<PAGE>

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               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                  FORM 10-KSB

[X]  Annual report under Section 13 or 15(d) of the Securities Exchange Act of
     1934 for the fiscal year ended March 31, 1998

[_]  Transition report under Section 13 or 15(d) of the Securities Exchange Act
     of 1934
     For the transition period from ____________ to ____________
     
                      Commission file number: 33-93982-LA

                            ANNIE'S HOMEGROWN, INC.
       (Exact name of Small Business Issuer as specified in its charter)

               DELAWARE                                      06-1258214
     (State or other jurisdiction of                      (I.R.S. Employer
     incorporation or organization)                      Identification No.)

  395 MAIN STREET, WAKEFIELD, MA                               01880
     (Address of principal executive offices)                (Zip Code)

                                 781-224-1172
               (Issuer's telephone number, including area code)

  Securities registered pursuant to Section 12(b) of the Exchange Act:  NONE

  Securities registered pursuant to Section 12(g) of the Exchange Act:  NONE

Check whether the Issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.   Yes [X]  No [_]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
the Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this form. [X]

The issuer's revenue for the fiscal year ended March 31,1998 was $6,792,177. As
of March 31, 1998, the aggregate market value of the Issuer's voting stock held
by non-affiliates was approximately $7,266,066 based on the initial public
offering price of Common Stock of $6.00 per share.

As of June 15, 1998, there were 4,548,168 shares of the Issuer's Common Stock,
$.001 par value, issued and outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definite proxy statement for the Annual Meeting of Stockholders
of Annie's Homegrown, Inc. (the "Proxy Statement"), to be filed with the
Securities and Exchange Commission within 120 days after March 31, 1998 are
incorporated by reference into Part III of this Report.
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                                    PART I

ITEM 1.   BUSINESS

GENERAL
 
Annie's Homegrown, Inc. ("Annie's" or the "Company"), which was founded by Ann
E. Withey and Andrew M. Martin, is engaged in the manufacture, marketing and
sale of premium all natural macaroni and cheese dinners, all natural pasta meals
and other all natural food products. The Company's products include; Annie's
Shells and Cheddar, Annie's Alfredo, Annie's Whole Wheat Shells and Cheddar and
Annie's Mild Mexican/TM/. During the quarter ending March 31, 1997, the Company
introduced a new line of all natural pasta meals called Annie's One-Step. The
One-Step meals combine different pasta shapes with five sauce recipes which
provide the convenience and simplicity of one-step, one-pot cooking. During the
fiscal year ended March 31, 1998, the Company introduced 4 more dinners
including; Annie's Pizza Pasta, Annie's Mild White Cheddar, Annie's Family Size
and Annie's Bunny ShaPe PaSTa & Yummy Cheese.

The Company uses contract packers to manufacture its products according to
strict Company specifications, which include the recipe, ingredients, graphics
and packaging for the product. The Company's products are sold primarily through
distributors to supermarkets and natural and specialty food stores. The Company
also manufactures a private label house brand for a specialty retailer, using a
formulation of an all-natural white cheddar cheese formula together with elbow
macaroni. In the natural food stores, the Company's original products are
distributed nationally along with the new products being introduced on a
national scale. In the supermarkets, the Company has previously focused its
marketing and distribution efforts on the Northeast and West Coast U.S. markets.
The Company has started to expand into the Mid Atlantic, Rocky Mountain and
Central U.S. markets. The Company's strategy is to expand its supermarket
distribution nationally in addition to developing new and unique all natural
food products to sell to its existing customer base.
 
Annie's mission is to provide the highest quality, all natural food products to
its customers and to serve as an ethically, socially, and environmentally
conscious business model for customers, other companies and the food industry.
The Company promotes environmental efforts to minimize the consumption of
resources and encourages individuals to make personal commitments to social and
environmental causes.

The Company was founded in January 1989 as a Delaware corporation. Its principal
executive offices are located at 395 Main Street, Wakefield, MA 01880 and its
telephone number is (781) 224-1172.

Statements in this Form 10-KSB which are not historical facts, so called
"forward-looking statements", are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. When used in this Form 10-
KSB, the terms "anticipates", "expects", "estimates", "believes" and other
similar terms as they relate to the Company or its management are intended to
identify such forward-looking statements. The Company's actual results,
performance or achievements may differ materially from those expressed or
implied by such forward-looking statements. Investors are cautioned that all
forward-looking statements involve risks and uncertainties, including those
detailed herein and in the Company's other filings with the Securities and
Exchange Commission. See "Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Certain Factors That May Affect
Future Results."

PRODUCTS

The Company manufactures and sells a variety of products under the Annie's name.
All of the Company's products are made using premium all natural ingredients.
The Company's products include:

Annie's Shells and Cheddar, introduced in January 1989, made with petite durum
semolina pasta shells and premium all natural white Vermont cheddar cheese.

                                       1
<PAGE>
 
Annie's Alfredo, introduced in August 1989, made with petite durum semolina
pasta shells and premium all natural white Vermont cheddar cheese with garlic
and basil.

Annie's Whole Wheat Shells and Cheddar, introduced in February 1990, made with
an organically grown whole wheat pasta shells and premium all natural white
Vermont cheddar cheese.

Annie's Mild Mexican/TM/, introduced in November 1994, made with petite durum
semolina pasta shells and premium all natural white Vermont cheddar cheese and
Mexican spices.

Annie's Pizza Pasta, introduced in April 1997, made with durum semolina pizza
wheels and premium totally natural cheddar cheese and pizza seasonings.

Annie's Mild Cheddar, introduced in April 1997, made with durum semolina elbows
and premium totally natural mild cheddar cheese. The product was developed to
appeal to the tastes of young children.  Its packaging highlights the world-
famous "Free Willy" whale pursuant to a license agreement with The Free Willy-
Keiko Foundation.

Annie's Family Size Shells and Cheddar, introduced in September 1997, is a
larger version of the original Annie's Shells and Cheddar.

Annie's Bunny ShaPe PaSTa & Yummy Cheese, introduced in September 1997, made
with bunny shaped durum semolina pasta and a yummy premium all natural white
cheddar cheese.

These products are typically priced at retail between $0.99 and $1.49 for a
package.

In the quarter ended March 1997, the Company introduced a new line of  five all
natural pasta dinners called Annie's One-Step. The dinners combine different
pasta shapes with five sauce recipes which provide the convenience and
simplicity of one-step, one-pot cooking. Annie's One-Step Dinners include the
following:

Annie's One-Step Rotini with Four Cheese Sauce

Annie's One-Step Penne Pasta with Alfredo Sauce

Annie's One-Step Radiatore Pasta with Sundried Tomato and Basil Sauce

Annie's One-Step Corkscrew Pasta with Savory Herb and Garlic Sauce

Annie's One-Step Curly Fettuccine with White Cheddar and Broccoli Sauce

Annie's One-Step dinners are typically priced at retail between $1.59 and $1.99
for a 5 oz. package.

Annie's White Cheddar Popcorn, introduced in the second quarter of 1997, a
totally natural, white cheddar popcorn based on the founders' successful
Smartfood White Cheddar popcorn recipe.  The product is sold in 4 oz. and 1 oz.
bags in the natural and mass markets.

New Zealand Organic Creamed Honey, a totally natural antibiotic and chemical-
free creamed honey produced by small family farmers located in rural New
Zealand.  It is produced without the pesticides, herbicides or antibiotics
commonly used by American and European producers.

In the second quarter, Annie's acquired Raw Materials Food Company a producer of
all natural organic whole food concentrates. Raw Materials Food Company makes
and sells three products under the Living Food name:

                                       2
<PAGE>
 
Living Food, which is a meal replacement product, which strengthens the body by
providing 100% organic whole food nourishment, not stimulants. The primary
ingredients including grains and seeds are grown on our state of the art
hydroponics farm using our proprietary sprouting technology. Living Food sells
in a 17.5 oz jar and is typically priced at retail around $29.95

Living Cleanse provides total body purification without any extensive lifestyle
modifications. This product allows virtually anyone to improve their energy
levels and mental focus without an interruption of their daily schedule. Living
Cleanse sells 60 tablets in a jar, which is typically priced at retail around
$24.95.

Living Enzymes assist the body in the breakdown and absorption of nutrients.
This reduces the burdens of digestion and improves overall energy levels.
Living Enzymes sell 90 capsules in a jar, which is typically priced at retail
around $19.95.

SALES, MARKETING AND DISTRIBUTION

The Company sells its products through distributors to primarily two classes of
retailers:  (i) supermarket chains, also known as "mass markets;" and (ii)
natural and specialty food stores.  Selection of new regional markets is based
upon consumer profiles, product opportunity and costs of introduction.

In the mass markets, the Company sells in large supermarket chains such as Stop
and Shop in New England and Safeway Stores in California. The Company currently
has penetrated all of the major supermarket chains in New England, and sells in
several major supermarket chains in New York and California. The Company is
currently expanding its sales area to include major supermarkets in the Mid-
Atlantic, Rocky Mountain, and Central region.

The Company's products are also sold in natural food markets and specialty food
stores, such as Whole Foods and Fresh Fields, and to select natural and
specialty food distributors. Buying practices of natural and specialty food
stores are highly selective due to the nature of the retailers, which reflect
their customers' demands for both natural and premium quality products.
According to Spence Information Services which is the only sales information
service catering to the natural food trade, Annie's was the Number 2 ranked
brand, based on total dollar sales, in the Entree and Mixes category with the
top two selling items in that category for the two months ended March 31, 1998.

In October 1996, the Company signed a master distribution agreement with Liberty
Richter, Inc.("Liberty"). The agreement calls for Liberty to distribute all of
the Company's products except for the private label and mail order lines in the
continental United States.  The Company sells the products to Liberty who in
turn sells the products to supermarket chains, natural and specialty food stores
and to select natural and specialty food sub distributors who in turn sell to
the two classes of trade. Liberty has two warehouses, one located in New Jersey
and the other located in California. Liberty distributes and sells Annie's
products within the territory utilizing its own sales force that they maintain.
In addition, Liberty provides other services such as order processing,
invoicing, record management, sales coverage, broker management, promotion
execution, management of sales allowances and trade show participation. All
promotions and slotting presentations as well as sub distributors and brokers
are subject to Annie's approval.

Using the Company's sales and marketing presentation, Liberty, through its
regional managers and food brokers, presents the Company's products to the
supermarket or distributor buyer. The key competitive factors in influencing a
purchasing decision by the buyer include the product quality, packaging, sales
history, profitability, and consumer demand.   If a buyer decides to accept the
product, other issues such as the cost of acquiring shelf space (slotting fees)
and the Company's specific commitments to marketing programs are negotiated.
Introductory slotting fees and marketing programs often varies from customer to
customer. Emphasizing the selling features of its products, the Company, through
Liberty and its brokers, attempts to negotiate the lowest slotting cost.
Slotting fees can take the form of cash payments and/or free product allowances.
Utilizing both Liberty's and the brokers' knowledge regarding specific accounts,
the Company tailors its introductory marketing program to each new account.

                                       3
<PAGE>
 
Under the Liberty Agreement, Liberty must distribute any new products that
Annie's chooses to distribute through Liberty's channels unless Liberty has a
preexisting non-compete provision with another vendor.  The contract expires
December 31, 1998 with automatic renewals scheduled on a year to year basis.

Prior to October 1996, the Company sold its products directly to supermarket
chains and select natural and specialty food distributors, utilizing regional
food brokers on a commission basis. Regional food brokers served as the
Company's sales representatives and assisted the Company in the sales process.
The Company had retained 21 food brokers.  Using the Company's sales and
marketing presentation, the food brokers presented the Company's products to the
supermarket or distributor buyer. Prior to entering into the Liberty Agreement,
the Company's products were shipped directly from the manufacturer via common
carrier to either of the Company's two public warehouses located in
Massachusetts and California.  The Company did not rent the warehouses but was
charged a fee based on the amount of use. The Company then distributed its
products by shipping either directly to supermarket chains' central warehouses,
where the products were then redistributed to individual stores as needed, or to
a distributor's warehouse.

The Company's strategy is to continue to expand its supermarket distribution
nationally in addition to developing new and unique all-natural food products to
sell to its existing customer base. Management believes the Company will benefit
from greater trade relations due to Liberty's favorable position in the
supermarket and natural food trade.  In addition, Management believes its
consolidated distribution with Liberty's other products will provide the Company
greater access to key accounts in expansion markets as well as facilitate new
product introductions into its existing customers.

For the fiscal year ended December 31, 1996, no one customer accounted for more
than 10% of the Company's net sales. For the fiscal year ended March 31, 1998,
Liberty accounted for approximately 85% of the Company's net sales under the
master distribution agreement.

CUSTOMERS

The Company's products are marketed toward mothers, children and young adults.
These three groups are the primary purchasers in the macaroni and cheese dinner
category. Management believes its customers are people who prefer to buy a
natural, better-tasting product and are willing to pay a premium price.

The Company relies primarily on brand loyalty and word of mouth to promote its
products. The Company's marketing strategy is designed to encourage customers to
try its products for the first time and develop brand loyalty. The Company
accomplishes this by continually educating customers about the differences
between its all natural products and the competition's products, as well as
through product sampling, community giveaways, promotional pricing and account
specific marketing events such as buy-one get-one free promotions.

PRODUCT QUALITY AND DEVELOPMENT
 
Ann E. Withey, the Company's co-founder, Director, and Inspirational President,
maintains the final responsibility for the recipes for the Company's products.
The Company takes great pride in producing high quality, all natural, easy to
prepare meals. Annie's pasta is made from 100% durum semolina flour. Management
believes the quality of its 100% durum semolina pasta is one of the more
important differences between Annie's and other competitive national brands.
Several of the lower priced brands are prepared from a lower grade, less
expensive blend of spring wheat and durum flour. Pure durum semolina flour
produces a golden, translucent looking finished pasta product, while blended
enriched flour produces a faded, chalky looking finished product. The Company
has retained a product development consultant to increase the speed at which new
products are created and introduced to the market. The consultant reviews all
recipes and flavors with the Company, all of which are subject to Ms. Withey's
final approval.

                                       4
<PAGE>
 
MANUFACTURING

The Company uses a contract packer to manufacture its products according to
strict Company specifications, which include the recipe, ingredients, graphics
and packaging for the product. The Company has all the components of the
products shipped to the contract packer. The Company has never experienced
material shortages or delays in the manufacture of its products. However, its
products are subject to the inherent risks in agriculture and all of its
products must be transported from its manufacturer and are therefore subject to
work stoppages and other risks. The Company believes that there are numerous
companies, which could manufacture its products under its quality specifications
without a substantial increase in cost or delay in delivery.

COMPETITION

The industry in which the Company competes is highly competitive. The principal
methods of competition in the macaroni and cheese market include pricing,
product quality and taste, brand advertising, trade and consumer promotions,
packaging and the development of new products. The Company competes not only for
consumer acceptance but also for shelf space in supermarkets and natural food
stores and for the marketing focus by the Company's distributors, some of which
also distribute other competing products. The Company competes in two primary
classes of trade: (i) the mainstream supermarket trade, also known as the "mass
markets" and (ii) the natural food trade. The macaroni and cheese category in
the mass-market trade is highly competitive. The leading brand in the category
is Kraft's Original Macaroni and Cheese Dinner (Kraft is owned by Philip Morris
Companies, Inc.) which accounted for over 40% of the total dollar sales in the
category in 1996 according to Information Resources Infoscan reports. In
addition to the Kraft brand, the category is comprised of other products such as
Golden Grain (The Quaker Oats Company), private label products (store brands),
and several regional brands. Store brands are usually sold at prices well under
the Company's products. Most of the companies that compete in the macaroni and
cheese category are larger than Annie's and have significantly greater
resources.

Management believes that the Company's products do not directly compete with
these "value-priced" lines.  The Company's products are positioned as a
"premium" brand and viewed as a natural alternative to the low-priced,
artificially flavored brands.  Management believes its target customers are
people who prefer to buy natural, better-tasting products and are willing to pay
a premium for those products. The Company uses unique, brightly colored
packaging to differentiate its products from competing brands, which tend to be
very similar in graphical design.

The macaroni and cheese category is less competitive in natural food stores,
which do not typically carry Kraft Macaroni and Cheese or Golden Grain.  The
Company competes in that market with other branded products as well as store
brands based on quality and all natural ingredients. Several of these brands are
also being offered by companies larger than the Company.  There is less pricing
competition within this segment, as natural, specialty and gourmet food stores
typically sell products based on their quality and ingredients, not price.

Management believes that the principal bases of competition include price,
product quality, taste, reputation and brand loyalty. The Company believes that
it competes favorably with respect to these factors, although there can be no
assurance that it will be able to continue to do so. The ability of the Company
to compete successfully in the future will depend on factors both within and
outside its control, including the Company's ability to respond to changing
market conditions and the activities of its competitors, to control costs, to
introduce successful new products, to grow its customer base, and general market
and economic conditions. There can be no assurance that the Company will be able
to compete successfully with respect to these factors in the future or that
present competitors or future entrants will not successfully compete with the
Company in the future, any of which could have a material adverse effect on the
Company's business, results of operations or financial condition.

                                       5
<PAGE>
 
PHILOSOPHY AND CORPORATE CULTURE

The Company understands that it has a responsibility to produce profits for its
stockholders.  However, in addition to its corporate responsibilities, the
Company is committed to benefiting the community as a reward for its support.
Since its inception, the Company has supported hundreds of non-profit and school
groups that helped woman, children and the environment.  Currently, Annie's
Homegrown continues to support hundreds of non-profit groups through its
Community Enrichment Program.

COMMUNITY ENRICHMENT PROGRAM
 
The Company's mission is to provide the highest quality all natural food
products to its customers and to serve as an ethically, socially, and
environmentally conscious business model for customers, other companies and the
food industry.  The Company promotes environmental efforts to minimize the
consumption of resources and encourages individuals to make personal commitments
to social and environmental causes. The Company also actively supports a variety
of non-profit and school groups that help woman, children and the environment.

The Company's Community Enrichment Program contributes cases of its products to
PTA groups, walkathons, book fairs, bake sales, daycare centers and other non-
profit groups and events.  These groups can give away the cases or sell the free
cases as a fund-raiser to generate support for their organization.  The
Community Enrichment Program helps society and the environment while
simultaneously increasing the public awareness for Annie's products.

The Company has also created and supports the Be Green(R) environmental
awareness program.  There is a description on each package of the Company's
product describing how individuals can help the environment by increasing
environmental awareness.  Consumers can receive a free Be Green(R) bumper
sticker which helps consumers express their support for the environment.

Be Green(R) Magazine is a publication produced by the Company and is a forum
whereby the Company can communicate its philosophy, products and community
programs. Be Green(R) Magazine features inspiring articles and stories, facts
about the environment, coloring pages, comic strips for kids, stories about
groups that are helping the environment and society.

The Company also created and supports the Support American Volunteer Efforts
(S.A.V.E.) awareness program.  Each package of the Company's pasta products
describes how individuals can help their community by volunteering.  Consumers
can receive a free brochure, which helps them express their support for
volunteers as well as to identify local opportunities.

In January 1997, the Company entered into an agreement with the Free Willy-Keiko
Foundation, Inc. (the "Foundation") concerning the use of the Foundation's mark,
Keiko."  The Foundation is a non-profit organization dedicated to the rescue,
rehabilitation and attempt to return captive and stranded dolphins and whales to
the wild.  Under this agreement, the Company has used the Keiko trademarks in
conjunction with the promotion and sale of Annie's Mild Cheddar macaroni and
cheese dinners. The Company makes a royalty payment of 2.5% of its gross
receipts attributable to the sale of products in connection with which it has
used the rights of the Foundation to support its programs.

INTELLECTUAL PROPERTY RIGHTS

The Company seeks to protect the value of its trademarks, trade dress,
copyrights and trade secrets through licensing and other means.  It has the
following registered trademarks in the United States:  "Bernie-Rabbit of
Approval," "Annie's," "Annie's Homegrown," "Annie's Pasta," and "Be Green."  The
Company also uses other trademarks and trade dress for which federal trademark
registrations are now pending.  The Company uses appropriate copyright notices
with its packaging, promotional materials and other artwork.  All of the
Company's suppliers, have entered into confidentiality agreements with the
Company, pursuant to which they have agreed to keep confidential and not use the
Company's trade secrets, including its processes, formulae, ingredients and

                                       6
<PAGE>
 
recipes, except for the benefit of the Company.   The Company does not have any
patents.  The Company believes that it is not infringing on the intellectual
property rights of any third party, and it intends to take all necessary and
appropriate action to protect against dilution, imitation of its products,
packaging, promotional materials and other art work, and to defend such
trademarks, copyrights, and trade secrets against such infringements.

In January 1997, the Company entered into an agreement with the Free Willy-Keiko
Foundation, Inc. (the "Foundation") concerning the use of the Foundation's mark,
Keiko."  The Foundation is a non-profit organization dedicated to the rescue,
rehabilitation and attempt to return captive and stranded dolphins and whales to
the wild.  Under this agreement, the Company has the right to use the Keiko
trademarks in conjunction with the promotion and sale of Annie's prepackaged
macaroni and cheese dinners.  The Agreement continues until January 31, 2000.
The Company makes a royalty payment of 2.5% of its gross receipts attributable
to the sale of goods in connection with which it has used the rights of the
Foundation to support its programs.

REGULATION

The production and marketing of the Company's products are subject to the rules
and regulations of various federal, state, and local heath agencies, including
the United States Food and Drug Administration (the "FDA"). The FDA also
regulates the labeling of the Company's products.

EMPLOYEES

As of March 31, 1998, the Company had twelve employees: three general management
employees, two salespeople, three sales and marketing support, and four
operations including financial management. The Company has never participated in
a collective bargaining agreement. Management believes the relationship it has
with its employees is good.

ITEM 2. DESCRIPTION OF PROPERTIES

The Company leases 3,400 square feet at 395 Main Street, Wakefield,
Massachusetts and leased 600 square feet of office space at 200 Gate Five Road,
Suite 211, Sausalito, California. The Wakefield lease expires on May 31, 2003,
The lease has a monthly base rent (which increases approximately 5% each year)
plus an additional amount due for its portion of the real estate taxes and
building expenses. The Sausalito lease expired on June 15, 1998. The Company
believes that its properties are adequately covered by insurance.

The Company believes that its facilities and equipment are in good condition and
are suitable for its operations as presently conducted and for its foreseeable
future operations. The Company currently believes that additional facilities and
equipment can be acquired if necessary, although there can be no assurance that
additional facilities and equipment will be available upon reasonable or
acceptable terms, if at all.

ITEM 3. LEGAL PROCEEDINGS

The Company is not currently involved in any material legal proceedings.

                                       7
<PAGE>
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At the Company's annual meeting of stockholders held on October 27, 1997, the
Company's stockholders:

  (i) Elected the following persons as Directors of the Company to serve a one-
year term:

<TABLE>
<CAPTION>
                                 Total Vote For  Total Vote Withheld
                                 Each Director   From Each Director
                                 -----------------------------------
     <S>                         <C>             <C>
     Ann E. Withey                  3,373,973            1,500      
     Andrew Martin                  3,373,123            2,350      
     Deborah Churchill Luster       3,373,973            1,500      
     Brady Bevis                    3,373,873            1,600      
     Patrick DeTemple               3,374,023            1,450      
     Paul Geffner                   3,374,073            1.400      
     Kare Anderson                  3,373,873            1,600       
</TABLE>

     (ii) Ratified the appointment of KPMG Peat Marwick LLP as the Company's
     independent auditors for the fiscal year ending March 31, 1998. With
     respect to such matter, the votes were as following: 3,366,213 shares voted
     for the proposal, 1,050 shares voted against the proposal, and 8,210 shares
     abstained from voting on the proposal.


                                    PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock, $.001 par value, is not listed on any public
securities exchange and does not trade in any other public market.

The approximate number of record holders of the Company's Common Stock as of
March 31, 1998 was 2,580. The Company has never paid a cash dividend with
respect to its shares of the Common Stock. The Company currently intends to
retain earnings, if any, for use in its business and does not anticipate paying
cash dividends on its shares of Common Stock in the foreseeable future.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS

OVERVIEW

The Company has developed four premium macaroni and cheese dinners: Annie's
Shells and Cheddar, Annie's Alfredo, Annie's Whole Wheat Shells and Cheddar, and
Annie's Mild Mexican. During the quarter ending March 31, 1997, the Company
introduced a new line of all natural pasta meals called Annie's One-Step. The
One-Step meals combine different pasta shapes with five sauce recipes which
provide the convenience and simplicity of one-step, one-pot cooking. During the
fiscal year ended March 31, 1998, the Company introduced 4 more dinners
including; Annie's Pizza Pasta, Annie's Mild White Cheddar, Annie's Family Size
and Annie's Bunny ShaPe PaSTa & Yummy Cheese. The Company also has an agreement
with a specialty retailer to provide a private label house brand using an all-
natural white cheddar cheese formula together with elbow macaroni.

In October 1996, the Company signed a master distribution agreement with Liberty
Richter, Inc.("Liberty"). The Liberty Agreement calls for Liberty to distribute
all of the Company's products except for the private label and mail order lines
in the continental United States.  The Company sells the products to Liberty who
in turn sells the products to its two main classes of trade supermarket chains
and natural and specialty food stores. Liberty has two warehouses, one located
in New Jersey and the other located in California.

                                       8
<PAGE>
 
Liberty distributes and sells Annie's products within the territory utilizing
its own sales force and sub distributors that they maintain. In addition,
Liberty provides other services such as order processing, invoicing, record
management, sales coverage, broker management, promotion execution, management
of sales allowances and food show participation. All promotions and slotting
presentations as well as sub distributors and brokers are subject to Annie's
approval.

Using the Company's sales and marketing presentation, Liberty, through its food
brokers, presents the Company's products to the supermarket or distributor buyer
The key competitive factors in influencing a purchasing decision by the buyer
include the product quality, packaging, sales history, profitability and
consumer demand.   If a buyer decides to accept the product, other issues such
as the cost of acquiring shelf space (slotting fees) and the Company's specific
commitments to marketing programs are negotiated. Introductory slotting fees and
marketing programs often varies from customer to customer. Emphasizing the
selling features of its products, the Company, through Liberty and its brokers,
attempts to negotiate the lowest slotting cost. Slotting fees can take the form
of cash payments and/or free product allowances. Utilizing both Liberty's and
the brokers' knowledge regarding specific accounts, the Company tailors its
introductory marketing program to each new account.

Under the Liberty Agreement , Liberty must distribute any new products that
Annie's chooses to distribute through their channels unless Liberty has a
preexisting non-compete provision with another vendor.  The contract expires
December 31, 1998 with automatic renewals scheduled on a year to year basis.

On July 31, 1997, RMFC Acquisition Corp, a wholly owned subsidiary of the
Company, merged with Raw Materials Food Company ("RMFC"), with RMFC as the
surviving corporation. This transaction allowed the Company to acquire all the
outstanding shares of RMFC, a Colorado based whole food supplement company, for
stock valued at $360,000 and paid acquisition costs. The acquisition has been
accounted for using the purchase method of accounting and, accordingly, the
purchase price has been allocated to the assets purchased and the liabilities
assumed based upon the fair values at the date of acquisition. The fair value of
assets acquired, including goodwill, was $437,555, and the liabilities assumed
totaled $52,610. Goodwill of $400,184 is being amortized over 20 years on the
straight-line basis. The operating results of RMFC have been included in the
consolidated statements of operations from the date of acquisition.

The Company's cost of sales consists of the cost of finished product shipped
from a contract packer.  The raw materials are purchased by the Company and
shipped to the contract packer according to the specifications provided by the
Company, which include the recipe, ingredients, graphics and packaging for the
product. Then, the contract packer packages the raw materials into the
appropriate boxes and cases according to orders specified by the Company. The
products are shipped directly from the manufacturer via common carrier to either
of two of Liberty's public warehouses located in New Jersey and California. The
Company distributes its products through Liberty's distribution system to either
the supermarket chains' central warehouses or to a distributor.

Selling expenses include the costs of product marketing, sales commissions, cost
of product distribution and account management. Liberty retains brokers at the
approval of the Company who present the Company's products to supermarket chains
and distributors.  The brokers work on a commission basis, generally 5% of net
cash received.  The Company negotiates, through the broker, the cost of
acquiring shelf space (introductory slotting fees) as well as the continuing
support needed for the product as indicated.  Introductory slotting fees can
take the form of cash payments and/or free product allowances.

The Company's sales strategy is to continue to expand its supermarket
distribution nationally in addition to developing new and unique all-natural
food products to sell to its existing customer base. The Company will benefit
from greater trade relations due to Liberty's favorable position in the
supermarket and natural food trade.  Management believes its consolidated
distribution with Liberty's other products will provide the Company greater
access to key accounts in expansion markets as well as facilitate new product
introductions into its existing customers. For the fiscal year ended December
31, 1996, no one customer accounted for more than 10% of the Company's net
sales. For the fiscal year ended March 31, 1998, Liberty accounted for
approximately 85% of the Company's net sales under the master distribution
agreement.

                                       9
<PAGE>
 
RESULTS OF OPERATIONS

The following table sets forth, as a percentage of net sales, certain items
included in the Company's Statements of Operations (see Financial Statements and
related Notes) for the years indicated (the items for the year ended March 31,
1997 are proforma amounts and are unaudited). The proforma year ended March 31,
1997 amounts were calculated by adding the quarter ended March 31, 1997 and
subtracting the quarter ended March 31, 1996 from the audited financial
statements at December 31, 1996.

<TABLE>
<CAPTION>
                                                YEARS ENDED MARCH 31,
                                               -----------------------
                                                  1997         1998
                                               -----------  ----------
     <S>                                       <C>          <C>
     STATEMENTS OF OPERATIONS DATA:
     Net sales...............................      100.00%     100.00%
     Cost of sales...........................       57.74       58.13
     Gross profit............................       42.26       41.87
     Selling expenses........................       26.32       26.10
     General and administrative expenses.....       13.51       14.08
     Slotting fees...........................        3.41        0.95
     Compensation of outside directors.......        0.11        0.00
     Operating income (loss).................       (1.09)       0.74
     Interest expense and borrowing charges..        1.09        0.80
     Interest and other income...............        0.21        0.13
     Income tax expense......................        0.04        0.01
     Net income (loss).......................       (2.01)       0.06
</TABLE>

FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO PROFORMA FISCAL YEAR ENDED MARCH
31, 1997

NET SALES. Net sales increased by $1,440,388 or 26.91% from $5,351,789 in 1997
to $6,792,177 in 1998.  The net sales increase was primarily a result of sales
growth of existing products in existing stores (10.15%), new products (13.41%),
and sales by RMFC (3.35%). In the natural food stores, the Company's original
products are distributed nationally along with the new products being introduced
on a national scale. The Company believes that it has penetrated all major
supermarket chains in the New England states, and sells in several major
supermarket chains in New York and California. The Company has expanded its
supermarket business into the Mid-Atlantic, the Rocky Mountain and Central U.S.
regions.

GROSS PROFIT. As a percentage of net sales, gross profit decreased from 42.26%
in 1997 to 41.87% in 1998.  This decrease was primarily the result of the
increase in dairy and wheat costs during 1998, offset by reduced raw material
costs due to the Company's decision to purchase all its raw materials directly
from suppliers and having the co-packers produce the product using these raw
materials. This enabled the Company to achieve better pricing than purchasing
the finished product from the co-packer where the co-packer provided the raw
materials.

SELLING EXPENSES. Selling expenses increased by $364,655 or 25.89% from
$1,408,563 in 1997 to $1,773,218 in 1998 and decreased as a percentage of net
sales from 26.32% in 1997 to 26.10% in 1998. The increase in selling expenses
reflected an increase in spending in marketing costs, including price reductions
and trade show appearances, associated with the continued roll-out of the
Company's new products in 1998. The Company maintained the same number of
personnel to sell and support its products and customer base. Freight costs
remained level due to efficiencies of larger customer orders and customers
picking up orders despite the customer base expanding away from the Company's
warehouses.

                                       10
<PAGE>
 
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $233,080 or 32.24% from $722,963 in 1997 to $956,043 in 1998 and
increased as a percentage of net sales from 13.51% in 1997 to 14.08% in 1998.
The increase in general and administrative expenses is primarily a result of
increased spending in four areas: (i) increase in the management fee from
Liberty Richter due to the increase in volume; (ii) increased insurance costs
including Directors and Officer's Insurance; (iii) increased payroll costs
offset by Officers' voluntary salary reduction of approximately $46,000 and
related benefits; and (iv) increased costs on new product development.

SLOTTING FEES.  Slotting expenses decreased by $118,167 or 64.74% from $182,518
in 1997 to $64,351 in 1998, and decreased as a percentage of net sales from
3.41% in 1997 to 0.95% in 1998.  The decrease was due to the Company's decision
to scale back purchasing additional shelf space at supermarkets, which requires
paying introductory slotting fees as a result of insufficient working capital.
These slotting fees are required by most supermarkets and are expensed at the
time of product introduction.

COMPENSATION OF OUTSIDE DIRECTORS. In 1997, $6,000 in compensation for stock
options granted in 1995 was recorded for the four outside directors of the
Company.  The Company pays no compensation for its directors who are also
employees of the Company.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations to date through the initial public
offering of Common Stock, private sale of equity and convertible debt
securities, a line of credit from a financial institution and cash generated
from operations.  At March 31, 1998 and 1997, the Company had working capital
of $443,796 and $576,992, respectively.  The net decrease in working capital was
primarily generated by a substantial reduction in advances from distributor, a
reduction in accounts payable, an increase in other assets netted against a
substantial reduction in inventory and an increase in borrowing under the line
of credit.

Net cash used in operating activities for the year ended March 31, 1998 was
$436,184, consisting primarily of a decrease in accounts payable and a
substantial decrease in advances from distributor offset by a substantial
decrease in inventory.

Net cash used in investing activities consisted of capital expenditures totaling
$41,340 which related principally to the purchase of plates and dies for the new
products as well as office equipment and $23,901 used for the acquisition of Raw
Materials Food Company.

The Company negotiated a line of credit with a financial institution for
$600,000, which closed on February 3, 1998 ("Line of Credit"). The Line of
Credit is for a term of two years and is secured by all of the assets of the
Company and guaranteed by the two largest stockholders of the Company. Also, the
Company has initiated discussions with other parties for the purpose of raising
additional capital.

The Company's primary capital needs are for developing new products to sell to
its existing consumer base, purchase existing all natural brands, or expansion
into national supermarket distribution. The Company is negotiating with the
financial institution for a $300,000 increase in the Line of Credit. The Company
anticipates that the funds available from the Line of Credit, together with
funds generated from operations, will be sufficient to meet its liquidity needs
for the next twelve months. However, the Company needs additional capital in the
future to fully implement its business strategy as set forth herein. If such
capital is unavailable either because of general market conditions or the
results of the Company's operations, the Company will have to continue to scale
back either its investments in new products, or its national supermarket
expansion, or both.

OTHER MATTERS

In June 1997, the FASB issued Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" and No. 131, "Disclosure about Segments of an Enterprise
and Related Information", which are effective for fiscal years beginning after
December 15, 1997. The Company will comply with the required presentation of
SFAS No. 130 in fiscal 1999 and is currently evaluating the effects of SFAS No.
131.

                                       11
<PAGE>
 
Management is aware of the potential software anomalies associated with the year
2000 date change. The Company has been evaluating the potential issues that need
to be addressed in connection with its operations. A review of the Company's
computer systems and software is largely complete and the Company is not aware
at this time of any significant year 2000 issues in its own systems that will
not be resolved prior to the year 2000. Formal communications have begun with
Liberty, the Company's master distributor, to ensure that Liberty has
appropriate plans in place to properly address the year 2000 issue. Based on
preliminary information, costs of addressing the issue are not expected to have
any material effect upon the Company's financial position, results of
operations, or cash flows in future periods. The Company believes it has
adequate plans in place to address the year 2000 issue. However, there can be no
assurance that the systems of other companies, on which the Company's systems
and operations rely, will be converted on a timely basis and will not have a
material effect on the Company.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

From time to time, information provided by the Company, statements made by its
employees or information included in its filings with the Securities and
Exchange Commission (including this Form 10-KSB) may contain statements which
are not historical facts, so called "forward-looking statements", which involve
risks and uncertainties. Forward-looking statements are made pursuant to the
safe harbor provisions of the Private Securities  Litigation Reform Act of 1995.
When used in this Form 10-KSB, the terms "anticipates", "expects", "estimates",
"believes" and other similar terms as they relate to the Company or its
management are intended to identify such forward-looking statements. In
particular, statements made above in "Item 2. Description of Property" relating
to the suitability of the Company's facilities and equipment for future
operations and the availability of additional facilities and equipment in the
future and in "Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations" relating to the sufficiency of funds for
the Company's working capital requirements during 1999 and the Company's
expectation that future cash flow will continue to be provided from operations
will have any significant impact on its business may be forward-looking
statements. The Company's actual future results may differ significantly from
those stated in any forward-looking statements. Factors that may cause such
differences include, but are not limited to, the factors discussed below. Each
of these factors, and others, are discussed from time to time in the Company's
filings with the Securities and Exchange Commission.

SEASONALITY

The Company's quarterly and annual operating results are affected by a wide
variety of factors that could materially affect revenues and profitability,
including: competitive pressure on selling prices and margins; cost of
ingredients; transportation and distribution costs; timing of customer orders;
timing and amount of slotting fees and capital expenditures: and the
introduction of new products by the Company's competitors. As a result of the
foregoing and other factors, the Company may experience material fluctuations in
future operating results on a quarterly or annual basis which could materially
and adversely affect its business, operating results and stock price.

RELIANCE ON NEW PRODUCTS/NATIONAL EXPANSION STRATEGY

The Company's strategy is to expand its sales by developing new products to sell
to its existing consumer base, purchase existing all natural brands, or
purchasing shelf space (slotting fees) at major supermarket chains. The
introductory slotting fees are required by most retailers and are fully expensed
at the time of new product introductions. The Company must then implement
marketing programs and promotions, as well as rely upon customers' perception of
quality, value and approval of the Company's business philosophy and style, to
generate sufficient initial and repeat sales, and to provide profit to the
retailer.  If that profitability is not demonstrated to the retailer's
satisfaction, or if other products are considered more profitable to the
retailer, the Company could lose its shelf space at certain retail markets
following the trial period.  In 1989, the Company lost one retailer after having
paid introductory slotting fees.  To date, the Company has lost only one other
retailer for which it had acquired shelf space

                                       12
<PAGE>
 
COMPETITION

In the national market (consisting principally of sales to supermarket chains),
the Company's products compete with nationally known brands, as well as other
lesser known brands and private label store brands.  Most of the other brands
are sold at prices lower than the prices of the Company's products and are
offered by companies which are larger than the Company and have greater
financial and marketing resources.  Private label store brands often are sold at
prices substantially lower than the Company's products.  In its other market
segment (comprising natural and specialty food stores), the Company competes
with other products based on taste, quality and choice of ingredients.  Several
of these brands are also offered by companies larger than the Company.

PRODUCT LIABILITY

Food products, including the Company's, are subject to certain hazards, such as
contamination.  The Company maintains product liability insurance, which may or
may not be sufficient to pay any losses for which the Company could potentially
be held liable.  From inception through March 31, 1998, no product liability
claims have been made against the Company.

LIMITED OPERATING HISTORY; LOSSES

The Company's future results are subject to substantial risks and uncertainties.
The Company has operated at a very small profit or at a loss for its entire
history and there can be no assurance of it ever achieving consistent
profitability. Management expects to continue operating profitably as sales
increase.  However, future events, including management's ability to adjust to
greater complexities, unanticipated expenses, increased price competition,
interruptions of supplies, unfavorable economic conditions or decreased consumer
demand for natural food products could have a material adverse effect on the
Company's future operating results.  There can be no assurance that future
product sales will meet the Company's expectations or that the Company will be
profitable in the future.

DEPENDENCE ON MASTER DISTRIBUTOR

In October 1996, the Company signed a master distribution agreement with Liberty
Richter, Inc. ("Liberty"). The Liberty Agreement calls for Liberty to distribute
all of the Company's products except for the private label and mail order lines
in the continental United States.  The Company will sell substantially all of
it's the products to Liberty who in turn sells the products to its two main
classes of trade: (i) supermarket chains and (ii) natural and specialty food
stores. The Liberty Agreement expires on December 31, 1998 but automatically
renews for a twelve months period unless terminated by September 15 of the then
current year. Management also believes the Company will benefit from greater
trade relations due to Liberty's favorable position in the supermarket and
natural food trade.  Management believes its consolidated distribution with
Liberty's other products will provide the Company greater access to key accounts
in expansion markets as well as facilitate new product introductions into its
existing customers. The ability of the Company to achieve its operating plan
will be largely dependent on the ability of Liberty to sell the Company's
products and execute its business strategy. The loss or termination of the
Liberty Agreement or the inability of Liberty to execute the Company's strategy
may have a material adverse effect on the Company's business, results of
operations, and financial condition.

DEPENDENCE ON SUPPLIERS AND PACKERS

The Company does not own a production facility.  The Company's pasta products
are produced according to the Company's specifications pursuant to certain
supply contracts.  The ingredients are packaged by packers, and shipped to the
distributor's public warehouses via common carrier.

PRODUCT COSTS, RISK OF INTERRUPTIONS AND MARKET PRICE FLUCTUATIONS

The Company's operating results and financial condition may be adversely
affected by market fluctuations in the cost of its raw materials, particularly
wheat and cheese.  Raw materials costs are determined by a constantly changing
market over which the Company has no control.  Cost fluctuations in the open
market could increase the Company's product costs and adversely affect its
operations.  Interruptions in supplies of certain agricultural commodities to
the Company's suppliers, or transportation to and from the suppliers, packers,
distributors and customers, by natural disasters or other causes, could have a
material adverse effect on the Company's success

                                       13
<PAGE>
 
DEPENDENCY ON FOUNDERS AND OTHER EMPLOYEES

The Company seeks to employ a minimum number of employees to limit operating
costs.  The loss of any key person or persons could affect the success of the
Company unless and until new personnel could be hired and trained.  The success
of the Company is also dependent upon its ability to hire and retain its
managers and executive officers.  Competition for such personnel is intense, and
there can be no assurance that the Company will be able to hire or retain such
necessary management and executive personnel.  Ann E. Withey, the Company's co-
founder and Inspirational President, is particularly identified with the Company
and its products.  In addition, the Company has been largely dependent on the
creativity, guidance, direction and efforts of Andrew M. Martin, the Company's
co-founder and present Chairman of the Board of Directors.  The Company has no
employment agreements with either Ms. Withey or Mr. Martin, neither of whom
presently devotes their full time efforts to the Company.  The loss of the
services of either Ms. Withey or Mr. Martin could have a material adverse effect
on the Company.  The Company maintains a key person life insurance policy on 
Mr. Martin for $1 million.

FUTURE CAPITAL NEEDS; ADDITIONAL FUTURE FUNDING

The Company's future results are subject to substantial risks and uncertainties.
The Company has operated at a very small profit or at a loss for its entire
history and there can be no assurance of it ever achieving consistent
profitability. The Company had working capital at March 31, 1998 of $443,796.
The Company may still require additional working capital in the future and there
can be no assurance that such working capital will be available on acceptable
terms, if at all.  In addition, the Company needs additional capital in the
future to fully implement its business strategy as set forth herein. If such
capital is unavailable either because of general market conditions or the
results of the Company's operations, the Company will have to continue to scale
back either its investments in new products, or its national supermarket
expansion, or both.

PROTECTION OF TRADEMARK RIGHTS

The Company's regards its trademarks, service marks, trade dress, trade secrets
and other intellectual property, including without limitation, "Bernie Rabbit of
Approval(R)", "Annie's(R)", "Annie's Homegrown(R)", "Annie's Pasta(R)", and "Be
Green(R)", as material to the Company's success due to such property's name
recognition with its customers.  The Company's intellectual property is
protected by common law, as well as by registration and contract.  The Company
intends to take action to protect against imitation of its products and to
protect its intellectual property rights as necessary.  Litigation, which could
result in substantial cost to, and diversion of effort by, the Company, may be
necessary to protect the Company's intellectual property rights or to determine
the enforceability, scope and validity of the proprietary rights of others.

COMPANY DONATIONS MAY AFFECT GROWTH AND EXPANSION

The Company's philosophy includes a commitment to social and environmental
responsibility as evidenced by support of community organizations through
product give-a-ways and donations, as well as time and effort.  The Company
intends to donate a percentage of certain product proceeds to such
organizations.  No assurance can be given that these donations will not
adversely affect the Company's growth and expansion plans

ITEM 7. FINANCIAL STATEMENTS

Please refer to pages F-1 through F-16
Independent Auditors' Report
Consolidated Balance Sheets at March 31 1998 and 1997
Consolidated Statements of Operations for the Year ended March 31, 1998, Three
Months Ended March 31, 1997 and Year Ended December 31, 1996
Consolidated Statements of Stockholders' Equity for the Year ended March 31,
1998, Three Months Ended March 31, 1997 and Year Ended December 31, 1996
Consolidated Statements of Cash Flows for the Year ended March 31, 1998, Three
Months Ended March 31, 1997 and Year Ended December 31, 1996
Notes to Consolidated Financial Statements at March 31 1998 and 1997 and
December 31, 1996

                                       14
<PAGE>
 
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

NOTE: ITEMS 9 THROUGH 12 ARE INCORPORATED BY REFERENCE (INTO PART III OF THIS
REPORT) TO THE PROXY STATEMENT TO BE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION WITHIN 120 DAYS AFTER MARCH 31, 1998.


ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K

(A) EXHIBITS

     Exhibit Number                     Description
     --------------                     -----------                

         ** 3.1       Certificate of incorporation, as amended
         ** 3.2       By-Laws, as amended
         ** 10.1      Lease agreement with Second Street Limited Partnership
                      dated December 19, 1994 for Chelsea, MA office
         ** 10.2      Lease agreement with Marin Freeholders dated August 31,
                      1995 for Sausalito, CA office
         ** 10.6      Distribution Agreement with Liberty Richter, Inc.
         ** 10.7      Employment Contract with Paul B. Nardone
         ** 10.8      Loan and Security Agreement dated as of February 3, 1998
                      between Fremont Financial Corporation and Annie's
                      Homegrown, Inc.
         ** 10.31     1990 Incentive Stock Option Plan
         ** 10.32     1996 Stock Plan
         ** 10.41     Loan Agreement and Security Agreement with Inventory
                      Addendum dated June 7, 1996 with Presidential Financial
                      Corporation of Massachusetts
         ** 10.42     Demand and Secured Promissory Note dated June 7, 1996
                      payable to Presidential Financial Corporation of
                      Massachusetts
          * 10.43     Lease agreement with Anthony C. Simboli dated February 3,
                      1998 for Wakefield, MA office
          * 10.44     Loan Agreement dated December 31, 1997 between Andrew M.
                      Martin and Annie's Homegrown, Inc.
          * 10.45     Stock Purchase and Loan Agreement dated October 1, 1997
                      between Andrew M. Martin and Annie's Homegrown, Inc.
          * 10.46     Amendment to Stock Purchase and Loan Agreement between
                      Andrew M. Martin and Annie's Homegrown, Inc. dated
                      December 31, 1997
          * 10.47     Stock Purchase and Loan Agreement dated October 1, 1997
                      between Ann E. Withey and Annie's Homegrown, Inc.
          * 10.48     Amendment to Stock Purchase and Loan Agreement between Ann
                      E. Withey and Annie's Homegrown, Inc. dated December 31,
                      1997
          * 10.49     Stock Purchase and Loan Agreement dated October 1, 1997
                      between Deborah Churchill and Annie's Homegrown, Inc.
          * 10.50     Pledge Agreement dated December 31, 1997 between Andrew
                      M. Martin and Annie's Homegrown, Inc.
         ** 11        Computation of Per Share Earnings
         ** 24.1      Power of Attorney (included on Signature Page of this
                      report)
          * 27.1      Financial Data Schedule

                                       15
<PAGE>
 
____________________

*   Filed herewith
**  Previously filed as an Exhibit to the Company Registration statement on
    Form SB-2 (R6 No. 33-93982-L.A.) and incorporated herein by reference.
(B) REPORTS ON FORM 8-K

No reports on Form 8-K were filed by the Company during the Company's fiscal
quarter ended March 31, 1998.

                                       16
<PAGE>
 
                                  SIGNATURES

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

                                              ANNIE'S HOMEGROWN, INC.
                                              Registrant



                                               /s/ Andrew Martin
                                              ------------------------
                                              Andrew Martin, Chairman
                                              Chairman, Chief Executive Officer

                                              June 29, 1998
                                              --------------------
                                              Date

Each person whose signature appears below appoints Andrew M. Martin, Deborah
Churchill, and Neil Raiff, as his or her attorney-in-fact, with full power of
substitution and resubstitution to sign any and all amendments to this report on
Form 10-KSB of Annie's Homegrown, Inc. and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said attorney-in-
fact and agent or his or her substitute or substitutes may lawfully do or cause
to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

<TABLE> 
<CAPTION> 
  SIGNATURE                                  TITLE                                   DATE
  ---------                                  -----                                   ----
<S>                             <C>                                             <C>   
  /s/ Andrew M. Martin          Chairman, Chief Executive Officer               June 29, 1998
----------------------------                                                   
Andrew M. Martin                and Director (Principal Executive Officer)


 /s/  Ann E. Withey              Inspirational President & Director             June 29, 1998
----------------------------                                                         
Ann E. Withey


 /s/ Paul Nardone                President                                      June 29, 1998
----------------------------   
Paul Nardone


 /s/ Deborah Churchill           Secretary & Director                           June 29, 1998
----------------------------                                                  
Deborah Churchill


 /s/ Neil Raiff                  Chief Financial Officer & Treasurer            June 29, 1998
----------------------------                                                                
Neil Raiff                       (Principal Financial and Accounting Officer)
</TABLE> 

                                       17
<PAGE>
 
<TABLE> 
<S>                              <C>                                            <C>   
 /s/ Brady Bevis                 Director                                       June 29, 1998
----------------------------                                 
Brady Bevis


 /s/ Patrick DeTemple            Director                                       June 29, 1998
----------------------------                                           
Patrick DeTemple
</TABLE> 

                                       18
<PAGE>
 
                        SUPPLEMENTAL INFORMATION TO BE
                     FURNISHED WITH REPORTS FILED PURSUANT
                       TO SECTION 15(d) OF THE EXCHANGE
                         ACT BY NON-REPORTING ISSUERS


No annual report or proxy material has been sent to the Issuer's security
holders with respect to the year ended March 31, 1998. A copy of the Issuer's
Annual Report to Stockholders for the fiscal year ended March 31, 1998 and the
Issuer's Proxy Statement for the 1998 Special Meeting in Lieu of Annual Meeting
of Stockholders will be furnished to stockholders and filed with the Securities
and Exchange Commission on or about August 1, 1998.

                                       19
<PAGE>
 
                          INDEPENDENT AUDITORS' REPORT
                                        

The Board of Directors and Stockholders
Annie's Homegrown, Inc.:


We have audited the accompanying consolidated balance sheets of Annie's
Homegrown, Inc. as of March 31, 1997 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year
ended December 31, 1996, for the three months ended March 31, 1997, and for the
year ended March 31, 1998.  These consolidated financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the 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.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Annie's Homegrown,
Inc. at March 31, 1997 and 1998 and the results of their operations and their
cash flows for the year ended December 31, 1996, for the three months ended
March 31, 1997, and for the year ended March 31, 1998, in conformity with
generally accepted accounting principles.

                                                      /s/ KPMG Peat Markwick LLP
                                                      --------------------------
                                                      KPMG Peat Marwick LLP

Boston, Massachusetts
May 26, 1998

                                      F-1
<PAGE>
 
                            ANNIE'S HOMEGROWN, INC.
                                        
                          Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                   March 31,   March 31,
                     ASSETS                                          1997        1998
                                                                  ----------  ----------
<S>                                                              <C>         <C>
Current assets:
 Cash and cash equivalents                                       $  484,196     249,669
 Accounts receivable:
   Trade (note 10)                                                   67,901      67,174
   Related parties (note 5)                                          40,323      20,541
 Inventory                                                        1,162,391     820,855
 Other assets                                                             -      84,896
                                                                 ----------   ---------
           Total current assets                                   1,754,811   1,243,135
                                                                 ----------   ---------
 
Office equipment, plates and dies                                    85,642     129,129
Accumulated depreciation                                            (39,964)    (58,980)
                                                                 ----------   ---------
           Office equipment, plates and dies, net                    45,678      70,149
                                                                 ----------   ---------
 
Due from officer (note 5)                                            75,000      75,000
Goodwill, net                                                             -     386,848
Other assets                                                         26,809     112,656
                                                                 ----------   ---------
 
           Total assets                                          $1,902,298   1,887,788
                                                                 ==========   =========
 
   LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
 Notes payable (note 6)                                          $    7,500     279,398
 Accounts payable, trade (note 11)                                  621,065     431,542
 Accrued expenses (note 7)                                           79,996      47,805
 Advances from distributor                                          424,224       6,476
 Due to employees                                                    45,034      34,118
                                                                 ----------   ---------
           Total current liabilities                              1,177,819     799,339
                                                                 ----------   ---------
 
Commitments (note 8)
 
Stockholders' equity (note 9):
 Common stock, $.001 par value.  Authorized 10,000,000
   shares; issued 4,368,801 shares and 4,660,074
   shares at March 31, 1997 and 1998, respectively                    4,369       4,660
 Additional paid-in capital                                       1,761,932   2,306,659
 Accumulated deficit                                               (950,072)   (946,102)
 Note receivable stockholders                                        (1,750)   (186,768)
 Treasury stock; 111,906 common shares at cost                      (90,000)    (90,000)
                                                                 ----------   ---------
           Total stockholders' equity                               724,479   1,088,449
                                                                 ----------   ---------
 
           Total liabilities and stockholders' equity     $       1,902,298   1,887,788
                                                                 ==========   =========
</TABLE>
See accompanying notes to consolidated financial statements.

                                      F-2
<PAGE>
 
                            ANNIE'S HOMEGROWN, INC.
                                        
                     Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                                  Three months
                                                                     Year ended       ended      Year ended
                                                                     December 31,   March 31,     March 31,
                                                                        1996          1997          1998
                                                                      ---------      ---------   ---------- 
<S>                                                                 <C>          <C>            <C>
Net sales (note 10)                                                  $4,811,762     $1,948,510   $6,792,177
Cost of sales                                                         2,784,902      1,193,518    3,948,084
                                                                      ---------      ---------   ----------
         Gross profit                                                 2,026,860        754,992    2,844,093
                                                                      ---------      ---------   ----------
 
Operating expenses:
 Selling                                                              1,344,084        469,829    1,773,218
 General and administrative                                             673,694        236,327      956,043
 Slotting fees                                                          227,403         12,842       64,351
 Compensation of outside directors                                       15,000              -            -
                                                                      ---------      ---------   ----------
         Total operating expenses                                     2,260,181        718,998    2,793,612
                                                                      ---------      ---------   ----------
 
         Operating (loss) income                                       (233,321)        35,994       50,481
 
Other (expense) income:
 Interest expense and borrowing charges (note 6)                        (50,952)       (18,582)     (54,334)
 Interest and other income                                                8,201          3,798        8,967
                                                                      ---------      ---------   ----------
 
         (Loss) income before income tax expense                       (276,072)        21,210        5,114
 
Income tax expense (note 4)                                               3,286          1,050        1,144
                                                                     ----------     ----------   ----------
 
         Net (loss) income                                           $ (279,358)    $   20,160   $    3,970
                                                                     ==========     ==========   ==========
 
(Loss) earnings per common share:
 Basic                                                                  $ (.067)        $ .005       $ .001
 Diluted                                                                $ (.067)        $ .004       $ .001
 
Weighted average number of shares used in computation
 of per share data:
   Basic                                                             $4,180,910     $4,256,895   $4,412,532
   Diluted                                                           $4,180,910     $4,993,003   $4,661,146
 
</TABLE>
See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>
 
                            ANNIE'S HOMEGROWN, INC.
                                        
                Consolidated Statements of Stockholders' Equity

        Year ended December 31, 1996, three months ended March 31, 1997
                         and year ended March 31, 1998
<TABLE>
<CAPTION>
                                 Common stock         Additional                        Note          Deferred 
                             --------------------       paid-in    Accumulated      receivable-   compensation 
                              Shares       Amount       capital        deficit      stockholder      directors 
                             ---------     ------     -----------     ---------     ------------     ----------
<S>                          <C>        <C>        <C>             <C>           <C>              <C>          
Balance at December 31,                                                                                        
 1995                        4,178,211  $   4,178  $     726,518   $  (690,874)  $       (1,750)  $    (15,000)
                                                                                                               
 Issuance of common stock                                                                                      
  upon public offering         190,590        191      1,134,457             -                -              - 
                                                                                                               
 Public offering costs               -          -        (99,043)            -                -              - 
                                                                                                               
 Amortization of deferred                                                                                      
   compensation of                                                                                             
    directors                        -          -              -             -                -         15,000 
                                                                                                               
 Net loss                            -                         -      (279,358)               -              - 
                             ---------                ----------      --------         --------      --------- 
Balance at December 31,                                                                                        
 1996                        4,368,801      4,369      1,761,932      (970,232)          (1,750)             - 
                                                                                                               
 Net income                          -          -              -        20,160                -              - 
                             ---------      -----     ----------      --------         --------      --------- 
Balance at March 31, 1997    4,368,801      4,369      1,761,932      (950,072)          (1,750)             - 
                                                                                                               
 Exercise of stock options     231,273        231        184,787             -         (185,018)             - 
                                                                                                               
 Shares issued in                                                                                              
  connection with                                                                                              
   purchase of subsidiary       60,000         60        359,940             -                -              - 
                                                                                                               
 Net income                          -          -              -         3,970                -              - 
                             ---------      -----     ----------      --------         --------      --------- 
Balance at March 31, 1998    4,660,074  $   4,660  $   2,306,659   $  (946,102)        (186,768)             - 
                             =========      =====     ==========      ========         ========      ========= 
</TABLE>
<TABLE>
<CAPTION>
                                    Treasury Stock    
                                 --------------------    Stockholders'
                                 Shares       Amount        equity
                                 -------     --------    ------------
<S>                              <C>      <C>          <C>   
Balance at December 31,         
 1995                            111,906  $  (90,000)  $    (66,928)
                                
 Issuance of common stock       
  upon public offering                 -           -      1,134,648
                                
 Public offering costs                 -           -        (99,043)
                                
 Amortization of deferred       
   compensation of              
    directors                          -           -         15,000

 Net loss                              -           -       (279,358)
                                 -------     -------      ---------
Balance at December 31,         
 1996                            111,906     (90,000)       704,319
                                
 Net income                            -           -         20,160
                                 -------     -------      ---------
Balance at March 31, 1997        111,906     (90,000)       724,479
                                
 Exercise of stock options             -           -              -
                                
 Shares issued in               
  connection with               
   purchase of subsidiary              -           -        360,000
                                
 Net income                            -           -          3,970
                                 -------     -------      ---------
Balance at March 31, 1998        111,906     (90,000)  $  1,088,449
                                 =======     =======      =========
 
</TABLE>
See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>
 
                            ANNIE'S HOMEGROWN, INC.
                                        
                     Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
 
 
                                                                                            Three months
                                                                              Year ended        ended      Year ended
                                                                             December 31,     March 31,     March 31,
                                                                                 1996           1997          1998
                                                                             -------------  -------------  -----------
<S>                                                                          <C>            <C>            <C>
 
Cash flows from operating activities:
 Net (loss) income                                                             $ (279,358)     $  20,160    $   3,970
 Adjustments to reconcile net (loss) income to net cash
   used in operating activities:
     Depreciation and amortization                                                 11,173          4,500       31,336
     Outside directors compensation                                                15,000              -            -
     Changes in:
       Accounts receivable - trade                                                118,597         18,195        5,995
       Accounts receivable - related parties                                      (76,937)        57,367       19,782
       Inventory                                                                 (828,346)        71,719      355,528
       Other assets                                                               (11,992)         4,836     (154,807)
       Accounts payable - trade                                                   425,971       (396,565)    (236,710)
       Advances from distributor                                                  535,068       (110,844)    (417,748)
       Accrued expenses                                                           (74,530)       (25,057)     (32,614)
       Due to employees                                                            (5,053)           373      (10,916)
                                                                               ----------      ---------    ---------
               Net cash used in operating activities                             (170,407)      (355,316)    (436,184)
                                                                               ----------      ---------    ---------
 
Cash flows from investing activities:
 Purchase of office equipment, plates and dies                                    (18,044)       (10,976)     (41,340)
 Acquisition of business, net of cash acquired                                          -              -      (23,901)
                                                                               ----------      ---------    ---------
               Net cash used in investing activity                                (18,044)       (10,976)     (65,241)
                                                                               ----------      ---------    ---------
 
Cash flows from financing activities:
 Net (repayment of) proceeds from notes payable                                   (22,115)       (10,014)     266,898
 Issuance of common stock and exercise of stock options, net                    1,035,605              -            -
                                                                               ----------      ---------    ---------
               Net cash provided by (used in)
                 financing activities                                           1,013,490        (10,014)     266,898
                                                                               ----------      ---------    ---------
 
Net increase (decrease) in cash and cash equivalents                              825,039       (376,306)    (234,527)
 
Cash and cash equivalents, beginning of year                                       35,463        860,502      484,196
                                                                               ----------      ---------    ---------
 
Cash and cash equivalents, end of year                                         $  860,502      $ 484,196    $ 249,669
                                                                               ==========      =========    =========
 
Supplemental disclosures of cash flow information:
 Cash paid for interest                                                        $    5,990      $  18,582    $  35,336
                                                                               ==========      =========    =========
 Cash paid for income taxes                                                    $    3,286      $   1,050    $   1,144
                                                                               ==========      =========    =========
 
Supplemental disclosure of noncash activities:
 Compensation expense recorded for issuance of common stock
 and stock options to four outside directors                                   $   15,000      $       -    $       -
                                                                               ==========      =========    =========
 
 Common stock issued in exchange for acquired business                         $        -      $       -    $ 360,000
                                                                               ==========      =========    =========
 
 Note receivable received for exercise of stock options                        $        -      $       -    $ 185,018
                                                                               ==========      =========    =========
</TABLE>
See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>
 
                            ANNIE'S HOMEGROWN, INC.
                                        
                   Notes to Consolidated Financial Statements

              December 31, 1996, March 31, 1997 and March 31, 1998


(1) DESCRIPTION OF BUSINESS

   Annie's Homegrown, Inc. (the "Company") is engaged in the manufacture,
   marketing and sale of premium all natural macaroni and cheese dinners, all
   natural pasta meals and other natural food products.


(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   (A)  PRINCIPLES OF CONSOLIDATION

   The consolidated financial statements for the year ended March 31, 1998
   include the accounts of Annie's Homegrown Inc. and its wholly owned
   subsidiary. All significant intercompany accounts and transactions have been
   eliminated in consolidation.

   (B)  CHANGE IN FISCAL YEAR

   Effective April 1, 1997, the Company elected to change its fiscal year end
   from December 31 to March 31. The results of operations and cash flows for
   the three months ended March 31, 1997 are not necessarily indicative of
   results that would be expected for a full year.

   (C)  CASH AND CASH EQUIVALENTS

   For purposes of the statements of cash flows, the Company considers all
   highly liquid debt instruments with an original maturity of three months or
   less to be cash equivalents.

   (D)  REVENUE RECOGNITION

   Most of the Company's sales are made to Liberty Richter, Inc. ("Liberty" or
   "distributor") under contract terms allowing certain rights of return on
   unsold product held by Liberty. The contract calls for Liberty to pay the
   Company based on terms relating to the receipt of the company's products by
   Liberty. The Company defers recognition of such sales until the product is
   sold by Liberty to its two main classes of trade; supermarket chains and
   natural and specialty food stores. Accordingly, if Liberty pays the Company
   before Liberty sells to a third party, the Company records an advance from
   distributor. If Liberty sells product to a third party before it pays the
   Company, the Company records a receivable from distributor.

   (E)  INVENTORIES

   Inventories are valued at the lower of average cost, using the first-in,
   first-out (FIFO) method, or market.

                                      F-6
<PAGE>
 
                            ANNIE'S HOMEGROWN, INC.
                                        
             Notes to Consolidated Financial Statements, Continued



(2), CONTINUED

   (F) OFFICE EQUIPMENT, PLATES AND DIES

   Office equipment, plates and dies are recorded at cost. The cost of office
   equipment, plates and dies is depreciated using accelerated depreciation
   methods over the estimated useful lives of the related assets, generally five
   to seven years.

   (G)  GOODWILL

   Goodwill represents the excess of purchase price over the fair value of net
   assets acquired in connection with purchase business combinations. Goodwill
   is amortized using the straight-line method over 20 years.

   The Company evaluates impairment of intangible and other long-term assets
   annually, or more frequently if events or changes in circumstances indicate
   that carrying amounts may not longer be recoverable. Recoverability of
   intangible assets is determined based upon the excess of carrying amounts
   over expected future cash flows (undiscounted) of the underlying business or
   product line. The assessment of the recoverability of intangible assets will
   be impacted if estimated future cash flows are not achieved.

   (H)  INCOME TAXES

   Income taxes are accounted for under the asset and liability method. Deferred
   tax assets and liabilities are recognized for the future tax consequences
   attributable to differences between the financial statement carrying amounts
   of existing assets and liabilities and their respective tax bases and
   operating loss and tax credit carryforwards. Deferred tax assets and
   liabilities are measured using enacted tax rates expected to apply to taxable
   income in the years in which those temporary differences are expected to be
   recovered or settled. The effect on deferred tax assets and liabilities of a
   change in tax rates is recognized in income in the period that includes the
   enactment date. A valuation allowance reduces deferred tax assets when it is
   "more likely than not" that some portion or all of the deferred tax asset
   will not be recognized.

   (I)  SLOTTING FEES

   Introductory slotting fees paid as required by most retailers for the
   acquisition of shelf space at supermarkets are fully expensed at the time of
   new product introduction.

                                      F-7
<PAGE>
 
                            ANNIE'S HOMEGROWN, INC.
                                        
             Notes to Consolidated Financial Statements, Continued


(2), CONTINUED

   (J)  EARNINGS PER COMMON SHARE

   During 1997, the Company adopted the provisions of SFAS No. 128, Earnings Per
   Share. Under the provisions of SFAS 128, basic earnings per share replaces
   primary earnings per share and the dilutive effective of stock options and
   warrants are excluded from the calculation. Fully diluted earnings per share
   are replaced by diluted earnings per share and include the dilutive effect of
   stock options and warrants, using the treasury stock method. All prior period
   earnings per share data have been restated to conform to the requirements of
   SFAS 128.

   A reconciliation of the weighted average number of shares outstanding used in
   the computation of the basic and diluted earnings (loss) per share is as
   follows:

<TABLE>
<CAPTION>
                                                            Three
                                                           months      Year
                                             Year ended     ended      ended
                                            December 31,  March 31,  March 31,
                                                1996        1997       1998
                                            ------------  ---------  ---------
<S>                                         <C>           <C>        <C>
 
       Weighted average shares (basic)         4,180,910  4,256,895  4,412,532
 
       Effect of dilutive stock options                -    736,108    248,614
 
       Weighted average shares (diluted)       4,180,910  4,993,003  4,661,146
</TABLE>
   The net income used in the calculation for basic and diluted earnings per
   share calculations agrees with the net income appearing in the financial
   statements.

   For the year ended December 31, 1996, net loss per share, assuming full
   dilution of stock options, was considered to be the same as basic since the
   effect of stock options would have been antidilutive.

   (K)  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.

   (L) FAIR VALUE OF FINANCIAL INSTRUMENTS

   The carrying amounts of cash and cash equivalents, accounts receivable,
   accounts payable, accrued expenses and notes payable approximate fair value
   because of the short maturity of those instruments.

                                      F-8
<PAGE>
 
                            ANNIE'S HOMEGROWN, INC.
                                        
             Notes to Consolidated Financial Statements, Continued



(2), CONTINUED

   (M)  STOCK OPTION PLAN

   Prior to January 1, 1996, the Company accounted for its stock option plan in
   accordance with the provisions of Accounting Principles Board ("APB") Opinion
   No. 25, Accounting for Stock Issued to Employees, and related
   interpretations. As such, compensation expense would be recorded on the date
   of grant only if the current market price of the underlying stock exceeded
   the exercise price. On January 1, 1996, the Company adopted SFAS No. 123,
   Accounting for Stock-Based Compensation, which permits entities to recognize
   as expense over the vesting period the fair value of all stock-based awards
   on the date of grant. Alternatively, SFAS No. 123 also allows entities to
   continue to apply the provisions of APB Opinion No. 25 and provide pro forma
   net income (loss) and pro forma earnings (loss) per share disclosures for
   employee stock option grants made in 1995 and future years as if the fair-
   value-based method defined in SFAS No. 123 had been applied. The Company has
   elected to continue to apply the provisions of APB Opinion No. 25 and provide
   the pro forma disclosure provisions of SFAS No. 123.

   (N) RECENT ACCOUNTING PRONOUNCEMENTS

   The Financial Accounting Standards Board recently issued SFAS No. 129,
   Disclosure of Information about Capital Structure. This statement establishes
   standards for disclosing information about an entity's capital structure.
   This statement is effective for periods ending after December 15, 1997. The
   Company is in compliance with this standard.

   The Financial Accounting Standards Board recently issued SFAS No. 130,
   Reporting Comprehensive Income. This statement establishes standards for
   reporting and display of comprehensive income and its components in a full
   set of general purpose financial statements. This statement is effective for
   fiscal years beginning after December 15, 1997 and requires reclassification
   of financial statements for earlier periods provided for comparative
   purposes. The Company will comply with the required presentation in fiscal
   1999.

   The Financial Accounting Standards Board recently issued SFAS No. 131,
   Disclosures about Segments of an Enterprise and Related Information. This
   statement establishes standards for reporting operating segments of publicly
   traded business enterprises in annual and interim financial statements and
   requires that those enterprises report selected information about operating
   segments. This statement supersedes SFAS No. 14, Financial Reporting for
   Segments of a Business, but retains the requirement to report information
   about major customers. This statement is effective for financial statements
   for fiscal years beginning after December 15, 1997 and requires that
   comparative information for earlier years be restated. The Company has not
   yet determined what impact, if any, this standard will have on its financial
   statement presentation.

                                      F-9
<PAGE>
 
                            ANNIE'S HOMEGROWN, INC.
                                        
             Notes to Consolidated Financial Statements, Continued



(2), CONTINUED

   The Financial Accounting Standards Board recently issued SFAS No. 132,
   Employers' Disclosures about Pensions and Other Postretirement Benefits. This
   statement standardizes disclosure requirements for pensions and other
   postretirement benefits, and is effective for fiscal years beginning after
   December 15, 1997. This statement does not apply to the Company as the
   Company does not currently sponsor any defined benefit plans.


(3)  ACQUISITION OF WHOLLY OWNED SUBSIDIARY

   On July 31, 1997, RMFC Acquisition Corp., a wholly owned subsidiary of the
   Company, merged with Raw Materials Food Company ("Raw Materials"), with Raw
   Materials as the surviving corporation.  This transaction allowed the Company
   to acquire all the outstanding shares of Raw Materials, a Colorado-based
   whole food supplement company, for stock valued at $360,000 and paid
   acquisition costs.

   The acquisition has been accounted for using the purchase method of
   accounting and, accordingly, the purchase price has been allocated to the
   assets purchased and the liabilities assumed based upon the fair values at
   the date of acquisition.  The fair value of assets acquired, including
   goodwill, was $437,555, and liabilities assumed totaled $52,610.  Goodwill of
   $400,184 is being amortized over 20 years on the straight-line basis and
   amounted to $13,336 for the period ended March 31, 1998.

   The operating results of Raw Materials have been included in the consolidated
   statements of operations from the date of acquisition.  Pro forma combined
   results of operations of the Company and Raw Materials on the basis that the
   acquisition had taken place on January 1, 1996 are not presented since the
   effect is not material.


(4)  INCOME TAXES

   Income tax expense consists of state taxes of $3,286, $1,050 and $1,144 in
   1996, 1997 and 1998, respectively.

   As of March 31, 1998, the Company had the following net operating loss
   carryforwards for tax purposes:

          Federal                            $894,341
                                             ========

          State                              $796,129
                                             ========

                                      F-10
<PAGE>
 
                            ANNIE'S HOMEGROWN, INC.
                                        
             Notes to Consolidated Financial Statements, Continued

(4), CONTINUED

   These net operating loss carryforwards are available to offset future
   federal/state taxable income through 2012.  The Company also has alternative
   minimum tax net operating loss carryforwards of $707,523 as of March 31,
   1998, which are available to reduce future federal alternative minimum
   taxable income through 2012.  Pursuant to Section 382 of the Internal Revenue
   Code, if there is a change in stock ownership of the Company exceeding 50%
   during a three-year period, the utilization of the Company's net operating
   loss carryforwards may be limited.  The provision for income taxes differs
   from the amounts computed by applying the lowest federal statutory rate (15%)
   to pre-tax income (loss) due to the following:

<TABLE>
<CAPTION>
                                                                Three months
                                                  Year ended        ended      Year ended
                                                 December 31,     March 31,     March 31,
                                                       1996         1997          1998
                                                 ------------   ------------  -----------
<S>                                              <C>            <C>            <C>
 
   Federal income tax (benefit) expense
     at statutory rate                           $(41,410)       $ 3,181        $      767
   State income taxes, net of federal benefit       2,793          1,485               358
   Change in federal valuation allowance           39,253         (4,353)          (2,825)
   Other                                            2,650            737             2,844
                                                 --------        -------        ----------
             Actual income tax expense           $  3,286        $ 1,050        $    1,144
                                                 ========        =======        ==========
</TABLE>

   The tax effects of temporary differences that give rise to significant
   portions of deferred tax assets are presented below:

<TABLE>
<CAPTION>
                                                        March 31,     March 31,
                                                          1997           1998
                                                         ---------   ---------
<S>                                                   <C>            <C>
   Deferred tax assets:
     Net operating loss carryforward                     $ 163,410   $ 204,211
     Deferred revenue                                       34,417         324
     Payroll expense, due to accrual for financial
       reporting purposes                                   15,973       6,440
                                                         ---------   ---------
                                                           213,800     210,975
   Valuation allowance                                    (213,800)   (210,975)
                                                         ---------   ---------
   Deferred tax liabilities                                      -           -
                                                         ---------   ---------
     Net deferred tax asset                              $       -   $       -
                                                         =========   =========
</TABLE>
   The total federal and state valuation allowance was $213,800 and $210,975 at
   March 31, 1997 and 1998, respectively.

                                      F-11
<PAGE>
 
                            ANNIE'S HOMEGROWN, INC.
                                        
             Notes to Consolidated Financial Statements, Continued


(5)  RELATED PARTY TRANSACTIONS

   Amounts due from related parties consist of:
<TABLE>
<CAPTION>
                         March 31,  March 31,
                           1997       1998
                         ---------  ---------
<S>                       <C>       <C>
 
Due from officer          $ 75,000     75,000
Other related parties       40,323     20,541
                           -------    -------
 
                          $115,323     95,541
                          ========    =======
</TABLE>
   Due from officer is evidenced by a promissory note secured by 25,000 shares
   of Company common stock.  The note earns interest at an annual rate of 6%.

   The balance due from other related parties at March 31, 1997 and 1998
   included $9,484 and $20,541 representing advances to an officer of the
   Company.


(6)       NOTES PAYABLE
 
          Notes payable consist of:

<TABLE> 
<CAPTION> 
                                                    March 31,  March 31,
                                                         1997       1998
                                                    ---------  ---------
<S>                                                  <C>       <C>
   (a)  Notes payable - financial institution          $    -   $279,398
   (b)  Notes payable - officer                         7,500          -
                                                       ------   --------
 
                                                       $7,500   $279,398
                                                       ======   ========
</TABLE>
   (a) The line of credit agreement for $600,000 was signed on February 3, 1998.
       This line of credit with a financial institution is for a term of two
       years and allows for borrowing of 75% or 90% of certain categories of the
       Company's accounts receivables with interest at the "Prime Rate" as
       published by the Wall Street Journal plus 3% (11.5% at March 31, 1998).
       The financial institution also charges an annual facility fee of $6,000.
       The line of credit calls for minimum monthly interest payments based on
       borrowings of $400,000.  The line of credit is secured by all of the
       assets of the Company and guaranteed by the two largest stockholders of
       the Company.

   (b) The $7,500 demand note payable to an officer of the Company bore interest
       at 11% and was repaid during fiscal 1998.

                                      F-12
<PAGE>
 
                            ANNIE'S HOMEGROWN, INC.
                                        
             Notes to Consolidated Financial Statements, Continued

(7)  ACCRUED EXPENSES

   Accrued expenses consist of:

<TABLE> 
<CAPTION> 
                                    March 31, March 31,
                                       1997       1998
                                     ------  ---------
<S>                               <C>        <C>
                                 
   Compensation                     $67,031    $40,049
   Other                             12,965      7,756
                                    -------    -------
                                    $79,996    $47,805
                                    =======    =======
</TABLE>

(8)  LEASES

   The Company leases office space under operating leases that expire through
   2003.

   A schedule of future minimum lease payments under noncancelable leases is as
   follows:
<TABLE>
<CAPTION>
                      Year ending                   
                       March 31,                      Total
                      -----------                     ------
                   <S>                                <C>
                                                   
                        1999                         $ 34,153
                        2000                           35,558
                        2001                           37,262
                        2002                           38,955
                        2003                           40,658
                        Thereafter                      9,600
                                                     --------
                                                     $196,186
                                                     ========
</TABLE>

   Total net expense on operating leases amounted to $24,775, $7,373 and $38,676
   for the year ended December 31, 1996, for the three months ended March 31,
   1997, and for the year ended March 31, 1998, respectively.


(9)       STOCKHOLDERS' EQUITY

   On August 22, 1995, the Company filed an effective Registration Statement
   offering for sale 600,000 shares of common stock. The offering was made
   directly by the Company and was closed on July 31, 1996. The Company sold
   256,895 shares of common stock under the offering for gross proceeds of
   $1,532,478. Expenses related to the offering totaled $310,937.

                                      F-13
<PAGE>
 
                            ANNIE'S HOMEGROWN, INC.
                                        
             Notes to Consolidated Financial Statements, Continued


(9), CONTINUED

   The Company maintains a 1990 stock option plan which permits the Company to
   grant stock options to key employees and certain non-employees. The Board of
   Directors administers the plan, selects individuals to whom options will be
   granted, and determines the number of shares and the exercise price of each
   option. All options granted under the plan are exercisable upon the date of
   grant, expire five years from the date of grant, and have certain transfer
   restrictions. As of March 31, 1998, options to purchase 406,982 shares were
   outstanding at exercise prices per share ranging from $1.01 to $5.90, and
   12,338 shares were available for future grants.

   During the year ended March 31, 1998, three officers of the Company exercised
   stock options for 231,273 shares in exchange for full recourse promissory
   notes in the amount of $185,018 bearing interest at 6-3/4%. The notes are
   collateralized by the stock issued upon the exercise of the options.

   The principal balance of the notes plus interest thereon will be forgiven at
   a rate of 20% per year as long as the officers continue to be employed by the
   Company.

   In October 1996, the Company adopted the 1996 stock plan. Under this plan,
   the Company has authorized 200,000 shares to be granted as stock options to
   officers, employees, directors and consultants. The Board of Directors
   administers the plan, selects individuals to whom options will be granted,
   determines the number of shares, the exercise price of each option and the
   term of the options. At March 31, 1998, no options were issued under this
   plan.

   A summary of changes in common stock options is as follows:
<TABLE>
<CAPTION>
                                                      Weighted
                                                      average
                                        Number    exercise price
                                       of shares     per share
                                       ---------  --------------
<S>                                    <C>        <C>   
 
   Outstanding at December 31, 1995      997,519   $   1.57
                                         -------    
                                                    
   Outstanding at December 31, 1996      997,519       1.57
                                         -------    
                                                    
   Outstanding at March 31, 1997         997,519       1.57
                                         -------    
                                                    
     Options granted                           -          -
                                                    
     Options exercised                   231,273        .80
                                                    
     Options expired/canceled            359,264       1.21
                                         -------    
                                                    
   Outstanding at March 31, 1998         406,982   $   2.33
                                         =======
</TABLE>

                                      F-14
<PAGE>
 
                            ANNIE'S HOMEGROWN, INC.
                                        
             Notes to Consolidated Financial Statements, Continued


(9), CONTINUED

   The following table summarizes information about fixed stock options
   outstanding at March 31, 1998:
<TABLE>
<CAPTION>
 
                                    Options Outstanding and Exercisable
                           -----------------------------------------------------
                                                    Weighted
                                  Number            average          Weighted
         Range of               outstanding        remaining         average
      exercise prices        at March 31, 1998  contractual life  exercise price
      ---------------        -----------------  ----------------  --------------
<S>                          <C>                <C>               <C>
          $1.01                    286,894          9 months       $   1.01
     $ 5.10 to 5.90                120,088             19              5.51
                                   -------
     $ 1.01 to 5.90                406,982                         $   2.33
                                   =======
</TABLE>

   The Company applies APB Opinion No. 25 and related interpretations for its
   stock option plan. Had compensation cost for the Company's stock option plan
   been determined consistent with SFAS No. 123, the Company's net (loss) income
   and (loss) income per share would not have changed.


(10)  CONCENTRATION OF CREDIT RISK

   For the year ended December 31, 1996, no one customer accounted for more than
   10% of net sales. The Company's top ten customers accounted for approximately
   51% of net sales for the year ended December 31, 1996. For the three months
   ended March 31, 1997 and the year ended March 31, 1998, Liberty, under the
   master distribution agreement, accounted for approximately 83% and 85% of net
   sales, respectively.

   Two customers accounted for 70% of accounts receivable at March 31, 1997 and
   three customers accounted for 45% of accounts receivable at March 31, 1998.


(11)  SUPPLIER/SOURCES OF SUPPLY

   Two vendors accounted for 30% and 40% of accounts payable at March 31, 1997
   and 1998, respectively.


(12)  DISTRIBUTION AGREEMENT

   In October 1996, the Company signed a master distribution agreement with
   Liberty. The agreement calls for Liberty to distribute all of the Company's
   products except for the private label and mail order lines in the continental
   United States. The Company sells the products to Liberty who in turn sells
   the products to supermarket chains, and natural and specialty food stores.
   Liberty has two warehouses, one located in New Jersey and the other located
   in California.

                                      F-15
<PAGE>
 
                            ANNIE'S HOMEGROWN, INC.
                                        
             Notes to Consolidated Financial Statements, Continued



(12), CONTINUED

   Liberty distributes and sells the Company's products within the territory
   utilizing its own sales force and sub distributors that they maintain.  In
   addition, Liberty provides other services such as order processing,
   invoicing, record management, sales coverage, broker management, promotion
   execution, management of sales allowances and trade show participation.  All
   promotions and slotting presentations as well as sub distributors and brokers
   are subject to the Company's approval.

   Under the Liberty Agreement, Liberty must distribute any new products that
   the Company chooses to distribute through their channels unless Liberty has a
   pre-existing non compete provision with another vendor.  The current contract
   expires December 31, 1998 with automatic renewals scheduled on a year-to-year
   basis.

                                      F-16