<PAGE>

                                    FORM 10-K
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

        (Mark Only One)
    (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
        SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
        For fiscal year ended: December 31, 1996

                                       OR

     () TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
        SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

        For transition period from..............to............
                       Commission File Number 0-2246

                            VESTRO NATURAL FOODS INC.
--------------------------------------------------------------------------------
               (Exact name of Registrant as specified in Charter)

            Delaware                                     11-1676942
-------------------------------                     --------------------
(State of Other Jurisdiction of                     (IRS Employer I.D.#)
Incorporation or Organization)

                    1065 East Walnut Street, Carson, CA 90746
--------------------------------------------------------------------------------
                    (Address of Principal Executive Offices)

Registrant's telephone number:                              (310) 886-8200
------------------------------                              --------------

          Securities Registered Pursuant to Section 12 (b) of the Act:
                                      NONE
          Securities Registered Pursuant to Section 12 (g) of the Act:

                          Common Stock ($.01 par value)
                          -----------------------------
                                (Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes X  No
                                       ---   ---

Aggregate market value of the voting stock held by nonaffiliates of Registrant
as of March 3, 1997: $6,018,785

Number of shares of Common Stock outstanding on March 3, 1997:  5,950,588.

The Exhibit Index is located on Page Number 36 .


                                  Page 1 of 38
<PAGE>

                                     Part I

Item 1.   BUSINESS

     Vestro Natural Foods Inc. ("Company") is engaged in the marketing and
distribution of natural  and organic food products.

     The Company, a Delaware corporation, was originally incorporated in New
York on June 13, 1947 under the name of Project Fabrication Corporation.  In
1987, the Company assumed the name Vestro Foods Inc., adopting its present name
in 1994. The Company began its program of acquiring specialty food companies
during 1987 as a result of an equity infusion of $3,420,000 (later increased to
$5,000,000) by a group of institutional investors.

     On February 5, 1988, effective January 1, 1988, Westbrae Natural Foods,
Inc. ("Westbrae"), a California corporation, merged with and into a wholly owned
subsidiary of the Company.  Westbrae marketed soy beverages, condiments, pasta,
and Japanese products.  This subsidiary was the first in the Company's Natural
Foods core.

     Effective September 29, 1989, the Company acquired 100% of the Common Stock
of Little Bear Organic Foods, Inc. ("Little Bear") a national marketer of
organic snack foods such as corn chips, salsas, popcorn, taco and tostada shells
and refried beans under the trade names Little Bear and Bearitos, to the natural
foods industry.

     On December 27, 1989, the Company completed a private placement of
$9,575,000 of a new issue of 10% Exchangeable Convertible  Preferred Stock ("10%
Stock") to an investment group principally comprised of  institutional
investors.

     Effective December 18, 1992, substantially all of the assets of the
Company's Fine Baked Products operations, Heidi's Pastry, Inc. and Jan
Holzmeister Cheesecake, Ltd., were sold.  Reference is made to Form 8-K dated
December 18, 1992 which is incorporated herein by reference.

     On January 10, 1994, an Exchange Agreement was executed providing for the
exchange of the Company's outstanding Series A Convertible Preferred Stock
("Series A Stock") and 10% Exchangeable Convertible Preferred Stock for
3,899,570 (after the reverse split described below) shares of the Company's
Common Stock and $1,500,000 of Subordinated Notes.  In addition, $2,872,000
principal amount of Subordinated Notes were issued to the holders of the
Company's 10% Stock.  Reference is made to Form 8-K dated January 10, 1994 which
is incorporated herein by reference.

     On January 21, 1994, the Company's shareholders approved an amendment to
the Company's Certificate of Incorporation to effect a reverse split of the
Company's Common Stock on the basis of one new share for each ten shares issued
and outstanding.

                                        2
<PAGE>

NATURAL FOOD

     Westbrae Natural Foods, Inc. and Little Bear Organic Foods Inc. are the
Company's subsidiaries operating in the Natural Food industry.

     Westbrae markets an extensive line of natural food products, including soy
and rice beverages, cookies, potato chips, canned beans, soups, pasta,
condiments, tahini, ramen soups, soy sauce and rice cakes.  Westbrae's products
are sold nationally through specialty food distributors, which in turn sell to
retail natural food stores, specialty food stores and mass market food stores.
Westbrae's products are marketed under the trade names Westbrae Natural, WestSoy
and Right from the Field.

     Little Bear has been a leader in the natural food industry in the use of
organic products, i.e. those grown without the use of chemical fertilizers or
pesticides.  Little Bear's product lines consist of snack foods (blue, yellow
and white corn tortilla chips, popcorn, corn chips, cheddar puffs, and licorice)
and canned products (refried beans, chili, baked beans, bean dip, salsa).
Little Bear's products are marketed under the trade names Little Bear and
Bearitos.

     The Company believes there is significant potential in the expansion of
Little Bear's organic product lines as well as new Westbrae products which are
organic.  Little Bear and Westbrae operate in the same marketplace and sell
their products through the same distribution channels for sale nationally by
natural food, specialty food and mass market retail stores.

     In January, 1992, the Company consolidated the operations of Westbrae and
Little Bear.  The product lines continue to be sold under each label, but the
sales, distribution and administration functions are performed by a unified
operating staff.

     The Company has historically been a leader in its industry in the
formulation and introduction of new products.  These introductions have provided
the impetus to the Company's growth.

     In September, 1989, Westbrae introduced a line of potato chips made from
100% organically grown potatoes and oil.  The potato chips are now available in
salted, no salt, barbecue, sour cream ranch and ripple varieties.

     In March, 1990, Westbrae introduced Westsoy Lite, a reduced fat (1%) soy
beverage in three flavors, cocoa, vanilla, and plain.  This product line was
unique in the natural food industry and has produced significant sales for the
Company.

     In September, 1991, Westbrae introduced Westsoy Plus, a fortified (with
vitamins and calcium) soy beverage in three flavors.

                                        3
<PAGE>

     In 1992, Westbrae and Little Bear introduced items that fit into the
growing trend to "low fat" food products.  Westbrae added a line of five Lite
Malteds to its soy beverage offerings.  Little Bear brought out a Lite version
of its Cheddar Puffs.

     In 1993, Westbrae and Little Bear continued their high level of product
introductions with an emphasis on "fat free" and "low fat" products.  Most
significantly, a new soy drink, which is both lowfat and popularly priced, and a
product line of eight flavors of fat free soups were introduced.

     In 1994, Westbrae introduced a rice drink as an addition to its non dairy
beverage line, as well as a nonfat soy beverage.  At the end of the year a line
of reduced fat cookies in ten flavors was introduced.  These cookies were very
well received in the market place and produced over $2.5 million of net sales in
their first year.

     In 1995, the Company introduced corn chips in four varieties, the first in
the natural foods industry. To reinforce its commitment to lowfat and nonfat
products, the Company reformulated its soups, caramel corn and baked chips to
improve their taste while retaining their healthy characteristics

     In 1996, Westbrae became the first company to sell non dairy beverages in
an aseptic half gallon size.  Westbrae introduced six varieties of non dairy
beverages in this size.  Also introduced during the year were Sweet Interludes
shortbread cookies in four flavors, popcorn bars in two flavors and three
varieties of canned organic vegetables.

     Approximately 5% of Westbrae's products are currently imported through one
trading company in Japan.  Westbrae is subject to the risks of currency price
fluctuations on these products.  During certain times of the year certain items
with long lead delivery times must be purchased in advance and inventoried to
ensure available product at reasonable prices.  Some raw materials used in the
Company's products are subject to seasonal availability.

     The Company uses copackers to process products to the Company's
specifications.  In some product lines, the Company uses only one source.  In
the past the Company has been able to change copackers without a significant
disruption of its business.  However, the loss of a copacker could disrupt the
Company's supply chain of those products resulting in reduced revenue in that
product line until a replacement is found.

     Westbrae and Little Bear compete with a number of producers of natural and
organic food products on a national basis.  The principal factors of competition
are believed to be the formulation of natural and organic products and consumer
confidence in the nutritional content of the ingredients.  The Company believes
it

                                        4
<PAGE>

prices its products competitively and has a well recognized and trusted name in
its marketplace.

     Sales to three customers amounted to $9,126,000 (27%),  $6,275,000 (18%)and
$4,728,000 (14%), respectively, of consolidated net sales in 1996.  Although
sales of several of the Company's products (i.e. soups) may be affected by
seasonal usage, the Company's overall product sales do not exhibit a high degree
of seasonality.  The Company does not normally have a material backlog.
     The Company currently employs 39 people.

     The Company owns the right to certain trademarks, tradenames, and service
marks used in its business.

     The Company maintains ongoing product development programs relating to new
food products which it considers important to the growth of its business.

     Operations are supervised by various federal, state and local regulatory
agencies, including the U. S. Department of Agriculture, U. S. Food and Drug
Administration, California Food and Agricultural Department, California Air
Resources and Solid Waste Management Boards, California Industrial Relations
Department, Air Pollution Control Board, Building Inspectors Office and Bureau
of Weights and Measures.  The Company believes that it substantially complies
with pertinent environmental regulations and does not contemplate any
significant expenditures for environmental control facilities in the foreseeable
future.

Item 2.    PROPERTIES

     Vestro Natural Foods Inc., Westbrae and Little Bear currently lease 9,600
square feet of office space in Carson, California.  The lease for this property
runs to September 30, 1997 with a short term cancellation clause.  In addition,
the Company currently rents 38,000 square feet of warehouse space in the same
building for the storage and shipping of its inventory.  The Company believes
that this arrangement should be adequate to meet its needs for the foreseeable
future. The Company is in discussion to extend the lease term as well as
exploring alternative facility locations.  Westbrae and Little Bear also utilize
public warehouses as well as the facilities of co-packers to inventory and
distribute their products.

Item 3.   LEGAL PROCEEDINGS

          None.

Item 4.   SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS

          None.

                                        5
<PAGE>

                              Part II

Item 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

     The Company's Common Stock trades on the Nasdaq Small Cap Market tier of
the Nasdaq Stock Market under the symbol VEST.  The following table sets forth
the high and low trading prices for the quarters commencing January 1, 1995
through December 31, 1996.

               1995                High           Low
          ----------------         -----          ----

          First Quarter            2              1-1/4
          Second Quarter           1-7/8          1-1/2
          Third Quarter            2-1/2          1-5/8
          Fourth Quarter           2              1-3/8

               1996                High           Low
          ----------------         -----          ----

          First Quarter            2-5/8          1-1/2
          Second Quarter           2-7/8          2-1/4
          Third Quarter            4-1/8          2
          Fourth Quarter           3-3/4          2-7/8

     The Company had approximately 800 holders of record of its Common Stock as
of February 28, 1997.

     The Company has not paid any dividends on its Common Stock during the past
two fiscal years and does not anticipate paying a dividend this fiscal year.

                                        6
<PAGE>

Item 6.   SELECTED FINANCIAL DATA
---------------------------------
<TABLE>
<CAPTION>
                                                                  1996           1995           1994           1993           1992
                                                                  ----           ----           ----           ----           ----
<S>                                                       <C>            <C>            <C>            <C>            <C>
Selected statement of operations data

Net Sales                                                  $32,583,000    $28,836,000    $24,892,000    $26,065,000    $36,847,000
Gross Profit                                                12,440,000     10,462,000      8,833,000      8,824,000     10,585,000
Earnings from                                                1,203,000        602,000        538,000      1,535,000     (3,551,000)
  Continuing Operations

Earnings (loss) from                                             $0.19          $0.10          $0.09          $0.28         ($2.60)
  Continuing Operations per
  Share of Common Stock

Selected Balance Sheet Data
  Current Assets                                            $6,517,000     $6,159,000     $6,336,000     $5,439,000     $6,211,000
  Property, Plant and
    Equipment, Net                                             169,000        156,000        166,000        172,000        139,000
  Other Assets                                               7,084,000      7,452,000      7,772,000      7,663,000      7,810,000
                                                           -----------------------------------------------------------------------
TOTAL ASSETS                                               $13,775,000    $13,767,000    $14,276,000    $13,274,000    $14,160,000

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

Current Liabilities                                         $3,348,000     $3,691,000     $4,165,000     $2,900,000     $5,321,000
Long-term obligations                                        1,913,000      2,765,000      3,402,000              -              -

Shareholders' Equity                                         8,514,000      7,311,000      6,709,000     10,374,000      8,839,000

Total Liabilities and                                      -----------------------------------------------------------------------
Shareholders' Equity                                       $13,775,000    $13,767,000    $14,276,000    $13,274,000    $14,160,000
                                                           -----------------------------------------------------------------------
</TABLE>

No dividends were declared on the Company's Common Stock during any of the above
periods.

Cumulative preferred dividends of $1,048,000 for each of the years ended
December 31, 1993, and 1992, not paid or declared are deducted from net income
(loss) applicable to common shareholders in the period in which they are earned.

In 1992, results were affected by the sale of substantially all the assets of
Heidi's Pastry, Inc. and Jan Holzmeister Cheesecake, Ltd.

Selected Financial Data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements of the Company located elsewhere in this
Report.

                                        7
<PAGE>

Item 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS.

LIQUIDITY AND CAPITAL RESOURCES

As of January 1, 1994, the Company entered into a credit agreement with a bank
to provide up to $4,000,000 of financing based upon certain percentages of the
Company's accounts receivable and inventory.  Under the terms of the agreement,
the Company had $2,400,000 of borrowing capacity at December 31, 1996.  At
December 31, 1996, no borrowing was outstanding under this facility.  This
agreement expires on April 30, 1997.  The bank has made a proposal to renew the
agreement.

The Company's Senior Subordinated Notes A, totalling $1,226,000, are payable,
interest and principal, monthly through May 15, 1998.  $676,000 of principal was
paid in 1996 with principal payments of $831,000 due in 1997.  Senior
Subordinated Notes B, totalling $1,500,000, are payable, interest only,
quarterly through May 15, 1998.  Principal payments will then be made quarterly
through November 15, 1999.  Interest on both series is payable at 8% per annum.
Payments of interest or principal on the Senior Subordinated Notes B are subject
to a limitation that the total principal and interest paid on both series in any
fiscal quarter cannot exceed 30% of net income.  During 1996, the Board of
Directors determined that, due to the Company's cash position and availability
under its credit line, interest on Subordinated Notes B would be paid.

During the year 1996, cash generated by the Company's operations was used for
principal payments of the Subordinated Notes and increased inventory levels,
largely for new products introduced during the year.

The Company anticipates that cash flow from operations together with its current
cash balance and the availability under its credit line should be sufficient to
support its operating needs for at least the current fiscal year.

INFLATION

In general, the impact of inflation on the Company's operations has not been and
is not expected to be significant.  The Company has been able, from time to
time, to make selected price increases which have offset the effects of rising
costs.

RESULTS OF OPERATIONS

1996 COMPARED TO 1995

Net sales for the year ended December 31, 1996 were $32,583,000, an increase of
13% from net sales of $28,836,000 in the prior year.  The sales increase for the
year reflects several

                                        8
<PAGE>

important marketing strategies adopted by the Company as described herein.  The
Company's canned products sales grew by over 30% for the year largely due to
additional attractive offerings in this category.  During 1996, Vestro
introduced canned organic vegetables and semi-condensed soups.  Vestro has built
brand equity in its extensive lines of canned goods and has grown to be among
the natural food industry's leaders in this product category through significant
product introductions during the last two years.

The Company's non dairy beverage business experienced significant growth due to
the introduction of six varieties of its Westbrae non dairy beverages in a half
gallon size container.  The Company is the only producer of non dairy beverages
in half gallons in the natural food marketplace and believes that consumer
acceptance of this size product should grow to mirror that of dairy milk
products.  Westbrae's established non dairy products also continued their record
of year over year growth.

     Gross profit of the Company was $12,440,000 or 38.2% of sales for the year
ended December 31, 1996 compared to $10,462,000 or 36.3% of sales in 1995.  The
1.9% improvement in gross profit margin reflects the Company's objective of
formulating new products (and when possible, reformulating existing products) to
produce better gross margins.

     Selling, general and administrative expenses were $10,822,000 or 33.2% of
sales for the year ended December 31, 1996 compared to $9,676,000 or 33.6% of
sales in 1995.  The increase was due almost entirely to increased variable
expenses, principally promotional expenditures with retailers and distributors
to promote the Company's products at attractive retail prices.  The Company
believes these expenditures contributed to the generation of increased revenue.
The non-variable component of the Company's selling, general and administrative
expenses remained level with the prior year.

     The Company had net interest expense of $266,000 in 1996 compared to net
interest expense of $259,000 in the prior year.  The interest expense arises
from regular payments on the Company's Subordinated Notes as well as short term
borrowing under the Company's line of credit.  The Company had other income
(net) of $9,000 in 1996 compared to $89,000 in 1995.  During 1995, the Company
recorded $83,000 of income from an adjustment to the valuation reserve recorded
against the receivable from the purchaser of the Company's Fine Baked Products
operations.  This note was fully collected in 1995 and no additional income was
recognized in 1996.

     The Company recorded income tax expense of $158,000 for the year ending
December 31, 1996.  The Company's state net operating loss carry forward was
fully utilized early in 1996 and state income taxes were accrued on the balance
of the Company's income.

                                        9
<PAGE>

Provision was also made for Federal alternative minimum tax.

     As a result of the above items, the Company recorded net income of
$1,203,000 or $.19 per share for the year ended December 31, 1996.  In the year
ended December 31, 1995, the Company had net income of $602,000 or $.10 per
share.

1995 COMPARED TO 1994

     Net sales for the year ended December 31, 1995 were $28,836,000 an increase
of 16% over net sales of $24,892,000 in the prior year.  A major contribution to
the increased level was the introduction of Chocolate Chip Classic and Cookie
Classic reduced fat cookies.  These cookies, in ten flavors, accounted for over
$2.5 million of net sales in 1995.  The Company's non dairy beverages also
experienced a significant increase of 19% over 1994.

     Gross profit of the Company was $10,462,000 or 36.3% of sales for the year
ended December 31, 1995 compared to $8,833,000 or 35.5% of sales in 1994.
Margins on the Company's non dairy beverages improved somewhat from 1994,
offsetting increased costs of Japanese products due to the weakened dollar early
in the year.

     Selling, general and administrative expenses were $9,676,000 or 33.6% of
sales for the year ended December 31, 1995 compared to $8,168,000 or 32.8% of
sales in 1994.  The increase was due largely to marketing expenses incurred to
promote the Company's products.  In 1995, the Company began its first consumer
magazine advertising program with placements in seven healthy lifestyle
magazines.  In addition, the Company sponsored a promotion in conjunction with
Dr. Earl Mindell's book "The Soy Miracle."  The Company provided displays to
most natural food stores in the country and gave the book to consumers who
purchased the Company's soy beverages.

     The Company had net interest expense of $259,000 in 1995 compared to net
interest expense of $257,000 in the prior year.  The Company had other income
(net) of $89,000 in 1995 compared to $148,000 in 1994.  In both years, this
arose largely from an adjustment to the valuation reserve recorded against the
receivable from the purchaser of the Company's Fine Baked Products operations,
$83,000 in 1995 and $256,000 in 1994.

     The Company recorded income tax expense of $14,000, which represents
alternative minimum tax, in the year ended December 31, 1995 while there was
$18,000 of income tax expense for the year ended December 31, 1994.

     As a result of the above items, the Company recorded net income of $602,000
or $.10 per share for the year ended December 31, 1995.  In the year ended
December 31,1994, the Company had net income of $538,000 or $.09 per share.

                                       10
<PAGE>

Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements and financial statement schedules required by Item
8 of this report are set forth on pages  15 through 27.

Item 9.   DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

          None

                                    Part III

Item 10.  EXECUTIVE OFFICERS OF THE COMPANY

     Listed below are the executive officers of the Company.  All officers serve
at the pleasure of the Board of Directors.  There are no family relationships
among any officers or directors of the Company.

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

B. Allen Lay                  62             Chairman of the Board,
                                             President and Chief Executive
                                             Officer.

Stephen Schorr                51             Vice President,
                                             Finance, Secretary,
                                             Treasurer and Chief
                                             Financial Officer.

     Mr. Lay was elected President and Chief Executive Officer of the Company on
January 12, 1995 and Chairman of the Board on August 6, 1996.  Mr. Lay has been
a Director of the Company since 1987.  Mr. Lay has served as a General Partner
of Southern California Ventures, a venture capital firm, since May, 1983.  He is
a director of PairGain Technologies (OTC), Physical Optics Corp., Kofax Imaging,
ViaSat Inc., Helisys and Medclone Inc.  Mr. Lay was Chairman and C.E.O. of
Meridian Data Inc. from July, 1993 to December, 1994.

     Mr. Schorr joined the Company in July, 1988 as Vice President, Finance.  He
is an Officer and Director of each of the Company's subsidiaries.  From
December, 1982 through June, 1988, he held the positions of Vice President,
Finance and Corporate Controller of Linear Corporation, a manufacturer of
electronic components.

                                       11
<PAGE>


SIGNIFICANT EMPLOYEES

     Andrew Jacobson, 36, is President of Westbrae and Little Bear.  From 1985
to 1992, Mr. Jacobson was employed by Tree of Life Inc. a major national natural
products distributor, in several executive capacities culminating as Director of
Sales of Tree of Life West prior to joining Westbrae in November, 1992.  Mr.
Jacobson is a member of the Board of Directors of the National Nutritional Foods
Association.

     Myron Cooper, 63, is Vice President, Technical Services of Westbrae and
Little Bear.  Prior to joining Vestro in 1988, Mr. Cooper held executive
positions in operations, marketing, product development and qulity control with
Kellogg's, Fairmont Foods and Hain Pure Food Company.  Mr. Cooper holds a Ph. D.
in Food Science and Biochemistry.  He is Vice President of the Soy Foods of
America Association and a member of the California Organic Advisory Board.

Item 11.  EXECUTIVE COMPENSATION

Item 12.  SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Except for information regarding the Company's executive officers (See Item
10), the information called for by Items 10 through 13 is incorporated in this
Report by reference to the definitive Information Statement for the Company's
1997 Meeting of Shareholders.



                                       12
<PAGE>

                                     Part IV

Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

          (a)  The following documents are filed as part of this report.

          1.   FINANCIAL STATEMENTS

               The following Consolidated Financial Statements of Vestro Natural
               Foods Inc. and subsidiary companies are incorporated by reference
               in Part II, Item 8:

                                                          Pages
                                                         -------
               REPORT OF INDEPENDENT ACCOUNTANTS.....       14

               CONSOLIDATED BALANCE SHEETS
                 DECEMBER 31, 1996 and 1995..........       15

               CONSOLIDATED INCOME STATEMENTS
                 FOR THE YEARS ENDED DECEMBER 31,
                 1996, 1995, and 1994................       16

               CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
                 EQUITY FOR THE YEARS ENDED
                 DECEMBER 31, 1996, 1995, and 1994...       17

               CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 1996,
                 1995, and 1994......................       18

               NOTES TO CONSOLIDATED FINANCIAL
                STATEMENTS...........................       19-29

          2.   FINANCIAL STATEMENT SCHEDULES

          All financial statement schedules are omitted because they are not
          applicable, or because the information required is either immaterial
          or included in the Consolidated Financial Statements and notes
          thereto.

                                       13
<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors
and Shareholders of
Vestro Natural Foods Inc.

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 13 present fairly, in all material
respects, the financial position of Vestro Natural Foods Inc. and its
subsidiaries at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles.  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 of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for the opinion expressed
above.


/s/ Price Waterhouse LLP


PRICE WATERHOUSE LLP
Costa Mesa, California
March 25, 1997

                                       14
<PAGE>

VESTRO NATURAL FOODS INC.

CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                                 1996           1995
<S>                                                       <C>            <C>
ASSETS

Current assets:
  Cash and cash equivalents                                $     1,000    $   192,000
  Accounts receivable, trade - net of allowance
    for doubtful accounts of $52,000 and $49,000             2,105,000      2,084,000
  Inventories (Note 1)                                       3,779,000      2,910,000
  Prepaid expenses                                             632,000        973,000
                                                           -----------    -----------
        Total current assets                                 6,517,000      6,159,000
                                                           -----------    -----------
Properties (Note 1):
  Machinery and equipment                                      667,000        566,000
  Leasehold improvements                                        16,000         15,000
                                                           -----------    -----------
                                                               683,000        581,000
  Less accumulated depreciation and amortization               514,000        425,000
                                                           -----------    -----------
                                                               169,000        156,000
                                                           -----------    -----------
Excess of cost over net assets of businesses
  acquired - net of accumulated amortization
  of $1,583,000 and $1,370,000 (Note 1)                      6,694,000      6,907,000
Other assets                                                   395,000        545,000
                                                           -----------    -----------
        Total assets                                       $13,775,000    $13,767,000
                                                           -----------    -----------
                                                           -----------    -----------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                         $ 1,713,000    $ 2,409,000
  Accrued liabilities (Note 10)                                786,000        507,000
  Current portion of long-term debt (Note 3)                   849,000        775,000
                                                           -----------    -----------
        Total current liabilities                            3,348,000      3,691,000
Long-term debt, net of current portion (Note 3)              1,913,000      2,765,000
                                                           -----------    -----------
        Total liabilities                                    5,261,000      6,456,000
                                                           -----------    -----------
Commitments and contingencies (Notes 3 and 9)

Shareholders' equity (Notes 5 and 6):
  Common stock, $.01 par value, 30,000,000 shares
    authorized; 5,950,588 shares issued and outstanding         60,000         60,000
  Additional paid-in capital                                17,202,000     17,202,000
  Note receivable under stock purchase plan                   (444,000)      (444,000)
  Accumulated deficit                                       (8,304,000)    (9,507,000)
                                                           -----------    -----------
        Total shareholders' equity                           8,514,000      7,311,000
                                                           -----------    -----------
        Total liabilities and shareholders' equity         $13,775,000    $13,767,000
                                                           -----------    -----------
                                                           -----------    -----------
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       15
<PAGE>

VESTRO NATURAL FOODS INC.

CONSOLIDATED INCOME STATEMENT
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                FOR THE YEARS ENDED DECEMBER 31,
                                                               1996           1995           1994

<S>                                                      <C>            <C>            <C>
Net sales                                                 $ 32,583,000   $ 28,836,000   $ 24,892,000

Cost of goods sold                                          20,143,000     18,374,000     16,059,000
                                                          ------------   ------------   ------------

  Gross profit                                              12,440,000     10,462,000      8,833,000

Selling, general and administrative expenses                10,822,000      9,676,000      8,168,000
                                                          ------------   ------------   ------------

  Income from operations                                     1,618,000        786,000        665,000

Interest expense                                              (266,000)      (259,000)      (257,000)
Other income, net                                                9,000         89,000        148,000
                                                          ------------   ------------   ------------

  Income before provision for income taxes                   1,361,000        616,000        556,000

Provision for income taxes (Note 4)                            158,000         14,000         18,000
                                                          ------------   ------------   ------------

Net income                                                $  1,203,000   $    602,000   $    538,000
                                                          ------------   ------------   ------------
                                                          ------------   ------------   ------------


Earnings per common share (Note 1)                                $.19           $.10           $.09
                                                                  ----           ----           ----
                                                                  ----           ----           ----

Weighted average common shares outstanding                   6,275,125      6,067,376      6,260,130
                                                          ------------   ------------   ------------
                                                          ------------   ------------   ------------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       16
<PAGE>

VESTRO NATURAL FOODS INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                                           NOTE
                                                                10%                                                     RECEIVABLE
                                              SERIES A      CONVERTIBLE                                                    UNDER
                                             CONVERTIBLE   EXCHANGEABLE                   ADDITIONAL                       STOCK
                                              PREFERRED      PREFERRED       COMMON         PAID-IN      ACCUMULATED     PURCHASE
                                                STOCK          STOCK          STOCK         CAPITAL        DEFICIT         PLAN

<S>                                       <C>            <C>            <C>            <C>            <C>            <C>
Balance at December 31, 1993               $  1,140,000   $  8,768,000   $     17,000   $ 11,096,000   $(10,647,000)

Exchange of 3,899,570 shares
  of common stock for
  preferred stock (Note 5)                   (1,140,000)    (8,768,000)        39,000      5,403,000
Issuance of 659,750 shares of
  common stock under stock
  purchase plan (Note 6)                                                        7,000      1,228,000                  $   (784,000)
Repurchase of 263,900 shares
  under stock purchase plan                                                    (3,000)      (525,000)                      340,000
Net income for the year                                                                                     538,000
                                           ------------   ------------   ------------   ------------   ------------   ------------

Balance at December 31, 1994                                                   60,000     17,202,000    (10,109,000)      (444,000)

Net income for the year                                                                                     602,000
                                           ------------   ------------   ------------   ------------   ------------   ------------

Balance at December 31, 1995                                                   60,000     17,202,000     (9,507,00O)      (444,000)

Net income for the year                                                                                   1,203,000
                                           ------------   ------------   ------------   ------------   ------------   ------------

Balance at December 31, 1996               $              $              $     60,000   $ 17,202,000   $ (8,304,000)  $   (444,000)
                                           ------------   ------------   ------------   ------------   ------------   ------------
                                           ------------   ------------   ------------   ------------   ------------   ------------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       17
<PAGE>

VESTRO NATURAL FOODS INC.

CONSOLIDATED STATEMENT OF CASH FLOWS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                  FOR THE YEARS ENDED DECEMBER 31,
                                                                1996           1995           1994

<S>                                                       <C>            <C>            <C>
Cash flows from operating activities:
  Net income                                               $ 1,203,000    $   602,000    $   538,000
                                                           -----------    -----------    -----------
  Adjustments to reconcile net income
   to net cash provided by operating activities:
    Depreciation                                                90,000         76,000         71,000
    Amortization of intangibles                                213,000        213,000        213,000
    Compensation expense under stock
     purchase and stock option plans                            52,000         52,000        238,000
    Provision (reversal) for doubtful accounts
     and note                                                    3,000        (59,000)      (220,000)
    Provision for slow-moving inventory
     and discontinued products                                  60,000         77,000        237,000
    Changes in operating assets and liabilities,
     net of effect of business disposition:
       (Increase) decrease in accounts receivable              (24,000)      (333,000)       105,000
       Increase in inventories                                (929,000)      (440,000)      (664,000)
       Decrease (increase) in prepaid expenses                 341,000       (530,000)        80,000
       (Decrease) increase in accounts payable                (696,000)      (563,000)       813,000
       Increase (decrease) in accrued liabilities              227,000       (189,000)      (225,000)
                                                           -----------    -----------    -----------
       Total adjustments                                      (663,000)    (1,696,000)       648,000
                                                           -----------    -----------    -----------
       Net cash provided by (used in)
         operating activities                                  540,000     (1,094,000)     1,186,000
                                                           -----------    -----------    -----------
Cash flows from investing activities:
  Capital expenditures                                        (103,000)       (66,000)       (65,000)
  Proceeds from note receivable                                               167,000        379,000
  Decrease (increase) in other assets                          150,000        107,000       (322,000)
                                                           -----------    -----------    -----------
       Net cash provided by (used in)
         investing activities                                   47,000        208,000         (8,000)
                                                           -----------    -----------    -----------
Cash flows from financing activities:
  Proceeds from borrowings on bank note payable                 36,000         38,000
   (Repayment of) proceeds from borrowings
   on revolving line of credit                                (100,000)       100,000
  Repayments under long-term debt                             (714,000)      (549,000)      (422,000)
  Payment in connection with
   recapitalization (Note 5)                                                                 (94,000)
  Proceeds from stock purchase plan                                                           66,000
                                                           -----------    -----------    -----------
       Net cash used in financing activities                  (778,000)      (411,000)      (450,000)
                                                           -----------    -----------    -----------
Increase (decrease) in cash and cash equivalents              (191,000)    (1,297,000)       728,000
Cash and cash equivalents, beginning of year                   192,000      1,489,000        761,000
                                                           -----------    -----------    -----------
Cash and cash equivalents, end of year                     $     1,000    $   192,000    $ 1,489,000
                                                           -----------    -----------    -----------
                                                           -----------    -----------    -----------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       18
<PAGE>

VESTRO NATURAL FOODS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
--------------------------------------------------------------------------------

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     DESCRIPTION OF BUSINESS
     Vestro Natural Foods Inc., a Delaware corporation, is engaged in the
     ownership and operation of specialty food businesses.  Its products are
     sold under the tradenames Westbrae, Westsoy, Little Bear and Bearitos.

     BASIS OF PRESENTATION
     The consolidated financial statements include the accounts of Vestro
     Natural Foods Inc. and its subsidiaries (the Company), all of which are
     wholly-owned.  All significant intercompany accounts and transactions have
     been eliminated in consolidation.

     USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     disclosure of contingent assets and liabilities at the date of the
     financial statements and the reported amounts of revenues and expenses
     during the respective reporting periods.  Actual results could differ from
     those estimates.

     FAIR VALUE OF FINANCIAL INSTRUMENTS
     The Company values financial instruments as required by Statement of
     Financial Accounting Standards No. 107, "Disclosure about Fair Values of
     Financial Instruments" (SFAS 107).  The carrying amounts of cash and cash
     equivalents, accounts and other receivables, accounts payable, accrued
     liabilities and debt approximate fair value.

     CASH AND CASH EQUIVALENTS
     The Company considers all highly liquid debt instruments purchased with an
     original maturity of three months or less to be cash equivalents for
     purposes of the consolidated statement of cash flows.

     CONCENTRATIONS OF CREDIT RISK
     Financial instruments that potentially subject the Company to
     concentrations of credit risk consist principally of trade receivables.
     The credit risk exists because the Company's sales are concentrated to a
     relatively small number of customers within the natural foods industry.
     The Company maintains reserves for potential credit losses and such losses
     have been within management's expectations.

     INVENTORIES
     Inventories are valued at the lower of cost or market, cost being
     determined on a first-in, first-out basis.  At December 31, 1996 and 1995,
     inventories consist of:

                                                     1996           1995

     Finished goods                             $  2,598,000   $  2,541,000
     Raw materials and supplies                    1,181,000        369,000
                                                ------------   ------------
                                                $  3,779,000   $  2,910,000
                                                ------------   ------------
                                                ------------   ------------

                                       19
<PAGE>

VESTRO NATURAL FOODS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
--------------------------------------------------------------------------------

     PROPERTIES
     Properties are stated at cost less accumulated depreciation.  Machinery and
     equipment are depreciated using a straight-line basis over the estimated
     useful life of the asset ranging from five to seven years.  Leasehold
     improvements are amortized on a straight-line basis over the lesser of the
     useful lives or the term of the lease.

     INTANGIBLE ASSETS
     The excess of the cost over the fair value of net assets of purchased
     businesses (goodwill) is amortized on a straight-line basis, generally over
     40 years.  The Company evaluates whether there has been any impairment of
     goodwill based upon management's estimate of future net income, on an
     undiscounted basis, over the remaining useful life of goodwill.

     INCOME TAXES
     The Company accounts for income taxes in accordance with Statement of
     Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
     109).  Under the liability method specified by SFAS 109, the deferred tax
     liability is determined based on the difference between the financial
     statement and tax bases of assets and liabilities as measured by the
     enacted tax rates which will be in effect when these differences reverse.
     Deferred tax expense is the result of changes in the liability for deferred
     taxes.

     STOCK OPTIONS
     The Company adopted Statement of Financial Accounting Standards No. 123,
     "Accounting for Stock-Based Compensation" (SFAS 123) in 1996.  As permitted
     by  SFAS 123, the Company continues to measure compensation cost in
     accordance with Accounting Principles Board Opinion No. 25, "Accounting for
     Stock Issued to Employees" (APB 25) but provides pro forma disclosures of
     net income and earnings per common share as if the fair value method (as
     defined in SFAS 123) had been applied beginning in 1995.

     EARNINGS PER SHARE
     Earnings per share are based upon the weighted average number of common
     shares and common stock equivalents outstanding.  Assumed exercise of
     contingent shares, convertible preferred stock, outstanding warrants and
     options have been considered in the computation of per share data to the
     extent they are dilutive.


                                       20
<PAGE>

VESTRO NATURAL FOODS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
--------------------------------------------------------------------------------

2.   BUSINESS DIVESTITURES

     DIVESTITURE OF THE NET ASSETS OF HEIDI'S PASTRY, INC. AND JAN HOLZMEISTER
     CHEESECAKE, LTD.
     Effective December 18, 1992, the Company sold substantially all of the
     assets of Heidi's Pastry, Inc., a bakery and wholesale distributor of
     gourmet pastries, and Jan Holzmeister Cheesecake, Ltd., a producer of
     cheesecakes.  The sales price included $4,200,000 in cash, a note
     receivable valued at $411,000, and the assumption of certain related
     liabilities and obligations.  A cash payment for the remaining balance of
     the note receivable was received during 1995.

3.   DEBT OBLIGATIONS

     REVOLVING LINE OF CREDIT
     In April 1994, the Company executed a revolving credit agreement with a
     financial institution.  The original agreement established an expiration
     date of April 30, 1996.  In 1996, the Company executed an amendment which
     extended the expiration to April 30, 1997 and revised certain other terms
     of the credit agreement.  The terms of the credit agreement, as amended,
     provide:  (1) borrowings up to 80% of eligible accounts receivable plus 30%
     of eligible inventory (up to $1,000,000) less all outstanding commercial
     and standby letters of credit; (2) a maximum outstanding credit balance of
     $4,000,000; (3) interest rate at the bank's prime rate plus 0.5% with a
     Company option to have all or portion of the principal balance bear
     interest at LIBOR plus 2.5%; (4) a requirement to maintain a non-interest
     bearing deposit of $200,000 or pay a fee calculated at the prime rate plus
     3% on the difference between the average daily deposit and the $200,000
     requirement.

     Upon execution of the agreement, the Company paid a loan fee of $40,000.
     Upon execution of the 1996 amendment, the Company paid an additional fee of
     $10,500.  In addition, the Company was required to reimburse such expenses
     as filing, recording and search fees, appraisal fees, title report fees,
     legal and audit fees.  These expenses were not significant for the years
     ended December 1996, 1995 and 1994.  Outstanding borrowings under the
     revolving credit agreement were $-0- and $100,000 at December 31, 1996 and
     1995, respectively.

     In addition to revising terms of the existing revolving line of credit, the
     1996 amendment provided an additional credit facility to the Company.  The
     Company was permitted to borrow up to $150,000 through December 31, 1996
     for capital expenditures.  The outstanding borrowing under this additional
     credit facility was $36,000 at December 31, 1996 which is included in long-
     term debt in the financial statements.  This balance bears interest at the
     bank's prime rate plus 0.75% and is due in equal monthly installments
     through December 31, 1998.

     The revolving line of credit is secured by substantially all of the
     Company's assets.  The agreement contains various covenants which restrict
     the Company from incurring additional indebtedness and require the Company
     to maintain certain financial ratios.

                                       21
<PAGE>

VESTRO NATURAL FOODS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
--------------------------------------------------------------------------------

     NOTES PAYABLE
     In connection with the exchange agreement (see Note 5) with the holders of
     the Company's 10% convertible exchangeable preferred stock, the Company
     issued $4,372,000 in notes payable bearing interest at 8% per annum.  The
     Senior Subordinated Notes A (Notes A) were issued in consideration of the
     dividends in arrears at the time of the agreement, which amounted to
     approximately $2,872,000.  Principal and interest on Notes A are due
     monthly through May 15, 1998.  The Senior Subordinated Notes B (Notes B)
     total $1,500,000.  Interest on Notes B is payable monthly through May 15,
     1998, subject to the limitation that the total principal and interest paid
     under both Notes A and B does not exceed 30% of net income.  Any interest
     payments that are deferred due to this provision are payable in the next
     quarter that such provision will permit.  Principal payments on Notes B are
     due quarterly beginning August 15, 1998 through 1999.  The aggregate
     principal maturities of Notes A and B are payable as follows:

          YEAR ENDED
         DECEMBER 31,
             1997                                 $  831,000
             1998                                    908,000
             1999                                    987,000

     The agreement also contains various covenants which restrict the Company
     from incurring additional indebtedness and property liens without the
     consent of the holders of a majority of the notes payable.


4.   INCOME TAXES

     The income tax provision for the years ended December 31, 1996 and 1995
     consists of:

                                                       1996           1995
          Current income taxes:
             Federal                               $  81,000      $   7,000
             State                                    77,000          7,000
                                                   ---------      ---------
                                                     158,000         14,000
                                                   ---------      ---------

          Deferred income taxes:
             Federal
             State
                                                   ---------      ---------

                                                   ---------      ---------
                                                   $ 158,000      $  14,000
                                                   ---------      ---------
                                                   ---------      ---------

                                       22
<PAGE>

VESTRO NATURAL FOODS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
--------------------------------------------------------------------------------

     The differences between the tax provision calculated based on the statutory
     and effective tax rates for the year ended December 31, 1996 and 1995 are
     as follows:

                                                       1996           1995

          Computed income taxes, at 34%            $ 463,000      $ 209,000
          State income tax, net of federal
             income tax benefit                       51,000          5,000
          Goodwill and other nondeductible
             expenses                                 76,000         77,000
          Utilization of NOL carryforwards          (516,000)      (231,000)
          Other                                       84,000        (46,000)
                                                   ---------      ---------
                                                   $ 158,000      $  14,000
                                                   ---------      ---------
                                                   ---------      ---------

        Deferred tax assets (liabilities) comprise the following:

                                                          DECEMBER 31,
                                                      1996           1995
          Deferred tax assets:
             Net operating loss carryforwards    $ 1,190,000    $ 1,716,000
             Asset reserves                          114,000         89,000
             Accrued expenses                        276,000        219,000
             Deferred tax asset valuation
               allowance                          (1,546,000)    (1,995,000)
                                                 -----------    -----------
                                                      34,000         29,000
                                                 -----------    -----------
                                                 -----------    -----------
          Deferred tax liabilities:
             Properties                              (34,000)       (29,000)
                                                 -----------    -----------
             Net deferred tax asset
               (liability)                       $         -    $         -
                                                 -----------    -----------
                                                 -----------    -----------

     The Company has net operating loss carryforwards for federal income tax
     purposes of approximately $3,457,000 which expire in varying amounts
     through 2009.  The amount of net operating loss deductions available to the
     Company to offset future taxable income may be limited due to certain
     income tax regulations related to a change in ownership of the Company.

5.   CAPITAL STOCK
     On January 21, 1994, the shareholders approved an amendment to the
     Company's certificate of incorporation reducing the authorized common
     shares to 30,000,000 and authorized a one-for-ten reverse stock split.  A
     total of 14,924,729 shares of common stock were retired in connection with
     the split.  The stated par value of each share was not changed from $.01.
     A total of $149,000 was reclassified from the Company's common stock
     account to additional paid-in capital account, representing the par value
     of the shares retired.  All references in the financial statements to
     average number of shares outstanding, per share amounts and stock option
     plan data have been restated to reflect the split.

                                       23
<PAGE>

VESTRO NATURAL FOODS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
--------------------------------------------------------------------------------

     On January 10, 1994, the Company consummated an exchange agreement with the
     holders of the Series A convertible preferred stock whereby all shares were
     retired and dividends in arrears eliminated in exchange for $21,000 in cash
     and 534,800 shares of the Company's common stock.  At the time of the
     exchange, dividends in arrears amounted to $297,000.

     On January 10, 1994, the Company consummated an exchange agreement with the
     holders of the 10% convertible exchangeable preferred stock whereby all
     shares were retired and dividends in arrears eliminated in exchange for
     $73,000 in cash, 3,364,770 shares of the Company's common stock, and notes
     payable in the amount of $4,372,000 see Note 3).  At the time of the
     exchange, dividends in arrears amounted to $2,872,000.


6.   INCENTIVE COMPENSATION AND STOCK PURCHASE AND OPTION PLANS

     The Company adopted a stock option plan in 1996 under which employees may
     be granted options to purchase up to 150,000 shares of the Company's common
     stock at prices not less than the fair market value of the common stock on
     the date of grant.  Stock options may be granted under the plan through
     2006.  As of December 31, 1996, 74,500 options are outstanding under this
     plan, none of which are currently exercisable.


     In 1996, the Company granted nonqualified stock options to purchase 120,000
     shares of the Company's common stock to an officer of the Company.  Of the
     options, 60,000 were granted at an exercise price of $1.50 per share and
     the remaining 60,000 were granted at $2.25 per share.  The options were
     granted at market value of the Company's common stock and as such no
     compensation expense was recorded.  These options were 100% exercisable
     upon issuance.

     In 1995, the Company granted nonqualified stock options to purchase 120,000
     shares of the Company's common stock to an officer of the Company.  Of the
     options, 60,000 were granted at an exercise price of $1.63 per share and
     the remaining 60,000 were granted at $1.88 per share.  The options were
     granted at market value of the Company's common stock and as such no
     compensation expense was recorded.  These options were 100% exercisable
     upon issuance.

     In 1995, the Company granted nonqualified stock options to purchase 160,000
     shares of the Company's common stock at an exercise price of $1.88 per
     share to the Directors of the Company.  The options were granted at market
     value of the Company's common stock and as such no compensation expense was
     recorded.  The options vest over a three-year period with up to two years
     credit given to individual Directors for prior service.  As of December 31,
     1996, 133,333 of these options are exercisable.

                                       24
<PAGE>

VESTRO NATURAL FOODS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
--------------------------------------------------------------------------------

     Effective January 1, 1994, the Company adopted a 401(k) Savings Plan
     covering substantially all employees.  Monthly contributions to the Savings
     Plan are made by the Company based upon the employee's contributions to the
     plan.  The Company contributed $32,000, $26,000 and $26,000 to the Savings
     Plan during the years ended December 31, 1996, 1995 and 1994, respectively.

     In 1994, the Company entered into a bonus arrangement with two key
     executive officers.  In connection with the arrangement, the officers
     participate in an incentive compensation plan which provides a bonus based
     on pre-tax earnings in excess of predetermined targets.  The incentive
     compensation bonus was $7,000 for the year ended December 31, 1994.  This
     arrangement expired on December 31, 1994.

     On January 10, 1994, the Company consummated a stock purchase plan under
     which 659,750 shares of the Company's common stock were issued to an
     executive officer for total consideration of $850,000, consisting of
     $66,000 in cash and a $784,000 note receivable, bearing interest at 5.75%,
     due December 31, 1997.  The purchase plan provides the Company with the
     right to repurchase shares in the event that the officer's employment is
     terminated prior to a five-year vesting period.  Following the officer's
     resignation in January 1995, the Company was entitled to repurchase 395,850
     shares with a corresponding reduction in the amount of the note receivable
     due from the former officer.  The Company entered into a severance
     agreement with the former officer which entitled the officer to purchase an
     additional 131,950 shares with a note receivable.  The Company recorded the
     repurchased shares and the severance agreement in the financial statements
     as of December 31, 1994.  The Company also recognized earned compensation
     expense of $198,000 during the year ended December 31, 1994, representing
     the difference between the sale price and the fair market value of these
     shares as of the date of the stock purchase plan and of the severance
     agreement.  Nonqualified stock options to purchase 494,812 shares of the
     Company's common stock were also forfeited upon the former officer's
     resignation.

     In 1993, the Company granted nonqualified stock options to purchase 329,875
     shares of the Company's common stock at an exercise price of $1.29 per
     share to an officer of the Company's subsidiary.  In connection with the
     nonqualified stock options granted below the fair market value of the
     Company's common stock at the date of grant, the Company will amortize
     $194,000 to compensation expense over a five-year vesting period.
     Amortization recorded to compensation expense was $52,000 for each the
     years ended December 31, 1996 and 1995.

     The Company adopted a stock option plan in 1988 under which employees may
     be granted options to purchase up to 150,000 shares of the Company's common
     stock at prices not less than the fair market value of the common stock on
     the date of grant.  Stock options may be granted under the plan through
     1998.  As of December 31, 1996, 149,500 options are outstanding under this
     plan, 58,375 of which are currently exercisable.

                                       25
<PAGE>

VESTRO NATURAL FOODS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
--------------------------------------------------------------------------------

     The Company adopted a nonqualified stock option plan in 1987 under which
     certain employees and directors may be granted options to purchase up to
     270,000 shares of the Company's common stock at prices not less than the
     fair market value of common stock on the date of grant.  Stock options may
     be granted under the plan through 1997.  As of December 31, 1996, there are
     no options outstanding under this plan.

     The following table sets forth the options granted, forfeited and exercised
     during the three years ended December 31, 1996 and their respective
     exercise price ranges:

<TABLE>
<CAPTION>
                                                                SHARES           PRICES
<S>                                                         <C>             <C>
Shares under option, December 31, 1993                         925,687       $ 1.29 - 6.00
   Granted                                                      56,500         2.75
   Forfeited and expired                                      (520,812)        2.58 - 6.00
                                                             ---------       -------------

Shares under option, December 31, 1994                         461,375         1.29 - 6.00
   Granted                                                     405,500         1.38 - 1.88
   Forfeited and expired                                      (107,500)        1.38 - 6.00
                                                             ---------       -------------

Shares under option, December 31, 1995                         759,375         1.29 - 1.88
   Granted                                                     194,500         1.50 - 3.00
   Forfeited and expired                                             -
                                                             ---------       -------------

Shares under option, December 31, 1996                         953,875       $ 1.29 - 3.00
                                                             ---------       -------------
                                                             ---------       -------------
</TABLE>

     The options issued during 1996 in accordance with the 1996 stock option
     plan were granted for 10 year periods.  All other options were granted for
     5 year periods.  Except as noted above, options granted to officers and
     employees are not generally exercisable for a period of one year after date
     of grant and thereafter become exercisable at 25% annually.  The following
     table summarizes information about stock options outstanding at December
     31, 1996:


                                            WEIGHTED-AVERAGE
                           SHARES               REMAINING          SHARES
     EXERCISE PRICE      OUTSTANDING        CONTRACTUAL LIFE     EXERCISABLE

          $1.29             329,875                 1.0             263,900
          $1.38             149,500                 3.2              58,375
          $1.50              60,000                 4.1              60,000
          $1.63              60,000                 3.1              60,000
          $1.88             220,000                 3.6             193,333
          $2.25              60,000                 4.5              60,000
          $3.00              74,500                 9.8                 -0-
                         -----------        ----------------     -----------
       $1.29-$3.00          953,875                 3.2             695,608
                         -----------        ----------------     -----------
                         -----------        ----------------     -----------


                                                                 26
<PAGE>

VESTRO NATURAL FOODS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
--------------------------------------------------------------------------------

     Had compensation cost been determined on the basis of fair value
     pursuant to SFAS 123 net income and earnings per common share
     would have been as follows:

                                                           DECEMBER 31,
                                                       1996           1995
          Net income:
             As reported                         $ 1,203,000    $   602,000
                                                 -----------    -----------
                                                 -----------    -----------

             Pro forma                           $ 1,030,000    $   371,000
                                                 -----------    -----------
                                                 -----------    -----------
          Earnings per common share:
             As reported                         $       .19    $       .10
                                                 -----------    -----------
                                                 -----------    -----------
             Pro forma                           $       .16    $       .07
                                                 -----------    -----------
                                                 -----------    -----------


     The fair value of each option grant is estimated on the date of grant using
     the Black-Scholes model with the following assumptions used for grants
     during both periods: no dividend yield; expected volatility of 39%; risk
     free interest rates of 6.5% in 1996 and 7.1% in 1995; and expected option
     lives of 3-7 years.

     At December 31, 1996 the Company has reserved 953,875 shares of common
     stock for the exercise of outstanding stock options.


7.   RELATED PARTY TRANSACTIONS

     The Company leases certain office and warehouse space in Carson, California
     from a partnership which includes a Director of the Company.  Total rent
     expense paid to the partnership was $196,000, $196,000 and $161,000 for the
     years ended December 31, 1996, 1995 and 1994, respectively.

8.   SALES TO MAJOR CUSTOMERS

     In 1996 sales to three customers accounted for $9,126,000, $6,275,000 and
     $4,728,000 or approximately 27%, 18% and 14% of total revenue,
     respectively.  In 1995 sales to four customers accounted for $4,860,000,
     $3,674,000, $3,170,000 and $3,016,000 or approximately 17%, 13%, 11% and
     11% of total revenue, respectively.  In 1994 sales to three customers
     accounted for $3,650,000, $3,625,000 and $2,592,000 or approximately 15%,
     15% and 10% of total revenue, respectively.

                                       27
<PAGE>

VESTRO NATURAL FOODS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
--------------------------------------------------------------------------------

9.   COMMITMENTS AND CONTINGENCIES

     LEASES
     As of December 31, 1996, the Company and its subsidiaries are obligated
     under various agreements to lease facilities and equipment.  Future minimum
     rentals under noncancellable operating leases are as follows:

                                                   OPERATING
        YEAR ENDING DECEMBER 31,                     LEASES

                  1997                            $  152,000
                  1998                                 3,000
                                                  ----------

                  Total                           $  155,000
                                                  ----------
                                                  ----------


     Rental expense related to operating leases amounted to $201,000, $207,000
     and $228,000 for the years ended December 31, 1996, 1995 and 1994,
     respectively.

     LEGAL PROCEEDINGS
     Management has received information furnished by legal counsel on the
     current status of all outstanding legal proceedings and the development of
     these matters to date.  Based upon this review, it is the opinion of
     management that adequate provision has been made for all reasonably
     estimable costs and that the ultimate aggregate liability, if any, should
     not materially affect the Company's financial position or results of
     operations.


10.  ACCRUED LIABILITIES

     Accrued liabilities consist of the following:

                                                      1996           1995

     Compensation expense and related benefits    $  455,000     $  288,000
     Income Taxes Payable                            147,000
     Other                                           184,000        219,000
                                                  ----------     ----------

                                                  $  786,000     $  507,000
                                                  ----------     ----------
                                                  ----------     ----------

                                       28
<PAGE>


VESTRO NATURAL FOODS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
--------------------------------------------------------------------------------

11.  CONSOLIDATED STATEMENT OF CASH FLOWS - SUPPLEMENTAL DISCLOSURES

     SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

          Interest paid during 1996, 1995 and 1994 amounted to $268,000,
          $268,000 and $257,000, respectively.

          Cash paid for income taxes during 1996, 1995 and 1994 amounted to
          $4,000, $8,000 and $8,000, respectively.

     SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

          YEAR ENDED DECEMBER 31, 1994

          Notes payable exchanged in retirement of
          preferred stock and dividends in arrears          $  4,372,000
                                                            ------------
                                                            ------------

          Note receivable recorded in connection
          with stock purchase plan, net of reduction
          for shares repurchased                            $    444,000
                                                            ------------
                                                            ------------

                                       29
<PAGE>

          3.   EXHIBITS

               (b)  No reports on Form 8-K were filed during the last quarter of
                    the fiscal year.

               (c)  (3.1)     CERTIFICATE OF DESIGNATION, VOTING POWERS,
                              PREFERENCES AND RIGHT OF THE SERIES OF THE
                              PREFERRED STOCK OF VESTRO NATURAL FOODS INC. TO BE
                              DESIGNATED SERIES A CONVERTIBLE PREFERRED STOCK
                              EFFECTIVE JANUARY 28, 1988.  Incorporated by
                              reference to the Company's Form 8-K filed on
                              February 19, 1988.

                    (3.2)     CERTIFICATE OF INCORPORATION, DATED APRIL 1, 1987.
                              Incorporated by reference to the Company's
                              Information Statement filed on May 26, 1987.

                    (3.3)     BY-LAWS.  Incorporated by reference to the
                              Company's Form 8-B Report filed on July 16, 1987.

                    (4.1)     STOCK PURCHASE AGREEMENT BY AND AMONG EQUITABLE
                              LIFE ASSURANCE SOCIETY OF THE UNITED STATES, STATE
                              EMPLOYEE'S RETIREMENT FUND OF THE STATE OF
                              DELAWARE, ICI AMERICAN HOLDINGS INC., THRESHOLD
                              FUND II, L.P., SCOTTISH INVESTMENT TRUST REVERE
                              FUND, AMONG OTHERS AND VESTRO NATURAL FOODS, INC.
                              Incorporated by reference to the Company's Form
                              8-K dated December 27, 1989.

                    (4.2)     CERTIFICATE OF DESIGNATION OF 10% CONVERTIBLE
                              EXCHANGEABLE PREFERRED STOCK OF VESTRO NATURAL
                              FOODS, INC.  Incorporated by reference to the
                              Company's Form 8-K dated December 27, 1989.

                    (4.3)     REGISTRATION RIGHTS AGREEMENT BY AND AMONG
                              EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED
                              STATES, STATE EMPLOYEES' RETIREMENT FUND OF THE
                              STATE OF DELAWARE, ICI AMERICAN HOLDINGS INC.,
                              THRESHOLD FUND II, L.P., SCOTTISH INVESTMENT
                              TRUST, REVERE FUND, AMONG OTHERS AND VESTRO
                              NATURAL FOODS INC.  Incorporated by reference to
                              the Company's Form 8-K dated December 27, 1989.

                    (4.4)     EXCHANGE AGREEMENT; dated as of
                              October 28, 1993, among the holders of the
                              Company's Preferred Stock and Vestro Natural Foods
                              Inc.  Incorporated by

                                       30
<PAGE>

                              reference to the Company's Form 8-K dated January
                              10, 1994.

                    (4.5)     FORM OF SENIOR SUBORDINATED NOTE A
                              Incorporated by reference to the Company's Form
                              8-K dated January 10, 1994.

                    (4.6)     FORM OF SENIOR SUBORDINATED NOTE B
                              Incorporated by reference to the Company's Form
                              8-K dated January 10, 1994.

                    (10.1)    1988 STOCK OPTION PLAN OF VESTRO NATURAL FOODS
                              INC. DATED MAY 23, 1988.  Incorporated by
                              reference to the Company's Form 10-Q for the
                              quarter ending June 30, 1988, Item 6.

                    (10.2)    MANAGEMENT AGREEMENT BETWEEN VESTRO NATURAL FOODS
                              INC., AND ALANE CORPORATION DATED DECEMBER 15,
                              1989.  Incorporated by reference to the Company's
                              Form 10-K for the year ended December 31, 1989.

                    (10.3)    AGREEMENT AND PLAN OF MERGER EFFECTIVE MAY 1,
                              1990, BY AND BETWEEN JAN HOLZMEISTER CHEESECAKE,
                              LTD., VESTRO NATURAL FOODS INC. AND JHC
                              ACQUISITION CORPORATION.  Incorporated by
                              reference to the Company's Form 10-Q for the
                              quarter ending June 30, 1990, Item 6.

                    (10.4)    AGREEMENT RESPECTING MERGER EFFECTIVE MAY 1, 1990
                              BY AND BETWEEN JAN HOLZMEISTER CHEESECAKE, LTD.,
                              VESTRO NATURAL FOODS INC. AND JHC ACQUISITION
                              CORPORATION.  Incorporated by reference to the
                              Company's Form 10-Q for the quarter ending June
                              30, 1990, Item 6.

                    (10.5)    EMPLOYMENT AGREEMENT DATED MAY 15, 1990, BETWEEN
                              JHC ACQUISITION CORPORATION AND ROBERT KLEIN.
                              Incorporated by reference to the Company's Form
                              10-Q for the quarter ending June 30, 1990, Item 6.

                    (10.6)    CONSULTING AGREEMENT DATED MAY 15, 1990 BY AND
                              AMONG ROBERT KLEIN, JAN HOLZMEISTER CHEESECAKE,
                              LTD. AND JHC ACQUISITION CORPORATION.
                              Incorporated by reference to the Company's Form
                              10-Q for the quarter ending June 30, 1990, Item 6.

                                       31
<PAGE>

                    (10.7)    WARRANTS TO PURCHASE 400,000 SHARES OF COMMON
                              STOCK DATED MAY 23, 1990, ISSUED TO THE
                              STOCKHOLDERS OF JAN HOLZMEISTER CHEESECAKE, LTD.
                              Incorporated by reference to the Company's Form
                              10-Q for the quarter ending June 30, 1990, Item 6.

                    (10.8)    CONSULTING AGREEMENT BETWEEN VESTRO NATURAL FOODS
                              INC., ALANE CORPORATION AND ALFRED STROGOFF dated
                              March 31, 1992.  Incorporated by reference to the
                              Company's Form 10K dated December 31, 1992.

                    (10.9)    ASSET PURCHASE AGREEMENT EFFECTIVE DECEMBER 18,
                              1992 BY AND AMONG VESTRO NATURAL FOODS INC.,
                              HEIDI'S PASTRY INC., JAN HOLZMEISTER CHEESECAKE
                              LTD. AND HK ACQUISITION CORPORATION.  Incorporated
                              by reference to the Company's Form 8-K dated
                              December 18, 1992.

                    (10.10)   SETTLEMENT CONTRACT AND RELEASE BETWEEN JENNIFER
                              MUELLER, VESTRO ACQUISITION CORPORATION, VESTRO
                              NATURAL FOODS INC. AND LITTLE BEAR ORGANIC FOODS,
                              INC.  effective December 31, 1992.  Incorporated
                              by reference to the Company's Form 10K dated
                              December 31, 1992.

                    (10.11)   STOCK PURCHASE AGREEMENT, AS OF JULY 29, 1993 BY
                              AND BETWEEN VESTRO NATURAL FOODS INC. AND ALLAN
                              DALFEN.  Incorporated by reference to the
                              Company's Form 10K dated December 31, 1993.

                    (10.12)   STOCK OPTION AGREEMENT AS OF JULY 29, 1993 BY AND
                              BETWEEN VESTRO NATURAL FOODS INC. AND ALLAN
                              DALFEN.  Incorporated by reference to the
                              Company's Form 10K dated December 31, 1993.

                    (10.13)   STOCK OPTION AGREEMENT AS OF JULY 29, 1993 BY AND
                              BETWEEN VESTRO NATURAL FOODS INC. AND ANDREW
                              JACOBSON.  Incorporated by reference to the
                              Company's Form 10K dated December 31, 1993.

                    (10.14)   SEVERANCE AND SETTLEMENT AGREEMENT DATED AS OF
                              FEBRUARY 28, 1995 BETWEEN VESTRO NATURAL FOODS
                              INC. AND ALLAN DALFEN. Incorporated by
                              reference to the company's Form 10-K dated
                              December 31, 1995.


                    (10.15)   1996 INCENTIVE STOCK PLAN OF VESTRO NATURAL

                                       32
<PAGE>

                              FOODS INC. DATED JUNE 20, 1996.
                              Incorporated by reference to the Company's
                              Information Statement dated May 15, 1996.

                    (11)      Computation of Earnings per Share.

                    (22)      Subsidiaries of the Company.

                    (28.1)    PROMISSORY NOTE DATED DECEMBER 18, 1992, OF HK
                              ACQUISITION CORPORATION Incorporated by reference
                              to the Company's Form 8-K dated December 18, 1992.



                                       33
<PAGE>


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

                                 VESTRO NATURAL FOODS INC.
                                 -------------------------


Dated:March 28, 1997          By:/s/   B. Allen Lay
      --------------             ---------------------------
                                 B. Allen Lay
                                 Principal Executive Officer
                                 and Director


Dated:March 28, 1997          By:/s/  Stephen Schorr
      --------------             ---------------------------
                                 Stephen Schorr
                                 Vice President Finance




                                       34

<PAGE>


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



Dated:  March 28, 1997             By:/s/ Stephen Monticelli
                                      ---------------------------
                                          Stephen Monticelli

Dated:  March 28, 1997             By:/s/ Jay J. Miller
                                      ---------------------------
                                          Jay J. Miller


Dated:  March 28, 1997             By:/s/ Henry W. Poett III
                                      ---------------------------
                                          Henry W. Poett III


Dated:  March 28, 1997             By:/s/ Donald R. Stroben
                                      ---------------------------
                                          Donald R. Stroben


                                       35
<PAGE>



                                  EXHIBIT INDEX


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


11        Computation of Earnings per Share               37


22        Subsidiaries of the Registrant                  38





                                       36