UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                            -------------------------

                                   FORM 10-KSB

                                  ANNUAL REPORT
                        PURSUANT TO SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                             -----------------------
                   For the fiscal year ended December 31, 2000

                        AIR PACKAGING TECHNOLOGIES, INC.
             (Exact name of Registrant as specified in its Charter)

         Delaware                                            95-4337254
  (State of Incorporation)                              (IRS Employer ID No.)

                25620 Rye Canyon Road, Valencia, California 91355
                    (Address of principal executive offices)

                                 (661) 294-2222
                         (Registrant's telephone number)

        Securities registered pursuant to Section 12(b) of the Act: none


  Securities registered pursuant to section 12(g) of the Act: 11,298,358 common

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 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. [x] yes [ ]no

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) 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. [ ]


Revenues for fiscal year ended December 31, 2000:  $ 909,214
                                                   ---------


The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registration was $13,600,611 as of March 30, 2001.
                 -----------

       Shares of Common Stock Outstanding as of March 31, 2001: 11,298,358


<PAGE>



Part I

Item 1.                            BUSINESS
                                   --------

     INTRODUCTION
     ------------

     Air  Packaging  Technologies,  Inc.,  a Delaware  corporation  ("APTI")  is
engaged in the manufacturing, distribution, marketing, and continued development
of  inflatable,  protective  packaging for use in shipment of higher end fragile
products.  It holds  worldwide  patents on a  packaging  system  which  utilizes
chambered   packing  material  which  provides  an  Air  Box(R)  cushion  around
shipments.  Its Air Box(R) system  competes  favorably  against  materials  like
bubble  wrap,  urethane  foam,  etc.,  in terms of  protection,  ease of use and
storage, for shipment of higher value items throughout the world.

A.   BUSINESS DEVELOPMENT
-------------------------

     The Registrant's  predecessor was organized as a Canadian corporation under
the  British  Columbia  Company  Act in 1985,  under the name "MDE  Exploration,
Inc.".  MDE Exploration  made an initial public offering in 1988 in Canada under
the auspices of the Vancouver Stock  Exchange,  and raised  CDN$175,000  (net of
commissions)  through the issuance of 500,000 shares of Common Stock at CDN$0.40
per share.

In 1989, MDE Exploration,  Inc. was reincorporated in Delaware,  and reorganized
and combined with Puff Pac Hold Co. Inc.,  P&P  Industries,  Inc.,  and Puff Pac
Ltd., under the name Puff Pac Industries, Inc.

In September of 1992 Puff Pac Industries, Inc. changed its name to Air Packaging
Technologies, Inc.

The Registrant's  stock commenced trading on the NASD Bulletin Board in April of
1994.

     Puff Pac Ltd., a California Limited  Partnership,  remains in existence due
to ownership by a small  minority  interest.  APTI owns 99.13% of the beneficial
interest in Puff Pac Ltd..

     APTI's  corporate  offices are located at 25620 Rye Canyon Road,  Valencia,
California  91355; its telephone number is (661) 294-2222;  its facsimile number
is (661) 294-0947.

     APTI has one wholly owned subsidiary:

          Puff  Pac  Industries  Canada  Inc.  ("Canco"),   a  British  Columbia
          corporation.


<PAGE>


B.   BUSINESS
-------------

1.   PRODUCTS
-------------

     APTI manufactures and markets a line of industrial packaging products under
the name "Air  Box"(R) and two private  label  brands  pursuant to two  separate
agreements with Minnesota  Mining and  Manufacturing  Company under the names 3M
Inflata-Pak(TM) Air Cushion Packaging and 3M (TM)Air Cushion Packaging.

     The Air Box(R) provides reusable  protective  packaging during shipping and
storage  for a wide range of high  value  items.  It  provides  vastly  superior
protection from ESD (electro static  discharge)  damage,  and moisture.  It also
provides  see-through  transparency for visual  inspection of the product during
shipment and storage.

     The patented  design suspends an item within a  double-chambered  envelope,
which  when  inflated,  surrounds  the item with a  protective  cushion  of air,
protected by a double wall of transparent material, made out of a combination of
polyethylene and nylon.

     Although not an inexpensive  form of packaging,  the Air Box(R)  provides a
cost-effective  packaging solution for higher value items and is environmentally
superior to  conventional  packaging.  When deflated and disposed of, use of the
Air Box  reduces  the amount of waste by up to 90%,  compared  with  traditional
packaging.  The  packaging  is also easily  storable in deflated  form,  greatly
reducing warehouse space required to be devoted to package material storage.

     Air Box(R) is reusable, allowing the package to be deflated and reused. The
Air Box is designed for companies that have substantial round-trip packaging and
shipping requirements.

     APTI has also developed and markets a Static Discharge  Shielding (SDS) Air
Box(R).   This   product  is  designed   for   electronic   products   requiring
static-discharge  protection (i.e., Wafers and Integrated Circuits). The SDS Air
Box(R) has two layers of  anti-static  coated  film  (inner and outer bags) that
dissipate  static  electricity  while the  package's  air chamber  provides full
static shielding.  This provides one hundred times the protection of traditional
static  shielding  bags,  and  still  provides  cushion  protection,  all in one
package.

<PAGE>

     The SDS Air Box(R) also meets MIL B81705C  Type II and Type III and EIA 541
specifications. The Electronics Industry Association (EIN) puts out the standard
which  is  titled  packaging  materials  standard  for  Electro-state  discharge
sensitive items. Motorola and other electronic  semiconductor  manufacturers are
presently  using the SDS Air Box(R) for  shipment of their wafer and  integrated
circuits.

     During the first  quarter of 2000 APTI  introduced  a new line of  products
which will  substantially  reduce the amount of material  while  preserving  the
products protective qualities.  The new product, to be called  Suspend-A-Pak(TM)
will be  suitable  for the  shipment  of laptop  computers  and  similar  shaped
products.  APTI has  applied  for the  patent  for this new  packaging  concept,
Suspend-A-Pak(TM). The bag is made similar to an inner tube surrounding the item
while allowing the 4 corners to protrude  through the tube. This in effect lifts
and suspends the item giving it excellent  protection against drop and vibration
damage.

     APTI has  adapted  the AIR BOX(R) for the  promotional  market,  shipping a
variety of products from invitations to Champagne  bottles.  The transparency of
the Air Box(R) lends itself to promotional  packaging and, in certain instances,
product  has been  shipped in the Air Box(R)  with no  exterior  packaging.  The
Company intends to continue to vigorously pursue this market.

     Air Box(R)  products  are  offered  in 6 standard  sizes and SDS Air Box(R)
products are offered in 8 standard sizes.

     Air Box(R) quilting is an additional process developed by the Company which
allows the Air Box(R) to take up less space when inflated and to support heavier
items  for  shipping.  Air  Boxes can  accommodate  products  up to 15 pounds in
weight.

     APTI has created the Air Box(R)  Shipping  Center as a marketing  tool. The
Center is designed for the miscellaneous shipping needs of small businesses.  It
is portable,  measuring 17"x22"x4", made of corrugated cardboard, and comes with
an assortment of one hundred and twenty (120) Air Boxes in eight different sizes
and a portable air pump. It offers packaging  protection  equivalent to a closet
full of Styrofoam.

     Conventional  packaging requires as much as nine times more material volume
than the Air Box(R),  which consists of 90 percent air when inflated.  Since the
Air Boxes are stored flat, storage space requirements are greatly reduced.

     Designed to be reused as often as five times per Air Box(R), deflatable Air
Box  materials  going into a landfill  after use  represent  45 times less waste
material compared with existing materials.

     The  see-through  film of the Air Box(R) permits  instant  verification  of
contents and allows a humidity  indicator  card to be read  without  opening the
package.  In some styles bar codes can also be scanned  directly through the Air
Box without opening it.

     During  inflation,  the two chambers,  sealed together at the edges,  swell
against one another, immobilizing the product trapped between.

<PAGE>

     The  product's  disadvantage  is its  high  unit  cost.  Further,  in  some
applications  the  product's  moisture  barrier does not meet certain Mil specs,
although the Company's research and development department is working to improve
such protection. The product is also relatively unknown, and there are limits to
size, shapes and weights.

     At the point of unpacking in the recipient's  plant, Air Boxes are deflated
by pulling up the valve stem on the valve  allowing  air to escape  through  the
center of the valve.  When the Air Box is ready for reuse the valve stem will be
pushed back down after inflation.


     In summary the Company's Air Box product has the following  attributes  and
advantages:

>       A unique packaging system
>       Patented products
>       Superior drop and vibration protection
>       Transparency
>       ESD protection
>       Custom shapes
>       Custom printing
>       Reusable, Cost effective, Environmentally friendly
>       Suspend-A-Pak is a low cost alternative to traditional packaging



MARKETING
---------

     The Company has identified  and has focused upon six key  industries  which
management believes can immediately benefit from its products. These are:

>        Promotional product or event announcements
>        Semiconductor industry and other Static Discharge Shielding (SDS) users
>        Medical
>        Dental
>        In-store display
>        Retail packaging
>        Electronic finished products and product repairs

     The Company has  entered  into two  agreements  with  Minnesota  Mining and
Manufacturing  Company  (3M)pursuant to which the Company will be  manufacturing
products to be sold under 3M's name. It is  anticipated  these  agreements  will
account for the majority of Company sales in 2001 with the percentage increasing
in future years. As detailed below, the agreement dated February 26, 2001 grants
to 3M exclusive  worldwide rights to sell and distribute  industrial  protective
packaging after May 1, 2001.

3M AGREEMENT DATED SEPTEMBER 1, 2000 WITH 3M STATIONERY PRODUCTS DIVISION

     Under this  agreement  which is  denominated  as a Private  Label  Purchase
Agreement,  3M has been granted the  exclusive  worldwide  rights for the retail
market as well as certain other  marketing  rights.  Pursuant to this agreement,
the Company is manufacturing five sizes of inflatable protective packaging to be
sold at retail under the name 3M Inflata-Pak(TM)  Air Cushion  Packaging.  It is
anticipated  that this  product  will be offered for sale in over 15,000  stores
throughout  the United States in 2001.  3M will be  supporting  its sales effort
with an extensive public relations and advertising campaign.
<PAGE>

3M AGREEMENT DATED FEBRUARY 26, 2001 WITH 3M PACKAGING SYSTEMS DIVISION

     Under this  agreement  which is  denominated  as a Private  label  Purchase
Agreement, 3M has been granted the exclusive worldwide rights for the industrial
protective  packaging market  commencing May 1, 2001. The industrial  protective
packaging  market is defined in the  agreement  as "direct or indirect  sales to
small businesses,  industrial  customers,  and logistics companies for packaging
applications,  the  predominant  purpose of which is to protect  products and/or
manufacturer  throughout the logistics and distribution  channel to the ultimate
destination of the product and product component." The Company shall be entitled
to continue to sell to any existing  customer in this market and any prospective
customer that it was actively  soliciting  independent  of 3M as of May 1, 2001.
The  Agreement  also  grants to 3M  non-exclusive  rights to sell the  Company's
products in all other markets.


PROMOTIONAL AIR BOX

     The Company is attempting to take advantage of the unique appearance of its
Air Box by  increasing  its  efforts  to sell  the  product  in the  promotional
packaging  market.  By changing the  materials,  the price of the Air Box can be
significantly reduced which allows the Company to compete with traditional forms
of  packaging.   The  Company   intends  to  seek   strategic   alliances   with
well-established companies in the promotion and business premium industries. The
Company  will  continue  to  actively  pursue  opportunities  in this market and
anticipates  that 3M will also actively pursue this market  throughout the world
pursuant to the above described agreement.

SEMICONDUCTOR AND OTHER SDS USES

     This is an  industrial  protective  packaging  market and  pursuant  to the
February  26,  2001  agreement  with 3M,  as of May 1,  2001,  3M will  have the
exclusive  rights to sell to this  market.  The  Company  will be  permitted  to
continue  to  sell  to  existing  customers  and any  customers  it is  actively
soliciting as of May 1, 2001.

     The SDS market is principally the semiconductor  market.  Manufacturers are
concerned  with the shipment of silicon  wafers used to  manufacture  integrated
circuits,  and  IC's  packaged  in a Tape  and Reel  for  shipment  and  further
manufacture. This is a worldwide market.

     Management  believes its products are the only  protective  packaging  with
both static shielding and cushion  protection.  The Air Box(R) provides superior
static shielding, is cost effective,  requires less storage space, allows use of
primary shipment containers (Empak) (reusing the manufacturer's carrier provides
additional  cost savings),  and is more effective in reducing  damage from drops
and vibrations.

     The product  exceeds all ESD standards,  all ISTA and ASTM  compression and
transportation  standards, and has passed all commercial airline altitude tests.
The product does not particulate - avoiding wafer contamination.  The product is
environmentally  friendly with 90% less waste going into the landfill  after use
as compared to other packaging materials. The Company's customers report the Air
Box(R) is  providing  cost  savings  and  freight  savings,  since there is less
shipment  weight and the  corrugated box is smaller when compared to traditional
cushion packaging.
<PAGE>

     In a typical  application,  the two  chambers  contain  air and are  sealed
together at the edges, with the exception of an open end in which the product is
inserted along with a humidity  indicator card. An operator applies  pressurized
air  from an  inexpensive  regulator,  supplied  by APTI  to the  bag's  nozzle,
inflating the bag. The open end is then vacuum-sealed  using existing equipment.
The   resulting   product/package    construction,    consisting   of   film/air
gap/film/product/film/air  gap/film, is what gives the package its strong static
shielding protection.  The air gaps can range anywhere from 1/2 to 1 inch thick,
depending on the  contents.  The film is coated to provide the  required  static
dissapative  properties,  the  polyethylene  and nylon  both  provide  enhancing
properties to resist puncture and a long shelf life.

     After a variety of tests  conducted  under  several  different  conditions,
independent testing laboratory Fowler Associates  confirmed that the combination
of the  material  and  the  air  gaps  "provide  a very  good  ESD  package  for
essentially  all devices under  essentially  all  conditions."  In one test, the
package withstood a 20kV discharge while containing integrated circuits that are
rated at 150 v maximum.


     Another part of the SDS market is the Photomask  market.  The Photomask has
no efficient nor cost-effective  method of shipment,  is extremely  fragile,  is
subject to transit damage, and is particularly  sensitive to contamination.  SDS
Air Box(R) can be sealed to eliminate  contamination during transit and storage.
Prior to the SDS Air Box entering this market,  the Photomask  manufacturers had
no efficient way to ship their fragile Photomasks. They were getting substantial
damage  during  shipping  and  storage,  causing  them to use such  extremes  as
packaging  them in a  five-gallon  ammo  can  with  bubble  wrap or a full  size
suitcase lined with polyurethane  foam. If the Photomask was extremely  fragile,
they had to hand carry it to the customer.  In all cases,  it was  substantially
more expensive to insure the safety of the Photomask  prior to the  introduction
of the SDS Air Box.  APTI has been selling the  Photomask  Air Box to Photronics
for nine months,  and recently  began selling the SDS Air Box for  Photomasks to
two other companies. These three companies control 60% of the Photomask market.

     Other  markets  for the SDS Air Box(R)  include  sensitive  parts for wafer
making  machines,   high-end  disc  drives,  quartz  glassware  used  in  making
semiconductor wafers, and lightweight surface mount boards, among others.

MEDICAL

     This is an  industrial  protective  packaging  market and  pursuant  to the
February  26,  2001  agreement  with 3M,  as of May 1,  2001,  3M will  have the
exclusive  rights to sell to this  market.  The  Company  will be  permitted  to
continue  to  sell  to  existing  customers  and any  customers  it is  actively
soliciting as of May 1, 2001.

     The Company has sold a custom designed Air Box to ship living human skin in
a Petrie dish from its manufacturer,  Organogenises Inc. to hospitals throughout
the country. The living skin is sold under the name Apligraf(TM). If Apligraf is
subjected to substantial vibration or shock during transportation,  it will form
a small bubble under the skin and die.  Many forms of packaging  were tested and
the Air Box design is the only FDA-approved method of shipment.

     The  Company  is  also   manufacturing   a  disposable  air  splint  called
Pneusplint(TM) for STI Medical products. Pneusplint is a new, adjustable, highly
stable and low cost  device  which can be used to  stabilize  extremities  after
injury. It is manufactured in three sizes.

     The Dental market is concerned with the shipment of dental impressions from
the dentist's  office to the laboratory for the fabrication of dental plates and
apparati and the return trip to the Dentist. Deliveries inside of about 75 miles
are now hand  delivered,  and do not need the Air Box.  Dentists who are outside
the 75-mile  radius of the laboratory  must ship both ways by air courier.  APTI
has replaced the corrugated box and foam interior with a simple reusable Air Box
that fits into an  overnight  courier bag.  The  laboratory  is saving $1.00 per
shipment  on freight  (going both ways) and plans to use the Air Box four times,
giving them additional  savings.  They also have their packages  delivered up to
two hours earlier than if packaged in boxes and foam. The  environmental  effect
is tremendous  and  important to the  industry;  the Air Box is 95% less dunnage
going into the land fill, and if used four times is 98% less dunnage.

<PAGE>

IN STORE DISPLAY

     The Company is also  utilizing  the unique  appearance of the Air Box(R) to
increase  sales of its  product  to the in store  display  market in  department
stores and  service  establishments.  A leading  manufacturer  of beauty  parlor
supplies  will  introduce a new line of products to its beauty  salon  customers
using a custom-designed Air Box(R) set in a metallic base.

     The Company will continue to actively pursue  opportunities  in this market
and  anticipates  that 3M will also actively  pursue the market  throughout  the
world pursuant to the above described agreement.

RETAIL PACKAGING

     The Company is  presently  working  with both  packaging  design  firms and
manufacturers to develop a market for the Air Box(R)as a package for products to
be sold at retail.  The Air  Box(R)  will serve two  functions:  to protect  the
enclosed product and to attract the attention of retail  customers.  The Company
received its first significant order in this market from a packaging design firm
in Lisbon,  Portugal  which used the Air Box(R) as a retail package for the sale
of cell phones.

     The Company will continue to actively pursue  opportunities  in this market
and  anticipates  that 3M will also actively  pursue the market  throughout  the
world pursuant to the above described agreement.



SUSPEND-A-PAK

     Suspend-A-Pak, a totally new line of Air Boxes, was introduced in the first
quarter of 2000. It is designed to be used as suspension packaging using Air Box
technology  but  utilizing  substantially  less  material.  This will  allow the
Company  to  compete  in  high   volume,   low-end   applications   and  in  the
transportation of electronic items such as laptop computers.

     This is an  industrial  packaging  market and  pursuant to the February 26,
2001 agreement with 3M, as of May 1, 2001, 3M will have the exclusive  rights to
sell to this market. The Company will be permitted to sell to existing customers
and any customers it is actively soliciting as of May 1, 2001.


2.  Methods of Sales
--------------------

     The Company has a Vice  President of Sales handling all accounts as well as
an inside sales person located in Valencia CA.

     End user sales are at present mainly handled through a variety of packaging
distributors  throughout the United States.  Pursuant to the agreements  with 3M
described above, 3M is currently the exclusive seller of the Company's  products
in the retail  market under the 3M name and,  effective  May 1, 2001, 3M will be
conducting  all of the sales  efforts  in the  industrial  protective  packaging
market  worldwide.  Company  personnel  will act in a  supporting  role in these
markets.

<PAGE>

     The Company will continue to pursue with its own personnel opportunities in
all of those  markets for which 3M does not have  exclusivity  and will seek out
appropriate strategic "partners" to aid its sales efforts.


3.   Manufacturing
------------------

     APTI  purchases raw  materials in the form of custom  extruded or laminated
webs of thin flexible plastic films which have been printed or coated by outside
suppliers.  These films are produced to meet the  Company's  specifications  and
standards.

     These films are then converted into the Company's  various  products on the
Company's custom designed and computer  controlled modular converting  machines.
These  custom bag  machines  use heat  sealing  technology  to join the multiple
layers of plastic film together. The specific sequence of operations and control
parameters is proprietary to the Company, and is covered by process patents. The
Company  currently has two product  fabrication  converting  machines  which are
capable of producing a total of seven (7) million units per year per shift.  The
Company is currently operating at two shifts per day.

     The Company fabricates its patented air inflation flat valve using extruded
printed thin plastic films which are heat sealed together to form the valve on a
custom designed fabrication machine. In the first half of 1998 APTI designed and
developed an  industrially  acceptable  push-pull  hard valve.  Field tests were
completed with some of the Company's largest  customers.  They  enthusiastically
endorsed  the  valve.  The new  push-pull  valve  eliminates  the  threat of air
escaping  through  the  valve.   APTI  is  using  the  push-pull  valve  in  all
Semiconductor applications and most custom design industrial applications.

     The Company utilizes  continuous process quality monitoring of raw material
and  finished  products.  Production  lot  testing  and other  elements of Total
Quality  Management  are  used to  produce  a high  quality  of  product,  which
continues to hold air in all required shipping environments.

     The  Company  packages  its  products  in boxes  for  shipment  to its many
customers  and  distributors  throughout  the world.  Some of the  products  are
"standard"  items and are produced to forecast and warehoused for quick response
fulfillment. Most other products are produced only upon specific customer order.
On large special orders the Company can provide products with custom printing to
the customer's requirements;  all other orders are produced and shipped with the
Company's standard logo and patent information printing.

4.   Sources and Availability of Raw Material
---------------------------------------------

     The Company has at least two suppliers  fully  qualified to produce each of
the raw material films required for its products and several companies qualified
to provide the printing required.

     Basic raw  materials  required by us from our  suppliers,  such as Smurfitt
Stone, Huntsman and Winpak, are produced and readily available to us. All of the
film raw materials  used are produced in the millions of tons currently in other
industries. The Company has adopted industry standard processes to fabricate its
raw  materials.  As a result,  supplies of raw  materials  are  available to the
Company  from many  sources,  though the  lead-time  can be several  weeks until
receipt of raw materials into the Company plant.

<PAGE>

5.   Patents, Trademarks & Licenses
-----------------------------------

     The Company has a combination of products, process and application patents,
backed by  proprietary  and trade secret  manufacturing  technology.  Management
believes the patents and trademarks provide a formidable barrier to competition.
They include 13 U.S. patents and 1 pending with 2 trademarks and 1 pending, with
13 foreign patents with 2 pending and 1 trademark  pending - and further filings
continue to protect  and  strengthen  the  technology  position.  The Company is
required to pay minor royalties  related to certain patents and trademarks,  and
in prior years had paid royalties on both patents and the trademark  "Puff Pac",
which trademark is no longer used. Total expense related to these agreements was
$ 5,723 in 2000 and $4,324 in 1999.  The continuing  royalty  payment on patents
continues  for the life of the original  patents,  and is fixed at 2% of cost of
goods sold on an annual basis.


6.   Seasonal Factors
---------------------

     The seasonal  factors in the  Company's  Air Box product are  limited,  and
revolve only around industry slow downs.


7.   Inventory and Other Working Capital Items
----------------------------------------------

     The Company carries a continuing  inventory of its Air Box products,  based
on sales  forecasts.  The book value of this  inventory  has been  significantly
reduced due to the slower than expected sales rate and potential obsolescence or
rework  necessitated  by  the  Company's   continuing  product  development  and
improvement.  The Company had inventory reserves of $134,000 and $33,000 in 2000
and 1999, respectively.


8.   Principal Customers
------------------------

     One  customer,  3M,  accounted  for 13% of the  Company's  sales during its
fiscal year ended  December 31, 2000.   During the year ended December 31, 1999,
three customers,  Motorola (XPEDX), The Air Packaging Company (Europe) Ltd., and
C-PAK PTE,  LTD  (Singapore)  accounted  for 16%,  17% and 24% of the  Company's
sales. These companies are not affiliates of APTI.


9.   Firm Backlog
-----------------

     As of December 31, 2000,  APTI had  $209,000 in backlog  orders,  which are
scheduled to be completed  within 90 days. The backlog orders as of December 31,
1999 totaled  $97,000.  Most orders are  non-custom,  and are filled and shipped
within 14 working days.  Custom orders require 6 to 8 weeks to  manufacture  and
ship.

<PAGE>

10.  Competition
----------------

     APTI has two distinct types of competitors,  one in the standard Air Box(R)
market and one in the SDS Air Box(R) market.

     The Standard Air Box(R) competes against traditional cushion packaging such
as die cut styrofoam,  loose fill,  bubble wrap, die cut corrugated,  convoluted
foam and other forms of  packaging.  The  Company's  products are  competitively
priced with most of these  competitors.  The Company's Air Box product  performs
better than all other cushion packaging in transportation tests.

     The second  market is the static  shielding  market.  Here,  APTI  competes
against anti-static foam cushion packaging. Most of the Company's competition is
multi-step packaging, compared to the one step method offered by SDS Air Box(R).
The Company's SDS Air Box(R) is competitively  priced, and management expects to
increase its share of this market.


11.  Research, Development & Laboratory
---------------------------------------

     The Company maintains an ongoing research and development effort,  striving
to develop more effective and efficient  packaging products based around the Air
Box technology and design.  The Company  maintains three full time  researchers,
assisted on a part time basis by other  employees,  and has  established an ISTA
Certified testing  laboratory within its manufacturing  premises in order to aid
its  research  and  development  efforts.  The Company  also  partners  with its
customers or prospective  partners in an effort to develop new and more creative
solutions to the customer's unique packaging needs.

     For the years ended  December 31, 2000  and 1999, research and  development
expenses were $2,300 and $5,419, respectively.


12.  Environmental Factors
--------------------------

     The Company's manufacturing processes are environmentally  "clean", as they
comprise only the use of electrically generated heat at modest temperatures (300
to 400F) to heat  seal the  layers  of  plastic  films  together.  There  are no
by-products  created by the Company's  manufacturing  processes other than scrap
plastic films  generated  when the machines are set up or  occasionally  require
adjustment.  There is no toxic  or  dangerous  fumes  emitted  by the heat  seal
processes as the materials are kept well below their boiling points.


13.  Employees
--------------

     The Company  currently has 73 full-time  employees.  Twelve of these are in
management,  sales, product development,  or administration positions and 61 are
in production/warehousing/shipping operations.

     The production and packaging operations are supplemented by the addition of
temporary personnel when scheduling requires.  The operation is a non-union shop
with  staffing  drawn from the  Valencia and Los Angeles  metroplex,  California
areas.  The  production   workers  when  hired  are  typically   non-skilled  or
semi-skilled,  and are trained,  by the Company,  in operation of its converting
fabrication  equipment.  The Company  believes that its  relationships  with its
employees are good.

<PAGE>


Item 2.                           PROPERTIES
                                  ----------

     The Issuer has corporate offices, manufacturing,  research and distribution
facilities   housed  in  its  17,280  square  foot   headquarters  in  Valencia,
California. All products are manufactured at this location.  Management believes
its facility is adequate for the Company's current level of operation.

     The facility is leased on a long-term  lease which expires May 31, 2005, at
a current rental of $11,000 per month, plus common area expenses.



Item 3.                       LEGAL PROCEEDINGS
                              -----------------

     A former  employee  of the  Company  was  seeking a  severance  payment  of
$101,500 per terms of his employment agreement, which was voluntarily terminated
in November  1998.  Mediation was held during April 2000 between the parties and
the issue was  settled.  During  May 2000,  the  Company  paid  $50,000  in full
settlement  of the claim.  The Company has  recognized  miscellaneous  income of
$51,500 during the year ended  December 31, 2000 as the  difference  between the
original liability and the settlement amount, and is recorded in "Other income".

     Aside from the above, there is no litigation outstanding, and management is
not aware of any potential claims which might be asserted.


Item 4.         SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
                ---------------------------------------------------

     No matters were submitted in the fourth quarter of fiscal 2000.




Part II

Item 5.          MARKET PRICE AND DIVIDENDS ON REGISTRANT'S COMMON
                 -------------------------------------------------
                   STOCK EQUITY AND RELATED STOCKHOLDER MATTERS
                   --------------------------------------------


     The  Company's  Common  Stock  traded on the  Vancouver  Stock  Exchange in
Vancouver,  British  Columbia,  under the symbol "APT" until July 23, 1998.  The
symbol was changed on September  1, 1992  commensurate  with a name change.  The
closing  sales price as of July 22, 1998,  the last day traded on the  Vancouver
Stock Exchange, was $0.14US.

     The  Company's  Common Stock trades on the NASD Bulletin  Board,  under the
symbol "AIRP". The closing sales price on December 31, 2000 was $0.75.

<PAGE>

Set forth  below is the high and low bid  information  in U.S.  dollars  for the
Company's Common Stock for each full quarterly period within the two most recent
fiscal years. The information set forth below was obtained from the OTC Bulletin
Board and has been  retroactively  adjusted for a one for 10 reverse stock split
which  occurred in January 2000.  The quotations  reflect  inter-dealer  prices,
without  retail  markup,  markdown or commission  and may not  represent  actual
transactions.

                           High              Low
Period                     Bid               Bid
----------------           -----            -----


4th Quarter 2000           $1.02            $0.97
3rd Quarter 2000            0.57             0.52
2nd Quarter 2000            0.61             0.56
1st Quarter 2000            0.61             0.55


4th Quarter 1999           $1.20            $1.00
3rd Quarter 1999            1.70             1.70
2nd Quarter 1999            1.70             1.70
1st Quarter 1999            2.60             1.70


     At March 31, 2001 the Company had approximately 567 shareholders of record.

     The Company has not paid a dividend since its incorporation, and management
does not anticipate the Company will pay dividends in the near future.

<TABLE>
<CAPTION>

RECENT SALES OF UNREGISTERED SECURITIES
---------------------------------------

                                         Class of        Nature            Amount
                            Amount     Persons  to         of                of            Exemption
Dates    Title             Sold (5)     Whom Sold      Consideration    Consideration       Claimed
-----    -----           ------------  -----------     -------------    -------------     ------------
<S>      <C>             <C>           <C>             <C>              <C>               <C>
11/00-   Conv.            1,000,000     6 Offshore         Cash          $1,000,000        4(2), 4(6)
1/01     Notes &                        Accredited                                         RegD and/or
         Warrants (1)                    Investors                                           Reg S


6/16/00  Common              90,000    One Director &      Cash          $   45,000        4(2), 4(6)
         Stock(6)                       1 Offshore                                         RegD and/or
                                        Accredited                                           Reg S
                                         Investor

6/1/00   Common             450,000     1 offshore         Cash          $  225,000        4(2), 4(6)
         Stock &                        Accredited                                         RegD, and/or
         Warrants(3)                     Investor                                            Reg S

5/26/00  Common           3,137,943     6 Offshore       Conversion        (2)             4(2), 4(6)
         Stock(2)                       Accredited        of debt to                       Reg D and/or
                                        Investors          equity                             Reg S

4/28/00  Common             100,000     1 Offshore        Services       $   42,000        4(2), 4(6)
         Stock(4)                       Accredited                                         RegD and/or
                                         Investor                                            RegS
<PAGE>

9-10/99  7% Conv.         1,500,000     6 offshore         Cash          $1,500,000        4(2), 4(6)
         Notes (2)                      Accredited                                        RegD, and/or
                                         Investors                                           Reg S

6/11/99  Common             335,000     1 Offshore         Cash          $  502,500         Reg S
         Stock(6)                       Accredited
                                         Investor

4/26/99  Common             160,000     1 Offshore         Cash          $  240,000         Reg S
         Stock(6)                       Accredited
                                         Investor

1/28/99  Common             246,667     1 Offshore         Cash          $  370,000         Rule 504
         Stock(6)                       Accredited                                           and/or
                                         Investor                                            Reg S

1/28/99  Common               3,333     1 Offshore         Cash          $    5,000          Reg S
         Stock(6)                       Accredited
                                         Investor
<FN>


(1)  Each note is convertible into common stock of the Company at $0.40, upon 61
     days prior notice, at anytime before January 1, 2004. Each $0.50 warrant is
     exercisable,  upon 61 days written  notice,  only after  conversion  of the
     debenture and only for 9 months after such conversion. Each  $0.60  warrant
     is exercisable, upon 61 days notice, only after the  exercise  of the $0.50
     warrants and only for 9 months after such exercise.

(2)  Each note was  convertible  into common stock at $1.50 per share.  On March
     24, 2000 the  exercise  price was  temporarily  reduced to the then current
     market price or $0.50 whichever was greater.  All of the debt was converted
     then into  3,000,000  shares of Common Stock.  In addition,  137,943 shares
     were issued to pay accrued interest.

(3)  Each  warrant  provides  the right to acquire one share of common  stock at
     $0.50 and has a three year term.

(4)  The shares  were  issued as  partial  consideration  for the  signing of an
     Investment Banking Agreement with the investor and were valued at $0.42 per
     share,  the market price for the Company's  common stock at the time of the
     agreement.

(5)  Number of shares reflects  the  10  for  1 reverse  stock split that became
     effective January 4, 2000.

(6)  Issued in  connection  with  exercise  of warrants  and options  previously
     placed with offshore investors.

</FN>
</TABLE>

<PAGE>



DESCRIPTION OF REGISTRANT'S SECURITIES
--------------------------------------

     The Company  has only one type of equity  security,  Common  Stock with par
value equal to U.S.$0.01. There are 50,000,000 authorized shares of Common Stock
of which 11,298,358 shares were issued/outstanding as of December 31, 2000.

     The holders of Common Stock are entitled to one vote for each share held of
record on all  matters  submitted  to a vote of the  holders of  Capital  Stock.
Holders of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available  therefor.  In
the event of a  liquidation,  dissolution  or  winding  up of the  Company,  the
holders of Common  Stock are entitled to share  ratably in all assets  remaining
after payment of  liabilities  and the  liquidation  preference of any preferred
stock  that  might be issued in the  future.  Holders  of Common  Stock  have no
preemptive  or  subscription  rights,  and there are no redemption or conversion
rights with respect to such shares.  All outstanding  shares of Common Stock are
fully paid and nonassessable.

     During 2000, the Company issued $875,000 in Convertible Notes with interest
payable  annually in common  stock on December 31 at 8.75% per annum.  The 8.75%
Convertible  Notes are  secured by certain  assets of the Company and are due on
December  31,  2004.  At the option of the  holder,  the holder may  convert the
principal  amount of such Note at any time before  December 31, 2003 into shares
of common  stock of the  Company.  The  conversion  price shall be the lesser of
$0.40 per share or a 20%  discount  to be closing  high bid price on the date of
conversions  if the closing  high bid price for the  Company's  common stock has
been less than $0.40 for the previous 40 consecutive  business  days.  There are
also mandatory conversion provisions. In addition, each Convertible Note is part
of a unit  consisting of the debenture,  one $0.50 warrant and one $0.60 warrant
allowing the purchase of one share of common stock per warrant at certain  times
before January 1, 2004, subject to certain conditions.

     The Board of  Directors  proposed to the  Company's  shareholders  and they
adopted at its Annual Meeting held on June 4, 1999, resolutions giving the Board
of Directors the authority and discretion to reverse split the Company's  Common
Stock on a 1 for 10 basis, if and at such time over the succeeding 12 months, as
the Board of Directors  determines such a reverse split would be in the interest
of the Company.  In such event,  the  authorized  capital  stock would change to
50,000,000  shares  of  common  stock  authorized  and  each  10  shares  of the
outstanding common stock would automatically  convert into a single share of new
common  stock.  In January  2000,  the Board of Directors  declared a one-to-ten
reverse  stock split and all stock  related data for all periods  presented  has
been adjusted.


Item 6.            Management's  Discussion and Analysis of Financial
                   --------------------------------------------------
                        Condition and Results of Operation
                        ----------------------------------



1.   Results of Operations
     ---------------------

Year  Ended  December  31,  2000  Compared  to  Year  Ended  December  31,  1999
--------------------------------------------------------------------------------

     Sales for the year  ended  December  31,  2000 were  $909,214  compared  to
$959,712 for the fiscal year ended December 31, 1999. This represents a decrease
of $50,498 or 5% during  fiscal 2000.  The net decrease is primarily  due to the
decrease in sales of the Company's  Dental Air Box as a result of an order which
was not repeated during fiscal 2000 and the decrease in sales of the SDS Air Box
which  resulted  from  the  loss of a  distributor  during  fiscal  2000.  These
decreases  were  partially  offset by the increases in custom orders  related to
increases in sales to 3M and in the promotional market.

<PAGE>

     Cost of sales for the year ended  December 31, 2000 was  $1,148,010 or 126%
of sales compared to $1,012,083 or 105% of sales for the year ended December 31,
1999.  The Company  has not yet  achieved  sufficient  sales to cover all of its
fixed operating costs, with the result that until sales increase  substantially,
the Company will continue to operate at a deficit. Cost of sales at December 31,
2000 includes an additional inventory reserve of $133,000 recorded during fiscal
2000 to reserve for slow moving and obsolete  inventory and to record  inventory
at the lower of cost or market.  The  Company  also had an increase in labor and
overhead in the manufacturing  process which resulted in additional period costs
during fiscal 2000 from the comparable period of the preceding year.

     Selling,  general and administrative  expenses decreased by $44,923 or 2.5%
during fiscal 2000 as compared to fiscal 1999. The net decrease is primarily due
to the decreases in consulting fees of approximately $100,000, sales salaries of
approximately  $85,000  and  public  company  costs  of  approximately  $50,000,
partially  offset  by  the  increase  in  investor  relations  of  approximately
$110,000,  casual labor of approximately  $30,000, sales travel of approximately
$30,000 and bad debt expense of approximately $25,000.

     The increases include investor relations which increased as a result of the
Company's  use of an investor  relations  firm during fiscal 2000 which began in
March 2000 at a monthly fee of $5,000 plus expenses.  In addition,  the value of
the 100,000  shares issued to Givigest  pursuant to the terms of the  investment
banking  agreement  of $42,000 is being  amortized  and $31,500 was  included as
investor  relations  expense in fiscal  2000.  Casual  labor has  increased as a
result of increased  usage of  temporary  agencies  for  additional  individuals
working in the quality control, laboratory and administrative departments of the
Company.  Sales related travel  increased during fiscal 2000 from the comparable
period of the preceding  year as sales  activity  increased  and required  sales
personnel to visit  locations  for training.  Bad debt expense  increased as the
Company  recorded  a  reserve  in  fiscal  2000 of  approximately  $43,000.  The
decreases  include the decrease in consulting  fees during fiscal 2000 caused by
the decrease in stock-based consulting expense and a decrease in consulting fees
for a  restructuring  which occurred in fiscal 1999.  Sales  salaries  decreased
during  fiscal 2000 as an employee in the sales  department  left the Company at
the end of May 1999 and his position  was not replaced in 2000.  The decrease in
public  company  costs is  primarily  due to a reduction  in stock  transactions
during fiscal 2000 and to changes in the Company's  transfer  agent and printer.
The changes have reduced the Company's expense for those related items.

     Research and development  expenses decreased by $3,119 or 58% during fiscal
2000.

     Interest  expense was $1,568,852 for fiscal 2000 as compared to $30,444 for
fiscal  1999.  The  increase is due to the Senior  Convertible  Notes  issued in
fiscal 1999 and 2000. Interest expense of approximately  $1,010,000 was recorded
as a result of the induced  conversion  which resulted from the reduction in the
conversion price of the 7% Senior Convertible Notes issued in 1999. In addition,
interest  expense of  approximately  $355,000  was  recorded  as a result of the
beneficial  conversion  feature on the 8.75%  Convertible  Notes issued in 2000.
Interest  expense in 2000 also  includes  amortization  expense  relating to the
amortization of deferred costs  associated  with the 7% Convertible  Debentures.
The costs  associated with the raising of the 7% Senior  Convertible  Notes were
being amortized over the life of the notes. The Notes were converted into equity
during May 2000 and the associated costs were then fully amortized.  The Company
did not have a similar  transaction  during  fiscal 1999.  The Company  recorded
interest expense on the 1999 7% Notes of  approximately  $43,750 during 2000 and
interest expense on the 2000 8.75% Notes of approximately $16,750.

     Interest  income was $20,262  during fiscal 2000 as compared to $20,900 for
fiscal 1999.

<PAGE>

     Miscellaneous other income increased  approximately $41,000 during the year
ended  December 31, 2000 from the comparable  period of the preceding  year. The
increase is primarily due to the  settlement of a legal  proceeding in which the
Company recorded miscellaneous other income of $51,500 during fiscal 2000.

     As a result of the  aggregate  factors  discussed  above,  the  Company has
incurred a net loss of  $3,489,220  or basic and diluted loss per share of $0.36
for the year ended  December 31, 2000  compared to a net loss of  $1,853,012  or
basic and diluted loss per share of $0.25 for the year ended December 31, 1999.


     The Company is currently in a loss carryforward position. The net operating
loss carryforward as of December 31, 2000 was approximately $19,700,000 compared
to $18,200,000 as of December 31, 1999. The net operating loss  carryforward  is
available to offset  future  taxable  income  through  2020.  The  Company's net
operating loss  carryforwards may be limited due to ownership changes as defined
under Section 382 of the Internal Revenue Code of 1986.

     As  of  December  31,  2000,  the  Company  had a  deferred  tax  asset  of
approximately  $7,400,000 which primarily relates to the net operating losses. A
100% valuation  allowance has been  established as management  cannot  determine
whether  it is more  likely  than not  that  the  deferred  tax  assets  will be
realized.


2.  Liquidity  and  Capital  Resources
    -----------------------------------

     The Company's  primary need for capital has been to purchase raw materials,
upgrade machinery and continue to develop and enhance patents and trademarks.

     As of December  31,  2000,  the  Company's  working  capital  was  $695,782
compared to $1,416,212 as of December 31, 1999. The decrease is primarily due to
the cash infusion of $1,500,000  from the 7% Convertible  Debentures  during the
last half of fiscal 1999 as compared to the cash  infusion of $875,000  from the
8.75% Convertible Debentures issued in the last half of fiscal 2000.

     The net receivables at December 31, 2000 were $182,444  compared to $57,603
at  December  31,  1999.  At  December  31,  2000  one  customer  accounted  for
approximately  35% of  accounts  receivable,  compared  to three  customers  who
accounted for approximately 84% of accounts receivable at December 31, 1999.

     Net  inventory at December  31, 2000 was  $480,419  compared to $577,389 at
December 31, 1999.  The net decrease of $96,970 is primarily due to the increase
in the inventory reserve during fiscal 2000.

     Advances  and  prepaids at December  31,  2000 and  December  31, 1999 were
$20,491 and $41,895, respectively.

     The Company  recognized a negative gross profit of 26% during 2000 compared
to a negative gross profit of 5% during 1999. The decrease during fiscal 2000 is
due to the increase in labor and  overhead in the  manufacturing  process  which
resulted in additional  period  costs,  and  therefore  decreased  gross margin,
during  the year  ended  December  31,  2000 from the  comparable  period of the
preceding year. The decrease is also  attributable  to the additional  inventory
reserve  recorded  in fiscal  2000 of  $133,000  to reserve  for slow moving and
obsolete inventory and to record inventory at the lower of cost or market.  This
addition  brought the  inventory  reserve to $134,000 at December 31, 2000.  The
Company  will  continue  to  operate  at  low  margins   until  sales   increase
substantially.  In addition,  as sales increase,  additional  working capital is
required to fund inventory and work in process. As a result of these factors the
Company has an ongoing and urgent  need for an  infusion of  additional  working
capital.  This need was met by the  placement in fiscal 1999 of $1,500,000 in 7%
Senior  Convertible  Notes and in fiscal  2000 by the  placement  of $875,000 in
8.75% Convertible Notes.

<PAGE>

     The Company may  continue  to require an  infusion  of  additional  working
capital in order to develop its business.  The source,  timing and costs of such
infusion  is  uncertain,  and there is no  certainty  that the  Company  will be
successful in raising  additional  working  capital,  either through the sale of
debt or equity  securities,  or through  commercial banking lines of credit. The
Company currently has no banking lines of credit.

     The Company had cash outflows of $1,581,668  from operating  activities for
the 2000 fiscal year compared to cash outflows of $1,465,588 for the 1999 fiscal
year. The change in net outflows of $116,080 from operating  activities  between
2000 and 1999 primarily resulted from the following items. There was an increase
in trade  receivables  of  $189,253,  an increase in  advances  and  prepaids of
$11,835,  an increase in deposits of $278,  an increase in accounts  payable and
accrued  expenses of $106,727  and an increase in accrued  officers  salaries of
$1,859. The total increases were partially offset by the decrease in inventories
of $132,718  combined  with the decrease in the net loss from  operations  after
adjustments for non-cash items of $49,389 during fiscal 2000.

     Net cash used in investing  activities was $216,759  during the 2000 fiscal
year compared to $189,018 during the 1999 fiscal year. The increase is due to an
increase in property and equipment expenditures during 2000, partially offset by
a reduction in patent expenditures.

     Cash flows from financing activities were $1,023,933 during the 2000 fiscal
year compared to $2,678,958  during fiscal 1999.  The net decrease of $1,655,025
is due to the decrease in proceeds  from the exercise of warrants of  $1,304,069
and the decrease in proceeds from the 7% senior  convertible notes of $1,500,000
and the  increase in costs  associated  with debt  conversion  of $9,517.  These
decreases  are  partially  offset  by the  increase  in  proceeds  of a  private
placement of $201,172, the increase in proceeds from the 8.75% convertible notes
of  $875,000,  the  increase  in net  proceeds  from the  exercise of options of
$19,889 and the reduction of deferred costs associated with the placement of the
senior convertible debt of $62,500.

     The Company  has  suffered  recurring  losses  from  operations  and has an
accumulated  deficit  of  ($23,299,212)  at  December  31,  2000,  which  raises
substantial  doubt  about  its  ability  to  continue  as a going  concern.  The
auditor's  report  includes an explanatory  paragraph on the  uncertainty of the
Company's  ability to continue as a going concern.  The financial  statements do
not  include  any  adjustments  that  might  result  from  the  outcome  of this
uncertainty.  The Company's continued existence is dependent upon its ability to
raise  substantial   capital,  to  increase  sales,  to  significantly   improve
operations,  and ultimately become profitable.  The Company believes that future
investments and certain  sales-related efforts will provide sufficient cash flow
for it to continue as a going concern in its present form. However, there can be
no assurance that the Company will achieve such results.

<PAGE>

     On March 24,  2000,  the  Board of  Directors  of the  Company  approved  a
temporary  reduction in the conversion price on the 7% Senior  Convertible Notes
into common stock.  The  conversion  price was reduced from $1.50 to the average
bid  price of the  Company's  common  stock  for the  twenty-five  trading  days
immediately  prior  the  receipt  of  a  notice  of  conversions,  with  minimum
conversion price of $0.50. The notice of conversion for the temporary  reduction
was required to be received by April 30, 2000 and included all accrued  interest
through May 31, 2000.  During April 2000, the Company  received notices from all
debenture  holders.  As a result,  the Company issued 3,137,943 shares of common
stock and recorded an expense of  $1,009,771  related to the induced  conversion
that resulted from the reduction in conversion price.

     On March 24,  2000,  the  Board of  Directors  also  approved  a  temporary
reduction in the exercise  price of all  warrants and options  outstanding.  The
exercise  price was reduced from $1.50 to the average bid price of the Company's
common stock for the twenty-five  trading days immediately  prior to the receipt
of a notice of conversion, with a minimum conversion price of $0.50. As a result
of the  temporary  reduction  in  conversion  price,  the Company  received  net
proceeds of $24,889 for the exercise of 50,000  warrants by a shareholder  at an
exercise  price of $0.50 per share and net  proceeds of $19,889 for the exercise
of 40,000 stock options at an exercise  price of $0.50 per share (net of capital
costs). In addition,  the Company recorded  additional  compensation  expense of
$11,765 related to the reduction in exercise price.

     During 2000,  the Company  cancelled  100,000 stock options  outstanding to
officers and issued an additional 675,000 stock options, which expire on various
dates  through  December  31,  2004 and are  subject to certain  vesting  terms.
100,000 of these  options  are  considered  replacement  options  and thus,  are
subject to variable plan accounting.  As a result,  the Company recorded $19,000
in compensation  expense for the year ended December 31, 2000,  which represents
the amount by which the intrinsic value of the variable  options at December 31,
2000 exceeded the value of the options on July 1, 2000, or the measurement date.
The remaining 575,000 options were granted as fixed options at an exercise price
equal to the fair  market  value of the  Company's  stock at the date of  grant.
Thus, there was no expense recorded related to these options.

     On March 27, 2000, the Company entered into a one-year  investment  banking
agreement  with  Givigest  Fiduciaria  SA  "Givigest"  to raise equity  capital.
Pursuant to this agreement, the Company issued 100,000 shares of common stock to
Givigest  which were valued at fair market  value,  or $0.42.  As a result,  the
Company  recorded a deferred  financing cost of $42,000 which is classified as a
current  asset  and  being  amortized  over  the  term  of the  agreement  and a
corresponding  credit to additional  paid-in  capital of $41,779 (net of capital
costs).  During the year ended  December  31,  2000,  amortization  amounted  to
$31,200.

         On March 22, 2001, the Company renewed its investment banking agreement
with Givigest for an additional one-year term, effective April 1, 2001. Pursuant
to the terms of the agreement,  the Company and Givigest have agreed to raise up
to $1,250,000 by June 30, 2001.  There are no assurance that the Company will be
able to raise any proceeds  under this  agreement.  Pursuant to the terms of the
agreement the Company granted 250,000  warrants to purchase the Company's common
stock for a three-year term. In addition,  the Company will grant one additional
warrant for each $10 raised.


3.  Seasonality and Inflation
    -------------------------

     The  Company's   sales  do  not  appear  to  be  subject  to  any  seasonal
fluctuations.  The Company  does not believe that  inflation  has had a material
impact on its operations.

<PAGE>

4.   New Accounting Pronouncements
     -----------------------------

     In December 1999, the SEC staff released Staff Accounting Bulletin No. 101,
"Revenue  Recognition  in Financial  Statements"  ("SAB 101").  SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in the financial statements. SAB 101 must be applied to the financial statements
no later than the fourth quarter of fiscal years ending after December 15, 2000.
The Company  adopted SAB 101 during the year ended December 31, 2000, and it had
no impact on the Company's  financial position or results of operations and cash
flows.

     In  March  2000,   the   Financial   Accounting   Standards   Board  issued
Interpretation No. 44 ("FIN 44") Accounting for Certain  Transactions  Involving
Stock  Compensation,  an  Interpretation of APB Opinion No. 25. FIN 44 clarifies
the application of APB No. 25 for (a) the definition of employee for purposes of
applying APB No. 25, (b) the criteria for  determining  whether a plan qualifies
as  a  non-compensatory  plan,  (c)  the  accounting   consequences  of  various
modifications  to the terms of a previously fixed stock option or award, and (d)
the  accounting  for an  exchange  of stock  compensation  awards in a  business
combination.  FIN 44 is effective  July 2, 2000, but certain  conclusions  cover
specific  events that occur after either December 15, 1998, or January 12, 2000.
During  the  year  ended  December  31,  2000,  the  Company  adopted  FIN 44 in
accounting for stock options.

Forward Looking Statement
-------------------------

     The above  paragraphs  and other  parts of this Form 10-KSB  Annual  Report
include  "Forward Looking  Statements".  All statements other than statements of
historical fact included herein,  including any statements with respect to sales
forecast, future product acceptance or other future matters, are Forward Looking
Statements.  Although the Company  believes that there is a reasonable basis for
the  projections  reflected in such Forward Looking  Statements,  it can give no
assurance  that such  expectations  will  prove to be  correct.  Certain  of the
important  factors  that could cause  actual  results to differ  materially  and
negatively from the Company's expectations, among others, include a slow down in
the trend in sales and orders  during the remainder of the year, an inability to
obtain  sufficient  working  capital to meet order  demand,  and/or a  worldwide
economic slowdown.






Item 7.                       FINANCIAL STATEMENTS
                             ---------------------

                             See Index at (Item 13),
                         Exhibits and Reports on Form 8K


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

         Not applicable.

<PAGE>


Part III

Item 9.                 DIRECTORS AND EXECUTIVE OFFICERS
                        --------------------------------

     The names,  ages and positions of the  directors and executive  officers of
the Company as of December 31, 2000, are as follows:

Name                       Age        Position                           Since
----                       ---        --------                           -----
Donald Ochacher            63         Chairman, CEO & a Director         06/99
Janet Maxey                38         Chief Financial Officer            07/97
Garry Newman               50         Vice President                     06/97
Elwood C. Trotter          58         Vice President                     04/89
Carl Stadelhofer           47         Director                           11/98
Marco Calmes               53         Director                           05/00


     The Directors serve until the next annual meeting of shareholders, or until
their successors are elected.

     Donald Ochacher - President and Chief Executive Officer and Chairman of the
Board of  Directors  of the Company  since June 1999.  Mr.  Ochacher  has been a
member of the New York bar since 1960 and was engaged in the private practice of
law  specializing  in  corporate  and tax law until 1973 when he became  General
Counsel and Chief Financial and Administrative Officer of the Newark Group Ltd.,
a large privately owned paper company.  Since 1985, he has been both an attorney
and  business  consultant  and at  various  times,  has served as  President  of
privately owned companies engaged in the paper, hazardous waste, real estate and
long distance  telephone resale  industries,  from May 1994 to the present,  Mr.
Ochacher is president of The 800 Network,  Inc. From August 1997 to August 1998,
he was chief  Financial  Officer of Electric  Entertainment  Corp. Mr.  Ochacher
graduated from the New York University  School of Law in 1960,  receiving a LL.B
degree and received his B.A degree from Cornell University in 1957.

     Janet Maxey - Ms. Maxey has been an employee of the Company since May 1991,
and became Chief Financial  Officer in July 1997. Ms. Maxey attended  California
State  University,  Northridge,  and  earned a  Bachelor  of  Science  Degree in
Business Administration.

     Garry Newman - Vice President of Manufacturing  and Engineering  since June
1997. Prior to that, Mr. Newman was Engineering & Quality  Assurance Manager for
Richmond  Technology  from October 1994 until he joined the Company.  Mr. Newman
attended  University  of  California,  Davis,  and earned a Bachelor  of Science
Degree in Chemical Engineering.

<PAGE>

     Elwood  Trotter - Mr.  Trotter has been an  employee  of the Company  since
April 1989 and became Vice  President,  Special  Projects in February  1996. Mr.
Trotter attended Simon Fraser University in British Columbia, Canada.

     Carl  Stadelhofer  - Attorney  with  Rinderknecht  Klein &  Stadelhofer  in
Switzerland  since July 1990.  Mr.  Stadelhofer  is a French and Swiss  citizen;
admitted  in  Switzerland  1982.  Education:  Law  Schools  of Zurich  and Berne
University  (lic.jur1979);   Harvard  Law  School,   Massachusetts;   Georgetown
University,   Washington,  D.C.  Mr.  Stadelhofer  specializes  in  banking  and
financing,   mergers  and  acquisitions,   investment   funds and  international
securities transactions.

     Marco  Calmes - Since March of 2000,  Mr.  Calmes has been  coordinator  of
portfolio  management  at SCF Societa Di  Consulenza  Finanziaria  SA. From 1990
until 2000 he had been  employed by Banca Adamas  Lugano as a portfolio  manager
and responsible for the development of institutional clients. He has been in the
banking  business in  Switzerland  since  1978.  In 1968 he received a Bachelors
degree. In 1969 he received a Masters in Business  Administration  from Michigan
State University.




Section 16(a)   Beneficial Ownership Reporting Compliance

The following Officers,  Directors or Beneficial Owners of more than ten percent
of the Company's outstanding common stock failed to timely file reports required
under Section 16(a) of the Exchanges Act during 2000.

                                                              Transactions Not
Name                        Number of Late Filings            Reported Timely

Donald Ochacher                      Two                            Two
Elwood Trotter                       Two                            Two
Garry Newman                         Two                            Two
Janet Maxey                          Two                            Two
Carl Stadelhofer                     One                            One
Marco Calmes                         None                           None




Item 11.                     EXECUTIVE COMPENSATION
                             ----------------------

     The following table sets forth the annual  compensation paid and accrued by
the Company during its last three fiscal years to the executive officers to whom
it paid in excess of $100,000, including cash and issuance of securities.

<PAGE>
<TABLE>
<CAPTION>



                                        Summary Compensation
                                        --------------------

                        Annual Compensation                   Awards                  Payouts
                ------------------------------------   ----------------------   ---------------------
                                             Other                  Secur-
Name                                         Annual    Restricted   ities                  All Other
and                                          Compen-   Stock        Underlying  LTIP       Compen-
Principal                   Salary    Bonus  sation    Award(s)     Options/    Payouts    sation
Position         Year         ($)      ($)     ($)       ($)        SARs (#)    ($)        ($)
--------        --------    -------   -----  ------    ------       --------    ------     -------
<S>             <C>         <C>      <C>     <C>       <C>         <C>          <C>       <C>
Donald
Ochacher          2000      98,354     n/a      -        -          325,000(2)    -          -
Chairman       (1)1999      42,900     n/a      -        -           40,000       -          -
Of the Bd         1998       n/a       n/a      -        -               -        -          -
& CEO

Elwood            2000     112,592     n/a      -        -          160,000(2)    -          -
Trotter           1999     109,200     n/a      -        -           75,000(3)    -          -
Vice              1998     104,260     n/a      -        -           22,500       -          -
President
Sales &,
Marketing,
Former
Director

--------------------
<FN>

(1)  Donald Ochacher has been President and CEO of the Company since June 1999.
(2)  Includes stock options which were granted in prior years but were cancelled
     and reissued during fiscal 2000.
(3)  Includes  stock options which were granted in prior years but were repriced
     during fiscal 1999.
</FN>
</TABLE>




Options/SAR Grants in Last Fiscal Year
--------------------------------------



                                       Individual
                                       Grants
                                       ------

                        No. Of Sec.    % of Total
                        Underlying     Options/SARs
                        Options/       Granted to      Exercise
                        SARs           Employees       or Base
                        Granted (a)    In Fiscal       Price         Expiration
Name                       (#)         Year            ($/Sh)        Date
----                       ---         ----            ------        ----
Donald Ochacher
Chairman of
The Board
& CEO                    150,000          22%           $0.50         12/31/04
                         150,000          22%           $0.50         08/22/04

                          25,000           4%           $0.50         08/24/04

Elwood Trotter
Vice President
Sales &
Markeing &
Former
Director                  85,000          13%           $0.50         12/31/04

                          75,000          11%           $0.50         08/24/04



(a)  Includes options which were cancelled and re-issued during fiscal 2000.

     Options  issued  during fiscal 2000  contained  vesting terms which include
immediate vesting of 50% of the options granted and quarterly vesting for twelve
quarters for the balance.



<PAGE>



     The following  table sets forth the number of shares covered by exercisable
and unexercisable  options held by such executives on December 31, 2000, and the
aggregate  gains that would have been realized had these options been  exercised
on December 31,  2000,  even though these  options were not  exercised,  and the
unexercisable  options could not have been exercised,  on December 31, 2000. The
Company did not issue stock appreciation rights.
<TABLE>
<CAPTION>

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

                                                     Number of                Value of Unexercised
                                               Securities Underlying               in-the-Money
                   Shares                           Unexercised                   Options/SARs
                   Acquired     Value            Options/SARs at             at Fiscal Year End(a)
                   on Exercise  Realized            FY-End (#)                         ($)
Name               $            $             Exercisable  Unexercisable    Exercisable   Unexercisable
----               -----------  --------    ----------------------------   --------------------------
<S>                <C>          <C>          <C>           <C>              <C>          <C>
Donald Ochacher    -                -            195,832    129,168             48,959    32,291

Elwood Trotter     -                -             40,000        -                 -         -
                   -                -             96,873     63,127             24,219    15,781

<FN>

(a)  Market  value of shares  covered by  in-the-money  options on December  31,
     2000, less option exercise  price.  Options are  in-the-money if the market
     value of the shares  covered  thereby is greater  than the option  exercise
     price based on the last trading day in 2000 of $0.75 per share.

</FN>
</TABLE>
<PAGE>

     The Company has no Long-Term Incentive Plans and no Awards were made in its
Last Fiscal Year.

     In March 2000, the Company  cancelled 40,000 stock options issued to Donald
Ochacher  at an exercise  price of $1.50 per share and  cancelled  35,000  stock
options issued to Elwood  Trotter at an exercise  price of $1.50 per share.  The
Company  then issued  40,000 and 35,000  stock  options to Donald  Ochacher  and
Elwood  Trotter,  respectively,  at an exercise price of $0.50 per share,  which
represented the fair market value of the Company's stock on the date of grant.







Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
         --------------------------------------------------------------

     The following table sets forth information  regarding  beneficial ownership
as of December 31, 2000,  of the Company's  Common  Stock,  by any person who is
known to the Company to be the beneficial owner of more than 5% of the Company's
voting  securities  and by each  director and by officers  and  directors of the
Company as a group.


                                                      Beneficial1    Percentage
Officers and Directors                                Ownership      of Class(1)
----------------------                                ---------      -----------

Donald Ochacher, Chairman, CEO and a Director(2)       220,832           1.9%
Elwood C. Trotter, Vice President(3)                   155,649           1.4%
Carl Stadelhofer, Director                             223,333           1.9%
Marco Calmes                                             -0-             0.0%
                                                     ---------       -----------
All current directors and
officers as a group (6 persons)                        718,962           6.0%
                                                     =========       ==========
5% Holders
Schmitt Industries, Inc.                             1,153,058          10.2%

2765 N.W Nicolai Street
Portland OR  97210

1    Assumes that only each  person's  options have been  exercised and no other
     person's have been exercised for the percentage calculation.

2    Includes  195,832 stock options  outstanding  and  exercisable at 12/31/00.
     Options  issued  during fiscal 2000  contained  vesting terms which include
     immediate  vesting of 50% of the options granted and quarterly  vesting for
     twelve quarters for the balance.
3    Includes  136,873 stock options  outstanding  and  exercisable at 12/31/00.
     Options  issued  during fiscal 2000  contained  vesting terms which include
     immediate  vesting of 50% of the options granted and quarterly  vesting for
     twelve quarters for the balance.






Item 12.           CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
                   ----------------------------------------------

1.   A former  employee of the  Company,  who  resigned  effective  June 4, 1999
     entered into a one year consulting agreement to provide consulting services
     at a fee of $5,000  per  month.  The  agreement  expired  on May 31,  2000.
     Consulting  expense  for the years  ended  December  31,  2000 and 1999 was
     $25,000 and $35,000, respectively.

<PAGE>


Item 13. EXHIBITS AND REPORTS ON FORM 8-K
         --------------------------------


     (a)  Financial Statements

          Reports of Independent Certified Public Accountants

          Consolidated Financial Statements

              Balance Sheet as of December 31, 2000;
              Statements of Operations for the years ended December 31, 2000 and
              1999;
              Statements of  Stockholders'  Equity for the years ended  December
              31, 2000, and 1999;
              Statements of Cash Flows for the years ended December 31, 2000 and
              1999

          Notes to Consolidated Financial Statements

     (b)  Exhibits Required by Item 601 of Regulation SB.

          3(i) Articles of Incorporation,  Incorporated by reference to exhibits
               attached to Amended Form 10 filed July 23, 1999

          3(ii)Bylaws,   Incorporated  by  reference  to  exhibits  attached  to
               Amended Form 10 filed July 23, 1999

          4    Instruments  defining  rights  of  security  holders,   including
               indentures.

               None.

          9    Voting Trust Agreement

               None

          10   Material Contracts

               Lease Agreement for plant  facilities,  Incorporated by reference
               to exhibits attached to Amended Form 10 filed July 23, 1999

               (b)1.Employment  Agreement  with Garvin McMinn,  Incorporated  by
                    reference to exhibits attached to Amended Form 10 filed July
                    23, 1999
               (b)2.Amendment to Employment with Garvin McMinn,  Incorporated by
                    reference to exhibits to Amended Form 10 filed July 23, 1999
               (c)1.Employment  Contract with CFO Janet Maxey,  Incorporated  by
                    reference to exhibits attached to Amended Form 10 filed July
                    23, 1999
               (c)2.Amendment  to  Employment  Contract  with CFO  Janet  Maxey,
                    Incorporated  by reference  to exhibits  attached to Amended
                    Form 10 filed July 23, 1999
<PAGE>

               (d)1.Employment  Contract  with Vice  President  Elwood  Trotter,
                    Incorporated  by reference  to exhibits  attached to Amended
                    Form 10 filed July 23, 1999
               (d)2.Amendment to Employment  Contract with Vice President Elwood
                    Trotter,  Incorporated by reference to exhibits  attached to
                    Amended Form 10 filed July 23, 1999
               (e)  Form  of  Option   Certificate   delivered  to  certain  Key
                    Employees in connection with the Grant of Individual Options
                    to said  Employees,  Incorporated  by  reference to exhibits
                    attached to Amended Form 10 filed July 23, 1999
               (f)  Patent  Royalty   Agreement  between  Puff  Pac,  Ltd.  (the
                    Company's predecessor), and Puff Pac People, Incorporated by
                    reference to exhibits attached to Amended Form 10 filed July
                    23, 1999
               (g)  Escrow  Agreement,  Incorporated  by  reference  to exhibits
                    attached to Amended Form 10 filed July 23, 1999
               (h)  1999  Non-Qualified Key Man Stock Option Plan,  Incorporated
                    by reference  to exhibits  attached to Amended Form 10 filed
                    July 23, 1999
               (i)  1999 Investment Banking Agreement, Incorporated by reference
                    to Form 10K exhibits filed April 14, 2000
               (j)  2000 Investment Banking Agreement, Incorporated by reference
                    to Form 10K exhibits filed April 14, 2000
               (k)  2001 Investment Banking Agreement
               (l)  3M Agreement with 3M Stationery Products Division
               (m)  3M Agreement with 3M Packaging Systems Division

          21   Subsidiaries of the Registrant

                           Name                               Domicile
                           Puff Pac Industries
                           (Canada) Inc. (inactive)           Canada








<PAGE>



SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.


                                          AIR PACKAGING
                                          TECHNOLOGIES, INC.

                                          /s/ Donald Ochacher
                                          -----------------------------
                                          Donald Ochacher
Date:  4/16/01                            Chief Executive Officer


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

Signature                               Title                          Date
---------                               -----                          ----
                                  Chairman of the Board,
                                  Director, and
/s/ Donald Ochacher               Chief Executive Officer             4/16/01
---------------------------
Donald Ochacher


/s/ Janet Maxey                   Chief Financial Officer             4/16/01
---------------------------
Janet Maxey


/s/ Carl Stadelhofer              Director                            4/16/01
---------------------------
Carl Stadelhofer



<PAGE>




                        Air Packaging Technologies, Inc.
                                 and Subsidiary

                                    Contents



Report of Independent Certified Public Accountants                           F-1


Consolidated financial statements

  Balance Sheet as of December 31, 2000                                      F-2

  Statements of Operations for the years ended December 31, 2000 and 1999    F-3

  Statements of Stockholders' Equity for the years ended
       December 31, 2000 and 1999                                            F-4

  Statements of Cash Flows for the years ended December 31, 2000 and 1999    F-5


Notes to Consolidated Financial Statements                                   F-6






<PAGE>



               Report of Independent Certified Public Accountants



To the Stockholders and Board of Directors
Air Packaging Technologies, Inc.
Valencia, California


We have audited the  accompanying  consolidated  balance  sheet of Air Packaging
Technologies,  Inc. and  Subsidiary  as of December  31,  2000,  and the related
consolidated statements of operations,  stockholders' equity, and cash flows for
each of the two years in the period ended  December 31,  2000.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these 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 audits to obtain  reasonable  assurance  about whether the financial
statements  and schedule 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 consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  financial  position of Air  Packaging
Technologies, Inc. and Subsidiary at December 31, 2000, and the results of their
operations  and their cash  flows for each of the two years in the period  ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
financial statements,  the Company has suffered recurring losses from operations
that raise  substantial  doubt about its ability to continue as a going concern.
Management's  plans in regard to these matters are also described in Note 3. The
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.

                                                            /s/ BDO Seidman, LLP

Los Angeles, California
March 13, 2001, except for Note 13 as to which
  the date is March 22, 2001


                                      F-1
<PAGE>


                        AIR PACKAGING TECHNOLOGIES, INC.
                                 AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEET


                                                                    December 31,
                                                                        2000
                                                                   ------------

Assets (Note 8)

Current assets
   Cash and cash equivalents                                       $    375,657
   Trade receivables, net of allowance for doubtful
     accounts of $53,000 (Note 12)                                      182,444
   Inventories, net (Note 4)                                            480,419
   Advances and prepaids                                                 20,491
                                                                   ------------

Total current assets                                                  1,059,011

Property and equipment, net (Note 5)                                    660,204

Intangible assets, net (Note 6)                                         211,792

Deferred financing costs, net of accumulated
   amortization of $64,773 (Notes 8 and 9)                              107,188

Deposits                                                                 60,378
                                                                   ------------

Total assets                                                       $  2,098,573
                                                                   =============

Liabilities and Stockholders' Equity

Current liabilities
   Accounts payable                                                $    261,435
   Accrued expenses                                                     101,794
                                                                   ------------

Total current liabilities                                               363,229
                                                                   ------------

Long term liabilities
   Convertible notes, net of discount of
     $364,031 (Note 8)                                                  510,969
                                                                   ------------

Total liabilities                                                       874,198
                                                                   ------------

Commitments and contingencies (Notes 9 and 11)

Stockholders' equity (Notes 8 and 9)
   Common stock, $.01 par value, 50,000,000 shares
     authorized; 11,298,358 shares issued and outstanding               112,984
   Additional paid-in capital                                        24,410,603
   Accumulated deficit                                              (23,299,212)
                                                                   ------------

Total stockholders' equity                                            1,224,375
                                                                   ------------

Total liabilities and stockholders' equity                         $  2,098,573
                                                                   =============



                    See accompanying notes to consolidated financial statements.


<PAGE>
<TABLE>
<CAPTION>


                        AIR PACKAGING TECHNOLOGIES, INC.
                                 AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS



                                                         Years ended December 31,
                                                       --------------------------
                                                           2000            1999
                                                       -----------    -----------

<S>                                                    <C>            <C>
Net sales (Note 12)                                    $   909,214    $   959,712

Cost of sales                                            1,148,010      1,012,083
                                                       -----------    -----------

Gross loss                                                (238,796)       (52,371)
                                                       -----------    -----------

Operating expenses
   Selling, general and administrative                   1,752,205      1,797,128
   Research and development                                  2,300          5,419
                                                       -----------    -----------

Total operating expenses                                 1,754,505      1,802,547
                                                       -----------    -----------

Loss from operations                                    (1,993,301)    (1,854,918)
                                                       -----------    -----------

Other income (expense)
   Interest expense (Note 8)                            (1,568,852)       (30,444)
   Interest income                                          20,262         20,900
   Other income                                             52,671         11,450
                                                       -----------    -----------

Total other income (expense)                            (1,495,919)         1,906
                                                       -----------    -----------

Net loss
                                                       $(3,489,220)   $(1,853,012)
                                                       ===========    ===========

Loss per common share - basic and diluted
                                                       $      (.36)   $      (.25)
                                                       ============   ===========

Weighted average number of common shares outstanding
   Basic and diluted                                     9,771,632      7,249,585
                                                       ============   ===========



                       See accompanying notes to consolidated financial statements.
</TABLE>


                                                                             F-3
<PAGE>
<TABLE>
<CAPTION>


                                                  AIR PACKAGING TECHNOLOGIES, INC.
                                                           AND SUBSIDIARY

                                           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY



                                                               Common Stock            Additional                          Total
                                                       ---------------------------      Paid-In       Accumulated     Stockholders'
                                                         Shares          Amount         Capital         Deficit          Equity
                                                       ------------    -----------   -------------  --------------  --------------

<S>                                                      <C>         <C>             <C>            <C>             <C>
Balance, January 1, 1999                                 7,071,408   $     70,714    $ 19,420,979   $ (17,956,980)  $   1,534,713

Exercise of warrants (Note 9)                              895,000          8,950       1,320,008               -       1,328,958
Stock-based compensation for options issued (Note 9)             -              -          32,750               -          32,750
Revaluation of options (Note 9)                                  -              -          16,050               -          16,050
Net loss                                                         -              -               -      (1,853,012)      (1,853,012)
                                                       ------------    -----------   -------------  --------------  --------------

Balance, December 31, 1999                               7,966,408         79,664      20,789,787      (19,809,992)     1,059,459

Cancellation of escrow shares (Note 9)                    (445,993)        (4,460)          4,460               -               -
Net cash proceeds from private placements (Note 9)         450,000          4,500         196,672               -         201,172
Conversion of 7% senior debentures (Notes 8 and 9)       3,137,943         31,380       2,543,052               -       2,574,432
Exercise of options (Note 9)                                40,000            400          19,489               -          19,889
Exercise of warrants (Note 9)                               50,000            500          36,154               -          36,654
Issuance of common stock for services (Note 9)             100,000          1,000          40,779               -          41,779
Issuance of warrants for services (Note 9)                       -              -          42,460               -          42,460
Stock-based compensation related to re-priced options
     (Note 9)                                                    -              -          19,000               -          19,000
Beneficial conversion feature of 8.75% convertible
     notes (Note 8)                                              -              -         718,750               -         718,750
Net loss                                                         -              -               -       (3,489,220)     (3,489,220)
                                                       ------------    -----------   -------------  --------------  --------------

Balance, December 31, 2000                               11,298,358   $    112,984    $ 24,410,603   $ (23,299,212)  $   1,224,375
                                                       ============    ===========   =============  ==============  ==============




                                                                        See accompanying notes to consolidated financial statements.

                                                                                                                                 F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>


                             AIR PACKAGING TECHNOLOGIES, INC.
                                    AND SUBSIDIARY

                         CONSOLIDATED STATEMENTS OF CASH FLOWS


Increase (decrease) in cash and cash equivalents
                                                                        Years ended December 31,
                                                                   ------------------------------
                                                                       2000             1999
                                                                   -------------    -------------
<S>                                                                <C>              <C>
Cash flows from operating activities

   Net loss                                                        $ (3,489,220}    $ (1,853,012)
   Adjustments to reconcile net loss to net cash used in
     operating activities:
     Depreciation and amortization                                      288,327          289,521
     Provision for doubtful accounts                                     42,663           17,500
     Inventory reserve                                                  133,000                -
     Stock-based compensation                                            19,000           48,800
     Interest expense associated with debt conversion price
       reduction                                                      1,009,771                -
     Non-cash interest expense related to 8.75% convertible
       notes                                                            354,719                -
     Non-cash financing and interest expense                            204,355           10,417
     Expense on revaluation of warrants                                  11,765                -
     Increase (decrease) from changes in:
       Trade receivables                                               (167,504)          21,749
       Inventories                                                      (36,028)        (168,746)
       Advances and prepaids                                             21,404           33,239
       Deposits                                                            (278)               -
       Accounts payable and accrued liabilities                          26,358          133,085
       Accrued officers' salaries                                             -            1,859
                                                                   -------------    -------------

Net cash used in operating activities                                (1,581,668)      (1,465,588)
                                                                   -------------    -------------

Cash flows from investing activities
   Purchases of property and equipment                                 (180,904)        (129,126)
   Patent expenditures                                                  (35,855)         (59,892)
                                                                   -------------    -------------

Net cash used in investing activities                                  (216,759)        (189,018)
                                                                   -------------    -------------

Cash flows from financing activities
   Net proceeds from private placements, net of $48,828
     capital costs                                                      201,172                -
   Net proceeds from exercise of warrants, net of $111
     capital costs                                                       24,889        1,328,958
   Net proceeds from exercise of options, net of $111 capital
     costs                                                               19,889                -
   Payments of deferred loan costs                                      (87,500)        (150,000)
   Proceeds from 7% senior convertible debentures                             -        1,500,000
   Proceeds from 8.75% convertible notes                                875,000                -
   Costs associated with debt conversion                                 (9,517)               -
                                                                   -------------    -------------

Net cash provided by financing activities                             1,023,933        2,678,958
                                                                   -------------    -------------

Net increase (decrease) in cash                                        (774,494)       1,024,352

Cash, at beginning of year                                            1,150,151          125,799
                                                                   -------------    -------------

Cash, at end of year                                               $    375,657     $  1,150,151
                                                                   =============    =============


                                      See accompanying notes to consolidated financial statements.

                                                                                              F-5
</TABLE>

<PAGE>

                        AIR PACKAGING TECHNOLOGIES, INC.
                                 AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS



Supplemental disclosure of cash flow information

The  Company  paid  interest  in the amount of $0 and $237 during 2000 and 1999,
respectively.  The  Company  paid  income  taxes in the  amount of $800 and $800
during 2000 and 1999, respectively.

During  the  year  ended  December  31,  1999,  the  Company   recorded  $22,750
representing  stock-based compensation in conjunction with stock options granted
to nonemployees (see Note 9).

During 1999,  the  Company's  board of directors  repriced  435,000  outstanding
options to their fair value.  As a result,  stock-based  compensation of $16,050
was  recorded  during the year ended  December  31, 1999 for options held by non
employees (see Note 9).

During the year ended  December  31,  1999,  the  Company  recorded  stock-based
compensation of $10,000 related to employee options.  This amount represents the
excess fair  market  price of the  Company'  stock at the date of grant over the
exercise price (see Note 9).

During 2000, the Company repriced  100,000 stock options  outstanding to various
employees,  which are  subject to variable  plan  accounting.  As a result,  the
Company recorded $19,000 in compensation expense for the year ended December 31,
2000,  which  represents the  appreciation in stock price from the date on which
variable plan accounting went into effect (see Note 9).

In January 2000, the Company released 445,993 shares of common stock from escrow
(see Note 9).

The Company  issued  500,000  warrants  in partial  consideration  for  services
rendered  under an investment  banking  agreement,  and recorded  total deferred
financing  cost of $42,460 at December 31, 2000,  of which $29,105 was amortized
during the year. Under the same agreement,  the Company issued 100,000 shares of
common stock and recorded a deferred  financing  cost of  approximately  $42,000
that is being amortized over the term of the agreement (see Note 9).

During  2000,  the  Board of  Directors  of the  Company  approved  a  temporary
reduction in the conversion price on the 7% Senior Convertible Debentures, which
resulted in an induced conversion of $1,500,000  Debentures and accrued interest
of approximately $74,000 into 3,137,943 shares of common stock. As a result, the
Company  recorded an expense of  $1,009,771  relating to the induced  conversion
feature (see Note 8).

During  2000,  the  Company  recorded  a  discount  of  $718,750  relating  to a
beneficial  conversion feature on $875,000 of 8.75% Convertible Notes. (See Note
8.)






                    See accompanying notes to consolidated financial statements.


                                      F-6
<PAGE>


                        AIR PACKAGING TECHNOLOGIES, INC.
                                 AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1--NATURE OF OPERATIONS

Air  Packaging  Technologies,  Inc. and  Subsidiary  (the  "Company")  develops,
manufactures  and  distributes  inflatable  commercial  packaging  systems.  The
Company's  sales of the Air Box are  primarily  to companies  producing  Silicon
wafers and computer chips in California,  Arizona, Oregon, Colorado and Texas in
the United States,  Denmark and the U.K. in Europe,  and Singapore in Asia. APTI
has adapted the Air Box for the promotional market. The Company has entered into
two agreements with Minnesota Mining and Manufacturing  Company (3M) pursuant to
which the Company will be manufacturing products to be sold under 3M's name. The
Company was incorporated in the State of Delaware on November 9, 1989.

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The  consolidated  financial  statements  include the accounts of Air  Packaging
Technologies,  Inc. and its  wholly-owned  foreign  subsidiary.  All significant
intercompany  balances and transactions  have been eliminated in  consolidation.
The foreign  subsidiary  currently has no  operations,  therefore has no foreign
translation adjustment.

Revenue Recognition

Revenue is recognized upon shipment of products.

Cash Equivalents

For purposes of the statements of cash flows,  the Company  considers all highly
liquid  investments  purchased with an original maturity of three months or less
to be cash equivalents.

Inventory

Inventory, which consists of raw material, work in progress, and finished goods,
is valued at the lower of cost or market.  Cost is  determined  by the first-in,
first-out (FIFO) method.

Property and Equipment

Property  and  equipment  are  stated  at cost.  Depreciation  of  property  and
equipment is calculated using the straight-line method over the estimated useful
lives (ranging from 3 to 5 years) of the respective  assets.  The cost of normal
maintenance and repairs is charged to operating  expenses as incurred.  Material
expenditures which increase the life of an asset are capitalized and depreciated
over the estimated  remaining useful life of the asset. The cost of property and
equipment  sold,  or  otherwise   disposed  of,  and  the  related   accumulated
depreciation  or  amortization  are removed from the accounts,  and any gains or
losses are reflected in current operations.


                                      F-7
<PAGE>
                        AIR PACKAGING TECHNOLOGIES, INC.
                                 AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Intangible Assets

Patents, trademarks, and rights to patent and trademark royalties are carried at
cost less accumulated  amortization which is calculated on a straight-line basis
over  ten  years,  the  estimated  useful  lives  of  the  assets.  The  Company
periodically evaluates and assesses the overall recoverability of its intangible
assets by  determining  if the  unamortized  balance  can be  recovered  through
undiscounted future operating cash flows.

Impairment of Long-Lived Assets

Statement  of  Financial  Accounting  Standards  No.  121,  "Accounting  for the
Impairment  of  Long-Lived  Assets and  Long-Lived  Assets to be  Disposed  Of,"
established  guidelines  regarding when impairment losses on long-lived  assets,
which include plant and equipment and certain  identifiable  intangible  assets,
should be recognized and how impairment  losses should be measured.  The Company
periodically  reviews such assets for possible  impairments and expected losses,
if any, are recorded currently.

Income Taxes

The Company  provides for income taxes in accordance with Statement of Financial
Accounting  Standards No. 109 ("SFAS 109"),  "Accounting for Income Taxes". SFAS
109 requires a company to use the asset and liability  method of accounting  for
income taxes.

Under the asset and liability  method,  deferred income taxes are recognized for
the tax consequences of "temporary  differences" by applying  enacted  statutory
tax rates  applicable  to future  years to  differences  between  the  financial
statement carrying amounts and the tax bases of existing assets and liabilities.
A valuation allowance is provided when management cannot determine whether it is
more likely than not that the deferred  tax asset will be  realized.  Under SFAS
109, the effect on deferred  income taxes of a change in tax rates is recognized
in income in the period that includes the enactment date.

Stock-Based Compensation

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation"  ("SFAS 123"),  establishes a fair value method of accounting  for
stock-based  compensation plans and for transactions in which a company acquires
goods or services from  non-employees in exchange for equity  instruments.  SFAS
123 also gives the option to account for  stock-based  employee  compensation in
accordance  with  Accounting   Principles  Board  Opinion  No.  25  ("APB  25"),
"Accounting  for Stock issued to Employees," or SFAS 123. The Company elected to
follow APB 25 which measures compensation cost for employee stock options as the
excess,  if  any,  of the  fair  market  price  of the  Company's  stock  at the
measurement date over the amount an employee must pay to acquire stock.

Also, in accordance with SFAS 123, the Company has provided footnote  disclosure
with  respect to  stock-based  employee  compensation.  The cost of  stock-based
employee  compensation  is  measured at the grant date based on the value of the
award and is recognized  over the service  period.  The value of the stock-based
award is  determined  using a pricing  model  whereby  compensation  cost is the
excess of the fair value of the stock as  determined  by the model at grant date
or other  measurement  date over the amount an employee  must pay to acquire the
stock.

                                      F-8
<PAGE>
                        AIR PACKAGING TECHNOLOGIES, INC.
                                 AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Fair Value of Financial Instruments

The estimated fair values for financial instruments under Statement of Financial
Accounting  Standards  No.  107,  "Disclosures  about  Fair  Value of  Financial
Instruments," are determined at discrete points in time based on relevant market
information. These estimates involve uncertainties and cannot be determined with
precision.  The estimated  fair values of the Company's  financial  instruments,
which includes all cash, accounts receivables, accounts payable, long-term debt,
and other debt,  approximates the carrying value in the  consolidated  financial
statements  at December 31, 2000 as a result of their short term nature,  or due
to the interest rates approximating the Company's effective borrowing rates.

At  December  31,  2000,  the fair value of the  Senior  Convertible  Notes,  is
estimated to be  approximately  $529,000 based on the quoted market prices using
an interest rate of 12%.

Earnings (Loss) Per Share

Statement of Financial Accounting Standards No. 128 ("SFAS 128"),  "Earnings Per
Share,"  requires  presentation of basic and diluted  earnings per share.  Basic
earnings  (loss) per share is computed by dividing  income  (loss)  available to
common  shareholders by the weighted average number of common shares outstanding
for the  reporting  period.  Diluted  earnings per share  reflects the potential
dilution  that  could  occur if  securities  or other  contracts,  such as stock
options,  to issue common stock were  exercised or converted  into common stock,
but does not  include  the  impact of these  dilutive  securities  that would be
antidilutive.  During the two years ended  December 31, 2000,  these  securities
were  antidilutive  and thus, were excluded from the computation of diluted loss
per share.  All prior period weighted  average and per share  information had no
effect on the amounts presented in accordance with SFAS 128.

At December 31, 2000,  there were  outstanding  options and warrants to purchase
2,322,500  common shares and convertible  debt securities that were  convertible
into  2,187,500  common  shares,  which were not included in the  computation of
diluted  loss per common  share  because the effect  would be  antidilutive.  At
December 31, 1999, 575,000  outstanding  options and warrants were excluded from
the computation of diluted loss per common share.

During 1999, the Company had 445,993 shares in escrow  included in the number of
shares outstanding which were excluded from the computation of basic and diluted
loss per share for the year ended  1999 as the  necessary  conditions  for their
release had not been satisfied (see Note 9).

Comprehensive Income

Statement of Financial  Accounting  Standards No. 130, "Reporting  Comprehensive
Income,"  ("SFAS  130")  establishes  standards  for  reporting  and  display of
comprehensive  income  and  its  components  in a full  set  of  general-purpose
financial  statements.  Comprehensive  income is comprised of net income and all
changes to  stockholders'  equity except those due to  investments by owners and
distribution   to  owners.   The  Company  does  not  have  any   components  of
comprehensive income for each of the years ended December 31, 2000 and 1999.

                                      F-9
<PAGE>
                        AIR PACKAGING TECHNOLOGIES, INC.
                                 AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Segments of an Enterprise

Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise  and Related  Information,"  ("SFAS 131")  requires that public
companies  report  certain  information  about  operating  segments,   products,
services and geographical areas in which they operate.  At December 31, 2000 and
1999,  the Company  did not report any segment  information  as  operations  and
business activity are considered one unit.  Adoption of SFAS 131 did not have an
impact on the  Company's  financial  position,  results of  operations  and cash
flows.  Adoption of SFAS 131 resulted in expanded  disclosures  for the year and
all prior periods. See Note 12.

Use of Estimates in the Preparation of Financial Statements

The preparation of the Company's consolidated financial statements in conformity
with generally accepted accounting  principles requires the Company's 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  and the  reported  amounts of revenues  and expenses
during the reporting period. Actual results could differ from those estimates.

New Accounting Pronouncements

In December  1999, the SEC staff  released  Staff  Accounting  Bulletin No. 101,
"Revenue  Recognition  in Financial  Statements"  ("SAB 101").  SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in the financial statements. SAB 101 must be applied to the financial statements
no later than the fourth quarter of fiscal years ending after December 15, 2000.
The Company  adopted SAB 101 during the year ended December 31, 2000, and it had
no impact on the Company's  financial position or results of operations and cash
flows.

In March 2000, the Financial  Accounting  Standards Board issued  Interpretation
No.  44  ("FIN  44")  Accounting  for  Certain   Transactions   Involving  Stock
Compensation,  an  Interpretation  of APB Opinion No. 25. FIN 44  clarifies  the
application  of APB No. 25 for (a) the  definition  of employee  for purposes of
applying APB No. 25, (b) the criteria for  determining  whether a plan qualifies
as  a  non-compensatory  plan,  (c)  the  accounting   consequences  of  various
modifications  to the terms of a previously fixed stock option or award, and (d)
the  accounting  for an  exchange  of stock  compensation  awards in a  business
combination.  FIN 44 was effective July 2, 2000, but certain  conclusions  cover
specific  events that occur after either December 15, 1998, or January 12, 2000.
During  the  year  ended  December  31,  2000,  the  Company  adopted  FIN 44 in
accounting for stock options (see Note 9).

Reclassifications

Certain reclassifications have been made to the prior year statements to conform
to the 1999 presentation. Such reclassifications had no effect on the previously
reported net loss.


                                      F-10
<PAGE>
                        AIR PACKAGING TECHNOLOGIES, INC.
                                 AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3--LIQUIDITY AND GOING CONCERN

The accompanying  consolidated  financial statements have been prepared assuming
that the  Company  will  continue as a going  concern,  which  contemplates  the
realization of assets and the  satisfaction  of liabilities in the normal course
of business.  However, there is substantial doubt about the Company's ability to
continue as a going  concern  because of the  magnitude of its losses during the
past  two  years,  ($3,489,220)  and  ($1,853,012)  in  2000  and  1999  and  an
accumulated deficit of ($23,299,212) at December 31, 2000.

The  Company's  continued  existence  is  dependent  upon its  ability  to raise
substantial capital, to increase sales, to significantly improve operations, and
ultimately become  profitable.  Management  believes that future investments and
certain  sales-related  efforts  will  provide  sufficient  cash  flow for it to
continue  as a going  concern  in its  present  form.  However,  there can be no
assurance  that  the  Company  will  achieve  such  results.   Accordingly,  the
consolidated  financial statements do not include any adjustments related to the
recoverability  and  classification  of recorded asset amounts or the amount and
classification  of liabilities or any other  adjustments that might be necessary
should the Company be unable to continue as a going concern.

NOTE 4--INVENTORIES

Inventories consist of the following at:

                                                                December 31,
                                                                    2000
                                                               --------------

Raw materials                                                  $     369,351
Work-in-process                                                       13,916
Finished goods                                                        97,152
                                                               --------------

                                                               $     480,419
                                                               ==============

The above balance is presented net of total inventory  reserves of approximately
$134,400 in 2000.

NOTE 5--PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

                                                               December 31,
                                                                   2000
                                                               --------------

Manufacturing equipment                                        $   1,867,140
Dies and molds                                                       189,567
Computer equipment                                                   107,876
Quality control lab                                                  102,630
Office equipment                                                     114,096
                                                               --------------

                                                                   2,381,309

Less accumulated depreciation                                     (1,721,105)
                                                               --------------

                                                               $     660,204
                                                               ==============

Depreciation  and  amortization  expense for property and  equipment  charged to
operations  for the years  ended  December  31, 2000 and 1999 was  $234,886  and
$225,397, respectively.

                                      F-11
<PAGE>
                        AIR PACKAGING TECHNOLOGIES, INC.
                                 AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6--INTANGIBLE ASSETS

Intangible assets consist of the following at:

                                                                December 31,
                                                                    1999
                                                             ----------------

Patents                                                      $       747,400
Trademarks                                                             3,647
Rights to patent and trademark royalties                              90,146
                                                             ----------------

                                                                     841,193

Less accumulated amortization                                       (629,401)
                                                             ----------------

                                                             $       211,792
                                                             ================

Amortization  expense for intangible  assets charged to operations for the years
ended December 31, 2000 and 1999 was $53,441 and $64,124, respectively.

NOTE 7--RELATED PARTY TRANSACTIONS

A former  employee of the Company,  who resigned  effective June 4, 1999 entered
into a one year consulting  agreement to provide consulting services at a fee of
$5,000 per month. The agreement expired on May 31, 2000.  Consulting expense for
the  years  ended   December   31,  2000  and  1999  was  $25,000  and  $35,000,
respectively.

NOTE 8--7% SENIOR CONVERTIBLE DEBENTURES AND 8.75% CONVERTIBLE NOTES

During the year ended  December 31, 1999,  the Company  issued  $1,500,000 in 7%
Senior  Convertible  Debentures with interest  payable annually on June 30 at 7%
per annum. The Senior Convertible  Debentures are unsecured and due on September
30,  2003.  At the option of the holder,  the holder may  convert the  principal
amount of such Debentures at any time before  September 30, 2003, into shares of
common stock.  The conversion  price was equal to or greater than the fair value
of the stock on the date the Senior Convertible Debentures were issued.

On March 24, 2000,  the Board of  Directors of the Company  approved a temporary
reduction in the conversion price on the 7% Senior  Convertible  Debentures into
common  stock.  The  conversion  price was reduced from $1.50 to the average bid
price of the Company's common stock for the twenty-five trading days immediately
prior to the receipt of a notice of conversion,  with a minimum conversion price
of $.50. The notice of conversion for the temporary reduction was required to be
received by April 30, 2000 and  included  all accrued  interest  through May 31,
2000.  During April 2000, the Company received notices of conversion from all of
the debenture  holders.  As a result,  the Company  issued  3,137,943  shares of
common  stock and  recorded  an expense  of  $1,009,771  related to the  induced
conversion that resulted from the reduction in conversion price (see Note 9).

In conjunction with these Notes, the Company paid a finder's fee of $150,000 and
other financing  costs,  of which $10,417 was amortized  during 1999. Due to the
conversion of the  Debentures,  the remaining  portion,  or $139,583,  was fully
amortized by December 31, 2000.

                                      F-12
<PAGE>
                        AIR PACKAGING TECHNOLOGIES, INC.
                                 AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8--7% SENIOR CONVERTIBLE DEBENTURES AND 8.75% CONVERTIBLE NOTES (Continued)

During 2000,  the Company  issued  $875,000 in  Convertible  Notes with interest
payable  annually in common  stock on December 31 at 8.75% per annum.  The 8.75%
Convertible  Notes are  secured by certain  assets of the Company and are due on
December  31,  2004.  At the option of the  holder,  the holder may  convert the
principal  amount of such Note at any time before  December 31, 2003 into shares
of common  stock of the  Company.  The  conversion  price shall be the lesser of
$0.40 per share or a 20%  discount to the closing  high bid price on the date of
conversions  if the closing  high bid price for the  Company's  common stock has
been less than $0.40 for the previous 40 consecutive  business  days.  There are
also mandatory conversion provisions. In addition, each Convertible Note is part
of a unit  consisting of the debenture,  one $0.50 warrant and one $0.60 warrant
allowing the purchase of one share of common stock per warrant at certain  times
before January 1, 2004, subject to certain conditions (see Note 9).

As a result of the beneficial  conversion feature related to the 20% discount on
conversion  price, the Company recorded a discount on the Notes of $718,750,  of
which  $354,719 was  recognized as interest  expense  during 2000. The remaining
unamortized discount is being amortized over the life of the Notes.

In connection with these Notes, the Company paid a finder's fee of $87,500 which
is being  amortized  over  the life of the  Notes,  of  which  $21,875  has been
recorded as a current  asset.  At December  31, 2000,  amortization  amounted to
$4,167.

NOTE 9--STOCKHOLDERS' EQUITY

Common Stock

During the year  ended  December  31,  1999,  895,000  warrants  were  exercised
resulting in proceeds of $1,328,958.

In connection with the reverse stock split discussed  below, the Company amended
its  Articles  of  Incorporation  to reduce the  authorized  common  shares from
100,000,000 at $0.001 par value to 50,000,000 at $0.01 par value.

Pursuant to a one-year  investment  banking  agreement dated March 27, 2000 with
Givigest Fiduciaria SA ("Givigest") to raise capital, the Company issued 100,000
shares of common stock to Givigest  which were valued at fair market  value,  or
$0.42. As a result,  the Company  recorded a deferred  financing cost of $42,000
which is classified as a current asset and being  amortized over the term of the
agreement and a  corresponding  credit to additional  paid-in capital of $41,779
(net of capital  costs).  During the year ended December 31, 2000,  amortization
amounted to $31,500.

On March 24, 2000, the Board of Directors approved a temporary  reduction in the
exercise price of all warrants and options  outstanding.  The exercise price was
reduced  from $1.50 to the average bid price of the  Company's  common stock for
the  twenty-five  trading days  immediately  prior to the receipt of a notice of
conversion,  with a  minimum  conversion  price  of  $.50.  As a  result  of the
temporary  reduction in conversion  price,  the Company received net proceeds of
$24,889 for the  exercise of 50,000  warrants  by a  shareholder  at an exercise
price of $0.50 per share, and net proceeds of $19,889 for the exercise of 40,000
stock options at an exercise price of $0.50 per share (net of capital costs). In
addition,  the  Company  recorded  additional  compensation  expense  of $11,765
related to the reduction in exercise price.

In May 2000,  the Company  completed a private  placement for 450,000 shares and
received net proceeds of approximately $201,000 after expenses.

During 2000, the Company  issued a total of 3,137,943  common shares as a result
of converting $1,500,000 of 7% Senior Convertible Debentures and related accrued
interest amounting to approximately  $74,000. In addition,  the Company recorded
an expense of  $1,009,771  related to the  beneficial  conversion  feature  that
resulted from the reduction in conversion price (see Note 8).

                                      F-13
<PAGE>
                        AIR PACKAGING TECHNOLOGIES, INC.
                                 AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 9--STOCKHOLDERS' EQUITY (Continued)

Escrow Agreement

In 1991,  certain  stockholders of the Company entered into an escrow  agreement
under which 445,993 shares of the Company's  common stock were placed in escrow.
The shares were entitled to be released from escrow based on the  performance of
the Company as measured by cash flow (as defined by the  agreement)  and certain
other conditions. While the shares were in escrow, the stockholders waived their
rights to receive  dividends or participate in the distribution of assets upon a
winding up of the Company. Per the agreement,  any shares remaining in escrow at
December 31, 1999 would be canceled by the Company. The shares were cancelled by
the Company's  Transfer Agent in January 2000.  These shares are included in the
number of shares  outstanding during the year ended 1999, but were excluded from
the computation of basic and diluted loss per share.

Stock Split

In January  2000,  the Board of Directors  declared a one-to-ten  reverse  stock
split. All share related data in the consolidated  financial  statements reflect
the stock split for all periods presented.

Stock Options

The Company has issued  options to purchase  common  stock to certain  officers,
employees and others under various stock option plans for services performed and
to be performed. Some options require continued employment.

During 2000, the Company cancelled 100,000 stock options outstanding to officers
and issued an additional  675,000 stock  options,  which expire on various dates
through  December 31, 2004 and are subject to certain vesting terms.  100,000 of
these  options  are  considered  replacement  options  and thus,  are subject to
variable  plan  accounting.  As  a  result,  the  Company  recorded  $19,000  in
compensation  expense for the year ended December 31, 2000, which represents the
amount by which the intrinsic value of the variable options at December 31, 2000
exceeded the value of the options on July 1, 2000, or the measurement  date. The
remaining  575,000  options were granted as fixed  options at an exercise  price
equal to the fair  market  value of the  Company's  stock at the date of  grant.
Thus,  there was no expense recorded related to these options in accordance with
APB 25.

During 1999, the Company's board of directors repriced 435,000 outstanding stock
options based on the fair value of the stock,  and amended the exercise price to
$1.50 per share. Of the 435,000  options,  320,000 options were to employees and
115,000  options  were to  non-employees.  As a  result,  the  Company  recorded
stock-based  compensation  of $16,050  for the  options  held by  non-employees,
calculated based on the Black Scholes option-pricing model. The employee options
were subject to variable plan accounting beginning on July 1, 2000. During 2000,
no  compensation  expense was  recorded  because the stock price at December 31,
2000 did not exceed the  measurement  price,  which is the exercise price on the
date on which the variable plan accounting went into effect.

During the year ended December 31, 1999, the Company recorded $22,750 related to
stock-based   compensation   in  conjunction   with  stock  options  granted  to
non-employees.

During the year ended  December  31,  1999,  the  Company  recorded  stock-based
compensation of $10,000 related to employee options.  This amount represents the
excess fair  market  price of the  Company'  stock at the date of grant over the
exercise price.


                                      F-14
<PAGE>
                        AIR PACKAGING TECHNOLOGIES, INC.
                                 AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 9--STOCKHOLDERS' EQUITY (Continued)

Warrants

Pursuant to the investment banking agreement with Givigest,  the Company granted
a total of 500,000  warrants to purchase common stock,  exercisable at $0.50 per
share for three years. As a result,  the Company recorded  additional  financing
expense of  $42,460 to be  amortized  over the term of the  agreement,  of which
$29,105 was recognized during 2000.

In May 2000, the Company issued 450,000 shares of common stock through a private
placement.  Each share issued had attached a warrant to purchase one  additional
share of common stock at $0.50 for a three-year term.

On August 8, 2000, the Company  entered into a product  purchase  agreement (the
"Agreement")  with  Minnesota  Mining and  Manufacturing  ("3M") under which the
Company has agreed,  among other  things,  to sell  certain  products to 3M on a
worldwide exclusive basis. The Agreement is of an indefinite duration.  Pursuant
to the  Agreement,  3M has been granted under certain  circumstances  a right of
first  refusal to purchase the Company and has also been granted four  warrants,
each of which  entitles 3M to purchase  560,000  shares of the Company's  Common
Stock.  The first of the four warrants is  exercisable  immediately at $0.55 per
share  until  February  10,  2003.  The  value of  these  warrants,  which  were
calculated  based  on  the  Black-Scholes  model,  has  been  reflected  in  the
consolidated  financial statements.  The remaining three warrants will vest upon
the  attainment  of  certain  sales  levels by the  Company to 3M and will be at
market  price when such levels are reached and will be  exercisable  for two and
one half years from the vesting  date.  The warrants  that are  contingent  upon
future events have been excluded from the option and warrant tables below.

Also excluded  from the following  tables are 875,000  warrants  exercisable  at
$0.50 per share and 875,000 warrants  exercisable at $0.60 per share,  which are
non-detachable and issued as part of a unit in connection with $875,000 of 8.75%
Convertible  Notes  issued  during  2000 (see Note 8).  The $0.50  warrants  are
exercisable upon conversion of the note and expire nine months  thereafter.  The
$0.60 warrants become exercisable upon exercise of the $0.50 warrants and expire
nine months following that date.

Option and warrant activity is as follows:
<TABLE>
<CAPTION>

                                            Stock Options                       Warrants
                                     -----------------------------    -----------------------------
                                     Number of         Weighted        Number of        Weighted
                                                       Average                          Average
                                                       Exercise                         Exercise
                                       Shares           Price           Shares           Price
                                     -----------     -------------    ------------    -------------

<S>                                   <C>           <C>                <C>           <C>
Outstanding at January 1, 1999          387,000      $       1.90       1,828,754     $       1.50
    Granted                             570,000              1.50               -                -
    Exercised                                 -                 -        (895,000)            1.50
    Expired/canceled                   (522,000)             2.00        (793,754)            1.50
                                     -----------     -------------    ------------    -------------

Outstanding at December 31, 1999        435,000              1.50         140,000             1.50
    Granted                             675,000              0.50       1,510,000             0.52
    Exercised                           (40,000)             0.50         (50,000)            0.50
    Expired/canceled                   (257,500)             1.50         (90,000)            1.50
                                     -----------     -------------    ------------    -------------

Outstanding at December 31, 2000        812,500      $       0.67       1,510,000     $       0.52
                                     ===========     =============    ============    =============

Exercisable at December 31, 2000        559,375      $       0.75       1,510,000     $       0.52
                                     ===========     =============    ============    =============

</TABLE>
                                      F-15
<PAGE>

                        AIR PACKAGING TECHNOLOGIES, INC.
                                 AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 9--STOCKHOLDERS' EQUITY (Continued)

Information  relating  to stock  options  and  warrants  at  December  31,  2000
summarized by exercise price are as follows:
<TABLE>
<CAPTION>

                                         Outstanding                         Exercisable
                           -----------------------------------------   -------------------------
                                              Weighted Average             Weighted Average
                                          --------------------------   -------------------------
                                             Life         Exercise                    Exercise
Exercise Price Per Share     Shares        (Months)        Price         Shares         Price
------------------------   -----------    -----------    -----------   ------------   ----------
<S>                        <C>            <C>            <C>           <C>            <C>
Stock Options:

     $0.50                    675,000           46.2      $    0.50        421,875    $    0.50
     $1.50                    137,500           29.8           1.50        137,500         1.50
                           -----------    -----------    -----------   ------------   ----------

                              812,500           43.4      $    0.67        559,375    $    0.75
                           ===========    ===========    ===========   ============   ==========

Warrants:

     $0.50                    950,000           28.5      $    0.50        950,000    $    0.50
     $0.55                    560,000           25.0           0.55        560,000         0.55
                           -----------    -----------    -----------   ------------   ----------

                            1,510,000           27.2      $    0.52      1,510,000    $    0.52
                           ===========    ===========    ===========   ============   ==========
</TABLE>

Pro Forma Information

In accordance with SFAS 123 and as described in Note 2, the Company continues to
account for  stock-based  compensation  utilizing  the  intrinsic  value  method
prescribed  by APB 25.  Had  compensation  cost  for  stock  options  issued  to
employees been determined based on the fair value at grant dates consistent with
the method of SFAS 123, the Company's net loss and net loss per share would have
increased to the pro forma amounts presented below:
<TABLE>
<CAPTION>

                                                                 December 31,
                                                         -----------------------------
                                                            2000              1999
                                                         ------------     ------------
<S>                                                      <C>              <C>
Net loss, as reported                                    $(3,489,220)     $(1,853,012)

Net loss, pro forma                                       (3,552,060)      (1,935,285)

Loss per common share - basic and diluted, as reported   $      (.36)     $      (.25)

Loss per common share - basic and diluted, pro forma     $      (.36)     $      (.27)
</TABLE>

The fair  value of each  option  is  estimated  on the date of grant  using  the
Black-Scholes   option-pricing   model  using  the  following   weighted-average
assumptions:  expected volatility of 23% and 27% in 2000 and 1999, respectively,
an expected  life of four and a half and five and a half years in 2000 and 1999,
respectively,  no dividends  would be declared  during the expected  term of the
options,  risk-free  interest  rate of  6.30%  and  5.81%  for  2000  and  1999,
respectively.

The weighted  average fair value of stock  options  granted to employees  during
2000 and 1999 was $0.15 and $0.06, respectively.


                                      F-16
<PAGE>

                        AIR PACKAGING TECHNOLOGIES, INC.
                                 AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 10--INCOME TAXES

Income taxes are accounted for in accordance  with SFAS No. 109. At December 31,
2000, the Company has a net operating loss  carryforward  (NOL) of approximately
$19,700,000  for federal tax purposes.  At December 31, 2000,  the Company has a
deferred tax asset of approximately  $7,400,000,  which primarily relates to net
operating losses. A 100% valuation  allowance has been established as management
cannot determine  whether it is more likely than not that the deferred tax asset
will be realized. The NOLs expire as follows:

   Year ending December 31,                             Amount
   -------------------------                        -------------
          2007                                       $  5,400,000
          2008                                          2,000,000
          2009                                          2,300,000
          2010                                          1,400,000
          2011                                          1,700,000
          2012                                          2,200,000
          2018                                          1,400,000
          2019                                          1,600,000
          2020                                          1,700,000
                                                     -------------

          Total                                      $ 19,700,000
                                                     =============

The Company also has state net operating  loss  carryforwards  of  approximately
$10,100,000  available to offset  future  taxable  income for state tax purposes
that expire at various  dates through  2010.  The  Company's net operating  loss
carryforwards  may be limited due to ownership  changes as defined under Section
382 of the Internal Revenue Code of 1986.

NOTE 11--COMMITMENTS AND CONTINGENCIES

Lease Commitments

Minimum lease commitments under noncancelable  operating lease agreements are as
follows:

   Year ending December 31,                            Amount
  --------------------------                       -------------
         2001                                      $     137,972
         2002                                            138,047
         2003                                            138,047
         2004                                            135,916
         2005                                             57,938
                                                    -------------

         Total                                     $     607,920
                                                    =============

Rent expense was $147,494 and $151,131 for the years ended December 31, 2000 and
1999, respectively.

Royalty Agreements

The  Company  is  required  to pay  royalties  related to  certain  patents  and
trademarks.  Total expense  related to these  agreements  was $5,723 in 2000 and
$4,324 in 1999.


                                      F-17
<PAGE>

                        AIR PACKAGING TECHNOLOGIES, INC.
                                 AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 11--COMMITMENTS AND CONTINGENCIES (Continued)

Product Purchase Agreements

Effective  September  1,  2000,  the  Company  entered  into a product  purchase
agreement  with 3M under which the  Company  granted to 3M the right to sell and
distribute certain products in the retail market on a worldwide exclusive basis,
exclusive  rights  in all  markets  in  Japan,  and the  non-exclusive  right to
distribute and sell in all other markets. Pursuant to the agreement, 3M has been
granted  under  certain  circumstances  a right of first refusal to purchase the
Company and has also been granted four  warrants,  each of which  entitles 3M to
purchase  560,000  shares of the Company's  common stock.  The first of the four
warrants is  exercisable  upon  execution of the  agreement for two and one half
years.  The remaining  three warrants will vest upon attainment of certain sales
levels by the Company to 3M (see Note 9). In February 2001, the parties  entered
into another agreement, effective May 1, 2001, by which 3M was granted exclusive
rights to sell and  distribute  certain  products in the  industrial  protective
packaging  market  and  non-exclusive  rights  for all other  markets.  Sales of
product to 3M under both  agreements  will be  counted  toward the sales  levels
required in order for the remaining  three warrants to vest. Both agreements are
of indefinite duration.

Legal Proceedings

A former employee of the Company was seeking a severance payment of $101,500 per
terms of his employment agreement,  which was voluntarily terminated in November
1998. The Company had  established a liability for the entire amount.  Mediation
was held during April 2000 between the parties and the issue was settled. During
May 2000, the Company paid $50,000 in full settlement of the claim.  The Company
recognized  other income of $51,500  during the year ended  December 31, 2000 as
the difference between the original liability and the settlement amount.

NOTE 12--SIGNIFICANT CONCENTRATIONS OF CREDIT RISK, MAJOR CUSTOMERS AND OTHER
         RISKS AND UNCERTAINTIES

The  Company   operates   primarily   in  one  industry   segment:   developing,
manufacturing and distributing of inflatable  commercial  packaging systems. The
Company's sales are primarily to companies producing Silicon wafers and computer
chips in California,  Arizona,  Oregon, Colorado and Texas in the United States,
Denmark and the U.K. in Europe, and Singapore in Asia.

Foreign sales are summarized by geographic areas as follows:

For the year December 31,                         2000           1999
--------------------------                     ------------   ------------

Europe                                         $   137,822    $   165,691
Asia                                                38,481        230,050
Other                                               17,719              -
                                               ------------   ------------

Total foreign sales                            $   194,022    $   395,741
                                               ============   ============

                                      F-18

<PAGE>

                        AIR PACKAGING TECHNOLOGIES, INC.
                                 AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 12--SIGNIFICANT CONCENTRATIONS OF CREDIT RISK, MAJOR CUSTOMERS  AND OTHER
         RISKS AND UNCERTAINTIES (Continued)

The Company had one customer who accounted for approximately 13% of net sales in
2000 and three  customers  who  accounted  for 16%,  17% and 24% of net sales in
1999.

Financial  instruments that subject the Company to credit risk consist primarily
of accounts  receivable.  The Company  frequently  makes large  credit  sales to
customers.  At December 31, 2000,  approximately $83,000 or 35% of the Company's
accounts receivable was due from one customer.

NOTE 13--SUBSEQUENT EVENTS

In January 2001, the Company issued an additional  $125,000 of Convertible Notes
with interest payable annually in common stock on December 31 at 8.75% per annum
(see Note 10).

On March 14, 2001,  the Company  issued a promissory  note for $125,000  bearing
interest at 7% per annum and maturing on March 31,  2004.  The note is unsecured
and is callable  by either the  Company or the note  holder  upon  thirty  days'
written notice.

On March 22, 2001,  the Company  renewed its investment  banking  agreement with
Givigest for an additional  one-year term,  effective April 1, 2001. Pursuant to
the terms of the agreement,  the Company and Givigest have agreed to raise up to
$1,250,000 by June 30, 2001.  There are no  assurances  that the Company will be
able to raise any proceeds  under this  agreement.  Pursuant to the terms of the
agreement, the Company granted 250,000 warrants to purchase the Company's common
stock for a three-year term. In addition,  the Company will grant one additional
warrant for each $10 raised.





                                      F-19