Unassociated Document

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF

1934 For the fiscal year ended DECEMBER 31, 2008

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

OF 1934 or the transition period from _____ to __________

Commission file number 000-13118

ACTION PRODUCTS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

FLORIDA		59-2095427
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1101 N. KELLER RD., SUITE E

ORLANDO, FLORIDA 32810

(Address of principal executive offices)

(Issuer's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of each class		Name of each exchange on which registered
COMMON STOCK, $0.001 PAR VALUE		NASDAQ CAPITAL MARKET

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, or “smaller reporting company in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer `¨		Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.).

As of April 15, 2009, there were 6,491,400 shares of common stock of the registrant issued and outstanding.

As of December 31, 2008, the number of shares of Common Stock held by non-affiliates was approximately 5,951,400 shares. The approximate market value based on $0.69, the last sale price on December 31, 2008, of the registrant’s Common Stock was approximately $4,106,466.

		Page
PART I

ITEM 1.	DESCRIPTION OF BUSINESS	4
ITEM 1A.	RISK FACTORS	14
ITEM 2.	PROPERTIES	20
ITEM 3.	LEGAL PROCEEDINGS	20
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	20

PART II

ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	21
ITEM 6.	SELECTED FINANCIAL DATA	23
ITEM 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	23
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLSOURES ABOUT MARKET RISK	31
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATE	31
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	32
ITEM 9A.	CONTROLS AND PROCEDURES	32
ITEM 9B.	OTHER INFORMATION	36

PART III

ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	36
ITEM 11.	EXECUTIVE COMPENSATION	38
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	38
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	38
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	39

PART IV

ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES	39

Introductory Comment

Throughout this Annual Report on Form 10-K, the terms “we,” “us,” “our,” “Action Products” and “our company” refer to Action Products International, Inc., a Florida corporation.

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,” “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 “Risk Factors” 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.

ITEM 1.

DESCRIPTION OF BUSINESS

Action Products International, Inc. is historically a global manufacturer and distributor of brand-focused educational toys and activities within the specialty toy industry. Originally incorporated in New York in 1977, the company relocated its operations and state of incorporation to Florida in 1980 and went public on the NASDAQ stock market in 1984. The company began as a distributor of education-oriented toys, children’s books, stationery and souvenirs, supplying to museum gift shops exclusively. In 1997 a new business model was developed around our toy and children’s products business to develop a diversified portfolio of company designed and acquired brands of products while expanding sales distribution to include broader retail outlets.

Today our “Toy & Craft” business designs, manufactures and markets a diversified portfolio of educational, positive and non-violent brands of toys, crafts, gifts and activity products, to various retailing channels such as independent toy stores, gift stores, craft and hobby stores, specialty and discount retail chains, museums, zoos, aquariums, theme parks and attractions primarily in the United States and Canada. Since moving away from distribution for other manufacturers and publishers, we developed new proprietary products through internal development, licensing and corporate acquisitions.

Our website offers our consumers a well rounded shopping experience helping to explain the play values and importance of Action Toys. While at www.ActionToysInc.com consumers can view online videos, learn more about each product, review their educational content and play value and locate a retailer in their area or make a purchase online. The second phase of www.ActionToys Inc.com is expected to be ready in 2010 and is planned to include an online interactive "Fun Zone" that will include online games, free downloads, and value added content.

In 2008, we pursued additional lines of business, particularly in children’s book development and publishing and later the home health care industry to complement our current distribution and sales network. This, we hoped, was through the acquiring of BE Overseas LLC and the change of management – principally appointing Neil Swartz, one of the owners of BE Overseas, as our Chief Executive Officer and Chairman of the Board. As part of the acquisition of BE Overseas, Craig Sizer, the other controlling shareholder of BE Overseas, agreed to invest $500,000 in our company. Unfortunately, neither transaction was successful.

Our acquisition of BE Overseas has to date resulted in no significant furtherance of the home health care product sales on our behalf at great cost. There are currently no existing lines of home health products or other significant lines of business within BE Overseas Limited. Mr. Sizer has, to date, failed to complete his investment of $500,000, of which $300,000 remains unpaid.

On March 19, 2009, Neil Swartz, our Chairman and Chief Executive Officer, resigned from the company following the resignation of Robert Burrows, our Chief Financial Officer and Chief Operating Officer. Both Mr. Swartz and Mr. Burrows resigned without notice. At the time of their resignations, our cash position was essentially zero and our current asset based lender has declined to permit additional advances although we believe we have more than adequate eligible inventory and receivables and other securitized collateral to justify advances.

In light of the current dilemma, our board of directors rehired a former Chief Executive Officer and Chairperson, Warren Kaplan, to act as our Principle Officer & Restructuring Officer to pursue all avenues for growth, including improving cash flow, pursuing debt and equity financing and identifying strategic alternatives deemed in the best interest of our stakeholders. Since his appointment on March 20th, Mr. Kaplan has met with our principle lender, has made a short-term interest-free loan to the company for payment of sales commissions, has recruited an experienced sales management professional, negotiated reductions in our occupancy lease and decreased payroll and other operating expense.

We are pursuing various financing options, mergers and disposition of non-core business assets. Due to prevailing economic conditions and recent losses sustained by our business, we cannot make any assurances that we will achieve any of these goals. Further, we are currently considering legal remedies with respect to Messrs. Swartz, Sizer and Burrows with regard to breaches of contracts, misrepresentations and breaches of fiduciary duties.

For his full time efforts as our Restructuring or Principal Officer Mr. Kaplan is to be compensated $52,000 annually. The company has reported that it has been improving its collections of past due accounts, and building its account receivable through the sale of existing inventories. However, due to the structure of our working capital line of credit, described elsewhere herein, we are temporarily unable to get new sold goods (backlog orders) released from factories and ports.

Management believes that should it successfully achieve financial liquidity, the ultimate path to maximizing our current market position encompasses the following assets and operational strengths:

Accountable sales and brand marketing management

Eight award winning educational toy brands

32,000 sq ft company owned distribution center

Outsourced/scalable manufacturing process

Leverage over 1.5 million units sold annually with cross-selling materials

Currently sold in 2,000+ retail stores across USA

500+ location-based edutainment venues: Museums, Zoos, Aquariums, Theme-parks & Attractions

Specialty & Department Retail Chains: Toy’s R’ Us, Barnes & Noble, JoAnn’s, Michaels, Target, and others, as well as reestablishing international distributor sales.

Our operational focus for executing this strategy will be based on the following priorities:

Maximize existing relationships with retailers while opening new channels

Promote all products to all customer segments to generate additional revenue opportunities

Regain leadership in the Educational toy children’s segment

Create a multi-media on-line experience for our consumers to entertain, educate and generate revenue

Build targeted retailer and consumer programs to maximize selling opportunities year round

Find other opportunities in the consumer products segment that can take advantage of existing infrastructure, resources and experience

Find opportunities to capitalize on BE Overseas concept and website.

While working to correct short term financial and administrative obstacles described herein, we are working aggressively to implement strategies for expansion through mergers, acquisitions, distribution agreements as well as to expand our current toy and craft product business while leveraging our current tangible and intangible assets and our distribution and sales network. Our goal is to regain revenue growth in the educational toy and children’s segment and transform the company into a global holding company that generates shareholder value in one or more well-established or growth-stage companies.

Action Toys, Inc. and Curiosity Kits, Inc: Our toy and craft operation primarily designs, markets and sells educational toy products under the umbrella name “Action Toys™,” formerly known as “Action Products®.” Marketing and promotion programs focus on individual brands such as CURIOSITY KITS®, SPACE VOYAGERS®, CLIMB@TRON™, I DIG DINOSAURS®, WOODKITS™ and PLAY & STORE™. Products include premium wooden toys, action figures, play-sets, activity kits and various other playthings with a strategic emphasis on non-violent, educational and fun topics such as space, dinosaurs, science, and nature.

Our top contributing brands are I Dig Dinosaurs® (and related), Curiosity Kits®, Space Voyagers®, and Play & Store™. The Curiosity Kits® brand acquired April 2004 contributed $1.3 million to our net sales in 2008, and was revamped and reintroduced in mid-2008. The EarthLore® I Dig Dinosaurs® brand continues to be a strong brand group and contributed over $1.2 million to net sales in 2008. Our other brands, including Jay Jay the Jet Plane, Drop Zone Extreme™, Space Voyagers® and Play & Store™, contributed the remaining $2.9 million net sales in 2008.

While distribution systems continue to change at an increased rate, the consumer trends indicate increasingly knowledgeable parents and child caring adults. These more informed purchasers seek products and services that treat their children as learners rather than merely as consumers. There is increasing emphasis on promoting interest in, and encouraging appreciation of, education, “edutainment” natural sciences and our environment. There has been an upward trend in home activities noted in reports on do-it-yourself and at- home or “nesting” activities. These trends serve to drive increased spending on educational products and redefine markets for our toy and activity markets. We believe these trends provide our company a significant market opportunity

The second phase of our www.ActionToysInc website expected in late 2009 will be in concert with the growing dependency on the Internet –a new conduit into ‘speak’ directly with consumers regarding their preferences, our products and services, and their availability as it creates a learning environment using and promoting our products.

The principal markets for our toy and craft division’s products are consumers who purchase from our customer base of specialty retailers, toy stores, toy departments of national and regional chain retailers, museums and attractions, parent/teacher stores, mail order catalogs and increasingly the Internet. Our products are currently aimed primarily at the preschool and elementary school age categories. Our long-term goal is to capture a growing share of these markets in the U.S. and internationally.

Several of our product lines which include I Dig™, Curiosity Kits® and Space Voyagers® appeal to the international consumer. We expect our foreign sales to grow in the future as we continue to execute on globalizing our testing and packaging and establishing distribution agreements with foreign customers.

We continue to seek new businesses to acquire which will expand our revenue potential and better leverage our fixed cost base and our expertise, contacts and relationships.

Unlike promotional toys, Action Products brands emphasize quality and are a healthy alternative for consumers looking to avoid the negative influences of less positive play patterns and the exploitative, short-lived aspects of promotional toys. We believe we are well positioned to capitalize on the increased worldwide emphasis on education, “edutainment” and the trend towards encouraging children’s interest in positive play and their surroundings. We believe our innovative products meet this increasingly important market need.

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 our retail dealers and us. 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:

Acquired in 2004, Curiosity Kits a leading brand in the children’s arts & crafts segment, encompasses a variety of craft activity kits, with everything from innovative science kits to activities with sculpting, drawing and painting for self-expression. Curiosity Kits offers high quality materials, tools, and the information needed to imagine and create lasting treasures while learning and having fun. In 2007 we reestablished a creative relationship with the original creator of the brand and introduced over twenty new products in 2008. Curiosity Kits has received several toy or craft awards including in 2006 the Dr Toy’s 100 Best in 2006,

I DigTM Excavation Adventures

Our I Dig™ Excavation Adventures let children imagine they are modern day dinosaur hunters, archaeologists and treasure seekers. Using steel tools, children dig through dust free “rock” to unearth replica dinosaur bones, buried treasure and Egyptian artifacts. This line was expanded in 2007 with the introduction of two I Dig™ Adventures: an Arrowhead and Gold Rush dig. New for 2008 were more dinosaurs and other archaeological themes with the core I Dig scientific slant, and in development are some very imaginative themes with greater emphasis on the fun aspect of the digs.

Our Space Voyagers® line combines vehicles from 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 exploration, science and discovery appeal to a wide variety of consumers.

Climb@trons™ are interplanetary robots that climb up, down, around, and even upside down on smooth surfaces like windows, mirrors and cabinets using powerful suction cups and vacuum technology and auto reverse action to keep Climb@Tron™ going even after bumping into barriers. This is a consistent seller for Action Products in museums and attractions.

Our Kidz Workshop™ line includes the award winning EZ Build Projects™ that promote confidence-building with its fun-to-assemble ease where one tool does it all; Kidz Workshop™ fits the bill for children ages 7 and up. EZ Build Projects are winners of toy product awards. The company no longer seeks licenses but rather seeks to sell licenses.

We became licensees in December 2001 obtaining the rights to manufacture and market certain toy lines under the Jay Jay The Jet Plane™ name. In January 2006 we renewed with a new licensing agreement which we opted to allow to expire in December 2008, however can access thereafter on an as-sold basis with cooperation from the licensor.

In May of 2007 our company entered into a merchandising license agreement with the American Museum of Natural History to produce and sell its Ology brand products. The agreement expires June 30, 2010 and contains sales quotas and minimum royalty payments due for each annual period. It is possible this arrangement will end in 2009.

In November 2007 the company entered into a product development and royalty agreement with a consultant to revamp marketing presentation and packaging of existing Curiosity Kits products and produce new product concepts for the Curiosity Kits brand. The agreement expired September 30, 2008 and provided for potential royalty payments based on achievement above certain sales levels on annual aggregate net sales for the life of the products specified in the agreement. In December 2008, the company entered into a settlement agreement terminating the consulting agreement and eliminating royalty payments.

Manufacturing, Logistics and Other Operations

Our manufacturing and operations strategy is designed to maximize the use of outsourced product manufacturing 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 25 contract manufacturers based on their technical and production capabilities and matched to particular products to achieve cost and quality efficiencies. They are located in Hong Kong and China.

During 2008 and 2007 our largest single manufacturer supplied 36% and 25% respectively, of our products and our top three manufacturers combined supplied a total of 64% and 60% respectively. We believe other manufacturers are available to us should any of our significant manufacturers, including our largest manufacturer, be unable or unwilling to continue to manufacture our products for us.

Based on our net sales in 2008, major retailers and international distributors took title to approximately 2%of our products directly from our manufacturing facilities in Asia. However, the majority of our product is shipped directly to our warehouse in Ocala, Florida and is later shipped to meet the demands of our major U.S. retailers and other retailers and distributors throughout the U.S. and Canada.

Marketing, Sales and Advertising

We exhibit our product lines at toy, gift and related industry trade shows, the most important trade show is the American International Toy Fair held in New York City each February. In January 2007 we held our debut exhibit at the International trade fair of the Craft & Hobby Association, to positive reviews.

We sell our product lines through a network of manufacturer representative firms and an internal, direct-sales department. Our direct sales team focuses on selling to our original customer base in the attraction and museum categories. Our sales department includes 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 promote an 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 2008. We placed ads throughout the year in trade publications including Playthings, The Toy Book and publications of the American Specialty Toy Retailers Association (ASTRA) ) as well as consumer catalogs published by retailers and advertising cooperative groups such as Learning Express, and The Good Toy Group.

Sales and Distribution

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.

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 Germany.

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 expanded our distribution to national toy stores, specialty retailers and other available retail outlets. We have a diversified customer base including some of the major toy retailers in the U.S. and Canada. The ten largest customers accounted for approximately 32% of our net sales in 2008. Our largest single customer accounted for approximately 7% of our total net sales.

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 third-party 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.

With the launch of our upgraded website in December 2008 we offer our consumers a more rounded shopping experience helping to explain the play values and importance of Action Toys. While at www.ActionToysInc.com consumers can view online videos, learn more about each product, review their educational content and play value and locate a retailer in their area or make a purchase online.

International Operations, Sales and Manufacturing

Overall revenues from our international sales represented approximately $0.3 million or 5% of our total revenues in 2008 and $0.4 million or 6% in 2007. Slightly less than 85% of international sales were to Canada and the United Kingdom. Revenues from other international customers still represent a limited percentage of our total revenues.

Although we have a formal distribution agreement for The United Kingdom, we sell other international accounts and distributors on a direct basis.

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 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 25 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 in the fall of 2002 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 did not have a materially adverse effect on our business. We do not expect this event to reoccur any time soon.

We experience minimal currency risk because these foreign sourcing transactions are conducted using U.S. dollars.

We believe 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.

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.

Our business is highly competitive and we compete for shelf space with various toy manufacturers, importers and distributors including Leapfrog with approximately $450 million educational toy sales; Learning Curve with over $100 million in sales to specialty retailers; Jakks Pacific which keys its growth to acquisitions; and a number of smaller companies primarily having single product lines and often privately owned. 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.

Product Design & Development

The company works to refresh and redesign existing toy product lines and to develop innovative new toy product lines. During 2008 and 2007 we spent $363,000 and $259,800, respectively, in connection with the design and development of new products.

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 owned by us. 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 currently 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 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 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.

As of December 31, 2008, we had 29 employees worldwide, including two executive officers, seven sales and customer support personnel, three marketing and product development personnel, seven distribution personnel and ten administrative and procurement personnel. We offer our employees a benefits package that includes health and life insurance plans, a 401(k) plan and an employee-contributed IRC Section 125 health plan. None of our employees are represented by a labor union or are subject to a collective bargaining agreement.

ITEM 1A.

RISK FACTORS

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 shares 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-K.

Risks associated with our business

Recently inadequate working capital has caused, and will continue to cause, inadequate availability of credit from vendors, cash reserves to be held by our asset based lender, and delays in delivering merchandise. Our lack of working capital has resulted in a reluctance of certain key creditors to extend us adequate credit. Because of this inadequate credit, we have been unable to fulfill our orders in a timely manner, resulting in substantial back orders and delayed payment of our obligations. The inability to ship goods on a timely basis has resulted in increased customer order cancellations, higher than normal returns of goods, damage to our reputation and loss of repeat buyers.

There are a number of outstanding accounts payable that were not paid in 2008 even when funds were available. This hurt relationships with many of our providers and sources adversely affecting the company into 2009. All open payables and ostensible commitment are currently under review.

We may not be successful in securing additional vendor credit and improving shipment of merchandise in the future. If we cannot get additional vendor credit, we may continue to incur substantial losses. As a result of our lack of working capital, our auditors have issued their report to our financial statements accompanying this report with a going concern qualification.

To the extent that cash generated internally and cash available under our loan facility are not sufficient to provide the capital required to fund future operations, we will require additional debt and/or equity financing in order to provide such capital. Such financing, however, may not be available or, if available, may not be on terms satisfactory to us. If we fail to obtain sufficient additional capital in the future, we may not be able to implement our business strategy. If we are able to obtain additional debt financing, we may incur increased interest and amortization expense, increased leverage, increased exposure to competitive pressures and increased exposure to economic downturns. If we are able to obtain equity financing, such financing may dilute the equity interest of our existing stockholders.

If we incur losses, our ability to satisfy our cash requirements may be more difficult. We incurred a net loss of approximately $3.9 million in fiscal 2008, and an operating loss of approximately $1.9 million in fiscal 2007. If we fail to generate operating income and net income, we could have difficulty meeting our working capital requirements as well as NASDAQ listing requirements.

Changing consumer preferences may negatively impact our product lines. As a result of changing consumer preferences, many toys are successfully marketed for only a few 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 product 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 therefore shift some of the inventory risk from the retailer to the 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.

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) and Hong Kong. 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 internationally in countries including 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. However, we generally sell to international customers under terms requiring letters of credit or payment in advance. 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,

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 120 days, pursuant to various sales promotion programs. 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 second six months of the year and slower sales in the first six months.

Factors 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

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 Capital 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.

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 39.7% 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.

We have implemented anti-takeover defenses. 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 from time to time by our board. 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 were dependent upon the efforts and abilities of certain of our senior management, particularly Neil Swartz, our Chief Executive Officer, and Robert Burrows CFO and COO. We do not maintain key man life insurance on any executive officer. We believe 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 currently do not intend to pay cash dividends. We expect that we will retain a major portion of available earnings, if any, generated by our operations for the development and growth of our business.

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 December 31, 2008, we had 5,951,400 shares of our common stock outstanding. Our board has the ability, without further shareholder approval, to issue up to 19,048,600 additional shares of common stock. Such issuance may result in a reduction of the book value or market price of our outstanding common stock. Issuance of additional common stock will reduce the proportionate ownership and voting power of the then existing shareholders. Further, if all our outstanding options, convertible preferred stock and warrants are exercised, we will have approximately 13,187,600 shares outstanding. Thus, the percentage of shares owned by all existing shareholders will be reduced proportionately as options and warrants are exercised. The table below summarizes our current outstanding common stock, options, warrants and preferred stock:

Common Shares, Options, Warrants and Preferred Stock	Number of Common Shares			Number of Common Shares underlying Options, Warrants and Preferred Stock		Total

Common stock issued as of December 31, 2008
Issued		6,191,900					6,191,900
Less treasury shares		(240,500	)				(240,500	)
Options outstanding as of December 31, 2008
Currently exercisable					130,500		130,500
Currently unexercisable					22,500		22,500
Warrants outstanding as of December 31, 2008
2003 warrants					1,704,400		1,704,400
2006 warrants					5,191,300		5,191,300
Other warrants					12,500		12,500
Preferred Stock
Series A Preferred Stock					175,000		175,000
TOTAL		5,951,400			7,236,200		13,187,600

Our corporate headquarters are located in Orlando, Florida, where we lease a 6,000 square foot suite in a business district near downtown Orlando, staffed by executive, sales, marketing, importing and graphics personnel. We are on a short-term occupancy lease and achieved a significant rent reduction in April 2009.

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 the current major portion of our warehousing and distribution needs. When peak warehouse space has been required we have been successful in obtaining additional space at reasonable rates in the vicinity of our facility.

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.

ITEM 3.

LEGAL PROCEEDINGS

The company is engaged in various legal proceedings incidental to its normal business activities, none of which, individually or in the aggregate, are deemed by management to be material risk to the company’s financial condition. In April 2009, we received a demand letter from our former CFO alleging cash and stock compensation due in the amount of approximately $250,000. We believe his claim is without merit and our management is exploring potential claims against the former CFO.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The 2008 Annual Meeting of Shareholders was held in our offices at 1101 North Keller Road, Orlando, Florida on Tuesday, November 11, 2008. The total number of shares entitled to vote at the meeting was 5,929,100. The total number of shares represented at the meeting in person or by proxy was 4,735,951.

Proposal 1. Election of Directors

The first proposal brought before the shareholders was election of Neil Swartz, Ronald S. Kaplan, Scott Runkel, Ann E.W. Stone, and Cecilia Sternberg as the members of our Board of Directors. As a result of the votes cast, as described below, all five nominees were elected for one-year terms to expire at the Annual Shareholders’ Meeting in 2009:

NAME	FOR		WITHHELD
Neil Swartz		3,441,364		1,294,587
Ronald S. Kaplan		3,324,845		1,411,106
Scott Runkel		4,684,149		51,802
Ann E. W. Stone		4,591,149		144,802
Cecilia Sternberg		4,667,920		68,031

Proposal 2. Approval of Adoption of 2008 Long-Term Equity Incentive Plan

The second proposal brought before the shareholders was to approve the adoption of the 2008 Long-Term Equity Incentive Plan. As a result of the votes cast, as described below, the second proposal was not approved.

FOR		AGAINST				ABSTAIN				BROKER NON-VOTE
250,896			1,428,404				1,948,925				1,107,726

Proposal 3. Approval of Amendment to Amended and Restated Articles of Incorporation

The third proposal brought before the shareholders was to approve the amendment to the Amended and Restated Articles of Incorporation to increase the authorized Common Stock to 25,000,000 shares. As a result of the votes cast, as described below, the third proposal was approved.

FOR		AGAINST				ABSTAIN				BROKER NON-VOTE
4,562,695			134,480				38,776				-

ITEM 5.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the Nasdaq Capital Market under the symbol “APII.” The following table represents the range of the high and the low bid quotations for each fiscal quarter for the last two fiscal years ended December 31, 2007 and 2008. These quotations represent prices between dealers, may not include retail mark-ups, markdowns or commissions, and may not necessarily represent actual transactions.

Fiscal Quarter Ended	Low		High

March 31, 2007	$	1.36	$	1.74
June 30, 2007	$	1.48	$	1.80
September 30, 2007	$	1.15	$	1.73
December 31, 2007	$	0.45	$	1.89

March 31, 2008	$	0.70	$	1.37
June 30, 2008	$	0.43	$	1.19
September 30, 2008	$	0.48	$	3.52
December 31, 2008	$	0.06	$	1.61

On April 7, 2009, the closing price of our common stock was $0.29 and we had approximately 1300 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. We currently intend to retain the majority of 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.

On April 24, 2003 the company announced a warrant distribution to all shareholders of record as of June 12, 2003. Shareholders were issued one warrant for each share of common stock owned as of the record date. The warrant entitles the holder to purchase common stock at an exercise price of $2.00 per share. On June 6, 2006, the company’s Board of Directors extended the expiration date of the warrants to December 31, 2010. On December 16, 2008 the Board of Directors revised the exercise price of the warrants, from $2.00 to $1.00 per share, such that the warrants will allow the holders of each warrant owned to purchase one common share at an exercise price of $1.00 per share until December 31, 2010. All other terms of the warrants remain the same. Approximately 3,272,100 warrants had been originally issued and as of December 31, 2008, 1,567,600 had been exercised.

On October 28, 2005 the company announced a warrant distribution to all shareholders of record as of January 18, 2006. Shareholders were issued one warrant for each share of common stock owned as of the record date. Each warrant entitles the holder to purchase one common share at exercise prices of $3.25 and $3.75. On January 30, 2008, the company’s Board of Directors extended the expiration dates of the warrants such that the warrants will allow the holders of each warrant owned to purchase one share of common stock at an exercise price of $3.25 per share until January 31, 2009 or $3.75 per share from February 1, 2009 until January 31, 2011. As of December 31, 2008 approximately 5,197,200 warrants had been originally distributed and 5,900 had been exercised.

Recent Sales of Unregistered Securities

Other than as previously disclosed in the company’s SEC filings, there were no issuances or sales of our securities by us during the fourth quarter of 2008 that were not registered under the Securities Act.

Repurchase of Securities

On May 17, 2007, our Board of Directors authorized, effective immediately, a program to repurchase up to 150,000 of our outstanding common shares. Repurchases may be made by us from time to time in the open market at prevailing prices, in either block purchases or in privately negotiated transactions. The share repurchase program does not have a fixed expiration date. As of December 31, 2008, we have repurchased 34,800 of our common shares and 115,200 remain available under the plan.

Repurchases of Common Shares

	Total number of common shares purchased	Average price paid per common share		Total number of common shares purchased as part of publicly announced plans or programs	Maximum number (or approximate dollar value) of common shares that may yet be purchased under the plans or programs
October 1, 2008 – October 31, 2008	-	$	-	-		115,200
November 1, 2008 – November 30, 2008	-	$	-	-		115,200
December 1, 2008 – December 31, 2008	-	$	-	-		115,200
Total	-	$	-	-		115,200

ITEM 6.

SLECTED FINANCIAL DATA

Not applicable to smaller reporting companies.

ITEM 7.

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, 2008 and 2007 should be read in conjunction with our consolidated financial statements included in Item 7 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 7.

In 1997, we shifted our focus from being a distributor of other manufacturers’ toys, gifts, souvenirs, promotional premiums 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 opportunities 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 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.

Historically, our principal source of revenues has been the sale of products to retailers. We anticipate this will continue for the foreseeable future. However, we intend to augment this with revenue generating licensing agreements for our proprietary brands and trademarks. The competition and consolidation taking place in the retail sector will continue to present challenges. However, we believe the opportunities for increased penetration of existing channels, continued diversification into new distribution channels and interactive markets will allow us to achieve our growth objectives.

In August 2008 our CEO was succeeded by a new CEO to accommodate a commitment to financing and acquisition of a healthcare products distribution company. Upon receiving shares in our company for the acquisition the CEO resigned and has since been replaced by a Principal Restructuring Officer.

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, intangible assets and stock-based compensation.

We recognize revenue upon shipment of our products provided there are no significant post-delivery obligations to the customer and collection is reasonably assured. This 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 items.

Accounts Receivable Valuation

Accounts receivable result from the sale of our products at sales prices, net of estimated sales returns and other allowances. We estimate an allowance for doubtful accounts based on a specific identification basis and additional allowances based on historical collections experience. Accounts are considered past due when outstanding beyond the stated payment terms. We generally write-off any account receivable after all reasonable means of collection have been exhausted and collection does not appear probable.

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 estimated net realizable value. Failure to accurately predict and respond to consumer demand could result in us under producing 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.

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”.

	2008			2007
Net Sales		100.0	%		100.0	%
Cost of Sales		68.8	%		57.9	%
Gross Profit		31.2	%		42.1	%

Selling Expense		33.8	%		26.7	%
General & Administrative Expense		60.6	%		46.0	%
Total Operating Expense		94.4	%		72.7	%

(Loss) from Operations		(63.2	)%		(30.6	)%

Other Income/(Expense)		(9.1	)%		51.1	%
Income (Loss) Before Income Taxes		(72.3	)%		20.5	%
Taxes		(0.5	)%		0.0	%
Net Income (Loss)		(72.8	)%		20.5	%

			Payments Due by Period
Contractual Obligations	Total		On or prior to 12/31/09		January 1, 2010 to December 31, 2010		January 1, 2011 to December 31, 2011
Credit Facility	$	1,279,900	$	1,279,900	$	-	$	-
Minimum Royalty Payments	$	30,000	$	10,000	$	20,000	$	-
Total Contractual Cash Obligations	$	1,309,900	$	1,289,900	$	20,000	$	-

Fiscal Year Ended December 31, 2008
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total
Net sales	$	1,223,700		$	1,111,000		$	1,733,100		$	1,337,400		$	5,405,200
Gross profit		432,900			421,800			335,300			496,400			1,686,400
Loss from Operations		(902,900	)		(813,600	)		(987,400	)		(714,800	)		(3,418,700	)
Net income (loss)	$	(905,800	)	$	(962,100	)	$	(1,170,900	)	$	(896,000	)	$	(3,934,800	)

Fiscal Year Ended December 31, 2007
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total
Net sales	$	1,369,200		$	1,432,800		$	1,684,900		$	1,613,500		$	6,100,400
Gross profit		591,200			578,700			686,900			714,200			2,571,000
Loss from Operations		(565,800	)		(397,500	)		(397,100	)		(505,100	)		(1,865,500	)
Net Loss	$	(548,800	)	$	(250,300	)	$	(529,300	)	$	2,582,900		$	1,254,500

Number		Description
3.1		Amended and Restated Articles of Incorporation (1)
3.2		Amendment to Amended and Restated Articles of Incorporation (2)
3.3		Amended and Restated Bylaws (2)
10.1		Amended and Restated 1996 Stock Option Plan (3)
10.2		401(k) Plan (4)
10.4		License Agreement dated December 17, 2001, by and between Action Products International, Inc. and Porchlight Entertainment, Inc. (5)
10.6		Warrant Agreement by and between Action Products International, Inc. and Registrar & Transfer Company dated June 12, 2003 (6)
10.7		Amendment Number One to Warrant Agreement by and between Action Products International, Inc. and Registrar & Transfer Company dated June 4, 2004 (7)
10.9		Asset Purchase Agreement dated as of April 5, 2004, by and between Action Products International, Inc., Curiosity Kits, Inc. and Brighter Vision Holdings, Inc. (8)
10.10		Loan Agreement by and between AmSouth Bank and Action Products International, Inc. dated September 6, 2005 *
10.11		License Agreement dated January 31, 2006, by and between Action Products International, Inc. and Porchlight Entertainment, Inc. (9)
10.12		Warrant Agreement by and between Action Products International, Inc. and Registrar & Transfer Company dated June 16, 2006 (10)
10.13		First Amendment to the Warrant Agreement by and between Action Products International, Inc. and Registrar & Transfer Company dated July 31, 2006 (11)
10.14		Second Amendment to the Warrant Agreement by and between Action Products International, Inc. and Registrar & Transfer Company dated January 31, 2007 (12)
10.15		Letter Agreement dated March 22, 2007 by and between Regions bank (as successor by merger to AmSouth Bank) and Action Products International, Inc. (13)
10.16		Loan and Security Agreement Modification and Extension Agreement dated October 31, 2007 by and between Regions bank (as successor by merger to AmSouth Bank) and Action Products International, Inc. (14)
10.17		Employment Agreement dated November 5, 2007 by and between Robert L. Burrows and Action Products International, Inc. (15)

Name	Age	Position
Warren Kaplan	72	Acting Chief Executive Officer/Chief Financial Officer/Chairperson of the Board/Director

Scott Runkel	60	Director

Cecilia Sternberg	57	Director

Ann E. W. Stone	55	Director

10.18		Proprietary Information and Inventions Agreement dated November 5, 2007 by and between Robert L. Burrows and Action Products International, Inc. (16)
10.19		Restricted Stock Grant Agreement dated November 5, 2007 by and between Robert L. Burrows and Action Products International, Inc. (16)
10.20		Warrant Solicitation Agreement dated November 15, 2007 by and between National Securities Corporation and Action Products International, Inc. (17)
10.21		Third Amendment to the Warrant Agreement by and between Action Products International, Inc. and Registrar & Transfer Company dated February 12, 2008 (18)
23.1		Consent of Berman Hopkins Wright & LaHam, CPAs and Associates, LLP*
23.2		Consent of Moore Stephens Lovelace, P.A.*
31.1		Chief Executive Officer - Sarbanes-Oxley Act Section 302 Certification*
31.2		Chief Financial Chief Financial Officer - Sarbanes-Oxley Act Section 302 Certification*
32.1		Chief Executive Officer - Sarbanes-Oxley Act Section 906 Certification*
32.2		Chief Financial Officer - Sarbanes-Oxley Act Section 906 Certification*

(1)	Incorporated by reference to our Definitive Proxy Statement, filed May 22, 1998, File No. 000-13118
(2)	Incorporated by reference to our Current Report on Form 8-K filed on June 9, 2004
(3)	Incorporated by reference to our Definitive Proxy Statement, filed May 12, 2005, File No. 000-13118
(4)	Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 1986, filed August 17, 1987, File No. 0-13118
(5)	Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 2002, filed on March 26, 2003
(6)	Incorporated by reference to our Registration Statement on Form S-3 filed on July 1, 2003 File No. 333-106713
(7)	Incorporated by reference to our Current Report on Form 8-K filed on June 9, 2004
(8)	Incorporated by reference to our Current Report on Form 8-K filed on April 20, 2004
(9)	Incorporated by reference to our Current Report on Form 8-K filed on January 31, 2006
(10)	Incorporated by reference to our Registration Statement on Form S-3, filed on June 16, 2006, File No. 333-135078
(11)	Incorporated by reference to our Current Report on Form 8-K filed on August 1, 2006
(12)	Incorporated by reference to our Current Report on Form 8-K filed on February 9, 2007
(13)	Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed April 2, 2007, File No. 000-13118.
(14)	Incorporated by reference to our Current Report on Form 8-K filed on November 1, 2007
(15)	Incorporated by reference to our Current Report on Form 8-K/A-1 filed on January 28, 2008
(16)	Incorporated by reference to our Current Report on Form 8-K filed on November 7, 2007
(17)	Incorporated by reference to our Current Report on Form 8-K filed on November 15, 2007
(18)	Incorporated by reference to our Current Report on Form 8-K/A-1 filed on February 15, 2008

		ACTION PRODUCTS INTERNATIONAL, INC.

Date: April 17, 2009	By:	/s/ WARREN KAPLAN
		Warren Kaplan Chief Executive Officer and Chairperson (Principal executive officer)

SIGNATURE	TITLE	DATE
/s/ WARREN KAPLAN	Chairperson of the Board and Chief Executive Officer and Chief Financial Officer	April 17, 2009
Warren Kaplan	(Principal executive and financial officer)

/s/ SCOTT RUNKEL	Director	April 17, 2009
Scott Runkel

/s/ ANN E. W. STONE	Director	April 17, 2009
Ann E. W. Stone

/s/ CECILIA STERNBERG	Director	April 17, 2009
Cecilia Sternberg

		Page
		Number

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS		F-2

FINANCIAL STATEMENTS

Consolidated Balance Sheets		F-4

Consolidated Statements of Operations		F-5

Statements of Changes in Shareholders’ Equity		F-6

Consolidated Statements of Cash Flows		F-7

Notes to Consolidated Financial Statements		F-8

	December 31,
	2008			2007
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	17,500		$	44,400
Investment securities		66,300			475,000
Accounts receivable, net of an allowance of $22,000 and $47,200		975,000			1,429,800
Other receivable		-			3,233,700
Inventories, net		1,411,400			2,131,800
Prepaid expenses and other assets		144,500			197,700
TOTAL CURRENT ASSETS		2,614,700			7,512,400

PROPERTY, PLANT AND EQUIPMENT		3,691,200			3,650,400
Less accumulated depreciation and amortization		( 2,906,900	)		( 2,761,100	)
NET PROPERTY, PLANT AND EQUIPMENT		784,300			889,300

GOODWILL		2,090,300			1,405,300
OTHER ASSETS		423,800			276,100
TOTAL ASSETS	$	5,913,100		$	10,083,100

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable	$	1,461,600		$	1,811,900
Accrued expenses, payroll and related expenses		433,100			593,900
Borrowings under line of credit		1,279,900			1,960,400
Borrowings under investment account		11,000			141,800
Other current liabilities		1,600			89,600
TOTAL CURRENT LIABILITIES		3,187,200			4,597,600

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY
Preferred stock - 10,000,000 shares authorized, 200,000 shares issued and 175,000 outstanding		200			-
Common stock -$.001 par value; 25,000,000 authorized; 6,192,000 and 5,660,000 shares issued at December 31, 2008 and 2007, respectively		6,200			5,700
Treasury stock - $.001 par value; 240,500 shares		( 200	)		( 200	)
Additional paid-in capital		10,236,600			9,260,200
Unearned Compensation Costs		( 58,500	)		( 256,300	)
Accumulated Deficit		( 7,458,400	)		( 3,523,900	)
TOTAL SHAREHOLDERS' EQUITY		2,725,900			5,485,500
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	5,913,100		$	10,083,100

	Years Ended December 31,
	2008			2007

GROSS SALES	$	5,706,700		$	6,363,400
SALES RETURNS AND ALLOWANCES		( 301,500	)		( 263,000	)
NET SALES		5,405,200			6,100,400

COST OF SALES		3,718,800			3,529,400
GROSS PROFIT		1,686,400			2,571,000

OPERATING EXPENSES
Selling		1,824,700			1,626,900
General and administrative		3,280,400			2,809,600
TOTAL OPERATING EXPENSES		5,105,100			4,436,500

LOSS FROM OPERATIONS		( 3,418,700	)		( 1,865,500	)

OTHER INCOME (EXPENSE)
Interest expense		( 106,000	)		( 145,000	)
Other		( 383,600	)		3,265,100
TOTAL OTHER INCOME (EXPENSE)		( 489,600	)		3,120,100

INCOME (LOSS) BEFORE INCOME TAX PROVISION		( 3,908,300	)		1,254,600

INCOME TAX PROVISION		( 26,200	)		-
NET INCOME (LOSS)	$	( 3,934,500	)	$	1,254,600

INCOME (LOSS) PER SHARE:
Basic and diluted	$	(0.69	)	$	0.24

WEIGHTED AVERAGE NUMBER OF COMMON SHARES
Basic and diluted		5,681,700			5,273,900

	Preferred Stock				Common Stock (net of Treasury Stock)								Unearned Share
	$.001 Par Value				$.001 Par Value					Additional			Based						Total
	Outstanding Shares		Amount		Outstanding Shares			Amount		Paid-In Capital			Compensation Cost			(Accumulated Deficit)			Shareholders’ Equity
BALANCE - JANUARY 1, 2007		-		-		5,231,500		$	5,200	$	8,958,800		$	(18,100	)	$	(4,778,400	)	4,167,800

TREASURY STOCK, at par
(Repurchase of Common Shares)		-		-		(5,100	)		-		(7,900	)		-			-			(7,900	)

COSTS RELATED TO ISSUANCE OF COMMON SHARES		-		-		-			-		(900	)		-			-			(900	)

SHARE BASED COMPENSATION
(net of cancellations)		-		-		225,000			300		310,200			(310,500	)		-			-

UNEARNED SHARE BASED COMPENSATION - AMORTIZATION														72,300						72,300

NET INCOME		-		-		-			-		-			-			1,254,500			1,254,500
BALANCE - DECEMBER 31, 2007		-	$	-		5,451,400		$	5,500	$	9,260,200		$	(256,300	)	$	(3,523,900	)	$	5,485,500

TREASURY STOCK, at par
(Repurchase of Common Shares)						(31,900	)				(32,900	)								(32,900	)

ISSUANCE OF COMMON SHARES						531,900			500		713,700									714,200

ISSUANCE OF PREFERRED SHARES		175,000		200							199,800									200,000

SHARE BASED COMPENSATION																				-
(net of cancellations)											95,800			(95,800	)					-

UNEARNED SHARE BASED COMPENSATION - AMORTIZATION														293,600						293,600

NET INCOME																	(3,934,500	)		(3,934,500	)
BALANCE - DECEMBER 31, 2008		175,000	$	200		5,951,400		$	6,000	$	10,236,600		$	(58,500	)	$	(7,458,400	)	$	2,725,900

	Twelve Months Ended Dec. 31
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss)	$	(3,934,500	)	$	1,254,500
Adjustments to reconcile net loss to net cash provided by/(used in) operating activities
Depreciation		145,800			176,800
Amortization		243,900			77,900
Unrealized (gain)loss on investment securities		138,400			51,800
Stock based compensation expense		293,600			72,300
Provision for bad debts		79,700			(49,800	)
Loss on disposal of other assets		-			52,400
Changes in:
Litigation settlement receivable		3,233,700			(3,233,700	)
Accounts receivable		375,100			533,800
Investment securities		270,300			(369,800	)
Inventories		720,400			(586,500	)
Prepaid expenses		53,200			65,600
Other assets		(381,600	)		(310,200	)
Accounts payable		(350,300	)		1,342,600
Accrued expenses, payroll and related expenses		(248,800	)		(185,700	)
Deferred revenue		-			(25,000	)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		638,900			(1,133,000	)

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment		(40,800	)		(66,400	)

CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock		(32,900	)		(7,900	)
Repayment of mortgage principal		-			(41,100	)
Proceeds from exercise of warrants and sale of preferred stock		219,200			-
Common stock options and warrants issuance costs		-			(900	)
Net change in borrowings under line of credit		(680,500	)		782,000
Net change in borrowings under investment account		(130,800	)		141,800
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(625,000	)		873,900

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(26,900	)		(325,500	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		44,400			369,900
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	17,500		$	44,400

Supplemental disclosures - cash paid for:
Interest	$	106,000		$	146,800
Income Taxes	$	26,200		$	-

NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of BE Overseas, goodwill, and prepaid expense through issuance of common shares	$	695,000		$	-

	Value At December 31, 2008			Cumulative Unrealized (Loss) At December 31, 2008
Equity Securities	$	66,300		$	(139,100	)
Short Positions	$	(1,600	)	$	(700	)

Building		40 Years
Furniture, fixtures and equipment		3 - 10 Years

	2008		2007
Land	$	67,400		67,400
Building improvements		1,058,100		1,058,100
Equipment		2,346,100		2,035,300
Furniture and fixtures		219,600		219,600
	$	3,691,200		3,650,400

	2008		2007
Insurance premiums	$	27,100		29,100
Trade show deposits		27,200		80,900
Service & software maintenance fees		70,400		34,000
Marketing and promotional materials		-		34,000
Other		9,200		19,700
	$	133,900		197,700

		Net Book		Net Book
		Value At		Value At
		December 31,		December 31,
		2008		2007
Product development costs	3 Years	$	365,300		236,200
Patents and trademarks	15 Years		9,600		12,600
Other	2 – 5 Years		48,900		27,300
		$	423,800		276,100

	December 31,
	2009		2010		2011		2012		2013		Thereafter
Amortization of product development and other intangible assets	$	168,500	$	163,000	$	64,800	$	2,100	$	2,100	$	7,100

	2008			2007
Deferred Tax Liabilities
Amortization of goodwill	$	(65,700	)		(65,700	)
Property and equipment depreciation		(28,400	)		(43,200	)
Gross deferred tax liabilities		(94,100	)		(108,900	)

Deferred Tax Assets
Bad debt allowance		4,300			9,300
Inventory reserves		8,900			23,800
Deferred stock based compensation		87,700			137,700
Unrealized loss on investments		52,100			19,500
Federal net operating loss carryforward		993,500			463,200
State net operating loss carryforward		394,800			198,300
Gross deferred tax assets		1,541,300			851,700
Valuation allowance		(1,447,200	)		(742,800	)
Net deferred tax assets		94,100			108,900

Net deferred taxes	$	-			-

	2008			2007
Federal provision (benefit) expected at statutory rates		(34.0	)%		34.0	%
State income taxes, net of federal income tax benefit		(3.3	)%		3.3	%
Net operating loss usage		-			(37.3	)%
Non-deductible expenses, effect of graduated rates and other rates and other		37.3	%		-
Benefit from income taxes	$	-		$	-

	2008			2007

Risk-free rate		3.70	%		5.0	%
Expected option life (in years)		4.60			4.9
Expected stock price volatility		69.00	%		69.00	%
Dividend yield		0.00	%		0.00	%
Weighted average grant date value	$	0.78		$	1.84

Date	Number of Shares
April 1, 2008		31,250
June 1, 2008		31,250
September 1, 2008		31,250
January 1, 2009		31,250
April 1, 2009		25,000
June 1, 2009		25,000
September 1, 2009		25,000
January 1, 2010		25,000
Total		225,000

				Weighted-
	Number of			Average
	Options			Exercise Price

Outstanding at December 31, 2006		255,000		$	3.22
Grants		-		$	-
Exercises		-		$	-
Cancellations		(51,000	)	$	3.35

Outstanding at December 31, 2007		204,000		$	3.13
Grants		115,000		$	1.43
Exercises		-		$	-
Cancellations		(166,000	)	$	3.12
Outstanding at December 31, 2008		153,000		$	1.87

Shares exercisable at December 31, 2008		130,500		$	1.88

	Total Outstanding Options
			Weighted
			Average
			Remaining		Weighted
	Number		Contractual		Average
Range of Exercise Prices	of Shares		Life (in years)		Exercise Price

$1.20 - $2.00		120,000		3.9	$	1.45
$2.01 - $3.00		10,000		2.7	$	2.35
$3.01 - $4.00		20,000		1.8	$	3.42
$4.01 - $5.00		-		-		-
$5.01 - $6.00		-		-		-
$6.01 - $6.75		3,000		0.3	$	6.75
		153,000		3.5	$	1.87

	Exercisable Options
			Weighted
			Average
			Remaining		Weighted
	Number		Contractual		Average
Range of Exercise Prices	of Shares		Life (in years)		Exercise Price

$1.25 - $2.00		97,500		3.8	$	1.37
$2.01 - $3.00		10,000		2.7	$	2.35
$3.01 - $4.00		20,000		1.8	$	3.42
$4.01 - $5.00		-		-		-
$5.01 - $6.00		-		-		-
$6.01 - $6.75		3,000		0.3	$	6.75
		130,500		3.3	$	1.88