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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 December 31, 1996

[ ]  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.)

     180 SECOND STREET, SUITE 202, CHELSEA, MA              02150
     (Address of principal executive offices)               (Zip Code)

                                  617-889-2822
                (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.

The issuer's revenue for the fiscal year ended December 31, 1996 was $4,811,762.
As of December 31, 1996, the aggregate market value of the Issuer's voting stock
held by non-affiliates was approximately  $6,735,726 based on the initial public
offering price of Common Stock of $6.00 per share.

As of December  31, 1996,  there were  4,256,895  shares of the Issuer's  Common
Stock, $.001 par value, issued and outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

None
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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  natural  macaroni and cheese dinners and other pasta  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 MexicanTM . In the first
quarter of 1997, the Company  introduced a new line of all natural pasta dinners
called Annie's  One-Step.  The One-Step  dinners combine  different pasta shapes
with five  sauce  recipes  which  provide  the  convenience  and  simplicity  of
one-step, one-pot cooking.

The Company's  products are  manufactured by contract  packers  according to the
specifications  provided by the Company, which include the recipe,  ingredients,
graphics  and  packaging  for the  product.  The  Company's  products  are  sold
primarily  through  supermarkets  and natural and  specialty  food  stores.  The
Company also manufactures a private label house brand for a specialty  retailer,
using its premium all natural white cheddar cheese  formula  together with elbow
macaroni.  To date,  the  Company has focused  its  marketing  and  distribution
efforts on the Northeast and West Coast 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 180 Second Street, Suite 202, Chelsea, MA 02150
and its telephone number is (617) 889-2822.

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 macaroni  and cheese  dinners
under the  Annie's  name.  The  Company's  products  are made using all  natural
ingredients  including  its premium all natural  white  cheddar  cheese  formula
together with petite pasta shells made from 100% durum  semolina.  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.

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.


                                       1



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

These products are typically priced at retail between $0.99 and $1.49 for a 7.25
oz. package.

In the first  quarter of 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.

SALES, MARKETING AND DISTRIBUTION

The  Company  sells its  products  primarily  to 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 to 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 states as well as the Rocky Mountain region.

The Company's  products are also sold to 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,  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 year ended December 31, 1996.

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 and natural and specialty food stores.
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 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
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




                                       2



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  (introductory
slotting)  and the  Company's  specific  commitments  to marketing  programs are
negotiated.  Introductory  slotting fees and marketing  programs often vary 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  Liberty's  channels unless Liberty has a
preexisting  non compete  provision with another  vendor.  The initial  contract
expires  December 31, 1997 with automatic  renewals  scheduled on a year to year
basis.

Prior to October  1996,  the Company sold its products  directly to  supermarket
chains  and  wholesale  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  wholesale
grocery distributor.

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.  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  years  ending  December  31,  1995 and  1996,  no one  customer
accounted for more than 10% of the Company's net sales.

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  petite pasta shells are 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


                                       3



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 Ms. Withey which are
subject to Ms. Withey's final approval.

MANUFACTURING

The Company's products are manufactured by two contract packers according to the
specifications  provided by the Company, which include the recipe,  ingredients,
graphics  and  packaging  for the  product.  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  products  based on quality and all
natural  ingredients.  Several  of these  brands are also  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.

PHILOSOPHY AND CORPORATE CULTURE



                                       4




The Company  understands that it has a responsibility to produce profits for its
shareholders.  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  women,  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 women, 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.

For the year ended  December 31,  1995,  the Company  contributed  approximately
$38,600 in cash, resources and products to various  organizations.  The Company,
adhering to its  philosophy,  made  contributions  of  approximately $ 24,000 in
cash, resources and products for the year ended December 31, 1996.

INTELLECTUAL PROPERTY RIGHTS

The Company  regards its  trademarks,  its packaging,  promotional  material and
other art work and its trade  secrets  comprising  of its  processes,  formulas,
ingredients, and recipes as critical to its success and attempts to protect such
property.  The Company has  registered  the  following  trademarks in the United
States; "Bernie-Rabbit of Approval",  "Annie's",  "Annie's Homegrown",  "Annie's
Pasta," "Be Green" and  "Annie's  Mild  Mexican.  The Company  also uses several
other trademarks for which federal trademark  registrations are now pending. The
Company also uses appropriate copyright notices with its packaging,  promotional
materials   and  other  art  work.   The   Company's   suppliers,   pursuant  to
confidentiality agreements with the Company, have agreed to retain in confidence
and not use the Company's  trade secrets  except for the benefit of the Company.
The Company  intends to take all  necessary  and  appropriate  action to protect
against imitation of its products,  packaging,  promotional  materials and other
art work and to defend  such  trademarks,  copyrights,  and trade  secrets.  The
Company does not have any patents.

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


                                       5




As of December 31, 1996, the Company had nine employees: two general management,
one  salesperson,  three  sales and  marketing  support,  and  three  operations
including  financial  management.  The  Company  has  never  participated  in  a
collective bargaining  agreement.  Management believes its relationship with its
employees are good.

ITEM 2. DESCRIPTION OF PROPERTIES

The Company leases 1,500 square feet at 180 Second Street,  Suite 202,  Chelsea,
Massachusetts  and leases 800 square feet of office space at 200 Gate Five Road,
Suite 211,  Sausalito,  California.  The Chelsea  lease  expires on December 31,
1997,  and has a  monthly  rent of  $1,150  for the  term of the  lease  with an
additional amount due for its portion of building expenses over a base period of
1994. The Sausalito  lease expires on September 30, 1997, and has a monthly rent
of $1,250.  The Company believes that both 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.

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

At the Company's  annual meeting of  stockholders  held on October 28, 1996, 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                                 3,654,906                        1,280
         Andrew Martin                                 3,654,906                        1,280
         Deborah Churchill Luster                      3,654,856                        1,330
         Brady Bevis                                   3,654,706                        1,480
         Patrick DeTemple                              3,654,856                        1,330
         Paul Geffner                                  3,654,856                        1.330
         Kare Anderson                                 3,654,806                        1,380

</TABLE>

         (ii)  Approved  the  Company's  1996 Stock Plan.  With  respect to such
         matter,  the votes were as  following:  3,648,540  shares voted for the
         proposal,  3,535 shares voted  against the  proposal,  and 4,111 shares
         abstained from voting on the proposal.

         (iii)  Ratified  the  appointment  of  KPMG  Peat  Marwick  LLP  as the
         Company's independent auditor's for the fiscal year ending December 31,
         1996.  With  respect  to such  matter,  the  votes  were as  following:
         3,651,875  shares voted for the proposal,  722 shares voted against the
         proposal, and 3,589 shares abstained from voting on the proposal.




                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS


                                       6




The  Company's  Common  Stock,  $.001 par  value,  is not  listed on any  public
securities  exchange or market and there can be no assurances that the Company's
Common  Stock  will be  listed on a stock  exchange  or market or that a trading
market will ever develop .

The  approximate  number of record  holders of the Company's  Common Stock as of
December  31, 1996 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(TM) . In the first quarter of 1997, the Company  introduced
a new line of 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 as follows:  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.  The
Company  also has an  agreement  with a specialty  retailer to provide a private
label house brand using the Company's  premium 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.

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  (introductory  slotting)  and the  Company's
specific commitments to marketing programs are negotiated. Introductory slotting
fees and marketing  programs  often vary 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 initial  contract
expires  December 31, 1997 with automatic  renewals  scheduled on a year to year
basis.

The Company's  cost of sales  consists of the cost of finished  product  shipped
from a co-packer.  The raw materials  are purchased by the Company  according to
the  specifications   provided  by  the  Company,   which  include  the  recipe,
ingredients,  graphics  and  packaging  for  the  product  and  shipped  to  the
co-packer.  Then, the co-packer  packages the



                                        7





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  Liberty's  two 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
wholesale grocery 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) 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
31,1995 and 1996,  no one customer  accounted for more than 10% of the Company's
net sales.

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:
<TABLE>
<CAPTION>
                                                                              Years Ended December 31,
                                                                              ------------------------
                                                                              1995              1996
                                                                            --------           -------
         STATEMENTS OF OPERATIONS DATA:
<S>                                                                           <C>            <C>    
         Net sales........................................                    100.00%        100.00%
         Cost of sales....................................                     57.33          57.88
         Gross profit.....................................                     42.67          42.12
         Selling expenses.................................                     29.81          27.93
         General and administrative expenses..............                     14.01          14.00
         Slotting fees....................................                      6.88           4.73
         Compensation of outside directors................                      0.99           0.31
         Operating income (loss)..........................                     (9.02)         (4.85)
         Interest expense and borrowing charges...........                      1.08           1.06
         Interest and other income........................                      0.24           0.17
         Income tax expense...............................                      0.06           0.07
         Net income (loss)................................                     (9.92)         (5.81)

</TABLE>

FISCAL YEAR ENDED  DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED  DECEMBER 31,
1995

Net sales.  Net sales  increased by $265,551 or 5.84% from $4,546,211 in 1995 to
$4,811,762 in 1996.  The net sales  increase was primarily a result of growth in
the slotting of new accounts.  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 states as well as the Rocky Mountain
region.  For the fiscal  years ended  December  31,  1995 and 1996,  none of the
Company's customers accounted for more than 10% of the Company's net sales.


                                       8




Gross profit.  As a percentage of net sales,  gross profit decreased from 42.67%
in 1995 to  42.12%  in 1996.  This  decrease  was  primarily  the  result of the
increase in dairy and wheat costs  during  1996,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 decreased by $11,045 or 0.82% from $1,355,129
in 1995 to  $1,344,084  in 1996 and  decreased as a percentage of net sales from
29.81%  in 1995 to  27.93%  in 1996.  The  decrease  in  selling  expenses  as a
percentage of net sales primarily  reflected a leveling off in spending in three
primary areas;  personnel,  freight costs and promotional spending.  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.  Promotional  spending  including
price reductions were kept consistent with 1995 levels.

General  and  administrative  expenses.   General  and  administrative  expenses
increased  by $36,755 or 5.77% from  $636,939  in 1995 to  $673,694  in 1996 and
decreased  as a  percentage  of net sales from 14.01% in 1995 to 14.00% in 1996.
This   increase  was  due  primarily  to   expenditures   related  to  increased
professional costs due to governmental  reporting  requirements  required by the
Company's initial public offering.

Slotting fees. Slotting expenses decreased by $85,258 or 27.27% from $312,661 in
1995 to $227,403 in 1996,  and decreased as a percentage of net sales from 6.88%
in 1995 to 4.73% in 1996.  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 1995, $24,000 in compensation for Common
Stock issued and $21,000 in compensation  for stock options granted was recorded
for the four outside directors of the Company.  In 1996, $15,000 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  December  31,  1996 and 1995,  the  Company had a working
capital  (deficit) of $564,350  and  $(193,412),  respectively.  The increase in
working  capital  was  primarily  generated  by the  amount of  working  capital
received through the Company's initial public offering.

Net cash used in operating  activities  for the year ended December 31, 1996 was
$170,407,  consisting  primarily  of a  decrease  in  net  income  along  with a
substantial increase in inventory , offset by a substantial increase in accounts
payable and advances from distributor. Net cash provided by operating activities
was $40,621 in 1995  consisting  primarily of increases in collection on related
party  accounts,  as well as increases in accruals and trade payables and offset
in part by increases in slotting and accounts receivables.

Net cash used in investing activities consisted of capital expenditures totaling
$18,044 in 1996 and $18,787 in 1995 which related principally to the purchase of
office equipment.

The Company had net cash  provided by financing  activities  of  $1,013,490  and
$11,187  for 1996 and 1995,  respectively.  In 1996 and  1995,  net cash used in
financing activities was used primarily to pay off the revolving line of credit.
The Company had a revolving  line of credit with a financial  institution in the
amount of $150,000 which bore


                                       9




interest  at the  prevailing  prime rate plus 3%. In  addition,  each  borrowing
incurred a service fee which varies from 0.5% to 8% (up to 90 days) depending on
the number of days the borrowing is outstanding.  The line of credit was secured
by the Company's accounts  receivable and inventory and guaranteed by an officer
and certain directors of the Company. In June 1996, the Company renegotiated its
line of credit with the financial institution. The Company increased its line of
credit from  $150,000 to $300,000.  In  addition,  the service fees charged were
reduced  from  0.5% to 8% (up to 90 days) to 0.4% to 6.4%  (up to 90  days).  In
October 1996, the Company  terminated the use of the line of credit. The Company
also has a $10,000  unsecured line of credit with a bank which bears interest at
the prime rate plus 8.9%.  At  December  31,  1995,  the  Company had $32,129 of
outstanding  borrowings  under the lines of credit.  At December 31,  1996,  The
Company had $10,014 outstanding on the unsecured line of credit from the bank.

The Company  also has a $7,500  demand note payable to an Officer of the Company
which bears  interest  at 11%.  The  Company  used the  proceeds of the note for
general working capital.

On July 31, 1996,  the Company  closed its initial  public  offering.  In total,
256,895  shares  were  sold   resulting  in  gross  proceeds  of   approximately
$1,500,000.  Expenses from the inception of the offering  totaled  approximately
$310,000.  The Company's  primary  capital needs are for expansion into national
supermarket  distribution  and to develop new products.  The Company  intends to
expand its  supermarket  distribution  throughout the United States by acquiring
shelf  space or new  "slots"  (one  product in one store  equals one slot).  The
Company  acquired  new slots of shelf space  during 1996 and 1995 by opening new
accounts  and  slotting  its Alfredo and Mild  Mexican  products  into  selected
existing accounts.  The Company's  expenditures for slotting fees of $227,403 in
1996 were  funded  with a portion  of the net  proceeds  of the  initial  public
offering. Slotting expenses for 1995 were $312,661.

The Company  believes  that the net proceeds from the initial  public  offering,
together  with  the  funds  that  may be  generated  from  operations,  will  be
sufficient  to  fund  the  Company's   currently   anticipated  working  capital
requirement and expenditure requirements at least through December 31,1997.

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  1997  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.

The Company's future results are subject to substantial risks and uncertainties.
The Company has operated at a loss or a very small profit for its entire history
and there can be no assurance of it ever achieving consistent profitability. The
Company had  working  capital at  December  31,  1996 of $564,350  and a working
capital deficit of approximately $193,000 at December 31, 1995. In addition, the
Company  completed  its initial  public  offering in July 1996.  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. The macaroni and cheese  marketplace is highly  competitive and many of the
Company's  competitors have significantly  greater financial and other resources
greater than the Company. The failure of the Company to compete effectively with
existing or new competitors


                                       10





could result in price erosion,  decreased margins and decreased revenues, any or
all of which could have a material  adverse  effect on the  Company's  business,
results of operations,  and financial  condition.  The Company  historically has
relied on a relatively  small number of customers for a large  percentage of its
total revenues.  Loss of, or a decrease in orders from, any one or more of these
customers  could  have a material  adverse  effect on the  Company's  results of
operations and financial condition.

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.

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 its
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, 1997 but  automatically  renews for
twelve  months  periods  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.

The  Company's  strategy  is to  expand  its  sales by  purchasing  shelf  space
(slotting  fees) at major  supermarket  chains in addition to developing new and
unique  all-natural  food products to sell to its existing  customer  base.  The
inability  of the Company to execute this  strategy may have a material  adverse
effect  on  the  Company's  business,   results  of  operations,  and  financial
condition.

To date,  the Company has relied  significantly  on the talents and abilities of
Ann E. Withey, the Company's co-founder and Inspirational  President, and Andrew
M. Martin, the Company's  co-founder and Chairman and CEO. The loss of either of
these people could have a material  adverse  effect on the  Company's  business,
results of operations, and financial condition.

ITEM 7. FINANCIAL STATEMENTS

Please refer to pages F-1 through F-13

Independent Auditors' Report
Balance Sheets at December 31, 1996 and 1995
Statements  of  Operations  for the  Years  ended  December  31,  1996  and 1995
Statements  of  Stockholders'  Equity  (Deficit)  at December  31, 1996 and 1995
Statements of Cash Flows for the Years ended December 31, 1996 and 1995 Notes to
Financial Statements at December 31, 1996 and 1995

ITEM  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

None


                                       11





ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS: COMPLIANCE
                    WITH SECTION 16(A) OF THE EXCHANGE ACT

EXECUTIVE OFFICERS, KEY PERSONS AND DIRECTORS

The executive  officers and directors of the Company as of December  31,1996 are
as follows:

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

     Ann E. Withey               34     Inspirational President and Director
     Andrew Martin               42     Chairman and Chief Executive Officer
     Paul Nardone                29     President
     Deborah Churchill           34     Secretary and Director
     Neil Raiff                  39     Chief Financial Officer and Treasurer
     Brady Bevis                 52     Director
     Patrick DeTemple            45     Director
     Paul Geffner                43     Director
     Kare Anderson               47     Director

     ANN E. WITHEY  co-founded  the Company in 1989 and is  currently a director
     and the  Company's  Inspirational  President.  Ms.  Withey  has served as a
     director of the Company  since 1989.  Ms.  Withey's  responsibilities  also
     include new product development and consumer  correspondence and relations.
     Approximately 95% of Ms. Withey's time is devoted to the Company's matters.
     Ms.  Withey is also a  co-founder  and is  currently a director of The Good
     Idea Foods Company,  Inc. Ms. Withey was co-founder of Smartfood,  Inc. and
     creator of the original  recipe for Smartfood  Popcorn.  Smartfood Inc. was
     sold to Frito-Lay a division of PepsiCo in 1989. Ms. Withey and her husband
     own and operate a small  organic  produce farm in  Connecticut.  Ms. Withey
     actively  supports a variety of  programs  that  benefit  women,  children,
     education  and the  environment.  Ms.  Withey holds a B.A.  degree from the
     University of Connecticut.

     ANDREW M. MARTIN  co-founded  the  Company,  and since  1989,  has been the
     Company's Chairman and Chief Executive Officer.  Mr. Martin participates in
     all aspects of the Company's  development,  including  strategic  planning,
     product development,  finance,  management, sales and marketing. Mr. Martin
     was a co-founder,  President and Chairman of Smartfood,  Inc. In 1989,  Mr.
     Martin founded,  and is currently the Chairman and Chief Executive  Officer
     of Simple Packaging Solutions,  Inc., an international packaging technology
     corporation  located in  Sausalito,  California.  In 1993,  Mr. Martin also
     founded,  and is currently the Chairman and Chief Executive  Officer of The
     Good Idea Foods  Company,  Inc., a regional  snack food company  located in
     Chelsea, Massachusetts.  Mr. Martin spends approximately 60% of his time on
     matters relating to the Company. Mr. Martin holds several international and
     national patents and awards for technology excellence.  He has also created
     several successful programs to benefit the homeless and the environment.

     PAUL  NARDONE  is  currently  the  Company's  President.   Mr.  Nardone  is
     responsible for managing the Company's strategic plan. In 1988, Mr. Nardone
     founded The Olde Boston Snacks brand which is  distributed by Galaxy Foods,
     Inc. Mr.  Nardone  continues to work in an advisory role with Galaxy Foods,
     Inc.. In 1990, Mr.  Nardone  founded New England  Snacks,  Inc., a regional
     snack food  distributorship.  In March, 1992, New England Snacks,  Inc. was
     sold to Alternative Distributors where Mr. Nardone served as Vice President
     of sales  until  joining the Company in 1993.  Mr.  Nardone  also serves as
     President of Good Idea Foods Company, Inc. Approximately 95% of his time is
     spent on matters  relating to the Company.  Mr. Nardone holds a B.A. degree
     in Political Science from Tufts University in Medford, Massachusetts.


                                       12





     DEBORAH CHURCHILL is currently  serving as the Company's  Secretary and has
     been a director since 1991. She has also served as the Company's President.
     Her responsibilities include serving as a spokesperson for the Company, its
     products and  philosophy.  She has been honored as a speaker by many groups
     on behalf of issues relating to women,  business and the  environment.  Ms.
     Churchill  works  closely with the  Company's  President  and  Treasurer in
     directing  Company  matters.  She is also a  director  of Simple  Packaging
     Solutions,  Inc. and the Good Idea Foods Company, Inc. Prior to joining the
     Company in May 1990, Ms.  Churchill was a District Loan Officer,  in charge
     of all loan operations in Northern  California,  with Glendale Federal Bank
     of San Mateo  California.  Ms. Churchill holds a B.A. in Economics from the
     University of California at Santa Barbara.

     NEIL RAIFF is a certified  public  accountant  and currently  serves as the
     Company's  Chief  Financial  Officer and Treasurer.  From 1989 to September
     1994, Mr. Raiff served in this capacity on a contractual  basis. On October
     1, 1994,  Mr. Raiff was retained as a part-time  employee,  and in May 1995
     his status was changed to a full-time  employee.  Mr. Raiff is  responsible
     for  all  financial  and  administrative   functions   including  financial
     forecasting and strategic planning, expense control, accounting, purchasing
     and banking and insurance  relationships.  From 1991 to May 1995, Mr. Raiff
     was self  employed  as a CPA in private  practice.  From 1989 to 1991,  Mr.
     Raiff was a Manager with Cohen and Havian,  certified public accountants in
     Boston,  Massachusetts.  Mr. Raiff holds a B.S. in Accountancy from Bentley
     College in Waltham, Massachusetts.


     BRADY  BEVIS was  elected a director  in May,  1995.  Ms.  Bevis,  a public
     interest lawyer and businesswoman, is currently the Program Coordinator for
     the Bay Area Multimedia Partnership. Ms. Bevis was formerly on the Board of
     Supervisors  for the  County of Marin  during  which she ended the  17-year
     polarization  over the  conversion of Hamilton Air Force Base and started a
     collaborative process for planning its future. Prior to elected office, Ms.
     Bevis was Chair of the Marin SANE/Freeze, active in the nation wide Lawyers
     Alliance  on  Nuclear  Policy,   and  the  Marin  County  Peace  Conversion
     Commission.  Ms.  Bevis was a  founding  member of Marin  Action,  Exodus -
     establishing  residential  treatment facilities for autistic children,  and
     the Marin County  Commission on  Homelessness.  In addition,  Ms. Bevis has
     served on the Boards of Directors for numerous organizations  including The
     California  Council on Partnerships,  Marin  Conservation  League,  and the
     California Elected Women's Association for Education and Research.

     PATRICK  DETEMPLE has been a director of the Company since  September 1996.
     Mr.  DeTemple  is an  attorney  in  private  practice  with  a  history  of
     commitment  to social  issues.  Mr.  DeTemple has  extensive  experience in
     community, labor and political organizing,  negotiations, and campaigns. In
     these  capacities he has worked with labor  organizations  community groups
     and  political  organizations  In 1989  and  1990 Mr.  DeTemple  served  as
     National Field  Director for Earth Day 1990. Mr.  DeTemple has served as an
     attorney for the City of Cambridge,  practiced  immigration law., served as
     senator's  chief of staff in the  Massachusetts  State House and  traveled,
     worked,  wrote and spoke extensively in regard to events in Central America
     and the Philippines  during the 1980's.  Mr. DeTemple has obtained  degrees
     from Brown,  Northeastern  and Harvard  Universities and is a member of the
     Massachusetts and California Bars.

     PAUL GEFFNER has been a director of the Company since September,  1996. Mr.
     Geffner owns Escape From New York Pizza, a group of three pizza restaurants
     in San  Francisco.  Mr.  Geffner  founded  Captain  Video, a chain of video
     stores in  Northern  California,  which he sold in 1988..  Mr.  Geffner has
     assisted in the creation and development of many different  retail ventures
     including a juice and yogurt bar  (Fruitopia) , a women's  clothing  store,
     and an event  production  company.  Mr.  Geffner has been a big brother for
     seventeen  years and wrote and  produced  commercials  for Big  Brothers of
     California, which won an Emmy award in 1990.

     KARE ANDERSON has been a director of the Company since September, 1996. Ms.
     Anderson  is  an  author  and  speaker  who  translates   research  on  gut
     instinctual reactions into techniques to inspire and support for an idea or
     product.  Ms.  Anderson is a former  California  state  senator's  chief of
     staff;  reporter for


                                       13



     newspapers,  including The Wall Street  Journal and Le Monde ; producer for
     "Inside Sacramento", a syndicated radio feature; won an Emmy for television
     political  commentaries;  co  founder  on  nine  women's  political  action
     committees  and was Pacific  Bell's  first Cable TV and  Wideband  Division
     Director.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Not Applicable

ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth, for the fiscal years ended December 31, 1996 and
1995, certain  compensation paid by the Company,  including salary,  bonuses and
certain  other  compensation,  to its  Chief  Executive  Officer  and all  other
executive  officers  whose annual  compensation  for the year ended December 31,
1996 and 1995 exceeded $100,000 (the "Named Executive Officers").

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>

                                                             Annual Compensation       Long-Term Compensation
                                                             -------------------       ----------------------
                                                                                        Number of
                                                                                       Securities
                                                                                        All Other
Name and Principal Position                      Year       Salary        Bonus          Options       Compensation
---------------------------                      ----       ------        -----          -------       ------------

<S>                                                      <C>           <C>               <C>             <C>
     Andrew M. Martin............................1996     $    75,000      --               --              --
       Chairman & Chief Executive Officer        1995     $    84,000      --            37,302             --

</TABLE>

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth  information  with respect to the Named Executive
Officers  concerning  the grant of options during fiscal year ended December 31,
1996 and 1995,  under the Company's 1990 Incentive Stock Option Plan. No options
were granted under the 1996 Stock Plan.

<TABLE>
<CAPTION>
                                                                             INDIVIDUAL GRANTS
                                                          ----------------------------------------------------------
                                                            NUMBER OF       PERCENT OF
                                                           SECURITIES      TOTAL OPTIONS     EXERCISE
                                                           UNDERLYING       GRANTED TO       OR BASE
                                                             OPTIONS       EMPLOYEES FOR      PRICE       EXPIRATION           
NAME                                             YEAR        GRANTED        1996/1995        $/SHARE         DATE
----                                             ----        -------        ---------        -------         ----

<S>                                                          <C>            <C>             <C>            <C>
     Andrew M. Martin............................1996           --             --              --             --
       Chairman & Chief Executive Officer        1995        37,302           37.22%        $5.90 (1)      1/16/2000

(1)  The exercise  price on the date of grant was equal to or exceeded  110% of the fair market value of the Common
     Stock of the Company on the date of grant.

</TABLE>



                                       14



AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

The following table sets forth  information  with respect to the Named Executive
Officers  concerning the exercise of options during fiscal year end December 31,
1996 and 1995 and unexercised options held as of the end of fiscal 1996.

<TABLE>
<CAPTION>
                                                                                   NUMBER OF           VALUE OF
                                                                                  SECURITIES          UNEXERCISED
                                                                                  UNDERLYING         IN-THE-MONEY
                                                                                  UNEXERCISED         OPTIONS AT
                                                                                OPTIONS AT FY-       FY-END ($)(1)
                                                           SHARES ACQUIRED     END EXERCISABLE/        EXERCISABLE/
NAME                                             YEAR        ON EXERCISE         UNEXERCISABLE       UNEXERCISABLE
----                                             ----        -----------         -------------       -------------

<S>                                                          <C>                  <C>                <C>
     Andrew M. Martin............................1996            --                 268,874/0         $1,177,444/$0
     Chairman & Chief Executive Officer          1995            --                 268,874/0         $1,177,444/$0


(1)  Calculated  based on the initial  public  offering  price of the  Company's  Common Stock  ($6.00),  minus the
     exercise price of the option.
</TABLE>


DIRECTOR COMPENSATION

Directors are not paid any salary,  fees or other compensation for services as a
director,  except for shares of Common  Stock and options to purchase  shares of
Common  Stock  granted  to  non-employee  members  of the  Board  of  Directors.
Directors may be reimbursed for certain  expenses in connection  with attendance
at Board and committee meetings.


1996 STOCK  PLAN

On October 28,  1996,  the Company  adopted a 1996 stock  option plan (the "1996
Plan").  The purpose of the 1996 Plan is to encourage  ownership of Common Stock
of the Company by officers,  key  employees,  directors,  consultants  and other
persons not employed by the Company.  Pursuant to the 1996 Plan, the Company may
grant incentive stock options and  non-qualified  stock options to the Company's
employees,  officers,  directors and  consultants.  A total of 200,000 shares of
Common  Stock were  reserved  for  issuance  under the 1996  Plan.  The Board of
Directors is  authorized  to determine the  employees,  officers,  directors and
consultants  to whom  options  are  granted  and the  number of shares  for each
option.  The  Board  also  interprets  the  1996  Plan and the  options  granted
thereunder  and  is  authorized  to  adopt,  amend  or  rescind  the  rules  and
regulations  and make all other  determinations  necessary or advisable  for the
administration  of the 1996 Plan.  At December 31, 1996,  no options were issued
under  this 1996  Plan.  The 1996 Plan may be  amended at any time by the Board,
although certain amendments would require shareholder approval

The Board has the  discretion  to determine the extent to which an option may be
exercised  in part and the extent to which any part may or may not be  exercised
prior to expiration of specified  periods of time after the grant.  However,  no
option  shall be  exercisable  to any extent after the  expiration  of ten years
(five years in the case of an incentive  stock option  granted to a greater-than
10%  shareholder).  If the  optionee  terminates  his or her  services  with the
Company,  the  optionee  must  exercise  the option  within  the  earlier of the
expiration  date of such option or within 90 days of termination of services for
any reason other than death or disability.  In the event of



                                       15




death or disability,  the incentive  stock option shall terminate at the earlier
of such date of expiration or within 180 days and 90 days respectively following
such event. The exercise price of incentive stock options granted under the 1996
Plan must be at least equal to the fair market  value of the Common Stock of the
Company on the date of grant.  The  exercise  price of incentive  stock  options
granted to an optionee who owns stock  possessing more than 10% of the Company's
Common  Stock must equal at least  110% of the fair  market  value of the Common
Stock on the date of grant.

1990 INCENTIVE STOCK OPTIONS PLAN

In January  1990,  the  Company  adopted an  incentive  stock  option  plan (the
"Plan").  The purpose of the plan is to  encourage  ownership of Common Stock of
the Company by officers, key employees, directors, consultants and other persons
not  employed  by the  Company.  Pursuant  to the Plan,  the  Company  may grant
incentive  stock  options  and  non-qualified  stock  options  to the  Company's
employees,  officers,  directors and  consultants.  A total of 969,854 shares of
Common Stock were reserved for issuance  under the Plan.  The Board of Directors
is authorized to determine the employees, officers, directors and consultants to
whom  options are granted  and the number of shares for each  option.  The Board
also interprets the Plan and the options granted thereunder and is authorized to
adopt,   amend  or  rescind  the  rules  and  regulations  and  make  all  other
determinations necessary or advisable for the administration of the Plan.

The Board has the  discretion  to determine the extent to which an option may be
exercised  in part and the extent to which any part may or may not be  exercised
prior to expiration of specified  periods of time after the grant.  However,  no
option  shall be  exercisable  to any extent after the  expiration  of ten years
(five years in the case of an incentive  stock option  granted to a greater-than
10%  shareholder).  If the  optionee  terminates  his or her  services  with the
Company,  the  optionee  must  exercise  the option  within  the  earlier of the
expiration  date of such option or within 30 days of termination of services for
any reason other than death, retirement or disability.  In the event of death or
retirement,  the incentive  stock option shall  terminate at the earlier of such
date of expiration or within 180 days and 90 days  respectively  following  such
event. The exercise price of incentive stock options granted under the Plan must
be at least equal to the fair market value of the Common Stock of the Company on
the date of grant.  The exercise price of incentive  stock options granted to an
optionee who owns stock  possessing more than 10% of the Company's  Common Stock
must equal at least  110% of the fair  market  value of the Common  Stock on the
date of grant.

As of December 31, 1996, options to purchase an aggregate of 957,519 shares were
outstanding  at exercise  prices per share  ranging  from  $0.007 to $5.90,  and
12,338  shares of Common Stock were  available for future grants under the Plan.
The Plan may be amended at any time by the Board,  although  certain  amendments
would require shareholder  approval.  The Plan will terminate in January,  2000,
unless earlier  terminated when the total amount of Common Stock with respect to
which options may be granted shall have been issued upon the exercise of options
or by action of the Board, whichever shall occur first.


                                       16




ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  following  table  sets  forth  certain  information  known  to the  Company
regarding the beneficial  ownership of the Company's Common Stock as of December
31, 1996, for (i) each  shareholder  known by the Company to own beneficially 5%
or more of the outstanding  shares of its Common Stock; (ii) each director;  and
(iii) all directors and executive officers as a group. The Company believes that
the  beneficial  owners of the Common Stock listed below,  based on  information
furnished by such owners,  have sole investment and voting power with respect to
such shares, subject to community property laws where applicable.

<TABLE>
<CAPTION>

                Directors,                             Shares
            Executive Officers                      Beneficially             Percentage of
            and 5% Shareholders:                       Owned        Common Shares Outstanding (1)(2)
            --------------------                       -----        --------------------------------

<S>                                               <C>                           <C>
     Ann E. Withey (3)
     c/o Annie's Homegrown, Inc.
     180 Second Street, Suite 202
     Chelsea, MA  02150.....................         1,704,209                     39.18%

     Andrew Martin (4)
     c/o Annie's Homegrown, Inc.
     200 Gate Five Road., Suite 211
     Sausalito, CA  94965...................         1,785,679                     40.15%

     Deborah Churchill (5)..................           185,266                      4.27%

     Brady Bevis (6)........................            11,000                         *

     Patrick DeTemple ......................                 0                         *

     Paul Geffner ..........................                 0                         *

     Kare Anderson .........................                 0                         *


     All directors and executive officers
       as a group (9 persons) (7)...........         3,943,525                     77.84%

</TABLE>

 *   Less than 1% of total voting securities
(1)  Shares of Common  Stock  subject to options  exercisable  within 60 days of
     December 31, 1996, are deemed  outstanding  for computing the percentage of
     the person or group holding such securities.
(2)  Percentage of beneficial ownership is calculated on the basis of the amount
     of outstanding  securities at December 31, 1996 (4,256,895)  plus, for each
     person  or  group,  any  securities  that  person or group has the right to
     acquire within 60 days pursuant to options or other rights.
(3)  Includes  171,839  shares of Common Stock issuable upon exercise of certain
     options granted  pursuant to the Company's 1990 Incentive Stock Option Plan
     and 30,439 shares of Common Stock issuable upon exercise of certain options
     granted  pursuant to the Company's 1990 Incentive Stock Option Plan held by
     her husband
(4)  Includes  268,874  shares of Common Stock issuable upon exercise of certain
     options granted pursuant to the Company's 1990 Incentive Stock Option Plan.

(5)  Includes  159,155  shares of Common Stock issuable upon exercise of certain
     options granted pursuant to the Company's 1990 Incentive Stock Option Plan.

(6)  Includes  10,000  shares of Common Stock  issuable upon exercise of options
     granted to Ms. Bevis as a part of her Director's compensation.


                                       17




(7)  Includes  809,251  shares of Common Stock issuable upon exercise of certain
     options  granted  to  directors  and  executive  officers  pursuant  to the
     Company's 1990 Incentive Stock Option Plan.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Andrew  Martin,  Chairman  and Chief  Executive  Officer  and a Director  of the
Company, is also the majority  stockholder and holds similar offices with Simple
Packaging  Solutions,  Inc. ("Simpak") and Good Idea Foods Company,  Inc. ("Good
Idea").  Ann Withey ,  Inspirational  President and Director of the Company,  is
also a Director of Good Idea. Deborah  Churchill,  Secretary and Director of the
Company,  is also a  Director  of  Simpak  and Good  Idea.  Ms.  Withey  and Ms.
Churchill each own less than 5% of the outstanding  shares of Simpak. Ms. Withey
is a 25% stockholder of Good Idea. Paul Nardone, President of Annie's Homegrown,
Inc., is President of Good Idea and devotes  approximately 3% of his time to the
Good Idea business.

     Simpak  has  borrowed  from the  Company,  for  which  it has been  charged
interest at the rate of 11%.  At December  31,  1996,  there was an  outstanding
balance of  $67,598.  See Note 4 of Notes to  Financial  Statements.  All future
material affiliated transactions and loans will be made or entered into on terms
that are no less  favorable  to Annie's  than those  that can be  obtained  from
unaffiliated third parties; and all future material affiliated  transactions and
loans,  and any  forgiveness  of loans,  must be  approved  by a majority of the
independent  outside members of the Company's Board of Directors who do not have
an interest in the transactions.

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

<TABLE>
<CAPTION>

(A) EXHIBITS
         Exhibit Number                              Description
         --------------                              -----------

<S>                                                 <C>                                                                            
          **  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
          ** 10.31                                   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

          *  10.6                                    Distribution Agreement with Liberty Richter, Inc.
          *  10.7                                    Employment Contract with Paul B. Nardone
          *  11                                      Computation of Per Share Earnings
          *  24.1                                    Power of Attorney (included on Signature Page of this report)
          *  27.1                                    Financial Data Schedule

</TABLE>

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

*   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


                                       18




No reports on Form 8-K were filed by the  Company  during the  Company's  fiscal
quarter ended December 31, 1996.



                                       19




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

                                             March 27, 1997
                                             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           March 27 , 1997
--------------------------          and Director (Principal Executive Officer)
Andrew M. Martin


/s/ Ann E. Withey                   Inspirational President & Director          March 27 , 1997
--------------------------
Ann E. Withey



/s/ Paul Nardone                    President                                   March 27, 1997
--------------------------
Paul Nardone



/s/ Deborah Churchill               Secretary & Director                        March 27, 1997
--------------------------
Deborah Churchill



/s/ Neil Raiff                      Chief Financial Officer & Treasurer         March 27, 1997
--------------------------
Neil Raiff                          (Principal Financial and Accounting Officer)



                                       20






_______________________________     Director                                    March 27, 1997
Brady Bevis



/s/ Patrick DeTemple                 Director                                    March 27, 1997
-------------------------------
Patrick DeTemple




/s/ Paul Geffner                    Director                                    March 27, 1997
-------------------------------
Paul Geffner


_______________________________     Director                                    March 27, 1997
Kare Anderson


</TABLE>

                                       21





                         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 December 31, 1996. A copy of the Issuer's
Annual Report to  Shareholders  for the fiscal year ended  December 31, 1996 and
the Issuer's  Proxy  Statement  for the 1996  Special  Meeting in Lieu of Annual
Meeting of  Shareholders  will be furnished to  shareholders  and filed with the
Securities and Exchange Commission on or about August 1, 1997.






                                       22




                             ANNIE'S HOMEGROWN, INC.

                              Financial Statements

                           December 31, 1995 and 1996


                   (With Independent Auditors' Report Thereon)




                                       23





                          Independent Auditors' Report
                          ----------------------------



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

We have audited the accompanying balance sheets of Annie's Homegrown, Inc. as of
December  31,  1995  and  1996,  and  the  related   statements  of  operations,
stockholders'  equity (deficit),  and cash flows for the years then ended. These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the 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 financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of Annie's  Homegrown,  Inc. at
December 31, 1995 and 1996, and the results of its operations and its cash flows
for the years then ended,  in  conformity  with  generally  accepted  accounting
principles.

                                                           KPMG PEAT MARWICK LLP


Boston, Massachusetts
March 7, 1997



                                       24






                             ANNIE'S HOMEGROWN, INC.

                                 Balance Sheets

<TABLE>
<CAPTION>

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

<S>                                                                                  <C>                    <C>
Current assets:
     Cash and cash equivalents                                                         $       35,463           860,502
     Accounts receivable:
        Trade (notes 5 and 9)                                                                 204,693            86,096
        Related parties (note 4)                                                               20,753            97,690
     Inventory (note 5)                                                                       405,764         1,234,110
     Other current assets                                                                         500             5,878
                                                                                              -------         ---------
               Total current assets                                                           667,173         2,284,276
                                                                                              -------         ---------

Office equipment, plates and dies                                                              56,622            74,666
Accumulated depreciation                                                                      (24,291)          (35,464)
                                                                                              -------           ------- 
               Office equipment, plates and dies, net                                          32,331            39,202
                                                                                               ------            ------

Due from officer (note 4)                                                                      75,000            75,000
Other assets                                                                                   19,153            25,767
                                                                                               ------            ------

               Total assets                                                            $      793,657         2,424,245
                                                                                       ==============         =========

        Liabilities and Stockholders' Equity (Deficit)
        ----------------------------------------------
Current liabilities:
     Notes payable (note 5)                                                            $       39,629            17,514
     Accounts payable, trade (note 10)                                                        591,659         1,017,630
     Accrued expenses (note 6)                                                                179,583           105,053
     Deferred revenue from distributor (note 2b)                                                    -           535,068
     Due to employees                                                                          49,714            44,661
                                                                                               ------            ------
               Total current liabilities                                                      860,585         1,719,926
                                                                                              -------         ---------

Commitments (note 7)

Stockholders' equity (deficit) (note 8):
     Common stock, $.001 par value.  Authorized 10,000,000
        shares; issued 4,178,211 shares and 4,368,801
        shares at December 31, 1995 and 1996, respectively                                      4,178             4,369
     Additional paid-in capital                                                               726,518         1,761,932
     Accumulated deficit                                                                     (690,874)         (970,232)
     Note receivable stockholder                                                               (1,750)           (1,750)
     Deferred compensation directors                                                          (15,000)                -
     Treasury stock, 111,906 common shares at cost                                            (90,000)          (90,000)
                                                                                              -------           ------- 
               Total stockholders' (deficit) equity                                           (66,928)          704,319
                                                                                              -------           -------

               Total liabilities and stockholders' (deficit) equity                    $      793,657         2,424,245
                                                                                       ==============         =========
</TABLE>


See accompanying notes to financial statements.






                             ANNIE'S HOMEGROWN, INC.

                            Statements of Operations

<TABLE>
<CAPTION>

                                                                                                   Years ended
                                                                                                   December 31,
                                                                                                   ------------
                                                                                               1995             1996
                                                                                               ----             ----

<S>                                                                                <C>                      <C>      
Net sales (notes 2 and 9)                                                            $      4,546,211         4,811,762
Cost of sales                                                                               2,606,381         2,784,902
                                                                                            ---------         ---------
           Gross profit                                                                     1,939,830         2,026,860
                                                                                            ---------         ---------
Operating expenses:
     Selling                                                                                1,355,129         1,344,084
     General and administrative                                                               636,939           673,694
     Slotting fees (note 2f)                                                                  312,661           227,403
     Compensation of outside directors (note 8)                                                45,000            15,000
                                                                                            ---------         ---------
           Total operating expenses                                                         2,349,729         2,260,181
                                                                                            ---------         ---------

           Operating loss                                                                    (409,899)         (233,321)

Other (expense) income:
     Interest expense and borrowing charges (note 5)                                          (49,092)          (50,952)
     Interest and other income (note 4)                                                        10,846             8,201
                                                                                            ---------         ---------
           Loss before income tax expense                                                    (448,145)         (276,072)

Income tax expense (note 3)                                                                     2,865             3,286

           Net loss                                                                      $   (451,010)         (279,358)
                                                                                         ============          ======== 

Primary net loss per share                                                               $       (.11)             (.07)
                                                                                         ============          ======== 
Primary weighted average common shares outstanding                                          3,986,769         4,180,910
                                                                                         ============          ======== 


See accompanying notes to financial statements.


</TABLE>





                             ANNIE'S HOMEGROWN, INC.

                  Statements of Stockholders' Equity (Deficit)

                     Years ended December 31, 1995 and 1996

<TABLE>
<CAPTION>
                                                                      Additional                           Note        Deferred     
                                               Common stock             paid-in         Accumulated     receivable-  compensation   
                                            Shares       Amount         capital           deficit       stockholder    directors    
                                            ------       ------         -------           -------       -----------    ---------    

<S>                                      <C>          <C>           <C>             <C>              <C>            <C>             
Balance at December 31, 1994              4,013,906    $   4,014     $   476,966     $    (239,864)   $        -     $        -     

    Exercise of stock options (note 8)       94,000           94           3,686                 -        (1,750)             -     

    Grant of common stock to
      directors (note 8)                      4,000            4          23,996                 -             -              -     

    Issuance of common stock upon
      public offering (note 8)               66,305           66         397,764                 -             -              -     

    Public offering costs (note 8)                -            -        (211,894)                -             -              -     

    Deferred compensation relating to
      directors stock options (note 8)            -            -          36,000                 -             -        (15,000)    

    Net loss                                      -            -               -          (451,010)            -              -     
                                          ---------    ---------      ----------     -------------        --------     ----------   
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 (note 8)              190,590          191       1,134,457                 -             -              -     

    Public offering costs (note 8)                -            -         (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)             -     
                                          =========    =========     ===========     =============        ========     ==========   




                             Stockholders'    
      Treasury Stock            equity        
   Shares         Amount       (deficit)      
   ------         ------       ---------      
                                              
 <C>          <C>          <C>                
  111,906$      (90,000)     $     151,116    
                                              
        -              -             2,030    
                                              
                                              
        -              -            24,000    
                                              
                                              
        -              -           397,830    
                                              
        -              -          (211,894)   
                                              
                                              
        -              -            21,000    
                                              
        -              -          (451,010)   
  -------    -----------       -----------    
  111,906        (90,000)          (66,928)   
                                              
                                              
        -              -         1,134,648    
                                              
        -              -           (99,043)   
                                              
                                              
        -              -            15,000    
                                              
        -              -          (279,358)   
  -------    -----------       -----------    
  111,906    $   (90,000)      $   704,319    
  =======    ===========       ===========    
                                              
</TABLE>


                See accompanying notes to financial statements.






                             ANNIE'S HOMEGROWN, INC.

                            Statements of Cash Flows

<TABLE>
<CAPTION>

                                                                                                    Years ended
                                                                                                    December 31,
                                                                                                    ------------
                                                                                               1995             1996
                                                                                               ----             ----

<S>                                                                                       <C>                 <C>
Cash flows from operating activities:
    Net loss                                                                                $(451,010)         (279,358)
    Adjustments to reconcile net loss to net cash provided by (used in)
       operating activities:
          Depreciation and amortization                                                         9,666            11,173
          Outside directors compensation                                                       45,000            15,000
          Changes in:
              Accounts receivable - trade                                                      17,117           118,597
              Accounts receivable - related parties                                           276,373           (76,937)
              Inventory                                                                      (200,384)         (828,346)
              Other assets                                                                    (11,310)          (11,992)
              Accounts payable - trade                                                        272,918           425,971
              Deferred revenue from distributor                                                     -           535,068
              Accrued expenses                                                                 64,485           (74,530)
              Due to employees                                                                 17,766            (5,053)
                                                                                               ------            ------ 
                   Net cash provided by (used in) operating activities                         40,621          (170,407)
                                                                                               ------          -------- 

Cash flows from investing activities:
    Purchase of office equipment, plates and dies                                             (18,787)          (18,044)
                                                                                              -------           ------- 
                   Net cash used in investing activity                                        (18,787)          (18,044)
                                                                                              -------           ------- 

Cash flows from financing activities:
    Repayment of notes payable                                                               (176,779)          (22,115)
    Issuance of common stock and exercise of stock options, net                               187,966         1,035,605
                                                                                              -------         ---------
                   Net cash provided by financing activities                                   11,187         1,013,490
                                                                                               ------         ---------

Net increase in cash and cash equivalents                                                      33,021           825,039

Cash and cash equivalents, beginning of year                                                    2,442            35,463
                                                                                                -----            ------

Cash and cash equivalents, end of year                                                     $   35,463           860,502
                                                                                           ==========           =======

Supplemental disclosures of cash flow information:
    Cash paid for interest                                                                 $    4,299             5,990
                                                                                           ==========             =====
    Cash paid for income taxes                                                             $    2,865             3,286
                                                                                           ==========             =====

Supplemental disclosure of noncash financing activities are as follows:
    During 1995 and 1996, compensation expense of $45,000 and $15,000
       was recorded for common  stock issued and stock  options  granted to four
       outside directors, respectively.

See accompanying notes to financial statements.

</TABLE>






                             ANNIE'S HOMEGROWN, INC.

                          Notes to Financial Statements

                                              December 31, 1995 and 1996

(1)    DESCRIPTION OF BUSINESS

       Annie's Homegrown,  Inc. (the  "Company"),  incorporated  in 1989,  sells
           premium  macaroni  and cheese food  products to the natural  food and
           grocery business.

(2)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       (a) 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.

       (b) Revenue Recognition
       Effective December 1996, a majority of the Company's  sales are made to a
           distributor under contract terms allowing certain rights of return on
           unsold merchandise held by the distributor.  Accordingly, the Company
           defers  recognition  of such sales  until the  product is sold by the
           distributor. See note 12.

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

       (d) 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.

       (e) 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.

       (f) 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.

       (g) Loss per Share
       Net loss per share is computed  based on the weighted  average  number of
           common shares  outstanding  during each period after giving effect to
           the dilutive  effect of stock options,  which are  considered  common
           stock  equivalents.  For 1995 and 1996, net loss per share,  assuming
           full  dilution,  is  considered  to be the same as primary  since the
           effect of common stock equivalents would be antidilutive.
                                                                     (Continued)





                                       2
 
                             ANNIE'S HOMEGROWN, INC.

                          Notes to Financial Statements


       Pursuant to Securities and Exchange  Commission Staff Accounting Bulletin
           No. 83, common stock issued for consideration  below the IPO price of
           $6.00 per share and stock options  issued with exercise  prices below
           the IPO price during the  twelve-month  period  preceding the date of
           the initial filing of the  Registration  Statement have been included
           in the calculation of common  equivalent  shares,  using the treasury
           stock method, as if they were outstanding for both years presented.

       (h) 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.

       (i) 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.

       (j) Impairment of Long-Lived  Assets and Long-Lived Assets to Be Disposed
       Of  The Company  adopted the  provisions  of SFAS No. 121, Accounting for
           the Impairment of Long-Lived  Assets and for Long-Lived  Assets to Be
           Disposed  Of, on  January  1,  1996.  This  Statement  requires  that
           long-lived  assets and certain  identifiable  intangibles be reviewed
           for impairment  whenever events or changes in circumstances  indicate
           that  the  carrying  amount  of an  asset  may  not  be  recoverable.
           Recoverability  of  assets  to be  held  and  used is  measured  by a
           comparison  of the  carrying  amount of an asset to  future  net cash
           flows  expected  to be  generated  by the asset.  If such  assets are
           considered  to  be  impaired,  the  impairment  to be  recognized  is
           measured  by the  amount  by which the  carrying  amount of the asset
           exceeds  the fair value of the asset.  Assets to be  disposed  of are
           reported  at the lower of the  carrying  amount or fair  value,  less
           costs  to  sell.  Adoption  of  this  Statement  did not  impact  the
           Company's financial position, results of operations, or liquidity.

       (k) 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.

                                                                     (Continued)




                                        3


                             ANNIE'S HOMEGROWN, INC.

                          Notes to Financial Statements


(3)    INCOME TAXES

       Income tax  expense  consists of state taxes of $2,865 and $3,286 in 1995
           and 1996, respectively.

       As of December 31, 1996, the Company had the following net operating loss
           carryforwards for tax purposes:

                Federal                                    $     486,267
                                                           =============

                State                                      $     478,659
                                                           =============

       These net  operating  loss  carryforwards  are available to offset future
           federal/state  taxable  income  through  2011.  The Company  also has
           alternative  minimum tax net operating loss carryforwards of $378,087
           as of December 31, 1996, which are available to reduce future federal
           alternative  minimum taxable income through 2011. 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 loss due to the following:
<TABLE>
<CAPTION>

                                                                                                    Years ended
                                                                                                    December 31,
                                                                                                    ------------
                                                                                                 1995          1996
                                                                                                 ----          ----

<S>                                                                                       <C>                  <C>     
           Federal income tax expense (benefit) at statutory rate                         $      (67,222)      (41,410)
           State income taxes, net of federal benefit                                              2,435         2,793
           Change in federal valuation allowance                                                  69,986        39,253
           Other                                                                                  (2,334)        2,650
                                                                                                  ------         -----

                 Actual income tax expense                                                $        2,865         3,286
                                                                                          ==============   ===========

       The tax effects of temporary  differences  that give rise to  significant
           portions of deferred tax assets are presented below:
                                                                                                  December 31,
                                                                                                  ------------
                                                                                              1995           1996
                                                                                              ----           ----

           Deferred tax assets:
               Net operating loss carryforward                                         $      126,136         112,350
               Deferred revenue                                                                     -          86,712
               Payroll expense, due to accrual for financial
                     reporting purposes                                                        39,481          19,091
                                                                                               ------          ------
                                                                                              165,617         218,153
           Valuation allowance                                                               (165,617)       (218,153)
                                                                                             --------        -------- 
                                                                                                    -               -
           Deferred tax liabilities                                                                 -               -
                                                                                             --------        --------
               Net deferred tax asset                                                  $            -               -
                                                                                          ===========      ==========


                                                                                                            (Continued)
</TABLE>




                                        4


                             ANNIE'S HOMEGROWN, INC.

                          Notes to Financial Statements


       The total federal and state valuation allowance was $165,617 and $218,153
           at December 31, 1995 and 1996, respectively.

(4)    RELATED PARTY TRANSACTIONS

       Amounts due from related parties consist of:
<TABLE>
<CAPTION>
                                                                                                    December 31,
                                                                                                    ------------
                                                                                                 1995         1996
                                                                                                 ----         ----

<S>                                                                                        <C>                  <C>   
           Due from Simple Packaging Solutions, Inc.                                       $           -        67,598
           Due from officer                                                                       75,000        75,000
           Other related parties                                                                  20,753        30,092
                                                                                                  ------        ------

                                                                                           $      95,753       172,690
                                                                                               =========       =======

       The balances due from Simple Packaging Solutions, Inc. and officer earn interest at an annual 
           rate of 11%.

       The balance due from other  related  parties at December  31,  1995 and 1996  represents  costs  
           incurred by the Company on behalf of a related party.
</TABLE>

(5)    NOTES PAYABLE

       Notes payable consist of:
<TABLE>
<CAPTION>
                                                                                                   December 31,
                                                                                                   ------------
                                                                                                1995          1996
                                                                                                ----          ----

<S>                                                                                        <C>               <C>        
           (a) Notes payable - financial institution                                       $      21,370            -
           (b) Notes payable - bank                                                               10,759       10,014
           (c) Notes payable - officer                                                             7,500        7,500
                                                                                                   -----        -----

                                                                                           $      39,629       17,514
                                                                                               =========   ==========
</TABLE>

       (a) The  Company  had  a  revolving  line  of  credit  with  a  financial
           institution  in the amount of $150,000 at December  31,  1995.  Under
           this agreement,  borrowings  incurred  service fees which ranged from
           .5%  to 8% (up to 90  days)  depending  on the  number  of  days  the
           borrowings  were  outstanding.  The line of credit was secured by the
           Company's  accounts  receivable  and inventory  and  guaranteed by an
           officer and certain  directors  of the  Company.  This line of credit
           expired in 1996.

       (b) The Company  obtained a $10,000  unsecured line of credit with a bank
           in 1995 which  bears  interest at the prime rate plus 8.9% (17.4% and
           17.15%  at  December  31,  1995 and  1996,  respectively).  There was
           $10,759 and $10,014  outstanding  under the agreement at December 31,
           1995 and 1996, respectively.

       (c) The  Company has a $7,500  demand  note  payable to an officer of the
           Company at December 31, 1995 and 1996 which bears interest at 11%.

                                                                     (Continued)




                                        5


                             ANNIE'S HOMEGROWN, INC.

                          Notes to Financial Statements

(6)    ACCRUED EXPENSES

       Accrued expenses consist of:
                                                              December 31,
                                                              ------------
                                                          1995           1996
                                                          ----           ----

           Compensation                            $      162,946         87,143
           Other                                           16,637         17,910
                                                       ----------     ----------
                                                   $      179,583        105,053
                                                       ==========     ==========
(7)    LEASES

       The Company  leases  office space under  operating  leases that expire in
           1997. Future minimum lease payments total $25,580.

       Total rent  expense on operating  leases  amounted to $24,775 and $28,687
           for the years ended December 31, 1995 and 1996, respectively.

(8)    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.

       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  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 December 31,
           1996, options to purchase 957,519 shares were outstanding at exercise
           prices per share ranging from $0.007 to $5.90, and 12,338 shares were
           available for future grants.

       In  May 1995,  the Company's  directors  expanded the board and appointed
           four new outside directors. Each new director was issued 1,000 shares
           of the  Company's  common  stock,  as  compensation  for service as a
           director, and each was granted an option to purchase 10,000 shares of
           the Company's  common stock at an exercise  price equal to 85% of the
           public offering price.  These options vested on the first anniversary
           of the date of grant and expire if not  exercised  within three years
           after the vesting date.

       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,  and determines the number of shares and the
           exercise  price  of each  option.  All  options  under  the  plan are
           exercisable upon the date of grant, expire ten years from the date of
           grant, and have certain transfer restrictions.  At December 31, 1996,
           no options were issued under this plan.

                                                                     (Continued)




                                        6


                             ANNIE'S HOMEGROWN, INC.

                          Notes to Financial Statements


       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, 1994                                           1,045,092      $      .85

                Options granted                                                         140,231            5.49

                Options exercised                                                       (94,000)            .04

                Options expired/canceled                                                (93,804)            .92
                                                                                       --------
           Outstanding at December 31, 1995                                             997,519            1.57

                Options granted                                                               -            -

                Options exercised                                                             -            -

                Options expired/canceled                                                      -            -
                                                                                       --------
           Outstanding at December 31, 1996                                             997,519            1.57
                                                                                       ========        ========
</TABLE>

       The  following  table  summarizes  information  about fixed stock options
outstanding at December 31, 1996:

<TABLE>
<CAPTION>
                                                                 Options Outstanding and Exercisable
                                                                 -----------------------------------
                                                                                Weighted
                                                   Number                        average              Weighted
                     Range of                    outstanding                    remaining              average
                  exercise prices           at December 31, 1996            contractual life       exercise price
                  ---------------           --------------------            ----------------       --------------

<S>                 <C>                               <C>                      <C>                  <C>        
                    $.007                             2,984                    1.0 year             $      .007
                .80  to    1.01                     854,304                    2.0                          .93
              5.10   to    5.90                     140,231                    5.0                         5.49
                                                    -------
              $.007  to    5.90                     997,519                                                1.57
                                                    =======
</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 and loss per share  would have  increased  to the
           following pro forma amounts:

                                                                     (Continued)







                                        7


                             ANNIE'S HOMEGROWN, INC.

                          Notes to Financial Statements

<TABLE>
<CAPTION>

                                                                                       1995                 1996
                                                                                       ----                 ----

<S>                                                                             <C>                         <C>      
           Net loss as reported                                                 $      (451,010)            (279,358)
                                                                                ================             ======== 
           Pro forma net loss                                                   $      (684,725)            (279,358)
                                                                                ================             ======== 

           Net loss per shares as reported                                      $        (.11)                (.07)
                                                                                ================             ======== 
           Pro forma net loss per share                                         $        (.17)                (.07)
                                                                                ================             ======== 
</TABLE>

       The fair value of each  option  grant is  estimated  on the date of grant
           using  the  Black-Scholes  option-pricing  model  with the  following
           weighted-average  assumptions  used for  grants  issued  in 1995:  no
           dividend yield; expected volatility of 0%; risk-free interest rate of
           6.13%; and expected lives of 5 years.

(9)    CONCENTRATION OF CREDIT RISK

       For the years ended December 31, 1995 and 1996, no one customer accounted
           for more  than 10% of net  sales.  The  Company's  top ten  customers
           accounted  for  approximately  56% and 51% of net sales for the years
           ended December 31, 1995 and 1996, respectively.

       Two customers  accounted  for 23% of accounts  receivable at December 31,
           1995.  Three  customers  accounted for 50% of accounts  receivable at
           December 31, 1996.

(10) SUPPLIER/SOURCES OF SUPPLY

       One vendor  accounted  for 60% of accounts  payable at December 31, 1995.
           Three vendors  accounted for 60% of accounts  payable at December 31,
           1996.

(11) JOINT VENTURE

       In  May 1995,  the Company and the former sole  supplier of its  macaroni
           and cheese products entered into a joint and equal venture to produce
           and market a line of premium organic pasta products.  The Company was
           responsible  for the  marketing  and  sales of  products,  while  the
           supplier  was   responsible  for  the   manufacture,   packaging  and
           distribution of the products.

       The Company and the supplier each owned 50% of the issued and outstanding
           shares of the corporation formed to carry out the joint venture.  The
           Company  purchased its shares by paying $100 and signing a promissory
           note for $49,900, which accrued interest at 10% per annum and was due
           on August  17,  1995.  The  supplier  paid for its shares of stock by
           transferring  all the  plates,  dies and  trademarks  relating to the
           production,  packaging  and  marketing  of the  products to the newly
           formed corporation.

       As  of December 31, 1995, the Company had written off its $100 investment
           and has not  recorded the $49,900  promissory  note since the parties
           have  verbally  agreed to  discontinue  the  venture  with no further
           liability to the Company.

                                                                     (Continued)




                                        8


                             ANNIE'S HOMEGROWN, INC.

                          Notes to Financial Statements


(12) DISTRIBUTION AGREEMENT

       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,  and natural and specialty food stores.  Liberty
           has two  warehouses,  one located in New Jersey and the other located
           in California.

       Liberty distribtes 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  initial  contract  expires  December  31,  1997  with  automatic
           renewals scheduled on a year-to-year basis.