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

                                   FORM 10-KSB
(Mark One)

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

         For the fiscal year ended December 31, 1996
                                   -----------------

         [ ]  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
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(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
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------------------------------       -----------------------------------------

         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, 1996 were $4,632,400.

         On March 14, 1997,  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  $6,040,000 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  186,341  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 11, 1997,  there were 1,827,362  shares of Common Stock,  $.01
par value, issued and outstanding  (exclusive of 833 shares of non-voting Series
B Preferred Stock  convertible  into 3,500 shares of Common Stock, and exclusive
of 186,341 shares of voting Series D Preferred  Stock  convertible  into 186,341
shares of Common Stock).


                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None
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                                     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 and the  ability of the  Company to sustain  consumer
demand for the  Company's  principal  Sierra Club card line.  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.

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,

                                        2
<PAGE>

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.  See "Business - General Business  Developments  During Most
Recent Fiscal Year".

         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  500  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  82.2% of the Company's net sales for the
year ended  December 31, 1996 and for  approximately  85.1% of the Company's net
sales for the year ended December 31, 1995.

         In furtherance of its business  strategy of directing its main focus to
the sale of  cause-related,  nature  and  wildlife  product  lines in the fourth
quarter of 1993,  the Company  obtained  an  exclusive  license  from The Humane
Society of the United States to use its name on a line of greeting  cards.  This
line is  comprised  of a series of 24 Holiday  images.  The Humane  Society line
features domestic and wild animals in holiday like settings.  For the year ended
December 31, 1996, this line accounted for  approximately  5.9% of the Company's
net sales and for the year  ended  December  31,  1995 the Humane  Society  line
accounted for approximately 5.1% of the Company's net sales.

         The Company also  markets its SEA  DREAMS(R)  line,  which is presently
comprised of 123 designs in a 5x7 blank notecard  format and 32 designs in a 4x5
boxed blank  notecard  format.  SEA  DREAMS(R)  is a  collection  of  underwater
photographs of the sea and its creatures, and features corals, fish, sea-mammals
and other  inhabitants  of the sea.  For the years ended  December  31, 1996 and
1995, this line accounted for approximately 5.5% and 4.7%, respectively,  of the
Company's net sales.

         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 (which  presently  constitute the Company's  principal line in terms of
dollar  amount of gross sales) and the  Company's new sea life and wildlife 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 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

                                        3
<PAGE>

in America each year, one third being Christmas cards.  Since greeting cards are
an inexpensive personalized gift, sales tend to continue to increase 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) Humane
Society(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 decided to contribute a portion of its  wholesale  proceeds from the
sale of its SEA  DREAMS(R)  and  Healthy  Planet  product  lines to  scientific,
research,  environmental and other charitable  institutions.  During fiscal year
1996, the Company contributed approximately $53,000 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

         Introduction of Nature Baby(R) Line

         In December 1996, the Company  introduced its Nature Baby(R) line. This
new line,  which had been in  development  for two years,  is the first  product
which has de-emphasized counter cards and was specifically designed for the gift
market.  The line is  comprised  of 48 images of baby  animals in the wild,  and
includes cards,  magnets,  journals,  laser compatible stationery and envelopes,
matted prints and 16"x20" prints.

         New 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.

         Extension of Humane Society License

         Since  March of 1993,  the  Company  has been  licensed  by The  Humane
Society of the  United  States to utilize  The Humane  Society  name and logo in
connection  with  greeting  cards.  This license  agreement  was extended for an
additional two year term through December 31, 1998.

         License for New Zealand and Australia

         On  September  3, 1996,  the  Company  entered  into  separate  License
Agreements with Stanley Newcomb & Co. Ltd. of New Zealand and Taylorgraphic Pty.
Ltd. of Australia for the use of the Healthy  Planet  Product name and images on
products  in their  respective  markets.  These  license  agreements,  for terms
expiring in September, 1998, provide that the Company receive a royalty of 7% of
net sales of licensed products sold by each of the licensed companies.

         License for Europe

         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. The Company
may  license  the  rights to others to use its  Healthy  Planet  trademarks  for
certain product categories.


                                        5
<PAGE>

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.

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  82.2% and 85.1% of the Company's sales for the
years ended December 31, 1996 and 1995, respectively.  The Sierra Club card line
is comprised of over 275 everyday  designs and over 50 holiday  designs,  all of
which are printed on recycled 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 1996, with an annual  guaranteed  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 $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 each license year have
exceeded the base levels on which the guaranteed  minimum is to be paid. For the
year ended December 31, 1996,  the Company paid aggregate  royalties of $331,000
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.

                                        6
<PAGE>

         The  Company's  Sierra Club line is  comprised  of 5x7 blank note cards
which  utilize over 275 images and retail for $1.75 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 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, 1996,  sales of this line  represented
approximately 5.9% of the Company's net sales.

         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 is 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 is for a three year term through June
31,  1997 with the right to extend for one  additional  three year  period.  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,  1996  sales of this line  represented  approximately  2.5% of the
Company's net sales.

                                        7
<PAGE>
         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 was for an initial term commencing August
1, 1994 through  December  31, 1995.  The Company has renewed the license for an
additional  four-year  term.  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, 1996 and 1995,  sales of this line represented  approximately  5.5%
and 4.7% of the Company's net sales.

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.

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.  As  previously  described,  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 and  Australia.  The Company may license the
rights  to others to use its  Healthy  Planet  trademarks  for  certain  product
categories.

         The  Company  currently  markets  its  Sierra  Club card line under the
HEALTHY PLANET PRODUCTS(R)  trademark.  In addition, the Company's SEA DREAMS(R)
card line was  introduced  in the fourth  quarter of 1993 and are also  marketed
under the Company's HEALTHY PLANET  PRODUCTS(R)  trademark,  as is the Company's
NATURE  BABY(R) line,  which was introduced in 1996. The Company also produces a
line of social stationery comprising everyday boxed notes, stationery, journals,
magnets and tablets which feature various nature and wildlife themes. The themes
utilized are images which are the most popular  images in the  Company's  Sierra
Club line.  Social  stationery is sold in boxes of twenty sheets and coordinated
envelopes with a suggested retail price of $11.95 per box.  Magnetized note pads
incorporate similar nature and

                                        8
<PAGE>

wildlife  themes and are sold in packages of two 50-sheet  pads with a suggested
retail price of $4.95. Journals have a suggested retail price of $11.95 each and
consist of  approximately  100 lined sheets of recycled paper,  enclosed between
two extra  heavyweight  sheets of recycled "chip" board. The covers feature most
of the photographic images utilized for the social stationery products.

         As a licensee of The Wilderness Society, the Company, during the second
half of 1994,  developed a line of refrigerator magnets which feature nature and
wildlife themes. Consistent with environmental  considerations,  the magnets are
made from 100% recycled  plastic.  The Company also utilizes images from its Sea
Dreams(R) and Nature Baby(R) lines for separate  refrigerator magnet lines which
are marketed  utilizing The Marine  Mammal  Center  trademark in the case of Sea
Dreams(R)  and the CRES  trademark in the case of Nature  Baby(R).  Refrigerator
magnets  are  priced  at a $3.50  retail  price and are sold in units of 48 on a
cylindrical display.

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  12.1% of the
Company's net sales for the year ended December 31, 1996, no single  customer of
the Company  accounted for 6% or more of the  Company's  net sales.  The Company
does not have an on-going  contract or agreement with Barnes & Noble Superstores
with respect to future  purchase  commitments.  The Company  views its relations
with Barnes & Noble  Superstores  to be good.  No  assurance  may be given as to
future  purchases,  if any,  which may be effected to this account.  The Company
does not consider  that the loss of this account or an overall  reduction in its
purchasing volume would have an overall material adverse long term effect on the
Company.

         The   Company   utilizes    approximately    130   independent    sales
representatives who also represent the products of other companies.  Independent
sales  representatives  accounted for approximately 64% of Company sales for the
year ended December 31, 1996 (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 year ended December
31,  1996,  a  total  of  $471,000  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.


                                        9
<PAGE>

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 1996,  seasonal effects on the Company's  business
resulted in approximately 61% of the Company's sales being made in the third and
fourth  quarters.  During  fiscal year 1996,  approximately  21% 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  59% of the cost of  manufacturing  inventory  was incurred in the
second and third quarters of the 1996 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 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.

                                       10
<PAGE>

Employees

         The Company  currently has 24 full-time  employees,  including its four
executive officers, 8 in administrative, managerial, and sales positions, and 12
warehouse  persons.  In peak seasons,  the Company may employ up to 15 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 commenced to utilize 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.


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

                                       11
<PAGE>

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

         Nasdaq

         The range of high and low bid for such  Common  Stock  for the  periods
indicated below is as follows:

                  Year                   High                      Low
                  ----                   ----                      ---
                  
                  1995
                  1st Quarter            10                        7 1/2
                  2nd Quarter            10 5/8                    9 1/2

The above quotations,  reported by Nasdaq,  represent prices between dealers and
do not include retail mark-up, mark-down or commissions.  Such quotations do not
necessarily represent actual transactions.

         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:

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

                  1995
                  2nd Quarter            11 1/2            9 3/8
                  3rd Quarter            13 5/8           10 1/2
                  4th Quarter            12 1/2            8 1/8

                                       13
<PAGE>

                  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

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 11, 1997 was 149. 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. In addition, and with respect to the Company's Series B
and Series D Preferred Stock (none of which are publicly traded),  the number of
record holders of such classes of Preferred Stock were 1 and 16, respectively.


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:

                                       14
<PAGE>

                                             Relationship to Total Revenues
                                                   Fiscal Year Ended
                                                      December 3l,

                                          1994           1995          1996
                                          ----           ----          ----

Net Sales                                 100%            100%         100%

Operating Expenses:
 Cost of Goods                            37.6%           38.8%        42.4%
 Selling, General and Administrative      47.4%           43.8%        55.0%

Income From Operations                    14.9%           17.4%         2.6%
Interest and Other Income (Expense)        1.1%            2.3%          6.3%

Income Before Income Taxes                16.0%           19.7%         8.9%
Net Income                                23.4%           36.4%         5.3%

Year End Results - Applicability of FAS 109

         At December 31, 1996,  the Company had  available  net  operating  loss
carryforwards of  approximately  $4,664,000 to be applied against future federal
taxable income,  of which  $2,862,000 are subject to a limitation  under Section
382 of the Internal  Revenue Code of $476,950 per year.  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 net operating loss carryforwards.  Temporary
differences and carryforwards which give rise to deferred assets at December 31,
1996 are as follows:

         Benefits from net operating loss carryforward           $1,645,800
         Accounts receivable allowances                             170,800
         Inventory reserves                                          16,100
         Depreciation and amortization                               23,500
         Other                                                       26,800
                                                                 ----------
         Net deferred income taxes                                1,883,000
         Deferred income taxes expected to be utilized
           in 1997                                                  377,000
         Deferred income taxes                                   $1,506,000
                                                                 ==========

         Management of the Company believes that it is more likely than not that
the tax  benefits of the net  operating  loss  carryforwards,  will be realized.
Management's  belief is based on the Company's actual profitable results in each
of the years  commencing  1992.  In order to  utilize  the full  benefit  of the
deferred income tax asset, the Company needs to realize aggregate taxable income
of approximately $5,190,000,  which it expects to generate during the years 1997
through 2002.  The Company has estimated its future  taxable income based on its
actual  results  for the years 1992  through  1996.  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

                                       15
<PAGE>

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
income  tax  asset.  Such  conditions   include  general  economic   conditions,
competition  generally  and  specifically  relating to greeting  cards having an
environmental  and  wildlife  theme,  the  ability of the Company to continue to
renew its principal  Sierra Club License  Agreement which  presently  expires on
December 31, 2005,  and  continuity  of present  management.  The net  operating
losses expire as follows:

                  Year Ending December 31,             Amount
                  ------------------------             ------

                           2000                       $  201,000
                           2001                          742,000
                           2002                        1,919,000
                           2003                           88,000
                           2004                        1,300,000
                           2005                          383,000
                           2006                           31,000
                                                      ----------
                                                      $4,664,000
                                                      ==========

         As of  December  31,  1996,  the Company  had  available  approximately
$15,600 of Federal  investment  tax  credits  which can be carried  forward  and
offset  against  future  income  taxes.  The Company also has $25,500 of Federal
alternative  minimum tax credit  carryforwards  to reduce future  regular income
taxes over an indefinite period.

         In light of  profitability  for each of the last five fiscal years, the
Company is of the reasonable belief that it is more likely than not that it will
realize the tax benefits of its  carryforwards  based upon the  assumptions  and
increase in taxable income as discussed above.  This  anticipated  growth is the
result of increased sales,  continued control of costs and inflationary effects.
In calculating the benefit of the loss carryforwards, the Company has taken into
account the provisions of Section 382 of the Internal  Revenue Code which limits
the maximum  amount of loss to be  utilized  to be $476,950  per year for losses
incurred  prior to 1988 and  anticipated  loss of  benefits  of one of the prior
years' losses due to the  expiration of the 15- year  carryforward.  The Company
has not contemplated  the use of any new tax planning  strategies in calculating
the deferred income tax asset.

         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.  Include 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

                                       16
<PAGE>

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  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.

         1995 Compared to 1994

         Sales for the year ended December 31, 1995 were  $5,892,300  reflecting
an increase  versus the prior year level of  $4,736,400  of $1,155,700 or 24.4%.
Included in the year end results was a provision for future  holiday  returns of
approximately $350,000. 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.

                                       17
<PAGE>

         During 1995,  sales of the Company's  largest  product line, The Sierra
Club,  accounted  for 85.1% of total  revenues and showed a year to year gain of
27.3%. The balance of 1995 revenues were comprised of the Company's other lines,
The Humane Society of the United States,  Sea Dreams(R),  The Wilderness Society
and others.

         The Company reported  operating income of $1,026,500 or $.50 per share.
This level of operating income  represented a 45% increase versus the prior year
operating income of $707,700 or $.36 per share. Not included in operating income
was approximately $130,000 in interest income. Including interest income, income
before  taxes  amounted to  $1,161,700  or $.57 per share  versus the prior year
income  before  taxes of  $758,500  or $.39 per share.  Increased  sales  volume
combined with lower  percentage  operating  costs to result in this year to year
income gain.

         Cost of sales  amounted to $2,286,700  for the year ended  December 31,
1995 representing  38.8% of sales.  This rate compares  unfavorably to the prior
year rate of 37.6%. Increased sales of lower margin packaged goods combined with
an  increased  return  provision  resulted in the year to year  percentage  cost
increase.

         Selling,  shipping and marketing  expenses of $998,300 were $150,900 or
17.8% above 1994 actual results. Higher shipping expenses, commissions and sales
incentives on higher Company sales accounted for this year to year increase.

         General and  administrative  expenses  amounted to $1,580,800  for 1995
reflecting  an increase of $181,900  or 13.0%.  Budgeted  increases  in staff to
support the sales increase accounted for the period to period increase.

         The  Company's  net  profit for the year ended  December  31,  1995 was
$2,144,900  representing  $1.05 per share. This level compares  favorably to the
1994 net profit of $1,107,700 or $.57 per share.  Included in both 1995 and 1994
year end  results  is a benefit  from  deferred  income  taxes of  $983,200  and
$349,200,  respectively.  These benefits  represent the recognition of estimated
future NOL uses.

         Total  assets  at  December  31,  1995  amounted  to  $8,418,300  which
reflected  an  increase  of  $2,693,800  when  compared  to the  1994  level  of
$5,724,500.  Increased  cash and  inventory  in  support  of and as a result  of
increased sales combined with an increase in deferred income taxes accounted for
the period to period increase.  Liabilities  amounted to $707,900 as of December
31, 1995 representing an increase versus the December 31, 1994 level of $674,400
of $33,500 or 5.0%.  Higher accounts payable and accrued expenses  accounted for
the period to period increase.

Liquidity and Capital Resources

         At December 3l, 1996,  the Company's  working  capital was  $5,841,700.
This  compared  to the 1995  working  capital of  $5,849,200  for a year to year
marginal  decrease of $7,500.  The year to year  decrease was  primarily  due to
increased account receivables,  inventory and prepaid expenses offset in part by
a decrease in cash and increase in dividends payable.

                                       18
<PAGE>

         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.  The Company has a secured line of
credit in the amount of $500,000 from  Westamerica  Bank.  During the year ended
December 31, 1996, the Company did not draw under this line of credit, and as of
December 31, 1996, no amounts were  outstanding  under this line of credit.  The
Company  believes and  anticipates  that the primary source of its liquidity and
capital  resources for its coming fiscal year will primarily be from its 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 immediately foreseeable operating needs.

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         45     Chairman, President, Chief Executive,
                                        Chief Operating and Chief Financial
                                        Officer

         Robert Fagenson         48     Director

         M. Scott Foster         45     Director and Vice President - Sales and
                                        Marketing

         Rick Williams           40     Vice President - Operations

         Joseph F. Furlong III   48     Director

         Daniel R. Coleman       40     Director

         At the Annual  Meeting of  Shareholders  held on August 11,  1995,  the
shareholders of the Company  approved,  among other things,  an Amendment to the
Company's  Certificate  of  Incorporation  to provide for a  staggered  Board of
Directors.  The  Amendment  classified  the Board of  Directors  into  three (3)
classes with initial staggered  three-year terms. Class 3 Directors were elected
to serve for terms expiring at the 1996 Annual  Meeting;  Class 2 Directors were
elected to serve for terms  expiring  at the 1997  Annual  Meeting;  and Class 1
Directors were elected to serve for terms  expiring at the 1998 Annual  Meeting.
The following persons were elected for the classes and terms as follows:

                  Director                     Class          Term Expires
                  --------                     -----          ------------

         Bruce A. Wilson                         1                1998
         M. Scott Foster                         1                1998
         Robert Fagenson                         2                1997
         Michael Jesselson                       2                1997
         Joseph F. Furlong III                   3                1999

         On August 26, 1996, Mr. Michael Jesselson resigned as a Director of the
Company and Mr. Daniel R. Coleman was elected by the Board as a Class 2 Director
to fill Mr. Jesselson's unexpired term.

                                       20
<PAGE>

         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 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  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 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.

         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.

         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.

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

         No person who,  during the fiscal year ended  December 31, 1996,  was a
director,  officer or beneficial owner of more than ten percent of the Company's
Common Stock (which is the

                                       21
<PAGE>

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

<TABLE>

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,  1996,  1995 and 1994 to the Chief  Executive  Officer and each of the named
executive officers of the Company.

                                            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>                <C>  
Bruce A. Wilson                  1996             $150,000         $19,867         $23,720(2)        $15,000(3)          --
President, Chief Exec-           1995             $125,000         $43,707         $35,010(2)        $34,000(3)          --
utive, Chief Operating           1994             $125,000         $30,359         $31,794(2)        $32,750(3)          --
and Chief Financial
Officer


Ricky Williams                   1996             $ 88,600         $ 9,000         $ 5,642(4)           --               --
Vice President of                1995             $ 80,500         $12,500         $ 5,575(4)           --               --
Operations                       1994             $ 73,205         $10,000         $ 5,510(4)           --               --


M. Scott Foster                  1996             $100,000         $11,411         $24,825(5)           --               --
Vice-President of                1995             $ 80,000         $57,595         $24,825(5)           --               --
Sales and Marketing              1994             $ 80,000         $59,347         $24,665(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

                                       22
<PAGE>

         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 1996,  an  automobile  allowance  of $12,000 and 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;  (ii) for 1995,  an  automobile
         allowance of $12,000,  the payment of premiums on a term life insurance
         policy of $2,610 and the payment of taxes on 4,000 shares of restricted
         Common Stock which  vested on December  31, 1995 of $20,400;  and (iii)
         for 1994, 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,
         1994 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,
         1996, an aggregate of 24,000 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, 1996,  the  aggregate  restricted
         stock  holdings of Mr.  Wilson  consisted  of 52,000  shares  valued at
         $195,000,  the market  value of these  shares as of December  31, 1996,
         without  giving effect to the diminution in value  attributable  to the
         restriction of such stock.

(4)      Includes:  (i) for 1996,  an  automobile  allowance  of $5,040  and the
         payment of premiums on a term life insurance  policy of $602;  (ii) for
         1995, an automobile  allowance of $5,040 and the payment of premiums on
         a term life insurance policy of $535; and (iii) for 1994, an automobile
         allowance  of $5,040 and payment of  premiums on a term life  insurance
         policy of $470.

(5)      Includes: (i) for 1996, an expense allowance of $24,000 and the payment
         of premiums on a term life insurance  policy of $825; (ii) for 1995, an
         expense allowance of $24,000 and the payment of premiums on a term life
         insurance  policy of $825; and (iii) for 1994, an expense  allowance of
         $24,000 and the payment of premiums on a term life insurance  policy of
         $665.
</FN>
</TABLE>

STOCK OPTIONS/SAR GRANTS

         No stock option grants or Stock Appreciation  Rights ("SARs") were made
during the year ended December 31, 1996 to any of the named  executive  officers
of the Company.

                                       23
<PAGE>

               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,
1996.
<CAPTION>

                                                           Number of
                                                           Securities
                                                           Underlying                  Value of
                         Shares                            Unexercised                 Unexercised
                         Acquired                          Options/SARS                In-the-Money
                            on              Value             as of                    Options/SARs  at
         Name            Exercise (#)      Realized($)     December 31,1996            December 31,1996(1)
         ----            ------------      -----------     Exercisable/Unexercisable   Exercisable/Unexercisable
                                                           -------------------------   -------------------------

<S>                           <C>          <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, 1996 ($3.75 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  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

                                       24
<PAGE>

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  recognize  his past
performance and  incentivize his continued  efforts to maximize the value of the
Company for all  stockholders.  As of December 31, 1996,  an aggregate of 24,000
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

                                       25
<PAGE>
(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.

         On August 5, 1996,  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, 1997. During the extended
term,  Mr.  Williams  is to receive a salary of $90,000  for the year 1997.  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, 1997. 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, 1997,
and vesting in equal increments on December 31st of each year of the term of his
Agreement, as extended, commencing December 31, 1994.

                                       26
<PAGE>

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 450,000  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  450,000  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.

         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

                                       27
<PAGE>

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 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

                                       28
<PAGE>

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 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.

                                       29
<PAGE>

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  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 11, 1997, there were outstanding options to purchase 45,000
shares under the Director Plan, at exercise  prices ranging from $5.00 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

                                       30
<PAGE>

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 11, 1997
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:



                   [BALANCE OF PAGE INTENTIONALLY LEFT BLANK]


                                       31

<PAGE>

Name and Address of                    Amount of and Nature        Percentage
Beneficial Owner                       of Beneficial Ownership      of Class
----------------                       -----------------------      --------

Bruce A. Wilson                            154,600(1)(2)               8.0%
1700 Corporate Circle
Petaluma, CA  94954

Robert Fagenson                             23,125(3)                  1.3%
19 Rector Street
New York, NY  10006

Starr Securities,Inc.                      131,048(4)                  7.0%
19 Rector Street
New York, NY 10006

Paul Bluhdorn                              181,256(5)                  9.2%
P.O. Box 7854
Burbank, CA 91510

Mark S. Siegel                              70,062(6)                  3.8%
P.O. Box 7854
Burbank, CA 91510

Yvette Bluhdorn                             71,738(6)(7)               3.9%
P.O. Box 7854
Burbank, CA 91510

Estate of
Ludwig Jesselson                           182,071(8)(9)              10.0%
1301 Avenue of the Americas
New York, NY 10019

Michael Jesselson                           92,062(8)(9)(10)           5.0%
1301 Avenue of the Americas 
New York, NY 10019

Ricky Williams                              55,000(11)                 2.9%
1700 Corporate Circle
Petaluma, CA  94954

M. Scott Foster                            102,500(12)                 5.3%
1700 Corporate Circle
Petaluma, CA 94954

Joseph F. Furlong III                        5,000(13)                  *
One Maritime Plaza
San Francisco, CA  94111

Daniel R. Coleman                            5,000(13)                  *
500 108th Avenue, NE
Bellevue, WA  98004

All Officers and Directors
as a Group (6 persons in
number)(1)(2)(3)(11)(12)(13)               345,225                    16.3%

                                       32

<PAGE>

---------------
 *       Less than 1%.

(1)      Includes 102,000 vested and presently exercisable options.

(2)      Includes  36,000  restricted  shares  subject to vesting at the rate of
         4,000 shares per year on December 31st in each year.

(3)      Includes  vested  options to purchase  20,000  shares of the  Company's
         Common Stock and excludes unvested options to purchase 5,000 shares.

(4)      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.

(5)      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  issuable upon  conversion  of 150,006  shares of Series D
         Preferred  Stock  owned by Mr.  Bluhdorn.  Does not  include  shares of
         Common Stock owned by Mrs.  Bluhdorn or Mr. Siegel,  as to which shares
         of Common Stock Mr. Bluhdorn disclaims beneficial ownership.

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

(7)      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.

(8)      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.

(9)      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 175,488
         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
         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.

                                       33

<PAGE>

(10)     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.

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

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

(13)     Includes 5,000 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 August 11, 1995,  upon adoption by the Company's  shareholders  of a
Non-Employee  Director  Stock Option Plan,  Messrs.  Fagenson and Jesselson were
each granted  5,000  options  under the Director  Plan.  Upon their  election as
Directors, Messrs. Coleman and Furlong were each granted 5,000 options under the
Director Plan. In addition,  each Director will receive  automatic annual grants
of 3,000 options as provided for in the Director Plan.


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

(A)      1.  Financial Statements

         See Index to Financial Statements Attached hereto.

         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.

                                       34
<PAGE>

(B)      Reports on Form 8-K
<TABLE>

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

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

<S>                       <C>                         <C>                                                        
November 5, 1996         Item 5. Other Events         Reporting License Agreement between
                                                      Registrant and the Zoological Society of San
                                                      Diego

</TABLE>


                   [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, and Principal Accounting
                          Officer


Dated:  March 28, 1997

         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 28, 1997
--------------------------------
Bruce A. Wilson
 Chairman of the Board, President,
 Chief Executive, Chief Operating
 and Chief Financial Officer


 \s\ Robert Fagenson                                  March 28, 1997
--------------------------------
Robert Fagenson
 Director


 \s\ M. Scott Foster                                  March 28, 1997
----------------------------------
M. Scott Foster
 Director, Vice President-Sales


 \s\ Joseph F. Furlong III                            March 28, 1997
--------------------------------
Joseph F. Furlong III
 Director


 \s\ Daniel R. Coleman                                March 28, 1997
-------------------------------
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*     Rights,  Designation  and  Preferences  of Series B  Preferred
                  Stock  [Exhibit  4  Quarterly  Report  on  Form  10-Q  for the
                  quarterly period ended June 30, 1990]

         4.4*     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 American Lung
                  Association  dated  June 27,  1994  [Exhibit  10.2 to  Current
                  Report on Form 8-K dated July 1, 1994]

         10.9*    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]

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

         10.11*   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]

         10.12*   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 7, 1997

         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 AND
                          FINANCIAL STATEMENT SCHEDULES


                                                                       Page

Independent Auditor's Report

Balance Sheet - December 31, 1996

Statements of Operations -
 Years ended December 31, 1996 and 1995

Statements of Shareholders' Equity -
 Years ended December 31, 1996 and 1995

Statements of Cash Flows -
 Years ended December 31, 1996 and 1995

Notes to Financial Statements -
 December 31, 1996 and 1995

Independent Auditor's Report on
 Supplementary Schedules

Valuation and Qualifying Accounts -
 Years Ended December 31, 1996 and 1995

Supplementary Income Statement Information -
 Years Ended December 31, 1996 and 1995


<PAGE>

                          HEALTHY PLANET PRODUCTS, INC.

                          INDEPENDENT AUDITOR'S REPORT

                                       AND
                              FINANCIAL STATEMENTS

                           DECEMBER 31, 1996 AND 1995

<PAGE>



                                    CONTENTS


                                                                           PAGE

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


FINANCIAL STATEMENTS

     Balance sheets - December 31, 1995 and 1996...........................F - 2

     Statements of Income -
         Years ended December 31, 1995 and 1996............................F - 4

     Statements of Shareholders' Equity -
         Years ended December 31, 1995 and 1996............................F - 5

     Statements of Cash Flows -
         Years ended December 31, 1995 and 1996............................F - 6

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



<PAGE>
MOSS ADAMS LLP
--------------------------------------------------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS

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, 1996 and 1995,  and the related  statements of income,
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, 1996 and 1995, 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 7, 1997



A member of
Moores Rowland
INTERNATIONAL
An association of independent
accounting firms throughout the world.



                                                                      Page F - 1

<PAGE>

                                                   HEALTHY PLANET PRODUCTS, INC.
                                                                  BALANCE SHEETS

--------------------------------------------------------------------------------
December 31,                                           1995              1996
--------------------------------------------------------------------------------

                                     ASSETS

CURRENT ASSETS
     Cash and cash equivalents                       $4,142,100       $1,650,600
     Marketable securities                                 --          1,989,300
     Accounts receivable                                736,500        1,003,400
     Inventories                                        905,300        1,418,000
     Prepaid expenses                                    33,200          125,200
     Deferred income taxes                              740,000          377,000
                                                     ----------       ----------

             Total current assets                     6,557,100        6,563,500
                                                     ----------       ----------

PROPERTY AND EQUIPMENT                                  444,900          454,800
                                                     ----------       ----------

OTHER ASSETS
     Deferred income taxes                            1,283,000        1,506,000
     Intangible assets                                  116,900           83,600
     Other                                               16,400          166,000
                                                     ----------       ----------

                                                      1,416,300        1,755,600
                                                     ----------       ----------

             Total assets                            $8,418,300       $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)
<CAPTION>
---------------------------------------------------------------------------------------
December 31,                                                  1995             1996
---------------------------------------------------------------------------------------
<S>                                                       <C>             <C>         
                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
     Accounts payable                                     $    293,900    $    394,800
     Royalties payable                                           8,600           7,400
     Commissions payable                                       156,000         118,000
     Income taxes payable                                        9,600          21,000
     Dividends payable                                            --            61,500
     Accrued wages, bonuses and payroll taxes                  131,500          70,600
     Accrued liabilities                                        17,900          48,500
     Accrued rent payable                                       90,400            --
                                                          ------------    ------------

             Total current liabilities                         707,900         721,800
                                                          ------------    ------------

ACCRUED RENT PAYABLE                                              --            40,500
                                                          ------------    ------------

SHAREHOLDERS' EQUITY
     Common stock, $.01 par value, 12,000,000 shares
         authorized, 1,744,028 and 1,827,362 shares
         issued and outstanding, respectively                   17,400          18,300
     Preferred stock, with aggregate liquidation
         preference totaling $952,200                           25,600          18,700
     Additional paid-in capital                             12,189,600      12,308,200
     Accumulated deficit                                    (4,522,200)     (4,333,600)
                                                          ------------    ------------

             Total shareholders' equity                      7,710,400       8,011,600
                                                          ------------    ------------

             Total liabilities and shareholders' equity   $  8,418,300    $  8,773,900
                                                          ============    ============

<FN>
The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
</FN>
</TABLE>
                                                                      Page F - 3
<PAGE>

                                                   HEALTHY PLANET PRODUCTS, INC.
                                                            STATEMENTS OF INCOME

--------------------------------------------------------------------------------
Years Ended December 31,                        1995           1996
--------------------------------------------------------------------------------

NET SALES                                   $ 5,892,300    $ 4,632,400

COST OF GOODS SOLD                            2,286,700      1,965,500
                                            -----------    -----------

GROSS PROFIT                                  3,605,600      2,666,900
                                            -----------    -----------

OPERATING EXPENSES
     Selling, shipping and marketing            998,300        898,700
     General and administrative               1,580,800      1,648,400
                                            -----------    -----------

                                              2,579,100      2,547,100
                                            -----------    -----------

OPERATING INCOME                              1,026,500        119,800
                                            -----------    -----------

OTHER INCOME (EXPENSE)
     Interest income                            129,700        158,400
     Other income                                 5,500        134,900
                                            -----------    -----------

                                                135,200        293,300
                                            -----------    -----------

INCOME BEFORE INCOME TAXES                    1,161,700        413,100

PROVISION FOR (BENEFIT FROM) INCOME TAXES      (983,200)       161,000
                                            -----------    -----------

NET INCOME                                    2,144,900        252,100

DIVIDENDS PAID AND ACCUMULATED
     ON PREFERRED STOCK                          (9,000)        (9,000)
                                            -----------    -----------

INCOME APPLICABLE TO COMMON STOCK           $ 2,135,900    $   243,100
                                            ===========    ===========

EARNINGS PER SHARE                          $      1.05    $      0.12
                                            ===========    ===========

WEIGHTED AVERAGE COMMON SHARES
     AND EQUIVALENTS OUTSTANDING              2,041,645      2,013,623
                                            ===========    ===========



The accompanying notes are an integral part of these financial statements.
--------------------------------------------------------------------------------
                                                                      Page F - 4


<PAGE>
<TABLE>

                                                   HEALTHY PLANET PRODUCTS, INC.
                                              STATEMENTS OF SHAREHOLDERS' EQUITY
                                                      December 31, 1995 and 1996
----------------------------------------------------------------------------------------------------

<CAPTION>

                                                                               PREFERRED STOCK                           
                                                                       -----------------------------
                                                 COMMON STOCK                    SERIES B            
                                         ----------------------------  ----------------------------  
                                             SHARES         AMOUNT         SHARES         AMOUNT     
                                         -------------  -------------  -------------  -------------  
<S>                                         <C>         <C>                   <C>      <C>           
Balance, December 31, 1994                  1,522,216   $     15,200          1,251    $        100  
    Net income for the year ended
      December 31, 1995                          --             --             --              --    
    Conversion of Series D Preferred
      stock to common stock                   110,500          1,100           --              --    
    Conversion of Series B Preferred
      stock to common stock                     8,334            100           (417)           --    
    Vesting of 4,000 restricted shares
      of common stock                            --             --             --              --    
    Exercise of employee stock
      options                                  60,000            600           --              --    
    Exercise of warrants                       42,978            400           --              --    
    Cost of registration of warrants             --             --             --              --    
                                         ------------   ------------   ------------    ------------   
Balance, December 31, 1995                  1,744,028         17,400            834             100  
    Net income for the year ended
      December 31, 1996                          --             --             --              --    
    Net unrealized loss on marketable
      securities                                 --             --             --              --    
    Dividends payable on  Series B
      Preferred stock                            --             --             --              --    
    Conversion of Series D Preferred
      stock to common stock                    68,334            700           --              --    
    Vesting of 4,000 restricted shares
      of common stock                            --             --             --              --    
    Exercise of employee stock
      options                                  15,000            200           --              --    
                                         ------------   ------------   ------------    ------------   
Balance, December 31, 1996                  1,827,362   $     18,300            834    $        100  
                                         ============   ============   ============    ============  
</TABLE>


<TABLE>
                                                   HEALTHY PLANET PRODUCTS, INC.
                                              STATEMENTS OF SHAREHOLDERS' EQUITY
                                                      December 31, 1995 and 1996
<CAPTION>
                                                PREFERRED STOCK                           
                                         -----------------------------      
                                                   SERIES D               ADDITIONAL                       
                                         ----------------------------       PAID-IN        ACCUMULATED     
                                             SHARES         AMOUNT          CAPITAL          DEFICIT
                                         -------------  -------------  ----------------  ---------------
<S>                                            <C>        <C>             <C>             <C>          
Balance, December 31, 1994                     365,175    $     36,500    $ 11,665,400    $ (6,667,100)
    Net income for the year ended
      December 31, 1995                           --              --              --         2,144,900
    Conversion of Series D Preferred
      stock to common stock                   (110,500)        (11,000)          9,900            --
    Conversion of Series B Preferred
      stock to common stock                       --              --              (100)           --
    Vesting of 4,000 restricted shares
      of common stock                             --              --            22,500            --
    Exercise of employee stock
      options                                     --              --           295,600            --
    Exercise of warrants                          --              --           245,300            --
    Cost of registration of warrants              --              --           (49,000)           --
                                          ------------    ------------    ------------    ------------
Balance, December 31, 1995                     254,675          25,500      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)
    Dividends payable on  Series B
      Preferred stock                             --              --              --           (61,500)
    Conversion of Series D Preferred
      stock to common stock                    (68,334)         (6,900)          6,200            --
    Vesting of 4,000 restricted shares
      of common stock                             --              --            22,500            --
    Exercise of employee stock
      options                                     --              --            89,900            --
                                          ------------    ------------    ------------    ------------
Balance, December 31, 1996                     186,341    $     18,600    $ 12,308,200    $ (4,333,600)
                                          ============    ============    ============    ============


<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
<CAPTION>
-----------------------------------------------------------------------------------------------
Years Ended December 31,                                               1995            1996
-----------------------------------------------------------------------------------------------
<S>                                                                  <C>            <C>        
CASH FLOWS FROM OPERATING ACTIVITIES
     Net income                                                      $ 2,144,900    $   252,100
     Adjustments to reconcile net income to net
         cash provided (used) by operating activities:
             Depreciation and amortization                               145,900        188,100
             Change in allowance for doubtful accounts and returns       302,800       (112,400)
             Vesting of restricted shares                                 22,500         22,500
             Deferred income taxes                                    (1,013,000)       140,000
             Loss on disposal of fixed assets                               --           12,500
         Changes in:
             Accounts receivable                                         (29,500)      (154,500)
             Inventories                                                (210,600)      (512,700)
             Prepaid expenses                                             (7,200)       (92,000)
             Accounts payable                                             67,700        100,900
             Royalties payable                                           (71,600)        (1,200)
             Commissions payable                                          32,100        (38,000)
             Income taxes payable                                          9,600         11,400
             Accrued wages, bonuses and payroll taxes                      5,200        (60,900)
             Accrued liabilities                                         (13,000)        30,600
             Accrued rent payable                                          3,500        (49,900)
                                                                     -----------    -----------
                Net cash provided (used) by operating activities       1,389,300       (263,500)
                                                                     -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES
     Purchases of marketable securities                                     --       (1,991,300)
     Purchases of property and equipment                                (306,500)      (137,700)
     Increase in publishing rights                                       (67,500)       (38,200)
     Other                                                                86,400       (150,800)
                                                                     -----------    -----------
                Net cash used by investing activities                   (287,600)    (2,318,000)
                                                                     -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES
     Costs of registration of warrants                                   (49,000)          --
     Proceeds from exercise of warrants                                  245,700           --
     Proceeds from exercise of employee stock options                    296,200         90,000
                                                                     -----------    -----------
                Net cash provided by financing activities                492,900         90,000
                                                                     -----------    -----------

INCREASE (DECREASE) IN CASH AND
     CASH EQUIVALENTS                                                  1,594,600     (2,491,500)
CASH AND CASH EQUIVALENTS
     Beginning of year                                                 2,547,500      4,142,100
                                                                     -----------    -----------
     End of year                                                     $ 4,142,100    $ 1,650,600
                                                                     ===========    ===========

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

                                                   HEALTHY PLANET PRODUCTS, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                      December 31, 1996 and 1995

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

NOTE  1 -     NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of business - Healthy Planet  Products  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 an  original  maturity  of  three  months  or  less  on  their
acquisition date 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.  These  securities  are stated at
estimated  fair value  based upon  market  quotes and  consist of 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  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
             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.

Other assets - 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.

Earnings  per share - Earnings  per share have been  computed  by  dividing  net
earnings, after reduction for paid and accumulated preferred stock dividends, by
the weighted average number of common shares and equivalents outstanding. Common
share equivalents included in the computation represent shares issuable upon the
assumed conversion of convertible  preferred stock and exercise of stock options
and warrants which would have a dilutive  effect on earnings.  Net earnings were
reduced for preferred stock dividends paid and/or  accumulated in 1996 and 1995,
by $9,000.

                                                                      Page F - 7
<PAGE>

                                                   HEALTHY PLANET PRODUCTS, INC.
                                       NOTES TO FINANCIAL STATEMENTS (Continued)
                                                      December 31, 1996 and 1995

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

NOTE  1 - NATURE OF BUSINESS 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 and money
funds 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, 1996 and 1995 were  $75,500 and $0,
respectively.  All other advertising costs are expensed as incurred. Advertising
expense  totaled  $41,800 and $24,800 for the years ended  December 31, 1996 and
1995, respectively.


NOTE  2 - MARKETABLE SECURITIES
<TABLE>

Following is a summary of marketable securities:
<CAPTION>
                                                                      Gross                Gross
                                                                    Unrealized           Unrealized           Estimated
                                                                     Holding              Holding                Fair
                                                  Cost                Gains                Losses               Value
                                            -----------------    -----------------    -----------------    -----------------
<S>                                              <C>               <C>                  <C>                     <C>        
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>

Maturities of marketable securities at December 31, 1996, were as follows:

                                            Cost                Fair Value
                                      -------------------    -------------------

Due within one year                     $        997,700       $        997,700
Due after one year through two years             993,600                991,600
                                      -------------------    -------------------

                                         $     1,991,300        $     1,989,300
                                      ===================    ===================

There were no sales of marketable securities during 1996.

                                                                      Page F - 8
<PAGE>
                                                   HEALTHY PLANET PRODUCTS, INC.
                                       NOTES TO FINANCIAL STATEMENTS (Continued)
                                                      December 31, 1996 and 1995

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

NOTE  3 - ACCOUNTS RECEIVABLE
                                                        1995           1996
                                                    -----------    ------------

Accounts receivable                                  $ 1,243,500    $ 1,375,600
Accrued interest                                            --           17,400
Income tax refund receivable                                --            5,000
Less allowances for doubtful accounts and returns       (507,000)      (394,600)
                                                     -----------    -----------
                                                     $   736,500    $ 1,003,400
                                                     ===========    ===========


NOTE  4 - INVENTORIES
                                                         1995           1996
                                                     -----------    -----------

Raw materials                                        $    36,800    $    85,300
Work-in-process                                          539,200        999,500
Finished goods                                           329,300        333,200
                                                     -----------    -----------
                                                     $   905,300    $ 1,418,000
                                                     ===========    ===========
NOTE  5 - PROPERTY AND EQUIPMENT

                                                            1995           1996
                                                     -----------    -----------

Machinery, equipment and leasehold improvements      $   748,900    $   647,200
Color separations                                        317,400        206,500
Furniture and fixtures                                    72,700         72,700
Computer software                                         38,200         38,200
                                                     -----------    -----------
                                                       1,177,200        964,600
Less accumulated depreciation and amortization          (732,300)      (509,800)
                                                     -----------    -----------
                                                     $   444,900    $   454,800
                                                     ===========    ===========

                                                                      Page F - 9
<PAGE>

                                                   HEALTHY PLANET PRODUCTS, INC.
                                       NOTES TO FINANCIAL STATEMENTS (Continued)
                                                      December 31, 1996 and 1995

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

NOTE  6 - INTANGIBLE ASSETS
                                                     1995               1996
                                                 -----------        -----------

Publishing rights                                $   376,800        $   415,000
Less accumulated amortization                       (259,900)          (331,400)
                                                 -----------        -----------
                                                 $   116,900        $    83,600
                                                 ===========        ===========

NOTE  7 - INCOME TAXES

                                                     1995               1996
                                                 -----------        -----------
Current
     Federal                                     $    29,000        $      --
     State                                               800             21,000
                                                 -----------        -----------
                                                      29,800             21,000
                                                 -----------        -----------
Deferred
     Current                                        (290,000)           363,000
     Non-current                                    (723,000)          (223,000)
                                                 -----------        -----------
                                                  (1,013,000)           140,000
                                                 -----------        -----------
                                                 $  (983,200)       $   161,000
                                                 ===========        ===========

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

                                                          1995          1996
                                                          ----          ----

Income tax provision                                      34.0%         34.0%
State taxes                                                9.3           9.3
Change in deferred tax asset valuation allowance        (139.0)          --
Change in allowance for doubtful accounts and returns     11.0         (11.8)
Non-deductible expenses                                    --            3.9
Other                                                     (0.3)          3.8
                                                         -----          ---- 
                                                         (85.0%)        39.2%
                                                         =====          ==== 

                                                                     Page F - 10
<PAGE>

                                                   HEALTHY PLANET PRODUCTS, INC.
                                       NOTES TO FINANCIAL STATEMENTS (Continued)
                                                      December 31, 1996 and 1995

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

NOTE  7 - INCOME TAXES (Continued)

At December 31, 1996, the Company had available net operating loss carryovers of
approximately  $4,664,000 to be applied  against future federal  taxable income.
Due to a change in  ownership  during  1988,  $2,862,000  of these  amounts  are
subject to a Section  382  limitation  of a maximum of  $476,950  per year.  The
remaining amount is available to be used without yearly limitation.  For federal
tax purposes, net operating losses expire as follows:

                  Year ending December 31,
                  -------------------------
                            2000                      $   201,000
                            2001                          742,000
                            2002                        1,919,000
                            2003                           88,000
                            2004                        1,300,000
                            2005                          383,000
                            2006                           31,000
                                                      ------------

                                                      $ 4,664,000
                                                      ============


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.

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

                                                   1995           1996
                                                -----------    -----------

Accounts receivable allowances                  $   219,500    $   170,800
Inventory reserve                                    32,900         16,100
Benefits from net operating loss carryforward       497,300        187,400
Other                                                (9,700)         2,700
                                                -----------    -----------

Current deferred tax asset                      $   740,000    $   377,000
                                                ===========    ===========

Depreciation and amortization                   $    25,300    $    23,500
Benefits from net operating loss carryforward     1,233,100      1,458,400
Other                                                24,600         24,100
                                                -----------    -----------

Non current deferred tax asset                  $ 1,283,000    $ 1,506,000
                                                ===========    ===========

Management  of the  Company  believes  it is more  likely  than not that all net
operating loss carryforwards will be utilized prior to expiration.  Accordingly,
the valuation allowance was eliminated in the third quarter of 1995.

                                                                     Page F - 11
<PAGE>

                                                   HEALTHY PLANET PRODUCTS, INC.
                                       NOTES TO FINANCIAL STATEMENTS (Continued)
                                                      December 31, 1996 and 1995

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

NOTE  8 - LINE OF CREDIT

The Company has  available  a revolving  line of credit for up to $500,000  with
interest  at the bank's  Index Rate plus .75%,  collateralized  by  receivables,
inventory,  contract rights,  equipment, and intangibles.  This line matures May
31,  1997,  and  requires  that the Company  meet  restrictions  relating to key
financial  ratios.  At December 31, 1996, the Company had no  outstanding  draws
under this line-of-credit agreement.


NOTE  9 - COMMITMENTS

Leases - The Company leases office and warehouse  space under an operating lease
expiring May 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,
               ------------------------
                         1997                    $   331,900
                         1998                        336,500
                         1999                        451,700
                         2000                        548,100
                         2001                        548,100
                      Thereafter                   2,562,400
                                                -------------

                                                 $ 4,778,700
                                                =============

Rent expense totaled $330,700 and $205,800 for the years ended December 31, 1996
and 1995, respectively.

Employment  Agreements - The Company entered into employment agreements expiring
through  December 31, 1999,  with three key employees.  Compensation  related to
these agreements amount to $338,600 for the year ending December 31, 1996.

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,  and The Humane  Society of the United  States,  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 $4,029,700, over the life of these 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 82% and 85% of total  sales for the years  ended
December 31, 1996 and 1995, respectively.

                                                                     Page F - 12
<PAGE>

                                                   HEALTHY PLANET PRODUCTS, INC.
                                       NOTES TO FINANCIAL STATEMENTS (Continued)
                                                      December 31, 1996 and 1995

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

NOTE 10 - MAJOR SUPPLIERS

During the year ended December 31, 1996, the Company made 41.1%,  19.9% and 8.2%
of its  purchases  from three  suppliers.  Amounts due to suppliers  included in
accounts payable and accrued liabilities totaled $308,400 at December 31, 1996.

<TABLE>

NOTE 11 - CAPITAL STOCK
<CAPTION>
                                                                       1995      1996
                                                                     -------   -------
<S>                                                                  <C>       <C>                     
Series B, $.10 par value, with aggregate liquidation preference of
     $100,000, 14,250 shares authorized, 834 and 834 shares
     shares issued and outstanding                                   $   100   $   100

Series D, $.10 par value, with aggregate liquidation preference of
     $952,200, 371,009 shares authorized, 254,675 and 186,341
     shares issued and outstanding, respectively                      25,500    18,600
                                                                     -------   -------

                                                                     $25,600   $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,  which is  declared  semi-annually.  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.  At December 31, 1996,  cumulative
dividends totaled $61,500.

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  1996,  68,334
shares of Series D Preferred stock were converted to common stock.


NOTE 12 -     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 1996, 20,000 options were granted,
15,000 options were exercised,  and 35,000 options were  forfeited.  At December
31, 1996,  290,000 common stock options were  exercisable at a  weighted-average
exercise price of $6.45. In addition, 20,000 options become exercisable in 1997.
The exercise  prices of the options  range from $4.75 to $10.50.  Options have a
remaining life of one to five years.

                                                                     Page F - 13
<PAGE>

                                                   HEALTHY PLANET PRODUCTS, INC.
                                       NOTES TO FINANCIAL STATEMENTS (Continued)
                                                      December 31, 1996 and 1995

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

NOTE 12 - STOCK OPTIONS AND WARRANTS (Continued)

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.

The  Company  has issued  common  stock  warrants  which  entitle  the holder to
purchase  up to  51,095  shares  of  common  stock  as  follows:  12,500  shares
exercisable at $5.20 per share through 1997;  6,920 shares  exercisable at $1.60
per share through 1995; and 31,675 shares exercisable 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.

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 1995 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 1995 and 1996  consistent with the provisions of SFAS No. 123, the
Company's  net  earnings  and  earnings  per share would have reduced to the pro
forma amounts indicated below:

                                        1995          1996
                                   -------------   -----------

Net earnings - as reported         $   2,135,900   $   243,100
Net earnings - pro forma           $   2,107,000   $   184,100

Earnings per share - as reported   $        1.05   $      0.12
Earnings per share - pro forma     $        1.03   $      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:

                                         1995                    1996
                                  --------------------    --------------------

Dividends                                 None                    None
Expected volatility                      41.24%                  41.24%
Risk free interest rate                   7.03%                   6.64%
Expected life                          4 years                 4 years


Options  issued  during 1995 and 1996 have an  estimated  weighted  average fair
value of $4.38 and $2.38,  respectively.  Warrants  issued  during  1996 have an
estimated fair value of $2.09.

                                                                     Page F - 14
<PAGE>

                                                   HEALTHY PLANET PRODUCTS, INC.
                                       NOTES TO FINANCIAL STATEMENTS (Continued)
                                                      December 31, 1996 and 1995

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

NOTE 12 -     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            Excise            Under            Excise          Restricted
                                         Warrants            Price           Options            Price            Shares
                                       --------------    --------------   --------------    --------------    -------------
<S>                                           <C>          <C>               <C>             <C>                <C>
Balance, December 31, 1994                    51,095                         390,000                           44,000
Granted                                           --                          10,000                               --
Exercised                                    (42,978)                        (60,000)                              --
Forfeited                                         --                              --                               --
Vested                                            --                              --                           (4,000)
                                       --------------                   ------------                        ----------     
                                                                                                         
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
                                       ==============                  ==============                     ============ 
</TABLE>
                                                                   
NOTE 13 -     STATEMENTS OF CASH FLOWS                                

                                            1995                 1996
                                       ------------------    ----------------
Cash paid during the year for:
     Interest                           $             --      $           --
     Income taxes                                 20,200              21,900

                                                                 
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 - 15
<PAGE>

                                                   HEALTHY PLANET PRODUCTS, INC.
                                       NOTES TO FINANCIAL STATEMENTS (Continued)
                                                      December 31, 1996 and 1995

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

NOTE 14 - MAJOR CUSTOMER

Sales to a major  customer  was  approximately  $559,000  during  the year ended
December 31,  1996,  representing  12.1% of total  sales.  At December 31, 1996,
amounts due from this customer included in accounts receivable was $101,800.


NOTE 15 - EMPLOYEE BENEFIT PLAN

During the year the Company  adopted a 401(k)  profit  sharing plan covering all
employees  meeting  minimum  service   requirements.   Plan   contributions  are
discretionary. There were no employer contributions for the year.

                                                                     Page F - 16