in connection with this
Agreement are promptly paid as required hereunder and in such event, upon
written request of Licensee to Licensor, Licensor will not interfere with the
rights of Licensee provided in this Agreement to continue to use the Property,
trademarks, copyrights and other intellectual property of Licensor, provided
such use is strictly in accordance with and pursuant to the terms of this
Agreement.


                                      15


                           (ii) Failure to Manufacture, Market or Distribute:
Licensee's failure to commence in good faith the marketing of the Licensed
Products by the date set forth in Schedule "A" (the "Marketing Date"), or if
Licensee fails to meet the Distribution Date set forth in Schedule "A" for the
shipping and sale of the Licensed Products, and to continue during the Licensed
Period to distribute and sell commercially reasonable quantities of the minimum
number of required SKUs of the Licensed Products as set forth in Schedule "A"
in the Distribution Channels in all parts of the Licensed Territory, will
result in immediate damage to Agent and Licensor and shall constitute an Event
of Default under this Agreement.

                           (iii) Licensee's Violation of Agreement: The
violation by Licensee of any other material obligations or conditions or the
violation of Licensee's representations and warranties under this Agreement,
whether such breach pertains to a default or failure to make proper and timely
payment of any and all sums due hereunder or otherwise, shall also constitute
an Event of Default hereunder.

                  (b) Notice of Event of Default and Cure: Upon the occurrence
of an Event of Default hereunder as set forth in Paragraphs 15(a)(ii) and (iii)
above, (but not in the case of a bankruptcy as set forth in Paragraph 15(a)(i)
above, in which event termination of this Agreement shall be automatic), Agent
shall have the right (but not the obligation) to terminate this Agreement. In
the event Agent elects to terminate this Agreement, Agent shall serve upon
Licensee a written notice of such election.

                           (i) Licensee shall thereupon have a period of thirty
days after receipt of such notice within which to remedy the breach except with
respect to any and all payments due hereunder, Licensee shall have a period of
fifteen (15) business days after receipt of notice to remedy any failure to
make payment of sums due hereunder.

                           (ii) If Licensee fails to duly remedy the same, then
upon the expiration of the thirty day period or fifteen (15) business day
period with respect to payments, as applicable, this Agreement and the license
herein granted shall in all respects cease and terminate, and Licensee shall
have no further rights hereunder.

                           (iii) Notwithstanding such termination, all rights
of Agent and/or Licensor arising out of this Agreement or in connection
therewith or existing prior thereto shall nevertheless continue in full force
and effect, including but not limited to Agent's and/or Licensor's right to sue
for damages caused to it by Licensee's default and the right hereunder to
receive earned but unpaid Compensation/Royalties or other sums due from
Licensee pursuant to Paragraph 5.

                           (iv) Upon any termination under this Paragraph 15,
neither Licensee nor its receiver, representative, trustees, agents,
administrators, successors and/or assigns shall have any right to sell, exploit
or in any way deal with or in any Licensed Products or Collateral Materials
hereunder except with and pursuant to Agent's consent and instructions in
writing.


                                      16


                  (c) Effect of Termination or Expiration:

                           (i) Upon expiration or earlier termination of this
Agreement, all rights granted to Licensee hereunder shall revert to Agent
and/or Licensor (as specifically agreed upon by Agent and Licensor in the
Representation/Option agreements), and except as provided in Paragraph 16,
Licensee shall not use or refer to the Property or any characters, names,
titles or other elements in connection with the manufacture, sale or
distribution of products of Licensee, which in Agent's or Licensor's opinion
are similar to the Property.

                           (ii) Upon expiration or earlier termination of this
Agreement, Licensee will cease manufacture and sale of the Licensed Products
except as expressly permitted herein and Licensee will turn over to Agent all
artwork and other materials provided hereunder and all molds and other
materials which reproduce the Licensed Products or otherwise utilize the
Property shall be destroyed or, at Licensee's option, Licensee may retain such
molds provided that all use and reference to the Property shall be removed
therefrom, including all names, logos, images, trademarks and characteristic
elements of the Property, and Licensee shall provide Agent with satisfactory
evidence of such destruction or proof of removal.

                           (iii) Licensee's failure to cease the manufacture,
distribution, sale or advertisement for sale of the Licensed Products upon the
expiration or earlier termination of this Agreement except as provided in
Paragraph 16, will result in immediate and irreparable damage to Agent and
Licensor. Licensee acknowledges that no adequate remedy at law exists for such
failure and Licensee agrees that Agent and/or Licensor shall be entitled to an
injunction or other equitable relief to prevent a breach of this Agreement by
Licensee.

                           (iv) If this Agreement is terminated, all unpaid
Percentage Compensation/Royalties, and the unpaid Guaranteed Minimum Payment(s)
due hereunder shall be immediately due and payable in accordance with Paragraph
5(c) within ten (10) days after the effective date of termination.

                           (v) On a date at least sixty (60) days prior to
expiration of this Agreement or, if applicable, within ten (10) days after the
effective date of any earlier termination, Licensee shall account to Agent in a
statement, sworn to by an authorized officer of Licensee, indicating the number
and description of the Licensed Products on hand and/or in process of
manufacture. Agent may, at its option, conduct a physical inventory of Licensee
to verify such statement of remaining inventory. If Licensee shall refuse to
permit Agent to conduct such physical inventory, Licensee shall forfeit its
right to dispose of such inventory in accordance with Paragraph 16 below.
Licensee acknowledges and agrees that during the last three (3) months of the
Licensed Period, Licensee will not manufacture any more quantities of the
Licensed Products than it genuinely anticipates selling during the balance of
the Licensed Period (based upon prior sales of such Licensed Products during
the preceding six (6) months of the Licensed Period) in the normal course of
business and without any special promotional activities.


                                      17


                           (vi) Nothing in this Paragraph 15 shall be construed
to limit Agent's and Licensor's rights or remedies.

         16. DISPOSAL UPON EXPIRATION: Upon expiration of the Licensed Period,
Licensee shall have the non-exclusive right, pursuant to the provisions hereof,
for a period of not more than the Sell-Off Period set forth in Schedule "A", to
dispose of all unsold Licensed Products manufactured by it or in the process of
manufacture during the one hundred eighty (180) days prior to expiration;
provided that Licensee has provided Agent with all accountings and has paid all
compensation accrued to such time (including, but not limited to, the
Guaranteed Minimum Payment(s) and Percentage Compensation/Royalties). During
the Sell-Off Period, Licensee shall be required to account to and pay as
provided in Paragraph 5(c), the Percentage Compensation/Royalties set forth in
Schedule "A" on all Net Sales of the Licensed Products during the Sell-Off
Period. Licensee shall deliver a report to Licensor in the form required in
Paragraph 6 and shall make payment of all sums shown to be due therein on a
monthly basis during the Sell-Off Period and Licensee shall provide Agent with
a final accounting and any unpaid sums shown to be due on such final accounting
within thirty (30) days following the end of the Sell-Off Period. Licensee
shall comply with all terms and conditions herein with respect to sales,
distribution and use of the Property during said Sell-Off Period. It is
specifically understood that Licensee shall not sell or dispose of any such
Licensed Products in job lots at reduced prices or other than as is customary
in the ordinary course of business; and provided further that Licensee shall
not sell or dispose of any Licensed Products if this Agreement was terminated
for any reason by Agent and/or Licensor, including but not limited to, any
reason set forth in Paragraph 15. Following the Sell-Off Period, all remaining
Licensed Products shall either be returned to Agent or destroyed (and Licensee
shall deliver a certificate of destruction promptly thereafter) at Licensee's
sole cost and expense.

         17. FORCE MAJEURE: Licensee shall be released from its obligations
under this Agreement in the event that governmental regulations, act of God,
war, riot, fire, strike or other labor dispute, epidemic or other causes beyond
the control of Licensee, render performance by Licensee impossible. In such
force majeure event, all future Percentage Compensation/Royalties payable in
accordance with the provisions of this Agreement shall continue to be payable
as provided herein, however, all Royalty amounts which may be due with respect
to sales already made by Licensee of the Licensed Products shall become
immediately due and payable and no portion of the Minimum Guaranteed Payment(s)
shall be repayable or returnable to Licensee. If such event shall continue for
a period in excess of two (2) months, Agent shall have the right to terminate
this Agreement by giving Licensee ten (10) days prior written notice. In the
event of such termination, the provisions of Paragraph 16 shall apply.

         18. INSURANCE: Licensee shall obtain and maintain at its sole cost and
expense for the life of the Licensed Product standard commercial general and
product liability insurance, the form of which must be acceptable to Agent,
from a qualified insurance company, naming PorchLight, JJPP and WonderWings, as
additional named


                                      18


insureds, which policy shall provide protection against any and all claims,
demands and causes of action arising out of any defects or failure to perform,
alleged or otherwise, in the Licensed Product(s) or any material used in
connection therewith or any use thereof including for product liability and
personal injury, and for breach of contract, copyright and trademark
infringement, advertising, libel, slander, or other form of defamation,
invasion, infringement of or interference with the rights of privacy or
publicity, whether under statutory or common law, caused by Licensee or the
Licensed Products. The amount of coverage shall be a minimum of One Million
U.S. Dollars (US$1,000,000.00) combined single limit for each single occurrence
for bodily injury and property damage and Three Million U.S. Dollars
(US$3,000,000.00) in the aggregate with a deductible no greater than $10,000.
Said policy shall provide for thirty (30) days notice to Agent from the insurer
by registered or certified mail, return receipt requested, in the event of any
modification, cancellation or termination of said policy. Licensee shall
furnish to Agent a certified copy of said policy providing such coverage within
ten (10) days after the effective date of this Agreement and in no event shall
Licensee manufacture, distribute or sell the Licensed Products prior to the
receipt by Agent of such evidence of insurance.

         19. INDEMNITY:

                  (a) Licensee will at all times indemnify, defend and hold
harmless PorchLight, JJPP and WonderWings and their respective officers,
directors, employees, agents and representatives from and against any and all
claims, damages, litigation, judgments, costs and expenses caused by or arising
out of any (i) breach of any representation, warranty, obligation or covenant
of Licensee contained herein, (ii) misuse of the Property by Licensee in
connection with the Licensed Products or otherwise or (iii) alleged defects in
or other claim relating to the Licensed Products. However, PorchLight, JJPP and
WonderWings, may, at their election, individually or collectively, defend any
such action, by their respective counsel and at Licensee's expense in which
they are a named party or which may affect the ownership or rights in and to
the Property or trademarks and copyrights related thereto. Licensee will cause
its counsel to cooperate fully with PorchLight, JJPP and/or WonderWings and
their counsel in the defense of such action. No Party hereto shall admit any
liability or compromise or settle any suit, pertaining to any other Party
without first obtaining such other Party or Parties consent in writing, which
such consent shall not be unreasonably withheld.

                  (b) Licensor represents and warrants that it has all rights
necessary to grant the rights hereunder to Licensee. Additionally, Licensor and
Agent represent and warrant that they have not licensed rights to any other
entity which would in any way prohibit Licensee's exercise of any rights granted
hereunder to Licensee. Licensor will at all times indemnify, and hold harmless,
Licensee and its officers, directors, employees, agents and representatives from
and against any and all claims, damages, litigation, judgments, costs and
expenses arising as a result of any claim brought by a third party that the
Property infringes upon or violates the rights of such third party and Licensor
and/or Agent, jointly or individually, as applicable, will at all times
indemnify, and hold harmless, Licensee and its officers, directors, employees,

                                      19


agents and representative from and against any and all claims brought by a third
party arising as a result of a breach of Licensor's and/or Agent's
representations, warranties and covenants made under this Agreement. Licensee
shall promptly notify Agent in writing upon Licensee's acquiring knowledge of
any such claim or action, and PorchLight, JJPP and WonderWings shall,
individually or collectively, undertake the defense or settlement of such claim
or action.

         20. NO JOINT VENTURE: Licensee shall not have the power to bind or
obligate any of the other Parties, individually or collectively, in any manner
whatsoever. Nothing herein contained shall be construed to constitute the
Parties as partners or joint venturers, nor shall any similar relationship be
deemed to exist between them.

         21. NO ASSIGNMENT: The license hereby granted is and shall be personal
to Licensee, and shall not be assignable by any act of Licensee or by operation
of law. Licensee shall have no right to grant any sub-licenses. Any attempt by
Licensee to grant a sub-license or to assign, mortgage or part with possession
or control of this license or of any of its rights hereunder shall constitute a
material breach of this Agreement. This Agreement shall inure to the benefit of
and shall be binding upon Agent's and Licensor's successors and assigns and may
at Agent's and Licensor's election be assigned.

         22. WAIVER; MODIFICATION: No waiver or modification of any of the
terms of this Agreement shall be valid unless in writing. No waiver by any of
the Parties of a breach hereof or a default hereunder shall be deemed a waiver
by such Party of the same or any other breach or default or a waiver by such
Party of its right to enforce any such breach or default in the future. Should
any provision of this Agreement be found to be invalid or unenforceable by a
court of competent jurisdiction, then such provision shall be deemed severed
from this Agreement or enforceable only to the extent permitted by law and any
such invalidity or unenforceability shall not affect the validity or
enforceability of any of the other provisions of this Agreement and all
remaining provisions shall survive and be fully enforceable.

         23. REMEDIES: The Parties recognize the unique and special nature and
value of the use of the Property and agree that it is extremely difficult and
impractical to ascertain the extent of the detriment to Agent and Licensor
which would be caused in the event of any use of the Property contrary to the
terms of this Agreement. The Parties further acknowledge that Agent and
Licensor will have no adequate remedy at law in the event Licensee uses the
Property in any way not permitted hereunder including, without limitation, use
of the Property or sale of Licensed Products after the Licensed Period, and
that Agent and Licensor shall be entitled to equitable relief by way of
temporary and permanent injunction, and such other and further relief at law or
equity as any arbitrator or court of competent jurisdiction may deem just and
proper, in addition to any and all other remedies provided for herein.
Notwithstanding the foregoing, Licensee agrees that its sole remedy in the
event of a breach of this Agreement by Agent and/or Licensor shall be an action
at law against such Party or Parties, as applicable, for damages, and in no
event shall Licensee be entitled to


                                      20


equitable relief against Agent and/or Licensor or to enjoin the production,
distribution or any exploitation of the Property or the Licensed Products.

         24. ARBITRATION: Any dispute between the Parties arising under or
related to this Agreement, other than to protect Licensor's copyright and
trademark rights in and to the Property, to secure compliance with or involving
a continuance of this Agreement, to prevent a violation or threatened violation
thereof or to prevent unauthorized or improper use of the Property, shall be
resolved exclusively by arbitration, which shall be held in Los Angeles,
California and conducted in accordance with the Commercial Rules of the
American Arbitration Association then in effect. The Parties hereto agree that
they will abide by and perform any award rendered in such an arbitration
conducted pursuant hereto, and any judgment upon the award rendered shall be
final, binding and non-appealable and may be entered in any court having
jurisdiction. Each Party shall bear its own expenses of the arbitration, except
that the arbitrator's fees and costs shall be borne equally by the Parties and
the arbitrator shall have the power to award costs and expenses, including
attorneys' fees, to the prevailing Party.

         25. ENFORCEMENT OF RIGHTS: Any and all rights granted to Licensee
pursuant to the terms of this Agreement may be enforced by either or both of
Agent and/or Licensor, at any time and from time to time, to the extent such
rights are possessed by such Party. Licensee acknowledges and agrees that
should Licensee receive notice from Licensor or Agent that Agent's rights have
expired or been terminated, Licensee shall continue abiding by all of the terms
and conditions contained herein directly with Licensor and all statements and
payments to be made hereunder shall be made as directed by Licensor.

         26. MANUFACTURE OF MERCHANDISE: Licensee shall provide Agent with a
list of all third parties who will be engaged to provide services in connection
with the manufacture of merchandise relating to the Property. Licensee shall
also insure that each such manufacture executes an agreement in the form
attached hereto as Exhibit "2" or such other form approved by Agent, pursuant
to which the manufacturer: (a) acknowledges WonderWings' trademark and JJPP's
and WonderWings' copyright rights in the Property and the merchandise, and (b)
represents and warrants that it will sell merchandise in connection with the
Property only to Licensee and that it will use the Property only as directed by
Licensee, Licensor or Agent and upon notification of expiration or termination
of this License Agreement or, when Licensee ceases to require the manufacture
of the Licensed Products, whichever is earlier, it will immediately cease
manufacturing the Licensed Products and destroy or deliver to Licensee, as
advised, any devices used to reproduce the Property of any

                                      21



elements thereof. Notwithstanding the foregoing, Licensee acknowledges and
agrees that any act of such manufacturer appointed by Licensee shall be deemed
the acts of Licensee for all purposes and such manufacturer's failure to fully
and properly account to Licensee shall not relieve Licensee of any liability
resulting therefrom.

         27. NOTICES: Notices by any Party to the other shall be given by
telefax, with confirmed delivery, and by registered or certified mail, return
receipt requested, or by other reputable overnight mail/delivery services (such
as Federal Express or United Parcel Service) with proof of delivery, all
charges prepaid. All statements, payments and notices hereunder shall be given
at the respective addresses of the Parties as set forth on the first page of
this Agreement unless written notice of a change of address is given. Notices
shall be deemed given the date the notice is sent as provided above, except
that notices of change of address shall be effective when received. Copies of
all notices to Agent and JJPP shall be sent to Agent at 11777 Mississippi
Avenue, Los Angeles, CA 90025, Attention: Business Affairs, Tel.: 310-477-8400,
Fax: 310-477-5555; and to WonderWings at P. O. Box 823006, Dallas, TX 75382,
Tel.: 972-235-4400, Fax: 972-235-9994, with a copy to Frederick Fierst, Esq.,
at Fierst & Pucci LLP, Suite 4, 64 Gothic Street, Northampton, MA 01060-3018,
Tel.: 413-584-8067, Fax: 413-585-0787; and to Licensee at the address set forth
in Schedule "A".

         28. JURISDICTION; ATTORNEYS' FEES: This Agreement shall be governed by
and construed in accordance with the laws of the State of California and the
United States. It is hereby agreed that any matter arising under this Agreement
(subject to the arbitration provisions hereof) and including, without
limitation, any suit to enforce an award under the arbitration provisions
hereof, must be finally adjudged or determined in any court or courts of the
State of California or of the United States of America, in Los Angeles County,
California, and the Parties hereto hereby submit generally, exclusively,
irrevocably and unconditionally to the jurisdiction and venue of such courts
and of any of them in respect of any such matter and consent to service of
process by any means authorized by California law. In the event that any legal
action or any other proceeding is commenced to enforce any provision of this
Agreement or as a result of a breach, default or misrepresentation in
connection with any provision of this Agreement, the successful or prevailing
party shall be entitled, in addition to any other relief to which said party
may be entitled, to recover actual attorneys' fees and costs incurred in such
action or proceeding.

         29. ENTIRE AGREEMENT: This Agreement (including Schedule "A," Schedule
"B," Schedule "C", Exhibit "1" and Exhibit "2") constitutes the entire
understanding between the Parties and shall not be modified or amended unless
in writing signed by all Parties.

By signing in the spaces provided below, the Parties have agreed to all of the
terms and conditions contained in this Agreement and the attached Schedules and
Exhibits


                                      22


incorporated herein by reference as part of this Agreement. Subject to full
execution of this Agreement by all Parties set forth below, this Agreement
shall be effective upon the Effective Date first written above.

PORCHLIGHT ENTERTAINMENT, INC.

BY:  /S/WILLIAM BAUMANN
     ---------------------
     WILLIAM T. BAUMANN
ITS: EXECUTIVE VP, COO & CFO



JAY JAY THE JET PLANE PRODUCTIONS, INC.

BY:  /S/WILLIAM BAUMANN
     ------------------
     WILLIAM T. BAUMANN
ITS: EXECUTIVE VP, COO & CFO




KIDQUEST, INC. DBA WONDERWINGS.COM ENTERTAINMENT

BY:  /S/ DAVID MICHEL
     ----------------
ITS: CEO




ACTION PRODUCTS INTERNATIONAL, INC.

BY:  /S/ RONALD S. KAPLAN
     --------------------
ITS: CEO


                                       23

                             JAY JAY THE JET PLANE

                         MERCHANDISE LICENSE AGREEMENT

                                  SCHEDULE "A"

1.       LICENSED PRODUCTS:

         Licensed Products shall include only the following:

         (1) Wooden Sky-Track Adventure System consisting of Wooden Character
         Vehicles, Wooden Destination Play Boards, Wooden Buildings,
         3-Dimensional Sky Track and Wooden Play Table components as defined
         below:

         Wooden Character Vehicles - Approximate size: 3-3.5" in length. The
         primary material from which these Character Vehicles will be
         constructed will be wood. Specifically, wood will be used for the
         fuselage and wings of the airplanes. Plastic will only be used for
         rendering character faces, and as needed for minimal minor trim that
         cannot be fabricated from wood. All of the Wooden Character Vehicles
         will be compatible with the Sky-Track Adventure System. Each may have
         additional features to be approved by Agent and Licensor on a case by
         case basis, such as implanted electronic components, which interact
         with other products in the Sky-Track Adventure System. Ultimately to
         include all 9 recurring character/vehicles, with a minimum of 5
         different character/vehicle SKUs to be produced and marketed in the
         first year of the Initial Term, with the additional character/vehicles
         and new custom variations to be introduced by Licensee during the
         balance of the Initial Term.

         Wooden Destination Play Boards - Approximate size: 16x16" square or
         16x32" square. The Wooden Destination Play Boards are to consist of
         flat wooden boards with full-color artwork. In addition, these will
         include 3-dimensional play elements to make up the "scenery" of the
         various story locations, and each will feature story-appropriate
         electronic and mechanical functions, to be approved by Agent and
         Licensor on a case by case basis, that will interact with the Wooden
         Character Vehicles. These 3-Dimensional "scenery" will be constructed
         of wood when feasible with a minimal amount of plastic materials for
         trim. Each of the Destination Play Boards will combine to create
         extended play surfaces. At least 5 initial SKUs of the Destination
         Play Boards will be produced and marketed in the first year of the
         Initial Term and will together make up the 48x32" play surface for use
         with the Play Table described below.

         Wooden Buildings - Size: Various but in scale with the Wooden
         Destination Play Boards. The Wooden Buildings will be made primarily
         of wood, with minimal plastic and metal decorative elements as
         necessary to achieve accurate and durable reproductions (for example,
         the "donut" atop the Donut Shop). The Buildings will be designed as
         replicas of buildings shown in the Jay Jay The Jet Plane television
         series, such as the Tarrytown Airport hangars and the Donut Shop and
         Hardware Store in Tarrytown village and will be sized in scale for use
         with the Wooden Destination Play Boards. A minimum of 6 initial SKUs
         of the Wooden Buildings will be produced and marketed in the first
         year of the Initial Term with the additional Buildings to be
         introduced by Licensee during the balance of the Initial Term.


                                      24


         3-Dimensional Sky Track - Size: Various but in scale with the Wooden
         Destination Play Boards. These will assemble to create 3-dimensional
         flight paths for the Wooden Character Vehicles to follow, to simulate
         the appearance of flight. As this system is intended to suggest
         imaginative flight it is necessary to fabricate these components out
         of a multiplicity of materials as approved by Agent and Licensor,
         including plastic provided use of such Sky Track is designed only for
         the Sky Track Adventure System.

         Wooden Play Table - Size: 48X32" square, 18-24" high. The Wooden Play
         Table is intended to serve as a surface for assembling the Destination
         Play Boards, Buildings, and Sky-Track into a complete play environment
         which demonstrates all of the features of the Sky-Track Adventure
         System. Materials are not yet determined, but will likely be wood,
         Formica, and/or composites, with metal hardware as approved by Agent
         and Licensor. Wooden Play Table to be produced and marketed during the
         first year of the Initial Term. Not to conflict with furniture items.

         (2) Die Cast Metal Vehicles as defined below:

         Approximate size: 2.5-3.5" in length. The vehicle body to be fabricated
         from die cast metal. Plastic will be used only for the chassis and
         wheels and for rendering character faces. Such design is consistent
         with industry standards for die cast metal vehicles, particularly those
         depicting characters. These will include free-moving or mechanically
         actuated wheels, propellers, and other elements as appropriate and
         approved by Agent and Licensor. Ultimately to include all nine
         recurring character/vehicles, with a minimum of 5 different
         character/vehicle SKUs to be produced and marketed during the first
         year of the Initial Term, with the additional character/vehicles and
         new custom variations to be introduced during the balance of the
         Initial Term.

         (3) Bead "Coasters" as defined below:

         Wooden bases with coated metal wire and diminimus plastic trim to
         depict Jay Jay The Jet Plane characters and sky elements (sun, clouds,
         etc.) moving through 3-dimensional space along rigid guide-wires.
         Ultimately 2-3 SKUs will be produced during the Initial Term at varying
         size/price points, with a minimum of 1 SKU to be produced and marketed
         during the first year of the Initial Term.

         (4) Character Carry-All as defined below:

         Carry case with individual, non-removable storage compartments to hold
         wooden or die-cast metal character vehicles as well as additional play
         elements from the Wooden Sky-Track Adventure System. May be constructed
         of vinyl, fabric, or a mixture thereof, in only 1 SKU to be produced
         and marketed during the first year of the Initial Term. Not to conflict
         with hand-held luggage or luggage on wheels.

         (5) Pilot Wings as defined below:

         Plastic "pilot" wings, which may be included with the Character
         Carry-All, Wooden Character Vehicles or with the other Licensed
         Products. Pilot Wings may not be sold separately.

2.       LICENSED TERRITORY:

         United States, its territories and possessions and Canada.

3.       DISTRIBUTION CHANNELS:


                                      25


         Licensee's rights are specifically limited to sales and distribution
         through the following retail channels of distribution:

         Specialty Toy Stores to include, without limitation, but by way of
         example of such category: Imaginarium, Right Start, Zany Brainy, FAO
         Schwarz, and Leaning Express; Airport Shops to include, without
         limitation, but by way of example of such category: WH Smith, Host
         Marriott and Paradies Shops;

         Book Stores to include, without limitation, but by way of example of
         such category: Barnes and Noble, Borders, Waldenbooks, B. Dalton, Books
         A Million and Independent "Mom and Pop" type Book/Gift Stores;

         Craft Stores to include, without limitation, but by way of example of
         such category: Michaels, Pearl Paint and Joanne's;

         Mid-Tier and Upper-Tier Department Stores such as JC Penney, Sears and
         May Co. and other similar Mid-Tier and Upper-Tier Department Stores;

         Museum Shops; and

         Catalogs including, without limitation: Lilly's Kids and J.C. Penney's
         catalogs, provided that all such catalogs sales and distribution are
         designed for and limited to the Territory granted herein.

         Additionally, QVC/Television Home Shopping, Internet Sales, Aviation
         Attractions, Rainforest Cafe outlets, Theme Parks such as Six Flags,
         Mass Market Retail Stores and Brand Name Discounters, such as Target,
         TJ Maxx, Marshall's, Ross Stores, Toys R Us and Kay Bee Toys shall be
         subject to Agent's written approval on a case by case basis.

4.       LICENSED PERIOD:

         Initial Term: The period commencing on December 1, 2001 and expiring
         on December 31, 2004, subject to the full execution of this Agreement.

         Renewal Term: Provided that Licensee is fully performing its
         obligations as set forth herein and is not in breach of any of the
         terms and conditions of this Agreement, Licensee shall have the right
         to extend the Agreement for an additional one (1) year period (herein
         the "Renewal Term"), provided that, Licensee shall give written notice
         to Agent of its election to extend the Initial Term no later than
         ninety (90) days prior to the expiration of the Initial Term and
         further provided that Licensee shall pay an additional sum of Seventy
         Five Thousand Dollars ($75,000) as and for an additional Guaranteed
         Minimum Payment for the Renewal Term which such additional sum shall
         be payable in accordance with the Payment Schedule for the Guaranteed
         Minimum Payment for the Renewal Term set forth below.

         In the event that Licensee shall elect to extend the Initial Term for
         the Renewal Term in accordance with the provisions set forth herein,
         the Initial Term and Renewal Term shall be collectively referred to in
         this Agreement as the Licensed Period.

5.       PAYMENT:

         GUARANTEED MINIMUM PAYMENT FOR THE INITIAL TERM:
         ONE HUNDRED THOUSAND DOLLARS ($100,000) PAYABLE AS AN ADVANCE
         ("ADVANCE") AS FOLLOWS:

         PAYMENT SCHEDULE FOR GUARANTEED MINIMUM PAYMENT/ADVANCE FOR THE
         INITIAL TERM:

         TWENTY FIVE THOUSAND DOLLARS ($25,000) due upon execution of the
         Agreement;


                                      26

         TWENTY FIVE THOUSAND DOLLARS ($25,000) due on or before June 30, 2002;
         FIFTEEN THOUSAND DOLLARS ($15,000) due on or before December 31, 2002
         SEVENTEEN THOUSAND FIVE HUNDRED DOLLARS ($17,500) due on or before
         December 31, 2003; and

         SEVENTEEN THOUSAND FIVE HUNDRED DOLLARS ($17,500) due on or before
         September 30, 2004.

         GUARANTEED MINIMUM PAYMENT FOR THE RENEWAL TERM:
         SEVENTY FIVE THOUSAND DOLLARS ($75,000) PAYABLE AS AN ADVANCE FOR THE
         RENEWAL TERM AS FOLLOWS:

         PAYMENT SCHEDULE FOR THE ADDITIONAL GUARANTEED MINIMUM PAYMENT FOR THE
         RENEWAL TERM:
         THIRTY SEVEN THOUSAND FIVE HUNDRED DOLLARS ($37,500) due on January 1,
         2005; and
         THIRTY SEVEN THOUSAND FIVE HUNDRED DOLLARS ($37,500) due on or before
         July 1, 2005.

         THE PARTIES ACKNOWLEDGE AND AGREE THAT THE ADDITIONAL GUARANTEED
         MINIMUM PAYMENT FOR THE RENEWAL TERM SHALL ONLY BE PAYABLE IN THE
         EVENT THAT LICENSEE SHALL ELECT TO EXTEND THE INITIAL TERM FOR THE
         RENEWAL TERM AS SET FORTH ABOVE.

         PERCENTAGE COMPENSATION/ROYALTY:
         Ten percent (10%) Domestic; or
         Twelve percent (12%) F.O.B. Hong Kong, as applicable.

6.       MARKETING DATE AND DISTRIBUTION DATE:
         The Licensed Products shall be marketed and previewed at the 2002 Toy
         Fair held in New York on or before February 28, 2002 (the "Marketing
         Date") and distributed on or before September 30, 2002 (the
         "Distribution Date") for a Fall 2002 Launch.

7.       EXCLUSIVITY:
         NON-EXCLUSIVE.
         Subject to the terms and conditions set forth in the Agreement to
         which this Schedule "A" is incorporated by reference and attached to
         and made a part thereof, Licensee shall have the non-exclusive right
         to manufacture, sell and distribute the Licensed Products (see "1"
         above) in the Licensed Territory (see "2" above) and in the designated
         Distribution Channels (see "3" above) during the Licensed Period (see
         "4" above) set forth in this Schedule "A".

8.       SELL-OFF PERIOD:
         Ninety (90) days.


                                      27



9.       ADDRESS FOR NOTICES TO LICENSEE:

         Name:         Action Products International, Inc.
         Address:      390 N. Orange Avenue, 21st Floor

                       Orlando, Florida  32801
         Tel.:         (407) 481-8007
         Fax:          (407) 481-2781
         Attn:         Ron Kaplan


                                      28



                                  SCHEDULE "B"

                                    PROPERTY

The name(s), design(s), artwork, logo(s), copyright(s) and trademark(s)
appearing in the animated television series entitled "Jay Jay The Jet Plane"
(herein the "Series"), including the following animated characters as they
appear in said Series:

                           Jay Jay

                           Snuffy

                           Old Oscar

                           Tracy

                           Savannah

                           Big Jake

                           Herky

                           Revvin' Evan

                           Tuffy


                                      29

                                  SCHEDULE "C"

                              TRADEMARK AND LOGOS

             (TO BE USED ON ALL PRODUCT PACKAGING AND ADVERTISING)

                   [PORCHLIGHT ENTERTAINMENT GRAPHIC OMITTED]



                [WINDERWINGS.COM ENTERTAINMENT GRAPHIC OMITTED]

                       [MODERN CARTOONS GRAPHIC OMITTED]



                    [JAY JAY THE JET PLANE GRAPHIC OMITTED]


Trademark footnote:

The mark set forth above, "Jay Jay The Jet Plane", is owned by KIDQUEST, INC.,
d/b/a WonderWings.com Entertainment which has granted to PorchLight
Entertainment, Inc., as agent, the right to license such mark.


                                      30


                                  EXHIBIT "1"

                              LICENSEE REPORT FORM

                                 (PAGE 1 OF 2)

                        ROYALTY REPORT SUMMARY STATEMENT

- --------------------------------------------------------------------------------
Licensee Name:
- --------------------------------------------------------------------------------
Date:
- --------------------------------------------------------------------------------
Agreement Number:
- --------------------------------------------------------------------------------
Property:
- --------------------------------------------------------------------------------
Quarter (circle one)
1st, 2nd, 3rd, 4th, 200[   ]
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
PRE-PAID ADVANCE (IF APPLICABLE):
$[                             ]

Total Net Sales Dollars:       $[                             ]
(from Detailed Royalty Report)

Royalty Rate:
(from Detailed Royalty Report) [                   %]

TOTAL ROYALTY AMOUNT DUE:

$[                              ]
(from Detailed Royalty Report)

LESS UNRECOUPED BALANCE OF ADVANCE FROM
PRIOR STATEMENT (IF APPLICABLE):

$[                              ]
- --------------------------------------------------------------------------------
BALANCE DUE/(UNRECOUPED BALANCE):                                      $[      ]
- --------------------------------------------------------------------------------

Please make payments by check or wire transfer to: Jay Jay The Jet Plane
Productions, Inc.

Certification: We have examined this report and certify it to be a true and
accurate statement as reflected by our books and records for the quarter
concerned.

                  Authorized Licensee Signature:
                                                ---------------------------
                  Printed Licensee Signature/Title:
                                                   ------------------------

                  Date Signed:
                              ----------------------


                                      31

                              LICENSEE REPORT FORM
                                 (PAGE 2 OF 2)
                            DETAILED ROYALTY REPORT


                                                                             
- ------------------------------------------------------------------------------------------------------------------------------------
LICENSEE NAME:
- ------------------------------------------------------------------------------------------------------------------------------------
DATE:
- ------------------------------------------------------------------------------------------------------------------------------------
AGREEMENT NUMBER:
- ------------------------------------------------------------------------------------------------------------------------------------
PROPERTY:
- ------------------------------------------------------------------------------------------------------------------------------------
PERIOD COVERED:  1ST QTR/2ND QTR/3RD QTR/4TH QTR 200[  ]  (PLEASE CIRCLE ONE)            FROM:              TO:
- ------------------------------------------------------------------------------------------------------------------------------------
TERRITORY:                  (PLEASE LIST ALL COUNTRIES WITHIN THE TERRITORY SEPARATELY)
- ------------------------------------------------------------------------------------------------------------------------------------
LICENSEE INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
ADDRESS:
- ------------------------------------------------------------------------------------------------------------------------------------
CITY/STATE/ZIP:
- ------------------------------------------------------------------------------------------------------------------------------------
TELEPHONE NUMBER:
- ------------------------------------------------------------------------------------------------------------------------------------
FAX NUMBER:
- ------------------------------------------------------------------------------------------------------------------------------------
ATTENTION:
- ------------------------------------------------------------------------------------------------------------------------------------
 LICENSED
 PRODUCTS
   SKU
  Number   -------------------------------------------------------------------------------------------------
                     Description  Total Units     Total Units       Gross Sales    Allowable   Net Sales
                                  Manufactured   Ship/Distributed     (Units)       Returns*    (Units)
                                   During Qtr      During Qtr                        (Units)
- ------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------

TOTAL AMOUNT
                    ----------------------------------------------------------------------------------------


                                                                         
- ------------------------------------------------------------------------------------------------------------------------------------
LICENSEE NAME:
- ------------------------------------------------------------------------------------------------------------------------------------
DATE:
- ------------------------------------------------------------------------------------------------------------------------------------
AGREEMENT NUMBER:
- ------------------------------------------------------------------------------------------------------------------------------------
PROPERTY:
- ------------------------------------------------------------------------------------------------------------------------------------
PERIOD COVERED:  1ST QTR/2ND QTR/3RD QTR/4TH QTR 200[  ]  (PLEASE CIRCLE ONE)            FROM:              TO:
- ------------------------------------------------------------------------------------------------------------------------------------
TERRITORY:                  (PLEASE LIST ALL COUNTRIES WITHIN THE TERRITORY SEPARATELY)
- ------------------------------------------------------------------------------------------------------------------------------------
LICENSEE INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
ADDRESS:
- ------------------------------------------------------------------------------------------------------------------------------------
CITY/STATE/ZIP:
- ------------------------------------------------------------------------------------------------------------------------------------
TELEPHONE NUMBER:
- ------------------------------------------------------------------------------------------------------------------------------------
FAX NUMBER:
- ------------------------------------------------------------------------------------------------------------------------------------
ATTENTION:
- ------------------------------------------------------------------------------------------------------------------------------------
 LICENSED
 PRODUCTS
   SKU
  Number   -------------------------------------------------------------------------------------------------------------------------
                     Unit Selling  Gross Sales    Allowable     Net Sales   Royalty       Royalty
                         Price         ($)         Returns*        ($)       Rate       Amount Due
                          ($)                        ($)                      (%)           ($)
- ------------------------------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------------------

TOTAL AMOUNT

                    ----------------------------------------------------------------------------------------------------------------


* Please provide copies of relevant invoices for verification of allowable
  returns, if applicable.



                                  EXHIBIT "2"
                            MANUFACTURER'S AGREEMENT

Dated:
      ------------------------------

To:  PorchLight Entertainment, Inc.
     11777 Mississippi Avenue
     Los Angeles, CA 90025

Re:      Merchandising License Agreement dated __________, 200_ between
         PORCHLIGHT ENTERTAINMENT, INC. ("Agent" or "PorchLight"), JAY JAY THE
         JET PLANE PRODUCTIONS, INC. ("JJJP"), and KIDQUEST, INC., dba
         WonderWings.com Entertainment ("WonderWings") on the one hand, and

         ___________________________________________ ("Licensee"), on the other
         hand.

This letter will serve as notice to you that we, ______________________________
(the "Manufacturer"), located at: ________________________________________,
have been engaged by the above-referenced Licensee to manufacture
_______________________________________________ (the "Licensed Products"),
utilizing the Jay Jay The Jet Plane(TM) Property (the "Property"), in
accordance with the terms and conditions of the Merchandising License Agreement
referenced above (herein referred to as the "Agreement") and we are cognizant
of, and agree to the terms and conditions set forth in said Agreement as they
relate to our function as the Manufacturer.

We hereby acknowledge WonderWings' trademarks in and to the Property and the
copyrights of JJJP and WonderWings (JJJP and WonderWings shall be referred to
collectively herein as the "Licensor") and Licensor's respective rights and
ownership thereof and the right of Agent to license said Property. We agree
that we will not claim any rights or ownership in and to the Property or in any
parts thereof and we will not use any trademark, copyright, servicemarks or
trade name which is identical to or confusingly similar to the Property or any
part thereof. Further, we acknowledge and agree that all copyrights in any
literary, artistic or musical work made by us or on our behalf for the purposes
of manufacturing the Licensed Products which incorporate the Property or any
part thereof, shall inure to the benefit of Licensor and we shall take such
steps that may be necessary to assign all such copyrights to Licensor.

We understand and agree that the Manufacturer has no right to use the Property
and the licensed material, trademarks, copyrights or servicemarks thereof
except as specifically authorized in writing by Licensee, Licensor or Agent in
connection with the manufacture of the Licensed Products, and Manufacturer may
not sublicense, subcontract or in any way transfer the rights hereunder or
dispose of, sell or distribute the Licensed Products or licensed material to
any person or entity other than Licensee. Manufacturer further acknowledges and
agrees that upon notice from Licensee, Licensor or Agent of expiration



or termination of the aforementioned Agreement or, when Licensee ceases to
require the manufacture of the Licensed Products, which ever is earlier,
Manufacturer will deliver to Licensee, or if otherwise advised, to Licensor or
Agent, any artwork, molds, patterns, plates, designs or other devices used to
reproduce the name or any likeness, design or other elements of the Property
and we will immediately cease any further manufacture of Licensed Products or
any part thereof.

We agree to supply Agent, at Agent's request, but not more frequently than
quarterly, with a statement detailing all items manufactured and/or supplied to
Licensee in connection with the Property and/or the Licensed Products and we
hereby acknowledge that Agent and/or Licensor, or their representative(s) shall
have the right to examine the books and records of Manufacturer as they relate
to the Licensed Products as well as the right of Agent and/or Licensor, or
their representative(s) to visit the plant or plants where the Licensed
Products are manufactured and where the containers, packaging material and the
like are printed or produced in order to determine whether the Manufacturer and
Licensee are in compliance with the terms herein and in the aforementioned
Agreement. We further agree that we will look solely to Licensee for any
payments and/or compensation or other sums with respect to the manufacture,
shipment and/or supply of the Licensed Products or any part thereof and that we
will have no claim against Licensor or Agent with respect to such payments or
any other matters in connection with the Licensed Products or the Property.

We understand that our engagement as Manufacturer for the Licensee is subject
to our agreement to the foregoing terms and Agent and/or Licensor shall be
entitled to invoke any remedy permitted by law for violation of this
Manufacturer's Agreement. Manufacturer's appointment shall also be subject to
Licensor's and Agent's approval which will not be deemed granted unless and
until this Manufacturer's Agreement is executed below by all parties.

Read and Agreed to:

By:
   -------------------------
Manufacturer

By:
   -------------------------
Licensee

Approved:

By:                              and
    ---------------------------,     --------------------------
             Licensor

By:
    ---------------------------
             Agent

EX-10.10

                                 EXHIBIT 10.10

                              SEPARATION AGREEMENT

         This Separation Agreement ("Agreement") is made and entered into by
and among Action Products International, Inc. ("APII"), a Florida corporation,
with its principal offices at 390 North Orange Avenue, Suite 2185, Orlando,
Florida 32801 and Ronald E. Tuchman ("Tuchman"), an individual residing at 566
Wayne Drive, River Vale, New Jersey 07675.

         WHEREAS, Tuchman accepted employment as President and Chief Operating
Officer of APII under an Employment Agreement with an effective date of January
29, 2001, as amended, including the Amendment to Employment Agreement dated as
of July 1, 2002 (the "Employment Agreement"), and subsequently began employment
with APII; and

         WHEREAS, pursuant to Section 3(c) of the Employment Agreement, APII
agreed to grant Tuchman the right to purchase up to 130,000 shares of APII's
common stock, par value $0.001 per share, pursuant to, and subject to the terms
of, a Stock Option Agreement dated February, 2001 (the "Non-Plan Stock Option
Agreement"); and

         WHEREAS, APII granted to Tuchman the right to purchase up to 70,000
shares of APII's common stock, par value $0.001 per share, under the 1996 Stock
Option Plan (the "Plan Stock Option Agreement") (the Non-Plan Stock Option
Agreement and Plan Stock Option Agreement are collectively referred to herein
as the "Stock Option Agreements"); and

         WHEREAS, pursuant to Section 4 of the Employment Agreement, APII and
Tuchman executed a Subscription Agreement (the "Subscription Agreement") dated
February 2001, under which Tuchman acquired 114,286 shares of APII's common
stock, par value $0.001 per share from APII at a purchase price of $1.75 per
share for an aggregate purchase price of $200,000; and

         WHEREAS, APII and Tuchman desire, among other matters contained
herein, to terminate both the employment relationship and the Employment
Agreement, upon mutually acceptable terms and to settle any and all
differences, claims and potential claims arising out of, among other matters,
(i) Tuchman's employment and termination of employment with APII, (ii)
termination of the Employment Agreement, (iii) termination of APII's
obligations under the Stock Option Agreements and any other options or warrants
issued or granted to Tuchman, and (iv) termination of the parties executory
obligations under the Subscription Agreement.

         NOW THEREFORE, in consideration of the mutual promises and other
consideration contained herein and intending to be legally bound, the parties
agree as follows:

1.       SEPARATION.

         (A)      Tuchman hereby resigns, effective on the date hereof, from
any and all positions, officerships, and directorships he holds with APII or
any of its subsidiaries or affiliates. Simultaneous with the execution and
delivery hereof, Tuchman has delivered to APII his written resignation in the
form attached hereto as Exhibit "A".

         (B)      Tuchman has returned to APII any of the following that he has
in his possession: records and business documents, whether on computer or hard
copy, and other materials



(including but not limited to computer disks and tapes, computer programs and
software, office keys, APII credit cards, business cards (which business cards
Tuchman has either returned to API or destroyed), correspondence, files,
customer lists, technical information, customer information, pricing
information, sources of supply, vendor information, business strategies, sales
and purchasing records and copies thereof) (collectively, the "APII Records")
provided by APII and/or its predecessors, subsidiaries or affiliates and/or
obtained as a result of his employment with, or in any of his capacities with,
or rendering of services for, APII and/or its predecessors, subsidiaries or
affiliates, and/or created by Tuchman while employed by and/or rendering
services to or for APII and/or its predecessors, subsidiaries or affiliates.
Tuchman acknowledges that all such APII Records are the property of APII. In
addition, Tuchman shall promptly return in good condition, normal wear and tear
excepted, any and all computer equipment and accessories belonging to and/or
leased by APII and/or its predecessors, subsidiaries or affiliates.

2.       TERMINATION OF EMPLOYMENT AGREEMENT. The parties hereby mutually agree
that the Employment Agreement is terminated in its entirety as of the date of
this Agreement, and that Tuchman waives any claim he has or may have under the
Employment Agreement for any payment of salary or accrued vacation time,
receipt of other benefits, reimbursement for any expenses or automobile
allowance; provided, however, that nothing herein shall restrict Tuchman's
right to elect to continue health benefits in accordance with the Consolidated
Omnibus Budget Reconciliation Act of 1986 ("COBRA").

3.       TERMINATION OF STOCK OPTION AGREEMENTS. The parties hereby mutually
agree that the Stock Option Agreements, and any other rights to acquire any
capital stock of APII issued or granted, or discussed or contemplated, to
Tuchman, are terminated in their entirety as of the date of this Agreement.

4.       TERMINATION OF SUBSCRIPTION AGREEMENT. The parties hereby mutually
agree that Articles IV and V of the Subscription Agreement are terminated as of
the date of this Agreement.

5.       RIGHTS OF INTELLECTUAL PROPERTY. Tuchman acknowledges and agrees that
all patents, licenses, copyrights, tradenames, trademarks, service marks,
planning, marketing and/or creative policies, advertising campaigns, media
campaigns, and budgets, practices, concepts, strategies, and methods of
operation (excluding such budgets, practices, concepts, strategies, and methods
of operation that are standard practices in the toy industries), financial or
business projections, designs, logos, slogans and business plans developed or
created by Tuchman in the course and scope of his employment with APII and/or
any of its subsidiaries or affiliates, either individually or in collaboration
with others, was and is deemed works for hire and the sole and absolute
property of APII. Tuchman agrees that, at APII's request and expense, he will
take all steps necessary to secure the rights thereto to APII by patent,
copyright or otherwise.

6.       REPRESENTATIONS AND WARRANTIES.

         (A)      As an inducement for APII to enter into this Agreement,
Tuchman represents and warrants to APII that (i) during his employment with
APII, he has not committed material breach of any restrictive covenant in
Section 10 of the Employment Agreement, (ii) that he has not assigned or
attempted to assign any right or interest in any claim against APII or any of
its affiliates or subsidiaries to any other person and that no other person has
an interest in such rights


                                       2


or claims, whether such claim arises under the Employment Agreement, Stock
Option Agreements, Subscription Agreement, or otherwise, and he has not used or
disclosed his knowledge of APII's business affairs to aide others in
competition with APII.

         (B)      As an inducement for Tuchman to enter into this Agreement,
APII represents and warrants to Tuchman that (i) APII is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Florida; (ii) APII has the requisite corporate power and authority to
execute and deliver this Agreement and to perform its obligations hereunder;
(iii) the execution, delivery and performance of this Agreement by APII and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by all requisite corporate action, and no other corporate
proceedings on the part of APII is necessary to authorize the execution,
delivery or performance of this Agreement; and (iv) APII has adequate capital
under the Florida Business Corporation Act to purchase the Redemption Shares
under Paragraph 7.

7.       STOCK REPURCHASE. Provided Tuchman has not revoked this Agreement, and
has delivered written confirmation that he has not revoked this Agreement,
pursuant to Paragraph 17(c) herein, on the seventh (7th) business day after the
date of this Agreement (the "Redemption Date"), APII shall purchase from
Tuchman, and Tuchman sell to APII, 114,286 shares of APII common stock, par
value $0.001 per share, which Tuchman acquired from APII pursuant to the
Subscription Agreement, (the "Redemption Shares") for a total purchase price of
One Hundred Twenty Eight Thousand Dollars ($128,000.00) (the "Redemption
Price"). On the Redemption Date, (i) Tuchman shall deliver to APII the
certificate(s) evidencing the Redemption Shares, with medallion guaranteed
stock powers, endorsed in blank, which, Tuchman represents and warrants to APII
are free and clear of any liens or claims and, and (ii) APII shall deliver to
Tuchman the Redemption Price by wire transfer to such account as designated by
Tuchman.

8.       NON-DISPARAGEMENT.

         (A)      Tuchman shall not communicate, directly or indirectly, any
negative or disparaging comments or information about APII or any of the
current officers, directors, managers, supervisors, executives, employees or
representatives of APII ("APII Agents") or any of APII's subsidiaries and
affiliates concerning the reputation or status of APII's or APII's Agents'
professional abilities or APII's, or any of APII's subsidiary's or affiliate's
business or financial condition. In addition, Tuchman shall inform his
affiliates, agents and representatives ("Tuchman Agents") to comply with these
same terms with respect to APII and the APII Agents, and shall use reasonable
efforts to cause them to comply with such terms, where he has actual knowledge
of their failure to do so."

         (B)      APII shall not communicate, directly or indirectly, any
negative or disparaging comments or information about Tuchman or any of the
Tuchman Agents concerning the reputation or status of Tuchman's or the Tuchman
Agents' professional abilities or the business or financial condition of any of
Tuchman, the Tuchman Agents, or any business in which Tuchman is currently, or
in the future, involved. In addition, APII shall inform the APII Agents to
comply with these same terms with respect to Tuchman, the Tuchman Agents, and
any other business in which Tuchman is involved, and shall use reasonable
efforts to cause them to comply with such terms, where APII has actual
knowledge of their failure to do so."


                                       3


         (C)      Notwithstanding the foregoing, nothing contained in
subparagraphs (a) and (b) immediately preceding shall be applicable with
respect to any statements made by a party, where compelled by law to make any
such statements, provided that such statements are true."

         (D)      In addition to all other remedies, any party that has been
damaged by any statements prohibited by the provisions of this Paragraph 8,
shall be entitled to a temporary and permanent injunction without the necessity
of showing any actual damage, or posting bond.

9.       CONFIDENTIALITY OF SEPARATION AGREEMENT.

         (A)      Tuchman agrees not to disclose to anyone, either directly or
indirectly, any information whatsoever regarding the existence or substance of
this Agreement or the matters which have resulted in it, including those
pertaining to Tuchman's separation from APII.

         (B)      APII agrees not to disclose to anyone, either directly or
indirectly, any information whatsoever regarding the existence or substance of
this Agreement or the matters which have resulted in it, including those
pertaining to Tuchman's separation from APII. If contacted by an outside party,
APII will use its best efforts to have all such inquiries referred to Ronald S.
Kaplan (APII's Chief Executive Officer), or any successor Chief Executive
Officer of APII if Mr. Kaplan is not available, who shall be instructed to
respond that Tuchman's termination was by mutual agreement and on an amicable
basis and to confirm Tuchman's position and period of employment.

         (C)      If either party is requested or becomes legally compelled or
is required by any law, regulation or order, or by a regulatory body to make
any disclosure that is prohibited or otherwise constrained by this Paragraph 9,
such party will provide the other party with prompt notice of such request so
that it may seek an appropriate protective order or other appropriate remedy.
Subject to the foregoing, such party may furnish that portion (and only that
portion) of such information that, in the written opinion of its counsel, the
other party is legally compelled or is otherwise required to disclose. For
purposes of APII's public disclosure obligations under Federal and state
securities laws, the Rules and Regulation of the Securities and Exchange
Commission and the Nasdaq Stock Market, APII may disclose such information
about this Agreement as, in the opinion of counsel for APII, is necessary to
comply with such laws, rules and regulations.

10.      TUCHMAN'S RELEASE OF ALL CLAIMS. Tuchman, on behalf of himself, his
agents, executors, legatees, devisees, administrators, successors, and assigns,
does hereby irrevocably, forever and unconditionally release and forever
discharge (i) APII, and (ii) each of its current executive officers and
directors, and (iii) each of its past, present and future shareholders, agents,
directors, officers, executives, employees, representatives, attorneys in each
of their capacity as such, and (iv) their predecessors, successors, affiliates,
insurers, heirs, executors, administrators and assigns, and all persons acting
by, through, under or in concert with any of them (collectively referred to
herein as the "APII Released Parties"), of and from any and all actions, causes
of action, suits, debts, judgments, charges and expenses (including attorneys'
and paralegal fees and costs at all levels of dispute resolution), of any
nature whatsoever, asserted or unasserted, known or unknown, ("Claims"), which
Tuchman ever had, now has, or hereafter may have against any of the APII
Released Parties; including, without limitation, any Claims in any way arising
out of or


                                       4


related to Tuchman's employment and/or other capacity and/or service as a
director and/or otherwise with APII and/or any of its subsidiary and/or
affiliated entities and/or the termination of his employment and/or other
capacities and/or services with APII and/or its subsidiary and affiliated
entities, regardless of whether any or all of such Claims arises under any
state, federal or foreign statute, ordinance, regulation, order or common law.
The Claims released by Tuchman include, but are not limited to, those under the
Age Discrimination in Employment Act ("ADEA"), 29 U.S.C. Section 621 et seq.;
Title VII of the Civil Rights Act of 1964 ("Title VII"), 42 U.S.C. Section
2000e et seq.; the Americans with Disabilities Act of 1990 ("ADA") 42 U.S.C.
Section 12101 et seq.; the Family and Medical Leave Act of 1993 ("FMLA"), 29
U.S.C. Section 2601 et seq.; and the Employee Retirement Income Security Act of
1974 ("ERISA"), 29 U.S.C. Section 1001 et seq. and under any state law of a
similar nature; and as any or all of the foregoing are or may be amended, or
any other federal, state local or foreign statute, rule or ordinance and any
other claims in law or equity. In further expansion of the foregoing releases,
Tuchman releases the APII Released Parties of and from any and all Claims based
on constructive discharge, express, implied or quasi-contract, and breach of
the implied covenant of good faith and fair dealing. In still further expansion
of the foregoing releases, Tuchman releases the APII Released Parties of and
from any and all Claims for fraud of any kind. Expanding the foregoing releases
further still, Tuchman releases the APII Released Parties of and from any and
all Claims for wrongful discharge of any kind (including in violation of public
policy and constructive discharge), infliction of emotional distress, whether
intentional or negligent, defamation, negligence, conspiracy, any and all other
common law torts and discrimination on any basis prohibited by statute, public
policy or otherwise.

11.      APII'S RELEASE OF ALL CLAIMS. APII, on behalf of itself and its
subsidiaries, successors and assigns, does hereby irrevocably, forever and
unconditionally release and forever discharge Tuchman and each of his
successors, heirs, executors, administrators and assigns, and all persons
acting by, through, under or in concert with any of them (collectively referred
to herein as the "Tuchman Released Parties"), of and from any and all Claims,
which APII ever had, now has, or hereafter may have against any of the Tuchman
Released Parties; including, without limitation, any Claims in any way arising
out of or related to Tuchman's employment and/or other capacity and/or service
as a director and/or otherwise with APII and/or any of its subsidiary and/or
affiliated entities and/or the termination of his employment and/or other
capacities and/or services with APII and/or its subsidiary and affiliated
entities, regardless of whether any or all of such Claims arises under any
state, federal or foreign statute, ordinance, regulation, order or common law.
In still further expansion of the foregoing releases, APII releases the Tuchman
Released Parties of and from any and all Claims for fraud of any kind.

12.      CLAIMS RELEASED CONSTRUED BROADLY. Tuchman and APII intend that the
provisions of this Agreement regarding the Claims being released by the parties
under the provisions of this Agreement shall be construed as broadly as
possible. However, nothing contained in this Agreement is intended to waive any
claims or rights based on this Agreement or a breach of this Agreement, or
based on conduct or any event that occurs after the effective date of this
Agreement.

13.      ASSUMPTION OF RISK OF CHANGE IN FACTS. Each of the parties understands
that the facts under which either of them gives this release herein may prove
to be different than now known or


                                       5


believed by him or it, and each of them accepts and assumes the risk thereof
and agrees that the party's respective release shall remain in full force and
effect and not subject to modification, termination or rescission by reason of
any difference in facts.

14.      COVENANT NOT TO SUE.

         (A)      Neither Tuchman nor any person or entity on Tuchman's behalf
has or shall commence, maintain or prosecute any lawsuit, complaint, action or
proceeding of any kind against any of the APII Released Parties with respect to
any act, omission or other matter in connection with any of the Claims released
under Paragraph 10 occurring up to and including the effective date of this
Agreement. The foregoing notwithstanding, this covenant not to sue does not
extend to any claim for breach of this Agreement.

         (B)      Neither APII nor any person or entity on APII's behalf has or
shall commence, maintain or prosecute any lawsuit, complaint, action or
proceeding of any kind against any of the Tuchman Released Parties with respect
to any act, omission or other matter in connection with any of the Claims
released under Paragraph 11 occurring up to and including the effective date of
this Agreement. The foregoing notwithstanding, this covenant not to sue does not
extend to any claim for breach of this Agreement.

15.      RESTRICTION ON COMPETING ACTIVITIES.

         (A)      Tuchman shall not, until the first anniversary of the date of
this Agreement, directly or indirectly, alone or in conjunction with others,
through subsidiaries or affiliates, joint ventures or other business
arrangements:

                  (i)      develop, aid, consult, own, manage, operate, join,
control, finance or participate in the ownership, management, operation,
control or financing of, or be connected as an officer, director, employee,
consultant or otherwise with, any business or enterprise located anywhere in
the world, engaged in any business that designs, develops, markets,
manufactures, distributes or sells anything substantially similar or directly
competitive to the following products, as such products are described in the
attached catalogs:

         -        I Dig Excavation Kits -- using toys pre-embedded in
                  sand-like, clay, plaster or other material and sold as an
                  activity toy/kit for excavating;

         -        Jay Jay the Jet Plane - a wooden play system that includes
                  airplanes, buildings and accessories, used in conjunction
                  with a wooden play system centered on airplanes; or other
                  toys using the Jay Jay the Jet Plane brand;

         -        Space Voyagers, Ocean Voyagers, et al, - a line of authentic,
                  educational non-violent action figures, vehicles and
                  accessories based on science and nature exploration
                  activities;

         -        EZ Build - wooden construction projects for children;

         -        Play & Store - a line of packaged toys marketing the
                  convenience of container packaging as the unique selling
                  proposition, where the container is the common value added;

         -        Climbatron - remote control or mechanical (including wind-up)
                  toys that scale vertical surfaces; and


                                       6


         -        Drop Zone - parachute toys using parachute material.

Nothing under this Section 15(a)(i) shall prohibit Tuchman from employment (as
an employee, consultant or otherwise) or being a shareholder or director with
any retailer that currently carries any product that is similar or directly
competitive to the APII products set forth on the list above.

                           (ii)     solicit any officers or employees of APII
to terminate their relationships with or to take any action that would have a
material adverse effect on the business of APII;

                           (iii)    induce or attempt to induce any customers,
suppliers or distributors of APII to terminate their relationships with or to
take any action that would have a material adverse effect on the business of
APII;

                           (iv)     collude with Pablo Savetman and/or Timothy
Young, former APII employees, in the inducement to profit from advantageous and
privileged access to APII confidential information during employment; or

                           (v)      contact employees of APII (other than
Ronald S. Kaplan (or any successor chief executive officer) or other employees
solely for administrative purposes), during business hours, for any reason.

It is expressly  agreed that the limitation  under  Paragraph  15(a)(i) is not
intended to restrict or prohibit the ownership by Tuchman of stock or other
securities of a publicly-held  corporation in which the Tuchman does not possess
beneficial  ownership of five (5%) percent or more of the voting capital stock
of corporation or participate in any management or advisory capacity.

         (B)      In the event that any of the provisions contained in this
Paragraph 15 relating to the period of restriction or the scope of such
restrictions shall be determined by a court of competent jurisdiction to exceed
the maximum periods of time which such court determines to be enforceable, or
to exceed the enforceable scope of such provisions, the period or scope of such
restriction, as the case may be, shall, for purposes of this Agreement, be
deemed to be the maximum time period or maximum scope which such court would
deem valid and enforceable; and

         (C)      In addition to all other remedies, APII shall be entitled to
a temporary and permanent injunction without the necessity of showing any
actual damage and or a decree for specific performance of this Paragraph 15.

16.      CONFIDENTIAL INFORMATION. During Tuchman's employment and other
service with APII and/or its subsidiary or affiliated entities, he has had
access to confidential and other information proprietary to APII and/or its
subsidiary or affiliated entities, including but not limited to trade secrets,
operations, customer information, customer prospects, vendor information,
sources of supply, strategic plans, inventions, business plans, formulas
processes, designs, methods, techniques, know-how, systems, software programs,
works of authorship, plans, proposals, information about products including
product costs or sale prices, manufacturer and supplier lists, compensation
information, and other proprietary information (the "Confidential
Information"). Tuchman has not and shall not at any time disclose to any person
or entity the Confidential Information acquired during or in connection with
his employment with or in rendering services to


                                       7


APII and/or any of its subsidiaries and affiliates without prior written
permission from APII. Tuchman shall keep secret the Confidential Information
and all matters that have been entrusted to him and shall not use or attempt to
use any of the Confidential Information in any manner that may injure or cause
loss or may be calculated to injure or cause loss, whether directly or
indirectly, to APII and/or its subsidiaries and affiliates. The above
restrictions shall not apply to:

                  (i)      information that at the time of disclosure is in the
public domain through no fault of Tuchman;

                  (ii)     information received from a third party outside of
APII that was disclosed without a breach of any confidentiality obligation;

                  (iii)    information approved for release by written
authorization of APII;

                  (iv)     information that may be required to be disclosed by
law or by an order of any court, agency or proceeding, provided that Tuchman
shall provide APII with notice of any such required disclosure once Tuchman has
knowledge of it and will provide all reasonable assistance requested by APII to
obtain an appropriate protective order with respect to such information; or

                  (v)      information known by Tuchman prior to the
commencement of his relationship with APII or developed independently by
Tuchman prior to the period of his relationship with APII, provided that no
Confidential Information is used by Tuchman.

17.      KNOWING AND VOLUNTARY AGREEMENT.

         (A)      Tuchman acknowledges that he has carefully read and
understands all of the provisions and effects of this Agreement; that he is
voluntarily and knowingly entering into this Agreement free of coercion or
duress; and that in agreeing to sign this Agreement, he has not, except for
representations, promises, statements, or explanations made herein or in an
exhibit attached hereto, relied on any representations, promises, agreements,
statements or explanations made by APII or its attorneys concerning the terms
or effects of this Agreement in connection with his decisions to execute the
same.

         (B)      TUCHMAN REPRESENTS AND WARRANTS THAT HE HAS HAD A FULL AND
COMPLETE OPPORTUNITY TO REVIEW THIS AGREEMENT AND THAT HE HAS BEEN STRONGLY
ADVISED TO SEEK LEGAL COUNSEL PRIOR TO SIGNING THIS AGREEMENT. TUCHMAN
ACKNOWLEDGES THAT HE HAS THE RIGHT TO CONSIDER THIS AGREEMENT FOR TWENTY-ONE
(21) DAYS PRIOR TO SIGNING AND RETURNING IT TO RONALD S. KAPLAN, CHIEF
EXECUTIVE OFFICER, ACTION PRODUCTS INTERNATIONAL, INC., 390 NORTH ORANGE
AVENUE, SUITE 2185, ORLANDO, FLORIDA 32801. TUCHMAN REPRESENTS THAT, IF HE
SIGNED THIS AGREEMENT PRIOR TO THE EXPIRATION OF THE TWENTY-ONE (21) DAY
PERIOD, HE HAS FREELY AND VOLUNTARILY WAIVED HIS RIGHT TO CONSIDER THIS
AGREEMENT FOR SUCH PERIOD.

         (C)      TUCHMAN ALSO ACKNOWLEDGES THAT HE IS AWARE OF AND HAS BEEN
ADVISED OF HIS RIGHT TO REVOKE THIS AGREEMENT FOR A PERIOD OF SEVEN (7) DAYS
AFTER HE SIGNS THIS AGREEMENT BY NOTIFYING, IN WRITING, RONALD S. KAPLAN, BY
FACSIMILE TO (419) 781-3805, BY 5 P.M., NEW YORK TIME, ON OR BEFORE THE SEVENTH
(7TH) DAY AFTER HE SIGNS AND RETURNS THE AGREEMENT.

         (D)      THIS AGREEMENT WILL NOT BECOME EFFECTIVE UNTIL THE SEVEN-DAY
REVOCATION PERIOD HAS EXPIRED AND TUCHMAN HAS NOT OTHERWISE REVOKED THIS
AGREEMENT IN ACCORDANCE


                                       8


WITH PARAGRAPH 17(C). APII SHALL HAVE NO OBLIGATIONS UNDER THIS AGREEMENT UNTIL
THIS AGREEMENT HAS BECOME EFFECTIVE.

18.      APPLICABLE LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Florida, without regard for
its conflicts of laws principles.

19.      INDEMNIFICATION.

         (A)      DIRECTORS AND OFFICERS INDEMNITY. APII shall, to the extent
not covered by its directors' and officers' insurance policy then in effect,
and to the full extent permitted by law and by APII's articles of incorporation
and by-laws, indemnify Tuchman and hold him harmless for any acts or decisions
made by him while performing his duties as a director, officer and employee,
during the term of his employment and services as a director of APII; provided
that Tuchman acted in good faith and in a manner he reasonably believed to be
in, or not opposed to, the best interests of APII and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.

         (B)      INDEMNIFICATION OF APII.

                  (i)      Tuchman agrees to indemnify, defend and hold
harmless APII and its shareholders, officers, directors, affiliates, agents and
employees (each an "APII Indemnified Party") from and against and in respect of
any and all losses, damages, claims, liabilities, actions, suits, proceedings
and costs and expenses of defense thereof, including reasonable attorneys' fees
(a "Loss"), suffered or incurred by any such party by reason of or arising out
of any breach of any representation, warranty, covenant or agreement of Tuchman
set forth in this Agreement.

                  (ii)     An APII Indemnified Party shall give to Tuchman
prompt written notice of any claim, suit or demand which such APII Indemnified
Party believes will give rise to a claim for indemnification under Paragraph
19(b)(i); provided, however, that the failure of such APII Indemnified Party to
give such prompt written notice shall not affect the liability of Tuchman
hereunder, except to the extent that the rights of Tuchman to defend himself or
to cure or mitigate the damages are actually prejudiced thereby. Thereafter,
such APII Indemnified Party shall furnish to Tuchman, in reasonable detail,
such information as it may have with respect to such claim, action, suit or
proceeding, including copies of any summons, complaint or other pleading which
may have been served upon it or any written claim, demand, invoice, billing or
other document evidencing or asserting the same. Provided Tuchman, within ten
(10) days after receipt of such written notice from such APII Indemnified
Party, shall acknowledge in writing to such APII Indemnified Party, Tuchman's
assumption of responsibility for defense and indemnification with respect to
such claim, action, suit or proceeding, Tuchman shall have the right to assume
defense of such claim, action, suit or proceedings through counsel selected by
Tuchman at Tuchman's expense, and to contest or compromise such claim, action,
suit or proceeding. Upon such assumption of defense by Tuchman, such APII
Indemnified Party shall cooperate with Tuchman in Tuchman's conduct of such
defense to the extent reasonably requested by Tuchman and at Tuchman's expense.
So long as Tuchman is defending such claim, action, suit or proceeding, such
APII Indemnified Party shall not settle or compromise the same without
Tuchman's prior written consent, which consent shall not be unreasonably
withheld. Without the


                                       9


prior written consent of APII and such APII Indemnified Party, Tuchman shall
not be entitled to settle any claim, action, suit or proceedings the defense of
which has been assumed by Tuchman if such settlement might have a material
adverse effect or impose any material condition or limitation on the business,
operations, prospects or condition (financial or otherwise) conducted by APII.

         (C)      INDEMNIFICATION OF TUCHMAN.

                  (i)      APII agrees to indemnify, defend and hold harmless
Tuchman and his successors, heirs and assigns (each a "Tuchman Indemnified
Party") from and against and in respect of any and all Losses suffered or
incurred by any such party by reason of or arising out of any breach of any
representation, warranty, covenant or agreement of APII set forth in this
Agreement.

                  (ii)     A Tuchman Indemnified Party shall give to APII
prompt written notice of any claim, suit or demand which such Tuchman
Indemnified Party believes will give rise to a claim for indemnification under
Paragraph 19(c)(i); provided, however, that the failure of such Tuchman
Indemnified Party to give such prompt written notice shall not affect the
liability of APII hereunder, except to the extent that the rights of APII to
defend itself or to cure or mitigate the damages are actually prejudiced
thereby. Thereafter, such Tuchman Indemnified Party shall furnish to APII, in
reasonable detail, such information as it may have with respect to such claim,
action, suit or proceeding, including copies of any summons, complaint or other
pleading which may have been served upon it or any written claim, demand,
invoice, billing or other document evidencing or asserting the same. Provided
APII, within ten (10) days after receipt of such written notice from such
Tuchman Indemnified Party, shall acknowledge in writing to such Tuchman
Indemnified Party APII's assumption of responsibility for defense and
indemnification with respect to such claim, action, suit or proceeding, APII
shall have the right to assume defense of such claim, action, suit or
proceedings through counsel selected by APII at APII's expense, and to contest
or compromise such claim, action, suit or proceeding. Upon such assumption of
defense by APII, such Tuchman Indemnified Party shall cooperate with APII in
APII's conduct of such defense to the extent reasonably requested by APII and
at APII's expense. So long as APII is defending such claim, action, suit or
proceeding, such Tuchman Indemnified Party shall not settle or compromise the
same without APII's prior written consent which consent shall not be
unreasonably withheld.

20.      CHANGE, MODIFICATION AND WAIVER. No change or modification of this
Agreement shall be valid unless it is in writing and signed by Tuchman and an
authorized officer of APII. No waiver of any provision of this Agreement shall
be valid unless it is in writing and signed by the party against whom the
waiver is sought to be enforced (in the case of APII, by an authorized officer
of APII). The failure of a party to insist upon strict performance of any
provision of this Agreement in any one or more instances shall not be construed
as a waiver or relinquishment of the right to insist upon strict compliance
with such provision in the future.

21.      INTEGRATION. This Agreement and its exhibits constitutes the entire
agreement between APII and Tuchman concerning the subject matters hereof and
supercedes all prior representations, promises and agreements, whether oral or
written, implied or otherwise with respect thereto.


                                      10


22.      BINDING AGREEMENT. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective officers,
directors, agents, representatives, employees, servants, affiliates, attorneys,
heirs, successors, assigns, or other representatives, if any.

23.      SEVERABILITY. Any provision of this Agreement which is adjudged to be
prohibited or unenforceable shall be ineffective to the extent of such
prohibition or unenforceability without affecting the validity or
enforceability of the remainder of this Agreement.

24.      ATTORNEYS' FEES. In the event an action is brought by either party for
breach of by, or to enforce this Agreement, including Paragraph 15, against,
the other party, including arbitration, the prevailing party shall receive his
or its reasonable attorneys and paralegal fees and costs at all levels of
dispute resolution involved as determined by the court or arbitrators, as the
case may be.

25.      JURISDICTION OF DISPUTES; WAIVER OF JURY TRIAL. In the event any party
to this Agreement commences any litigation, proceeding or other legal action in
connection with or relating to this Agreement or any matters described or
contemplated herein, with respect to any of the matters described or
contemplated herein or therein, the parties to this Agreement hereby (a) agree
under all circumstances absolutely and irrevocably to institute any litigation,
proceeding or other legal action in a court of competent jurisdiction located
within the County of Orange, Florida, whether a state or federal court; (b)
agree that in the event of any such litigation, proceeding or action, such
parties will consent and submit to personal jurisdiction in such court; (c)
agree to waive to the full extent permitted by law any objection that they may
now or hereafter have to the venue of any such litigation, proceeding or action
in any such court or that any such litigation, proceeding or action was brought
in an inconvenient forum; (d) agree as an alternative method of service to
service of process in any legal proceeding by mailing of copies thereof to such
party at its address set forth herein for communications to such party; (e)
agree that any service made as provided herein shall be effective and binding
service in every respect; and (f) agree that nothing herein shall affect the
rights of any party to effect service of process in any other manner permitted
by law. EACH PARTY HERETO WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY DISPUTE IN
CONNECTION WITH OR RELATING TO THIS AGREEMENT OR ANY MATTERS DESCRIBED OR
CONTEMPLATED HEREIN OR THEREIN, AND AGREE TO TAKE ANY AND ALL ACTION NECESSARY
OR APPROPRIATE TO EFFECT SUCH WAIVER.

26.      NOTICES. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered to the recipient by (i) hand, (ii) mailed, first
class certified mail, return receipt, with postage paid, or (iii) a nationally
recognized overnight courier service:

If to APII, to:
Action Products International, Inc.
390 North Orange Avenue, Suite 2185
Orlando, Florida 32801
Attn: Ronald S. Kaplan

with a copy to:
Raice Paykin & Krieg, LLP


                                      11

185 Madison Avenue, 10th Floor
New York, New York 10016
Attn: James G. Smith, Esq.

If to Tuchman, to:
Ronald E. Tuchman
566 Wayne Drive
River Vale, New Jersey 07675

With a copy to:
Foreht, Last, Ladau, Miller and Katz, LLP
228 East 45th Street, 17th Floor
New York, NY  10017
Attn: Scott M. Miller, Esq.

27.      COUNTERPARTS AND FACSIMILE SIGNATURES. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which taken together shall constitute one and the same
instrument. Execution and delivery of this Agreement by exchange of facsimile
copies bearing the facsimile signature of a party hereto shall constitute a
valid and binding execution and delivery of this Agreement by such party. Such
facsimile copies shall constitute enforceable original documents.

                 [remainder of page internationally left blank]


                                      12


         IN WITNESS WHEREOF, the parties have agreed to, and executed, this
Agreement, effective as of the last date written below.

EXECUTIVE:

/s/ RONALD E. TUCHMAN
- ---------------------
Ronald E. Tuchman

Dated: February 7, 2003



APII:

Action Products International, Inc.



By: /s/ RONALD S. KAPLAN
    --------------------
Ronald S. Kaplan, Chief Executive Officer

Dated: February 7, 2003


                                      13


                                  EXHIBIT "A"

                         Form of Letter of Resignation

February 7, 2003

Ronald S. Kaplan
Action Products International, Inc.
390 N. Orange Ave., Suite 2815
Orlando, FL  32801

Dear Ron,

Effective with this notice of February 7, 2003, I hereby resign as an officer
and director of Action Products International, Inc. I wish you and the
organization success in the future.

Sincerely,



Ronald Tuchman


                                      14

EX-23.1

                                                                    EXHIBIT 23.1

                   CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

We consent to the incorporation by reference in the Registration Statement of
Action Products International, Inc. on Form S-8 for the registration of 900,000
shares of its common stock is usable pursuant to its 1996 Stock Option Plan
(SEC File Number 333-76675) and in the related prospectus of our report dated
January 30, 2003, except for Note 11, as to which the date is March 12, 2003,
with respect to the consolidated statements of Action Products International,
Inc. and subsidiary included in this Annual Report on Form 10-KSB for the year
ended December 31, 2002.


/s/ MOORE STEPHENS LOVELACE, P.A. -
- -----------------------------------
MOORE STEPHENS LOVELACE, P.A.
CERTIFIED PUBLIC ACOUNTANTS
Orlando, Florida
March 21, 2003

EX-99.1

                                                                    Exhibit 99.1

               CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                 SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Ronald S. Kaplan, Chief Executive Officer of Action Products International,
Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1350, that:

         -        the Company's Annual Report on Form 10-KSB for the fiscal year
                  ended December 31, 2002, as filed with the Securities and
                  Exchange Commission on the date hereof (the "Report") fully
                  complies with the requirements of Section 13(a) or 15(d) of
                  the Securities Exchange Act of 1934; and

         -        the information contained in the Report fairly presents, in
                  all material respects, the financial condition and result of
                  operations of the Company for the periods presented therein.

                                                     /s/ RONALD S. KAPLAN
                                                     --------------------
                                                     Ronald S. Kaplan
                                                     Chief Executive Officer

                                                     Date: March 21, 2003


A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.

EX-99.2

                                                                    Exhibit 99.2

               CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                 SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Robert L. Burrows, Chief Financial Officer of Action Products International,
Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1350, that:

         -        the Company's Annual Report on Form 10-KSB for the fiscal year
                  ended December 31, 2002, as filed with the Securities and
                  Exchange Commission on the date hereof (the "Report") fully
                  complies with the requirements of Section 13(a) or 15(d) of
                  the Securities Exchange Act of 1934; and

         -        the information contained in the Report fairly presents, in
                  all material respects, the financial condition and result of
                  operations of the Company for the periods presented therein.

                                                     /s/ ROBERT L. BURROWS
                                                     ---------------------
                                                     Robert L. Burrows
                                                     Chief Financial Officer

                                                     Date: March 21, 2003


A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.