<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549
                                       
                             REPORT ON FORM 10-KSB

         /X/      Annual Report pursuant to Section 13 or 15(d) of the
                  Securities Exchange Act of 1934


         For the fiscal year ended June 30, 1996

         / /               Transition Report pursuant to Section 13 or 15(d) of
                           The Securities Exchange Act of 1934


         For the transition period from _______________ to _______________.

Commission File No. 33-98282


                               APPLEWOODS, INC.
            (Exact name of registrant as specified in its charter)


           Delaware                                            13-3859709
(State of or other jurisdiction                (IRS Employer Identification No.)
of incorporation or organization)


274 Riverside Avenue
Westport, Connecticut                                              06881
 (Address of Principal                                          (Zip Code)
   Executive Officers)

Registrant's telephone number, including area code:   (203) 227-4912

Securities registered pursuant to Section 12(b) of the Act:  None.

Securities registered pursuant to Section 12(g) of the Act:


                   Common Stock, par value $.0001 per share
                               (Title of Class)

         Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Sections 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__


<PAGE>


         Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of the 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 10K-SB or any amendment to this
Form 10-KSB. /X/

         Issuer's revenues for its most recent fiscal year were
$3,807,796.

         The aggregate market value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the closing
price of such stock as of September 30, 1996, was approximately
$26,796,000.

         Number of shares outstanding of the issuers common stock, as
of September 30, 1996, was 8,472,000.


                DOCUMENTS INCORPORATED BY REFERENCE:

         Portion of the Registrant's definitive Proxy Statement
relating to the Registrant's 1996 Annual Meeting of Stockholders
("Proxy Statement") to be filed pursuant to Regulation 14A are
incorporated by reference in Part III of this Report.

                                  2

<PAGE>


                               PART I

Item 1.  BUSINESS.

         Applewoods, Inc., a Delaware corporation ("Applewoods
Delaware"), through its wholly owned subsidiary Applewoods
International Limited, an English corporation ("AIL"), manufactures
and sells natural soaps, oils, lotions, other toiletries and related
gift products to both licensed Applewoods' retail stores and
authorized distributors around the world. Applewoods Delaware and AIL
are collectively referred to herein as the "Company" or "Applewoods".
The Company's principal products include natural hair and skincare
products and related gift items. Applewoods Delaware was formed in
September 1995 to acquire all of the outstanding shares of capital
stock of AIL and ALA Limited ("ALA"), a wholly-owned subsidiary of the
Company which was dissolved on July 15, 1996. All share and per share
data included in this annual report have been restated to reflect the
Company's two-for-one stock split effected in May 1996.

         In April 1996, immediately prior to the Company's initial
public offering, Applewoods Delaware acquired AIL and ALA by issuing
an aggregate of 3,600,000 shares of Common Stock of Applewoods
Delaware for the all of the issued and outstanding shares of capital
stock of AIL and ALA. In connection with its initial public offering,
the Company raised approximately $6,900,000 from the sale of 2,760,000
shares of the Company's Common Stock. The proceeds from the offering
were used to repay certain indebtedness and has been and will continue
to be used to expand the Company's business. Following the Company's
initial public offering, holders of an aggregate of 576,000 of the
Company's Class A Warrants exercised such warrants for an aggregate
exercise price of $1,728,000.

         The Company was formed in 1978 for the purpose of developing
and marketing natural toiletries. In July 1992, the Company's
predecessor was placed into receivership in England. (Receivership in
England is similar to bankruptcy in the United States). In August
1992, Messrs. Roger Buoy and Tony Swash, the Company's Chief Executive
Officer and Chief Operating Officer, respectively, purchased the
Company's assets from the receiver. Prior to entering into
receivership, AIL owned and operated six retail stores throughout the
United Kingdom, all of which were closed prior to the receiver being
appointed. Messrs. Buoy and Swash redirected the Company's business by
concentrating on establishing licensed retail stores to sell the
Company's natural soaps, oils, lotions, and gift items.

         Since purchasing the assets of AIL, the Company has focused
upon establishing licensed retail stores and enhancing its product
lines. The Company concentrates its efforts upon creating,
manufacturing and marketing natural beauty products rather than
operating Company owned retail stores. The Company's credo is "Beauty
Without Cruelty", and reflects the Company's efforts to develop and

market products which eventually will be free from animal by-products
and not

                                  

<PAGE>




tested on animals.

         The Company believes that Applewoods' retail stores are most
likely to be successful if they are owner operated. Therefore, the
Company's business plan has been to license the Applewoods' concept to
entrepreneurs who, on their own or through sublicensees, open their
own Applewoods' retail stores and market Applewoods' products. In
selecting prospective store licensees, the Company seeks individuals
based upon their knowledge of the natural toiletry business and their
empathy with the Company's underlying belief in Beauty without
Cruelty.

         As of September 15, 1996, there were 52 Applewoods' retail
stores (including stores within other larger retail stores) located in
Asia, the Middle East, Europe, the Caribbean, North America and
Central America, offering 13 product lines: Applewoods Soaps,
Extracts, Naturals, Orchid and Camelia, Discoveries, Mother and Baby,
EVER, Aromatherapy, Out of Africa, Marine, Love Oils from the Planet
Venus, Rich Shea Butter and Pot Pourri. These product lines include
hand and body lotions, skincare products, bath oils, fragranced
candles, men's grooming items, powders, creams, aromatherapy products,
soaps, conditioners, bubble baths, shower gels, massage oils, bath
sponges, massagers and other accessory products. Although most of the
Company's products are designed to appeal to women, one product line
in particular, EVER, is directed at the male market. EVER products
also tend to be purchased by women as gifts for men. The Company also
offers a variety of sundry products, such as wooden and plastic bath
and body accessories and candles. Applewoods' retailers are restricted
from purchasing or selling products from third parties without the
Company's prior written consent.

         The Company does not charge its retail store licensees any
franchise, advertising or other licensing fees. However, the Company
receives an initial fee (approximately $70,000), for designing and
fixturing the retail space, and providing initial support services. In
addition, in order to commence operations, retail store licensees need
to purchase the initial inventory from the Company at the established
wholesale price (approximately $40,000). After a new licensee is
approved, a Company representative visits the territory to review
potential sites selected by the licensee for retail stores. Once a
prospective location is found and a decision is made to proceed, all
necessary construction details are obtained. The Company designs the
store front and interior fixtures, normally including lighting. After
finalizing the proposed design and budget, the Company constructs the

fixturing and store frontage at its own facilities and ships these
items to the new location, where they are installed (in all cases, but
for eleven stores which were installed directly by the licensees) by a
representative of the Company's construction department. All
Applewoods' stores are similar in atmosphere and design although
layout will vary to meet the particular requirements of each building
or structure. Applewoods' retail stores normally occupy between 500 to
1,000 square feet of floor space.

         The Company develops and manufactures almost all of its own
products, with the exception of soaps, candles, some alcohol-based
products and various accessories. The Company hopes that Applewoods'
products eventually will be free from animal by-products, subject to
the availability of a successful vegetable or synthetic replacement.
Applewoods is against testing on

                                  3

<PAGE>




animals and encourages its suppliers to share the same philosophy. The
packaging for the Company's products is minimal and recycled or
recyclable where possible.

Products

         The Company develops its own formulations for the face, body
and hair. Most formulas are carried in two or three sizes of
containers. The formulations for the face, body and hair include
natural ingredients such as herbs and extracts from vegetables,
flowers and fruits. These products are not tested on animals and,
whenever possible, the containers that they are packaged in are
recyclable. The Company believes it is in compliance with significant
regulatory requirements for safe ingredients, detailed ingredient
listing and non-drug claims as presently enacted. Unlike
pharmaceutical products, cosmetics and skincare products are not
generally patented and do not currently require approval by the Food
and Drug Administration ("FDA").

         The products marketed by the Company are often linked by
common characteristics, such as scent or skin-type, thereby creating a
fully integrated line of personal-care products which, in turn,
encourages customers to purchase all their personal-care needs from
the Company.

         The Company enhances the image of its products and its
overall corporate image by emphasizing natural, hypo-allergenic
formulations. The Company also emphasizes environmental sensitivity by
strictly avoiding products which are tested on animals, using minimal
packaging which has been or can be recycled, printing advertising and
educational materials on recycled paper. The Company is a member of

the animal rights group, British Union for Abolition of Vivisection.

         The Company is conducting research in an effort to develop
new product lines as well as new products for existing product lines.
The Company anticipates periodically introducing new products to the
marketplace based on customer preferences.

         The Company currently offers the following product lines:

Extracts

         Using extracts from nature with unusual properties (such as
aloe vera, chamomile, henna, peppermint, shea butter and rosemary),
"Extracts" represents a complete collection of hair and skincare
products for different skin types, formulated for everyday use.

Naturals

         "Naturals" includes shampoos, conditioners, moisturizers and
various toiletries in five (5) different fragrances packaged in
recycled Spanish glassware.



                                  4

<PAGE>




Orchid & Camelia

         Orchid & Camelia are classic "English" toiletries designed
specifically for the gift market which include soaps, lotions,
fragranced candles and scented drawer liners.

Ever

         "EVER" is a line of products which have been specially
developed by the Company for men. EVER products include bath and
shower gel, shampoo, soaps, aftershave and other men's grooming
products. EVER is primarily marketed to women as gift items for men.

Applewoods Aromatherapy

         "Aromatherapy" products include essential oils, shampoos,
lotions and skin preparations for all skin and hair types derived from
pure oils. "Aromatherapy" products are designed to produce aromas
which have a palliative, soothing and relaxing effect.

Mother and Baby

         The Company has created a natural range of soothing creams

and oils designed to pamper mothers-to-be and newborn babies by using
ingredients with limited fragrance and an absence of mineral oils and
talcum powder. "Mother and Baby" products include, powders, creams,
shampoo, oils, lotions and gels.

Applewoods Discoveries

         This group of soaps, shampoos, conditioners, bubble baths,
hand and body lotions, shower gels and body silks is brightly packaged
and are fragranced to resemble twelve (12) exotic fruits.

Out of Africa

         The "Out of Africa" collection consists of lotions, skin
toners, bubble baths, shampoos, conditioners and cologne, each
packaged in an attractive antique-looking bottle with an ornate
stopper.

Applewoods Marine

         The Company has a "Marine" collection of soaps, bath oils and
shower gels which are packaged in ecru and turquoise packaging to
capture the feeling of the sea.

Rich Shea Butter

         "Rich Shea Butter" uses a butter made from the Karite nut and
is characterized by its deep,

                                  5

<PAGE>




smooth, moisturizing properties. The Company has created a range of
products from Rich Shea Butter for everyday use that includes hand and
body lotion, a deluxe hand cream, a liquid soap and conditioners.

Love Oils from the Planet Venus

         The Company has created a group of bath and massage oils
intended for younger customers by using brightly colored liquids of
differing viscosities which management believes creates a psychedelic
or "1960's" appearance.

The Applewoods Vegetable Soaps

         The Company sells translucent, vegetable-based glycerine
soaps. These soaps are sold in a variety of sizes and packaging
including bath-sized tablets, gift packages, collections of fruit
shape soap and small novelty soaps.


The Applewoods Pot Pourri Collection

         The Company's potpourri is hand-blended from flowers and
plants and then fragranced with natural oils.

Earth Tones

         The Company introduced in December 1995 a cosmetics line for
women. Earth Tones include lipsticks, blushes, foundations and
concealers. Nail polish and other nail treatments are not currently a
part of the Earth Tones cosmetics line.

         The Company's formulations are developed by the Company.
These formulations for the Company's products are not patented or
patentable and could be duplicated, although the Company considers its
product formulas to be trade secrets. The Company does not believe,
however, that the availability of similarly formulated products would
necessarily have a material adverse effect on the Company's prospects.
The Company's ability to select and have developed appealing
fragrances and other product formulas is a significant factor in
determining the success of a particular item. Success of a product is
also dependent, however, upon many variables including, marketing,
advertising, promotion, packaging, availability and consumer
perception of value and price. The Company, from time to time,
contracts with outside consultants to assist in developing new
products.

Sales and Marketing

         The Company's sales and marketing efforts are focused on
expanding the number of Applewoods' retail stores and increasing the
sales of its products at each location. Accordingly, the Company
intends to participate at a variety of trade fairs around the world
which specifically

                                  6

<PAGE>




focus on licensing new businesses. In addition, to expand its
distribution business, the Company participated at the International
Spring Fair in Birmingham, England during February 1996. The Company
has developed a new series of marketing and sales promotion media to
promote its products and the retail stores. The Company also has
upgraded its instore merchandising materials and information
literature, and has hired a public relations officer to aid with these
marketing campaigns.

         The Company's objective is to license retail stores which
provide adult customers of all ages the convenience of one-stop
shopping for skincare and haircare products. The Company's marketing

strategy is to require licensees to provide customers with a leisurely
atmosphere in which to shop while they select and test different
scents and colors at their own pace. The Company also sells directly
to independent retailers in England. The Company believes that its
products are affordable while, at the same time, maintaining a
high-quality standard. The Company prices its products below
comparable designer department-store brands (such as Lancome, Clarins
and Shiseido), but above comparable mass-market brands sold in
drugstores or discount stores (such as Naturistics, Freemans and
Montange Jeunesse). The Company anticipates that its marketing costs
will proportionately decrease as sales volumes increase.

Distribution

         Each retail licensee is required to purchase inventory prior
to the opening of an Applewoods' retail store. As inventory is sold,
or if a retailer wishes to purchase a new product line, the retail
store places orders for goods by facsimile transmission to the
Company's offices in Devon, England. The Company endeavors to fulfill
orders within two (2) weeks from the date of receipt. Most orders are
fulfilled from the Company's inventory or, in the event of a large
order, the Company manufactures the goods (except for certain goods
purchased from outside sources) as ordered. The Company's order
processing system is part of the Pegasus Accounting System which
allows the Company to maintain optimum inventory balances for the
maintenance of minimum balances and to minimize the carrying cost of
the Company's inventory. Most overseas orders are shipped FOB
Applewoods and each retailer usually requests delivery by container to
his facility.

Suppliers

         During the year ended June 30, 1995, the Company discontinued
manufacturing its own soap and soap related products and in August
1995, concluded the sale of its soap making equipment to ISC
International Ltd. ("ISC"), a British Virgin Island corporation,
previously a principal stockholder of the Company. ISC became a
subsidiary of the Dial Corporation, a United States corporation, and
transferred its shares of the Company to Tanisi International Ltd., a
British Virgin Island corporation. The Company decided to cease
manufacturing these particular products itself because management
concluded that better prices and larger margins could be obtained by
contracting for the manufacture of soap by an independent supplier. In
furtherance of this plan, the Company has entered into a ten (10) year
contract with ISC, renewable for a

                                  7

<PAGE>




further ten (10) years upon the fulfillment of certain conditions,

including, without limitation, the achievement of certain specified
sales targets.

         The Company acquires fragrances, packaging and labels from
outside suppliers for use in connection with its manufactured
products. The Company tests each product and their raw materials to
determine ingredient compatibility. These tests may be conducted by
independent third parties in those instances where the Company
believes outside testing to be necessary and appropriate.

         The Company believes that its present manufacturing
facilities enhanced by certain capital improvements, will be
sufficient to meet product demands for the foreseeable future. The
Company does not have any long-term contracts with the suppliers of
raw materials used in the manufacturing of the Company's products. As
a result, the Company will be required to identify new suppliers for
such materials in the event its present sources are interrupted or
discontinued. The Company believes that alternative suppliers exist,
and will be available if necessary. There can be no assurance,
however, that the Company will be able to obtain raw materials and
supplies from such alternative sources, or that it will be able to do
so without delay or increased costs.

Packaging

         The Company purchases plastic bottles and caps for its
products directly from manufacturers. In order to avoid any supply
disruptions, the Company operates under a minimum balance ordering
scheme for its inventory. The Company normally keeps two (2) to three
(3) months of inventory on hand. Management believes that this
provides adequate time to identify new suppliers should a particular
manufacturer experience any production or distribution delays.

         The Company designs the labels used on its products. Product
labels are designed to coordinate with the particular product and
packaging and are intended to project the Company's image. Product
labels are manufactured by outside suppliers.

Manufacturing

         The Company manufactures all of its liquid toiletry products
with the exception of certain alcohol-based products, soaps, soap
related products, candles and accessories. The Company's manufacturing
facilities are located at International House, Heathfield Industrial
Estate, Newton Abbot, Devon, England where the Company leases
approximately 34,500 square feet (plus a further facility of
approximately 5,000 square feet of offsite warehouse space). This
facility is also utilized by the Company for the construction of
storefronts and fixtures to be utilized in Applewoods stores. The
manufacturing facility operates for one and a half shifts during busy
periods.





                                  8

<PAGE>




Retail Store Licenses

         Most Applewood's stores are operated by a licensee pursuant
to the terms of a license agreement typically entered into by the
Company and the licensee for a period of five (5) years. The license
agreement restricts (i) the territory in which the licensee may
operate, (ii) the goods which such licensee may sell in an Applewoods'
store, and (iii) the licensee from competing with the Company's
business or from using the Company's trademarks (except as expressly
permitted). Further, the licensee is required to comply with the
Company's manual, to meet certain sales targets and to open further
stores in the territory as agreed upon. The agreement is typically
renewable for a further five (5) year period upon the fulfillment by
the licensee of certain conditions, including achieving certain sales
targets. The Company intends to enter into such license agreement with
all retailers operating an Applewoods' retail store.

Retail Stores

         Each Applewoods' store is owned and operated under the
direction of a licensee or sublicensee. The Company's stores are
designed to provide an attractive, clean, natural, colorful and
convenient atmosphere for customers. The typical Applewoods store
devotes an average of 90% of its total square footage to selling
space. Store sizes typically range from 500 to 1,000 square feet, with
an average size store being 700 square feet and having selling space
of 650 square feet. There are wall to wall shelves to display products
by category, with related products displayed on adjacent areas.
Point-of-sale signs containing prices and descriptions of the products
are prominently displayed and brochures for most products are also
available for customers.

         Although the stores are self-service, store personnel are
trained to assist customers by guiding them to appropriate products or
product groups and providing product information.

Store Locations

         As of September 15, 1996, there were 52 Applewoods' retail
stores in the following locations:

                  USA                       4
                  Canada                    9
                  Asia                      10
                  Europe                    18
                  Middle East               7

                  Latin America             4
                                            -
                  TOTAL                     52
                                            ==

         The Company encourages site selection by its licensees based
on customer demographics, traffic generated by shopping malls,
residents, shoppers or tourists. Given the number of geographic
regions that management believes have high market potential, the
Company expects a sufficient number of suitable locations to be
available for new Applewoods' stores.

                                  9

<PAGE>




         An important aspect of the Company's growth strategy is to
reach new customers through the opening of new stores in new markets
and, as conditions warrant and appropriate locations become available,
in existing markets. There can be no assurance that the Company's
expansion within its existing markets will not adversely affect the
individual financial performance of the Company's existing stores or
its overall results of operations. The Company's ability to implement
its expansion plans successfully will depend upon a number of factors,
including the ability to attract qualified licensees, hire and train
qualified employees, the availability of suitable store locations on
acceptable terms, availability of additional capital on acceptable
terms, the ability to control operating costs and the ability to
maintain management information and distribution systems to meet
growth requirements.

Competition

         The Company competes in the retail cosmetics and
personal-care products industry. The industry is comprised of large
discount chains, independent discount outlets, department stores,
supermarkets, drugstores, direct marketers and specialty retailers.
Although the Company competes with all of these sellers of
personal-care products, the Company believes that its success will be
determined upon how it competes with specialty retailers, such as The
Body Shop, Crabtree and Evelyn, and Bath and Body Works. Virtually all
of the Company's competitors and potential competitors (including The
Body Shop, Crabtree and Evelyn and Bath and Body Works) have
substantially greater resources, including capital, research and
development personnel and manufacturing and marketing capabilities,
and also may offer well established, broad product lines. Some of the
Company's competitors have long-term or preferential supply
arrangements with established retailers. Such arrangements may act as
a barrier to market entry. There can be no assurance that the Company
will be able to compete successfully.


International Operations

         Information as to sales to unaffiliated customers by
geographic area is set forth in footnote 8 to the Consolidated
Financial Statements of the Company and is incorporated herein by
reference.

Trademarks and Service Marks

         The Company has filed applications to register or has
received certain registered trademarks in each country in which the
Company sells products and believes such protection to be necessary.
In certain countries, including but not limited to, Singapore, Chile
and the Philippines, the related Registrar has raised objections to
registration. Although the Company is endeavoring to overcome said
objections, there is no guarantee that the related trademarks will be
registered or that once registered, infringements will not occur.
Further, in certain countries including, but not limited to, Spain
and Japan, notwithstanding prohibitions in the related license
agreement, the related licensee registered the Company's trademarks in
the related licensee's own name. The Company has prosecuted such
infringements vigorously and has been successful in

                                  10

<PAGE>




several countries, including Spain and Japan, but there is no
guarantee that in the future the Company will be successful at
restricting unauthorized usage of its trademarks. Nevertheless, the
Company intends to defend vigorously claims that use by the Company of
its trademarks infringe upon the intellectual property rights of third
parties.

         The Company's interest in the Company's trademarks in Latin
America was reassigned to it by its wholly-owned subsidiary ALA and
ALA was dissolved on July 15, 1996.

Management and Employees

         The Company employs three (3) executive officers,
approximately nine (9) people in administration, approximately forty
eight (48) in product development, manufacturing and distribution, two
(2) in store operations and training, and approximately thirty two
(32) people in shopfitting and additional personnel on a part-time
basis as required to compensate for seasonal fluctuations. The
Company's work force is not currently unionized, nor is the Company
aware of any efforts by its employees to unionize. The Company
considers its employee relations to be good.

Government Regulation


         The Company is subject to the Consumer Product Safety Act,
the Federal Hazardous Substance Act and to the jurisdiction of the
Consumer Product Safety Commission as well as product safety laws in
foreign jurisdictions. Such regulations subject the Company to the
possibility of requirements of repurchase or recall of products found
to be defective and the possibility of fines or penalties. The FDA has
promulgated certain regulations concerning product labeling and
product claims. In addition, the Federal Trade Commission ("FTC")
regulates product claims. Existing and future FDA and FTC regulations
could impact certain products of the Company.

         The Company currently enters into license agreements with
each Applewoods' retailer, pursuant to which the Company requires such
licensees to purchase the Company's products and to sell those
products in accordance with the Company's manual. Accordingly,
although the Company has endeavored to create relationships with its
United States licensees which do not violate federal or state
franchise laws and regulations, such laws and regulations may apply to
the licenses awarded by the Company to one or more of the existing or
future United States retail stores. Such laws and regulations require
certain disclosures to be made by a franchisor to a potential
franchisee and govern the offer and sale of franchises. These laws
have broad enforcement provisions, including civil and criminal
penalties, and, under certain state laws, potential and existing
franchisees may have a private cause of action for franchise
violations. While management does not currently believe that it has
violated such franchise laws, there can be no assurance that the
Company will not be required to comply with such laws and regulations,
particularly as the Company enters into additional relationships with
retailers located in the United States. Consequently, the Company
intends to prepare the required disclosure documents and

                                 11 

<PAGE>




commence filings with the Federal Trade Commission and relevant state
agencies in order to comply with all applicable state and federal
franchise laws with respect to existing Applewoods locations in the
United States as well as the opening of new Applewoods' stores. There
can be no assurance that the Company will be granted all necessary
approvals to conduct a franchise business, either by the FTC or state
agencies, or that such approval will be granted without delay.

Item 2.  PROPERTIES.

         The Company's corporate offices are located in England at
International House, Heathfield Industrial Estate, Newton Abbot, Devon
TQ12 6RY and in the United States at 274 Riverside Avenue, Westport,
Connecticut 06881. The Company leases three units at its Heathfield

Industrial Estate, Devon, England facility for office and warehouse
space. Each of there leases expires in August 1998. The annual rent
for the Company's Devon facilities is (pound)103,500 per annum
(approximately $165,031) and council rates of (pound)23,362
(approximately $37,251) per annum. In addition, the Company leases a
small warehouse in Devon of 5,000 square feet at an annual rate of
(pound)12,708 (approximately $20,265). The Company believes that these
facilities are adequate to meet its current needs and that suitable
additional or alternative space will be available as needed in the
future on commercially reasonable terms.

         The Company's executive headquarters are in Westport,
Connecticut. The Company's lease is on a month to month basis at a
rent of $500 per month.

Item 3.  LEGAL PROCEEDINGS.

         There is no material litigation pending or threatened against
the Company nor are there any such proceedings to which the Company is
a party. There is one continuing proceeding to which the Company is a
party which the Company does not believe is material for the reasons
set forth below.

         In November 1993, Mr. Ian Mitchell, the former controlling
stockholder of AIL prior to its entering into receivership, commenced
proceedings against AIL in a litigation entitled Ian Robert Mitchell
and Applewoods International Limited in The High Court of Justice,
Queen's Bench Division, in England, seeking damages for wrongful
dismissal from his position as sales director of AIL and for loss of
his shareholdings. Should he succeed he places a value on this claim
of not less than $186,000, although he is also seeking an assessment
of unspecified damages. The Company intends to vigorously defend Mr.
Mitchell's claim and has asserted counterclaims in excess of
plaintiff's demand against Mr. Mitchell and his wife, Judith Ann
Mitchell, alleging deception, breach of warranty, and
misrepresentation by them in connection with their sale to AIL of the
business and property of AIL and grave misconduct and material
breaches of Mr. Mitchell's service agreement, such that AIL was
entitled to terminate his employment and treat the service agreement
as rescinded. The Company intends to vigorously defend against the
claims asserted by Mr. Mitchell.

                                 12

<PAGE>

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

         No matters were submitted to the Company's shareholders for
vote during the last quarter of its fiscal year.

                               PART II

Item 5.  MARKET FOR REGISTRANT'S COMMON

         EQUITY AND RELATED STOCKHOLDER MATTERS.

         The Company's shares of Common Stock commenced trading on The
Nasdaq SmallCap Market ("Nasdaq") on the effectiveness of the
Company's initial public offering on April 10, 1996 under the trading
symbol "APWD". The Common Stock is regularly quoted and traded on
Nasdaq.

         The following table indicates the high and low bid prices for
the Company's Common Stock for the period up to September 30, 1996
based upon information supplied by Nasdaq. Prices represent quotations
between dealers without adjustments for retail markups, markdowns or
commissions, and may not represent actual transactions.

                                                   Quoted Bid Price
                                                   -----------------
                                                 High             Low
                                                 ----             ---
          1996 Calendar Year
          ------------------
          Second Quarter                        16.50            6.75
           April 10, 1996
           - June 30, 1996

          Third Quarter                         15.25            5.50
           July 1, 1996
           - September 30, 1996

---------------
         The Company effected a two-for-one stock split with respect
to its shares of Common Stock outstanding on May 9, 1996.

         On September 30, 1996, the closing price of the Common Stock
as reported on Nasdaq was $5.50. On October 4, 1996, there were 18
holders of record of Common Stock.


                                 13

<PAGE>




Item 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
         FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

         Applewoods, Inc., a Delaware corporation, ("AI"), was formed
in September 1995 to acquire all of the outstanding stock of
Applewoods International Limited ("AIL"), a company registered in
Great Britain. The acquisition was recorded as a recapitalization of
AIL, with AI as the acquirer. AI and AIL are collectively referred to

as the "the Company."

         The business of the Company is the establishment of licensed
retail stores to sell "natural" soaps, toiletries and related gift
products. The Company manufactures both the products and the
associated shopfittings at its premises in Devon, England. During the
past three years, the Company has pursued an active policy of
developing original product lines in-house and sourcing accessory
products from around the world. This is essential to provide a
sufficient range and variety of products to make the stores
successful. It is anticipated that this range development will
continue for the foreseeable future.

         The Company has recently exhibited at major trade shows in
the USA, Canada, Europe and South America where management met with
its existing and potential licensees in order to secure new operators
of Applewoods retail stores.

         The year ending June 1996 has been dominated by the activity
surrounding the Company's initial public offering which was declared
effective on April 10, 1996. The funds raised give the Company the
ability to develop its products and bring them to market as rapidly as
it is able. Historically, the performance of the Company has been
greatly hampered by the lack of financial resources. The Company
believes that it now has the products and resources to become
successful in the cosmetics market.

Results of Operations

Year ended June 30, 1996 compared to year ended June 30, 1995

         The Company's revenues are generated from the initial fee
charged to its retail store licensees for the design and fixturing of
the retail space and from the sale of products to these licensees.
Total revenues increased by 11.2% over the previous year. Within this,
product sales increased by 21.1% over the previous year, essentially
due to the increased number of shops. At June 1996, the Company had 47
shops operating compared with 30 at June 1995. Shopfitting revenue,
however, decreased by 20.1% This was partly a result of the standstill
in shopfitting activity due to potential licensees waiting for the
outcome of the public offering and partly due to the fact that some of
the shops opened in this year were smaller in-store concessions which

                                 14

<PAGE>




were fitted out locally.

          The gross profit percentage for the year ended June 30, 1996
declined from 37% to 28%. This was a result of the lack of activity in

shopfitting where the margin slipped from 41% to 14%, while the
product sales gross margin decreased from 36% to 32%. Approximately
$95,000 of this was due to the write off of inventory relating to
stock lines which, following the completion of the public offering,
are now to be replaced by new products.

         Selling, general and administrative expenses increased to
some $2,101,000 this year from some $1,363,000 in the previous year.
The Company commenced salary payments to two officers this year,
incurring an expense of some $255,000. Also, the provision for
doubtful accounts has increased by $95,000 to $97,000. The remaining
expense increase was some $390,000 or some 29% over the previous year.
The major element within this was the increase in sales promotion,
travel and product development, which all relate to the increased
efforts by the Company to develop the worldwide market for its
products.

         The Company also recognized $720,000 of noncash consulting
expense related to two new consulting agreements which commenced in
October 1995, and $278,000 in accreted interest in respect of certain
bridge loans made to the Company. An additional loss of $107,000 on
extinguishment of the debt is shown as an extraordinary item.

         Other than the bridge interest expense referred to above,
interest expense for the year decreased by $78,000 or 30% from the
previous year. This was due to the effect of the public offering in
April 1996 which replaced the bank borrowings and other loans with a
cash surplus.

         It should be noted that there remains a further $1,200,000 of
noncash consulting fee expense which will be recognized over the next
five quarters.

Year ended June 30, 1995  compared to year ended June 30 , 1994

         Total revenues increased by 37.8% over the previous year.
Within this, product sales increased by 26.3% over the previous year,
essentially due to the increased number of shops. At June 1995, the
Company had 30 shops operating compared with 14 at June 1994.
Shopfitting revenue increased by 92.9%, this being the first year that
the policy of concentrating on licensed shops was put into operation.

          The gross profit percentage for the year ended June 30, 1995
remained at approximately 37%.

         Selling, general and administrative expenses increased to
some $1,363,000 this year from some $1,350,000 in the previous year.
This increase of only 1% reflects the improved use of personnel where
the Company was able to generate a higher sales volume with a reduced
number of sales employees.


                                 15


<PAGE>




         Interest expense for the year increased by $17,000 or 7% from
the previous year.

Liquidity and Capital Resources

         At June 30, 1996, the Company had working capital of
$6,392,000 including cash and cash equivalents of $3,958,000.

         During the year, the Company used cash of approximately
$1,889,000 to fund operations. Contributing to this use of cash was a
net loss for the year, before noncash bridge loan and consulting items
of some $1,210,000, an increase in inventory of $403,000 and an
increase in the Company's accounts receivable of approximately
$230,000. Net cash used in investing activities increased to $334,000
due to the purchase in the year of new machinery to automate the
production process. Net cash provided by financing activities
increased to $6,073,000 essentially due to the public offering and
subsequent warrant conversion, which raised some $7,137,000, net of
offering costs. Bank borrowings of $666,000 were repaid during the
year.

         Currently, the Company expects to spend approximately
$250,000 in capital expenditures in 1996/97, primarily in further
production machinery. The Company believes that existing bank balances
and cash flow from operations will be sufficient to meet these
requirements for the foreseeable future.

Impact of Inflation

         Inflation has not been a major factor in the Company's
business since inception. There can be no assurances that this will
continue.

Seasonality

         The Company experiences considerable seasonal fluctuation in
its quarterly results due to the pre-Christmas retail sales period. In
the last two years, an average of 39% of annual product sales were
generated in the October to December quarter. Quarterly results should
therefore be viewed in the context of the above.

Item 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         See financial statements following Item 13 of this Annual
Report on Form 10-KSB.

Item 8.  CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS
         ON ACCOUNTING AND FINANCIAL DISCLOSURE.


         Moore Stephens, P.C. (formerly Mortenson & Associates, P.C.)
("Moore Stephens") by the

                                 16

<PAGE>




letter dated June 26, 1996 was dismissed as the independent
accountants for the Registrant. The reports of Moore Stephens on the
financial statements of the Registrant for the past two fiscal years
contain no adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting
principles. The Registrant's Board of Directors approved the dismissal
of Moore Stephens. For the two most recent fiscal years and through
June 26, 1996, there have been no disagreements between the Registrant
and Moore Stephens on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or
procedure, which would have caused Moore Stephens to make a reference
thereto in its report on the Registrant's financial statements for
such period. During the two most recent fiscal years and through June
26, 1996, there have been no reportable events (as defined in
Regulation S-K, Item 304(a)(1)(v)).

         The Registrant was furnished with a letter from Moore
Stephens addressed to the Securities and Exchange Commission stating
that Moore Stephens agrees with the above statements.

         The Registrant engaged Price Waterhouse LLP ("PW"), as its
new independent accountants as of June 26, 1996. Prior to such date,
the Registrant did not consult with PW regarding (i) the application
of accounting principles, (ii) the type of audit opinion that might be
rendered by PW, or (iii) any other matter that was the subject of a
disagreement between the Registrant and its auditor (as defined in
Item 304(a)(1)(iv) of Regulation S-K) or a reportable event (as
described in Item 304(a) (1)(v) of Regulation S-K).



                                 17


<PAGE>



                              PART III

Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT OF THE REGISTRANT.

Directors and Executive Officers

         The information required by this Item is included under the
captions "Directors and Executive Officers," "Biographical Summaries,"
"Meetings and Committees of the Board of Directors," and "Compliance
with Section 16(a) of the Exchange Act of 1934" in the Proxy
Statement, and is incorporated herein by reference.

Item 10.  EXECUTIVE COMPENSATION

         The information required by this Item is included under the
captions "Compensation of Directors and Executive Officers - Summary
Compensation Table", and "Compensation of Directors and Executive
Officers Employment and Consulting Agreements" in the Proxy Statement
and incorporated herein by reference.

Item 11. SECURITY OWNERSHIP OF CERTAIN
         BENEFICIAL OWNERS AND MANAGEMENT.

         The information required by this Item is included under the
caption "Principal Stockholders and Stock Ownership of Management" in
the Proxy Statement, and is incorporated herein by reference.

Item 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information required by this Item is included under the
caption "Certain Transactions" in the Proxy Statement, and is
incorporated herein by reference.




                                 18


<PAGE>

                               PART IV

Item 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)(1)  Financial Statements.

        The following financial statements are included in 
Part II, Item 8:

Index to Financial Statements and Schedules

Report of Independent Certified Public Accountants                    F-1

Balance sheets as of June 30, 1996 and June 30, 1995                  F-2

Statements of operations for the years ended                          F-3
 June 30, 1996 and 1995

Statements of stockholders' equity for the years                      F-4
  ended June 30, 1996 and 1995

Statements of cash flows for the years ended                          F-5
 June 30, 1996 and 1995

Notes to financial statements                                      F-6 - F-13


                                 19


<PAGE>

                  REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders of
Applewoods, Inc.

In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of income, of stockholders' equity and
of cash flows present fairly, in all material respects, the financial
position of Applewoods, Inc. at June 30, 1996 and 1995, and the
results of their operations and their cash flows for the years then
ended 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 audit. 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.


PRICE WATERHOUSE LLP

Morristown, New Jersey
October 11, 1996

                                 F-1

<PAGE>

APPLEWOODS, INC.
--------------------------------------------------------------------------------

CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------


                                                     June 30         June 30
                                                      1996            1995
                                                      ----            ----    
Assets:
Current Assets:
   Cash                                             $3,958,168    $       --
   Trade Accounts Receivable, net of
      allowance for doubtful accounts
      of $ 97,538                                      673,689         443,457
   Other Receivables                                   108,118          26,271
   Inventory                                         1,742,066       1,339,308
   Prepaid Consultancy Fees                            993,000            --
   Other Current Assets                                 65,177         130,843
                                                  ------------    ------------
Total Current Assets                                 7,540,218       1,939,879
                                                  ------------    ------------

                                                  ------------    ------------
Property, Plant and Equipment - Net                    424,222         238,478
                                                  ------------    ------------

Other Assets
   Trademarks - Net                                     80,794          66,838
   Prepaid Consultancy Fees                            293,000            --
                                                  ------------    ------------
Total Other Assets                                     373,794          66,838
                                                  ------------    ------------

                                                  ============    ============
Total Assets                                        $8,338,234      $2,245,195
                                                  ============    ============

Liabilities and Stockholders' Equity:
Current Liabilities:
   Overdraft at Bank                              $       --          $427,072
   Accounts Payable                                    905,889         917,334
   Accrued Expenses                                    100,384         153,431
   Accrued Taxes                                        34,685          37,809
   Leases Payable                                         --            63,389
   Other Current Liabilities                            57,311          39,698
   Other Current Liabilities -
      Related Parties                                   49,883         122,888
   Notes Payable                                          --           239,175
                                                  ------------    ------------
Total Current Liabilities                            1,148,152       2,000,796

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

Long-Term Liabilities
   Leases Payable                                         --            14,547
   Related Party Debt                                     --         2,651,341
                                                  ------------    ------------
Total Long-Term Liabilities                               --         2,665,888
                                                  ------------    ------------

Commitments And Contingencies (Notes 4 and 15)

Stockholders' Equity:
   Series A Preferred Stock - $.0001 Par Value,
      500,000 Shares Authorized, 249,911
      Shares Issued                                         25            --
   Common Stock, $.0001 Par Value,
      30,000,000 Shares Authorized, 8,472,000
      Shares Issued                                        847             180
   Additional Paid-In Capital                       12,040,017         211,153
   Accumulated Deficit                              (4,919,790)     (2,604,716)
   Cumulative Foreign Currency Translation
      Adjustment                                        68,983         (28,106)
                                                  ------------    ------------
Total Stockholders' Equity                           7,190,082      (2,421,489)

                                                  ============    ============
Total Liabilities and Stockholders' Equity          $8,338,234      $2,245,195
                                                  ============    ============

    See accompanying notes to the consolidated financial statements

                                 F-2


<PAGE>

APPLEWOODS, INC.
--------------------------------------------------------------------------------

CONSOLIDATED STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------


                                                      Years Ended
                                             --------------------------
                                                June 30      June 30
                                                 1996         1995
                                                -------      -------   
Revenues:
   Product Sales                              $3,146,258     $2,598,008
   Shopfitting Revenue                           661,538        827,470
                                             -----------   ------------

     Total Revenues                            3,807,796      3,425,478
                                             -----------   ------------

Cost of Sales:
   Product Sales                               2,156,754      1,671,538
   Shopfitting Revenue                           568,246        485,507
                                             -----------   ------------

      Total Cost of Sales:                     2,725,000      2,157,045
                                             -----------   ------------

    Gross Profit                               1,082,796      1,268,433

Selling, General and Admin. Expenses           2,101,066      1,363,345
Consultancy Fees                                 734,000           --
                                             -----------   ------------

  (Loss)  From Operations:                    (1,752,270)       (94,912)
                                             -----------   ------------

Other Income (Expense):

    Gain on Sale of Equipment                      8,993         34,374
    Foreign Exchange (Loss)/Gain                  (3,441)        33,420
    Interest Income                                  943              0
    Interest Expense                            (462,025)      (261,400)
                                             -----------   ------------
          Total Other (Expense)                 (455,530)      (193,606)
                                             -----------   ------------

(Loss) before Income Taxes and
  Extraordinary Item                          (2,207,800)      (288,518)

Provision for Income Taxes                          --             --
                                             -----------   ------------


(Loss) before Extraordinary Item              (2,207,800)      (288,518)

Exraordinary Item, Loss on Extinguishment
  of Debt                                       (107,274)          --
                                             -----------   ------------

Net (Loss)                                   $(2,315,074)  $   (288,518)
                                             ===========   ============

(Loss) before Extraordinary Item per share   $     (0.37)  $      (0.06)

Extraordinary Item per share                       (0.02)            --
                                             -----------   ------------

Net (Loss) per share                         $     (0.39)  $      (0.06)
                                             ===========   ============

Weighted average number of shares              5,927,342      5,136,000
                                             ===========   ============

    See accompanying notes to the consolidated financial statements

                                 F-3


<PAGE>

APPLEWOODS, INC
--------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                                                      Cumulative
                                                                                                       Foreign
                                 Common Stock        Series A Preferred    Additional                 Currency         Total
                              ------------------     ------------------     Paid-In    Accumulated   Translation     Stockholders'
                              Shares      Amount     Shares      Amount     Capital      Deficit     Adjustments    Equity/(Deficit)
                              ------      ------     ------      ------    ----------  -----------   -----------    ---------------
<S>                           <C>         <C>        <C>         <C>        <C>        <C>           <C>            <C>
Balance - June 30 1994:       3,600,000    $180        --          --       $139,850   $(2,316,198)    $43,726       $(2,132,442)

Capital Contributions
of Imputed Interest                --       --         --          --         71,303          --          --              71,303

Foreign Currency
Translation Adjustment             --       --         --          --           --            --       (71,832)          (71,832)

Net Loss                           --       --         --          --           --        (288,518)       --            (288,518)
                              --------------------------------------------------------------------------------------------------

Balance - June 30 1995:       3,600,000     180        --          --        211,153    (2,604,716)    (28,106)       (2,421,489)

Capital Contributions
of Imputed Interest                --       --         --          --         55,119          --          --              55,119

Conversion of Debt
to Equity                          --       --      249,911        25      2,330,591          --          --           2,330,616


Issuance of Stock
- Consultancy                   960,000      48        --          --      1,919,952          --          --           1,920,000
Issuance of Stock
- Bridge Loan                   576,000      29        --          --        386,157          --          --             386,186
Issuance of Stock
- Public Offering             2,760,000     138        --          --      5,409,497          --          --           5,409,635
(Net of Offering Costs
of $1,490,365)
Issuance of Stock -
Class "A" Warrant Conversion    576,000      29        --          --      1,727,971          --          --           1,728,000

Stock Split                        --       423        --          --           (423)         --          --                --

Foreign Currency
Translation Adjustment             --       --         --          --           --            --        97,089            97,089


Net Loss                           --       --         --          --           --      (2,315,074)       --          (2,315,074)
                              --------------------------------------------------------------------------------------------------

Balance - June 30 1996:       8,472,000    $847     249,911       $25    $12,040,017   $(4,919,790)    $68,983        $7,190,082
                              ==================================================================================================
</TABLE>

   See accompanying notes to the consolidated financial statements

                                 F-4

<PAGE>

APPLEWOODS, INC.
--------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------


                                                       Years Ended
                                               --------------------------
                                                  June 30        June 30
                                                   1996            1995
                                                   ----            ----    
Operating Activities:
    Net Loss                                   $(2,315,074)     $(288,518)
 Adjustment to Reconcile Net Loss to Net
 Cash Used for Operating Activities
      Depreciation                                 101,882         93,834
      Amortization of Trademarks                    30,383         21,062
      (Gain) on Sale of Equipment                   (8,993)       (34,373)
      Loss on Extinguishment of Debt               107,274           --
      Imputed Interest                              55,119         71,303
      Non-Cash Consulting Fees                     720,000           --
      Accretion of Interest on  Bridge Loans       278,912           --
Changes in Assets and Liabilities:
          Trade Accounts Receivable               (230,232)      (132,141)
          Other Receivables                        (81,847)        40,735
          Inventory                               (402,758)      (514,695)
          Other Current Assets                      32,666        (79,630)
          Other Assets                             (53,000)          --
          Accounts Payable                         (11,445)       431,354
          Accrued Expenses                         (53,047)       (29,183)
          Accrued Taxes                             (3,124)        18,574
          Other Current Liabilities                 17,613         80,025
          Other Current Liabilities -
            Related Parties                        (73,005)       (77,112)
                                               -----------    -----------
Net Cash - Operating Activities                 (1,888,676)      (398,765)
                                               -----------    -----------

Investing Activities:
    Proceeds from Sale of Equipment                 37,290        156,496
    Purchase of Property and Equipment            (324,522)       (64,997)
    Investment in Trademarks                       (47,264)       (27,772)
                                               -----------    -----------
Net Cash - Investing Activities                   (334,496)        63,727
                                               -----------    -----------

Financing Activities:
    Proceeds of Stock Issue, net                 7,137,635           --
    Payment of Lease Obligations                   (77,936)       (55,379)
    (Repayment of)/Proceeds from Cash
        Overdraft                                 (427,072)        16,595

    (Repayment of)/Proceeds from
       Short-Term Loans                           (239,175)       237,615
    (Repayment of)/Proceeds from Related
       Party Loans                                (320,725)       149,735
                                               -----------    -----------
Net Cash - Financing Activities                  6,072,727        348,566
                                               -----------    -----------

                                               -----------    -----------
Effect of Exchange Rate Changes On Cash            108,613        (13,528)
                                               -----------    -----------

Net Increase In Cash                             3,958,168           --

Cash  - Beginning of Period                           --             --
                                               -----------    -----------
Cash  - End of Period                           $3,958,168    $      --
                                               ===========    ===========


Supplemental Disclosures of Cash
  Flow Information:
    Cash paid during the year for:
          Interest                                $212,196        $42,892
          Income Taxes                         $      --      $      --


    See accompanying notes to the consolidated financial statements

                                 F-5

<PAGE>


(1)      Organization and Business

         Applewoods, Inc, a Delaware corporation ("AI") was formed in
September 1995 to acquire all of the outstanding stock of Applewoods
International Limited ("AIL") . AIL, an English corporation,
established in 1978, sells natural soaps, oils, fragrances, lotions,
other toiletries and related gift products to licensed Applewoods
stores; it also manufactures the shop units and fits out the stores.
AI and AIL are collectively referred to as "the Company".

         The acquisition is recorded as a recapitalization of AIL,
with AI as the acquirer. AI is considered a public shell and
accordingly, the transaction is not considered a business combination.
The transaction is accounted for as a reverse acquisition whereby AI
is considered to be the acquiree even though legally it is the
acquiror, since it issued its shares of stock to effect the
acquisition. Since this is a reverse acquisition, the legal acquiror,
AI, continues in existence as the legal entity whose shares represent
the outstanding common stock of the combined entities. The financial
statements give retroactive effect to the recapitalization as if it
occurred at the beginning of the first period presented.

         The stock acquisition, as described above, occurred
immediately preceding the effective date of the Company's initial
public offering on April 10, 1996.

(2)      Summary of Significant Accounting Policies

         Basis of Presentation - The accompanying consolidated
financial statements include the accounts of the Company and its
wholly-owned subsidiaries, after elimination of all significant
intercompany transactions.

         Use of Estimates - 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 reporting period.
Actual results could differ from those estimates.

         Cash and Cash Equivalents - The Company considers all highly
liquid investments with an original maturity of three months or less
to be cash equivalents. The Company did not have any cash equivalents
at June 30, 1996.

         Accounts Receivable - Substantially all accounts receivable
are due from the Company's licensed shops and distributors. Product is
purchased by licensed shops on a per shipment basis. Credit is
extended based on an evaluation of the customers' financial condition.
Management limits its credit risk by insuring the great majority of

its non-U.K. receivables up to their full value.


                                 F-6

<PAGE>




         Inventory - Inventory is stated at the lower of cost or
market. At the balance sheet date, cost is determined using the
first-in, first-out method.

         Prepaid Consultancy Fees - The Company has entered into
consultancy contracts related to developing business in the U.S. The
Company is currently evaluating certain business opportunities in the
U.S. These contracts will be amortized using the straight-line method
over the period of benefit. It is the Company's policy to periodically
review and evaluate whether the benefits associated with these
contracts are expected to be realized.

         Property, Plant and Equipment and Depreciation - Property,
plant and equipment are carried at cost. Depreciation is recorded on
the straight-line method over the estimated useful lives of the
assets, which range from three to five years.

         Trademarks - Trademarks, which are stated at cost, consist
primarily of legal costs incurred in registering the trademarks.
Amortization is provided on a straight-line basis over the life of the
trademark, which is estimated to be five years.

         Recoverability of Long-Lived Assets - The Company reviews the
recoverability of its long-lived assets on a periodic basis in order
to identify business conditions which may indicate a possible
impairment. The assessment for potential impairment is based primarily
on the Company's ability to recover the unamortized balance of its
long-lived assets from expected future cash flows from its operations
on an undiscounted basis.

         Revenue Recognition - The Company's revenues are generated
from its retail store licensees for the design and fixturing of the
retail space ("shopfitting revenue") and from the sale of products to
these licensees. Revenues from product sales are recognized at time of
shipment. Shopfitting revenues are recognized upon shipment of the
completed fixtures. Immediately upon delivery of the fixtures, the
Company provides installation, set-up and product services. The fees
for these services, which are immaterial, are included in shopfitting
revenue.

         Income Taxes - Deferred income taxes reflect the expected
future tax consequences of differences between the tax bases of assets
and liabilities and their financial reporting amounts at each year
end. If it is more likely than not that some portion or all of a

deferred tax asset will not be realized, a valuation allowance is
recognized.

         Foreign Currency Translation - Balance sheet amounts
denominated in British pound sterling have been translated into US
dollars using the balance sheet date rate of exchange. Operational
results denominated in British pound sterling have been translated
into US dollars using the average period rate of exchange. Equity
transactions denominated in British pound sterling have been
translated into US dollars using the effective rate of exchange at
date of issuance. Foreign exchange gains and losses have been included
in income.


                                 F-7

<PAGE>




         Earnings (Loss) Per Share - Earnings (loss) per share of
common stock is based on the weighted average number of common shares
outstanding for the periods presented. Generally, common stock
equivalents are included in the computation only when their effect is
considered dilutive. However, stock and warrants issued within a
one-year period prior to the initial filing of the Company's public
offering have been included in the computation as outstanding for all
periods presented even when their effect is anti-dilutive.

         Research and Development - Research and Development costs are
expended as incurred.

         Non Cash Investing and Financing Activities - In October
1995, the Company entered into two-year consulting agreements with two
unaffiliated individuals and issued a total of 960,000 shares of the
Company's Common Stock with a fair value of $1,920,000 of which
$720,000 was expended through June 1996.

         In April 1996, immediately prior to the effective date of the
Company's initial public offering, the related party debt was either
canceled and contributed to capital or converted to Series A Preferred
Stock. The existing stockholders of AIL exchanged their interests in
AIL for a pro rata number of the 3,600,000 shares of the Company. In
addition, as capital contributions, they canceled indebtedness owed to
them in the aggregate principal amount of $1,081,072. The Company
issued 249,911 shares of Series A Preferred Stock to two Directors and
others in exchange for the cancellation of indebtedness of the Company
in the aggregate principal amount of $1,249,544.

(3)      Related Party Transactions

         In April 1994, the Company received from a director of the
Company a $100,000 deposit to be applied against future product

shipments. The Company applies 50% of product shipments against this
deposit and the remaining 50% is paid in cash. The Company expects
this deposit to be fully utilized during the year ended June 30, 1997.
As of June 30, 1996, the balance of this deposit is $12,339 and is
included on the balance sheet as "Other Current Liabilities - Related
Parties". Total revenue recognized to date on sales to this director
is approximately $136,000.

         In April 1994, the Company entered into a ten-year agreement
with ISC International, Ltd ("ISC"), a former stockholder of the
Company, and a company under the common control of Armando Araujo, a
director (until August 1996) of the Company, for the manufacture of
soap and soap related products.

         In April 1994, the Company entered into a license agreement
with ISC to exclusively sell the Company's products in Latin America.
In connection with this agreement, the Company received from ISC an
advance payment of $100,000 to be applied against future product
shipments. The Company applies 50% of product shipments against this
advance payment and the remaining 50% is paid in cash. The Company
expects this advance payment to be fully utilized during the year
ending June 30, 1997.

                                 F-8

<PAGE>




As of June 30, 1996, $37,544 remains deferred and is included on the
balance sheet as "Other Current Liabilities - Related Parties". Total
revenue recognized to date on sales to ISC is approximately $75,000.

(4)      Commitments

         (A) Employment Agreements - In July 1995, the Company entered
into three-year employment agreements with its Chief Executive Officer
and Chief Operating Officer. The agreements provide for an aggregate
annual salary of $300,000 with future increases and bonuses at the
discretion of the Board of Directors. In addition, the agreements
provide for the grant of options upon the Company's attainment of
specified earnings levels. If the specified earnings levels are
attained, each officer will receive options to purchase 12% of the
outstanding stock of the Company. This granting of options to purchase
common stock will result in compensation expense to the Company equal
to the excess of the fair market value per share of the common stock
over the exercise price of $1.50 per share multiplied by the number of
options granted.

         (B) Consulting Agreements - In October 1995, the Company
entered into two two-year consultancy agreements. The Company issued
an aggregate 960,000 shares of its common stock as compensation for
these agreements. Consulting expense of approximately $1,920,000 will

be recognized over the two-year term of these agreements. During the
year ended June 30,1996, the Company recognized $720,000 consulting
expense related to these agreements.

         (C) Stock Incentive Plan - In October 1995, the Company
adopted the 1995 Stock Plan (the "1995 Plan") to provide an incentive
for officers and other key employees. The 1995 Plan authorizes the
grant to officers and other key employees of the Company of stock
options, restricted stock, deferred stock, bonus shares, performance
awards, dividend equivalent rights, limited stock appreciation rights
and other stock-based awards, or any combination thereof. The maximum
number of shares of common stock with respect to which awards may be
granted pursuant to the 1995 Plan is initially 1,000,000 shares. In
January 1996, the Company issued 100,000 options to purchase shares of
the Company's common stock at an exercise price of $2.50 per share.
The options vest equally on each one year anniversary during the
three-year period following the date of issuance and are exercisable
for an eighteen-month period commencing on the vesting date.

         (D) Leases - The Company leases building and office space
under operating leases terminable in various years through 1998.
Rental expense for the years ended June 30, 1996 and 1995 was $162,925
and $163,664, respectively.


                                 F-9

<PAGE>


         Minimum annual lease commitments at June 30, 1996, under
noncancellable leases, to June 30 each year, are as follows:


         1997                               $  153,244
         1998                                  145,669
         1999                                   14,006
    ----------

                                            $  312,919
                                            ==========
(5)      Property, Plant & Equipment

Property, Plant & Equipment is comprised of the following:

                                           June 30,           June 30,
                                               1996               1995
  ---------          ---------
Plant & Machinery                         $ 441,798          $ 247,398
Office Equipment & Fittings                 140,496             29,404
Motor Vehicles                               36,900            133,099
                                          ---------          ---------

                                            619,194            409,901


Less: Accumulated depreciation              194,972            171,423
                                          ---------          ---------

                                           $424,222           $238,478
  =========           ========


(6)     Trademarks

Trademarks are comprised of the following:

                                           June 30,          June 30,
                                               1996              1995
                                           --------          --------
Cost                                      $ 149,949         $ 106,004

Less: Accumulated amortization               69,155            39,166

                                          ---------          -------- 
                                          $  80,794         $  66,838
                                          =========          ======== 

                                 F-10

<PAGE>

(7)     Inventory

The following is a summary of inventory:

                                           June 30,          June 30,
                                               1996              1995
                                         ----------        ---------- 
Raw Materials                             $ 856,893         $ 748,852
Work in Progress                             24,886             7,864
Finished Goods                              860,287           582,592
                                         ----------        ---------- 

                                         $1,742,066        $1,339,308
                                         ==========        ========== 


(8)     Export Sales

        A substantial portion of the Company's revenues are derived
from export sales to geographic areas outside the U.S. These areas and
the corresponding revenues from sales made to unaffiliated customers
within these areas is as follows:

                                            June 30,          June 30,
                                                1996              1995
                                         -----------        ---------- 
North America                            $   267,650        $  219,704

Europe                                     1,298,730         1,626,659
South East Asia                            1,268,389           516,240
Rest of World                                559,352           680,766
                                         -----------        ---------- 

                                         $ 3,394,121        $3,043,369
                                         ===========        ========== 

(9)     Bridge Lenders

        In September and October 1995, the Company borrowed an
aggregate of $500,000 to provide working capital for the Company, and
in connection with such loans executed promissory notes in the

                                 F-11

<PAGE>




principal amount of $500,000 bearing interest at 8% per annum. The
notes were payable on the earlier of the closing of the initial public
offering or June 30, 1996. As additional consideration, the bridge
lenders received 576,000 bridge units each consisting of one share of
Common Stock, one Class A Warrant, exercisable at $3.00 per share and
one Class B Warrant, exercisable at $5.00 per share. The bridge loans
together with accreted interest were repaid in April 1996. The proceeds
received were allocated to the notes ($114,000) and to the bridge
units ($386,000) based on the relative fair values of the notes and
bridge units. Interest on the notes was accreted to the date of
repayment and amounted to approximately $278,000 which has been
included in interest expense. The unamortized debt discount remaining
of $107,000 has been expended as an extraordinary item.

(10)    Public Offering

        On April 10, 1996, the Company's registration statement to
offer for sale 2,400,000 shares of Common Stock at $2.50 per share was
declared effective. In April 1996, the Company received net proceeds
of $5,409,635 from the sale of 2,400,000 shares and 360,000
over-allotment shares. In May and June 1996, an additional $1,728,000
was received from the conversion of 576,000 Class A Warrants issued to
the bridge lenders.

        Part of the proceeds have been used to repay the bridge
lenders the principal sum of $500,000 and a loan made by one of the
directors in the sum of approximately $325,000.

        In May 1996, the company undertook a 2-for-1 stock split. Per
share data for all periods presented have been adjusted to reflect
this.

(11)    Conversion of Debt


        Pursuant to a Stock Exchange Agreement, Roger Buoy, the
Company's Chief Executive Officer and Tony Swash, the Company's Chief
Operating Officer exchanged their respective thirty-five percent (35%)
interests in AIL, and Carmen Villalon, a director of AIL, and ISC
exchanged their respective fifteen percent (15%) interests in AIL, for
a pro rata number of the 3,600,000 shares of the Company. In addition,
as capital contributions to the Company, Roger Buoy and Tony Swash
each canceled indebtedness owed to them by the Company in the amount
of $411,025 and $412,592, respectively, and Carmen Villalon and Tanisi
(the successor in interest to ISC) each canceled indebtedness owed to
them by the Company in the amount of $153,837 and $103,799,
respectively.

        In addition, pursuant to the terms of a Series A Preferred
Stock Subscription Agreement, immediately prior to the effective date
of the initial public offering, the Company issued (i) 142,716 shares
of Series A Preferred Stock to Roger Buoy, in exchange for the
cancellation by Mr Buoy of certain indebtedness of the Company in the
aggregate principal amount of $713,577, (ii) 77,629 shares of Series A
Preferred Stock to Tony Swash in exchange for the cancellation by Mr
Swash of certain indebtedness of the Company in the aggregate
principal amount of $388,141, (iii) 15,695 shares of

                                 F-12

<PAGE>




Series A Preferred Stock to Josh Gaspero in exchange for the
cancellation by Mr Gaspero for certain indebtedness of the Company in
the aggregate principal amount of $78,473 and (iv) 13,871 shares of
Series A Preferred Stock to Tim Kelly in exchange for the cancellation
by Mr Kelly of certain indebtedness of the Company in the aggregate
principal amount of $69,352.

(12)    Provision for Income Taxes

        Pursuant to United States tax laws, if a subsidiary of a
United States company which is organized under the laws of the United
Kingdom is not engaged in business in the United States, profits of
such subsidiary will not be subject to United States taxation, until
distributed as dividends. However, the United States company would
receive a credit against federal income tax liability that would
otherwise result from any distributions from the subsidiary for any
United Kingdom corporate taxes paid by its subsidiary on these
distributions, as well as for any United Kingdom dividend and royalty
withholding taxes imposed directly on the United States company.

        As of June 30, 1996, the Company has approximately $2,600,000
of net operating losses arising in AIL, which can be used to offset
future United Kingdom taxable income arising in the same trade. Under

the United Kingdom tax code, there is no time limit for tax
utilization of net operating losses. Any deferred tax asset
established on such operating losses, however, would be offset by an
equivalent valuation allowance because the Company has no profitable
operating history and it is more likely than not that this deferred
tax asset will not be realized.

(13)     Stockholders' Equity

         (A) Common Stock - The Company is authorized to issue
30,000,000 common shares with a par value of $.0001. As of June 30,
1996, 8,472,000 shares have been issued.

         (B) Preferred Stock - The Company is authorized to issue
1,000,000 shares of convertible preferred stock. The Board of
Directors has the authority to issue shares in one or more classes and
to designate the number of shares and the terms within the class. As
of June 30, 1996, 500,000 shares of Series A Preferred Stock with a
par value of $.0001 have been authorized and 249,911 issued. Each
share is convertible into two shares of common stock, at the option of
the holder, for $2.50 per share, has a liquidating preference of $5.00
per share and may be redeemed by the Company with five days notice for
$5.00 per share. This stock ranks senior to any other preferred stock
which may be issued and to the common stock. Each holder is entitled
to one vote.

         (C) Options and Warrants - At June 30, 1996, 576,000 Class B
Warrants issued to the bridge lenders remained outstanding. Each Class
B Warrant is exercisable into one share of common stock commencing on
April 10, 1997, at an exercise price of $5.00. Each Class B Warrant
may be redeemed by the Company if the bid price exceeds $6.00 per
share.


                                 F-13

<PAGE>




(14)     New Authoritative Pronouncements

         In October 1995, the Financial Accounting Standards Board
issued SFAS 123, "Accounting for Stock Based Compensation," which is
effective for fiscal 1997. Under SFAS 123, companies can elect, but
are not required, to recognize compensation expense for all
stock-based awards, using a fair value methodology. The Company
expects to implement in 1997 the disclosure only provisions, as
permitted by SFAS 123.

(15)     Litigation

         A former shareholder / employee of AIL has commenced

litigation against the Company seeking damages for wrongful dismissal
and loss of his shareholdings. The Company intends to vigorously
defend its position and has asserted counterclaims against the
plaintiff. The Company believes that the disposition of this matter
will not have a material adverse effect on the Company's financial
position or results of operations.



                                 28

<PAGE>

<TABLE>
<CAPTION>
(a)(3)  Exhibits.
<S>               <C>
1.01*             Form of Underwriting Agreement.

3.01*             Certificate of Incorporation of the Company dated September 5, 1995.

3.02*             By-Laws of the Company.

3.03*             Form of Certificate of Designation of Series A Preferred Stock.

4.01*             Specimen Certificate for shares of Common Stock.

4.02*             Specimen Certificate for shares of Series A Preferred Stock.

4.03*             Form of Warrant Agreement

4.04*             Form of Underwriter's Warrant.

4.05*             Form of Lockup Letter with Officers and Directors.

5.01*             Opinion of Bernstein & Wasserman, LLP, counsel to the Company.

10.01*            Form of Retail Store License Agreement.

10.02*            Employment Agreement between the Company and Roger Buoy dated as of July 1, 1995.

10.03*            Employment Agreement between the Company and Tony Swash dated as of July 1, 1995.

10.04*            Form of September 1995 Bridge Loan Agreements.

10.05*            Consulting Agreement between the Company and SK Fullfillment Consulting, Inc.

10.06*            Consulting Agreement between the Company and Valjean Systems, Inc.

10.07*            Form of Stock Exchange Agreement between the Company, Roger Buoy, Tony Swash,
                  Carmen Villalon, Tanisi International Ltd., Mewbec Limited and Breams Trustees
                  Limited.

10.08*            Form of Series A Preferred Stock Subscription Agreement between the Company and

                  Roger Buoy.
</TABLE>

                                 29

<PAGE>


<TABLE>

<S>               <C>
10.09*            Form of Series A Preferred Stock Subscription Agreement between the Company and
                  Tony Swash.

10.10*            Form of Series A Preferred Stock Subscription Agreement between the Company and
                  Josh Gaspero.

10.11*            Form of Series A Preferred Stock Subscription Agreement between the Company and Tim
                  Kelly.

10.12*            Form of Financial Advisory and Investment Banking Agreement.

10.13*            1995 Stock Plan.

21.01*            List of Subsidiaries of the Registrant as of the Effective Date.

23.01*            Consent of Bernstein & Wasserman, LLP (to be included in Exhibit 5.01).

23.02             Consent of Price Waterhouse LLP.
</TABLE>


----------------
*        Incorporated by reference to the Company's Registration
         Statement on Form SB-2 No. 33-98282.

(B)      Reports on Form 8-K.

         A report on Form 8-K was filed on behalf of the Company on
June 26, 1996 with respect to the change in the Company's independent
auditors.

                                 30

<PAGE>


                              SIGNATURE

         Pursuant to the requirements 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.

Dated:  New York, New York
        October      , 1996

                                            APPLEWOODS, INC.

                                            By:s/ Roger Buoy
                                               -----------------------------
                                                  Roger Buoy
                                                  Chief Executive Officer


                                            By:s/ Terence McAuley
                                               -----------------------------
                                                  Terence McAuley
                                                  Chief Financial Officer, 
                                                  Principal Accounting Officer 
                                                  and Secretary


         Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement or Amendments thereto has been signed
below by the following persons in the capacities and on the dates
indicated.

<TABLE>
<CAPTION>

Signature                                   Title                                         Date
---------                                   -----                                         ----
<S>                                         <C>                                           <C>

s/ Roger Buoy                               Chief Executive Officer and                   October      , 1996
-----------------------------               Director
Roger Buoy                                          


s/Tony Swash                                Chief Operating Officer and                   October      , 1996
----------------------------                Director                                              
Tony Swash                                  


s/ Terence McAuley                          Chief Financial Officer,                      October      , 1996
--------------------------                  Principal Accounting Officer                                              
Terence McAuley                             and Secretary



s/Josh Gaspero                              Director                                      October      , 1996
-----------------------------                                                             
Josh Gaspero


s/Sherman A. Drusin                         Director                                      October      , 1996
-------------------------                                                                 
Sherman A. Drusin
</TABLE>
                                 31