**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-Q**





**x QUARTERLY
      REPORT
      PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES**


**EXCHANGE
      ACT OF 1934**





For
      the
      quarterly period ended September 30, 2008





OR





**o TRANSITION
      REPORT
      PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES**


**EXCHANGE
      ACT OF 1934**





For
      the
      transition period from ___________ to _____________





*Commission
      file number 005-79737*





AVP,
      INC.





(Exact
      name of registrant as specified in its charter)




Delaware
            
            98-0142664(State or other jurisdiction of
            
            (I.R.S. Employerincorporation or organization)
            
            Identification No.)





6100
      Center Drive, Suite 900, Los Angeles, CA 90045


(Address
      of principal executive offices - Zip code)





(310)
      426 - 8000


(Registrant's
      telephone number, including area code)





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





Yes x No  ̈





Indicate
      by check mark whether the registrant is a:





Large
                Accelerated Filer ̈
            Accelerated
                Filer ̈
            Non-Accelerated
                Filer ̈
            Smaller
                Reporting Companyx





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





Yes  ̈ No x





As
      of
      November 14, 2008, the Registrant had 21,489,626 shares of common stock
      outstanding.











**AVP,
      INC.**





INDEX





PagePART
                I.
            FINANCIAL
                INFORMATION
            3ITEM
                1.
            FINANCIAL
                STATEMENTS
            3ITEM
                2.
            MANAGEMENT'S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS
            22ITEM 4T.
            CONTROLS
                AND PROCEDURES
            30PART
                II.
            OTHER
                INFORMATION
            31ITEM
                6.
            EXHIBITS
            31





2





**PART
      I. FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS**





**AVP,
      INC.**


**Index
      to Financial Statements**


**Period
      Ended September 30, 2008**





PAGEConsolidated
                Balance Sheets as of September 30, 2008 (Unaudited) and December
                31,
                2007
            4Consolidated
                Statements of Operations for the three and nine months ended September
                30,
                2008 and 2007 (Unaudited)
            5Consolidated
                Statement of Changes in Stockholders' Equity for the nine months
                ended
                September 30, 2008 (Unaudited)
            6Consolidated
                Statements of Cash Flows for the nine months ended September 30,
                2008 and
                2007(Unaudited)
            7-8Notes
                to Consolidated Financial Statements (Unaudited)
            9





3





**AVP,
      INC.**





**CONSOLIDATED
      BALANCE SHEETS**





(Unaudited)September 30,
            
            December 31,2008
            
            2007**ASSETS****CURRENT
                ASSETS**Cash
                and cash equivalents
            
            $
            3,225,432
            
            $
            2,257,453Accounts
                receivable, net of
                allowance for doubtful accounts of $251,756 and $149,748
            
            
            5,108,785
            
            
            2,008,253Prepaid
                expenses
            
            
            429,660
            
            
            388,649Other
                current assets
            
            
            43,543
            
            
            116,393TOTAL
                CURRENT ASSETS
            
            
            8,807,420
            
            
            4,770,748**PROPERTY
                AND EQUIPMENT, net**
            
            
            384,232
            
            
            392,447**OTHER
                ASSETS**
            
            
            42,562
            
            
            115,496TOTAL
                ASSETS
            
            $
            9,234,214
            
            $
            5,278,691**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****CURRENT
                LIABILITIES**Accounts
                payable
            
            $
            3,421,529
            
            $
            908,020Accrued
                expenses
            
            
            2,346,670
            
            
            1,663,975Deferred
                revenue
            
            
            115,953
            
            
            101,245TOTAL
                CURRENT LIABILITIES
            
            
            5,884,152
            
            
            2,673,240**OTHER
                NON-CURRENT LIABILITIES**
            
            
            256,571
            
            
            96,419TOTAL
                LIABILITIES
            
            
            6,140,723
            
            
            2,769,659**NOTE/RESTRICTED
                SHARES**
            
            
            2,621,413
            
            
            -**COMMITMENTS
                AND CONTINGENCIES****STOCKHOLDERS’
                EQUITY**Preferred
                stock, 2,000,000 shares authorized:Series
                B convertible preferred stock, $.001 par value, 250,000 shares authorized,
                94,944 and 47,152 shares issued and outstanding
            
            
            96
            
            
            48Common
                stock, $.001 par value, 80,000,000 shares authorized, 21,089,626
                and
                20,490,096 shares issued and outstanding
            
            
            21,090
            
            
            20,490Additional
                paid-in capital
            
            
            40,979,914
            
            
            39,732,837Accumulated
                deficit
            
            
            (40,529,022
            )
            
            (37,244,343
            )TOTAL
                STOCKHOLDERS’ EQUITY
            
            
            472,078
            
            
            2,509,032TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            9,234,214
            
            $
            5,278,691




See
      notes
      to consolidated financial statements.





4





**AVP,
      INC.**




**CONSOLIDATED
      STATEMENTS OF OPERATIONS**




**(Unaudited)**


Three Months Ended September 30,
              
              Nine Months Ended September 30,**2008**
              
              **2007**
              
              **2008**
              
              **2007**REVENUESponsorships/Advertising
                  (1)
              
              $
              11,185,387
              
              $
              10,228,458
              
              $
              18,253,405
              
              $
              19,219,248Other
              
              
              2,853,899
              
              
              2,577,980
              
              
              4,605,005
              
              
              4,604,591TOTAL
                  REVENUE
              
              
              14,039,286
              
              
              12,806,438
              
              
              22,858,410
              
              
              23,823,839EVENT
                  COSTS
              
              
              11,524,174
              
              
              10,761,071
              
              
              18,285,360
              
              
              17,998,538GROSS
                  PROFIT
              
              
              2,515,112
              
              
              2,045,367
              
              
              4,573,050
              
              
              5,825,301OPERATING
                  EXPENSESSales
                  and marketing (2)
              
              
              868,221
              
              
              919,872
              
              
              2,939,985
              
              
              2,658,089Administrative
                  (3)
              
              
              1,636,953
              
              
              1,919,833
              
              
              4,878,281
              
              
              5,324,373TOTAL
                  OPERATING EXPENSES
              
              
              2,505,174
              
              
              2,839,705
              
              
              7,818,266
              
              
              7,982,462OPERATING
                  INCOME (LOSS)
              
              
              9,938
              
              
              (794,338
              )
              
              (3,245,216
              )
              
              (2,157,161
              )OTHER
                  INCOME (EXPENSE)Interest
                  expense
              
              
              -
              
              
              (745
              )
              
              -
              
              
              (745
              )Interest
                  income
              
              
              769
              
              
              44,748
              
              
              17,972
              
              
              158,725Gain
                  on disposal of asset
              
              
              -
              
              
              -
              
              
              3,500
              
              
              9,774Foreign
                  exchange loss
              
              
              14
              
              
              -
              
              
              (5,567
              )
              
              -TOTAL
                  OTHER INCOME
              
              
              783
              
              
              44,003
              
              
              15,905
              
              
              167,754INCOME
                  (LOSS) BEFORE INCOME TAXES
              
              
              10,721
              
              
              (750,335
              )
              
              (3,229,311
              )
              
              (1,989,407
              )INCOME
                  TAXES
              
              
              (9,793
              )
              
              (8,610
              )
              
              (10,943
              )
              
              (9,410
              )NET
                  INCOME (LOSS)
              
              
              928
              
              
              (758,945
              )
              
              (3,240,254
              )
              
              (1,998,817
              )Deemed
                  Dividend to Series B Preferred Stock Shareholders
              
              
              44,425
              
              
              -
              
              
              44,425
              
              
              -Net
                  Loss Available to Common Shareholders
              
              $
              (43,497
              )
              $
              (758,945
              )
              $
              (3,284,679
              )
              $
              (1,998,817
              )Loss
                  per common share:Basic
              
              $
              (0.00
              )
              $
              (0.04
              )
              $
              (0.15
              )
              $
              (0.10
              )Diluted
              
              $
              (0.00
              )
              $
              (0.04
              )
              $
              (0.15
              )
              $
              (0.10
              )Shares
                  used in computing loss per share:Basic
              
              
              22,151,979
              
              
              20,443,269
              
              
              21,262,181
              
              
              20,064,693Diluted
              
              
              22,151,979
              
              
              20,443,269
              
              
              21,262,181
              
              
              20,064,693




(1)
      Sponsorship/Advertising includes $0 and $507,800 in stock based contra-revenue
      for the three months ended September 30, 2008 and 2007, respectively and $0
      and
      $507,800 for the nine months ended September 30, 2008 and 2007,
      respectively.




(2)
      Sales
      and marketing expenses includes stock-based expenses of $18,182 and $19,045
      for
      the three months ended September 30, 2008 and 2007, respectively, and $54,545
      and $101,266 for the nine months ended September 30, 2008 and 2007,
      respectively.




(3)
      Administrative expenses include stock-based expenses of $156,216 and $21,236
      for
      the three months ended September 30, 2008 and 2007, respectively, and $552,009
      and $64,192 for the nine months ended September 30, 2008 and 2007,
      respectively.





See
      notes
      to consolidated financial statements.





5




**AVP,
      INC.**




**CONSOLIDATED
      STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY**





**For
      The Nine Months Ended September 30, 2008**





**(Unaudited)**





Series B
              Preferred Stock
            
            Common StockShares
            
            Amount
            
            Shares
            
            Amount
            
            Additional
              Paid-in Capital
            
            Accumulated
              Deficit
            
            Total
              Stockholders’
              EquityBalance,
                December 31, 2007
            
            
            47,152
            
            $
            48
            
            
            20,490,096
            
            $
            20,490
            
            $
            39,732,837
            
            $
            (37,244,343
            )
            $
            2,509,032Conversion
                of Series B Preferred Stock to common stock
            
            
            (2,208
            )
            
            (2
            )
            
            61,537
            
            
            62
            
            
            (60
            )
            
            -
            
            
            -Cashless
                exercise of option and warrants
            
            
            -
            
            
            -
            
            
            537,993
            
            
            538
            
            
            (538
            )
            
            -
            
            
            -Private
                placement offering, net of expenses of $45,459
            
            
            50,000
            
            
            50
            
            
            -
            
            
            -
            
            
            651,241
            
            
            -
            
            
            651,291Value
                of modification of non-employee warrants
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            42,719
            
            
            -
            
            
            42,719Deemed
                dividend from issuance of
              warrants
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            44,425
            
            
            (44,425
            )
            
            -Stock-based
                compensation expense
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            509,290
            
            
            -
            
            
            509,290Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,240,254
            )
            
            (3,240,254
            )Balance,
                September 30, 2008
            
            
            94,944
            
            $
            96
            
            
            21,089,626
            
            $
            21,090
            
            $
            40,979,914
            
            $
            (40,529,022
            )
            $
            472,078





See
      notes
      to consolidated financial statements.





6





**AVP,
      INC.**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**(Unaudited)**





**Nine Months Ended September 30,****2008**
            
            **2007**CASH
                FLOWS USED IN OPERATING ACTIVITIESNet
                loss
            
            $
            (3,240,254
            )
            $
            (1,998,817
            )Adjustments
                to reconcile net loss to net cash flows used in operating
                activities:Depreciation
                of property and equipment
            
            
            192,523
            
            
            169,507Bad
                debt expense
            
            
            110,008
            
            
            112,811Amortization
                of deferred commissions
            
            
            54,545
            
            
            101,266Gain
                on disposal of assets
            
            
            (3,500
            )
            
            (9,774
            )Contra-revenue
                from the issuance of warrants
            
            
            -
            
            
            507,800Stock-based
                compensation expense
            
            
            552,009
            
            
            64,192Decrease
                (increase) in operating assets:Accounts
                receivable
            
            
            (3,210,540
            )
            
            (2,938,621
            )Prepaid
                expenses
            
            
            (41,011
            )
            
            4,066Other
                assets
            
            
            9,305
            
            
            (153,793
            )Increase
                (decrease) in operating liabilities:Accounts
                payable
            
            
            2,513,509
            
            
            2,349,003Accrued
                expenses
            
            
            636,030
            
            
            1,599,207Deferred
                revenue
            
            
            215,958
            
            
            (1,028,841
            )NET
                CASH FLOWS USED IN OPERATING ACTIVITIES
            
            
            (2,211,418
            )
            
            (1,221,994
            )CASH
                FLOWS USED IN INVESTING ACTIVITIESInvestment
                in property and equipment
            
            
            (102,374
            )
            
            (241,430
            )Proceeds
                from investment in sales-type lease
            
            
            -
            
            
            150,000Proceeds
                from disposal of property and equipment
            
            
            3,500
            
            
            -NET
                CASH FLOWS USED IN INVESTING ACTIVITIES
            
            
            (98,874
            )
            
            (91,430
            )





See
      notes
      to consolidated financial statements.





7





**AVP,
      INC.**




**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**(Unaudited)**





(CONTINUED)





**Nine Months Ended September 30,****2008**
            
            **2007**CASH
                FLOWS PROVIDED BY FINANCING ACTIVITIESProceeds
                from sale of capital stock
            
            $
            696,750
            
            $
            -Offering
                costs
            
            
            (45,459
            )
            
            -Proceeds
                from note/restricted shares
            
            
            2,803,250
            
            
            -Offering
                costs
            
            
            (181,837
            )
            
            -NET
                CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
            
            
            3,272,704
            
            
            -Effect
                of exchange rates on cash and cash equivalents
            
            
            5,567
            
            
            -NET
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            967,979
            
            
            (1,313,424
            )CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            2,257,453
            
            
            5,052,636CASH
                AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            3,225,432
            
            $
            3,739,212**SUPPLEMENTAL
                DISCLOSURE OF****CASH
                FLOW INFORMATION**Cash
                paid during the period for:Interest
                expense
            
            $
            -
            
            $
            745Income
                taxes
            
            $
            10,943
            
            $
            9,410**SUPPLEMENTAL
                DISCLOSURE OF NON-CASH****INVESTING
                AND FINANCING INFORMATION**Conversion
                of Series B preferred stock into common stock
            
            $
            62
            
            $
            624Issuance
                of warrant to sales agent for services
            
            $
            -
            
            $
            $
                (21,793
            )Cashless
                exercise of options and warrants
            
            $
            538
            
            $
            114Reclassification
                of deposits into property and equipment
            
            $
            81,934
            
            $
            -Deemed
                dividend from issuance of warrants
            
            $
            44,425
            
            $
            -




See
      notes
      to consolidated financial statements.





8





**AVP,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**




**1.
      BASIS OF PRESENTATION**




The
      accompanying unaudited interim consolidated financial statements of AVP, Inc.
      (“AVP”) have been prepared in accordance with accounting principles generally
      accepted in the United States of America and the rules of the Securities and
      Exchange Commission ("SEC"), and should be read in conjunction with the audited
      financial statements and notes thereto contained in AVP’s latest Annual Report
      on Form 10-KSB filed with the SEC. In the opinion of management, all
      adjustments, consisting only of normal recurring adjustments, necessary for
      a
      fair presentation of AVP’s financial position and the results of operations for
      the interim periods presented have been reflected herein. The results of
      operations for interim periods are not necessarily indicative of the results
      to
      be expected for the full year. Notes to the consolidated financial statements
      that would substantially duplicate the disclosures contained in the consolidated
      audited financial statements for the most recent fiscal year 2007, as reported
      in the Form 10-KSB as previously filed with the SEC, have been
      omitted.




**2.
      EARNINGS (LOSS) PER BASIC AND DILUTED SHARE OF COMMON
      STOCK**




Basic
      earnings (loss) per common share is computed by dividing income available to
      common shareholders by the weighted-average number of shares of common stock
      outstanding during the period. Diluted earnings per common share is computed
      by
      dividing income available to common shareholders by the weighted-average number
      of shares of common stock outstanding during the period, increased to include
      the number of additional shares of common stock that would have been outstanding
      if the dilutive potential shares of common stock had been issued. The dilutive
      effect of outstanding options and warrants is reflected in diluted earnings
      per
      share by application of the “treasury stock” method. The dilutive effect of
      outstanding convertible preferred stock is reflected in diluted earnings per
      share by application of the “if-converted” method. Under the treasury stock
      method, an increase in the fair market value of the Company’s common stock can
      result in a greater dilutive effect from outstanding options and
      warrants.




The
      following options, warrants to purchase shares of common stock and other
      incremental shares were excluded from the computation of diluted earnings (loss)
      per share for the periods presented as their effect would be
      antidilutive:





Nine
                Months Ended September 30,2008
            
            2007Options
                and Warrants
            
            
            21,327,049
            
            
            18,770,220Series
                B Preferred Stock
            
            
            2,851,034
            
            
            1,314,126Total
            
            
            24,178,083
            
            
            20,084,346





9





**AVP,
      INC.**





**NOTES
      TO CONSOLIDATED**  **FINANCIAL
      STATEMENTS**


**(Unaudited)**




**3.
      STOCK BASED COMPENSATION**




On
      January 1, 2006, AVP adopted the fair value recognition provisions of SFAS
      No.
      123 (Revised 2004). Prior to January 1, 2006, AVP had accounted for stock-based
      payments under the recognition and measurement provisions of Accounting
      Principles Board (“APB”) Opinion 25 and related interpretations, as permitted by
      SFAS No. 123, “Accounting for Stock-Based Compensation.” In accordance with APB
      25, no compensation expense was required to be recognized for options granted
      that had an exercise price equal to the market value of the underlying common
      stock on the date of grant.




Under
      the
      modified prospective method of SFAS No. 123R, compensation expense was
      recognized during the year ended December 31, 2006 and included compensation
      expense for all stock-based payments granted prior to, but not yet vested as
      of
      January 1, 2006, based on the grant date fair value, estimated in accordance
      with the original provisions of SFAS No. 123.




Under
      the
      fair value recognition provisions of SFAS No. 123R, stock-based compensation
      cost is estimated at the grant date based on the fair value of the award. The
      fair value of stock options granted is estimated using the Black-Scholes-Merton
      option pricing model. The fair value is amortized on a straight-line basis
      over
      the requisite service period of the awards, which is generally the vesting
      period.




The
      table
      below sets forth the pricing assumptions used in determining the fair values
      for
      the common stock options and warrants using the Black Scholes
      model:




Nine Months Ended September 30,2008
            
            2007Risk-free
                interest rate
            
            
            1.78
                - 3.26%
            
            
            4.03
                - 4.95%Expected
                life
            
            
            1
                -
                5.77 years
            
            
            3
–
                5 yearsExpected
                volatility
            
            
            75
                - 82.74%
            
            
            77
                – 80%Expected
                dividend yield
            
            
            0%
            
            
            0%




Determining
      the appropriate fair value of stock-based awards at the grant date requires
      judgment, including estimating stock price volatility, and expected term. The
      Company uses its own stock price to compute estimated volatility, as it believes
      that historical volatility is a fair representation of future volatility.
      Historical forfeitures have been immaterial; therefore, the Company is not
      recognizing forfeitures prior to their occurrences. The expected term of options
      granted from historical data on employee exercises is not yet determinable.
      The
      Company does not have sufficient historical exercise data to provide a
      reasonable basis upon which to estimate expected term, due to the limited period
      of time its equity shares have been publicly traded. When more relevant detailed
      information becomes available, the Company intends to make more refined
      estimates of expected term. In December 2007, the SEC issued SAB 110, Shared
      Based Payment, to amend the SEC’s views discussed in SAB 107 regarding the use
      of the simplified method in developing an estimate of expected life of share
      options in accordance with SFAS No. 123R. In accordance with SAB 107, as amended
      by SAB 110, the Company used the simplified method in developing an estimate
      of
      expected term for the "plain vanilla" share options granted on February 5,
      and
      June 4, 2008. The risk-free interest rate is based on the U.S. Treasury yield
      curve in effect at the date of grant. As of September 30, 2008, the Company
      had
      approximately $1,183,242 of unrecognized compensation expense expected to be
      recognized over a weighted average period of approximately 2.33
      years.




Due
      to
      the inherent uncertainty in valuing awards for publicly-traded stock as of
      the
      grant date, given that such awards will be exercised, purchased, or sold at
      indeterminate future dates, the actual values realized by the recipients, if
      any, may vary significantly from the values of the awards estimated at the
      grant
      dates.





10





**AVP,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**


**4.
      STOCK OPTIONS**




**Stock
      Option Plans**




Under
      AVP’s 2005 Stock Incentive Plan, AVP may grant awards of stock options
      (including stock purchase warrants) and restricted stock grants to its officers,
      directors, employees, consultants, players, and independent contractors. AVP
      may
      issue an aggregate of 30,000,000 shares of its common stock under the 2005
      Plan,
      including approximately 14,000,000 shares underlying management warrants, as
      well as options previously granted by AVP’s wholly owned subsidiary, Association
      of Volleyball Professionals, Inc. (the “Association”), which were subsequently
      converted to AVP stock options upon the Association’s acquisition by AVP. AVP
      may grant both incentive stock options intended to qualify under Section 422
      of
      the Internal Revenue Code, and options, warrants, and other rights to buy AVP’s
      common stock that are not qualified as incentive stock options. The exercise
      price of each optioned share is determined by the Compensation Committee;
      however the exercise price for incentive stock options and nonqualified stock
      options will not be less than 100% of the fair market value of the optioned
      shares on the date of grant. The exercise price of incentive stock options
      granted to holders of more than 10% of AVP’s common stock must be at least 110%
      of the fair market value of the common stock on the date of grant.




The
      expiration date of each option shall be determined by the Compensation Committee
      at the date of grant; however, in no circumstances shall the option be
      exercisable after 10 years from the date of grant. Stock options granted under
      the 2005 Plan will expire no more than ten years from the date on which the
      option is granted, unless the Board of Directors determines an alternative
      termination date. If incentive stock options are granted to holders of more
      than
      10% of AVP’s common stock, such options will expire no more than five (5) years
      from the date the option is granted. Except as otherwise determined by the
      Board
      of Directors or the Compensation Committee, stock options granted under the
      2005
      Plan will vest and become exercisable on the anniversaries of the date of grant
      of such option at a rate of 25% per year over four years from the date of
      grant.




In
      connection with stock options granted to employees to purchase common stock,
      AVP
      recorded $156,216 of stock-based compensation expense for the three month period
      ended September 30, 2008, $21,236 for the three month period ended September
      30,
      2007, and $509,290 and $64,192 for the nine month periods ended September 30,
      2008 and 2007, respectively.




The
      following table contains information on the stock options under the 2005 Plan
      for the nine months ended September 30, 2008 and the year ended December 31,
      2007. The outstanding options expire from November 2008 to June
      2018.





Number of Shares
            
            Weighted
              Average
              Exercise Price
            
            Weighted
              Average
              Remaining
              Contractual
              Life (Years)
            
            Aggregate
              Intrinsic Value (1)Options
                outstanding at January 1, 2007
            
            
            12,078,084
            
            $
            0.86Granted
            
            
            3,450,000
            
            
            1.00Exercised
            
            
            (100,977
            )
            
            0.01Cancelled
            
            
            (8,081
            )
            
            2.31Options
                outstanding at December 31, 2007
            
            
            15,419,026
            
            
            0.90Granted
            
            
            2,305,544
            
            
            0.65Exercised
            
            
            (895,646
            )
            
            0.32Cancelled
            
            
            (2,457,451
            )
            
            0.93Options
                outstanding at September 30, 2008
            
            
            14,371,473
            
            $
            0.88
            
            
            3.4
            
            $
            1,277,826Options
                exercisable at September 30, 2008
            
            
            11,943,094
            
            $
            0.90
            
            
            2.1
            
            $
            1,277,826Options
                exercisable at September 30, 2008 and expected to vest
            
            
            14,339,619
            
            $
            0.88
            
            
            3.4
            
            $
            1,277,826





11




**AVP,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**




**4.
      STOCK OPTIONS (CONTINUED)**




**Stock
      Option Plans (Continued)**




(1)
      The
      aggregate intrinsic value is calculated as the difference between the exercise
      price of the underlying awards and the $0.25 closing stock price of our common
      stock on September 30, 2008, the last trading date of our quarter ended
      September 30, 2008. The intrinsic value was computed for only those awards
      that
      are in the money.




The
      weighted average fair value of options granted was $0.36 and $0 during the
      nine
      months ended September 30, 2008 and 2007, respectively.




The
      total
      intrinsic values of stock options exercised during the nine months ended
      September 30, 2008 and 2007 were $439,052 and $123,378, respectively. No cash
      was received, as the options were exercised in cashless exercises. The Company
      did not recognize any tax benefit related to these exercises.




The
      following table summarizes information about AVP’s options outstanding and
      exercisable by price range as of September 30, 2008:





Options Outstanding
            
            Options ExercisableRange of
              Exercise
              Prices
            
            Number of
              Shares Subject
              To
              Outstanding
              Options
            
            Weighted
              Average
              Remaining
              Contractual
              Life in Years
            
            Weighted
              Average
              Exercise
              Price
            
            Number
              Of Shares
              Subject to
              Exercisable
              Options
            
            Weighted
              Average
              Exercise
              Price$            .01
                -.30
            
            
            5,424,273
            
            
            1.4
            
            $
            0.01
            
            
            5,338,335
            
            $
            0.01.31
                -.90
            
            
            2,870,117
            
            
            7.2
            
            
            0.69
            
            
            1,813,969
            
            
            0.76.91
                -1.60
            
            
            2,676,657
            
            
            6.7
            
            
            1.15
            
            
            1,390,364
            
            
            1.291.61
                -2.80
            
            
            3,400,426
            
            
            0.7
            
            
            2.22
            
            
            3,400,426
            
            
            2.22$          .01
                -2.80
            
            
            14,371,473
            
            
            3.4
            
            $
            0.88
            
            
            11,943,094
            
            $
            0.90





12




**AVP,
      INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**




**4.
      STOCK OPTIONS (CONTINUED)**




**Other
      Stock Options/Warrants**





In
      connection with warrants granted to non-employees to purchase common stock,
      AVP
      recorded warrant expense of $42,719 in administrative expenses for the three
      and
      nine months ended September 30, 2008. For accounting purpose, the additional
      value of warrants cancelled and re-issued for the period ended September 30,
      2008 was treated as dividend. For the three and nine months ended September
      30,
      2007, AVP recorded $863 and $46,720 in sales and marketing expenses and $507,800
      and $507,800 in contra-revenue. Such amounts represent, for each non-employee
      stock option or warrants, the valuation determined using the Black Scholes
      Model
      at the time of grant.





The
      following table contains information on all of AVP’s non-plan stock options and
      warrants for the period ended September 30, 2008 and the year ended December
      31,
      2007.





Number of Shares
            
            Weighted
              Average
              Exercise Price
            
            Weighted
              Average
              Remaining
              Contractual
              Life (Years)
            
            Aggregate
              Intrinsic Value(1)Options
                outstanding at January 1, 2007
            
            
            6,216,942
            
            $
            1.44Granted
            
            
            600,000
            
            
            0.80Exercised
            
            
            (16,829
            )
            
            0.30Cancelled
            
            
            (473,011
            )
            
            2.10Options
                outstanding at December 31, 2007
            
            
            6,327,102
            
            
            1.33Granted
            
            
            3,430,341
            
            
            1.03Exercised
            
            
            -
            
            
            -Cancelled
            
            
            (2,801,867
            )
            
            1.26Options
                outstanding at September 30, 2008
            
            
            6,955,576
            
            $
            1.21
            
            
            1.9
            
            $
            0Options
                exercisable at September 30, 2008
            
            
            6,955,576
            
            $
            1.21
            
            
            1.9
            
            $
            0




The
      weighted average fair value of options granted was $0.03 and $0.85 during the
      nine months ended September 30, 2008 and 2007, respectively.





The
      total
      intrinsic value of stock options/warrants exercised during the nine months
      ended
      September 30, 2007 was $24,402. No options/warrants were exercised during the
      nine months ended September 30, 2008. No cash was received as the
      options/warrants were exercised in a cashless exercise. The Company did not
      recognize any tax benefit in connection with these exercises.





The
      following table summarizes information about options/warrants outstanding and
      exercisable by price range as of September 30, 2008:


Options Outstanding
              
              Options ExercisableRange of Exercise
                Prices
              
              Number
                  of Shares Subject to
                Outstanding
                  Options
              
              Weighted
                Average
                Remaining
                Contractual
                Life in Years
              
              Weighted
                Average
                Exercise
                Price
              
              Number
                  of Shares Subject to
                Exercisable
                  Options
              
              Weighted
                Average
                Exercise
                Price$         .30
                  - 1.50
              
              
              5,517,422
              
              
              2.2
              
              $
              0.94
              
              
              5,517,422
              
              $
              0.941.60
                  - 3.40
              
              
              1,438,154
              
              
              0.7
              
              
              2.24
              
              
              1,438,154
              
              
              2.24$        
                  .30 - 3.40
              
              
              6,955,576
              
              
              1.9
              
              $
              1.21
              
              
              6,955,576
              
              $
              1.21





13





**AVP,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**




**5.
      COMMITMENTS AND CONTINGENCIES**




**Operating
      Lease**




The
      Company leases its corporate office facilities under a non-cancellable operating
      lease expiring in March 2010. The lease contains a renewal option for an
      additional five-year term. In addition, the lease provides for rental
      escalations at defined intervals during the lease term. Rent expense is
      recognized on the straight-line method over the term of the lease. The
      difference between rent expense recognized and rent payable under the rental
      escalation clauses is reflected in accrued expenses.




The
      Company also subleases approximately 4,500 square feet of warehouse space
      pursuant to a sublease that expires on February 28, 2009. The space is used
      for
      storing tournament equipment and the Company’s trucks.




The
      future minimum rental payments under the non-cancellable operating leases are
      as
      follows:





Years
                Ending December 31,2008
            
            $
            95,5002009
            
            
            362,4002010
            
            
            90,000Total
            
            $
            547,900




Rent
      charged to operations was $108,939 and $103,133 for the three months ended
      September 30, 2008 and 2007, respectively. Rent expense was $306,522 and
      $285,309 for the nine months ended September 30, 2008 and 2007,
      respectively.




**Officer
      Indemnification**




Under
      its
      organizational documents, AVP’s directors are indemnified against certain
      liabilities arising out of the performance of their duties to AVP. AVP also
      has
      an insurance policy for its directors and officers to insure them against
      liabilities arising from the performance of their duties required by their
      positions with AVP. AVP’s maximum exposure under these arrangements is unknown
      as this would involve future claims that may be made against AVP that have
      not
      yet occurred. However, based on experience, AVP expects the risk of loss to
      be
      remote.




**Employment
      Agreements**




AVP
      has
      entered into “at will” employment agreements with two officers. In addition to
      base salary, the employment agreements provide for performance bonuses. The
      performance bonuses will be 50% of the respective officer’s base salary. The
      performance bonuses awarded, if any, will be based upon achieving certain
      milestones and targets as determined by the Board of Directors’ Compensation
      Committee. The agreements also provides for an additional cash performance
      bonus ranging from $25,000 to $125,000 in the event the Company achieves
      positive EBITDA. In the event the officers are terminated by AVP, their
      authority is diminished, or AVP breaches the employment agreements, the officers
      will continue to receive their annual base salary and their Annual Performance
      Bonus and benefits for periods of six months to two years following the
      termination, depending on the circumstances of the termination.




**Legal
      proceedings**




A
      complaint was filed on June 6, 2007 in the United States Circuit Court of Cook
      County, Illinois, in which the plaintiff seeks damages for personal injuries
      relating to a fall the plaintiff suffered during a volleyball tournament taking
      place at the Hard Rock Hotel & Casino in Las Vegas, Nevada on September 7,
      2005. Discovery is still being completed and therefore management is unable
      to
      determine or predict the outcome of this claim or the impact on the Company’s
      financial condition or results of operations. Accordingly, the Company has
      not
      recorded a provision for this matter in its consolidated financial statements.





14





**AVP,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**




**5.
      COMMITMENTS AND CONTINGENCIES (CONTINUED)**




**Service
      Contingency**




On
      March
      31, 2008, the Company accrued additional costs to accommodate a vendor who
      requested additional consideration for services rendered in 2007. The Company
      is
      not obligated to make such additional payment, but to preserve the relationship
      and receive future services, AVP recorded an accrual of approximately $0.2
      million for such service contingency. As of September 30, 2008, the parties
      have
      not yet reached an agreement.




On
      November 4, 2008, the Company entered into a settlement agreement with the
      vendor, whereby the Company issued 400,000 shares of common stock, a fully
      vested warrant with a 5-year term to purchase 250,000 shares of common stock
      at
      a purchase price of $1.25 per share, and a fully vested warrant with a 5-year
      term to purchase 250,000 shares of common stock at a purchase price of $0.75
      per
      share. The fair value of the consideration granted on the date of execution
      is
      approximately $0.1 million less than the value estimated as of September 30,
      2008. The reduction in fair value will be reflected on next quarter’s
      Consolidated Statement of Operations as a reduction in sales and marketing
      expense.




**6.
      CAPITAL TRANSACTIONS**




For
      the
      nine months ended September 30, 2007, 22,396 shares of Series "B" preferred
      stock were converted into 624,176 shares of AVP’s common stock pursuant to
      notice of conversion from an individual investor.




During
      the nine months ended September 30, 2007, AVP issued 13,945 shares of common
      stock pursuant to the cashless exercise of options for 16,829 shares of common
      stock. The exercise price of the options was $0.30 per share.




During
      the nine months ended September 30, 2007, AVP issued 100,137 shares of common
      stock pursuant to the cashless exercise of options for 100,977 shares of common
      stock. The exercise price of the options was $0.01 per share.




Pursuant
      to the April 12, 2006 Title Sponsorship Agreement with Crocs, AVP agreed to
      issue warrants to purchase up to 1,000,000 shares of common stock of AVP as
      follows: a warrant for 400,000 shares on April 12, 2006 and for 200,000 shares
      for each of the years 2008 through 2010. However, no warrants would be issued
      in
      2008, 2009, or 2010 if Crocs relinquished the “Title” sponsorship and reduced
      its sponsorship to a “Platinum” level sponsorship following the 2007 season, or
      if the agreement was not extended for two more years, or if the agreement was
      terminated for breach prior to the final event of the 2008 AVP Tour season.
      Crocs had the option to reduce its sponsorship level until July 15, 2007. Crocs
      did not exercise its option to reduce its sponsorship level for 2008; therefore,
      Crocs was granted a warrant to purchase additional 200,000 shares. The warrants
      were valued using the Black-Scholes model and recorded through the Consolidated
      Statement of Operations as contra-revenue. The warrants were recorded at a
      value
      of $174,600. The assumptions utilized in computing the fair value of the
      warrants were as follows: expected life of 4.75 years, estimated volatility
      of
      79.32% and a risk free interest rate of 4.95%.




On
      August
      12, 2007, Crocs extended the term of its Title Sponsorship Agreement through
      2012, which triggered a warrant grant for 400,000 shares for years 2009 and
      2010
      pursuant to the April 12, 2006 agreement. The warrants were valued at $333,200
      using the Black-Scholes model and recorded through the Consolidated Statement
      of
      Operations as contra-revenue. The assumptions utilized in computing the fair
      value of the warrants were as follows: expected life of 4.67 years, estimated
      volatility of 78.15% and a risk free interest rate of 4.57%.





15





**AVP,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**




**6.
      CAPITAL TRANSACTIONS (CONTINUED)**




For
      the
      nine months ended September 30, 2008, 2,208 shares of Series "B" preferred
      stock
      were converted into 61,537 shares of AVP’s common stock pursuant to notice of
      conversion from an individual investor.




During
      the nine months ended September 30, 2008, AVP issued 49,865 shares of common
      stock pursuant to the cashless exercise of options for 50,488 shares of common
      stock. The exercise price of the options was $0.01 per share.




During
      the nine months ended September 30, 2008, AVP issued 485,635 shares of common
      stock pursuant to the cashless exercise of options for 643,205 shares of common
      stock. The exercise price of the options was $0.20 per share.




During
      the nine months ended September 30, 2008, AVP issued 2,493 shares of common
      stock pursuant to the cashless exercise of options for 201,953 shares of common
      stock. The exercise price of the options was $0.80 per share.




Pursuant
      to a Subscription Agreement dated September 8, 2008, AVP sold 50,000 shares
      of
      authorized but unissued Series B Convertible Preferred Stock, par value $.001
      per share, for a total price of $696,750. The Series B Preferred Stock is
      convertible into an aggregate of 1,393,500 shares of the Company’s common stock.
      Costs incurred in connection to the transaction were recorded against the
      proceeds received.




The
      related Registration Rights Agreement required AVP to use its reasonable best
      efforts to file a registration statement once a request from the investors
      has
      been received, and once the registration statement is effective, the Company
      has
      an obligation to use its reasonable best efforts to keep the registration
      statement effective.




On
      September 19, 2008, AVP completed the sale of 5,606,500 restricted shares of
      the
      Company’s common stock, $0.001 par value, for an aggregate purchase price of
      $2,803,250 and a per share purchase price of $0.50, pursuant to a Securities
      Purchase Agreement dated September 8, 2008. As part of the transaction, the
      Company also entered into a loan agreement with the investor pursuant to which
      the investor agreed to loan $2,803,250 to AVP, against two convertible notes.
      The face amount of the notes is representative of the relative number of shares
      acquirable upon conversion of the notes. Unless the notes are earlier repaid
      in
      accordance with the terms and conditions of the loan agreement, the outstanding
      principal balance of the notes will be due and payable in shares of common
      stock
      on September 1, 2013. The loan does not bear interest unless there is a change
      in control or an event of default, such as payment default, bankruptcy, or
      breach of representation. Upon a change of control of AVP or an event of
      default, the loan bears 18% interest, compounded annually, and effective from
      when the loan was initially issued. Upon an event of default, the investors
      have
      the right to convert the notes payable into (1) a cash payment equal to the
      principal and any accrued but unpaid interest, and (2) receipt of the shares
      held in escrow. Had it been a change of control or an event of default as of
      September 30, 2008, the Company would have to pay $2,828,586, which represents
      the loan amount plus accrued interest.




Investor
      will have full voting rights associated with the shares of common stock once
      the
      shares are issued in the name of the investor, but the investor may not transfer
      the shares until they are delivered at the time that investor forgives the
      Company’s obligations under the loan agreement and the note, which will not
      occur later than September 1, 2013.





16




**AVP,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**




**6.
      CAPITAL TRANSACTIONS (CONTINUED)**




As
      a
      result of the shares sold in September 2008, the conversion rate of the
      outstanding Series B Convertible Preferred Stock increased from 27.87 to 32.43
      in accordance with the anti-dilution provision from the private placement of
      units of Series B Convertible Preferred Stock closed in February 2005 (“February
      2005 Financing”). Each unit sold in the February 2005 Financing consisted of 4
      shares of AVP's Series B Preferred Stock (each share of Preferred Stock was
      originally convertible into 24.3 shares of common stock), and a five-year
      warrant to purchase up to 24.3 shares of the AVP's common stock. In accordance
      with the February 2005 Financing anti-dilution provisions, the number of shares
      of common stock for which the warrants were exercisable was adjusted. The
      warrant agreement entitles Series B Preferred Stockholders to purchase 167,961
      additional shares of common stock—for accounting purposes, the additional
      warrants were treated as a dividend. All outstanding shares of Series B
      Convertible Preferred Stock from the February 2005 Financing are now convertible
      into 32.43 shares of common stock.




In
      addition, as a result of the new shares sold in September 2008, AVP issued
      to
      Maxim, the placement agent for the February 2005 financing, a warrant to
      purchase 285,241 additional shares of common stock in accordance with its
      anti-dilution provision. The warrants were recorded through the Consolidated
      Statement of Operations as an administrative expense with a value of $42,719,
      which was determined using the Black-Scholes valuation model.





17




**AVP,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**







**7.
      SEGMENT REPORTING**




The
      Company follows the provisions of SFAS No. 131, "Disclosures about Segments
      of
      an Enterprise and Related Information." This statement establishes standards
      for
      the reporting of information about operating segments in annual and interim
      financial statements. Operating segments are defined as components of an
      enterprise for which separate financial information is available that is
      evaluated regularly by the chief operating decision makers in deciding how
      to
      allocate resources and in assessing performance.




Our
      chief
      operating decision makers (i.e., our chief executive officer and his direct
      reports) review financial information presented on a consolidated basis,
      accompanied by disaggregated information about revenues by geographic region
      for
      purposes of allocating resources and evaluating financial performance. There
      are
      no segment managers who are held accountable by our chief operating decision
      makers, or anyone else, for operations, operating results and planning for
      levels or components below the consolidated unit level. Accordingly, in the
      opinion of management, the Company considers itself to be in a single reporting
      segment and operating unit structure and all revenues from its services are
      earned in this segment.




The
      Company has two geographic regions for its operations, the United States and
      Australia. Revenues are attributed to geographic areas based on the locations
      where the events take place. The following table depicts the geographic
      information:





**Three Months Ended**
              **September 30,**
            
            **Nine Months Ended**
              **September 30,**Revenues:
            
            
            **2008**
            
            
            **2007**
            
            
            **2008**
            
            
            **2007**United
                States
            
            $
            14,039,286
            
            
            12,806,438
            
            $
            21,982,890
            
            $
            23,823,839Australia
            
            
            -
            
            
            -
            
            
            875,520
            
            
            -Total
                Revenue
            
            $
            14,039,286
            
            
            12,806,438
            
            $
            22,858,410
            
            $
            23,823,839





**September 30,**Long-lived assets:
            
            
            **2008**
            
            
            **2007**United States
            
            $
            384,232
            
            $
            413,301Australia
            
            
            -
            
            
            -Total long-lived assets
            
            $
            384,232
            
            $
            413,301





18


**AVP,
        INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  **8.
        RECENTLY ISSUED ACCOUNTING STANDARDS**
  In
        September 2006, the FASB issued SFAS 157, “Fair Value Measures.” SFAS 157
        defines fair value, establishes a framework for measuring fair value and
        enhances disclosures about fair value measures required under other accounting
        pronouncements, but does not change existing guidance as to whether or not
        an
        instrument is carried at fair value. SFAS No. 157 is effective for fiscal
        years
        beginning after November 15, 2007. In February 2008, the FASB issued FSP
        157-2,
“Effective Date of FASB Statement No. 157” which permits a one-year deferral for
        the implementation of SFAS 157 with regard to non-financial assets and
        liabilities that are not recognized or disclosed at fair value in the financial
        statements on a recurring basis (at least annually). The Company elected
        to
        defer adoption of SFAS 157 for such items and it does not currently anticipate
        that full adoption in 2009 will materially impact the Company’s consolidated
        results of operations or financial condition.
  On
        September 29, 2006, the FASB issued SFAS 158, “Employers' Accounting for Defined
        Benefit Pension and Other Postretirement Plans – An Amendment of SFAS No. 87,
        88, 106, and 132R.” This new standard requires an employer to: (a) recognize in
        its statement of financial position an asset for a plan’s overfunded status or a
        liability for a plan’s underfunded status; (b) measure a plan’s assets and its
        obligations that determine its funded status as of the end of the employer’s
        fiscal year (with limited exceptions); and (c) recognize changes in the funded
        status of a defined benefit postretirement plan in the year in which the
        changes
        occur. Those changes will be reported in comprehensive income of a business
        entity and in changes in net assets of a not-for-profit organization. SFAS
        158
        applies to plan sponsors that are public and private companies and
        nongovernmental not-for-profit organizations. The requirement to recognize
        the
        funded status of a benefit plan and the disclosure requirements are effective
        for the fiscal year ended after December 15, 2006, for entities with publicly
        traded equity securities, and at the end of the fiscal year ended after June
        15,
        2007, for all other entities. The requirement to measure plan assets and
        benefit
        obligations as of the date of the employer’s fiscal yearend statement of
        financial position is effective for fiscal years ending after December 15,
        2008.
        The adoption of this accounting pronouncement is not expected to have a material
        effect on the Company’s consolidated financial position, results of operations
        or cash flows.
  In
        February 2007, the FASB issued SFAS 159, "The Fair Value Option for Financial
        Assets and Financial Liabilities." SFAS 159 permits entities to choose to
        measure many financial instruments and certain other items at fair value
        that
        are not currently required to be measured at fair value. Unrealized gains
        and
        losses on items for which the fair value option has been elected are reported
        in
        earnings. SFAS 159 does not affect any existing accounting literature that
        requires certain assets and liabilities to be carried at fair value. SFAS
        159 is
        effective for fiscal years beginning after November 15, 2007. The Company
        currently does not believe SFAS 159 will have a material impact on its
        consolidated financial position, results of operations or cash flows, as
        the
        Company has elected not to apply the fair value option for any of its eligible
        financial instruments and other items.




19





**AVP,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**




**8.
      RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)**




In
      December 2007, the FASB issued SFAS 141R, “Business Combinations-Revised.” This
      new standard replaces SFAS 141 “Business Combinations.” SFAS 141R requires that
      the acquisition method of accounting, instead of the purchase method, be applied
      to all business combinations and that an “acquirer” be identified in the
      process. The statement requires that fair market value be used to recognize
      assets and assumed liabilities instead of the cost allocation method where
      the
      costs of an acquisition are allocated to individual assets based on their
      estimated fair values. Goodwill would be calculated as the excess purchase
      price
      over the fair value of the assets acquired; however, negative goodwill will
      be
      recognized immediately as a gain instead of being allocated to individual assets
      acquired. Costs of the acquisition will be recognized separately from the
      business combination. The end result is that the statement improves the
      comparability, relevance and completeness of assets acquired and liabilities
      assumed in a business combination. SFAS 141R is effective for business
      combinations which occur in fiscal years beginning on or after December 15,
      2008. The adoption of SFAS 141R will impact the accounting for business
      combinations completed, if any, by the Company on or after January 1,
      2009.




In
      December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in
      Consolidated Financial Statements-an amendment of ARB No. 51.” This new standard
      requires that ownership interests held by parties other than the parent be
      presented separately within equity in the statement of financial position;
      the
      amount of consolidated net income be clearly identified and presented on the
      statements of income; all transactions resulting in a change of ownership
      interest whereby the parent retains control to be accounted for as equity
      transactions; and when controlling interest is not retained by the parent,
      any
      retained equity investment will be valued at fair market value with a gain
      or
      loss being recognized on the transaction. SFAS 160 is effective for business
      combinations which occur in fiscal years beginning on or after December 15,
      2008. The Company does not expect this statement to have an impact on its
      consolidated results of operations or financial condition.




In
      December 2007, the SEC issued SAB 110, “Certain Assumptions Used in Valuation
      Methods - Expected Term.” According to SAB 110, under certain circumstances the
      SEC staff will continue to accept beyond December 31, 2007 the use of the
      simplified method in developing an estimate of the expected terms of share
      options that possess certain characteristics in accordance with SFAS 123R beyond
      December 31, 2007. The Company adopted SAB 110 effective January 1, 2008 and
      will continue to use the simplified method in developing the expected term
      used
      for our valuation of stock-based compensation.




In
      March
      2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and
      Hedging Activities - an Amendment of SFAS 133.” This new standard enhances
      required disclosures regarding derivatives and hedging activities to provide
      greater transparency about (i) how and why an entity uses derivative
      instruments, (ii) how derivative instruments and related hedge items are
      accounted for under SFAS 133 and its related interpretations, and
      (iii) how derivative instruments and related hedged items affect an
      entity's financial position, results of operations and cash flows. To meet
      those
      objectives, SFAS 161 requires qualitative disclosures about objectives and
      strategies for using derivatives, quantitative disclosures about fair value
      amounts of gains and losses on derivative instruments and disclosures about
      credit-risk-related contingent features in derivative agreements. SFAS 161
      is effective for fiscal years beginning after November 15, 2008. The Company
      does not expect this statement to have an impact on its consolidated results
      of
      operations or financial condition.





20




**AVP,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**




**8.
      RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)**




In
      May
      2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting
      Principles.” This standard is intended to improve financial reporting by
      identifying a consistent framework, or hierarchy, for selecting accounting
      principles to be used in preparing financial statements that are presented
      in
      conformity with U.S. GAAP for nongovernmental entities. SFAS 162 is effective
      for fiscal years beginning after December 15, 2008. The Company does not
      expect this statement to have a material impact on its overall consolidated
      results of operations and financial position.




In
      May
      2008, the FASB issued SFAS 163, “Accounting for Financial Guarantee Insurance
      Contracts - an interpretation of SFAS 60.” SFAS 163 clarifies SFAS 60,
“Accounting and Reporting by Insurance Enterprises,” by requiring expanded
      disclosures about financial guarantee insurance contracts. Additionally, it
      requires that an insurance enterprise recognize a claim liability prior to
      an
      event of default (insured event), when there is evidence that credit
      deterioration has occurred in an insured financial obligation. SFAS 163 is
      effective for financial statements issued for fiscal years beginning after
      December 15, 2008, and all interim periods within those fiscal years, except
      for
      some disclosures about the insurance enterprise’s risk-management activities,
      which are effective the first period (including interim periods) beginning
      after
      May 23, 2008. Except for those disclosures, earlier application is not
      permitted. SFAS 163 is not expected to have a material impact on our
      consolidated financial statements.




In
      October 2008, the FASB issued FASB Staff Position FAS 157-3, “Determining the
      Fair Value of a Financial Asset When the Market for That Asset Is Not Active.”
FSP 157-3 clarifies the application of SFAS No. 157 in a market that is not
      active and provides an example to illustrate key considerations in determining
      the fair value of a financial asset when the market for that financial asset
      is
      not active. FSP 157-3 is effective immediately, and includes prior periods
      for
      which financial statements have not been issued. The Company does not expect
      this statement to have an impact on its consolidated results of operations
      or
      financial condition.




21




**ITEM
      2. MANAGEMENT'S DISCUSSION** **AND
      ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**





**AVP's
      Business**




We
        own
        and operate professional beach volleyball tournaments in the United States.
        The
        AVP tour is the sole nationally recognized U.S. professional beach volleyball
        tour. Every top U.S. men’s and women’s beach volleyball professional, including
        the women’s and men’s gold medalists in the 2008 Olympic Games and the reigning
        world champions, competed on the AVP tour in 2008. We have more than 200
        of the
        top professional players under exclusive contracts, as well as a growing
        base of
        spectators that we believe represent an attractive audience for national,
        regional, and local sponsors. Our business includes establishing and managing
        tournaments; sponsorship/advertising sales and sales of broadcast, licensing,
        and trademark rights; sales of tickets, food, beverage, and merchandise at
        the
        tournaments; contracting with players in the tour; and associated activities.
  AVP's
        beach volleyball tournament season customarily commences in early April and
        continues until late September or early October. For 2008, we scheduled 18
        men’s
        and 18 women’s events in Miami, FL; Dallas, TX; Huntington Beach, CA;
        Charleston, SC; Louisville, KY; Atlanta, GA; Hermosa Beach, CA; Belmar, NJ;
        Boulder, CO; Chicago, IL; Brooklyn, NY; Long Beach, CA; San Diego, CA;
        Cincinnati, OH; Santa Barbara, CA; San Francisco, CA; Manhattan Beach, CA;
        and
        Glendale, AZ. Fourteen of the 18 cities are the same as last year. Eight
        events
        were held in the second quarter and ten events were held in the third
        quarter.
  We
        partnered with Anschutz Entertainment Group (AEG) to produce the first-ever
        indoor beach volleyball national tour, the Hot Winter Nights Tour, from January
        10 to February 23, 2008. The 2008 AVP Hot Winter Nights Tour brought the
        excitement and experience of an AVP beach volleyball tournament indoors,
        with
        each stop consisting of a three hour competition and 'beach festival.' The
        2008
        AVP Hot Winter Nights Tour schedule included 19 stops in many snowbound cities
        in the Midwest and Northeast United States. We held indoor beach volleyball
        tournaments in Oklahoma City, OK; St. Louis, MO; Kansas City, MO; Milwaukee,
        WI;
        Madison, WI; LaCrosse, WI; Minneapolis, MN; Columbus, OH; Albany, NY; Trenton,
        NJ; Norfolk, VA; Charlottesville, VA; Omaha, NE; Rosemont, IL; Bloomington,
        IL;
        Spokane, WA; Everett, WA; Portland, OR; and Las Vegas NV.
  We
        entered a five-year agreement with the Australian Volleyball Federation (AVF)
        to
        promote the national beach volleyball tour in Australia. The 2008 AVF tour
        schedule included five events in prominent beach locations throughout Australia:
        Gold Coast in Surfers Paradise, Queensland; Manly Beach in Sydney, New South
        Wales; Port Macquarie, New South Wales; Perth, Scarborough Beach, Western
        Australia; and Adelaide in Glenelg, South Australia. We
        do
        have not have any additional events currently scheduled in Australia.


22




**Results
      of Operations for the Three Months Ended September 30, 2008 and
      2007**




**Revenue**




**Summary
      Revenue**





Three Months Ended September 30,
            
            Percentage**2008**
            
            **2007**
            
            IncreaseSponsorship/advertising
            
            $
            11,185,387
            
            $
            10,228,458
            
            
            9
            %Activation
                Fees
            
            
            877,138
            
            
            862,629
            
            
            2
            %Local
                Revenue
            
            
            1,324,290
            
            
            1,263,776
            
            
            5
            %Miscellaneous
                Revenue
            
            
            652,471
            
            
            451,575
            
            
            44
            %Total
                Revenue
            
            $
            14,039,286
            
            $
            12,806,438
            
            
            10
            %




AVP's
      beach volleyball tournament season customarily commences in early April and
      continues until late September or early October. Thus, AVP’s business is
      primarily seasonal; substantially all revenue is recorded in the second and
      third quarters. The majority of revenues are derived from sponsorship and
      advertising contracts with national sponsors of the AVP Tour. AVP recognizes
      national sponsorship/advertising revenue and activation fees during the tour,
      as
      the events occur and collection is reasonably assured, in the proportion that
      prize money for an event bears to total prize money for the season. Local
      sponsorship/advertising revenue, local promoter fees and local revenue are
      recognized as the applicable events occur.




Sponsorship/advertising
      revenue for the three months ended September 30, 2008 increased $1.0 million
      as
      compared to the three months ended September 30, 2007, due to the Company’s
      recognizing an increased percentage of annual contracted national
      sponsorship/advertising revenue of the AVP Tour, as ten events took place in
      the
      three months ended September 30, 2008 (out of 18 events), compared to nine
      events taking place in the three months ended September 30, 2007 (out of 18
      events). For the three months ended September 30, 2008 and 2007, the average
      sponsorship/advertising revenue per event was $1.1 million.




The
      2%
      increase in activation fees was also due to ten events taking place in the
      three
      months ended September 30, 2008 compared to nine events taking place in the
      three months ended September 30, 2007. The average activation revenue per event
      for the three months ended September 30, 2008 and 2007 were approximately
      $88,000 and $96,000, respectively.




Local
      revenue increased 5%, mainly due to an increase in the number promoter
      agreements. For the three months ended September 30, 2008, we entered seven
      promoter agreements, compared to five promoter agreements for the three months
      ended September 30, 2007. Three of the seven agreements were structured as
      a
“promoter fee” model, pursuant to which the event promoter paid AVP a promoter
      fee in exchange for the right to exploit local revenue, including ticket sales,
      local sponsorships, parking, and concessions. The other agreements were
      restructured as a “profit-share” model, pursuant to which the event promoter is
      responsible for certain specified event expenses (“approved event budget”)
      including the stadium, sand, various operational costs (e.g., phone lines,
      certain event personnel, and security), event permits, and/or marketing costs,
      and the parties share local revenue on a 50-50 basis after recoupment of the
      approved event budget. Two of the five promoter agreements entered during the
      three months ended September 30, 2007 were structured as a “promoter fee” model,
      and the other three were restructured as a “profit-share” model.




Miscellaneous
      revenue for the three months ended September 30, 2008 increased 44% primarily
      due to an increase in revenue generated from the marketing/interactive service
      program—online services which provide scores & stats, video content, fan
      forums, and player highlights, and AVPNext, our grass roots program.




23




**Event
      Costs**





**Summary
                Costs**
            
            **%
                Revenue**Three
                Months Ended
              September
                30,
            
            Three
                Months Ended
              September
                30,
            
            **Decrease** **as**
                **%** **of** **Revenue****2008**
            
            **2007**
            
            **2008**
            
            **2007**
            
            **2008** **vs.** **2007**Event
                Costs
            
            $
            11,524,174
            
            $
            10,761,071
            
            
            82
            %
            
            84
            %
            
            (2
            )%




AVP
      Tour
      event costs primarily include the direct costs of producing an event, costs
      related to the production and the airing of events on network television, and
      the cost of servicing our sponsors. AVP Tour event costs are recognized on
      an
      event-by-event basis, and event costs billed and/or paid prior to their
      respective events are recorded as prepaid event costs and expensed at the time
      the event occurs.




The
      increase of $0.8 million in total event costs was attributable to one more
      event
      taking place during the three months ended September 30, 2008 (ten events
      compared to nine events taking place during the three months ended September
      30,
      2007). In addition, event costs also increased due to increases in prize money
      and TV production costs. For the three months ended September 30, 2008 and
      2007,
      the average event cost was $1.2 million.





**Gross
      Profit**





Three Months Ended September 30,**2008**
            
            **2007**Revenue
            
            $
            14,039,286
            
            $
            12,806,438Event
                Costs
            
            
            11,524,174
            
            
            10,761,071Gross
                Profit
            
            $
            2,515,112
            
            $
            2,045,367Gross
                Profit %
            
            
            18
            %
            
            16
            %




The
      increase in gross profit margin for the three months ended September 30, 2008
      is
      primarily due to the increase in sponsorship/advertising revenue and new revenue
      generated from marketing/interactive services.




Our
      quarterly results of operations and gross margins vary depending on the number
      of events scheduled each quarter, the number of agreements with local promoters,
      and the mode of television distribution of our events.




**Operating
      Expenses**





**Summary
                Costs**
            
            **%
                Revenue**Three
                Months Ended
              September
                30,
            
            Three
                Months Ended
              September
                30,
            
            **Decrease** **as**
                **%** **of** **Revenue****2008**
            
            **2007**
            
            **2008**
            
            **2007**
            
            **2008** **vs.** **2007**Administrative
            
            $
            1,636,953
            
            $
            1,919,833
            
            
            12
            %
            
            15
            %
            
            (3
            )%Sales
                and Marketing
            
            
            868,221
            
            
            919,872
            
            
            6
            %
            
            7
            %
            
            (1
            )%Total
                Costs
            
            $
            2,505,174
            
            $
            2,839,705
            
            
            18
            %
            
            22
            %
            
            (4
            )%




The
      15%
      or $0.3 million decrease in administrative costs was due primarily to the fact
      that no transaction costs were incurred during the three months ended September
      30, 2008; compared to $0.6 million in transaction costs incurred during the
      three months ended September 30, 2007, which were related to the plan of merger
      with Shamrock Holdings, Inc. The decrease was partially offset by an increase
      in
      stock-based compensation expenses as a result of employee options valued under
      SFAS 123R for stock options granted to employees in 2007 and during the nine
      months ended September 30, 2008 and an increase in public company
      expenses.




24




The
      6% or
      $0.1 million decrease in sales and marketing costs mainly reflects a decrease
      in
      salary and website expenses. The decrease was partially offset by an increase
      in
      travel cost incurred in connection with the 2008 Summer
      Olympics.


**Operating Income (Loss) and Net**
                  **Income
                    (Loss)**
                
                **%
                    Revenue**Three****Months****Ended****September****30,
                
                Three****Months****Ended****September****30,2008
                
                2007
                
                2008
                
                2007Operating
                    Income (Loss)
                
                $
                9,938
                
                $
                (794,338
                )
                
                -
                %
                
                (6
                )%Net
                    Income (Loss)
                
                $
                928
                
                $
                (758,945
                )
                
                -
                %
                
                (6
                )%




The
      Company’s net income of approximately $1 thousand for the three months ended
      September 30, 2008 compared to net loss of $0.8 million for the three months
      ended September 30, 2007 primarily reflects an increase in
      sponsorship/advertising revenue, an increase in marketing/interactive service
      revenue, an increase in prize money, and a decrease in transaction costs which
      was partially offset by an increase in stock-based compensation expenses.




**Results
      of Operations for the Nine Months Ended September 30, 2008 and
      2007**




**Revenue**


**Summary
                  Revenue**
              
              PercentageNine****Months****Ended****September****30,
              
              Increase**2008**
              
              **2007**
              
              (Decrease)Sponsorship/advertising
              
              $
              18,253,405
              
              $
              19,219,248
              
              
              (5
              )%Activation
                  Fees
              
              
              1,396,484
              
              
              1,569,373
              
              
              (11
              )%Local
                  Revenue
              
              
              1,873,076
              
              
              1,761,038
              
              
              6
              %Miscellaneous
                  Revenue
              
              
              1,335,445
              
              
              1,274,180
              
              
              5
              %Total
                  Revenue
              
              $
              22,858,410
              
              $
              23,823,839
              
              
              (4
              )%




Sponsorship/advertising
      revenue for the nine months ended September 30, 2008 decreased $1.0 million
      as
      compared to the nine months ended September 30, 2007 mainly due to a decrease
      in
      annual contracted sponsorship/advertising revenue, which is the result of the
      current weak advertising economy. For the nine months ended September 30, 2008
      and 2007, the average sponsorship/advertising revenue per event was $1.0 million
      and $1.1 million, respectively.




The
      11%
      decrease in activation fees was also due to a decrease in annual gross
      activation revenue as a result of two sponsors from 2007 who utilized AVP’s
      activation services not returning as sponsors in 2008. The average activation
      revenue per event for the nine months ended September 30, 2008 and 2007 was
      approximately $78,000 and $87,000, respectively.




25




Local
      revenue increased 6% mainly due to an increase in the number of promoter
      agreements. For the nine months ended September 30, 2008, we entered 14 promoter
      agreements compared to ten promoter agreements for the nine months ended
      September 30, 2007. Five of the 14 agreements were structured as a “promoter
      fee” model, pursuant to which the event promoter paid AVP a promoter fee in
      exchange for the right to exploit local revenue, including ticket sales, local
      sponsorships, parking, and concessions. The other agreements were restructured
      as a “profit-share” model, pursuant to which the event promoter is responsible
      for certain specified event expenses (“approved event budget”) including the
      stadium, sand, various operational costs (e.g., phone lines, certain event
      personnel, and security), event permits, and/or marketing costs, and the parties
      share local revenue on a 50-50 basis after recoupment of the approved event
      budget. However, two of the ten promoter agreements entered during the nine
      months ended September 30, 2007 were structured as a “promoter fee” model, and
      the other agreements were restructured as a “profit-share” model.




Miscellaneous
      revenue for the nine months ended September 30, 2008 increased 5% primarily
      due
      to an increase in AVPNext revenue. The increase in miscellaneous revenue is
      also
      due to an increase in marketing/interactive service revenue and trademark
      licensing.




**Event
      Costs**





**Summary
                Costs**
            
            **%
                Revenue**Nine****Months****Ended
              September
                30,
            
            Nine****Months****Ended
              September
                30,
            
            **Increase as**
                **% of Revenue****2008**
            
            **2007**
            
            **2008**
            
            **2007**
            
            **2008 vs. 2007**Event
                Costs
            
            $
            18,285,360
            
            $
            17,998,538
            
            
            80
            %
            
            76
            %
            
            4
            %




Event
      costs primarily include the direct costs of producing an event, costs related
      to
      the production and the airing of events on network television, and the cost
      of
      servicing our sponsors. Event costs are recognized on an event-by-event basis,
      and event costs billed and/or paid prior to their respective events are recorded
      as prepaid event costs and expensed at the time the event occurs.




The
      increase of $0.3 million in total event costs was mainly attributable to an
      increase in TV production costs. Additional increases in prize money and event
      costs incurred in connection with five outdoor events that took place in
      Australia during the nine months ended September 30, 2008 were offset by the
      decrease in activation costs and total event costs for the summer AVP tour.
      Activation costs decreased as a result of two sponsors from 2007 who did not
      return as sponsors in 2008. The decrease in total event costs for the summer
      AVP
      tour is attributable to the cost savings resulting from fourteen promoter events
      as compared to ten promoter events for the nine months ended September 30,
      2007.
      The event promoters were responsible for certain operational costs of the
      events. In addition, our strategy of scheduling our events in proximate
      geographic areas enables us to achieve operating and cost efficiencies. For
      the
      nine months ended September 30, 2008 and 2007, the average event cost was $1.0
      million.





**Gross
      Profit**





Nine Months Ended September 30,**2008**
            
            **2007**Revenue
            
            $
            22,858,410
            
            $
            23,823,839Event
                Costs
            
            
            18,285,360
            
            
            17,998,538Gross
                Profit
            
            $
            4,573,050
            
            $
            5,825,301Gross
                Profit %
            
            
            20
            %
            
            24
            %




The
      decrease in gross profit margin for the nine months ended September 30, 2008
      is
      primarily due to the decrease in sponsorship/advertising revenue and an increase
      in TV production costs, prize money and the net loss related to our entry into
      the Australian market with the five outdoor Australian events that were held
      during the nine months ended September 30, 2008. For the nine months ended
      September 30, 2007, no Australian event was held.




26




**Operating
      Expenses**





**Summary
                Costs**
            
            **%
                Revenue**
            
            **Increase**Nine****Months****Ended
              September
                30,
            
            Nine****Months****Ended
              September
                30,
            
            **(Decrease) as**
                **% of Revenue****2008**
            
            **2007**
            
            **2008**
            
            **2007**
            
            **2008 vs. 2007**Administrative
            
            $
            4,878,281
            
            $
            5,324,373
            
            
            21
            %
            
            22
            %
            
            (1
            )%Sales
                and Marketing
            
            
            2,939,985
            
            
            2,658,089
            
            
            13
            %
            
            11
            %
            
            2
            %Total
                Costs
            
            $
            7,818,266
            
            $
            7,982,462
            
            
            34
            %
            
            33
            %
            
            1
            %




The
      8%,
      or $0.4 million, decrease in administrative costs was due primarily to the
      fact
      that no transaction costs were incurred during the nine months ended September
      30, 2008; as compared to $1.4 million in transaction costs incurred during
      the
      nine months ended September 30, 2007, which were related to the plan of merger
      with Shamrock Holdings, Inc. Such decrease was offset by an increase in
      stock-based compensation expenses as a result of employee options valued under
      SFAS 123R for stock options granted to employees in 2007 and during the nine
      months ended September 30, 2008, an increase in legal and public company costs
      as a result of scheduling an annual meeting and electing a new Board of
      Directors during the nine months ended September 30, 2008, as well as an
      increase in SEC compliance costs related to the Sarbanes Oxley Act of 2002
      and
      travel related expenses.




The
      11%,
      or $0.3 million, increase in sales and marketing costs mainly reflects an
      increase in website expenses, PR agency fees, and travel cost incurred in
      connection with the 2008 Summer Olympics. The increase in website costs includes
      an estimated payment due to a vendor for previously rendered services recorded
      to preserve the relationship. The increase in PR agency fees, Olympics costs,
      and consulting fees was offset by a decrease in salary, commission expense
      paid
      to external sales agents, and recruiting costs.


**Operating
                  Loss and Net Loss**
              
              **%
                  Revenue**Nine Months Ended September 30,
              
              Nine Months Ended September 30,2008
              
              2007
              
              2008
              
              2007Operating
                  Loss
              
              $
              (3,245,216
              )
              $
              (2,157,161
              )
              
              (14
              )%
              
              (9
              )%Net
                  Loss
              
              $
              (3,240,254
              )
              $
              (1,998,817
              )
              
              (14
              )%
              
              (8
              )%




The
      Company’s net loss of $3.2 million for the nine months ended September 30, 2008
      compared to a loss of $2.0 million for the nine months ended September 30,
      2007
      reflects a decrease in sponsorship/advertising revenue, an increase in TV
      production costs, an increase in stock-based compensation costs, legal costs,
      website expenses and the net loss related to the five outdoor Australian events
      that were held during the nine months ended September 30, 2008.




27




**Liquidity
      and Capital Resources**





**Sources
      of Liquidity**





September
                30,
              2008
            
            December
                31,
              2007
            
            IncreaseCash
                and cash equivalents
            
            $
            3,225,432
            
            $
            2,257,453
            
            $
            967,979Percentage
                of total assets
            
            
            35
            %
            
            43
            %





Nine Months Ended September 30,
            
            Increase2008
            
            2007
            
            (Decrease)Cash
                flows used in operating activities
            
            $
            (2,211,418
            )
            $
            (1,221,994
            )
            $
            989,424Cash
                flows used in investing activities
            
            
            (98,874
            )
            
            (91,430
            )
            
            7,444Cash
                flows provided by financing activities
            
            
            3,272,704
            
            
            -
            
            
            3,272,704




As
      of
      September 30, 2008, our primary source of liquidity is comprised of $3.2 million
      of cash and cash equivalents.  Over the last two years, our primary sources
      of liquidity have included cash on hand at the beginning of the year, cash
      flows
      generated from continuing operations, and cash flows provided by financing
      activities.  We have generated significant cash flows from the issuance of
      our common stock and preferred stock through private placements.




Cash
      flows used in operating activities for the nine months ended September 30,
      2008
      and 2007 were $2.2 million and $1.2 million, respectively. The variance in
      cash
      flows used in operating activities for the nine months ended September 30,
      2008
      is primarily due to an increase in net loss. Working capital, consisting of
      current assets less current liabilities, was $2.9 million at September 30,
      2008
      and $4.0 million at September 30, 2007.




We
      believe that we should likely have sufficient liquidity to continue operations.
      Our business is very sensitive to the timing of sponsorship payments from our
      national and local partners for 2008. Furthermore, we are currently discussing
      the renewal of sponsorship agreements for the 2009 tour season. Although we
      believe we will be able to renew several of these agreements, there is no
      assurance that they will be renewed, or what the terms of any such renewal will
      be, in part due to macroeconomic conditions. In the longer term, if we are
      unable to renew current AVP sponsors and attract new sponsors, the Company
      would
      implement extreme measures to preserve its ability to operate, including cost
      reductions, organizational changes, and reduction in personnel.




At
      September 30, 2008 and 2007, accounts receivable had increased $3.2 million
      and
      $2.9 million as compared to December 31, 2007 and 2006, respectively. At
      September 30, 2008 and 2007, deferred revenues had increased $0.2 million and
      decreased $1.0 million as compared to December 31, 2007 and 2006, respectively.
      Deferred revenues are recorded as AVP collects revenues prior to holding certain
      events.




Capital
      expenditures for the nine months ended September 30, 2008 and 2007 were $0.1
      million and $0.2 million, respectively. During the nine months ended September
      30, 2008, AVP purchased information technology equipment, accounting software,
      and signage equipment. During the nine months ended September 30, 2007, AVP
      purchased information technology equipment, vehicles and rotational signage
      equipment.




Cash
      flows provided from financing activities for the nine months ended September
      30,
      2008 and 2007 were $3.3 million and $0, respectively. During the third quarter
      of 2008, we completed a private placement of preferred stock and
      notes/restricted shares, which generated net proceeds of $3.3 million, net
      of
      offering costs of $0.2 million.




Pursuant
      to a Subscription Agreement dated September 8, 2008, AVP sold 50,000 shares
      of
      authorized but unissued Series B Convertible Preferred Stock, par value $.001
      per share, for a total price of $696,750. The Series B Preferred Stock is
      convertible into an aggregate of 1,393,500 shares of the Company’s common stock.
      Costs incurred in connection to the transaction were netted against the proceeds
      received.




28




On
      September 19, 2008, AVP completed the sale of 5,606,500 restricted shares of
      the
      Company’s common stock, $0.001 par value, for an aggregate purchase price of
      $2,803,250 and a per share purchase price of $0.50, pursuant to a Securities
      Purchase Agreement dated September 8, 2008. As part of the transaction, the
      Company also entered into a loan agreement with the investor pursuant to which
      investor agreed to loan $2,803,250 to AVP, against two convertible notes. The
      face amount of the notes is representative of the relative number of shares
      acquirable upon conversion of the notes. Unless the notes are earlier repaid
      in
      accordance with the terms and conditions of the loan agreement, the outstanding
      principal balance of the notes will be due and payable in shares of common
      stock
      on September 1, 2013. The loan does not bear interest, unless there is a change
      in control or an event of default. Upon a change of control of AVP or an event
      of default, the loan bears 18% interest, compounded annually, and effective
      from
      when the loan was initially issued. Upon an event of default, the investors
      have
      the right to convert the notes payable into (1) a cash payment equal to the
      principal and any accrued but unpaid interest, and (2) receipt of the shares
      held in escrow. Had it been a change of control or an event of default as of
      September 30, 2008, the Company would have to pay $2,828,586, which represents
      the loan amount plus accrued interest.




**Critical
      Accounting Policies**




**Revenue
      and Expense Recognition**




The
      majority of AVP’s revenues are derived from sponsorship and advertising
      contracts with national and local sponsors. AVP recognizes national
      sponsorship/advertising revenue and activation fees during the tour season,
      as
      the events occur and collection is reasonably assured, in the proportion that
      prize money for an event bears to total prize money for the season. Cash
      collected before the related events is recorded as deferred revenue. Event
      costs
      are recognized on an event-by-event basis. Event costs billed and/or paid before
      the related events are recorded as deferred costs and expensed at the time
      the
      event occurs.




AVP
      also
      derives additional revenue from local sponsorships/advertising, promoter fees,
      event ticket sales, concession rights, event merchandising, and licensing.
      Revenues and expenses from the foregoing ancillary activities are recognized
      on
      an event-by-event basis, as the revenues are realized and collection is
      reasonably assured. Licensing revenue is recognized as royalties are earned
      and
      collection is reasonably assured.




**Income
      Taxes**




AVP
      adopted the provisions of FASB Interpretation No. 48 on January 1, 2007. There
      was no material effect on the Company’s financial condition or results of
      operation as a result of implementing FIN 48. AVP accounts for income taxes
      under the asset and liability method. Deferred tax assets and liabilities are
      recognized for the future tax consequences attributable to the differences
      between the financial statement carrying amounts of existing assets and
      liabilities and their respective tax bases. The effect on deferred tax assets
      and liabilities of a change in tax rates is recognized in income in the period
      that includes the enactment date. A valuation allowance is recorded to reduce
      deferred taxes to the amount that is more likely than not to be
      realized.




**Recently
      Issued Accounting Standards**




A
      discussion of recent accounting pronouncements is included in Note 8 of Notes
      to
      Consolidated Financial Statements (Unaudited).




**Off-Balance
      Sheet Arrangements**




We
      have
      no off-balance sheet arrangements as defined in Item 303(c) of Regulation S-B.




29


**ITEM
      4T. CONTROLS AND PROCEDURES**





AVP's
      management has evaluated, with the participation of its principal executive
      and
      financial officers, the effectiveness of AVP's disclosure controls and
      procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the
      period covered by this report. Based on this evaluation, these officers have
      concluded, that, as of September 30, 2008, AVP's disclosure controls and
      procedures are effective to provide reasonable assurance that information
      required to be disclosed by AVP in reports that it files or submits under the
      Exchange Act is accumulated and communicated to AVP's management, including
      its
      principal executive and principal financial officers, as appropriate to allow
      timely decisions regarding required disclosure.





No
      changes in AVP’s internal control over financial reporting occurred during the
      quarter covered by this report that has materially affected or is reasonably
      likely to materially affect our internal control over financial
      reporting.




30




**PART
      II. OTHER INFORMATION**





**ITEM
      6. EXHIBITS**





10.1
      -
      Securities Purchase Agreement dated as of September 8, 2008, by and between
      AVP,
      Inc. and RJSM Partners, LLC. Incorporated by reference from Exhibits to Schedule
      13D of RJSM Partners, LLC, dated September 30, 2008.





10.2
      Subscription Agreement dated as of September 8, 2008, by and between AVP, Inc.
      and RJSM Partners, LLC. Incorporated by reference from Exhibits to Schedule
      13D
      of RJSM Partners, LLC, dated September 30, 2008.





10.3
      Registration Rights Agreement dated as of September 8, 2008, by and between
      AVP,
      Inc. and RJSM Partners, LLC. Incorporated by reference from Exhibits to Schedule
      13D of RJSM Partners, LLC, dated September 30, 2008.





10.4
      Side
      Letter Agreement dated as of September 8, 2008, by and between AVP, Inc. and
      RJSM Partners, LLC. Incorporated by reference from Exhibits to Schedule 13D
      of
      RJSM Partners, LLC, dated September 30, 2008.





10.5
      Loan
      Agreement dated as of September 8, 2008, by and between AVP, Inc. and RJSM
      Partners, LLC. Incorporated by reference from Exhibits to Schedule 13D of RJSM
      Partners, LLC, dated September 30, 2008.





31.1
      -
      Certification of President Pursuant to Section 302 of the Sarbanes-Oxley Act
      of
      2002





31.2
      -
      Certification of Chief Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002





32
      -
      Certification of President and Chief Financial Officer Pursuant to Section
      906
      of the Sarbanes-Oxley Act of 2002




31


**SIGNATURE**





Pursuant
      to the requirements of Section 13 or 15 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 on the 14th day of November,
      2008.





**AVP,
                INC.**(Registrant)By:
            /s/
                Jason HodellJason
                HodellChief
                Operating Officer andChief
                Financial Officer





32




**EXHIBIT
      INDEX**





10.1
      -
      Securities Purchase Agreement dated as of September 8, 2008, by and between
      AVP,
      Inc. and RJSM Partners, LLC. Incorporated by reference from Exhibits to Schedule
      13D of RJSM Partners, LLC, dated September 30, 2008.





10.2
      Subscription Agreement dated as of September 8, 2008, by and between AVP, Inc.
      and RJSM Partners, LLC. Incorporated by reference from Exhibits to Schedule
      13D
      of RJSM Partners, LLC, dated September 30, 2008.





10.3
      Registration Rights Agreement dated as of September 8, 2008, by and between
      AVP,
      Inc. and RJSM Partners, LLC. Incorporated by reference from Exhibits to Schedule
      13D of RJSM Partners, LLC, dated September 30, 2008.





10.4
      Side
      Letter Agreement dated as of September 8, 2008, by and between AVP, Inc. and
      RJSM Partners, LLC. Incorporated by reference from Exhibits to Schedule 13D
      of
      RJSM Partners, LLC, dated September 30, 2008.





10.5
      Loan
      Agreement dated as of September 8, 2008, by and between AVP, Inc. and RJSM
      Partners, LLC. Incorporated by reference from Exhibits to Schedule 13D of RJSM
      Partners, LLC, dated September 30, 2008.





31.1
      -
      Certification of President Pursuant to Section 302 of the Sarbanes-Oxley Act
      of
      2002





31.2
      -
      Certification of Chief Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002





32
      -
      Certification of President and Chief Financial Officer Pursuant to Section
      906
      of the Sarbanes-Oxley Act of 2002




33