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, 1995

         [ ]  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 Identification No.)
Incorporation or Organization)

1129 N. McDowell Blvd., 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:

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

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

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



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


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

--------------------------------------------------------------------------------
                                (Title of Class)
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         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 ended  December 31,
1995 were $5,892,300.

         On March 6, 1996,  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  $9,624,544 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 1, 1996, there were 1,812,362 shares of Common Stock, $.01 par
value,  issued and outstanding  (exclusive of 834 shares of non-voting  Series B
Preferred Stock  convertible into 3,667 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 1129 North McDowell  Boulevard,  Petaluma,  California
94954,  and its telephone  number is (707) 778-2280,  fax number (707) 778-7518.

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 and note cards, holiday cards,  stationery and gifts. The
Company also licenses the right to the use of the Healthy Planet  Products name,
trademark and art work in connection with the manufacture, sale and distribution
of the Company's products in certain foreign countries.  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 licensee,  all of the Company's  paper
products  are  produced  on  recycled  paper using  soy-based  ink.  The Company
publishes  and  markets  over  400  everyday,  occasional  and  seasonal  cards,
including  over 325 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 4,800 retail sales
outlets  comprised of card shops,  

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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  85.1% of the Company's net sales for the
year ended  December 31, 1995 and for  approximately  83.2% of the Company's net
sales for the year ended December 31, 1994.

         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 6 Holiday  images.  The Humane  Society  line
features domestic and wild animals in holiday like settings.  For the year ended
December 31, 1995, this line accounted for  approximately  5.1% of the Company's
net sales and for the year  ended  December  31,  1994 the Humane  Society  line
accounted for approximately 6.8% of the Company's net sales.

         In the fourth  quarter of 1993,  the Company  also  introduced  its SEA
DREAMS(R)  line,  which is  presently  comprised  of 69  designs  in a 5x7 blank
notecard  format  and 24  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, 1995 and 1994,  this line  accounted  for
approximately 4.7% and 2.9%, 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 

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<PAGE>

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

         The market for contemporary  cards, and more particularly cause related
and nature theme cards, is of recent origin,  having developed  primarily in the
last ten years to appeal to a large segment of the  population  with a taste for
more  contemporary  graphics and copy or those who wish to express their support
of a  particular  social  cause by utilizing  cards  associated  with the cause.
Contemporary, cause related and nature theme cards, including those published by
the Company,  creatively join graphics and copy to express a message or convey a
thought or sentiment  or, in the case of its Sierra  Club(R),  Sea Dreams(R) and
Humane  Society(R)   lines,   high 

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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) product lines to scientific,  research,  environmental
and  other  charitable  institutions.  During  fiscal  year  1995,  the  Company
contributed  approximately  $21,000 to  organizations  such as the Marine Mammal
Center located in Sausalito,  California,  the Sonoma California  Ecology Center
and the Petaluma  California Boys & Girls Club. These  contributions are made at
the discretion of the Company.  

GENERAL BUSINESS DEVELOPMENTS DURING MOST RECENT FISCAL YEAR

         Listing on the American Stock Exchange

         On April 3, 1995,  the  Company's  Common  Stock,  $.01 par value,  was
admitted for trading on the American  Stock Exchange and is traded thereon under
the trading  symbol  "HPP". 

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<PAGE>

Concurrent with its listing on the American Stock Exchange, the Company withdrew
the listing of its Common Stock on the Pacific  Stock  Exchange and the SmallCap
Market of The  Nasdaq  Stock  Market.  

         New  License  Agreements  with Twins Oaks Publishing

         On December 18, 1995,  the Company  entered into a Licensing  Agreement
with Twin Oaks Publishing  Limited ("Twin Oaks"), a United Kingdom  corporation,
pursuant to which the Company granted a license to use and utilize the Company's
registered mark "Healthy Planet Products" Logo Design and photographic images to
manufacture,  market and sell the Company's greeting cards, gifts and stationery
products in the territory  consisting of the United Kingdom,  Northern  Ireland,
Belgium,  Luxembourg,  Netherlands,  France,  Italy, Spain,  Portugal,  Germany,
Greece,  Denmark,  Eire,  Finland,  Austria,  Sweden,  Isle of Man,  The Channel
Islands and Norway (the  "Territory").  The license does not extend to the right
to use The Sierra  Club name and logo or the name and logo of any other  company
or entity from whom the Company has received a license.

         The  license  granted to Twin Oaks is for a five-year  term  commencing
March 1, 1996  through  February 28, 2001.  The License  Agreement  provides for
quality control and prior approval by the Company of all licensed products. Twin
Oaks is to pay the  Company a royalty  equal to 7% of the gross  sales  price of
licensed  articles,  less  deductions  for returns and  discounts,  with minimum
royalties  ranging from 12,285 (pound))  ($19,000 U.S.  dollars based on current
exchange  rates) for the first  licensed year to 81,900  (pound))  (127,000 U.S.
dollars based on current  exchange rates) for the last license year. The Company
may  terminate  the License  Agreement in the event of a breach by the licensee,
which  breach is not cured  within 30 days after  written  notice. 

 Extension of Sierra Club License

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<PAGE>

         In  January,  1995,  the Company  extended  its  principal  Sierra Club
license for an additional 9 years through December 30, 2005.

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 $250-$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 85.1% % and 83.2% of the Company's sales for the
years ended December 31, 1995 and 1994, respectively. The Sierra Club

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card line is comprised of over 250 everyday designs and over 70 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 $300,000 for the
calendar year 1995,  with an annual  guaranteed  minimum royalty of $300,000 for
each year  thereafter  increased  by 7% per year for each year  through the year
2000,  and 5% per year for each year  through the year 2005.  In addition to the
minimum  annual  guaranteed  royalty,  the  Company  paid Sierra Club a one time
additional  royalty  of  $60,000  for the year  1995 and will pay an  additional
$50,000 for the year 2001. The license agreement may be terminated by the Sierra
Club prior to its regular  expiration  date in the event of a material breach or
default by the Company of its material  obligations which remains uncured for 60
days. The material  obligations of the Company principally relate to the payment
of royalties.  The  experience of the Company with its Sierra Club line has been
that  sales in each  license  year have  exceeded  the base  levels on which the
guaranteed  minimum is to be paid.  For the year ended  December 31,  1995,  the
Company paid  aggregate  royalties of $385,000 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.

         The  Company's  Sierra Club line is  comprised  of 5x7 blank note cards
which  utilize over 250 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 

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<PAGE>

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, 1996 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, 1995,  sales of this line  represented
approximately 5.1% 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

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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,  1995  sales of this line  represented  approximately  1.1% of the
Company's net sales.

         D.       American Lung Association.

         On June 27, 1994, the Company entered into a License Agreement with the
American Lung  Association,  a nonprofit  corporation  headquartered in New York
City.  Pursuant to the License  Agreement,  the Company is granted an  exclusive
worldwide license to use the American Lung Association name, logo and artwork in
connection  with the  manufacture,  sale and  distribution  of  greeting  cards,
stationery  products,  journals and magnets. The license is for a four year term
through  June 31,  1998 with the right to extend for one  additional  three year
period.  The Company is to pay to the American Lung  Association a royalty of 5%
of the  wholesale  price of net sales of the  licensed  products.  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, 1995, sales of this line were not material.

         E.       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 

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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 year ended December 31, 1995,
sales of this line  represented  approximately  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  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 

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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.

         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.  The Company also
produces a line of social stationery comprising everyday boxed notes, stationery
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 $12.00 per box.  Magnetized note pads
incorporate  similar nature and 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 $9.95 each and  consist of  approximately  100 blank  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 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)
line for a separate  magnet line which is marketed  utilizing  The Marine Mammal
Center  trademark.  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 4,800 retail sales outlets
which are comprised of card shops; stationery stores; gift, book stores, notions
and variety shops;  drug

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stores,  and department  stores;  and miscellaneous and multiple retail outlets.
With the exception of Barnes & Noble, Inc., a national chain of bookstores which
accounted for approximately  19.5% of the Company's net sales for the year ended
December 31, 1995, no single customer of the Company accounted for 8% or more of
the  Company's  net sales.  The Company  does not have an  on-going  contract or
agreement with Barnes & Noble with respect to future purchase  commitments.  The
Company views its relations  with Barnes & Noble 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 52% of Company sales for the
year ended December 31, 1995 (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,  1995,  a  total  of  $495,000  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. 

Seasonal Aspects of the Company's Business

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<PAGE>

         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 1995,  seasonal effects on the Company's  business
resulted in approximately 65% of the Company's sales being made in the third and
fourth  quarters.  During  fiscal year 1995,  approximately  19% 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  66% of the cost of  manufacturing  inventory  was incurred in the
second and third quarters of the 1995 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 nature  preservation,  the
Company  believes that the market and demand for its  associated  card and other
product lines will increase. 

Competition

                                       14

<PAGE>

         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.

Employees

         The Company  currently has 27 full-time  employees,  including its four
executive officers, 9 in administrative, managerial, and sales positions, and 14
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

                                       15


<PAGE>

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  lines  featuring
underwater photographs.


Item 2.  Properties

         The Company's offices and business  facilities are located in Petaluma,
California  where  it  rents  approximately  24,854  square  feet of space in an
industrial park located at 1129 North McDowell Boulevard,  Petaluma,  California
94954. This facility, which is a concrete warehouse type building,  accommodates
the Company's executive and administrative offices and warehouse.

         The Company occupies its premises under a lease extending through March
31,  1999.  The base rent  under  the lease is  $13,910  per month  with  annual
increases on April 1st in each succeeding  lease year by $750 per month.  During
fiscal 1995,  the Company paid  $193,206 in lease  payments.  In addition to the
base rent, the Company paid, as additional rent, taxes relating

                                       16

<PAGE>

to the premises,  insurance  premiums relating to the premises,  and all utility
charges  relating  to  the  use of  the  premises  which,  during  fiscal  1995,
approximated $29,905 in the aggregate.

         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,  at which the Company's  executive offices and warehouse  facilities
will be relocated  to. 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 are being
newly  constructed for occupation by the Company.  The lease is for a term of 10
years  commencing  with the date  when  construction  of the  premises  has been
substantially  completed,  which  is  estimated  to be May 1,  1996,  and may be
extended  pursuant to three extension  options for one period of 2 years and two
successive  periods  of 5 years  each.  The  lease is on a  "triple  net  basis"
pursuant  to which the  Company is to pay a monthly  rent of  $26,486  per month
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.

                                       17

<PAGE>

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

                                 Not Applicable.

                   [BALANCE OF PAGE INTENTIONALLY LEFT BLANK]

                                       18
<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
                  ----                          ----              ----

                  1994
                  1st Quarter                   8 3/8              7
                  2nd Quarter                   8 3/4              7 3/4
                  3rd Quarter                   8 7/8              7 5/8
                  4th Quarter                   9 1/4              7 7/8

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

                  1995
                  1st Quarter                  10                  7 1/2
                  2nd Quarter                  10 5/8              9 1/2

                                       19
<PAGE>

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

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 1, 1996 was 175.  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

                                       20

<PAGE>

         The following table sets forth for the periods  indicated,  percentages
which certain items  reflected in the financial data bear to the revenues of the
Company:
                                            Relationship to Total Revenues
                                            ------------------------------
                                                  Fiscal Year Ended
                                                  -----------------
                                                     December 3l,
                                                     ------------

                                         1993          1994          1995
                                         ----          ----          ----
Net Sales                                100%          100%          100%

Operating Expenses:
 Cost of Goods                            37.8%         37.6%         38.8%
 Selling, General and
  Administrative                          53.4%         47.4%         43.8%

Income From Operations                     8.8%         14.9%         17.4%
Interest and Other
  Income (Expense)                         0.9%          1.1%          2.3%

Income Before
 Income Taxes                              9.7%         16.0%         19.7%
Net Income                                13.1%         23.4%         36.4%


Year End Results - Applicability of FAS 109

         At December 31, 1995,  the Company had  available  net  operating  loss
carryforwards of  approximately  $5,090,000 to be applied against future federal
taxable income,  of which  $3,339,000 are subject to a limitation  under Section
382 of the Internal  Revenue Code of $478,950 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,
1995 are as follows:

                                       21
<PAGE>


          Benefits from net operating loss carryforward   $1,730,400
          Accounts receivable allowances                     219,500
          Inventory reserves                                  32,900
          Depreciation and amortization                       25,300
          Other                                               14,900
                                                          ----------
          Net deferred income taxes                        2,023,000
          Deferred income taxes expected to be
                utilized  in 1996                            740,000
                                                          ----------
          Deferred income taxes                           $1,283,000
                                                          ==========


         Management  anticipates  future  taxable  income will be  sufficient to
utilize its net operations loss  carryforwards.  Management's belief is based on
the Company's  actual  profitable  results in each of the years 1992, 1993, 1994
and 1995. In order to utilize the full benefit of the deferred income tax asset,
the  Company  needs  to  realize   aggregate  taxable  income  of  approximately
$5,950,000, which it expects to generate during the years 1996 through 2002. The
Company has estimated its future  taxable income based on its actual results for
the years 1992, 1993, 1994 and 1995. Management  anticipates taxable income will
increase  at the annual rate of 10% per year  through  2000 and 5% per year from
2001 until all loss  carryforward  periods  expire in year 2002.  The  foregoing
constitutes  management's best estimates based upon current  conditions and most
recent  results of  operations.  The results of  operations  in future years are
subject to many  conditions,  many of which are beyond the control of Management
and which may  affect  the amount of taxable  income  that may be  generated  in
future  years,  and the  resultant  ability of the Company to fully  utilize the
deferred income tax asset. Such conditions include general economic  conditions,
the ability of the Company to maintain  is present  gross  margins,  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:

                                       22
<PAGE>

                  Year Ending December 31,           Amount
                  ------------------------           -------
                         2000                      $  502,000
                         2001                         745,000
                         2002                       2,092,000
                         2003                          34,000
                         2004                       1,300,000
                         2005                         385,000
                         2006                          32,000
                                                   ----------
                                                   $5,090,000
                                                   ==========
                                                
                             
         As of  December  31,  1995,  the Company  had  available  approximately
$15,600 and $6,300 of Federal and California investment tax credits respectively
which can be carried forward and offset against future income taxes.  California
credits  expire in 2004.  The Company also has $27,000 and $2,000 of Federal and
California alternative minimum tax credit carryforwards, respectively, to reduce
future regular income taxes over an indefinite period.

         In light of  profitability  for each of the last four 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.

         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 $1,155,900 or 24.4%.
Included in the year end

                                       23

<PAGE>

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.

         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  

                                       24

<PAGE>

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  provision  for  deferred
income taxes of $983,200 and $349,200,  respectively. These provisions 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.

         1994 Compared to 1993

         Sales  for the year  ended  December  31,  1994 were  $4,736,400.  This
reflected an increase versus the prior year level of $3,546,174 of $1,190,227 or
33.6%.  Included in the year end results was a provision  for future  returns of
approximately  $104,000.  The return  provision  recognizes and provides for the
return of unsold  seasonal  merchandise  from  customers who have been given the
return  privilege  in  exchange  for  varying  levels  of  display  of  everyday
merchandise year round.

         During 1994 sales of the  Company's  two  largest  product  lines,  The
Sierra Club and The Humane Society of the United States, accounted for 83.2% and
6.8% of total revenues,  respectively,  and showed a year to year gain of 29.0%.
The balance of the year to year sales  increase was due to the  introduction  of
new product lines comprised of The Wilderness  Society,  Wild World,  Sea Dreams
and Healthy Planet lines.

         The Company  reported  operating  income of $707,700 or $.36 per share.
This level of  operating  income  represented  a 126% gain versus the prior year
operating income of $313,213 or 

                                       25

<PAGE>

$.17 per share.  Not included in operating income was  approximately  $51,000 in
interest income.  Including the impact of interest  income,  income before taxes
amounted to $758,498 or $.39 per share versus the prior year income before taxes
of  $344,632  or $.19 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 $1,782,400  for the year ended  December 31,
1994  representing  37.6% of sales.  This rate is consistent with the prior year
rate of 37.8%.  New  products  introduced  during 1994 with lower  margins  were
offset in part by higher volumes of  established  product lines to result in the
overall percentage.

         Selling,  shipping and marketing  expenses of $847,400 were $132,657 or
18.6% above 1993 actual results.  Commissions and sales  incentives on increased
Company  sales  for the year  ended  December  31,  1994,  as well as  increased
shipping expenses, accounted for the period to period increase.

         General and  administrative  expenses  amounted to $1,398,900  for 1994
reflecting  an  increase  versus  the prior  year  level of  $222,689  or 18.9%.
Budgeted increases in key positions  including the hiring of a Vice President of
Sales and Marketing accounted for the year to year increase.

         The  Company's  net  profit for the year ended  December  31,  1994 was
$1,107,700, representing $.57 per share. The Company's operating income amounted
to $707,700  or $.36 per share.  Included in both 1994 and 1993 year end results
is a provision for deferred income taxes of $349,200 and $119,200  respectively.
These provisions represent the recognition of estimated future NOL uses.

         Total  assets  at  December  31,  1994  amounted  to  $5,724,500  which
reflected  an  increase  of  $1,051,240  when  compared  to the  1993  level  of
$4,673,260.  Increased accounts receivable and inventory in support of the sales
increase  combined with an increase in the deferred income tax

                                       26

<PAGE>

reserve accounted for the overall increase.  Liabilities decreased from the 1993
level of $753,293 by $78,893 to finish 1994 at $674,400 and royalties  accounted
for the year to year decline.

Liquidity and Capital Resources

         At December 3l, 1995,  the Company's  working  capital was  $5,849,200.
This compared  favorably to the 1994 working capital of $4,140,500 for a year to
year  increase of  $1,708,700.  The year to year  increase was  primarily due to
increased cash, inventory and the deferred tax asset.

         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, 1995, the Company did not draw under this line of credit, and as of
December 31, 1995, 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 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.

                                       27
<PAGE>

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]

                                       28
<PAGE>



                                    PART III

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

<TABLE>

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

                  Name             Age                  Position
                  ----             ---                  --------
         <S>                        <C>         <C>                          
         Lawrence M. Barnett        47          Chairman of the Board of Directors
                                                and Treasurer

         Bruce A. Wilson            44          Director, President, Chief Executive, Chief
                                                Operating and Chief Financial Officer

         Robert Fagenson            47          Director

         Rick Williams              39          Vice President - Operations

         M. Scott Foster            44          Director and Vice President - Sales
                                                and Marketing

         Michael Jesselson          43          Director

</TABLE>

         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 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:

                                       29
<PAGE>


             Director                      Class              Term Expires
             --------                      -----              ------------
         Bruce A. Wilson                      1                   1998
         M. Scott Foster                      1                   1998
         Robert Fagenson                      2                   1997
         Michael Jesselson                    2                   1997
         Lawrence M. Barnett                  3                   1996

         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.

         Lawrence M. Barnett,  founder of the Company,  has been a member of the
Board of Directors since the Company's formation in 1979. In October,  1982, Mr.
Barnett assumed the position and  responsibilities of Chief Executive Officer of
the  Company.  Until  approximately  April,  1990,  Mr.  Barnett was a full time
employee of the Company.  Commencing April, 1990, Mr. Barnett assumed the status
as a part time  employee.  In addition to his employment  with the Company,  Mr.
Barnett  and his wife are the owners and  operators  of the  Thistle  Dew Inn in
Sonoma, California, which may be considered his principal occupation.

         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 

                                       30

<PAGE>

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.

         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.

         Michael Jesselson was elected a Director of the Company in April, 1995.
Mr.  Jesselson  is,  and for in excess of five  years has been,  an  independent
investor.  Mr. Jesselson's principal business activities for the past five years
relate to various  businesses and entities owned by himself and his family.  Mr.
Jesselson is an officer and director of Jesselson Capital Corp.

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

         No person who,  during the fiscal year ended  December 31, 1995,  was a
director,  officer or beneficial owner of more than ten percent of the Company's
Common Stock (which is the only 

                                       31

<PAGE>

class of securities of the Company registered under Section 12 of the Securities
Exchange  Act of 1934 (the  "Act") (a  "Reporting  Person")  failed to file on a
timely basis,  reports  required by Section 16 of the Act during the most recent
fiscal year or prior years.  The  foregoing is based solely upon a review by the
Company of Forms 3 and 4 during the most recent  fiscal year as furnished to the
Company under Rule 16a-3(d)  under the Act, and Forms 5 and  amendments  thereto
furnished to the Company with  respect to its most recent  fiscal year,  and any
representation  received by the Company from any reporting person that no Form 5
is required.


Item 10. Executive Compensation

SUMMARY COMPENSATION

         The following  provides  certain  information  concerning  all Plan and
Non-Plan (as defined in Item 402 (a)(ii) of Regulation S-B) compensation awarded
to,  earned by, paid or accrued by the Company  during the years ended  December
31,  1995,  1994 and 1993 to the Chief  Executive  Officer and each of the named
executive officers of the Company.







                                       32


<PAGE>
<TABLE>

                                       SUMMARY COMPENSATION TABLE

<CAPTION>

                                                     Annual Compensation                Long term Compensation
                                                -----------------------------                   Awards
                                                                                        -----------------------

                                                                                                           No. of
                                                                                                           Securities
                                                                                                           Underlying
Name and                                                                 Other          Restricted         Options/
Principal                                                                Annual         Stock              SARs
Position                              Year       Salary      Bonus(1)    Comp.          Award(s)           Granted(2)
---------                             ----       -------     --------    ------         ----------         ------------
<S>                                   <C>        <C>         <C>         <C>            <C>                <C>
Bruce A. Wilson                       1995       $125,000    $ 43,707    $32,460(3)     $30,500(4)
President, Chief Exec-                1994       $125,000    $ 30,359    $31,794(3)     $32,750(4)
utive, Chief Operating                1993       $113,654    $ 17,870    $30,579(3)     $30,500(4)           80,000
and Chief Financial
Officer

Ricky Williams                        1995       $ 80,500    $ 12,500    $ 5,575(5)
Vice President of                     1994       $ 73,205    $ 10,000    $ 5,510(5)        --
Operations                            1993       $ 68,854    $  8,000    $ 5,637(5)                          30,000

M. Scott Foster                       1995       $ 80,000    $ 57,595    $24,825(7)
Vice-President of                     1994       $ 80,000    $ 59,347    $24,665(7)        --
Sales and Marketing                   1993(6)    $ 46,055    $ 29,285    $16,525(7)        --              125,000(8)


<FN>

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

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

(2)      On November 4, 1993,  the Company's  board of directors  authorized the
         granting  of  options  to  purchase  shares of Common  Stock to Messrs.
         Wilson,  Williams and Foster in the amounts of 15,000,  80,000,  30,000
         and 65,000  shares,  respectively,  at an exercise  price of $6.625 per
         share.  All the options as granted are ISOs except those granted to Mr.
         Wilson and Mr. Foster, which options are Non-Isos. All of these options
         are exercisable  through  December 31, 1996. See "Option/Sar  Grants in
         Last Fiscal Year."

(3)      Includes:  (i) for 1995,  an  automobile  allowance  of $12,000 and the
         payment of premiums 

                                       33
<PAGE>

         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 $18,300;  (ii) 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;  and  (iii)  for  1993,  an
         automobile allowance of $10,281, the payment of premiums on a term life
         insurance  policy of $1,998 and the payment of taxes on 4,000 shares of
         restricted Common Stock which vested on December 31, 1993 of $18,300.

(4)      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,
         1995, an aggregate of 20,000 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, 1995,  the  aggregate  restricted
         stock  holdings of Mr.  Wilson  consisted  of 52,000  shares  valued at
         $425,750,  the market  value of these  shares as of December  31, 1995,
         without  giving effect to the diminution in value  attributable  to the
         restriction of such stock.

(5)      Includes:  (i) for 1995,  an  automobile  allowance  of $5,040  and the
         payment of premiums on a term life insurance  policy of $535;  (ii) for
         1994, an automobile  allowance of $5,040 and the payment of premiums on
         a term life insurance policy of $470; and (iii) for 1993, an automobile
         allowance of $5,254.

(6)      Mr. Foster  commenced  employment  with the Company in May,  1993,  the
         information   reported  in  this  column  represents  the  compensation
         received during the portion of the year from May 1st to December 31st.

(7)      Includes: (i) for 1995, an expense allowance of $24,000 and the payment
         of premiums on a term life insurance  policy of $825; (ii) for 1994, an
         expense allowance of $24,000 and the payment of premiums on a term life
         insurance  policy of $665; and (iii) for 1993, an expense  allowance of
         $16,000 and the payment of premiums on a term life insurance  policy of
         $525.

(8)      In connection with his employment agreement, Mr. Foster was granted, on
         April 9, 1993,  options to purchase 60,000 shares of Common Stock at an
         exercise  price of $5.25  per  share.  These  options  are  exercisable
         through April 30, 1996. Of the options  granted to Mr.  Foster,  10,000
         options vested and became exercisable on April 30, 1994, 20,000 options
         vested and became exercisable on April 30, 1995 and 30,000 options will
         vest and become exercisable on April 30, 1996.
</FN>
</TABLE>


STOCK OPTIONS/SAR GRANTS

                                       34
<PAGE>

         No stock option grants or Stock Appreciation  Rights ("SARs") were made
during the year ended December 31, 1995 to any of the named  executive  officers
of the Company.

<TABLE>

               AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                          AND FY-END OPTION/SAR VALUES

         The  following  table  contains  information  with respect to the named
executive  officers  concerning  options held as of the year ended  December 31,
1995.
<CAPTION>
                                                 Number of
                                                 Securities
                                                 Underlying            Value of
                                                 Unexercised           Unexercised
                                                 Options/SARS          In-the-Money
                          Shares                   as of               Options/SARs at
Name                     Acquired                December 31,1995      December 31, 1995(1)
----                       on         Value      Exercisable/          Exercisable/
                         Exercise     Realized   Unexercisable         Unexercisable
                         ---------    --------   ----------------      -------------------
<S>                      <C>          <C>        <C>                   <C>                
Bruce A. Wilson          22,500       $120,938   72,500 / 30,000       $178,125 /  $56,250
Ricky Williams           22,500       $ 28,750   45,000 / 10,000       $131,250 /  $18,750
M. Scott Foster          50,000       $122,813   62,500 / 40,000       $127,500 / $116,250

<FN>

(1)      Based upon the average  closing bid and asked  prices of the  Company's
         Common Stock on December 29, 1995 ($8.50 per share),  less the exercise
         price for the aggregate number of shares subject to the options.
</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

                                       35



<PAGE>

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

                                       36

<PAGE>

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  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.

         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, 1995,  an aggregate of 20,000
restricted  shares  were  vested.  

                                       37

<PAGE>

In the  event of  certain  Change in  Control  transactions,  all then  unvested
restricted shares become immediately vested.

         Mr. Foster's Employment Agreement, as amended and restated, extends the
term of Mr. Foster's  employment through December 31, 1998. Mr. Foster continues
to be employed as Vice President of Sales and Marketing of the Company and is to
receive a base salary  (the "Base  Salary")  for the  calendar  year  commencing
January  1, 1995 of  $80,000  per  annum,  payable  over the  course of the year
pursuant to the  Company's  regular  payroll  periods.  For each of the calendar
years 1996,  1997 and 1998,  the amount of Base Salary is  increased to $100,000
per annum,  of which  $20,000 is to be paid in a single lump sum on January 15th
of each of said  years,  and the  remainder  of  $80,000  is to be paid over the
course of the year pursuant to the Company's regular payroll periods. Mr. Foster
is to further receive, for each year of the term, an incentive bonus as follows:
(i) 1% on net  shipments  on  initial  orders to  personal  sales  accounts,  as
defined,  (ii) a  commission  of 5% of the amount on all Company  net  shipments
exceeding the preceding year's net shipments by 10% but not to exceed the sum of
$75,000,  and (iii) an  additional  amount of 4% of the  Company's  net  pre-tax
profits in excess of $ 100,000 and up to $250,000,  2% of net pre-tax profits in
excess of  $250,000  up to  $750,000  and 1% of net pretax  profits in excess of
$750,000.  Mr.  Foster is to receive  reimbursement  for all  travel  outside of
Northern  California,  a policy of term life insurance in the amount of $500,000
payable to a  beneficiary  designated  by him,  health and  longterm  disability
insurance. In the event Mr. Foster is terminated without cause, he is to receive
a severance  benefit of 24 months Base Salary if terminated  after  December 31,
1997,  or 24 months  Base Salary plus the amount of Base Salary from the date of
termination  to December 31, 1997 if  terminated  prior to December 31, 1997. In
the event of a Change in Control in the Company, as defined, and, following such
Change in  

                                       38

<PAGE>

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 become 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 January 12, 1996, Lawrence M. Barnett and the Company entered into a
new employment agreement. Pursuant to this agreement, Mr. Barnett is employed as
the Company's  Chairman on a less than full time basis until  December 31, 1998.
Mr.  Barnett  receives a salary at the rate of $12,000 per year.  For the fiscal
1996 year, the Company has agreed to pay the premium on a term life insurance in
the amount of $500,000 payable to a beneficiary  designated

                                       39

<PAGE>

by him. The exercise  term of all  unexercised  options held by Mr.  Barnett was
extended to December 31, 1998.

         On September 10, 1993, 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, 1996. During the extended
term, Mr. Williams is to receive a salary of $73,200 for the year 1994,  $80,500
for the year 1995,  and $88,600 for the year 1996.  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 $420 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,
1996. 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  31,1996,  and  vesting  in equal  increments  on
December 31st of each year of the term of his Agreement, as extended, commencing
December 31, 1994. 

SENIOR MANAGEMENT INCENTIVE PLAN

         The Company's 1991 Senior Management Incentive Plan (sometimes referred
to as the "Plan" or the "Management  Plan") currently  provides for the issuance
of up to 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 

                                       40

<PAGE>

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

                                       41

<PAGE>

representing  more than 10% of the total combined voting power of all classes of
Common Stock of the Company ("10%  stockholder")  must be granted at an exercise
price of at least 110% of the fair market  value of the Common Stock on the date
of the grant. The exercise price of the non-ISOs may not be less than 65% of the
fair  market  value of the Common  Stock on the date of grant.  ISOs  granted to
persons other than 10% stockholders may be exercisable for a period of up to ten
years  from  the  date  of  grant;  ISOs  granted  to  10%  stockholders  may be
exercisable  for a  period  of up to five  years  from  the  date of  grant.  No
individual may be granted ISOs that become  exercisable in any calendar year for
Common  Stock  having a fair  market  value at the  time of grant in  excess  of
$100,000.  Non-ISOs may be  exercisable  for a period of up to 13 years from the
date of grant.

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

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

                                       42

<PAGE>

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

                                       43

<PAGE>

who at the  beginning  of such  period  constitute  the  entire  Board  cease to
constitute a majority of the Board,  unless the election,  or the nomination for
election,  of each  new  director  is  approved  by at least a  majority  of the
directors then still in office.

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

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

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

                                       44

<PAGE>

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"

                                       45

<PAGE>

(as such term is defined in Rule 13d-3  under the  Exchange  Act),  directly  or
indirectly,  of securities of the Company representing twenty-five percent (25%)
or more of the combined voting power of the then  outstanding  securities of the
Company ordinarily (and apart from rights accruing under special  circumstances)
having the right to vote in the election of directors (calculated as provided in
paragraph  (d) of such Rule 13d-3 in the case of rights to acquire the Company's
securities).

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

NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

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

                                       46

<PAGE>

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  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

                                       47

<PAGE>

treatment.  As of March 1, 1996,  there  were  outstanding  options to  purchase
15,000 and 10,000 shares under the Director  Plan, at an exercise price of $8.00
and $10.50 per share, respectively. 

EMPLOYEE 401(K) PLAN

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

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
         OWNERS AND MANAGEMENT

         The following table sets forth certain  information as of March 1, 1995
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]



                                       48
<PAGE>


                                         Amount of
                                         and Nature of
Name and Address of                      Beneficial                 Percentage
Beneficial Owner                         Ownership                  of Class
-------------------                      --------------             ------------
Lawrence M. Barnett                       26,885(l)(2)               1.7%
1129 N.McDowell Blvd                   
Petaluma, CA  94954                    
                                       
Bruce A. Wilson                          124,600(3)(4)               7.4%
1129 N.McDowell Blvd                   
Petaluma, CA  94954                    
                                       
Robert Fagenson                           23,125(5)                  1%
19 Rector Street                       
New York, NY  10006                    
                                       
Starr Securities, Inc.                   111,048(6)                  7.2%
19 Rector Street                       
New York, NY 10006                     
                                       
Paul Bluhdorn                            181,256(7)                 10.8%
P.O. Box 7854                          
Burbank, CA 91510                      
                                       
Mark S. Siegel                            70,062(8)                  4.6%
P.O. Box 7854                          
Burbank, CA 91510                      
                                       
Yvette Bluhdorn                           71,738(8)(9)               4.7%
P.O. Box 7854                          
Burbank, CA 91510                      
                                       
Estate of                              
Ludwig Jesselson                         182,071(10)(11)            10%
1301 Avenue of the                     
 Americas                              
New York, NY 10019                     
                                       
Michael Jesselson                         92,062(10)(11)(12)         6%
1301 Avenue of the                     
 Americas                              
New York, NY 10019                     
                                       
Ricky Williams                            45,000(13)                 2.4%
1129 N. McDowell Blvd                  
Petaluma, CA 94954                  

                                       49

<PAGE>


                                         Amount of
                                         and Nature of
Name and Address of                      Beneficial                 Percentage
Beneficial Owner                         Ownership                  of Class
-------------------                      --------------             ------------
M. Scott Foster                           62,500(14)                 3.3%
1129 N. McDowell Blvd                  
Petaluma, CA 94954                     
                                       
All Officers and Directors             
as a Group (5 persons in               
number)(1)(2)(3)(4)(13)(14)              511,243                    25.2%
                              
---------
(1)      Includes  6,885 shares held of record by the Barbell  Family Trust,  of
         which Mr. Lawrence M. Barnett is both a trustee and a beneficiary.

(2)      Includes 15,000 vested and presently exercisable options and options to
         purchase 5,000 shares of Common Stock not presently vested.

(3)      Includes 72,000 vested and presently  exercisable  options and excludes
         options to purchase 63,000 shares of Common Stock not presently vested.

(4)      Includes  40,000  restricted  shares  subject to vesting at the rate of
         4,000 shares per year on December 31st in each year.

(5)      Includes  vested  options to purchase  15,000  shares of the  Company's
         Common Stock and excludes unvested options to purchase 5,000 shares.

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

(7)      Based on information  contained in an amendment to a Schedule 13D dated
         January  27,  1993  (the  "Bluhdorn  13D"),  filed  on  behalf  of Paul
         Bluhdorn,  Yvette  Bluhdorn and Mark Siegel.  Includes 31,250 shares of
         the Company's Common stock owned by Mr. Bluhdorn, and 150,006 shares of
         Common Stock  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.

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

                                       50

<PAGE>

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

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

(11)     Based on information  contained in an amendment to a Schedule 13D dated
         September 21, 1995 (the "Jesselson 13D") on behalf of Ludwig Jesselson,
         Michael Jesselson, and the Estate of Ludwig Jesselson. Includes 175,488
         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.

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

(13)     Includes 45,000 vested and presently  exercisable  options and excludes
         options to purchase 10,000 shares of Common Stock not presently vested.

(14)     Includes 62,500 vested and presently  exercisable options, and excludes
         options to purchase 40,000 shares of Common Stock not presently vested.


Item 12. Certain Relationships and Related Transactions

         For  information  concerning  the  employment  agreements  of  Bruce A.
Wilson,  Lawrence M. Barnett,  Rick  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 19, 1994,
there was granted to Mr. Robert Fagenson, a Director of the Company,  options to
purchase 15,000 shares of the Company's  Common Stock through August 19, 1999 at
an  exercise  price of $8 per  share.  The

                                       51

<PAGE>

grant of these  options was for past service by Mr.  Fagenson as a  non-employee
Director. Mr. Fagenson additionally receives an annual director's fee of $6,000.

         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.  In addition,  each 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.

(B)      Reports on Form 8-K

         During  the last  quarter  of the period  covered  by this  Report,  no
reports on Form 8-K were filed by the Registrant.


                   [BALANCE OF PAGE INTENTIONALLY LEFT BLANK]

                                       52
<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
                                        President, Chief Executive, Chief
                                          Operating and Chief Financial
                                          Officer, and Principal Accounting
                                          Officer

Dated:  March 21, 1996


         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\ Lawrence M. Barnett                              March 21, 1996
-----------------------------                               
Lawrence M. Barnett
 Chairman of the Board



 \s\ Bruce A. Wilson                                  March 21, 1996
-----------------------------                               
Bruce A. Wilson
 President, Chief Executive,
 Chief Operating and Chief
 Financial Officer, and
 Director



 \s\ Robert Fagenson                                  March 21, 1996
-----------------------------                               
Robert Fagenson
 Director

                                       53

<PAGE>

 \s\ M. Scott Foster                                  March  21, 1996
-----------------------------                              
M. Scott Foster
 Director, Vice President-Sales



 \s\ Michael Jesselson                                March  21, 1996
-----------------------------                               
Michael Jesselson
 Director


                                       54
<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 2.1 to Registration
         Statement on Form S-18, File No. 2-97768]

 3.1*    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.  [Exhibits 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]

 4.1*    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*    Form of Employment Agreement between Registrant and Lawrence M. Barnett
         [Exhibit 10.2 to Current Report on Form 8-K dated December 21, 1990]

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

10.4*    Extension and Modification Agreement dated September 10, 1993

<PAGE>

         extending  Employment  Agreement  of  Rick  Williams  [Exhibit  10.1 to
         Current Report on Form 8-K dated September 24, 1993]

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

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

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

10.8*    License Agreement between  Registrant and The Wilderness  Society dated
         June 24, 1995 [Exhibit 10.1 to Current Report on Form 8-K dated July 1,
         1994]

10.9*    License Agreement between  Registrant and the American Lung Association
         dated June 27, 1994  [Exibit  10.2 to Current  Report on Form 8-K dated
         July 1, 1994]

10.10*   License Agreement between Registrant and The Marine Mammal Center dated
         July 28, 1994

10.11*   Lease for premises 1129 North McDowell Boulevard,  Petaluma, California
         94954  [Exhibit  10 to Current  Report on Form 8-K dated  December  26,
         1991]

10.12*   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]

11.0     Computation of Earnings per Common Share

23.0     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
         28, 1995

27.      Financial Data Schedule

28.1*    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

<PAGE>












                          HEALTHY PLANET PRODUCTS, INC.

                          INDEX TO FINANCIAL STATEMENTS

                                                                          PAGE
                                                                          -----
Independent Auditor's Report                                             F - 1

Balance Sheets - December 31, 1994 and 1995                              F - 2

Statements of Income -
  Years ended December 31, 1994 and 1995                                 F - 3

Statements of Shareholders' Equity -
  Years ended December 31, 1994 and 1995                                 F - 4

Statements of Cash Flows -
  Years ended December 31, 1994 and 1995                                 F - 5

Notes to Financial Statements                                            F - 6
                                                                           to
                                                                         F -13


<PAGE>

MOSS-ADAMS LLP
--------------------------------------------------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS                 438 First Street, Suite 320
                                             Santa Rosa, CA 95401-6339

                                             Phone 707.527.0800
                                             FAX 707.575.1712

                                             Offices in Principal Cities of
                                             Washington, Oregon and California



                          INDEPENDENT AUDITOR'S REPORT


To the Shareholders and Board of Directors
Healthy Planet Products, Inc.


We have audited the  accompanying  balance  sheets of Healthy  Planet  Products,
Inc.,  as of December 31, 1995 and 1994,  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, 1995 and 1994, 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 2, 1996


A member of
Moores
Rowland
International

An association of independent
accounting firms throughout the world.

                                      F - 1

<PAGE>

<TABLE>


                                                HEALTHY PLANET PRODUCTS, INC.

                                                       BALANCE SHEETS
<CAPTION>

                                                                                                       December 31,
                                                                                            ----------------------------------
                                                                                                 1994                1995
                                                                                             -----------          -----------
                                                           ASSETS

<S>                                                                                          <C>                  <C>        
CURRENT ASSETS
   Cash and cash equivalents                                                                 $ 2,547,500          $ 4,142,100
   Accounts receivable                                                                         1,009,800              736,500
   Inventories                                                                                   694,700              905,300
   Prepaid expenses                                                                               26,000               33,200
   Deferred income taxes                                                                         450,000              740,000
                                                                                             -----------          -----------

         Total current assets                                                                  4,728,000            6,557,100
                                                                                             -----------          -----------

PROPERTY AND EQUIPMENT                                                                           228,300              444,900
                                                                                             -----------          -----------

OTHER ASSETS
   Deferred income taxes                                                                         560,000            1,283,000
   Intangible assets                                                                             105,400              116,900
   Other                                                                                         102,800               16,400
                                                                                             -----------          -----------

                                                                                                 768,200            1,416,300
                                                                                             -----------          -----------

         Total assets                                                                        $ 5,724,500          $ 8,418,300
                                                                                             ===========          ===========

                                            LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
   Accounts payable                                                                          $   226,200          $   293,900
   Royalties payable                                                                              80,200                8,600
   Commissions payable                                                                           123,900              156,000
   Income taxes payable                                                                             -                   9,600
   Accrued wages, bonuses and payroll taxes                                                      126,300              131,500
   Accrued liabilities                                                                            30,900               17,900
   Accrued rent payable                                                                             -                  90,400
                                                                                             -----------          -----------

         Total current liabilities                                                               587,500              707,900
                                                                                             -----------          -----------

ACCRUED RENT PAYABLE                                                                              86,900                 -
                                                                                             -----------          -----------

SHAREHOLDERS' EQUITY
   Common stock, $.01 par value, 12,000,000 shares
      authorized, 1,522,216 and 1,744,028 shares
      issued and outstanding, respectively                                                        15,200               17,400
   Preferred stock, with aggregate liquidation
      preference totaling $1,401,400                                                              36,600               25,600
   Additional paid-in capital                                                                 11,665,400           12,189,600
   Accumulated deficit                                                                        (6,667,100)          (4,522,200)
                                                                                             -----------          -----------

         Total shareholders' equity                                                            5,050,100            7,710,400
                                                                                             -----------          -----------

         Total liabilities and shareholders' equity                                          $ 5,724,500          $ 8,418,300
                                                                                             ===========          ===========
<FN>

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

                                                             F - 2

<PAGE>

<TABLE>

                                                HEALTHY PLANET PRODUCTS, INC.

                                                    STATEMENTS OF INCOME
<CAPTION>

                                                                                                   Year Ended December 31,
                                                                                                 ----------------------------
                                                                                                   1994              1995
                                                                                                ----------         ----------
<S>                                                                                             <C>                <C>       
Net sales                                                                                       $4,736,400         $5,892,300

Cost of goods sold                                                                               1,782,400          2,286,700
                                                                                                ----------         ----------

Gross profit                                                                                     2,954,000          3,605,600
                                                                                                ----------         ----------

Operating expenses
    Selling, shipping and marketing                                                                847,400            998,300
    General and administrative                                                                   1,398,900          1,580,800
                                                                                                ----------         ----------

                                                                                                 2,246,300          2,579,100
                                                                                                ----------         ----------

Operating income                                                                                   707,700          1,026,500
                                                                                                ----------         ----------

Other income (expense)
    Interest income                                                                                 49,500            129,700
    Other income                                                                                     1,300              5,500
                                                                                                ----------         ----------

                                                                                                    50,800            135,200
                                                                                                ----------         ----------

Income before income taxes                                                                         758,500          1,161,700

Income tax benefit                                                                                 349,200            983,200
                                                                                                ----------         ----------

Net income                                                                                       1,107,700          2,144,900

Dividends paid and accumulated on preferred stock                                                  (13,500)            (9,000)
                                                                                                ----------         ----------

Income applicable to common stock                                                               $1,094,200         $2,135,900
                                                                                                ==========         ==========

Earnings per share                                                                              $      .56         $    1.05
                                                                                                ==========         ==========

Weighted average common shares and equivalents outstanding                                       1,952,509          2,041,645
                                                                                                ==========         ==========
<FN>
                                               The accompanying notes are an integral
                                                 part of these financial statements.

</FN>
</TABLE>
                                                             F - 3

<PAGE>

<TABLE>


                                                  HEALTHY PLANET PRODUCTS, INC.

                                               STATEMENTS OF SHAREHOLDERS' EQUITY

<CAPTION>

                                                                                            PREFERRED STOCK                      
                                                                      -----------------------------------------------------------
                                                  COMMON STOCK                  SERIES B                       SERIES D             
                                        ---------------------------   ----------------------------   ----------------------------   
                                            SHARES        AMOUNT           SHARES      AMOUNT           SHARES          AMOUNT      
                                        ------------   ------------   ------------    ------------   ------------    ------------   
<S>                                        <C>         <C>                   <C>      <C>                 <C>        <C>            
Balance,
  December 31, 1993                        1,516,382   $     15,100          1,251    $        100        371,009    $     37,100   

Net income for the year
  ended December 31, 1994                       --             --             --              --             --              --     

Conversion of Series D
  Preferred stock to common stock              5,834            100           --              --           (5,834)           (600)  

Vesting of 4,000 restricted
  shares of common stock                        --             --             --              --             --              --     
                                        ------------   ------------   ------------    ------------   ------------    ------------   

Balance,
  December 31, 1994                        1,522,216   $     15,200          1,251    $        100        365,175    $     36,500   
                                        ------------   ------------   ------------    ------------   ------------    ------------   

Net income for the year
  ended December 31, 1995                       --             --             --              --             --              --     

Conversion of Series D
  Preferred stock to common stock            110,500          1,100           --              --         (110,500)        (11,000)  

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        254,675    $     25,500   
                                        ============   ============   ============    ============   ============    ============   


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

</TABLE>
<PAGE>



                                        ADDITIONAL            
                                          PAID-IN        ACCUMULATED      
                                         CAPITAL           DEFICIT       
                                         ------------    ------------    
                                                                         
                                                                         
Balance,                                                                 
  December 31, 1993                      $ 11,642,400    $ (7,774,800)   
                                                                         
Net income for the year                                                  
  ended December 31, 1994                        --         1,107,700    
                                                                         
Conversion of Series D                                                   
  Preferred stock to common stock                 500            --      
                                                                         
Vesting of 4,000 restricted                                              
  shares of common stock                       22,500            --      
                                         ------------    ------------    
                                                                         
Balance,                                                                 
  December 31, 1994                      $ 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               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               $ 12,189,600    $ (4,522,200)   
                                         ============    ============    
                                                                         



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


                                      F - 4

<PAGE>

<TABLE>

                                                HEALTHY PLANET PRODUCTS, INC.

                                                  STATEMENTS OF CASH FLOWS
<CAPTION>


                                                                                                  Year Ended December 31,
                                                                                             ---------------------------------
                                                                                                 1994                 1995
                                                                                              ----------           -----------
<S>                                                                                           <C>                 <C>        
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                                                $1,107,700          $ 2,144,900
    Adjustments to reconcile net income
        to net cash provided by operating
        activities:
           Depreciation and amortization                                                         111,400              145,900
           Change in allowance for doubtful
              accounts and returns                                                                51,200              302,800
           Grant of restricted shares                                                             22,500               22,500
           Deferred income taxes                                                                (350,000)          (1,013,000)
    Changes in:
        Accounts receivable                                                                     (677,100)             (29,500)
        Inventories                                                                              (70,800)            (210,600)
        Advance on royalties                                                                       8,400                 -
        Prepaid expenses                                                                          50,400               (7,200)
        Accounts payable                                                                         (91,100)              67,700
        Royalties payable                                                                        (31,600)             (71,600)
        Commissions payable                                                                       (4,900)              32,100
        Income taxes payable                                                                        -                   9,600
        Accrued wages, bonuses and payroll taxes                                                  35,100                5,200
        Accrued liabilities                                                                       (5,000)             (13,000)
        Accrued rent payable                                                                      18,600                3,500
                                                                                              ----------          -----------

                 Net cash provided by operating activities                                       174,800            1,389,300
                                                                                              ----------          -----------

CASH FLOWS FROM INVESTING ACTIVITIES
    Purchase of property and equipment                                                          (161,400)            (306,500)
    Increase in publishing rights                                                                (78,000)             (67,500)
    Other                                                                                        (86,800)              86,400
                                                                                              ----------           -----------

                 Net cash used by investing activities                                          (326,200)            (287,600)
                                                                                              ----------          -----------

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

                 Net cash provided by financing activities                                          -                 492,900
                                                                                              ----------          -----------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                (151,400)           1,594,600

CASH AND CASH EQUIVALENTS
    Beginning of year                                                                          2,698,900            2,547,500
                                                                                              ----------          -----------

    End of year                                                                               $2,547,500          $ 4,142,100
                                                                                              ==========          ===========
<FN>                                                                                         
                                               The accompanying notes are an integral        
                                                 part of these financial statements.         
</FN>                                                              
</TABLE>                                                          


                                                             F - 5

<PAGE>


                          HEALTHY PLANET PRODUCTS, INC.

                          NOTES TO FINANCIAL STATEMENTS

                           December 31, 1995 and 1994


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

     (a)  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 4,800 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.

         (b)  Inventory  - Inventory  is stated at the lower of cost  (first-in,
first-out method) or market.

         (c) 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 to 7 years
          Color separations                                             3 years
          Furniture and fixtures                                        5 years
          Computer software                                             5 years

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

     (e)  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 6.

         (f) 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.

         (g)  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 1995 and 1994, by $9,000 and $13,500, respectively.

                                      F - 6

<PAGE>


                          HEALTHY PLANET PRODUCTS, INC.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

                           December 31, 1995 and 1994


NOTE 1 - NATURE OF BUSINESS  AND SUMMARY OF  SIGNIFICANT  ACCOUNTING  POLICIES
         (Continued)

         (h)  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 at
various  financial  institutions  and  are  within  FDIC  insurance  thresholds.
Receivables are not  collateralized,  but the Company  conducts  frequent credit
checks on customers with material balances.

         (i) 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.

     (j)  Advertising  - Costs  associated  with the  production of catalogs are
capitalized  and  amortized  over the expected life of the catalog of 1-2 years.
All other  advertising  costs are  expensed  as  incurred.  Advertising  expense
totaled  $24,800 and $29,500  for the years  ended  December  31, 1995 and 1994,
respectively.

         (k) Stock-based compensation - The Financial Accounting Standards Board
has recently issued  Statement of Financial  Accounting  Standards No. 123 (SFAS
123),  Accounting  for  Stock-Based  Compensation.  This  standard  will  become
effective for the year ending December 31, 1996, although earlier application is
permitted. The Company has determined that it will implement the new standard in
1996. Under SFAS 123, a fair value method is used to determine compensation cost
for stock options or similar equity instruments. Compensation is measured at the
grant date and is  recognized  over the  service or  vesting  period.  Under the
current  accounting  standard,  compensation  cost is the excess, if any, of the
quoted market price of the stock at a measurement date over the amount that must
be paid to acquire the stock.

         The new  standard  would  allow the  Company to continue to account for
stock-based  compensation  under the current  standard,  with  disclosure of the
effects of the new standard,  or adopt a fair value based method of  accounting.
The Company  has not yet  decided  which  method  will be  utilized,  nor has it
determined  the impact,  if any,  that adoption of the new standard will have on
the financial condition and results of operations.  However, management believes
the effect of the new accounting standard will not be significant.

NOTE 2 - ACCOUNTS RECEIVABLE

         Accounts receivable consist of the following:

                                                        December 31,
                                               ------------------------------
                                                  1994              1995
                                               ----------         ----------
                                                                              
         Accounts receivable                   $1,214,000         $1,243,500
         Less allowances for doubtful 
            accounts and returns                 (204,200)          (507,000)
                                               ----------         ----------

                                               $1,009,800         $  736,500
                                               ==========         ==========

                                      F - 7

<PAGE>


                          HEALTHY PLANET PRODUCTS, INC.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

                           December 31, 1995 and 1994


NOTE 3 - INVENTORIES

         Inventories consist of the following:
                                                           December 31,
                                                     --------------------------
                                                         1994           1995
                                                      ---------      ----------
                Raw materials                        $    6,300      $   36,800
                Work-in-process                         508,100         539,200
                Finished goods                          180,300         329,300
                                                     ----------      ----------
                                                
                                                     $  694,700      $  905,300
                                                     ==========      ==========
                                           

NOTE 4 - PROPERTY AND EQUIPMENT

                Property and equipment consist of the following:

                Machinery, equipment and 
                    leasehold improvements           $  479,100      $  748,900
                Color separations                       280,700         317,400
                Furniture and fixtures                   72,700          72,700
                Computer software                        38,200          38,200
                                                     ----------      ----------
                                                    
                                                        870,700       1,177,200
                Less accumulated depreciation       
                     and amortization                  (642,400)       (732,300)
                                                     ----------      ----------
                                                    
                                                     $  228,300      $  444,900
                                                     ==========      ==========
                                                

NOTE 5 - INTANGIBLE ASSETS

                Intangible assets consist of the following:

                Publishing rights                    $  309,300      $  376,800

                Less accumulated amortization          (203,900)       (259,900)
                                                     ----------      ----------

                                                     $  105,400      $  116,900
                                                     ==========      ==========


NOTE 6 - INCOME TAXES

                Income taxes consist of the following:
                                                       Year Ended December 31,
                                                     ---------------------------
                                                         1994           1995
                                                     -----------     ----------
                Current
                   Federal                           $  -            $   29,000
                   State                                    800             800
                                                     ----------      ----------

                                                            800          29,800
                                                     ----------      ----------

                                 F - 8

<PAGE>


                          HEALTHY PLANET PRODUCTS, INC.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

                           December 31, 1995 and 1994


NOTE 6 - INCOME TAXES (Continued)
                                                      Year Ended December 31,
                                                 ------------------------------
                                                    1994                 1995
                                                 ---------          -----------
         Deferred  
            Current                              $(390,000)         $  (290,000)
            Non-current                             40,000             (723,000)
                                                 ---------          -----------

                                                  (350,000)          (1,013,000)
                                                 ---------          -----------

                                                 $(349,200)         $  (983,200)
                                                 =========          ===========

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

                                                    Year Ended December 31,
                                                   --------------------------
                                                    1994               1995
                                                   ------             -------

          Income tax provision                     34.0 %             34.0 %
          State taxes                               9.3                9.3
          Recognition of net operating
             loss carryforward                    (43.3)               -

          Change in deferred tax asset
             valuation allowance                  (46.8)            (139.0)
          Change in allowance for doubtful
             accounts and returns                   3.0               11.0

          Other                                    (2.2)               (.3)
                                                  -----             ------

                                                  (46.0)%            (85.0)%
                                                  =====             ======

         At December 31, 1995,  the Company had  available  net  operating  loss
carryovers of  approximately  $5,090,000 to be applied  against  future  federal
taxable income.  Due to a change in ownership  during 1988,  $3,339,000 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                                   $  502,000
                  2001                                      745,000
                  2002                                    2,092,000
                  2003                                       34,000
                  2004                                    1,300,000
                  2005                                      385,000
                  2006                                       32,000
                                                         ----------

                                                         $5,090,000
                                                         ==========

                                      F - 9

<PAGE>


                          HEALTHY PLANET PRODUCTS, INC.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

                           December 31, 1995 and 1994


NOTE 6 - INCOME TAXES (Continued)

         The Company has available  approximately  $15,600 and $6,300 of federal
and  California  investment  tax  credits,  respectively,  which can be  carried
forward and offset against future income taxes.

<TABLE>

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

<CAPTION>
                                                                                          December 31,
                                                                                -------------------------------
                                                                                    1994               1995
                                                                                ----------          -----------

  <S>                                                                           <C>                 <C>        
  Accounts receivable allowances                                                $   88,400          $   219,500

  Inventory reserve                                                                 35,000               32,900

  Benefits from net operating loss carryforward                                    316,200              497,300

  Other                                                                             10,400               (9,700)
                                                                                ----------          -----------

  Current deferred tax asset                                                    $  450,000          $   740,000
                                                                                ==========          ===========

  Depreciation and amortization                                                 $   23,600          $    25,300

  Benefits from net operating loss carryforward                                  2,165,600            1,233,100

  Other                                                                            (14,200)              24,600
                                                                                ----------          -----------

  Non current deferred tax asset                                                 2,175,000            1,283,000
                                                                                ----------          -----------

  Less valuation allowance                                                      (1,615,000)               -
                                                                                ----------          -----------

                                                                                $  560,000          $ 1,283,000
                                                                                ==========          ===========
</TABLE>

     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.


NOTE 7 - 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  1.25%,   collateralized   by
receivables,  inventory,  contract rights, equipment, and intangibles. This line
matures May 31, 1996, and requires that the Company meet  restrictions  relating
to key financial  ratios.  At December 31, 1995,  the Company had no outstanding
draws under this line-of-credit agreement.


                                 F - 10

<PAGE>


                          HEALTHY PLANET PRODUCTS, INC.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

                           December 31, 1995 and 1994


NOTE 8 - COMMITMENTS

         Leases  - The  Company  leases  office  and  warehouse  space  under an
operating  lease  expiring  March  1999,  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,
                ------------------------
                          1996                         $208,200
                          1997                          223,200
                          1998                          238,200
                          1999                           60,500
                                                       --------

                                                       $730,100
                                                       ========

         Rent expense totaled $205,800 and $196,800 for the years ended December
31, 1995 and 1994, respectively.

         Subsequent  to year  end  the  Company  entered  into a new  lease  for
warehouse and offices space.  The lease term is for 10 years with annual minimum
lease  payments  ranging from $317,800 to $602,900.  The new lease  releases the
Company from all liability under the current lease.

         Employment  Agreements - The Company entered into employment agreements
expiring  through  December  31,  1999,  with four key  employees.  Compensation
related to these agreements  amount to $364,100 for the year ending December 31,
1995.

         License Agreements - The Company has entered into licensing  agreements
with the Sierra Club, The Wilderness  Society,  The Marine Mammal Center 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 $4,374,700, over the life
of these  agreements.  Options exist to extend the terms of certain  agreements.
Sales under the Sierra Club  agreement  accounted for 85% and 83% of total sales
for the years ended December 31, 1995 and 1994, respectively.


NOTE 9 - MAJOR SUPPLIERS

         During the year ended December 31, 1995, the Company made 45.7%,  18.9%
and 12.4% of its  purchases  from  three  suppliers.  Amounts  due to  suppliers
included in accounts payable totaled $174,200 at December 31, 1995.


                                     F - 11

<PAGE>


                          HEALTHY PLANET PRODUCTS, INC.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

                           December 31, 1995 and 1994


NOTE  10-CAPITAL STOCK

         Preferred Stock
<TABLE>

                Preferred stock consists of the following:

<CAPTION>
                                                                                                          December 31
                                                                                                         --------------------
                                                                                                           1994         1995
                                                                                                         -------      --------
                <S>                                                                                      <C>          <C>         
                Series B, $.10 par value, with aggregate liquidation  preference
                   of $100,000, 14,250 shares authorized, 1,251 and 834
                   shares issued and outstanding, respectively                                           $   100      $   100

                Series D, $.10 par value, with aggregate liquidation  preference
                   of $1,301,400, 371,009 shares authorized, 365,175 and 254,675
                   shares issued and outstanding,
                   respectively                                                                           36,500       25,500
                                                                                                         -------      -------

                                                                                                         $36,600      $25,600
                                                                                                         =======      =======
</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, 1995,  cumulative
dividends  totaled $52,500.  During 1995, 417 shares of Series B Preferred Stock
were converted to common stock.

         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  1995,  110,500
shares of Series D Preferred stock were converted to common stock.


NOTE  11-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 1995, 10,000 options
were granted and 60,000 options were  exercised.  At December 31, 1995,  249,000
common  stock  options were  exercisable.  In addition,  91,000  options  become
exercisable in 1996.

                                     F - 12

<PAGE>


                          HEALTHY PLANET PRODUCTS, INC.

                    NOTES TO FINANCIAL STATEMENTS (Continued)

                           December 31, 1995 and 1994


NOTE  11-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. During 1995, 42,978 of these warrants were exercised.

<TABLE>
         The activity of the stock option plan and warrants is as follows:

<CAPTION>
                                                                          Shares Under         Shares Under       Restricted
                                                                             Warrants            Options            Shares
                                                                             -------             -------            ------

                <S>                                                          <C>                 <C>                <C>            
                Balance, December 31, 1993                                    51,095             375,000            48,000
                Granted                                                         -                 15,000              -
                Exercised                                                       -                   -                 -
                Vested                                                          -                   -               (4,000)
                                                                             -------             -------            ------

                Balance, December 31, 1994                                    51,095             390,000            44,000
                Granted                                                         -                 10,000              -
                Exercised                                                    (42,978)            (60,000)             -
                Vested                                                          -                   -               (4,000)
                                                                             -------             -------            ------

                Balance, December 31, 1995                                     8,117             340,000            40,000
                                                                             =======             =======            ======
</TABLE>


NOTE 12 -       STATEMENTS OF CASH FLOWS

                Supplementary cash flow information includes the following:

                                                            December 31,
                                                          ---------------
                                                          1994       1995
                                                         ------     ------
                Cash paid during the year for:
                   Interest                             $ 2,400    $   -
                   Income taxes                             800     20,200

         Non-cash investing and financing activities for the year ended December
31, 1995 consisted of converting  110,500 shares of Series D Preferred  stock to
110,500  shares of common stock and  converting 417 shares of Series B Preferred
Stock to 8,334 shares of common stock.


NOTE  13-MAJOR CUSTOMER

         Sales to a major customer was approximately  $1,148,700 during the year
ended  December 31,  1995,  representing  19.5% of total sales.  At December 31,
1995,  amounts  due from this  customer  included  in  accounts  receivable  was
$351,100.

                                     F - 13