U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-KSB/A
                                Amendment No. 2

         (Mark One)

         [X] Annual report under Section 13 or 15(d) of the Securities  Exchange
             Act of 1934 (Fee required)

         For the fiscal year ended December 31, 1997

         [ ]  Transition  report  under  Section  13 or 15(d) of the  Securities
              Exchange Act of 1934 (No fee required)

         For the transition period from __________ to _________

                         Commission file number 1-13048

                          HEALTHY PLANET PRODUCTS, INC.
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                 (Name of Small Business Issuer in Its Charter)

          Delaware                                        94-2601764
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(State or Other Jurisdiction of                        (I.R.S. Employer
Incorporation or Organization)                        Identification No.)

1700 Corporate Circle, Petaluma, California                  94954
----------------------------------------                   ----------
(Address of Principal Executive Offices)                   (Zip Code)

                                 (707) 778-2280
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                (Issuer's Telephone Number, Including Area Code)

         Securities registered under Section 12(b) of the Exchange Act:

    Title of Each Class              Name of Each Exchange on Which Registered
    -------------------              -----------------------------------------

Common Stock, $.01 par value                American Stock Exchange
----------------------------                -----------------------

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

         Securities registered under Section 12(g) of the Exchange Act:

                          Common Stock, $.01 par value
-------------------------------------------------------------------------------
                                (Title of Class)

-------------------------------------------------------------------------------
                                (Title of Class)
<PAGE>

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

Yes    X          No
     -----              -----

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained,  to the best of  registrant's  knowledge,  in definitive  proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

         The Issuer's  revenues for its most recent  fiscal year ended  December
31, 1997 were $4,099,600.

         On March 16, 1998,  the  aggregate  market value of the voting stock of
Healthy Planet Products,  Inc. (consisting of Common Stock, $.01 par value) held
by non-affiliates  of the Registrant was  approximately  $5,848,600 based on the
closing  price for such Common  Stock on said date as  reported by the  American
Stock Exchange.

         In making the foregoing  calculation,  the Company has, for calculation
purposes  only,  (i) included all  presently  outstanding  31,335  shares of its
Series  D  Preferred  Stock  convertible  into  shares  of  Common  Stock  on  a
share-for-share  basis and (ii) assumed that any shareholder  owning 10% or more
of its  Common  Stock (or  Series D  Preferred  Stock) is an  affiliate  and has
excluded such shares in making the calculation.

         On March 16, 1998,  there were 2,282,368  shares of Common Stock,  $.01
par value, issued and outstanding (exclusive of 31,335 shares of voting Series D
Preferred Stock convertible into 31,335 shares of Common Stock).


                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None

<PAGE>


Prefatory Note to Amendment No. 2 on Form 10-KSB/A.

Healthy Planet Products,  Inc. (the "Company") has filed this Amendment No. 2 on
Form 10-KSB/A (i) to add certain  information  in Item I "Business - Manufacture
of Cards" with respect to certain of the Company's suppliers; (ii) to revise and
restate  certain  portions of Item 6  "Management's  Discussion  and Analysis of
Financial  Condition and Results of Operations" (i.e., - '1997 Compared to 1996'
and  'Liquidity  and  Capital  Resources'),  (iii)  to add  to  the  information
contained  in  Item 9  "Directors,  Executive  Offices,  Promoters  and  Control
Persons;  Compliance  with Section  16(a) of the Exchange  Act",  the dates upon
which certain directors first became directors of the Company, and (iv) to amend
the Signature  Page to indicate the full  capacities of each person  signing the
report.



<PAGE>


                                     PART I

Item l.  Business

Incorporation

         Healthy  Planet  Products,   Inc.   (hereinafter  referred  to  as  the
"Registrant"  or the "Company") was originally  organized  under the laws of the
state of California on July 12, 1979 under the name of Carolyn Bean  Publishing,
Ltd. On April 12,  1985,  the  Company  effected a  domiciliary  reincorporation
pursuant to which the Company was reincorporated  under the laws of the State of
Delaware,  and the  California  corporate  entity was merged into a new Delaware
corporation of the same name. On August 2, 1993, the Company changed its name to
Healthy  Planet  Products,  Inc. The Company's  executive  offices and warehouse
facilities are located at 1700 Corporate Circle, Petaluma, California 94954, and
its telephone number is (707) 778-2280, fax number (707) 778-0307.

Special Note Regarding Forward-Looking Statements

         Certain statements in this Form 10-KSB, including information set forth
under Item 6  "Management's  Discussion and Analysis of Financial  Condition and
Results  of  Operations"  constitute  "forward-looking  statements"  within  the
meaning of the Private  Securities  Litigation  Reform Act of 1995 (the  "Act").
Healthy Planet Products, Inc. (the "Company") desires to avail itself of certain
"safe harbor" provisions of the Act and is therefore including this special note
to enable the Company to do so. Forward-looking statements included in this Form
10-KSB or hereafter  included in other publicly  available  documents filed with
the Securities and Exchange  Commission,  reports to the Company's  stockholders
and other  publicly  available  statements  issued or  released  by the  Company
involve known and unknown  risks,  uncertainties,  and other factors which could
cause the  Company's  actual  results,  performance  (financial or operating) or
achievements  to differ  from the  future  results,  performance  (financial  or
operating) achievements expressed or implied by such forward looking statements.
Such  future  results  are based upon  management's  best  estimates  based upon
current  conditions  and the most recent  results of  operations.  These include
purchasing  plans and programs of certain large chain buyers relating to holiday
product,  recently  experienced  decline  in gross  margin  as well as  marginal
increases in general and  administrative  expenses,  the recent adverse trend in
the  general  retail  environment,  general  economic  conditions,   competition
generally  and  specifically  relating to greeting  cards having  environmental,
nature or wildlife themes, the ability of the Company to sustain consumer demand
for the  Company's  principal  Sierra  Club card  line,  and the  ability of the
Company to successfully market its newly acquired line of handcrafted sculptures
and figurines. In addition, the ability of the Company to enhance and expand its
product mix and to  successfully  introduce  new  products  which will meet with
consumer acceptance may also affect future results. The Company to date has been
materially  dependent  upon the  efforts  of Messrs.  Bruce  Wilson and M. Scott
Foster, who constitute the Company's core senior management.  The loss of either
Mr. Wilson's or Mr. Foster's services may have a materially  adverse effect upon
the business or operations of the Company.

                                        2
<PAGE>
Principal Industry in Which the Company is Engaged

         The Company  designs,  publishes  and  markets,  throughout  the United
States and Canada,  a  diversified  line of cause  related,  nature and wildlife
contemporary  greeting cards, note cards,  holiday cards,  stationery and gifts.
The Company also  licenses the right to the use of the Healthy  Planet  Products
name,  trademark  and art  work in  connection  with the  manufacture,  sale and
distribution of the Company's products in certain foreign countries. The Company
does not view its foreign licensing  activity to be significant to its business.
See "Business - General Business Developments During Most Recent Fiscal Year".

         On December 11, 1997,  the Company  acquired  certain assets of Corlett
Collectables,  Inc., a privately owned company which  specialized in the design,
manufacture  and  sale  of a  line  of  handcrafted  sculptures,  figurines  and
collectibles  of domestic and wild animals made from a customized  marble blend.
This acquisition commences the effort of the Company to expand its basic product
offering beyond its traditional  card lines.  The newly acquired  Healthy Planet
Collectables line consists of approximately 700 animal and wildlife  sculptures,
and was introduced by the Company in the first quarter of 1998.

         In response to environmental considerations, and in connection with its
identification  with the Sierra Club as a licensor,  all of the Company's  paper
products  are  produced  on  recycled  paper using  soy-based  ink.  The Company
publishes  and  markets  over  600  everyday,  occasional  and  seasonal  cards,
including  over 300 images which  comprise the Company's  principal  Sierra Club
card  line.  The  Company's   products  are   predominantly   marketed   through
approximately 130 independent sales  representatives  to over 4,900 retail sales
outlets  comprised of card shops,  stationery  stores,  gift, notion and variety
shops, drug stores,  book stores,  department stores and miscellaneous chain and
retail sales outlets.

         The Company is the exclusive  licensee of the Sierra Club, a nationally
known environmental and conservationist organization,  for the use of the Sierra
Club name on a line of wilderness and wildlife  cards,  stationery,  tablets and
magnets.  The Sierra Club line has evolved to become the  principal  line of the
Company,  accounting for approximately  70.5% of the Company's net sales for the
year ended  December 31, 1997 and for  approximately  82.2% of the Company's net
sales for the year ended December 31, 1996.

         The Company's products utilize both graphics and greetings to appeal to
a broad spectrum of consumer  tastes.  In the case of the Company's  Sierra Club
products and the Company's Sea Dreams and Nature Baby card lines consist of high
quality  wilderness,  wildlife  and  underwater  photographic  images  which are
intended  to evoke an  identification  with  environmental  issues,  nature  and
wildlife.  Everyday  note cards  contain no written  message,  whereas  seasonal
greeting cards contain short contemporary  messages,  which the Company believes
fulfills a desire for simplicity and multiple use in communication.

         The  greeting  card  occupies  a unique  place in the  American  retail
market,  and has been  incorporated  into the everyday lives of Americans.  Over
seven billion greeting cards are sent

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<PAGE>

in America each year, one third being Christmas cards.  Since greeting cards are
an inexpensive  personalized  gift, sales tend to continue even during difficult
economic times.

         There is little,  if any, price  competition in the card industry.  The
retail prices of the  Company's  cards range from $.73 to $1.95 with most at the
$1.75 price range.  The Company has met no price  resistance to its retail price
structure  for two reasons that apply  generally  to industry  retail sales as a
whole: first,  greeting cards are one of the least expensive forms of gifts, and
second, cards have become a socially required form of communication for everyday
and special occasions.  At the wholesale level,  competition  generally does not
relate to price,  but  rather to  quality of  service,  the number of  different
images that can be placed on store card displays,  how quickly cards sell at the
retail  level,  and the  compatibility  between the buyer's  tastes and the card
lines offered.

         The market for contemporary  cards, and more particularly cause related
and nature theme cards, is of recent origin,  having developed  primarily in the
last ten years to appeal to a large segment of the  population  with a taste for
more  contemporary  graphics and copy or those who wish to express their support
of a  particular  social  cause by utilizing  cards  associated  with the cause.
Contemporary, cause related and nature theme cards, including those published by
the Company,  creatively join graphics and copy to express a message or convey a
thought or sentiment  or, in the case of its Sierra  Club(R),  Sea Dreams(R) and
Nature Baby(R) lines, high quality wildlife,  wilderness and nature photography.
These  have  been  sold  in  the  past  predominantly  through  single-location,
independently-owned  businesses,  such as boutiques, gift shops and book stores,
rather than through stationery, card, drug or department stores, which have been
the traditional outlet for more conservative,  mass-marketed  cards published by
the major card companies.  The more traditional  marketplace  represents a large
sales source for contemporary and cause related cards. The Company believes that
the market for cause  related  cards will  continue to grow for the  foreseeable
future as consumers  express a desire to express support for a particular  cause
while satisfying their greeting card needs. It has been estimated that the total
number of  retail  outlets  for  cards  exceeds  350,000  outlets,  of which the
traditional outlets are a substantial portion. See "Item l. Business - Marketing
and Sales".

Charitable/Environmental Contributions.

         The Board of  Directors  and  Management  of the Company have adopted a
corporate  policy  whereby the Company has  committed  the Company to  providing
desirable,   high   quality   products   to  the  ever   increasing   number  of
environmentally  conscious  consumers.  In furtherance of this  commitment,  the
Company has contributed a portion of its wholesale  proceeds from Healthy Planet
product  lines to  scientific,  research,  environmental  and  other  charitable
institutions.  During fiscal year 1997,  the Company  contributed  approximately
$13,000 to organizations  such as the Marine Mammal Center located in Sausalito,
California,  the Petaluma  California  Soup Kitchen and the Petaluma  California
Boys &  Girls  Club.  These  contributions  are  made at the  discretion  of the
Company.

                                        4
<PAGE>

General Business Developments
During Most Recent Fiscal Year

         Additional Equity Capital

         On September 29, 1997, the Company completed a transaction with John V.
Winfield and InterGroup  Corporation,  an affiliate of Mr. Winfield in which the
Company sold 150,000 shares of its Common Stock to Mr. Winfield for an aggregate
of  $487,500  and  sold  150,000  shares  of  its  Common  Stock  to  InterGroup
Corporation  for an  aggregate  of  $487,500.  As part of the  transaction,  Mr.
Winfield  and  InterGroup  Corporation  were each  issued  warrants  to purchase
150,000  shares  of the  Company's  Common  Stock,  of which  one-third  of such
warrants are exercisable at $4.00 per share,  one-third at $4.25 per share,  and
one-third at $4.50 per share. The warrants are exercisable  commencing September
29, 1997 and may be  exercised  through  September  29, 2002.  Mr.  Winfield and
InterGroup   Corporation   were  each  accorded  certain  demand  and  piggyback
registration  rights.  In  connection  with the  transaction,  Mr.  Winfield was
elected a Class 3 Director  and the  Company  agreed to use its best  efforts to
cause Mr. Winfield to be elected as a Director through September 29, 2000.

         License for Commonwealth of Independent States (formerly Russia)

         On August 4, 1997,  the Company  entered into a license  agreement with
ZPR  International,  Inc. for the use of the Healthy  Planet  Products  name and
images on products in the territory  comprising the  Commonwealth of Independent
States. This license agreement, for a term expiring September 30, 2000, provides
for the  payment of a royalty to the  Company of 7% of  adjusted  gross  invoice
price of licensed products sold by the licensee.

Acquisition of Assets of Corlett Collectables, Inc.

         On December 11, 1997, the Company  completed the acquisition of certain
assets  of  Corlett   Collectables,   Inc.,  a  privately  owned  company  which
specialized  in the  design,  manufacture  and  sale  of a line  of  handcrafted
sculptures,  figurines and collectibles of domestic and wild animals made from a
customized  marble  blend.  The  purchase  price  for the  assets  acquired  was
$360,000, of which approximately $88,000 was paid at closing, and the balance is
to be paid in monthly installments of $10,000 following the closing.

License from Rainforest Action Network

         On  November  1, 1997,  the  Company  entered  into an  agreement  with
Rainforest  Action Network,  a California  non-profit  corporation,  pursuant to
which the Company was granted a license to use the  "Rainforest  Action Network"
name,  "RAN"  mark,  and  related  logos in  connection  with  the  manufacture,
advertising,  sale and distribution of cold cast sculpted  figurines and magnets
in the United States and Canada.  The license is for a term commencing  November
1, 1997 to December 31, 1999 and renewable for one year thereafter  provided the
Company makes royalty payments of not less than $20,000 during the original term
of the license.  Under the agreement,  the Company is obligated to pay a royalty
on licensed products

                                        5
<PAGE>

in an  amount  equal to 5% of the net sales  price  with a  minimum  royalty  of
$10,000 for the period  November 1, 1997 though  December 31, 1999. All licensed
products are subject to prior approval of the licensor.

Products

Source of Product and Arrangement with Photographers and Others

         Published Product.

         While the overall  concept and design of its products are  developed by
the  Company  in-house,  it  principally  relies  on  independent,  unaffiliated
photographers  to create images for its product  lines.  Agreements  between the
Company  and  its  photographers   apply  to  specific  images  submitted  by  a
photographer and accepted by the Company,  and are exclusive as to those images,
and do not normally cover all of a photographer's works. The Company utilizes an
available pool of 600-700  photographers.  It additionally  receives unsolicited
submissions  from time to time from various  photographers.  When  utilizing the
work of a  particular  photographer,  the  Company  generally  makes a one  time
payment of $300-$400,  which entitles the Company to utilize the particular work
for three to five years without further royalty payments.

         No single photographer with whom the Company has entered into a license
or purchase of rights agreement has created products which have accounted for 4%
or more of the Company's sales.

         The Company's new  collectible  line of figurines are designed and hand
sculpted by independent  artists and craftsmen who generally  receive a one time
fee of $400 or a  royalty  of 4%.  Master  molds are  designed  and  created  in
California,  and final  product  is cast and hand  painted  by a  non-affiliated
manufacturer located in the Far East.

License Agreements

         The following are the principal license agreements to which the Company
is a party.

         A.       The Sierra Club.

         Since June 4, 1980, the Company has been licensed by the Sierra Club to
use its name on an exclusive  worldwide  basis on a line of  greeting,  note and
seasonal cards as well as stationery products, tablets and magnets. This license
agreement has been extended  through December 31, 2005. Sales of the Sierra Club
line  represented  approximately  70.5% and 82.2% of the Company's sales for the
years ended December 31, 1997 and 1996, respectively.  The Sierra Club card line
is comprised of over 270 everyday  designs and over 30 holiday  designs,  all of
which are printed on recycled or chlorine  free paper using  soy-based  ink. All
products  developed  by the  Company  which  comprise  the Sierra  Club line are
subject to the prior  approval of the Sierra  Club.  Under the  current  license
agreement,  the Sierra Club  received an annual  guaranteed  minimum  royalty of
$321,000 for the calendar year 1997, with an annual guaranteed

                                        6
<PAGE>

minimum  royalty of $321,000 for each year  thereafter  increased by 7% per year
for each year  through the year 2000,  and 5% per year for each year through the
year 2005. In addition to the minimum  annual  guaranteed  royalty,  the Company
paid Sierra Club a one time additional  royalty of $60,000 for the year 1995 and
will pay an additional  $50,000 for the year 2001. The license  agreement may be
terminated by the Sierra Club prior to its regular  expiration date in the event
of a material breach or default by the Company of its material obligations which
remains uncured for 60 days. The material obligations of the Company principally
relate to the payment of  royalties.  The  experience  of the  Company  with its
Sierra Club line has been that sales in most  license  years have  exceeded  the
base levels on which the  guaranteed  minimum is to be paid.  For the year ended
December  31,  1997,  the Company  paid  aggregate  royalties of $343,470 to the
Sierra Club. No assurance may be given that actual  royalties to the Sierra Club
in future years will equal or exceed the minimum guaranteed royalty.

         The Company's Sierra Club line is predominantly  comprised of 5x7 blank
note cards which  utilize  over 300 images and retail for $1.95 each;  4x5 boxed
cards which  consist of eight cards and  envelopes  and have a suggested  retail
price of $5.95.  Holiday boxed cards have a suggested retail price of $10.95 and
consist  of 15 cards  and  envelopes.  The  Company  also  markets  Sierra  Club
stationery  and  envelopes  available  in 12  different  designs and packaged 25
sheets or  envelopes  to a package  with a suggested  retail  price of $4.50 and
$4.75, respectively. The remainder of the Sierra Club line consists of journals,
writing tablets and magnets.

         The Company believes that the loss of the Sierra Club line would have a
material  adverse affect upon the Company's  business unless and until such time
as other  lines  having  an  established  substantial  consumer  acceptance  are
developed.  No  assurance  can be given  that,  in the  event of the loss of the
Sierra Club line,  other lines can be developed that would enable the Company to
be profitable, if at all.

         B.       The Humane Society of the United States.

         In  furtherance  of its  focus  and  concentration  on the  design  and
development of  cause-related,  nature and wildlife card lines, the Company,  on
March 1, 1993,  entered into a license  agreement with The Humane Society of the
United States (the "Humane Society"),  pursuant to which the Company was granted
the right to use the  Humane  Society  name and logo in the  United  States  and
Canada in connection with greeting cards.  The license  agreement is to continue
through December 31, 1998 and may be extended by either party for one additional
two-year period. In consideration  for the grant of the license,  the Company is
to pay the Humane  Society a license  fee of 5% of the  wholesale  price for the
first  $100,000  of net  sales  of  licensed  product  during  the  term  of the
agreement,  increasing  to 7% of net sales in excess of  $100,000.  The  license
agreement may be terminated by the Humane Society in the event of the failure of
the Company to make any license payment or furnish any required  statement,  and
which default  continues for a period of 30 days after written notice, or in the
event the Company fails to cure any other breach of the license  agreement after
30 days written  notice.  The Humane  Society line is available in boxed holiday
cards.  For the year ended  December  31, 1997,  sales of this line  represented
approximately  7.7% of the Company's net sales.  The Company does not anticipate
that it will seek to renew this license.

                                        7
<PAGE>

         C.       The Wilderness Society.

         On June 24, 1994, the Company entered into a License Agreement with The
Wilderness Society, a nonprofit  corporation  headquartered in Washington,  D.C.
Pursuant  to the  License  Agreement,  the  Company  was  initially  granted  an
exclusive worldwide license to use The Wilderness Society name, logo and artwork
in connection with the manufacture, sale and distribution of everyday, Christmas
and/or  special  occasion  bookmarks and  refrigerator  magnets  produced  using
recycled paper and recycled  plastic  materials.  The license was for an initial
three  year  term  through  June 31,  1997  with the  right  to  extend  for one
additional  three year period.  The Agreement has been extended through the year
2000 on a non-exclusive basis. The Company is to pay to The Wilderness Society a
royalty of 5% of the wholesale price of net sales for the licensed products with
a minimum annual  royalty of $10,000.  The Company has been granted the right to
promote the licensed  products in two issues per year of The Wilderness  Society
Magazine.  All licensed  products are subject to prior approval of the licensor.
The  License  Agreement  is  subject  to early  termination  in the event of the
failure of the  Company to make  royalty  payments,  the  uncured  breach of the
Agreement  by the  Company,  or the filing by the Company for  protection  under
federal bankruptcy laws. For the year ended December 31, 1997 sales of this line
represented approximately 2.0% of the Company's net sales.

         D.       The Marine Mammal Center.

         On July 28, 1994, the Company entered into a License Agreement with The
Marine Mammal Center, a not for profit organization  headquartered in The Golden
Gate National  Recreational  Area,  Sausalito,  California,  and whose principal
activities  relate to the  preservation of marine mammals and related  research.
Pursuant to the  License  Agreement,  the  Company  was  granted  the  exclusive
worldwide  license to use The Marine  Mammal  Center name and logo in connection
with greeting cards, stationery,  journals, tablets,  bookmarks,  magnets, blank
books,  kites and puzzles.  The license is for a current  extended  term through
December 31, 1999. The Company paid a guaranteed  minimum  royalty of $2,500 for
the year 1994 and a  guaranteed  minimum  royalty  of  $5,000  for the year 1995
against a royalty of 3% of net sales of licensed products. All licensed products
are subject to prior approval of the licensor.  For the years ended December 31,
1997 and  1996,  sales of this  line  represented  approximately  6.6% and 5.5%,
respectively, of the Company's net sales.

         E.       License Agreement with the Zoological Society of San Diego.

         On September  30, 1996,  the Company  entered into a License  Agreement
with the Zoological  Society of San Diego pursuant to which the Company has been
licensed to use the registered marks "Zoological Society of San Diego",  "Center
for  Reproduction  of  Endangered  Species"  and "CRES" in  connection  with the
Company's Nature Baby(R) line. The license  continues through September 30, 1999
and provides for the payment of a royalty of 3% of the  adjusted  gross  invoice
price of the licensed product, with a minimum royalty of $5,000.

                                        8
<PAGE>

Manufacture of Cards

         The Company does not  manufacture  its  products,  nor does it have the
equipment to do so.  Rather,  it contracts  for the physical  production  of its
products with independent  contractors,  using different suppliers at each stage
of  production,  so as not to rely on any one  specific  supplier to satisfy its
needs.  The  Company  believes  that there are ample  suppliers  and  production
facilities available to it at competitive costs.

         During the year ended  December 31, 1997,  the Company made 31.8%,  20%
and 13.2% of its  purchases  from three  suppliers.  Each of these  suppliers is
unaffiliated with the Company.  The Company does not have any short or long term
supply  agreements or exclusive  dealing  agreements with these  suppliers.  The
Company  believes  that  the  loss of any of these  suppliers  would  not have a
material  impact upon the  Company's  business,  since it believes that multiple
alternate suppliers are available to the Company at competitive prices.

Proposed and New Product Lines

         Given the Company's particular  identification with the Sierra Club and
environmental  and other  causes,  the Company has created new non-card  product
lines marketed under the name "Healthy  Planet  Products",  which  trademark has
been registered with the United States Patent and Trademark Office.

         As part of its proposed  Healthy Planet  Products line, the Company has
designed,  developed  and marketed  diverse paper and gift  products,  including
stationery and other gift items.  The Company has entered into an agreement with
Twin Oaks Publishing  pursuant to which it granted an exclusive  license to Twin
Oaks, a licensee,  to use the Healthy Planet Products name for certain  products
in Europe.  Similar  license  agreements have been entered into for New Zealand,
Australia and the  Commonwealth of Independent  States  (formerly  Russia).  The
Company may license  the rights to others to use its Healthy  Planet  trademarks
for certain product categories.

         With the acquisition of the assets of Corlett  Collectables,  Inc., the
Company,  in the  first  quarter  of  1998,  launched  its  line of  handcrafted
sculptures,  figurines and  collectibles of wild and domestic  animals under the
Healthy Planet Collectibles(R) trademark.

         The  collectibles  are marketed under the Healthy  Planet  Collectibles
trademark  including separate series' of sculptures and figurines which comprise
the Nature Baby Hatchers(R) Garden Diggers(R) and Crystal Gallery(R) lines.

Marketing and Sales

         The Company's  products are marketed to over 4,900 retail sales outlets
which are comprised of card shops; stationery stores; gift, book stores, notions
and variety shops;  drug stores,  and department  stores;  and miscellaneous and
multiple retail  outlets.  With the exception of Barnes & Noble  Superstores,  a
national  chain of bookstores  which  accounted for  approximately  13.9% of the
Company's net sales for the year ended December 31, 1997, no single  customer of
the  Company  accounted  for  6.7% or more of the  Company's  net  sales.  As of
September 1997 Barnes & Noble  Superstores no longer carry the Companys everyday
card line due do to a change in vendors.

         The   Company   utilizes    approximately    130   independent    sales
representatives who also represent the products of other companies.  Independent
sales  representatives  accounted for approximately 63% of Company sales for the
year ended December 31, 1997 (with the balance of Company sales being  generated
via direct customer contact). Independent sales representatives are paid a fixed
sales commission ranging from 5% to 20% of sales. For the

                                        9
<PAGE>

year ended  December 31, 1997, a total of $501,134 in  commissions  were paid to
the sales  representatives.  During this period, no single sales  representative
accounted for more than 10% of the Company's sales.

         The Company has developed  various  merchandising  programs  which have
been  designed to provide  increasing  levels of benefits  to its  customers  as
customers'  commitments to the Company's  product lines increase.  The Company's
product  line has been  segmented  and is targeted to  specific  markets.  Sales
literature,  trade  advertising and catalogs explain and highlight the Company's
programs and products, and are used by sales representatives in presentations to
customers.  The Company  provides a range of options,  from small  "promotional"
displays to larger "departmental" displays.

Seasonal Aspects of the Company's Business

         The greeting  card,  social  stationery  and gift industry in which the
Company  is  engaged  has  historically   experienced  seasonal  sales  effects,
primarily  due to the emphasis on Christmas and holiday  product.  These effects
generally  include  peak  seasonal  production  costs in the  second  and  third
quarters of the year, and a seasonal buildup of accounts receivable in the third
and fourth quarters,  thereby resulting in an increase in capital carrying costs
during these periods.  During 1997,  seasonal effects on the Company's  business
resulted in approximately 58% of the Company's sales being made in the third and
fourth  quarters.  During  fiscal year 1997,  approximately  22% of total annual
sales were in accounts  receivable during the third and fourth quarter,  and are
not  collectible   until  the  first  quarter  of  the  following  fiscal  year.
Approximately  53% of the cost of  manufacturing  inventory  was incurred in the
second and third quarters of the 1997 year. Such factors require the application
of  working  capital to either  carry  accounts  receivable  during the last two
quarters  of the  year or to  cover  production  costs  during  peak  production
periods.

Advertising and Sales Promotion

         The Company uses various methods to promote its products. It advertises
in  certain  trade  and  gift  publications,  and  exhibits  at  several  of the
significant  industry trade shows.  In addition,  it produces sales materials at
the  beginning  of each season  which  feature new  products  and  merchandising
programs. One of the Company's most effective forms of retail advertising is the
visual display of its products in display space in retail  outlets.  The Company
believes  that its focus on cause  related,  nature and wildlife  card and other
product  lines  will  be the  indirect  beneficiary  of the  promotion  of  each
particular   cause  and  consumer   concerns  for  the  environment  and  nature
preservation.  As consumers  become more aware of each cause, and are supportive
of  the  particular   cause,   or  become  more   supportive  of   environmental
preservation, the Company believes that the market and demand for its associated
card and other product lines will increase.

Competition

         The  greeting  card,  social  stationery  and gift  industry  is highly
competitive.  The Company only marginally  competes with major  traditional card
companies,  such as Hallmark Cards, Inc.,  American Greetings  Corporation,  and
Gibson Greetings, Inc. The major greeting

                                       10
<PAGE>

card  companies  have  greater  financial  resources,   market  penetration  and
experience  than the Company.  The Company  primarily  competes with the smaller
alternative  card  companies,  several of whom have sales and resources  greater
than those of the Company; i.e., Recycled Paper Products,  Paramount and Sunrise
Publications, among others.

         The primary  basis upon which the Company  competes is the marketing of
its cause  related card lines and  associated  nature and  wildlife  card lines,
which can only be obtained  exclusively  through the  Company.  This factor is a
positive  aspect to the business of the Company so long as there continues to be
public  awareness,  support  and  identification  with  a  particular  cause  or
environmental  issues.  Conversely,  should a cause  fall out of vogue  with the
public,  the  attractiveness  of a line may diminish.  The Company does not view
itself as being a significant  competitive factor in the greeting card industry,
though the Company does believe that growth and opportunity  does present itself
with the niche of cause related and associated card and other product lines.

Employees

         The Company  currently has 25 full-time  employees,  including its four
executive officers, 8 in administrative, managerial, and sales positions, and 13
warehouse  persons.  In peak seasons,  the Company may employ up to 12 temporary
employees  for its  warehouse  operation.  None of the  Company's  employees are
represented by a labor union, and the Company  considers its  relationship  with
its employees to be good.

Trademarks and Copyrights

         In most cases,  the  Company  either  owns or shares  ownership  of the
copyright  with  the  photographers  who  create  photographs  for the  Company,
although there are some  photographers  who have the exclusive  ownership of the
copyright for the works  published by the Company,  in which case,  the right to
market and  exploit  the  product  is  licensed  to the  Company in return for a
royalty  fee or one time  payment  for  rights.  To the  extent  that any single
product  enjoys  substantial  consumer  acceptance  or  demand,  the  Company is
dependent  upon the validity of the  copyright of such  photograph.  The loss or
invalidity of a copyright will not have a material adverse effect on the Company
since no  single  product,  either  published  or  distributed  by the  Company,
accounts for a material portion of the Company's sales.

         The Company has registered HEALTHY PLANET PRODUCTS(R) as a trademark in
association  with its  environmentally  cause- related  product  lines,  and has
completed  registration  of the name, logo and design of HEALTHY PLANET PRODUCTS
with the United States Patent and Trademark Office.

         The  Company has also  registered  the "Sea  Dreams"  name and logo and
design  as a  trademark  used in  connection  with its  product  line  featuring
underwater photographs.

         The Company has  registered  the "Nature Baby" name and logo and design
as a trademark  used in connection  with its product line featuring baby animals
in natural wildlife settings.

                                       11
<PAGE>

         The  Company  is in the  process  of  registering  the  names and logos
"Healthy Planet  Collectibles",  "Nature Baby Hatchers",  and "Crystal Gallery",
which are used in connection with its figurine lines.


Item 2.  Properties

         The Company's offices and business  facilities are located in an entire
self-contained building located in Petaluma, California.

         On February 12, 1996, the Company  entered into a Lease  Agreement with
RNM Lakeville,  L.P., as landlord, for premises 1700 Corporate Circle, Petaluma,
California.  The Company  completed  the physical  relocation  of its  executive
offices  and  warehouse  to the new  facility in April 1996.  The  premises  are
comprised of an entire self-contained building of tilt-up concrete construction,
fully  sprinklered  located  in  an  established  business  park  consisting  of
approximately  52,000 square feet, of which  approximately  6,700 square feet is
first floor  office  space and  approximately  45,300  square feet is  warehouse
space.  Commencing the fourth year of the lease term, the Company will occupy an
additional 22,000 square feet which will then comprise the entire building.  The
leased premises were newly constructed for occupation by the Company.  The lease
is for a term of 10 years through April 30, 2006,  and may be extended  pursuant
to three extension options for one period of 2 years and two successive  periods
of 5 years  each.  The lease is on a "triple  net basis"  pursuant  to which the
Company is to pay a monthly  rent of $26,486  during the first year of the lease
term,  $28,045  per month for the  second  and  third  years of the lease  term,
$31,161 per month for the portion of the fourth year of the lease term until the
balance  of the entire  building  is  occupied,  and  $45,677  per month for the
remainder  of the fourth  year of the lease term  through  the sixth year of the
lease term,  and $50,244  per month for the seventh  through  tenth years of the
lease term. In addition to the monthly rent provided,  the Company is to pay, as
additional  rent, all taxes,  insurance  premiums,  maintenance and repair costs
relating to the Company's use and occupancy of the premises.


Item 3.  Legal Proceedings

         The Company is not a party to any pending legal proceedings, except for
one pending action for collection of a past due receivable.


Item 4.  Submission of Matters to a Vote of Security Holders

                                 Not Applicable.

                   [BALANCE OF PAGE INTENTIONALLY LEFT BLANK]

                                       12
<PAGE>

                                     PART II

Item 5.  Market of and Dividends on the Registrant's
         Common Equity and Related Stockholder Matters

A.       Principal Market

         On April 3, 1995,  the Common Stock of the  Registrant was accepted for
listing on the American  Stock  Exchange and commenced  trading under the symbol
"HPP".  Prior to such time, the Common Stock was traded in the  over-the-counter
market and was  included  in the  Nasdaq  Small-Cap  Market of The Nasdaq  Stock
Market ("Nasdaq") under the Nasdaq symbol "HPPI".  Prior to August 2, 1993, when
the  Company  changed its name from  Carolyn  Bean  Publishing,  Ltd. to Healthy
Planet  Products,  Inc., the Company's  Common Stock was traded under the symbol
"CBEN".  From May 9, 1994 through April 3, 1995, the Common Stock of the Company
was admitted for trading on the Pacific Stock  Exchange under the trading symbol
"HPP.P".  Simultaneously  with the  acceptance of listing on the American  Stock
Exchange, the Company withdrew from the Pacific Stock Exchange and Nasdaq.

B.       Market Information


         American Stock Exchange

         Since its admission for trading on the American Stock Exchange on April
3, 1995,  the  following  are the high and low closing  prices for the Company's
Common Stock for the periods indicated:

                  Year                 High               Low
                  ----                 ----               ---

                  1996
                  1st Quarter          9 3/8             7 1/4
                  2nd Quarter          8                 6 3/4
                  3rd Quarter          7 1/8             5
                  4th Quarter          5 3/16            3 11/16

                  Year                 High               Low
                  ----                 ----               ---

                  1997
                  1st Quarter          4 1/2             3 3/4
                  2nd Quarter          4 1/2             3 7/16
                  3rd Quarter          4 1/16            3 3/8
                  4th Quarter          4 3/8             3 1/2


                                       13
<PAGE>

C.       Dividends

         The Company has never paid a dividend, whether cash or property, on its
shares  of  Common  Stock  and has no  present  expectation  of  doing so in the
foreseeable future.

D.       Approximated Number of Equity Security Holders

         The approximate  number of record holders of the Company's Common Stock
as of  March  16, 1998 was 128. Such number of record owners was determined from
the Company's shareholder records, and does not include beneficial owners of the
Company's  Common Stock whose  shares are held in the names of various  security
holders,  dealers and clearing agencies. The Company believes that the number of
beneficial  owners of its Common  Stock  held by others as or in  nominee  names
exceeds 1,500 in number.


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

Results of Operations

         The following table sets forth for the periods  indicated,  percentages
which certain items  reflected in the financial data bear to the revenues of the
Company:

                                                 Relationship to Total Revenues
                                                 ------------------------------
                                                       Fiscal Year Ended
                                                       -----------------
                                                         December 3l,
                                                         ------------

                                                    1995      1996      1997
                                                    ----      ----      ----

Net Sales                                            100%      100%      100%

Operating Expenses:
 Cost of Goods                                      38.8%     42.4%     60.6%
 Selling, General and Administrative                43.8%     55.0%     66.3%

Income (Loss) From Operations                       17.4%      2.6%    (26.9%)
Interest and Other Income (Expense)                  2.3%      6.3%      4.7%

Income (Loss) Before Income Taxes                   19.7%      8.9%    (22.2%)
Net Income (Loss)                                   36.4%      5.3%    (45.0%)

                                       14
<PAGE>

Year End Results - Applicability of FAS 109

         At December 31, 1997,  the Company had  available  net  operating  loss
carryforwards of  approximately  $6,230,500 to be applied against future federal
taxable income.  Due to a change in ownership  during 1988,  $2,638,000 of these
amounts are subject to a limitation  under  Section 382 of the Internal  Revenue
Code of $476,950 per year. If the Company does not generate sufficient income to
use the  maximum  limitation,  remaining  amounts  accumulate  for use in future
periods until the operating loss expires. Federal net operating losses expire as
follows:

                    Year Ending December 31,
                    ------------------------
                            2002                  $2,638,600
                            2003                   1,222,000
                            2004                   1,299,100
                            2005                     383,300
                            2006                      31,700
                            2012                     655,800
                                                  ----------
                                                  $6,230,500
                                                  ==========

         The Company has  available  approximately  $326,000 of  California  net
operating  losses which can be carried forward and offset against future taxable
income. These loss carryforwards expire in 2002.

         The Company has available  approximately  $15,600 of federal investment
tax credits which can be carried forward and offset against future income taxes.
The Company also has approximately  $25,500 of federal  Alternative  Minimum Tax
credits to reduce future regular income taxes over an indefinite period.

         The Company  recognizes  deferred  tax  liabilities  and assets for the
expected  future  tax  consequences  of events  that have been  included  in the
financial  statements  or tax  returns,  including  the  future  benefit  of its
carryforwards.  Temporary  differences  and  carryforwards  which  give  rise to
deferred assets at December 31, 1997 are as follows:


     Benefits from net operating loss carryforwards         $2,147,200
     Inventory reserves                                        141,200
     Accounts receivable allowances                            138,400
     Depreciation and amortization                              21,100
     Other                                                       2,800
     Valuation allowance on deferred tax assets             (1,500,000)
                                                            ---------- 
     Net deferred income taxes                                 950,700
     Deferred income taxes expected to be utilized in 1998     264,900
                                                            ---------- 
     Deferred income taxes                                    $685,800
                                                            ==========

         Management  of the Company has decided to record a valuation  allowance
of $1,500,000  against deferred tax assets, due in part to the current year loss
before income taxes of $910,700. Management believes that it is more likely than
not  that the tax  benefits  of the net  operating  loss  carryforwards,  net of
valuation allowance, will be realized.  Management's belief is based on expected
sales of the new  Healthy  Planet  Collectibles  line,  new sales and  marketing
strategies for existing card lines,  and  profitability  of the card business in
four of the last  five  years.  In  order to  utilize  the full  benefit  of the
deferred income tax asset, the Company needs to realize aggregate taxable income
of approximately $1,965,000,  which it expects to generate during the years 1998
through  2007.  In  calculating  the benefit  from the loss  carryforwards,  the
Company has taken into  account the  provisions  of Section 382 of the  Internal
Revenue  Code  and  anticipated   expiration  of  loss carryforwards due to time
limitations.  The Company has not  contemplated  the use of any new tax planning
strategies in calculating the deferred income tax asset.

         The  foregoing  constitutes  management's  best  estimates  based  upon
current  conditions  and most  recent  results  of  operations.  The  results of
operations  in future  years are subject to many  conditions,  many of which are
beyond  the  control  of  Management  and which may affect the amount of taxable
income that may be generated in future years,  and the resultant  ability of the
Company to fully utilize the deferred tax asset. Such conditions include general
economic conditions, competition generally and specifically relating to greeting
cards having an environmental and wildlife theme and collectible figurines,  the
ability of the Company to continue to renew its  principal  Sierra Club  License
Agreement  which presently  expires on December 31, 2005,  continuity of present
management,  and the  ability of the  Company to market its new  Healthy  Planet
Collectible line.

                                       15

<PAGE>

         1997 Compared to 1996

         Sales for the year ended December 31, 1997 were $4,099,600 reflecting a
decrease  versus  the prior  year  level of  $4,632,400  of  $532,800  or 11.5%.
Everyday product sales finished the year even with prior year results due to the
launch of the Nature Baby line,  while seasonal product sales declined 32.2% due
to a drop off of holiday  boxed  card  sales,  resulting  in the  overall  11.5%
decline.  A general weak retail economy  during 1997,  and a decreased  consumer
demand for holiday  cards in particular  resulted in the seasonal  product sales
decline.  Everyday Sierra Club sales decreased versus the prior year due in part
to the  loss in  September  1997 of  Barnes  and  Noble,  the  Company'  largest
customer. Included in the year end results was a provision for future returns of
approximately  $192,000.  The seasonal return provision  recognizes and provides
for the return of unsold seasonal  product from customers who have qualified for
a return privilege.

         During 1997,  sales of the Company's  largest  product line, the Sierra
Club,  accounted  for  70.5% of total  revenues  compared  to 82.2% for 1996 and
showed a year to year  decline  of  24.2%.  A drop off of Sierra  Club  seasonal
holiday boxed cards accounted principally for this decline. The Company's Nature
Baby line, launched in January 1997, accounted for 10.9% of total 1997 revenues.
The balance of 1997 revenues were comprised of the Company's other product lines
utilizing  the names of The  Humane  Society of the  United  States,  The Marine
Mammal Center, The Wilderness Society, and others.

         The successful  launch of the Company's  Nature Baby line was offset in
part by declines in the  Company's  other  everyday and seasonal  product  lines
during  1997.  Increased  competition  from  larger  competitors  in  our  chain
accounts, a decline in retail space as a result of a continuing consolidation in
the retail industry, and a continuing industry-wide consumer down trend in boxed
holiday cards at retail could impact future revenues negatively.

         The Company reported an operating loss of $1,103,600 or $.58 per share.
Gross margin  declined  from the prior year level of $2,666,900 by $1,051,900 or
39.4%. In addition to the gross margin decline caused by the revenue  shortfall,
there were several  other factors that  contributed  to the overall gross margin
decline,  including (i) $158,000 in display costs  associated with the launch of
the Nature Baby product line, (ii) increased royalty expenses of $24,000,  (iii)
increased overhead expenses of $68,000,  and (iv) inventory reserves of $293,000
for  obsolete  inventories  relating to  discontinued  products.  The  inventory
reserve will be evaluated quarterly based on actual and projected sales.

         Cost of sales  amounted to $2,484,600  for the year ended  December 31,
1997 representing  60.6% of sales.  This rate compares  unfavorably to the prior
year  rate of 42.4%  due to the  impact of one time  costs  associated  with the
Nature  Baby  product  launch,  increased  royalty and  overhead  costs on lower
revenues, and an increase provision to write off obsolete inventory as discussed
above.

                                       16
<PAGE>


         Selling, shipping and marketing expenses of $1,050,200 were higher than
the previous  years level of $898,700 by  $151,500.  Increased  advertising  and
travel expenses associated with the Nature Baby product launch accounted for the
year to year increase.


         General and  administrative  expenses  amounted to $1,668,400  for 1997
reflecting  a  marginal  increase  of  $20,000  versus  the prior  year level of
$1,648,400.  Lower payroll costs were offset in part by higher professional fees
and insurance to result in the year to year marginal gain.

         The  Company's  net loss  for the  year  ended  December  31,  1997 was
$1,843,800 or $.97 per share. This level compares unfavorably to the prior years
profit of $252,100 or $.13 per share. The decline of gross margin and the impact
of  establishing  a valuation  allowance  on the  Company's  deferred  tax asset
resulted  in the net loss.  A  valuation  allowance  of  $1,500,000  reduced the
deferred tax asset by $932,300 for the year ended December 31, 1997 representing
$.49 of the total loss of $.97 per share.  The Company  recognizes the potential
for  continued  near term  losses  while it  repositions  itself  for growth and
profitability.

         Total  assets  at  December  31,  1997  amounted  to  $8,036,000  which
reflected a decrease  versus the prior year level of  $8,773,900  by $737,900 or
8.4%.  A decline in deferred  tax assets,  receivables  and cash and  marketable
securities  were offset in part by an increase in inventory  and fixed assets to
result in the year to year decline. The increase in fixed assets was a result of
the  acquisition of Corlett  Collectables  in November 1997. The  acquisition of
Corlett Collectables provides the Company an entree into new markets and product
categories  while  providing  a  three  dimensional  product  execution  of  the
Company's wildlife imagery.

         1996 Compared to 1995

         Sales for the year ended December 31, 1996 were $4,632,400 reflecting a
decrease  versus the prior year level of $5,892,300  of  $1,259,900 or 21.3%.  A
general  weak  retail  economy  during 1996 and sharply  reduced  holiday  sales
accounted for the year to date  decline.  Included in the year end results was a
provision for future  holiday  returns of  approximately  $212,000.  The holiday
return  provision  recognizes  and  provides  for the return of unsold  seasonal
merchandise  from  customers who have been given a return  privilege in exchange
for varying levels of display of everyday merchandise year round.

         During 1996,  sales of the Company's  largest  product line, The Sierra
Club, accounted for 82.2% of total revenues and showed a year to year decline of
24.0%. The balance of 1996 revenues were comprised of the Company's other lines,
The Humane Society of the United  States,  The  Wilderness  Society,  The Marine
Mammal Center, and others.

         The Company  reported  operating  income of $119,800 or $.06 per share.
This  level of  operating  income  reflected  a decline  versus  the prior  year
operating  income of 88.3% due  principally  to a loss at gross  margin on lower
revenues. Not included in operating income was

                                       17
<PAGE>


approximately  $293,000 in interest  and other  income.  Including  interest and
other income,  income before taxes amounted to $413,100 or $.20 per share versus
the prior year income before taxes of  $1,161,700 or $.57 per share.  Lost gross
margin on lower revenues accounted for the year to year decline.

         Cost of sales  amounted to $1,965,500  for the year ended  December 31,
1996 representing  42.4% of sales.  This rate compares  unfavorably to the prior
year rate of 38.8% due to the impact of fixed costs on lower revenues.

         Selling,  shipping and  marketing  expenses of $898,700  were below the
prior year level of $998,300 by $99,600 or 10.0%.  Lower shipping,  commissions,
and sales incentives on lower revenues accounted for the year to year decline.

         General and  administrative  expenses  amounted to $1,648,400  for 1996
reflecting  an  increase  of  $67,600  or 4.3%  versus  the prior  year level of
$1,580,800.  Higher facility rent and associated  triple net costs accounted for
the year to year increase.

         The  Company's  net  profit for the year ended  December  31,  1996 was
$252,100  representing  $.12 per share.  This level compares  unfavorably to the
prior  year  level of  $1.05.  Included  in the prior  year was a  benefit  from
deferred  income  taxes  raising  net profit by  $983,200  or $.48 per share.  A
provision  for income  taxes of $161,000  was made  during  1996 which  includes
$21,000 of estimated tax liability.  This tax provision will reduce deferred tax
assets.

         Total  assets  at  December  31,  1996  amounted  to  $8,773,900  which
reflected  an  increase  of  $355,600  or 4.2%  versus  the prior  year level of
$8,418,300.  Increased  receivables,  inventories,  prepaid  expenses  and other
assets  were  offset in part by a  decrease  in cash to  result  in the  overall
increase.  Liabilities amounted to $762,300 as of December 31, 1996 representing
an increase of $54,400  versus the prior year level of $707,900.  Lower  accrued
expenses  and  commissions  payable  due to the revenue  shortfall  offset by an
increase in dividends payable resulted in the overall increase.

Liquidity and Capital Resources

         At December 31, 1997,  the Company's  working  capital was  $5,406,000.
This  compared  to the 1996  working  capital of  $5,841,700  for a year to year
decline  of  $435,700.  The  year to year  decline  was due to  lower  cash  and
marketable  securities,  receivables and deferred income taxes offset in part by
higher  inventory  to result in the year to year  decline.  The Company  remains
liquid with a current ratio of 7.7:1.

         The  primary  source  of the  Company's  liquidity  is cash  internally
generated from operations,  the exercise of warrants and employee stock options,
the proceeds  remaining on hand from the Company's June,  1993 public  offering,
and the availability of a bank credit line. In addition,  in September 1997, the
Company sold Common Stock and Common Stock Purchase Warrants to an investor (and
certain of his affiliates), who became a director upon making the investment for
an  aggregate of  $975,000.  The Company has an unsecured  line of credit in the
amount of $500,000 from  Westamerica Bank with interest at the bank's Index Rate
plus .75% or 9.25% as of December 31, 1997.  During the year ended  December 31,
1997, the Company did not draw under this line of credit, and as of December 31,
1997, no amounts were outstanding under this line of credit.

         Net cash used in operations during 1997 amounted to $611,100. Operating
losses required  $745,700 in cash offset in part by $134,600 provided by changes
in the net receivables,  inventory, other assets and liabilities.  Cash provided
from investing  activities amounted to $1,357,600  comprised  principally of the
maturation of marketable  securities during 1997. Financing activities generated
$889,000 in cash due  principally  to the sale of Common  Stock and Common Stock
Purchase Warrants.

         The Company  believes and  anticipates  that the primary  source of its
liquidity and capital  resources  for its coming  fiscal year will  primarily be
from cash on hand,  funds available to it under its line of credit and from cash
internally  generated  from  sales;  all of which the Company  believes  will be
adequate and sufficient for its operations for 1998.  Longer term, the Company's
source  of  liquidity  and  capital  resources  are  expected  to  be  primarily
internally  generated  cash from sales and the  possible  exercise  of  existing
Common Stock Purchase  Warrants,  which the Company  believes should be adequate
for its  operations  for the  forseeable  future.  Although the loss of Barnes &
Noble as a customer  is likely to result in lower  revenues  for the  Company in
1998 and possibly  beyond,  the Company expects that the impact on liquidity can
be  offset  by  the  use  of the  current  assest  to  satisfy  working  capital
requirements.

                                       18

<PAGE>


Effects of Inflation

         The Company  does not view the effects of  inflation to have a material
effect upon its business. Increases in material and labor costs have been offset
by  increases  in the  price  of  the  Company's  products  and  through  higher
production  runs which have  reduced  the unit cost of the  Company's  products.
While the Company has in the past increased its prices to its customers,  it has
maintained its relative competitive price position.


Item 7.  Financial Statements and Supplementary Data

                  See Index to Financial Statements attached hereto.


Item 8.  Changes in and Disagreements with Accountants
                  on Accounting and Financial Disclosure

                                 Not Applicable


                   [BALANCE OF PAGE INTENTIONALLY LEFT BLANK]


                                       19
<PAGE>

                                    PART III

Item 9.  Directors, Executive Officers, Promoters
         and Control Persons; Compliance with
         Section 16(a) of the Exchange Act

         The Directors and Executive Officers of the Company are as follows:

                  Name              Age    Position
                  ----              ---    --------

         Bruce A. Wilson            46     Chairman, President, Chief Executive,
                                           Chief Operating and Chief Financial
                                           Officer

         Robert Fagenson            49     Director

         John V. Winfield           51     Director

         M. Scott Foster            46     Director and Vice President - Sales 
                                           and Marketing

         Rick Williams              41     Vice President - Operations

         Joseph F. Furlong III      49     Director

         Daniel R. Coleman          41     Director

         The Company's  Certificate  of  Incorporation  provides for a staggered
Board of Directors.  The following  persons are Directors of the Company for the
classes and terms as follows:

                  Director               Class                 Term Expires
                  --------               -----                 ------------
                                        
         Bruce A. Wilson                   1                       1998
         M. Scott Foster                   1                       1998
         Robert Fagenson                   2                       2000
         Daniel R. Coleman                 2                       2000
         Joseph F. Furlong III             3                       1999
         John V. Winfield                  3                       1999
                                   
         All Officers serve at the discretion of the Board of Directors. None of
the officers or directors are related to each other.  Set forth below is certain
biographical information for each Director and Officer.

         Bruce A. Wilson joined the Company as  Vice-President  of Operations on
October 15, 1987,  and has been  President of the Company,  Chief  Financial and
Chief Operating Officer since January 28, 1988, and a Director since January 28,
1988. In August, 1994, Mr. Wilson

                                       20
<PAGE>

assumed the added position of Chief  Executive  Officer.  From 1985 to 1987, Mr.
Wilson was  employed by Russ Berrie and Company  Inc. as General  Manager of its
Russ West Division,  a company whose  business is impulse gifts.  Prior thereto,
Mr. Wilson was employed by Richardson Vicks Inc. in various capacities, the last
of  which  was  from  1983 to  1984  as  Executive  Assistant  to the  Executive
Vice-President at Vidal Sassoon Inc.

         Robert  Fagenson  was  first  elected  a  Director  of the  Company  in
November, 1986 and continued to serve in such capacity until his resignation for
health reasons in January,  1990.  Mr.  Fagenson was re-elected as a Director in
March, 1991. Mr. Fagenson has, for more than the past five years, been President
and a  Director  of  Fagenson & Co.,  Inc.,  a  registered  broker  dealer,  and
Vice-President   and   Director  of  Starr   Securities   Inc.,   a   registered
broker-dealer. Mr. Fagenson currently serves as a Director of the New York Stock
Exchange.  Mr.  Fagenson  is  also a  Director  of The  Microtel  Franchise  and
Development  Corporation,  a developer of economy lodging facilities;  Autoinfo,
Inc., a company engaged in the sub-prime autofinance industry;  Nu-Tech Bio-Med,
Inc., a clinical laboratory company;  and Rentway,  Inc., which operates a chain
of rental/purchase stores.

         Joseph F. Furlong III was first elected as a Director of the Company on
August 5, 1996. He has been President of Adirondack Capital Advisors,  L.L.C., a
financial  firm,  since May 1996.  Prior to this,  Mr.  Furlong was a partner of
Colman Furlong & Co., a merchant  banking firm from February 1991 to April 1996.
Mr. Furlong has served as a Director of American HomePatient since June 1994 and
as a Director of Capstone Pharmacy Services since December 1994.

         Daniel R.  Coleman  was first  elected as a Director  of the Company on
August 29,  1996.  He has,  for the last five years,  been a general  partner in
three limited  partnerships that invest in United States equity  securities.  He
also serves as President of Clyde Hill Research, a consulting firm to investment
managers.

         John V.  Winfield was first elected a Class 3 Director on September 29,
1997 in  connection  with a private  transaction  in which he and a company with
which he is affiliated purchased an aggregate of 300,000 shares of the Company's
Common  Stock and 300,000  Common  Stock  Purchase  Warrants for an aggregate of
$975,000. In connection with this transaction, the Company has agreed to use its
best efforts to cause Mr. Winfield to be elected as a Director  through the year
2000. Mr.  Winfield is the Chairman of the Board,  President and Chief Executive
Officer of the  InterGroup  Corporation,  having first been appointed as such in
1987.  InterGroup is a public  company traded on the NASDAQ Stock Market (INTG).
He was a Director of Geotek Communications, Inc. (GEO), an international digital
wireless  communications  company  from June 1992 through June 1994 as well as a
Director of Pacific  Gateway  Properties  ("PGP"),  a holding  company with real
estate  investments  in the San  Francisco  Bay  area,  from  1995 to 1997.  Mr.
Winfield also presently serves as Chairman and Chief Executive  Officer of Santa
Fe Financial  Corporation (SFEF) and Portsmouth Square, Inc. (PRSI), both public
companies,  and as Director of Orckit  Communications  Ltd. (ORCTF), an advanced
communications company headquartered in Israel.

         Rick  Williams  joined the  Company in 1985 as a systems  analyst  and,
since 1988, served as the Company's Data Processing Manager. In November,  1990,
Mr. Williams was appointed Vice President of Operations  effective as of January
1, 1991.

                                       21
<PAGE>

         M. Scott Foster joined the Company in April,  1993 as Vice President of
Sales and Marketing. Mr. Foster was formerly employed by Russ Berrie and Company
from June, 1980 to April,  1993,  where he served in various  positions in sales
management,  the most recent of which was Regional Vice  President of Sales,  in
which  capacity Mr. Foster served from January,  1990 through  April,  1993. Mr.
Foster was first elected as a Director of the Company on April 7, 1995.

Certain Reports; Compliance with Section 16(a) of the Exchange Act

         No person who,  during the fiscal year ended  December 31, 1997,  was a
director,  officer or beneficial owner of more than ten percent of the Company's
Common Stock (which is the only class of  securities  of the Company  registered
under  Section  12 of  the  Securities  Exchange  Act of  1934  (the  "Act")  (a
"Reporting  Person")  failed  to file on a timely  basis,  reports  required  by
Section 16 of the Act during the most  recent  fiscal year or prior  years.  The
foregoing  is based  solely upon a review by the Company of Forms 3 and 4 during
the most recent  fiscal year as  furnished  to the Company  under Rule  16a-3(d)
under the Act, and Forms 5 and amendments  thereto furnished to the Company with
respect to its most recent fiscal year, and any  representation  received by the
Company from any reporting person that no Form 5 is required.


Item 10.          Executive Compensation

Summary Compensation

         The following  provides  certain  information  concerning  all Plan and
Non-Plan (as defined in Item 402 (a)(ii) of Regulation S-B) compensation awarded
to,  earned by, paid or accrued by the Company  during the years ended  December
31,  1997,  1996 and 1995 to the Chief  Executive  Officer and each of the named
executive officers of the Company.

                                       22
<PAGE>
<TABLE>

                           SUMMARY COMPENSATION TABLE
<CAPTION>
                                                                Annual Compensation                  Long term Compensation
                                                                -------------------                  ----------------------
                                                                                                             Awards
                                                                                                     ----------------------
                                                                                                                    No. of
                                                                                                                    Securities
                                                                                                                    Underlying
                                                                               Other              Restricted        Options/
Name and Principal                                                             Annual             Stock             SARs
Position                         Year              Salary         Bonus(1)     Comp.              Award(s)          Granted
----------------------           ----             --------        --------     ------             --------          -------
<S>                              <C>              <C>              <C>         <C>               <C>                    
Bruce A. Wilson                  1997             $150,000               -     $23,526(2)        $14,500(3)            -
President, Chief Exec-           1996             $150,000         $19,867     $23,720(2)        $15,000(3)            -
utive, Chief Operating           1995             $125,000         $43,707     $35,010(2)        $34,000(3)            -
and Chief Financial
Officer

Ricky Williams                   1997              $90,000               -      $9,670(4)            -                 -
Vice President of                1996              $88,600          $9,000      $5,642(4)            -                 -
Operations                       1995              $80,500         $12,500      $5,575(4)            -                 -

M. Scott Foster                  1997             $100,000               -     $24,825(5)            -                 -
Vice-President of                1996             $100,000         $11,411     $24,825(5)            -                 -
Sales and Marketing              1995              $80,000         $57,595     $24,825(5)            -                 -
<FN>
---------------------

(1)      Mr.  Wilson  commenced  serving as Chief  Executive  Officer in August,
         1994. Mr. Wilson  receives an incentive  bonus based upon the Company's
         net pre-tax  profit  before  interest  expense for each  calendar  year
         during the term.  The amount of  incentive  bonus ranges from 8% of the
         first $100,000 of net pre-tax profit to 3% of the net pre-tax profit in
         excess of  $250,000.  Mr.  Foster  receives  an  incentive  bonus  paid
         quarterly and adjusted  annually  which is calculated to include (i) 1%
         of the Company's net shipments on initial orders by new accounts opened
         by Mr. Foster;  (ii) 5% of all net shipments  exceeding the prior years
         shipments by 10% and (iii) a percentage of the Company's profits before
         taxes. See "Employment Agreements."

(2)      Includes:  (i) for 1997,  an  automobile  allowance  of $12,000 and the
         payment of premiums on a term life  insurance  policy of $2,826 and the
         payment  of taxes on 4,000  shares of  restricted  Common  Stock  which
         vested on December  31, 1997 of $8,700;  (ii) for 1996,  an  automobile
         allowance of $12,000,  the payment of premiums on a term life insurance
         policy of $2,720 and the payment of taxes on 4,000 shares of restricted
         Common Stock which vested on December 31, 1996 of $9,000; and (iii) for
         1995, an automobile  allowance of $9,900,  the payment of premiums on a
         term life insurance  policy of $2,244 and the payment of taxes on 4,000
         shares of restricted  Common Stock which vested on December 31, 1995 of
         $19,650.

(3)      In April, 1991, Mr. Wilson was granted 60,000 restricted shares vesting
         at the rate of 4,000 shares per year on December 31 of each year,  over
         a 15 year period subject to certain  accelerations.  As of December 31,
         1997, an aggregate of 28,000 shares have vested. Amounts reported under
         this column  represent the fair market value,  without giving effect to
         the diminution in value  attributable to the restriction of such stock,
         of 4,000  shares of the  Company's  Common Stock which have vested each
         year,  as  valued  on  December  31 of each  year.  See  "Other  Annual
         Compensation",  with respect to the cash payment for taxes attributable
         to these  shares.  As of December 31, 1997,  the  aggregate  restricted
         stock

                                       23
<PAGE>

         holdings of Mr.  Wilson  consisted of 52,000 shares valued at $188,500,
         the market  value of these  shares as of  December  31,  1997,  without
         giving  effect  to  the  diminution  in  value   attributable   to  the
         restriction of such stock.

(4)      Includes:  (i) for 1997,  an  automobile  allowance  of $9,000  and the
         payment of premiums on a term life insurance  policy of $670;  (ii) for
         1996, an automobile  allowance of $5,040 and the payment of premiums on
         a term life insurance policy of $601; and (iii) for 1995, an automobile
         allowance  of $5,040 and payment of  premiums on a term life  insurance
         policy of $535.

(5)      Includes: (i) for 1997, an expense allowance of $24,000 and the payment
         of premiums on a term life insurance  policy of $825; (ii) for 1996, an
         expense allowance of $24,000 and the payment of premiums on a term life
         insurance  policy of $825; and (iii) for 1995, an expense  allowance of
         $24,000 and the payment of premiums on a term life insurance  policy of
         $825.
</FN>
</TABLE>

STOCK OPTIONS/SAR GRANTS

         No stock option grants or Stock Appreciation  Rights ("SARs") were made
during the year ended December 31, 1997 to any of the named  executive  officers
of the Company.

               AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                      AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
         The  following  table  contains  information  with respect to the named
executive  officers  concerning  options held as of the year ended  December 31,
1997.
<CAPTION>
                                                                  Number of Securities
                                                                 Underlying Unexercised             Value of Unexercised
                        Shares                                        Options/SARs                      In-the-Money
                        Acquired on        Value                         as of                        Options/SARs at
        Name            Exercise (#)       Realized($)              December 31, 1997               December 31, 1997(1)
---------------------   ------------       -----------       ------------------------------   --------------------------
                                                                Exercisable/Unexercisable      Exercisable/Unexercisable
                                                                -------------------------      -------------------------
<S>                         <C>            <C>                    <C>                              <C>    
Bruce A. Wilson             -              $      -               102,500 /      -                 $   -    / $     -
Ricky Williams              -              $      -                55,000 /      -                 $   -    / $     -
M. Scott Foster             -              $      -               102,500 /      -                 $   -    / $     -
<FN>
                                          
(1)  Based upon the average closing bid and asked prices of the Company's Common
     Stock on December 31, 1997 ($3.625 per share),  less the exercise price for
     the  aggregate  number  of  shares  subject  to the  options,  none  of the
     Options/SARs are in-the-money.
</FN>
</TABLE>

Employment Agreements

         On May  15,  1995,  the  Company  entered  into  Amended  and  Restated
Employment Agreements with its President,  Chief Executive,  Chief Operating and
Chief Financial Officer,  Mr. Bruce A. Wilson, and with Mr. M. Scott Foster, its
Vice President of Sales and Marketing.

         Mr. Wilson's Employment Agreement, as amended and restated, extends the
term of Mr. Wilson's  employment through December 31, 1999. Mr. Wilson continues
to be employed as

                                       24
<PAGE>

President,  Chief Executive,  Chief Operating and Chief Financial Officer of the
Company,  and is to receive a base salary (the "Base  Salary")  for the calendar
year commencing January 1, 1995 of $125,000 per annum, of which $20,000 is to be
paid in a single lump sum on the 15th day of January,  1995 and the remainder of
$105,000  is to be paid over the course of the year  pursuant  to the  Company's
regular  payroll  periods;  for the calendar  years 1996 and 1997, the amount of
Base Salary is increased to $150,000 per annum,  of which  $30,000 is to be paid
in a single lump sum on January 15th of each year and the  remainder of $120,000
is to be paid over the  course of the year  pursuant  to the  Company's  regular
payroll periods; for the calendar years 1998 and 1999, the amount of Base Salary
is increased to $160,000 per annum,  of which  $40,000 is to be paid in a single
lump sum on January  15th of each year and the  remainder  of  $120,000 is to be
paid over the  course of the year  pursuant  to the  Company's  regular  payroll
periods.  Mr.  Wilson is to  further  receive,  for each  year of the  term,  an
incentive  bonus based upon the  Company's net pre-tax  profit  before  interest
expense for each  calendar  year,  which  incentive  bonus ranges from 8% of the
first  $100,000 of net pre-tax  profit to 3% of the net pre-tax profit in excess
of $250,000.  Mr.  Wilson is to receive an  automobile  allowance of $ 1,000 per
month,  a policy of term life  insurance in the amount of $500,000  payable to a
beneficiary designated by him, and long-term disability insurance.  In the event
Mr. Wilson is terminated  without cause, he is to receive a severance benefit of
24 months Base Salary if  terminated  after  December 31, 1997, or the remaining
amount of Base Salary if terminated prior to December 31,1997. In the event of a
Change in Control in the  Company (as  defined)  and,  following  such Change in
Control,  there is a change in the  composition  of a majority of the  Directors
comprising  the entire  Board of  Directors  immediately  prior to the Change in
Control,  Mr.  Wilson may elect,  within six months  following the change in the
composition  of the Board of  Directors  following  the  Change in  Control,  to
terminate his employment  with the Company and, in such case, he is to receive a
special severance payment in the form of the Company paying to Mr. Wilson,  with
respect to all options  granted to him prior to May 15, 1995,  the  differential
between the strike price of Mr.  Wilson's  options plus $3.20 and the average of
the closing  price of the Company's  Common Stock for the 10 days  preceding the
effective date of termination.

     In  connection  with  the  amendment  and  restatement  of  his  Employment
Agreement,  all options  granted to Mr.  Wilson  prior to December 31, 1999 have
been  re-designated  as  non-incentive  stock  options  and,  to the extent such
options become vested and are presently  exercisable,  may be exercised  through
December 31, 1999.  Options  granted to Mr. Wilson in accordance  with an option
grant  dated  November 4, 1993  continue  to be subject to the vesting  schedule
contained in the original  grant, of which 24,000 options vested on December 31,
1996.  Such vesting is subject to an  acceleration  of vesting in the event of a
Change in Control of the Company, as defined.

     In April,  1991, Mr. Wilson was granted 60,000  restricted shares under the
Company's 1991 Senior Management  Incentive Plan. These restricted shares are to
vest at the rate of 4,000  shares  per year over a 15 year  period,  subject  to
acceleration  of  vesting  in  certain  circumstances.  Except  in the  event of
acceleration,  each year, upon the vesting of each 4,000 shares,  the Company is
to pay to Mr. Wilson a cash bonus equal to 60% of the market value of the vested
shares,  for the  principal  purpose of  offsetting  taxes  attributable  to the
vesting  of the  shares.  The grant of  restricted  shares to Mr.  Wilson was in
furtherance  of the desire of the Board of Directors  to have Mr.  Wilson have a
significant stock interest in the Company which would

                                       25
<PAGE>

recognize his past performance and incentivize his continued efforts to maximize
the value of the  Company for all  stockholders.  As of December  31,  1997,  an
aggregate  of 28,000  restricted  shares  were  vested.  In the event of certain
Change in Control  transactions,  all then  unvested  restricted  shares  become
immediately vested.

         Mr. Foster's Employment Agreement, as amended and restated, extends the
term of Mr. Foster's  employment through December 31, 1998. Mr. Foster continues
to be employed as Vice President of Sales and Marketing of the Company and is to
receive a base salary  (the "Base  Salary")  for the  calendar  year  commencing
January  1, 1995 of  $80,000  per  annum,  payable  over the  course of the year
pursuant to the  Company's  regular  payroll  periods.  For each of the calendar
years 1996,  1997 and 1998,  the amount of Base Salary is  increased to $100,000
per annum,  of which  $20,000 is to be paid in a single lump sum on January 15th
of each of said  years,  and the  remainder  of  $80,000  is to be paid over the
course of the year pursuant to the Company's regular payroll periods. Mr. Foster
is to further receive, for each year of the term, an incentive bonus as follows:
(i) 1% on net  shipments  on  initial  orders to  personal  sales  accounts,  as
defined,  (ii) a  commission  of 5% of the amount on all Company  net  shipments
exceeding the preceding year's net shipments by 10% but not to exceed the sum of
$75,000,  and (iii) an  additional  amount of 4% of the  Company's  net  pre-tax
profits in excess of $ 100,000 and up to $250,000,  2% of net pre-tax profits in
excess of  $250,000  up to  $750,000  and 1% of net pretax  profits in excess of
$750,000.  Mr.  Foster is to receive  reimbursement  for all  travel  outside of
Northern  California,  a policy of term life insurance in the amount of $500,000
payable to a  beneficiary  designated  by him,  health and  longterm  disability
insurance. In the event Mr. Foster is terminated without cause, he is to receive
a severance  benefit of 24 months Base Salary if terminated  after  December 31,
1997,  or 24 months  Base Salary plus the amount of Base Salary from the date of
termination  to December 31, 1997 if  terminated  prior to December 31, 1997. In
the event of a Change in Control in the Company, as defined, and, following such
Change in  Control,  there is a change in the  composition  of a majority of the
Directors  comprising  the entire  Board of Directors  immediately  prior to the
Change in Control,  Mr. Foster may elect, within six months following the change
in the composition of the Board of Directors following the Change in Control, to
terminate his employment  with the Company and, in such case, he is to receive a
special severance payment in the form of the Company  purchasing from Mr. Foster
all of his vested and then presently  exercisable  options as of the date of his
termination  and which may have been granted to him prior to May 15, 1995.  Such
repurchase  is to be at a price of  $3.20  per  option  to the  extent  that the
average  closing price for the Company's  Common Stock for the 10 days preceding
the effective  date of  termination is less than $3.20 above the strike price of
his respective options.

         In  connection  with the amendment and  restatement  of his  Employment
Agreement,  all options  granted to Mr.  Foster  prior to December 31, 1999 have
been  re-designated  as  non-incentive  stock  options  and,  to the extent such
options vested and are presently exercisable,  may be exercised through December
31, 1999. Options granted to Mr. Foster in accordance with an option grant dated
November 4, 1993 continue to be subject to the vesting schedule contained in the
original grant, of which 30,000 options become vested on December 31,1996.  Such
vesting  is subject  to an  acceleration  of vesting in the event of a Change in
Control of the Company, as defined.

                                       26
<PAGE>

         On September 8, 1997, the Company  extended and modified the Employment
Agreement of Mr. Ricky  Williams,  Vice President of Operations.  Mr.  Williams'
Employment Agreement was extended through December 31, 2000. During the extended
term,  Mr.  Williams' base salary of $90,000 is increased by $5,000 in each year
of the extended term provided that the Company has achieved a net pre-tax profit
for the immediately preceding year. Mr. Williams is entitled to elect to receive
up to 10% of each year's base salary in January in each year, with the remainder
being paid to him over the course of the year pursuant to the Company's  regular
payroll policies. During the continuation of his employment,  Mr. Williams is to
receive an  automobile  allowance  of $750 per month and is to be provided  with
life  insurance  in the amount of  $250,000.  In  connection  with his  original
Employment Agreement, Mr. Williams was granted options to purchase 30,000 shares
of the Company's  Common Stock at an exercise  price of $4.75 per share.  All of
such  options are vested and are  exercisable  through  December  31,  2000.  On
November 4, 1993, Mr.  Williams was granted options to purchase 30,000 shares of
the Company's Common Stock at an exercise price of $6.625 per share, exercisable
through  December 31, 2000, and vesting in equal  increments on December 31st of
each year of the term of his  Agreement,  as extended,  commencing  December 31,
1994.

Senior Management Incentive Plan

         The Company's 1991 Senior Management Incentive Plan (sometimes referred
to as the "Plan" or the "Management  Plan") currently  provides for the issuance
of up to 465,000  shares of the Company's  Common Stock in  connection  with the
issuance of stock options and other stock purchase rights to executive officers,
key employees and  consultants.  To date,  options to acquire a total of 390,000
shares and an  additional  60,000  restricted  shares have been issued under the
Plan.

         The  Management  Plan is intended  to attract and retain key  executive
management  personnel whose performance is expected to have a substantial impact
on the  Company's  long-term  profit and growth  potential  by  encouraging  and
assisting  those persons to acquire  equity in the Company.  It is  contemplated
that only those executive  management  employees  (generally the Chairman of the
Board,   Vice-Chairman,   Chief  Executive  Officer,  Chief  Operating  Officer,
President and  Vice-Presidents  of the Company) who perform  services of special
importance to the Company will be eligible to  participate  under the Management
Plan,  although  other  full time  employees  of the  Company  are  eligible  to
participate  under  the Plan.  A total of  465,000  shares  of Common  Stock are
currently  reserved for issuance  under the  Management  Plan. It is anticipated
that awards made under the Management Plan will be subject to three-year vesting
periods,  although  the vesting  periods are  subject to the  discretion  of the
Administrator of the Board.

         Directors  who are not  otherwise  employed by the Company  will not be
eligible for participation in the Management Plan.

         The Management  Plan provides for four types of awards:  stock options,
incentive  stock rights,  stock  appreciation  rights  (including  limited stock
appreciation  rights) and  restricted  stock purchase  agreements,  as described
below.

                                       27
<PAGE>
         Stock Options.  Options granted under the Management Plan may be either
incentive  stock  options  ("ISOs")  or  options  which do not  qualify  as ISOs
("non-ISOs").  ISOs may be granted  at an option  price of not less than 100% of
the fair market value of the Common  Stock on the date of grant,  except that an
ISO granted to any person who owns capital stock  representing  more than 10% of
the total  combined  voting  power of all classes of Common Stock of the Company
("10% stockholder") must be granted at an exercise price of at least 110% of the
fair market  value of the Common  Stock on the date of the grant.  The  exercise
price of the  non-ISOs  may not be less than 65% of the fair market value of the
Common  Stock on the date of grant.  ISOs  granted  to  persons  other  than 10%
stockholders may be exercisable for a period of up to ten years from the date of
grant; ISOs granted to 10% stockholders may be exercisable for a period of up to
five years from the date of grant. No individual may be granted ISOs that become
exercisable  in any calendar year for Common Stock having a fair market value at
the time of grant in excess  of  $100,000.  Non-ISOs  may be  exercisable  for a
period of up to 13 years from the date of grant.

         Upon termination of employment or consulting services, an optionee will
be entitled to  exercise  the vested  portion of an option for a period of up to
three  months  after the date of  termination,  except  that if the  reason  for
termination was a discharge for cause, the option shall expire immediately,  and
if the reason  for  termination  was for death or  permanent  disability  of the
optionee, the vested portion of the option shall remain exercisable for a period
of twelve months thereafter.

         Incentive  Stock Rights.  Incentive  stock rights  consist of incentive
stock  units  equivalent  to one  share of  Common  Stock in  consideration  for
services performed for the Company.  If the employment or consulting services of
the holder with the Company  terminate prior to the end of the incentive  period
relating to the units  awarded,  the rights  shall  thereupon  be null and void,
except  that if  termination  is caused by death or  permanent  disability,  the
holder or his/her heirs,  as the case may be, shall be entitled to receive a pro
rata portion of the shares  represented by the units, based upon that portion of
the incentive period which shall have elapsed prior to the death or disability.

         Stock Appreciation  Rights (SARs). SARs may be granted to recipients of
options under the Management Plan. SARs may be granted  simultaneously  with, or
subsequent  to, the grant of a related option and may be exercised to the extent
that  the  related  option  is  exercisable,  except  that  no  general  SAR (as
hereinafter  defined) may be exercised within a period of six months of the date
of grant of such SAR and no SAR granted  with respect to an ISO may be exercised
unless the fair market value of the Common Stock on the date of exercise exceeds
the exercise  price of the ISO. A holder may be granted  general SARs  ("general
SARs") or limited SARs ("limited SARs"), or both. General SARs permit the holder
thereof to receive an amount (in cash,  shares of Common Stock or a  combination
of both) equal to the number of SARs  exercised  multiplied by the excess of the
fair market  value of the Common  Stock on the  exercise  date over the exercise
price of the related  option.  Limited SARs are similar to general SARs,  except
that, unless the Administrator determines otherwise,  they may be exercised only
during  a  prescribed  period  following  the  occurrence  of one or more of the
following  "Change of Control"  transactions:  (i) the  approval of the Board of
Directors of a consolidation or merger in which the Company is not the surviving
corporation, the sale of all or substantially all the

                                       28
<PAGE>
assets of the Company,  or the  liquidation or dissolution of the Company;  (ii)
the  commencement  of a tender or exchange offer for the Company's  Common Stock
(or securities  convertible  into Common Stock) without the prior consent of the
Board;  (iii) the  acquisition  of  beneficial  ownership by any person or other
entity  (other than the Company or any employee  benefit  plan  sponsored by the
Company) of  securities  of the Company  representing  25% or more of the voting
power of the Company's outstanding  securities;  or (iv) if during any period of
two years or less,  individuals  who at the beginning of such period  constitute
the  entire  Board  cease to  constitute  a majority  of the  Board,  unless the
election, or the nomination for election, of each new director is approved by at
least a majority of the directors then still in office.

         The exercise of any portion of either the related  option or the tandem
SARs will cause a  corresponding  reduction  in the  number of shares  remaining
subject to the option or the tandem SARs,  thus  maintaining  a balance  between
outstanding options and SARs.

         Restricted  Stock  Purchase   Agreements.   Restricted  stock  purchase
agreements  provide  for the sale by the  Company  of shares of Common  Stock at
prices  to be  determined  by the  Board,  which  shares  shall  be  subject  to
restrictions  on disposition for a stated period during which the purchaser must
continue employment with the Company in order to retain the shares.  Payment can
be made in cash,a  promissory  note or a combination  of both. If termination of
employment  occurs for any reason  within six months after the date of purchase,
or for any  reason  other than death or by  retirement  with the  consent of the
Company after the six-month  period but prior to the time that the  restrictions
on disposition  lapse, the Company shall have the option to reacquire the shares
at the original purchase price.

         Upon   expiration  of  the   applicable   restricted   period  and  the
satisfaction of any other applicable  conditions,  all or part of the restricted
shares and any dividends or other  distributions  not  distributed to the holder
(the "retained distributions") thereon will become vested. Any restricted shares
and any retained distributions thereon which do not so vest will be forfeited to
the Company.  If prior to the  expiration of the  restricted  period a holder is
terminated  without  cause or  because  of a total  disability  (in each case as
defined in the Management Plan), or dies, then,  unless otherwise  determined by
the  Administrator at the time of the grant, the restricted period applicable to
each award of restricted shares will thereupon be deemed to have expired. Unless
the Administrator  determines  otherwise,  if a holder's  employment  terminates
prior to the expiration of the applicable restricted period for any reason other
than as set forth above,  all restricted  shares and any retained  distributions
thereon will be forfeited.

         Accelerating  of the vesting of the awards made under the provisions of
the Management Plan shall occur on the first day following the occurrence of any
of the  following:  (a) the  approval by the  stockholders  of the Company of an
Approved  Transaction;  (b) a  Control  Purchase;  or  (c) a  Board  Change.  An
"Approved  Transaction"  is  defined as (A) any  consolidation  or merger of the
Company in which the Company is not the  continuing or surviving  corporation or
pursuant  to which  shares  of  Common  Stock  would  be  converted  into  cash,
securities  or other  property  other than a merger of the  Company in which the
holders  of  Common  Stock  immediately  prior  to  the  merger  have  the  same
proportionate ownership of common stock of the surviving corporation immediately
after the merger,  or (B) any sale, lease,  exchange,  or other transfer (in one
transaction or a series of related  transactions) of all, or substantially  all,
of the

                                       29
<PAGE>

assets of the  Company,  or (C) the  adoption  of any plan or  proposal  for the
liquidation or dissolution of the Company. In addition,  vesting will accelerate
in the event the Company fails to renew Mr. Wilson's employment agreement at the
conclusion of the term thereon on December 31, 1993 on terms  identical to those
in his present employment agreement.

         A "Control  Purchase" is defined as  circumstances  in which any person
(as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act),
corporation or other entity (other than the Company or any employee benefit plan
sponsored by the Company) (A) shall purchase any Common Stock of the Company (or
securities  convertible into the Company's Common Stock) for cash, securities or
any other  consideration  pursuant to a tender offer or exchange offer,  without
the prior consent of the Board of Directors, or (B) shall become the "beneficial
owner" (as such term is defined in Rule 13d-3 under the Exchange Act),  directly
or indirectly,  of securities of the Company  representing  twenty-five  percent
(25%) or more of the combined voting power of the then outstanding securities of
the  Company   ordinarily   (and  apart  from  rights   accruing  under  special
circumstances) having the right to vote in the election of directors (calculated
as provided in paragraph (d) of such Rule 13d-3 in the case of rights to acquire
the Company's securities).

         A "Board  Change"  is  defined as  circumstances  in which,  during any
period of two  consecutive  years or less,  individuals  who at the beginning of
such period constitute the entire Board shall cease for any reason to constitute
a majority  thereof  unless the election,  or the nomination for election by the
Company's stockholders,  of each new director was approved by a vote of at least
a majority of the directors then still in office.

Non-Employee Director Stock Option Plan

         At the Annual  Meeting held on August 11, 1995,  the Board of Directors
presented  for approval of the  Stockholders  the  Non-Employee  Director  Stock
Option Plan (the "Director Plan"), which approval was granted. The Director Plan
provides  for  issuance of a maximum of 75,000  shares of Common  Stock upon the
exercise  of stock  options  granted  under the  Director  Plan.  Options may be
granted  under the  Director  Plan  until  August 11,  2005 to (i)  non-employee
Directors as defined and (ii) members of any advisory  board  established by the
Company  who  are  not  full  time  employees  of  the  Company  or  any  of its
subsidiaries.  The Director Plan provides that each  non-employee  Director will
automatically  be granted an option to purchase  5,000  shares of the  Company's
Common Stock upon joining the Board of Directors  (or, for those persons who are
directors on the date of approval of the Director Plan by the  Stockholders,  on
such date),  and options to purchase  3,000  shares on each  anniversary  of the
initial date of service or date of approval, as the case may be.

         Under the terms of the Director  Plan,  the sum of the number of shares
to be received upon any grant  multiplied by the fair market value of each share
at the time of the grant may not exceed $75,000.  All awards shall be reduced to
the extent that they exceed such amount.  The exercise price for options granted
under the  Director  Plan shall be 100% of the fair  market  value of the Common
Stock on the date of grant  (or if there is no  closing  price  for such date of
grant, then the last preceding business day on which there was a closing price).
The "fair market  value"  shall mean (i) the closing  price of a share of Common
Stock on the American Stock

                                       30
<PAGE>

Exchange  ("AMEX")  or  other  national  securities  exchange;  or  (ii)  if the
Company's  Common Stock is not listed for trading on the AMEX or other  national
securities  exchange,  then the closing bid price of a share of Common  Stock on
the Nasdaq National Market System or Nasdaq SmallCap Market  (together  referred
to as "NASDAQ");  or (iii) in the event the Common Stock is not traded on either
the AMEX or the NASDAQ,  the fair market  value shall be the price of the Common
Stock as reported by the National  Quotation Bureau,  Inc., or a market maker of
the Company's  Common Stock; or (iv) if the Common Stock is not quoted by any of
the above,  by the Board of  Directors  acting in good  faith.  Until  otherwise
provided in the Director Plan,  the exercise price of options  granted under the
Director Plan must be paid at the time of exercise,  either in cash, by delivery
of shares of Common Stock of the Company or by a combination  of each.  The term
of each  option is five (5)  years  from the date of  grant,  unless  terminated
sooner as provided in the Director Plan. The Director Plan is  administered by a
committee of the Board of  Directors  composed of not fewer than two persons who
are officers of the Company (the  "Committee").  The Committee has no discretion
to determine which  non-employee  director will receive options or the number of
shares subject to the option,  the term of the option or the  exercisability  of
the  option.  However,  the  Committee  will  make  all  determinations  of  the
interpretation of the Director Plan.  Options granted under the Director Plan do
not qualify for incentive stock option treatment.

         As of March 16, 1998, there were outstanding options to purchase 60,000
shares under the Director Plan, at exercise  prices ranging from $3.69 to $10.50
per share, respectively.

Employee 401(k) Plan

         The Company  established a 401(k) Profit Sharing Plan and Trust through
the adoption of the Dun & Bradstreet  Pension  Services,  Inc.  Non-Standardized
401(k) Profit Sharing Plan and Trust (the "Plan"). The Plan is effective January
1, 1996 and covers all  employees of the Company.  Each present  employee or new
hire is eligible  to  participate  in the Plan after one year of  service.  Each
eligible  employee  may  elect  to  voluntarily  contribute  out  of  his or her
compensation amount ranging from 1% to 15% of compensation.  The Company, though
not required, may elect to make a matching contribution equal to a discretionary
percentage,   to  be  determined  by  the  Company,  of  the  employees'  salary
contributions.  Vesting of a participant's interest in the Plan is in accordance
with a schedule of vesting  ranging  from 20% after two years of service to 100%
after six years of service.


Item 11.          Security Ownership of Certain Beneficial
                  Owners and Management

         The following table sets forth certain information as of March 16, 1998
with respect to the ownership of Common Stock by (i) the persons  (including any
"group" as that term is used in Section 13(d)(3) of the Securities  Exchange Act
of 1934, as amended),  known by the Company to be the  beneficial  owner of more
than five percent of any class of the  Company's  voting  securities,  (ii) each
director and each officer  identified  in the Summary  Compensation  Table,  and
(iii) directors and executive officers as a group:


                                       31
<PAGE>
Name and Address of                        Amount of and Nature      Percentage
Beneficial Owner                           Beneficial Ownership       of Class
----------------                           --------------------       --------

Bruce A. Wilson                            155,600(1)(2)                6.5%
1700 Corporate Circle
Petaluma, CA  94954

John V. Winfield                           709,600(3)                  27.2%
2121 Avenue of the Stars
Los Angeles, CA  90067

The InterGroup Corporation                 374,400(4)                  15.4%
2121 Avenue of the Stars
Los Angeles, CA  90067

Robert Fagenson                             33,125(5)                   1.4%
19 Rector Street
New York, NY  10006

Starr Securities,Inc.                      131,048(6)                   5.6%
19 Rector Street
New York, NY 10006

Paul Bluhdorn                              181,256(7)                   7.9%
P.O. Box 7854
Burbank, CA 91510

Mark S. Siegel                              70,062(8)                   3.0%
P.O. Box 7854
Burbank, CA 91510

Yvette Bluhdorn                             71,738(8)(9)                3.1%
P.O. Box 7854
Burbank, CA 91510

Estate of Ludwig Jesselson                 182,071(10)(11)              7.9%
1301 Avenue of the Americas
New York, NY 10019

Michael Jesselson                           92,062(10)(11)(12)          4.0%
1301 Avenue of the Americas
New York, NY 10019

Ricky Williams                              55,000(13)                  2.3%
1700 Corporate Circle
Petaluma, CA  94954

M. Scott Foster                            102,500(14)                  4.3%
1700 Corporate Circle
Petaluma, CA 94954

Joseph F. Furlong III                       10,000(15)                    *
One Maritime Plaza
San Francisco, CA  94111

Daniel R. Coleman                           10,000(15)                    *
500 108th Avenue, NE
Bellevue, WA  98004

All Officers and Directors
as a Group (6 persons in
number)(1)(2)(3)(4)(13)(14)(15)          1,065,825                     36.8%

-----------------
                                       32
<PAGE>

*    Less than 1%.

(1)  Includes 102,500 vested and presently exercisable options.

(2)  Includes 32,000  restricted  shares subject to vesting at the rate of 4,000
     shares per year on December 31st in each year.

(3)  Based upon  information  contained in an Amendment  No. 1 to a Schedule 13D
     dated December 19, 1997 filed on behalf of John V. Winfield, The InterGroup
     Corporation  and  Santa Fe  Financial  Corporation  (the  "Winfield  13D").
     Includes  (i)  167,600  shares of Common  Stock and Common  Stock  Purchase
     Warrants  to  purchase  150,000  shares  of Common  Stock  owned by John V.
     Winfield,  (ii) 224,400  shares of Common  stock and Common Stock  Purchase
     Warrants to purchase 150,000 shares of Common Stock owned by The InterGroup
     Corporation  and as to which Mr. Winfield has shared voting and dispositive
     power,  and (iii) 12,600 shares of Common Stock owned by Santa Fe Financial
     Corporation  and as to which Mr. Winfield has shared voting and dispositive
     power.  Also  includes  options to purchase  5,000  shares of Common  Stock
     granted  to Mr.  Winfield  upon his  election  to the  Board  of  Directors
     pursuant to the Company's Non-Employee Director Plan.

(4)  Based upon information  contained in the Winfield 13D, and includes 224,400
     shares of Common Stock and 150,000 Common Stock Purchase  Warrants owned by
     The InterGroup Corporation.

(5)  Includes vested options to purchase  30,000 shares of the Company's  Common
     Stock.

(6)  Based upon (i)  information  contained  in an  amendment  to a Schedule 13D
     dated March 3, 1992 filed on behalf of Starr Securities, Inc. ("Starr") and
     its  shareholders  as members of a group (the "Starr 13D") and (ii) records
     of the Company  indicating a transfer by Starr of 12,500 Warrants  included
     in the Starr 13D. Includes 91,628 shares of Common Stock owned of record by
     Starr.  Includes  20,000  Warrants  which vested and became  exercisable on
     November  4,  1996.  According  to the  Starr  13D,  Starr is a  registered
     broker-dealer  and the share  ownership  reported  therein does not include
     shares held by Starr in its trading account.

(7)  Based on  information  contained  in an  amendment  to a Schedule 13D dated
     January 27, 1993 (the  "Bluhdorn  13D"),  filed on behalf of Paul Bluhdorn,
     Yvette  Bluhdorn and Mark Siegel.  Includes  31,250 shares of the Company's
     Common  stock owned by Mr.  Bluhdorn,  and 150,006  shares of Common  Stock
     issued in  February,  1998 upon  conversion  of 150,006  shares of Series D
     Preferred  Stock owned by Mr.  Bluhdorn.  Does not include shares of Common
     Stock owned by Ms.  Bluhdorn or Mr.  Siegel,  as to which  shares of Common
     Stock Mr. Bluhdorn disclaims beneficial ownership.

(8)  Based  on  information  contained  in the  Bluhdorn  13D and the  corporate
     records of the Company.

(9)  Based  on  information  contained  in the  Bluhdorn  13D and the  corporate
     records of the  Company.  Does not include  shares of Common Stock owned by
     Mr.  Bluhdorn  and Mr.  Siegel  as to which  shares of  Common  Stock  Mrs.
     Bluhdorn disclaims beneficial ownership.

(10) Ludwig  Jesselson died on April 3, 1993.  Mr.  Michael  Jesselson is one of
     four  Executors of the estate of Mr.  Jesselson.  As Executor,  Mr. Michael
     Jesselson  retains  the  authority  with regard to the  disposition  of the
     shares.

(11) Based on  information  contained  in an  amendment  to a Schedule 13D dated
     September  21, 1995 (the  "Jesselson  13D") on behalf of Ludwig  Jesselson,
     Michael  Jesselson,  and the Estate of Ludwig  Jesselson.  Includes 175,480
     shares of the  Company's  Common Stock owned by Ludwig  Jesselson and 6,583
     shares  of the  Common  Stock  owned by a trust  created  under the will of
     Ludwig Jesselson, of which Michael Jesselson is the former

                                       33
<PAGE>

     trustee.  Does not include  92,062  shares of Common Stock owned by Michael
     Jesselson,  as to which shares of Common Stock Ludwig  Jesselson  disclaims
     beneficial ownership.

(12) Based on  information  contained  in the  Jesselson  13D.  Does not include
     229,821 shares of Common Stock beneficially  owned by Ludwig Jesselson,  as
     to which shares of Common Stock Michael Jesselson had disclaimed beneficial
     ownership.  To the extent Michael  Jesselson may be a beneficiary under the
     Estate of Ludwig Jesselson, Michael Jesselson may be considered an indirect
     beneficial owner of these shares.

(13) Includes 55,000 vested and presently exercisable options.

(14) Includes 102,500 vested and presently exercisable options.

(15) Includes 10,000 vested and presently exercisable options.


Item 12.     Certain Relationships and Related Transactions

         For  information  concerning  the  employment  agreements  of  Bruce A.
Wilson,   Ricky   Williams  and  M.  Scott   Foster,   see  Item  10  "Executive
Compensation".

         For information  concerning the issuance of 60,000 restricted shares to
Mr. Bruce A. Wilson, see Item 10 "Executive Compensation".

         On September 29, 1997,  the Company  completed a transaction  with John
Winfield and InterGroup Corporation,  an affiliate of Mr. Winfield.  Pursuant to
the  transaction,  the Company  sold  150,000  shares of its Common Stock to Mr.
Winfield for an  aggregate  of $487,500  and sold  150,000  shares of its Common
Stock to  InterGroup  Corporation  for an aggregate of $487,500.  As part of the
transaction,  Mr. Winfield and InterGroup  Corporation were each issued warrants
to  purchase  150,000  shares  each of the  Company's  Common  Stock,  of  which
one-third of such  warrants  are  exercisable  at $4.00 per share,  one-third at
$4.25 per share,  and one-third at $4.50 per share. The warrants are exercisable
commencing  September 29, 1997 and may be exercised  through September 29, 2002.
Mr. Winfield and InterGroup  Corporation  were each accorded  certain demand and
piggyback registration rights. In connection with the transaction,  Mr. Winfield
was elected a Class 3 Director and the Company agreed to use its best efforts to
cause Mr. Winfield to be elected as a Director through September 29, 2000.


Item 13.          Exhibits, List and
                  Reports on Form 8-K

(A)      1.  Financial Statements

         See Index to Financial Statements Attached hereto.

                                       34
<PAGE>

         2.  Financial Statement Schedules

         See Index to Financial Statements attached hereto.

         3.  Exhibits:

         Incorporated  by  reference  to the  Exhibit  Index  at the end of this
         Report.

(B)      Reports on Form 8-K

         During  the last  quarter of the period  covered  by this  Report,  the
following reports on Form 8-K were filed by the Registrant:

Date of Report              Item Reported                Description of Item
--------------              -------------                -------------------

October 14, 1997         Item 5. Other Events         Transaction   relating  to
                                                      the sale of  Common  Stock
                                                      and  issuance  of Warrants
                                                      to  John V.  Winfield  and
                                                      InterGroup Corporation


                   [BALANCE OF PAGE INTENTIONALLY LEFT BLANK]

                                       35
<PAGE>
                                   SIGNATURES

         In  accordance  with  Section  13 or 15(d)  of the  Exchange  Act,  the
Registrant  caused  this  Report to be signed on its behalf by the  undersigned,
thereunto duly authorized.

                                  HEALTHY PLANET PRODUCTS, INC.


                                  By \s\ Bruce A. Wilson
                                    -------------------------------------------
                                    Bruce A. Wilson
                                    Chairman, President, Chief Executive, Chief 
                                    Operating and Chief Financial Officer

Dated:  March 30, 1998
        (February 4, 1999 as to Amendment No. 2)

         In accordance  with the Exchange Act, this Report has been signed below
by the following  persons on behalf of the  Registrant and in the capacities and
on the dates indicated.


 \s\ Bruce A. Wilson                                   March 30, 1998
----------------------------------
Bruce A. Wilson
 Chairman of the Board, President,
 Chief Executive, Chief Operating
 and Chief Financial Officer 
 (Principal Executive, Financial
 and Accounting Officer)


 \s\ Robert Fagenson                                   March 30, 1998
----------------------------------
Robert Fagenson
 Director


 \s\ John V. Winfield                                  March 30, 1998
----------------------------------
John V. Winfield
 Director


 \s\ M. Scott Foster                                   March 30, 1998
----------------------------------
M. Scott Foster
 Director, Vice President-Sales


 \s\ Joseph F. Furlong III                             March 30, 1998
----------------------------------
Joseph F. Furlong III
 Director


 \s\ Daniel R. Coleman                                 March 30, 1998
----------------------------------
Daniel R. Coleman
 Director

                                       36
<PAGE>

                                  EXHIBIT INDEX

         The exhibits designated with an asterisk (*) have previously been filed
with the Commission and, pursuant to 17 C.F.R. Secs. 201.24 and 240.12b-32,  are
incorporated by reference to the document  referenced in brackets  following the
descriptions of such exhibits.

       Exhibit
         No.                Description
       -------              -----------

         2.1*     Certificate  of  Merger  of  Carolyn  Bean  Publishing,   Ltd.
                  (California)  and Carolyn  Bean  Publishing,  Ltd.  (Delaware)
                  [Exhibit 2.l to Registration  Statement on Form S-18, File No.
                  2-97768]

         3.l*     Amended  and  Restated   Certificate   of   Incorporation   of
                  Registrant [Exhibit 3 to Quarterly Report on Form 10-Q for the
                  quarterly period ended June 30, 1990]

         3.2*     Certificate of Amendment of Certificate of Incorporation filed
                  on August 2, 1993  effecting  change in  Registrant's  name to
                  Healthy Planet Products, Inc. [Exhibit 3.2 to Annual Report on
                  Form 10-KSB for the year ended December 31, 1993]

         3.3*     By-Laws  [Exhibit 3.2 to Registration  Statement on Form S-18,
                  File No. 2-97768]

         4.l*     Form of  Common  Stock  Certificate  [Exhibit  4 to  Quarterly
                  Report on Form 10-Q for the  quarterly  period  ended June 30,
                  1990]

         4.3*     Form of  Rights,  Designation  and  Preferences  of  Series  D
                  Preferred Stock [Exhibit 4 to Current Report on Form 8-K dated
                  January 8, 1993]

         10.1*    Form of Employment  Agreement between  Registrant and Bruce A.
                  Wilson  [Exhibit  10.1 to  Current  Report  on Form 8-K  dated
                  December 21, 1990]

         10.2*    Extension Agreement dated February 24, 1993 between Registrant
                  and Bruce Wilson extending  Employment Agreement [Exhibit 10.3
                  to Annual Report on Form 10-KSB dated March 22, 1993]

         10.3*    Extension and Modification  Agreement dated September 10, 1993
                  extending  Employment Agreement of Rick Williams [Exhibit 10.1
                  to Current Report on Form 8-K dated September 24, 1993]

         10.4*    Modification  to  Employment  Agreement  of  M.  Scott  Foster
                  [Exhibit  10.2 to Current  Report on Form 8-K dated  September
                  24, 1993]

                                       37
<PAGE>

         10.5*    Modification  to  Employment  Agreement  of  Bruce  A.  Wilson
                  [Exhibit  10 to Current  Report on Form 8-K dated  November 3,
                  1993]

         10.6*    License  Agreement  between  Registrant  and Sierra Club dated
                  December 30, 1994 [Exhibit 10.1 to Current  Report on Form 8-K
                  dated January 24, 1995]

         10.7*    License  Agreement  between   Registrant  and  The  Wilderness
                  Society dated June 24, 1994 [Exhibit 10.1 to Current Report on
                  Form 8-K dated July 1, 1994]

         10.8*    License  Agreement  between  Registrant  and The Marine Mammal
                  Center dated July 28, 1994  [Exhibit  10.10 to Form 10-KSB for
                  year ended December 31, 1995]

         10.9*    Lease  for  premises  1694-1736  Corporate  Circle,  Petaluma,
                  California  94954  [Exhibit 10.1 to Current Report on Form 8-K
                  dated February 15, 1996]

         10.10*   License Agreement between  Registrant and Twin Oaks Publishing
                  Limited  dated  December  18,  1995  [Exhibit  10.1 to Current
                  Report on Form 8-K dated December 18, 1995]

         10.11*   License  Agreement  with the  Zoological  Society of San Diego
                  dated  September 30, 1996  [Exhibit 10.1 to Current  Report on
                  Form 8-K dated November 5, 1996]

         11       Computation of Earnings per Common Share

         23       Consent  of  Moss   Adams,   Independent   Auditors,   to  the
                  incorporation  by reference in the  Registration  Statement of
                  Healthy Planet Products,  Inc. on Form S-8 (File No. 33-84740)
                  of their report dated February 6, 1998

         27       Financial Data Schedule

         28.l*    Registrant's 1991 Senior Management Incentive Plan [Exhibit 28
                  to Form 8- K dated June 27, 1991]

         28.2*    Registrant's Non-Employee Director Stock Option Plan

                                       38
<PAGE>

                          HEALTHY PLANET PRODUCTS, INC.

                          INDEX TO FINANCIAL STATEMENTS


                                                                         Page

Independent Auditor's Report                                             F-

Balance Sheets - December 31, 1996 and 1997                              F-

Statements of Income -
 Years ended December 31, 1996 and 1997                                  F-

Statements of Shareholders' Equity -
 Years ended December 31, 1996 and 1997                                  F-

Statements of Cash Flows -
 Years ended December 31, 1996 and 1997                                  F-

Notes to Financial Statements                                            F-

<PAGE>
--------------------------------------------------------------------------------



                          HEALTHY PLANET PRODUCTS, INC.

                          INDEPENDENT AUDITOR'S REPORT
                                       AND
                              FINANCIAL STATEMENTS

                           DECEMBER 31, 1997 AND 1996






--------------------------------------------------------------------------------
<PAGE>


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




                                    CONTENTS


                                                                           PAGE

INDEPENDENT AUDITOR'S REPORT...............................................F - 1


FINANCIAL STATEMENTS

     Balance sheets - December 31, 1997 and 1996...........................F - 2

     Statements of Operations -
         Years ended December 31, 1997 and 1996............................F - 4

     Statements of Shareholders' Equity -
         Years ended December 31, 1997 and 1996............................F - 5

     Statements of Cash Flows -
         Years ended December 31, 1997 and 1996............................F - 6

     Notes to Financial Statements.........................................F - 7





--------------------------------------------------------------------------------
<PAGE>



                                                                       
INDEPENDENT AUDITOR'S REPORT



To the Board of Directors
Healthy Planet Products, Inc.


We have audited the  accompanying  balance  sheets of Healthy  Planet  Products,
Inc.,  as of  December  31,  1997  and  1996,  and  the  related  statements  of
operations,  shareholders' equity and cash flows for the years then ended. These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Healthy Planet Products,  Inc.,
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.



                                                    /s/ MOSS ADAMS LLP

Santa Rosa, California
February 6, 1998

                                                                        Page F-1
<PAGE>

                                                   HEALTHY PLANET PRODUCTS, INC.
                                                                  BALANCE SHEETS
                                                      December 31, 1997 and 1996
--------------------------------------------------------------------------------

                                     ASSETS

                                                         1997            1996
                                                     ----------       ----------
CURRENT ASSETS
     Cash and cash equivalents                       $3,286,100       $1,650,600
     Marketable securities                              250,000        1,989,300
     Accounts receivable                                754,300        1,003,400
     Inventories                                      1,541,000        1,418,000
     Prepaid expenses                                   115,700          125,200
     Deferred income taxes                              264,900          377,000
                                                     ----------       ----------
             Total current assets                     6,212,000        6,563,500
                                                     ----------       ----------
PROPERTY AND EQUIPMENT                                  851,400          454,800
                                                     ----------       ----------
OTHER ASSETS
     Deferred income taxes                              685,800        1,506,000
     Publishing rights                                  137,800           83,600
     Other                                              149,000          166,000
                                                     ----------       ----------
                                                        972,600        1,755,600
                                                     ----------       ----------
             Total assets                            $8,036,000       $8,773,900
                                                     ==========       ==========

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


--------------------------------------------------------------------------------
                                                                        Page F-2
<PAGE>

<TABLE>

                                                                HEALTHY PLANET PRODUCTS, INC.
                                                                   BALANCE SHEETS (Continued)
                                                                   December 31, 1997 and 1996
---------------------------------------------------------------------------------------------

                      LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
                                                                       1997           1996
                                                                 ------------    ------------
<S>                                                             <C>             <C>
CURRENT LIABILITIES
     Accounts payable                                            $    376,000    $    394,800
     Royalties payable                                                  4,600           7,400
     Commissions payable                                               94,200         118,000
     Income taxes payable                                                 800          21,000
     Series B preferred stock redemption and dividends payable        161,500          61,500
     Accrued wages, bonuses and payroll taxes                          47,000          70,600
     Accrued liabilities                                               20,300          48,500
     Current portion of long-term debt                                101,600            --
                                                                 ------------    ------------
             Total current liabilities                                806,000         721,800
                                                                 ------------    ------------
OTHER LIABILITIES
     Long-term debt, net of current portion                           142,800            --
     Accrued rent payable                                              85,600          40,500
                                                                 ------------    ------------
                                                                      228,400          40,500
                                                                 ------------    ------------

SHAREHOLDERS' EQUITY
     Common stock, $.01 par value, 12,000,000 shares
       authorized,  2,132,362 and 1,827,362 shares
       issued and outstanding, respectively                            21,300          18,300
     Preferred stock, with aggregate liquidation
       preference totaling $926,700                                    18,100          18,700
     Additional paid-in capital                                    13,127,100      12,308,200
     Accumulated deficit                                           (6,164,900)     (4,333,600)
                                                                 ------------    ------------
             Total shareholders' equity                             7,001,600       8,011,600
                                                                 ------------    ------------
             Total liabilities and shareholders' equity          $  8,036,000    $  8,773,900
                                                                 ============    ============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>

---------------------------------------------------------------------------------------------
                                                                                     Page F-3
</TABLE>
<PAGE>


                                                   HEALTHY PLANET PRODUCTS, INC.
                                                        STATEMENTS OF OPERATIONS
                                          Years Ended December 31, 1997 and 1996
--------------------------------------------------------------------------------


                                                       1997             1996
                                                   -----------      -----------
NET SALES                                          $ 4,099,600      $ 4,632,400
COST OF GOODS SOLD                                   2,484,600        1,965,500
                                                   -----------      -----------
GROSS PROFIT                                         1,615,000        2,666,900
                                                   -----------      -----------
OPERATING EXPENSES
        Selling, shipping and marketing              1,050,200          898,700
        General and administrative                   1,668,400        1,648,400
                                                   -----------      -----------
                                                     2,718,600        2,547,100
                                                   -----------      -----------
OPERATING INCOME (LOSS)                             (1,103,600)         119,800
                                                   -----------      -----------
OTHER INCOME (EXPENSE)
        Interest income                                144,500          158,400
        Other income                                    48,400          134,900
                                                   -----------      -----------
                                                       192,900          293,300
                                                   -----------      -----------
INCOME (LOSS) BEFORE INCOME TAXES                     (910,700)         413,100

PROVISION FOR INCOME TAXES                             933,100          161,000
                                                   -----------      -----------
NET INCOME (LOSS)                                   (1,843,800)         252,100

DIVIDENDS PAID AND ACCUMULATED
        ON PREFERRED STOCK                                --             (9,000)
                                                   -----------      -----------
INCOME (LOSS) APPLICABLE TO COMMON STOCK           $(1,843,800)     $   243,100
                                                   ===========      ===========
EARNINGS (LOSS) PER COMMON SHARE                   $     (0.97)     $      0.13
                                                   ===========      ===========
EARNINGS (LOSS) PER COMMON SHARE-
        ASSUMING DILUTION                          $     (0.97)     $      0.12
                                                   ===========      ===========


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

--------------------------------------------------------------------------------
                                                                        Page F-4
<PAGE>


                                                   HEALTHY PLANET PRODUCTS, INC.
                                              STATEMENTS OF SHAREHOLDERS' EQUITY
                                                      December 31, 1997 and 1996
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                              PREFERRED STOCK                  
                                                                -----------------------------------------------
                                             COMMON STOCK             SERIES B                  SERIES D      
                                        ---------------------   -----------------------------------------------
                                          SHARES      AMOUNT     SHARES       AMOUNT        SHARES       AMOUNT
                                        ---------   ---------   ---------    ---------    ---------    --------
<S>                                    <C>         <C>              <C>     <C>            <C>        <C>
Balance, December 31, 1995             1,744,028   $  17,400         834    $     100      254,675    $  25,500
  Net income for the year ended
    December 31, 1996                       --          --          --           --           --           --
  Net unrealized loss on marketable
    securities                              --          --          --           --           --           --
  Conversion of Series D Preferred
    stock to common stock                 68,334         700        --           --        (68,334)      (6,900)
  Vesting of 4,000 restricted shares
    of common stock                         --          --          --           --           --           --
  Exercise of employee stock
    options                               15,000         200        --           --           --           --
  Dividends payable on Series B
    Preferred stock                         --          --          --           --           --           --
                                       ---------   ---------   ---------    ---------    ---------    ---------

Balance, December 31, 1996             1,827,362      18,300         834          100      186,341       18,600
  Net loss for the year ended
    December 31, 1997                       --          --          --           --           --           --
  Net unrealized gain on marketable
    securities                              --          --          --           --           --           --
  Redemption of Series B Preferred
    stock                                   --          --          (834)        (100)        --           --
  Conversion of Series D Preferred
    stock to common stock                  5,000        --          --           --         (5,000)        (500)
  Vesting of 4,000 restricted shares
    of common stock                         --          --          --           --           --           --
  Sale of common stock
    net of $76,000 issuance costs        300,000       3,000        --           --           --           --
                                       ---------   ---------   ---------    ---------    ---------    ---------

 Balance, December 31, 1997            2,132,362   $  21,300        --      $    --        181,341    $  18,100
                                       =========   =========   =========    =========    =========    =========



                                         ADDITIONAL                    
                                          PAID-IN       ACCUMULATED    
                                          CAPITAL         DEFICIT      
                                       ------------    -------------    
                                                                       
Balance, December 31, 1995             $ 12,189,600    $ (4,522,200)
  Net income for the year ended
    December 31, 1996                          --           252,100
  Net unrealized loss on marketable
    securities                                 --            (2,000)
  Conversion of Series D Preferred
    stock to common stock                     6,200            --   
  Vesting of 4,000 restricted shares
    of common stock                          22,500            --   
  Exercise of employee stock
    options                                  89,900            --   
  Dividends payable on Series B
    Preferred stock                            --           (61,500)
                                       ------------    ------------

Balance, December 31, 1996               12,308,200      (4,333,600)
  Net loss for the year ended
    December 31, 1997                          --        (1,843,800)
  Net unrealized gain on marketable
    securities                                 --            12,500
  Redemption of Series B Preferred
    stock                                   (99,900)           --   
  Conversion of Series D Preferred
    stock to common stock                       500            --   
  Vesting of 4,000 restricted shares
    of common stock                          22,300            --   
  Sale of common stock
    net of $76,000 issuance costs           896,000            --   
                                       ------------    ------------

 Balance, December 31, 1997            $ 13,127,100    $ (6,164,900)
                                       ============    ============

<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

--------------------------------------------------------------------------------
                                                                        Page F-5
<PAGE>


<TABLE>
                                                          HEALTHY PLANET PRODUCTS, INC.
                                                               STATEMENTS OF CASH FLOWS
                                                 Years Ended December 31, 1997 and 1996
---------------------------------------------------------------------------------------
<CAPTION>
                                                                  1997           1996
                                                             ------------   -----------
<S>                                                          <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income (loss)                                          $(1,843,800)   $   252,100
  Adjustments to reconcile net income (loss) to net
    cash used by operating activities:
     Depreciation and amortization                               202,300        188,100
     Vesting of restricted shares                                 22,500         22,500
     Deferred income taxes                                       932,300        140,000
     Net change in unrealized gains on cash equivalents and
       marketable securities                                      12,500           --
    Change in allowance for doubtful accounts and returns        (71,500)      (112,400)
    Loss on disposal of fixed assets                                --           12,500

    Changes in:
      Accounts receivable                                        320,600       (154,500)
      Inventories                                               (123,000)      (512,700)
      Prepaid expenses                                             9,500        (92,000)
      Accounts payable                                           (18,800)       100,900
      Royalties payable                                           (2,800)        (1,200)
      Commissions payable                                        (23,800)       (38,000)
      Income taxes payable                                       (20,200)        11,400
      Accrued wages, bonuses and payroll taxes                   (23,800)       (60,900)
      Accrued liabilities                                        (28,200)        30,600
      Accrued rent payable                                        45,100        (49,900)
                                                             -----------    -----------
        Net cash used by operating activities                   (611,100)      (263,500)
                                                             -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES
  Maturity of marketable securities                            1,989,300           --
  Other                                                           17,000       (150,800)
  Purchases of property and equipment                           (271,400)      (137,700)
  Purchases of marketable securities                            (250,000)    (1,991,300)
  Purchase of publishing rights                                 (127,300)       (38,200)
                                                             -----------    -----------
        Net cash provided (used) by investing activities       1,357,600     (2,318,000)
                                                             -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES
  Net proceeds from sale of common stock                         899,000           --
  Principal repayments on note payable                           (10,000)          --
  Proceeds from exercise of employee stock options                  --           90,000
                                                             -----------    -----------
        Net cash provided by financing activities                889,000         90,000
                                                             -----------    -----------
INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS                                             1,635,500     (2,491,500)
CASH AND CASH EQUIVALENTS
  Beginning of year                                            1,650,600      4,142,100
                                                             -----------    -----------

  End of year                                                $ 3,286,100    $ 1,650,600
                                                             ===========    ===========

<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
---------------------------------------------------------------------------------------
                                                                               Page F-6
</TABLE>

<PAGE>

                                                   HEALTHY PLANET PRODUCTS, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
         POLICIES

Description of operations - Healthy Planet Products,  Inc., designs,  publishes,
markets  and  distributes  greeting  cards,  stationery  and  other  gift  items
throughout the United States and Canada.  The Company's products are marketed to
over 4,900 retail sales outlets. A small portion of Company sales are the result
of direct response catalog sales. The majority of the Company's sales are in the
Sierra Club's line of blank notes and holiday greeting cards.

Cash and cash equivalents and marketable  securities - The Company considers all
investments  with  maturities at the time of acquisition of three months or less
to   be   cash   equivalents.    Marketable   securities   are   classified   as
available-for-sale  and are available to support  current  operations or to take
advantage of other  investment  opportunities.  Cash  equivalents and marketable
securities  are stated at  estimated  fair value  based upon  market  quotes and
consist of CD's,  money funds,  and United States  government and Federal agency
securities.  Unrealized  gains and losses are  computed on the basis of specific
identification and are included in retained earnings.  Realized gains and losses
are included in other income. Interest earned is included in interest income.

Inventory  -  Inventory  consists  of  unprinted  paper,  unbatched  and batched
greeting cards,  stationary,  and other gift items and is stated at the lower of
cost (first-in, first-out method) or market.

Property  and  equipment  - Property  and  equipment  are stated at cost and are
depreciated  and  amortized  using the  straight-line  method over the estimated
useful  lives of the  assets  or over the  period  of the  lease.  Additions  or
improvements  to  property  and  equipment  are   capitalized  at  cost,   while
maintenance and repair expenditures are charged to operations.  Estimated useful
lives are as follows:

 
     Machinery, equipment and leasehold improvements         3  -   10 years
     Molds                                                           5 years
     Color separations                                               3 years
     Furniture and fixtures                                          5 years
     Computer software                                               5 years




Royalties - The Company pays royalties to licensers and artists for use of their
names, logos and card designs based on actual volume of cards sold.

Income  taxes - The  provision  for income  taxes is based on  pre-tax  earnings
reported in the financial  statements,  adjusted for requirements of current tax
law, plus the change in deferred taxes.  Deferred tax assets and liabilities are
recognized  using  enacted  tax  rates  and  reflect  the  expected  future  tax
consequences of temporary differences between the recorded amounts of assets and
liabilities  for financial  reporting  purposes and tax basis of such assets and
liabilities and future benefits from net operating loss  carryforwards and other
expenses previously recorded for financial reporting purposes.  Income taxes are
described further in Note 7.

Publishing rights - Publishing rights consist of costs incurred to obtain images
for use on the Company's products. Such costs are capitalized and amortized over
three years.

--------------------------------------------------------------------------------
                                                                        Page F-7
<PAGE>



                                                   HEALTHY PLANET PRODUCTS, INC.
                                       NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------------------------------------



NOTE  1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
          POLICIES (Continued)

Concentrations  of  risk -  Financial  instruments  potentially  subjecting  the
Company to  concentrations  of credit  risk  consist  primarily  of bank  demand
deposits in excess of FDIC insurance thresholds and trade receivable balances of
the Company's largest customers.  Cash equivalents consist of CD's, money funds,
and United  States  government  and Federal  agency  securities  held at various
financial   institutions.   The  CD's  are  within  FDIC  insurance  thresholds.
Receivables are not  collateralized,  but the Company  conducts  frequent credit
checks on customers with material balances.

Use of estimates - The  preparation of financial  statements in conformity  with
generally accepted accounting principles requires the Company make estimates and
assumptions affecting the reported amounts of assets, liabilities,  revenues and
expenses,  and  disclosure of  contingent  assets and  liabilities.  The amounts
estimated could differ from actual results.

Advertising - Costs  associated  with the production of catalogs are capitalized
and  amortized  over  the  expected  life of the  catalog  of 1-2  years.  Total
capitalized  catalog  costs at  December  31,  1997 and 1996  were  $42,300  and
$75,500,  respectively.  All other  advertising  costs are expensed as incurred.
Advertising  expense  totaled  $130,700 and $24,800 for the years ended December
31, 1997 and 1996, respectively.

Fair value of financial instruments - The following methods and assumptions were
used by the  Company in  estimating  its fair value  disclosures  for  financial
instruments:

Cash, CD's, and money funds: The carrying amount approximates fair value because
of the short maturities of these instruments.

United  States  government  and  Federal  agency  securities:  The fair value is
estimated based on quoted market prices.

Long-term debt: Based on the borrowing rates currently  available to the Company
for loans with similar terms and average maturities, the fair value of long-term
debt approximates cost.

Earnings (loss) per share - In 1997, the Company adopted  Statement of Financial
Accounting  Standards  ("SFAS") No. 128, "Earnings Per Share". In February 1998,
the Securities and Exchange  Commission  ("SEC") staff released Staff Accounting
Bulletin  ("SAB")  No. 98,  "Computations  of Earnings  per  Share".  SAB No. 98
revises  prior  SEC  guidance  concerning  presentation  of  earnings  per share
information  for companies  going public,  and requires all companies to present
earnings per share for all periods for which  income  statement  information  is
presented in accordance with SFAS No. 128. Earnings (loss) per common share were
computed  using  the  weighted  average  number of  common  shares  outstanding.
Earnings per common share  assuming  dilution were  computed  using the weighted
average number of common shares and the common equivalent shares that would have
been outstanding if the Company's dilutive potential shares had been issued. The
treasury  stock method was used to calculate  the  potential  number of dilutive
shares associated with the Company's outstanding stock options and warrants.

New  accounting  pronouncements  - In June 1997,  the FASB  issued SFAS No. 130,
"Reporting  Comprehensive  Income",  which  establishes  standards for reporting
comprehensive income and its components (revenues,  expenses,  gains and losses)
in  financial  statements.   SFAS  No.  130  requires  classification  of  other
comprehensive  income  in  a  financial  statement,   and  the  display  of  the
accumulated  balance of other  comprehensive  income  separately  form  retained
earnings and additional  paid-in  capital.  SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. The Company believes this pronouncement
will not have a material effect on its financial statements.

--------------------------------------------------------------------------------
                                                                        Page F-8
<PAGE>


                                                   HEALTHY PLANET PRODUCTS, INC.
                                       NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------------------------------------




NOTE  2 -     SHORT-TERM INVESTMENTS

Following is a summary of short-term  investments  included in cash  equivalents
and marketable securities:
<TABLE>
<CAPTION>
                                                             Gross        Gross
                                                          Unrealized   Unrealized      Estimated
                                                            Holding      Holding         Fair
                                             Cost            Gains       Losses          Value
                                         -----------     -----------   -----------    -----------
<S>                                      <C>            <C>            <C>            <C> 
December 31, 1997:
  Federal agency securities              $ 3,113,300    $    10,500    $      --      $ 3,123,800
                                         ===========    ===========    ===========
  Less short-term investments included
    in cash equivalents                                                                (2,873,800)
                                                                                      -----------

  Marketable securities                                                               $   250,000
                                                                                      ===========

December 31, 1996:
  U. S. Treasury securities              $ 1,241,200    $     1,300    $    (2,500)   $ 1,240,000
  Federal agency securities                  750,100           --             (800)       749,300
                                         -----------    -----------    -----------    -----------

                                         $ 1,991,300    $     1,300    $    (3,300)   $ 1,989,300
                                         ===========    ===========    ===========    ===========

</TABLE>


There were no short-term investments considered cash equivalents at December 31,
1996.

All short-term investments mature within one year of December 31, 1997.


NOTE  3 -     ACCOUNTS RECEIVABLE

                                                        1997           1996
                                                    -----------    -----------

Accounts receivable                                 $ 1,004,800    $ 1,375,600
Officer receivable                                       43,000           --
Accrued interest                                         29,600         17,400
Income tax refund receivable                               --            5,000
Less allowances for doubtful accounts and returns      (323,100)      (394,600)
                                                    -----------    -----------
                                                    $   754,300    $ 1,003,400
                                                    ===========    ===========

--------------------------------------------------------------------------------
                                                                        Page F-9
<PAGE>


                                                   HEALTHY PLANET PRODUCTS, INC.
                                       NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------------------------------------


NOTE  4 -     INVENTORIES

                                                         1997            1996
                                                      ----------     ----------
                                                                  
Raw Materials                                         $   24,600     $   85,300
Work-in-process                                        1,270,600        999,500
Finished goods                                           245,800        333,200
                                                      ----------     ----------
                                                      $1,541,000     $1,418,000
                                                      ==========     ==========
                                                                

NOTE  5 -     PROPERTY AND EQUIPMENT

                                                         1997            1996
                                                     -----------    -----------

Machinery, equipment and leasehold improvements      $   718,400    $   647,200
Molds                                                    376,200            --
Color separations                                        284,900        206,500
Furniture and fixtures                                    72,700         72,700
Computer software                                         38,200         38,200
                                                     -----------    -----------

                                                       1,490,400        964,600
Less accumulated depreciation and amortization          (639,000)      (509,800)
                                                     -----------    -----------

                                                     $   851,400    $   454,800
                                                     ===========    ===========

NOTE  6 -     PUBLISHING RIGHTS

                                                         1997           1996
                                                     -----------    -----------

Publishing rights                                    $   542,300    $   415,000
Less accumulated amortization                           (404,500)      (331,400)
                                                     -----------    -----------

                                                     $   137,800    $    83,600
                                                     ===========    ===========

--------------------------------------------------------------------------------
                                                                       Page F-10
<PAGE>


                                                   HEALTHY PLANET PRODUCTS, INC.
                                       NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------------------------------------

NOTE  7 -     PROVISION FOR INCOME TAXES

                                                           1997          1996
                                                        ----------    ----------
Provision for income taxes                             
   Federal                                                    --            --
   State                                                      800        21,000
                                                        ----------    ----------
                                                       
                                                              800        21,000
                                                        ----------    ----------
Deferred                                               
   Current                                                112,100       363,000
   Non-current                                            820,200      (223,000)
                                                        ----------    ----------
                                                          932,300       140,000
                                                        ----------    ----------
                                                       
                                                        $ 933,100     $ 161,000
                                                        ==========    ==========
                                                     

The  difference  between the actual  income tax  provision and the tax provision
computed by applying the statutory  federal  income tax rate to earnings  before
taxes is attributable to the following:

                                                           1997         1996
                                                        ----------    ----------

Income tax provision (benefit)                            (34.0%)       34.0%
State taxes (benefit)                                      (4.4)         9.3
Change in deferred tax asset valuation allowance          128.4           -
Change in inventory reserve                                13.8         (4.1)
Change in allowance for doubtful accounts and returns      (2.4)       (11.8)
Non-deductible expenses                                     0.4          3.9
Other                                                       0.6          7.9
                                                        ----------    ----------
                                                          102.4%        39.2%
                                                        ==========    ==========

--------------------------------------------------------------------------------
                                                                       Page F-11
<PAGE>

                                                   HEALTHY PLANET PRODUCTS, INC.
                                       NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------------------------------------

NOTE  7 -     PROVISION FOR INCOME TAXES (Continued)

At December 31, 1997, the Company had available net operating loss carryovers of
approximately  $6,230,500 to be applied  against future federal  taxable income.
Due to a change in  ownership  during  1988,  $2,638,000  of these  amounts  are
subject to a Section 382  limitation  of a maximum of $476,950 per year.  If the
Company  does not  generate  sufficient  income to use the  maximum  limitation,
remaining amounts  accumulate for use in future periods until the operating loss
expires.  The remaining net operating loss  carryovers  generated after 1988 are
available to be used without yearly  limitation.  For federal tax purposes,  net
operating losses expire as follows:

                   Year Ending December 31,
                   ------------------------
                             2002                     $     2,638,600
                             2003                           1,222,000
                             2004                           1,299,100
                             2005                             383,300
                             2006                              31,700
                             2012                             655,800
                                                     --------------------
                                                      $     6,230,500
                                                     ====================

The Company has available  approximately  $25,500 of federal Alternative Minimum
Tax credits which can be carried forward  indefinitely and offset against future
income taxes.

The Company has available  approximately  $326,000 of  California  net operating
losses which can be carried  forward and offset against  future taxable  income.
These loss carryforwards expire in 2002.

Temporary  differences and carryforwards  which give rise to deferred tax assets
at December 31, are as follows:


                                                         1997            1996
                                                     -----------     -----------
Accounts receivable allowances                       $   138,400     $   170,800
Inventory reserve                                        141,200          16,100
Benefits from net operating loss carryforward                --          187,400
Other                                                    (14,700)          2,700
                                                     -----------     -----------

Current deferred tax asset                           $   264,900     $   377,000
                                                     ===========     ===========

Depreciation and amortization                        $    21,100     $    23,500
Benefits from net operating loss carryforward          2,147,200       1,458,400
Valuation allowance                                   (1,500,000)            --
Other                                                     17,500          24,100
                                                     -----------     -----------

Non current deferred tax asset                       $   685,800     $ 1,506,000
                                                     ===========     ===========

--------------------------------------------------------------------------------
                                                                       Page F-12
<PAGE>


                                                   HEALTHY PLANET PRODUCTS, INC.
                                       NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------------------------------------

NOTE  7 -     PROVISION FOR INCOME TAXES (Continued)

Management of the Company  believes it is more likely than not that a portion of
the  federal  net  operating  loss  carryforwards  will  be  utilized  prior  to
expiration. A valuation allowance has been established against remaining federal
net operating loss carryforwards.


NOTE  8 -     LINE OF CREDIT

The  Company  has  available  an  unsecured  revolving  line of credit for up to
$500,000 with interest at the bank's Index Rate plus .75%. This line matures May
31,  1998,  and  requires  that the Company  meet  restrictions  relating to key
financial  ratios.  At December 31, 1997, the Company had no  outstanding  draws
under this line-of-credit agreement.


NOTE  9 -     LONG-TERM DEBT

Long-term debt consists of an unsecured, non-interest bearing note payable to an
officer due in monthly  payments of $10,000,  including  imputed  interest at an
effective  interest  rate  of  9.25%,  for the  purchase  of  molds  used in the
manufacture  of  hand  crafted  animal  figurines.   Principal   maturities  for
succeeding years are as follows:

                Year Ending December 31,
                -----------------------
                          1998                      $    101,600
                          1999                           111,400
                          2000                            31,400
                                                   -------------
                                                    $    244,400
                                                   =============




--------------------------------------------------------------------------------
                                                                       Page F-13
<PAGE>


                                                   HEALTHY PLANET PRODUCTS, INC.
                                       NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------------------------------------

NOTE 10 -     EARNINGS PER SHARE
<TABLE>
<CAPTION>
                                                                      Year Ended December 31, 1997
                                                    -------------------------------------------------------------
                                                                                                       Per-Share
                                                         Loss                   Shares                  Amount
                                                    ------------------    ------------------    -----------------
<S>                                                  <C>                          <C>                   <C>
Net loss                                             $    (1,843,800)
                                                    ================
Basic loss per share:
     Loss available to common shareholders           $    (1,843,800)             1,902,779             $   (0.97)
                                                                                                =================
Effect of dilutive securities                                      -                     -
                                                    ----------------      -----------------     
Diluted loss per share:
     Loss available to common shareholders
        plus assumed conversions                     $    (1,843,800)            1,902,779              $   (0.97)
                                                    ================      =================     =================
                                                                                                                   
</TABLE>

Warrants to purchase  368,117 shares of common stock at a weighted average price
per share of $4.45 and options to purchase  325,000  shares of common stock at a
weighted average price per share of $6.19 were outstanding at December 31, 1997,
but were not included in the  computation  of diluted  earnings per share as the
exercise prices were greater than the average market price of the common shares.

Preferred stock convertible into 181,341 shares of common stock were outstanding
at  December  31,  1997,  but were not  included in the  computation  of diluted
earnings per share as the effect would be anti-dilutive.

--------------------------------------------------------------------------------
                                                                       Page F-14
<PAGE>


                                                   HEALTHY PLANET PRODUCTS, INC.
                                       NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------------------------------------

NOTE 10 -     EARNINGS PER SHARE (Continued)
<TABLE>
<CAPTION>
                                                                  Year Ended December 31, 1996
                                                  --------------------------------------------------------
                                                                                                 Per-Share
                                                     Income                 Shares                Amount
                                                  -----------------   --------------------  --------------
<S>                                               <C>                         <C>            <C>
Net income                                        $        252,100
Less:  Preferred stock dividends                            (9,000)
                                                  ----------------
Basic earnings per share:
     Income available to common shareholders               243,100            1,823,612              0.13
                                                                                             ============
                                                                                                
Effect of dilutive securities:
     Options                                                    -                31,125
     Convertible preferred stock                             9,000              190,011
                                                  ----------------     ----------------
Diluted earnings per share:
     Income available to common shareholders
       plus assumed conversions                   $        252,100            2,044,748      $       0.12
                                                  ================     ================      ============
</TABLE>


Warrants to purchase  68,117 shares of common stock at a weighted  average price
per share of $5.31 and options to purchase  45,000  shares of common  stock at a
weighted average price per share of $7.60 were outstanding at December 31, 1996,
but were not included in the  computation  of diluted  earnings per share as the
exercise prices were greater than the average market price of the common shares.

--------------------------------------------------------------------------------
                                                                       Page F-15
<PAGE>


                                                   HEALTHY PLANET PRODUCTS, INC.
                                       NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------------------------------------

NOTE 11 -     COMMITMENTS

Leases - The Company leases office and warehouse  space under an operating lease
expiring April 2006, which includes  scheduled base rent increases over the term
of the lease.  The total  amount of the base rent  payments is being  charged to
expense  on the  straight-line  method  over the term of the  lease.  Since  the
inception of the lease,  the Company has  recorded a deferred  credit to reflect
excess of rent expense over cash payments.  Future minimum lease payments are as
follows:

              Year Ending December 31,
              -----------------------
                        1998                    $        336,500
                        1999                             451,700
                        2000                             548,100
                        2001                             548,100
                        2002                             602,900
                     Thereafter                        1,959,500
                                                -----------------
                                                 $     4,446,800
                                                =================

Rent expense totaled $385,600 and $330,700 for the years ended December 31, 1997
and 1996, respectively.

Employment  Agreements - The Company entered into employment agreements expiring
through  December 31, 2001,  with four key  employees.  Compensation  related to
these agreements amount to $400,000 for the year ending December 31, 1997.

License Agreements - The Company has entered into licensing  agreements with the
Sierra Club, The Wilderness  Society,  The Marine Mammal Center,  The Zoological
Society of San Diego, The Humane Society of the United States and the Rainforest
Action  Network,  expiring  through  December 31, 2005. The agreements  call for
royalty payments of 2% - 10% of net sales, as defined in the agreements, subject
to  minimum  cumulative  royalties  of  $3,708,800,   over  the  life  of  these
agreements.  All agreements are cancelable with 30 to 60 days notice, as defined
in the agreements.  Management  estimates that actual  royalties on future sales
will equal or exceed  minimum  royalties.  Options  exist to extend the terms of
certain agreements.  Sales under the Sierra Club agreement accounted for 70% and
82% of total sales for the years ended December 31, 1997 and 1996, respectively.


NOTE 12 -     MAJOR SUPPLIERS

During the year ended December 31, 1997,  the Company made 31.8%,  20% and 13.2%
of its  purchases  from three  suppliers.  Amounts due to suppliers  included in
accounts payable and accrued liabilities totaled $148,000 at December 31, 1997.

--------------------------------------------------------------------------------
                                                                       Page F-16
<PAGE>


                                                   HEALTHY PLANET PRODUCTS, INC.
                                       NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------------------------------------

NOTE 13 -     CAPITAL STOCK
<TABLE>
<CAPTION>
                                                                          1997           1996
                                                                      ------------   ------------
<S>                                                                   <C>            <C>
Series B, $.10 par value, with aggregate liquidation preference of
     $100,000, 14,250 shares authorized, 834 shares
     issued and outstanding at December 31, 1996                      $      --               100
  
Series D, $.10 par value, with aggregate liquidation preference of
     $926,700, 371,009 shares authorized, 181,341 and 186,341
     shares issued and outstanding, respectively                            18,100         18,600
                                                                      ------------   ------------

                                                                      $     18,100   $     18,700
                                                                      ============   ============
</TABLE>

Series B Preferred stock is non-voting and convertible  into common stock at the
rate of 4.40 shares of common stock for each share of preferred  stock. It has a
liquidating  preference  of $120  per  share  plus  any  cumulative  but  unpaid
dividends  over the  holders of common  stock.  The stock  carries a  cumulative
annual  dividend of $10.80 per share.  The Company may redeem stock upon 60 days
notice,  plus  cumulative  but  unpaid  dividends,  subject  to the right of the
stockholders to convert prior to the fixed date of redemption at $120 per share.
During 1997, the Company  exercised its right to redeem all  outstanding  shares
and suspended the  accumulation of dividends.  At December 31, 1997,  redemption
and cumulative dividends payable totaled $161,500.

Series D  Preferred  stock  has full  voting  rights at the rate of one vote per
share and is  convertible  into common  stock at the rate of one share of common
stock  for each  share of  preferred.  The  preferred  stock  has a  liquidating
preference of $5.11 per share and carries no dividend. During 1997, 5,000 shares
of Series D Preferred stock were converted to common stock.


NOTE 14 -     STOCK OPTIONS AND WARRANTS

The Company has a stock option plan which provides for the granting of qualified
and  non-qualified  stock options,  incentive stock rights,  stock  appreciation
rights and restricted shares to officers, key employees and its public relations
firm to  purchase  up to an  aggregate  of 465,000  shares of common  stock.  No
options shall be granted under the Plan after 2001. The Company also has a stock
option plan which  provides  for the granting of stock  options to  non-employee
directors and members of any advisory  boards,  as defined in the agreement,  to
purchase up to an aggregate of 75,000 shares of common  stock.  No options shall
be granted under the plan after 2005.  During 1997, 15,000 options were granted,
no options were exercised,  and no options were forfeited. At December 31, 1997,
310,000  common stock options were  exercisable at a  weighted-average  exercise
price of $6.31.  In addition,  15,000  options  become  exercisable in 1998. The
exercise  prices of the  options  range  from $3.69 to  $10.50.  Options  have a
remaining life of one to five years.

In 1991, 60,000 shares of restricted  shares were issued to an officer,  vesting
at 4,000 shares per year. Each year a cash bonus of 60% of the fair-market value
of the vested shares is paid to the officer for his income tax liability related
to the income attributable to vesting of shares.

--------------------------------------------------------------------------------
                                                                       Page F-17
<PAGE>


                                                   HEALTHY PLANET PRODUCTS, INC.
                                       NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------------------------------------

NOTE 14 -     STOCK OPTIONS AND WARRANTS (Continued)

The  Company  has issued  common  stock  warrants  which  entitle  the holder to
purchase up to 8,117 shares of common stock at $7.20 per share through 1998.

In September  1996, the Company issued 60,000 common stock warrants  exercisable
at $5.0625 per share through 2001.  The warrants  become  exercisable  in 20,000
increments in September 1996, 1997 and 1998.

In September 1997, the Company issued 300,000 common stock warrants  exercisable
as follows:  100,000 warrants at $4.00 per share,  100,000 warrants at $4.25 per
share, and 100,000 warrants at $4.50 per share.

The Company has adopted the disclosure  only provision of Statement of Financial
Accounting  Standards  No.  123,  "Accounting  for  Stock-Based   Compensation."
Accordingly,  no compensation  expense has been recognized for stock options and
warrants  issued during 1997 and 1996. Had  compensation  cost for the Company's
options and warrants been  determined  based on the fair value at the grant date
for awards in 1997 and 1996  consistent with the provisions of SFAS No. 123, the
Company's net earnings  (loss) and earnings  (loss) per share would have changed
to the pro forma amounts indicated below:

                                                        1997            1996
                                                   -------------    ------------
                                                                   
Net earnings (loss) - as reported                  $ (1,843,800)    $    243,100
Net earnings (loss)- pro forma                     $ (2,107,400)    $    184,100
                                                                   
Earnings (loss) per share - as reported            $      (0.97)    $       0.13
Earnings (loss) per share - pro forma              $      (1.11)    $       0.10
                                                                    
Diluted earnings (loss) per share - as reported    $      (0.97)    $       0.12
Diluted earnings (loss) per share - pro forma      $      (1.11)    $       0.09
                                                                      


The fair value of each  option and warrant is  estimated  on date of grant using
the  Black-Scholes  option-pricing  model  with the  following  weighted-average
assumptions used for grants in:

                                                        1997             1996
                                                   -------------    ------------

Dividends                                               None             None
Expected volatility                                   39.98%           41.24%
Risk free interest rate                                5.99%            6.64%
Expected life                                      4-5 years          4 years


Options  issued  during 1997 and 1996 have an  estimated  weighted  average fair
value of $1.68 and $2.38,  respectively.  Warrants  issued  during 1997 and 1996
have an estimated fair value of $1.31 and $2.09, respectively.

--------------------------------------------------------------------------------
                                                                       Page F-18
<PAGE>



                                                   HEALTHY PLANET PRODUCTS, INC.
                                       NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------------------------------------

NOTE 14 -     STOCK OPTIONS AND WARRANTS (Continued)
<TABLE>
The activity of the stock option plan and warrants is as follows:
<CAPTION>
                                                            Weighted-                          Weighted-
                                           Shares            Average          Shares            Average
                                            Under           Exercise           Under           Exercise         Restricted
                                          Warrants            Price           Options            Price            Shares
                                        --------------    --------------   --------------    --------------    ------------
<S>                                           <C>           <C>               <C>           <C>                   <C>    
Balance, December 31, 1995                      8,117       $   7.20          340,000       $   6.36              40,000
Granted                                        60,000           5.06           20,000           5.84                   -
Exercised                                           -                         (15,000)          4.75                   - 
Forfeited                                           -                         (35,000)          6.25                   - 
Vested                                              -                               -                             (4,000)
                                        --------------                     --------------                      ------------
Balance, December 31, 1996                     68,117           5.31          310,000           6.41              36,000
Granted                                       300,000           4.25           15,000           3.69                   -
Exercised                                           -                               -                                  -
Forfeited                                           -                               -                                  - 
Vested                                              -                                                             (4,000)
                                        --------------                     --------------                      ------------
Balance, December 31, 1997                    368,117       $   4.45          325,000       $   6.19              32,000
                                        ==============                     ==============                      ============

</TABLE>
NOTE 15 -     STATEMENTS OF CASH FLOWS

                                                        1997           1996
                                                   -------------   -------------
Cash paid during the year for:
     Interest                                       $        -      $        -
     Income taxes                                            -          21,900


Non-cash  investing and  financing  activities  for the year ended  December 31,
1997,  consisted of converting 5,000 shares of Series D Preferred stock to 5,000
shares of common stock, redemption of 834 shares of Series B Preferred stock for
$100,000,  which had not been paid as of December 31, 1997, and seller  financed
purchase of assets of $244,400. See note 9.

Non-cash  investing and  financing  activities  for the year ended  December 31,
1996,  consisted  of  converting  68,334  shares of Series D Preferred  stock to
68,334 shares of common stock, and recording of $61,500 of dividends  payable on
Series B Preferred Stock.

--------------------------------------------------------------------------------
                                                                       Page F-19
<PAGE>

                                                   HEALTHY PLANET PRODUCTS, INC.
                                       NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------------------------------------

NOTE 16 -     MAJOR CUSTOMER

Sales to a major  customer  was  approximately  $568,500  during  the year ended
December 31,  1997,  representing  13.9% of total  sales.  At December 31, 1997,
amounts due from this customer included in accounts receivable was $79,800.


NOTE 17 -     EMPLOYEE BENEFIT PLAN

The Company has a 401(k)  profit  sharing plan  covering all  employees  meeting
minimum service requirements.  Plan contributions are discretionary.  There were
no employer contributions for the years ended December 31, 1997 and 1996.

--------------------------------------------------------------------------------
                                                                       Page F-20