SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                          ----------------------------


                                   FORM 10-KSB
(Mark One)

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
     1934

For the fiscal year ended December 31, 2001
                          -----------------

                                       OR

[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934

For the transition period from ___________ to _________

         Commission file number                   000-31148
                                   --------------------------------------------

          PENNEXX FOODS, INC. (formerly known as PINNACLE FOODS, INC.)
--------------------------------------------------------------------------------
                 (Name of Small Business Issuer in Its Charter)

       Pennsylvania                                         23-3008972
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(State or Other Jurisdiction of                           (I.R.S. Employer
Incorporation or Organization)                          Identification No.)

                     980 Glasgow Street, Pottstown, PA 19464
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                    (Address of Principal Executive Offices)

                                  610-705-3620
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                (Issuer's Telephone Number, Including Area Code)

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

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

         None
--------------------------------------------------------------------------------

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

                     Common Stock, Par Value $0.01 per share
--------------------------------------------------------------------------------
                                (Title of Class)



<PAGE>




         Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for 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 contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-KSB
or any amendment to this Form 10-KSB.



         State issuer's revenues for its most recent fiscal year: $42.3 million
                                                                  -------------

         The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the issuer computed by reference to the closing sale
price of such common equity, as of March 25, 2002 was approximately $25,763,000.

                    APPLICABLE ONLY TO CORPORATE REGISTRANTS

         The number of shares outstanding of the issuer's common stock, par
value $0.01 per share as of March 25, 2002 was 26,424,822.

         Transitional Small Business Disclosure Format (check one):

Yes             No      X
          -----       ------

                       DOCUMENTS INCORPORATED BY REFERENCE

         Definitive Proxy Statement to be filed within 120 days of the end of
the issuer's fiscal year.




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<PAGE>


                                     PART I


Item 1.    Description of Business.

         Introduction

         Pennexx Foods, Inc. ("Pennexx" or the "Company") was incorporated under
the name Pinnacle Foods, Inc. on July 20, 1999 in the Commonwealth of
Pennsylvania to provide case-ready meat packaging services to retailers.
"Case-ready" refers to meat products that can be taken out of a box and put
directly into a retailer's meat case without any further processing or
packaging. Using what Pennexx believes is advanced technology, Pennexx can
achieve the trimming, cutting, wrapping, labeling, and pricing of a retail
product with extended shelf life that cannot be achieved at the store level.
Pennexx's service also allows its customers to avoid dealing with an increasing
shortage of butchers available to work at retail locations. Unlike some of its
competitors which only handle some species of meat, Pennexx cuts, packages,
processes, and delivers case-ready beef, pork, lamb, and veal.

         Pennexx's business is regulated in large part by the United States
Department of Agriculture (the "USDA"). Pennexx has instituted several key
methodologies to ensure that its products are in compliance with the USDA's
inspection methodology, the Hazard Analysis Critical Control Point program
("HACCP"). The Company currently leases plants in Pottstown, Pennsylvania and
Philadelphia, Pennsylvania. (See, Item 2, "Properties.")

         Strategically located in the highly populated area of the northeastern
United States, Pennexx believes it has developed a production process that
requires less skilled labor per pound than that currently being employed by
supermarkets. This process allows the Company to produce what it believes is a
superior product to supply the meat needs of retailers at an efficient price.

         The demand for case-ready meat products in the supermarket and the
price club sector, where customers who are members of a wholesale buying club
purchase in bulk, has grown rapidly in recent years as labor, food safety,
product consistency, and consumers' buying habits have all become issues of
great importance. In this environment, the supermarket industry is exploring
strategic alliances with selected vendors to create a vertically integrated
supply chain, which will allow them to manage their needs in these product
areas.

         The industry segment served by Pennexx has seen tremendous change in
the past few years. Convenience for the retail consumers, added value for the
retailer to increase margins, a longer shelf life for better inventory
management, and a marketing program geared toward the concept of "sell through"
have become the action plans of forward looking supermarket companies. Because
Pennexx's process can replace a supermarket's backroom (where the meat is
trimmed, cut, wrapped, labeled and priced), Company customers can remove
Pennexx's products from their shipping container and place them directly into
the case for resale. This plan of retail distribution permits customers to
engage in "elective marketing," whereby the customer markets (and therefore
purchases from Pennexx) only the specific cuts of meat products that the
customer wants. By contrast, a supermarket that maintains a backroom would




<PAGE>

inevitably produce a greater variety of cuts of meat product, including some
which might not fit the supermarket's marketing plan.

         Substantially all of the production line equipment necessary for
Pennexx's operations has been obtained from Robert Reiser & Co. Conveyor belts
connect key functions of the Company's equipment, which includes cutting,
wrapping, loading, grinding, labeling, and other equipment. Also included is
equipment used to create a modified atmosphere in each case-ready package.
Modified atmosphere packaging ("MAP") refers to the use of deep barrier foam and
plastic trays to house the meat, and the process of heat sealing the lid
tightly, evacuating the atmosphere in the package, and replacing it with a
proprietary mixture including oxygen. This process extends shelf life, keeps the
meat an appetizing bright meat color (using no additives), and eliminates
leakage. Pennexx has invested time and product to perform shelf life studies
under varying conditions of temperature and handling abuse to determine the best
method of creating the MAP.

         Pennexx's case-ready packaging process is meant to be a high volume and
high efficiency product line process whereby the Company processes whole loins,
cut, packaged, weighed and priced for delivery to the retailer. Waste product is
removed by a rendering contractor.

         Customers and Suppliers

         Although Pennexx's products are sold at approximately 800 retail
locations throughout the northeastern United States, the Company directly sells
regularly to only about fifteen supermarket chains, including ShopRite,
Pathmark, Giant and A&P. Pennexx has only a few customers because it services
primarily large and medium sized retail supermarket chains of which there are
relatively few located in any particular geographic region. The loss of any
significant customer would, therefore, have a material adverse effect on the
Company's business. In the year ended December 31, 2001, Pennexx's largest
customer accounted for approximately 58% of sales and together, its largest two
customers accounted for approximately 86% of sales, collectively. In the year
ended December 31, 2000, Pennexx's largest customer accounted for approximately
51% of sales and its largest three customers accounted for approximately 94%
of sales, collectively. Pennexx does not have a written agreement with any
customers; orders are placed periodically, usually once or twice per week.
Although Pennexx was the first supplier of case-ready meats to many of its
present customers, currently Pennexx is not the exclusive supplier of case-ready
meats to any of its customers.

         Historically, Pennexx has purchased uncut meat from between ten and
fifteen suppliers. Sometimes Pennexx's customer dictates the source of meat
supply, but in many cases the Company is free to select the supplier. The
Company believes it is on good terms with its suppliers. The meat supply
industry is consolidating and it is, therefore, likely that fewer suppliers will
be available to service the Company's requirements in the future. If Pennexx
becomes unable to obtain reliable sources of supply because of such
consolidation or for any other reason, it would have an adverse effect on the
Company's business. However, as a result of the investment by Smithfield Foods,
Inc. ("Smithfield") in 2001 (See, Item 1, "Business - Smithfield Transaction"),
the Company believes its access to beef and pork is less likely to be
uninterrupted then if the Smithfield transactions had not occurred.




                                       4
<PAGE>

         Pennexx delivers product almost exclusively through independent
trucking fleets. The Company does lease one tractor-trailer that it uses to
deliver its products to individual retail stores that are testing a case-ready
program. Currently, Pennexx delivers products to a central location for each
customer; the customers then redistribute the product as they deem appropriate.
Pennexx estimates the practical limitation on its ability to service such
centralized distribution sites is approximately 300 miles from Pennexx's
Pottstown facility.

         Employees

         Employees at the Company's facilities are represented by Local 56 of
the United Food and Commercial Workers' Union, AFL-CIO (the "Union"). Pennexx's
collective bargaining agreement with this Union expires in 2004. Pennexx employs
approximately 200 people at the Pottstown facility. The Philadelphia facility is
currently being used as a storage facility. The Company, therefore, does not
employ anyone at that facility. Pennexx considers its relations with its
employees to be good.

         Competition

         Pennexx's management believes that competition in the market for
case-ready meats is currently based primarily on availability and reliability: a
supplier's ability consistently and reliably to deliver a variety of meat
products. Although Pennexx knows of no major competitor in its target market
area that cuts and packages all the types of meat which Pennexx does, there are
some regional case-ready firms that sell some meat products that compete with
Pennexx. Moreover, Excel, a subsidiary of Cargill, Incorporated, has opened a
case-ready plant in Hazleton, Pennsylvania. Excel's Hazleton operation competes
with the Company most directly in the sale of grinds but also produces
case-ready pork and beef products. As the number of suppliers that produce a
full-line of case-ready products increases, price will become an increasingly
significant basis for competition.

         Pennexx does not believe that the case-ready concept lends itself well
to the long transportation time required from central meat processors (located
mainly in the Midwest). Once the product is prepared for retail sale (by
portioning, wrapping, labeling, and pricing), its shelf life is set at
approximately eight to ten days; the case-ready meat producer must be in close
proximity to its customers which want the product in its case for as much of its
shelf life as possible to reduce shrinkage. Shrinkage refers to the loss of
product that has aged beyond its self-life while waiting to be sold from the
retailer's case. For this reason, Pennexx believes that a case-ready
packer/processor must be located near its customers.

         Pennexx's management believes that the case-ready meat industry is
still young. Accordingly, it is very likely that as the industry matures, other
companies in the meat packaging and production industries will become
competitors of Pennexx. These potential competitors may include supermarket
chains, meat packaging companies, slaughterhouses, and other participants in the
food industry. In fact, all the major meat production companies have entered the
case-ready business. If the trend to case-ready distribution continues, Pennexx
believes it is highly likely that more of them will enter the Northeastern
United States before long. Moreover, Smithfield itself operates a case-ready
pork plant located in Virginia. If and when other companies enter or expand
their existing operations in the industry, they will probably have greater





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<PAGE>

financial and other resources, management experience, and contacts than the
Company does. Additionally, these companies may be able to purchase their raw
materials at a lower cost than the Company can. In the event that any of these
things occur, there would likely be a detrimental effect on the Company's
business.

         Intellectual Property

         The Company's management believes that the Company is not dependent on
its intellectual property, but believes that the proprietary mixture used in the
MAP and related know-how is significant. The Company has proprietary, trade
secret information, trademarks (unregistered and a pending application), and
copyrights.

         Pennexx sought and achieved the right to participate in the program for
Certified Angus Beef. This program allows Pennexx to produce Certified Angus
Beef (CAB) products and to sell these products to licensed customers. To
participate in the CAB program, the Company went through an application process
that included an interview of management and a third party inspection of the
Company's facilities and procedures to ensure that they meet the CAB program
standards. Pennexx is one of the only CAB MAP producers in the country. Pennexx
believes that retail customers recognize Certified Angus Beef as a high quality
product.

         Government Regulation

         Like other participants in the meat processing industry, Pennexx is
subject to various laws and regulations administered by Federal, state and other
entities. Management of the Company believes that Pennexx complies with all such
laws and regulations in all material respects. To ensure compliance, the Company
must file an Application for Federal Meat Inspection (an "Application for USDA
Inspection") pursuant to which a USDA inspector inspects the Pottstown plant
every day that the plant operates. Pennexx's plants operate under the USDA's
inspection regulations pursuant to a currently effective Application for USDA
Inspection. Pennexx historically has and will continue to work with the USDA
inspectors to comply with all applicable USDA regulations.

         Under the USDA HACCP program, responsibility for inspection of product
and facility has shifted in great part to individual processors such as the
Company. Each processor is responsible to review, write, audit, and maintain
records regarding all aspects of its operations. The processor must review its
facility, operations, process flow, sanitation and people. The processor then
must identify any potential areas (points) that can cause problems with or
contaminate product. Pennexx's employees must be HACCP certified to be eligible
to work at Pennexx's plants. Pennexx has instituted several key methodologies to
ensure that its plants, employees, and products are in compliance with the USDA
inspection methodology and the HACCP program.

         Smithfield Transactions

         Pennexx believes it enjoys a strategic advantage as a result of its
experience during the past two years and because of its geographical location.
Seeking to exploit these perceived strategic advantages, Pennexx has grown its
business each quarter since its inception. However, in late 2000 and into 2001,
Pennexx found that it needed a significant amount of capital to




                                       6
<PAGE>

finance the growth already experienced and to continue this growth. To meet this
need, management considered the possibility of a strategic relationship with a
large meat production company. After identifying Smithfield Foods, Inc. as the
most appropriate equity partner and having Smithfield execute a Confidentiality
Agreement, the Company began negotiating the outline, amount and nature of a
potential equity investment by Smithfield in Pennexx.

         Pennexx and Smithfield entered into a Stock Purchase Agreement dated
May 31, 2001 (the "Purchase Agreement") pursuant to which the Company sold and
Smithfield bought 13,003,494 shares of Company Common Stock, representing a
fifty percent (50%) interest in the Company. Smithfield paid Pennexx
consideration of $6 million, or approximately $0.45 per share. In the
transaction, Smithfield has acquired a Warrant (the "Warrant") which permits
Smithfield to purchase additional shares of Common Stock under certain
circumstances described below. The parties executed a $30 million revolving
credit agreement (the "Credit Agreement"), a Standstill Agreement which provides
limitations on certain activities in which Pennexx and Smithfield can each
engage (the "Standstill Agreement"), and related matters (together, the
"Smithfield transactions"). On June 27, 2001, the Company held a Special Meeting
of Shareholders at which the Company's shareholders approved the Smithfield
transactions.

         Ellis M. Shore, who before the Smithfield transactions was a
shareholder of more than five percent of the issued and outstanding shares of
the Common Stock of Pennexx, and Michael Queen, a shareholder, a director, and
the President of Pennexx, are parties to several of the agreements, which
together make-up the Smithfield transactions. In each case, each of Mr. Shore
and Mr. Queen is a party in his individual capacity as a shareholder of the
Company. Neither Mr. Shore nor Mr. Queen received any compensation from the
transactions. Pennexx has agreed to indemnify Messrs. Queen and Shore and each
of Pennexx's other directors and officers from any claims arising from the
Smithfield transactions.

         A summary of the terms of the principal agreements between the Company
and Smithfield is set forth below.

1.       The Warrant

         The Warrant protects Smithfield's fifty percent equity interest in
Pennexx from dilution in certain circumstances. The Warrant gives Smithfield the
right to purchase, from time to time, the number of shares of Common Stock
issued to any person other than Smithfield, if such issuance has not been
approved by at least one director of the Company who was nominated by Smithfield
or was not otherwise in compliance with the Standstill Agreement. In particular,
Smithfield will have the right to purchase additional shares of the Common Stock
when any person who currently holds an option to purchase shares of the Common
Stock exercises that option.

         The exercise price under the Warrant depends on the circumstances under
which Pennexx issues the Common Stock. When Pennexx issues shares of the Common
Stock other than issuances of stock in accordance with or as permitted by the
terms of the Standstill Agreement, the purchase price will be $0.01 per share.
This discount will strongly discourage Pennexx from issuing shares of the Common




                                       7
<PAGE>

Stock other than pursuant to the exercise of an existing option or otherwise in
accordance with the Standstill Agreement. The Term of the Warrant expires after
the later of: (1) the date on which the last currently existing option expires
or thirty days after its exercise, and (2) the date on which the Limitation
Period expires (see below, "The Standstill Agreement").

2.       The Standstill Agreement

         The Standstill Agreement helps define the business relationship between
Pennexx and Smithfield. Pennexx, Smithfield, and shareholders Ellis Shore and
Michael Queen each agree to act in conformity with the parties' understanding of
this business relationship. To this end, Pennexx, Smithfield, Shore and Queen
have agreed, among other things, (1) not to change the number of directors on
Pennexx's Board and (2) to vote their shares in order to ensure that Pennexx's
Board will remain composed of five directors: two nominees of Smithfield, two
nominees of Shore, and one nominee of Queen.

         Pursuant to the Standstill Agreement, during the Limitation Period
(defined below), Smithfield is not permitted to:

          o    Directly or indirectly, purchase or tender for any shares of the
               Common Stock, or propose, cause or vote in favor of any merger or
               consolidation including Pennexx on the one hand and Smithfield or
               any affiliate thereof on the other hand;

          o    Directly or indirectly, sell or otherwise transfer any shares of
               Common Stock, with some limited exceptions;

          o    Directly or indirectly, solicit proxies in opposition to any
               solicitation by Pennexx's Board; or

          o    Improperly use (including improper disclosure) any customer
               lists, trade secrets, and other proprietary information of
               Pennexx's acquired by Smithfield because of the business
               relationship between them.

         Furthermore, if Smithfield desires to sell any shares of the Common
Stock in compliance with the limited restrictions referred to above, Pennexx
will have an assignable right of first refusal to purchase such shares. If
either Mr. Queen or Mr. Shore desires to sell any or all of his shares of
Company Common Stock, Smithfield will have a right of first offer for a period
of five days.

         The Limitation Period begins on the date of the Standstill Agreement,
June 27, 2001, and terminates on the earliest of (1) June 27, 2006, (2) the last
day of the sixth consecutive calendar quarter in which Pennexx has a net loss
computed in accordance with Generally Accepted Accounting Principles, (3) the
first date on which neither Shore nor Queen is a Beneficial Owner of Voting
Securities (as defined in the Standstill Agreement), and (4) the last day of the
calendar quarter on which the net worth of Pennexx falls below $2 million.




                                       8
<PAGE>

3.       Registration Rights Agreement

         Under the Registration Rights Agreement, Smithfield may at any time
demand that Pennexx register the Registrable Shares (as defined in the
Registration Rights Agreement) under the Securities Act of 1933. Under certain
circumstances and as often as such circumstances arise, when Pennexx or other
holders of the Common Stock propose to register shares of Common Stock,
Smithfield may upon notice to Pennexx, demand that its shares of Common Stock be
included in any such registration under the Securities Act of 1933 subject to
typical black-out periods and underwriters' cutbacks, a so-called piggy-back
registration. Smithfield is required to pay the costs of any demand
registration, and must pay its own costs in connection with any piggy-back
registration.

4.       Credit Agreement

         Under the Credit Agreement, Smithfield agreed, subject to certain
conditions, to extend a $30 million revolving line of credit to Pennexx. Pennexx
may borrow from Smithfield under this line of credit an amount equal to 100% of
the Company's eligible accounts receivable and inventory. Pennexx may also
borrow other amounts within the reasonable discretion of Smithfield. Absent an
Event of Default, Pennexx will pay Smithfield interest on its outstanding
balances under the line of credit at an annual rate of one percent (1%) over the
prime rate announced from time to time by J. P. Morgan Chase & Co.

         The line of credit is secured by a lien on all of Pennexx's assets,
including after-acquired inventory and accounts receivable (the "Collateral").
Pennexx also promises not to encumber the Collateral without Smithfield's
written consent. The Credit Agreement defines Events of Default under the line
of credit to include (1) Pennexx's failure to meet its payment obligations, (2)
Pennexx's failure to maintain a positive equity position, (3) Pennexx's default
on other significant obligations, and (4) Pennexx's becoming bankrupt, insolvent
or otherwise unable to pay its debts when they come due.

5.       Subsequent Events

         Subsequent to the Smithfield closing, Smithfield agreed to contribute
493,333 shares of Common Stock to the capital of the Company; such shares are
being cancelled. As a result of this change, the purchase price per share
payable by Smithfield for its shares of Pennexx Common Stock increased from
approximately $0.45 per share to approximately $0.48 per share.

         In addition, the parties have modified the Credit Agreement to allow
the Company to borrow up to $2,000,000 to purchase the Tabor Road facility (see,
Item 2. "Properties"), up to an additional $2,000,000 to renovate the facility,
and up to an additional $6,500,000 to purchase equipment with which to furnish
the facility. The Company has agreed to give Smithfield a mortgage on the Tabor
Road facility and a security interest in the fixtures and equipment installed
there.

         The Company has applied for up to $2.75 million of below-market rate
loans through the Philadelphia Industrial Development Authority with respect to
the Tabor Road facility. The Company has agreed to pay down borrowings on the
Smithfield line of credit by all amounts received as a result this application,





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<PAGE>

and Smithfield has agreed to subordinate its mortgage and security interests to
the liens of the lender(s) making any such loans to the Company.

         Available Information

         As a reporting company under the Securities Exchange Act of 1934,
Pennexx is required regularly to file materials with the Securities and Exchange
Commission (the "SEC" or the "Commission"). The public may read and copy these
materials at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Information relating to the operation of the Reference
Room may be obtained by calling 1-800-SEC-0330. The SEC maintains an Internet
site (http:\\www.sec.gov) that contains information relating to issuers that
file these materials electronically. The Company's periodic reports may be
accessed at this site.

Item 2.  Description of Property.

         Pennexx currently leases two facilities. One facility is located at 980
Glasgow Street, Pottstown, Pennsylvania 19464. The Pottstown facility currently
serves as the Company's executive offices and the location where it processes
red meat, pork, lamb, and veal under USDA inspection. The Pottstown facility is
approximately 40,000 square feet in size. The lease expires on April 30, 2002,
and the Company expects to vacate the premises shortly thereafter. The current
annual base rental obligation for the Pottstown facility is approximately
$96,000. The Company is currently involved in litigation with the landlord of
the Pottstown facility. (See, Item 3, "Legal Proceedings.")

         Pennexx also leases a facility located at 934 North 3rd Street,
Philadelphia, Pennsylvania 19123. The Philadelphia facility is approximately
15,000 square feet in size, and currently used for warehousing. The lease for
this facility expires on August 31, 2002, but the Company has the option to
renew the lease for an additional three year term. The current annual rental
obligation for the Philadelphia facility is approximately $72,000. The
Philadelphia facility is beneficially owned by the parents of Samuel Lundy, the
former President of the Company. Currently, the Company uses the Philadelphia
facility primarily for storage, but it is USDA approved and can be used for
production.

         Pennexx has agreed to purchase a 145,000 square foot facility on ten
acres of land located in Philadelphia, Pennsylvania for a purchase price of
$2,000,000. Closing under the agreement is scheduled for April 2002. The Company
intends to move its executive offices and all operations to this facility by the
end of the third quarter of 2002, and to vacate its other two facilities when
the lease for each of those properties terminates.

Item 3.  Legal Proceedings.

         The Company is involved in a dispute with the landlord at the Pottstown
facility. Proceedings began on November 11, 2000 in the Montgomery County Court
of Common Pleas. The landlord has alleged that the Company failed to make timely
rental payments and is seeking damages and ejectment. The Company's defense is
that the rent was withheld because of the landlord's prior failure to honor its
obligations to make certain improvements at the property. All rents due to date
have either been paid to the landlord or deposited into escrow. Since the
commencement of the litigation, the landlord has filed a voluntary petition for
protection from its creditors under Chapter 11 of the Bankruptcy Code. The





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<PAGE>

Company has defeated the landlord's initial attempt to have the case between
them heard before the Federal bankruptcy court. If the Company were to lose this
suit, whether before the Montgomery County Court or the Federal bankruptcy
court, the landlord could eject the Company from the property, and the Company
could lose some or all of the benefit of certain improvements made to the
property in the aggregate approximate amount of $200,000.

         On December 7, 2001, Robert V. Matthews, a shareholder of the Company,
filed a complaint against the Company in the United States District Court for
the District of Connecticut. A description of the facts underlying Mr. Matthews
complaint are as follows.

         On November 22, 2000, the Company and Mr. Matthews entered into an
agreement pursuant to which he agreed to assist the Company in obtaining debt
financing to be used for a potential expansion into New England and for working
capital purposes (the "Matthews Agreement"). At the time of his engagement, Mr.
Matthews was also the holder of a note payable by the Company in the face amount
of $0.3 million. The agreement between the Company and Mr. Matthews provided
that the Company would issue 1.1 million shares of Company common stock to him
on February 1, 2001. The agreement further provided that, upon the closing of
debt financing in the amount of at least $9.5 million procured by Mr. Matthews
pursuant to the Matthews Agreement, the Company would issue a second group of
1.1 million shares of Company common stock to him. The Company received two
offers of financing (one of which arrived after the agreement had been
terminated by the Company) through Mr. Matthews' efforts. These offers were
individually and in the aggregate substantially below the threshold amount
required by the Matthews Agreement. Moreover, these proposed transactions were
inconsistent with and far less attractive than those contemplated by the
Matthews Agreement and accordingly, the Company rejected them. The Company
terminated the Matthews Agreement in accordance with its terms on April 6, 2001.

         The Matthews Agreement also provided that if, prior to the completion
of such debt financing and prior to the termination of the Matthews Agreement,
more than 30% of the Company's outstanding shares of common stock were sold in a
single transaction or a series of related transactions, Mr. Matthews would be
entitled to receive the second group of 1.1 million shares. The Matthews
Agreement further provided that if the Company sold new shares at a price of
less than $2.50 per share at any time after Mr. Matthews became entitled to
receive the second group of 1.1 million shares, the number of shares otherwise
deliverable pursuant to the Matthews Agreement would be increased in accordance
with a formula that varies inversely with the sales price for such newly sold
shares. Finally, the Matthews Agreement granted Mr. Matthews an option to
acquire, for no additional consideration, up to 2,000,000 additional shares of
Company common stock if any such debt financing were forgiven by the lender(s)
under specified circumstances. Because none of the contingencies described in
this paragraph occurred, the Company does not believe it has liability to Mr.
Matthews for any shares referred to in this paragraph.

         In the Complaint, Mr. Matthews has demanded that the Company issue and
deliver to him (a) 2.2 million shares of Pennexx Common Stock, (b) an option to
purchase for no additional consideration 2.0 million shares of Pennexx Common




                                       11
<PAGE>

Stock, and (c) shares of Pennexx Common Stock in payment of his $0.3 million
loan. In addition, Mr. Matthews has accused the Company of unfair and deceptive
business practices.

         Finally, Mr. Matthews asserts that he is entitled to an unspecified
number of additional shares of Pennexx Common Stock under the anti-dilution
provisions of the Matthews Agreement which he further alleges, will result in
the required additional issuances of shares to Smithfield and to him ad
inifinitem thereby effectively diluting other common shareholders of their
interest in the Company. Mr. Matthews has also demanded interest, costs and
attorneys' fees.

         The Company denies the allegations in the Matthews complaint and
intends to contest them vigorously. The Company has numerous defenses to the
Complaint including that the Matthews Agreement is void and unenforceable. Under
the Matthews Agreement, the Company's $0.3 million debt to him stopped accruing
interest and was required to be converted to shares of Company Common Stock at a
conversion price of $1 per share. In 2001 a certificate was issued for shares on
account of this debt, but the share certificate has not been delivered because
of uncertainties regarding the extent of the Company's obligations, which will
ultimately be resolved in the pending litigation.

         The Company has resolved its dispute with The Iowa Packing Company
concerning the Company's use of the name "Pinnacle Foods, Inc." The parties
executed a Settlement Agreement pursuant to which the Company has promised to
forbear from using the name "Pinnacle Foods" in connection with its sales of
meat products.

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

         None.

                                     PART II


Item 5.  Market For Common Equity and Related Stockholder Matters.

         Pennexx Common Stock has been quoted on the OTC Bulletin Board since
February 7, 2002. The Common Stock trades under the symbol "PNNX." From August
21, 2000 until February 7, 2002, such shares were quoted over the counter. The
following table sets forth the high and low closing sales prices for the Common
Stock during the time periods indicated:



                                       12
<PAGE>

<TABLE>
<CAPTION>
                                                               High              Low
         2002
<S>                                                         <C>               <C>
               First Quarter (through March 25, 2002)         $ 2.82            $ 1.10

         2001
               Fourth Quarter                                 $ 1.75            $ 1.25
               Third Quarter                                  $ 2.00            $ 1.39
               Second Quarter                                 $ 1.75            $ 1.40
               First Quarter                                  $ 2.13            $ 1.59

         2000
               Fourth Quarter                                 $ 3.50            $ 1.09
               Third Quarter (from August 21, 2000)           $ 3.50            $ 1.50
</TABLE>

         The information presented above was obtained from the NASDAQ internet
web site and reflects inter-dealer prices, without retail mark-up, markdown or
commission.

         On March 25, 2002 the last reported sales price of Pennexx Common Stock
was $2.00, and according to the Company's transfer agent there were 175 holders
of record of Pennexx Common Stock.

         On June 27, 2001, the Company sold 13,003,494 (later reduced to
12,510,161 shares; see, Item 1, "Business - Smithfield Transactions - Subsequent
Modification") shares of Common Stock to Smithfield that were not registered
under the Securities Act of 1933 at a price of $0.45 per share ($0.48 per share
after subsequent modification). The shares were exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933. Total cash proceeds of
the sale were $6 million. (See, Item 1, "Description of Business - Smithfield
Transaction.") The Company engaged no underwriters in connection with this sale,
and no underwriting discounts or commissions were paid.

         The $0.3 million convertible debenture (plus accrued interest) once
held by Mr. Matthews was converted into shares of common stock in accordance
with its terms, during 2001; however, the certificate for such shares has not
been delivered to Mr. Matthews because of uncertainties regarding the extent of
the Company's obligations which will ultimately be resolved in the pending
litigation between him and the Company. (See, Item 3, "Legal Proceedings.") This
conversion was exempt from registration pursuant to Section 3(a)(9) of the
Securities Act of 1933.

         During June of 2000 and March of 2001, the Company delivered a total of
226,194 shares of Common Stock in lieu of cash to a class of ten debenture
holders for the payment of interest on the debentures. In addition 1,206,667
shares were issued upon conversion of convertible debt. The price of the shares
delivered varied up to $1.69 per share in accordance with each debenture's
terms. In each case, such delivery of shares was exempt from registration under
Rule 506 promulgated under the Securities Act of 1933 and Section 3(a)(9)
thereof.



                                       13
<PAGE>

Item 6.  Management's Discussion and Analysis or Plan of Operation.

         Note Regarding Forward-Looking Statements

         This annual report statement contains certain forward-looking
statements. The forward-looking statements contained in this annual report
relate to projected results of operations, earnings, revenues, dividends, cash
flows and capital expenditures, management's future plans and objectives, future
economic performance, business strategies, operating efficiencies, budgets,
competitive positions, growth opportunities for existing and new businesses, and
other matters.

         These forward-looking statements, wherever they occur in this annual
report, are necessarily estimates reflecting the best judgment of the management
of the Company and involve a number of risks and uncertainties that could cause
actual results to differ from those suggested by the forward-looking statements.
These forward-looking statements should, therefore, be considered in light of
various important factors, including those set forth in this annual report.
Results could differ materially depending on such factors as Pennexx's inability
to generate cash and reduce debt, business climate, economic and competitive
uncertainties, higher production costs, reduced level of customer orders,
environmental and safety regulations and clean-up costs, adverse legal and
regulatory developments, and adverse changes in economic and political climates
around the world. Additional factors that could cause actual results to differ
from estimates or projections contained in the forward-looking statements
include, without limitation:

          o    the risk of legislative, regulatory or other governmental action
               imposing additional restrictions on Company operations or to
               increase the burden of necessary regulatory approvals for such
               operations;

          o    the risk of significant delay in obtaining or configuring
               additional space for the Company's growing operations,
               difficulties in achieving anticipated cost savings, difficulties
               in achieving other operational improvements and revenue
               enhancements, and diversion of management's focus and resources
               from other strategic opportunities and from operational matters
               during the expansion process;

          o    the risk that the assumptions and estimates underlying the
               anticipated cost savings may prove to be faulty or other factors
               may adversely affect the amount, nature or timing of anticipated
               cost savings;

          o    the risk that future state and Federal regulatory and/or
               legislative initiatives, including regulatory changes affecting
               the meat packaging industry and environmental matters might
               increase costs beyond the level anticipated, the development of
               competition in the case-ready niche of the meat packaging
               industry, including: legislative and regulatory restructuring
               initiatives, nature and resources of competitors entering the
               industry, and technological developments resulting in competitive
               disadvantages;

          o    the risks of unanticipated supply shortages (caused by unusual
               weather conditions, disease, or other cause), work stoppages




                                       14
<PAGE>

               (caused by catastrophic weather-related damage, labor disputes,
               unanticipated maintenance or repairs, transportation problems or
               other cause), all of which may affect revenues and margins; and

          o    the risk of pathogen contamination and resulting recall
               obligations.

         Words such as "estimate," "project," "plan," "intend," "expect,"
"believe," "anticipate" and similar expressions are intended to identify
forward-looking statements, although not every forward-looking statement
includes any of these words. These forward-looking statements are found at
various places throughout this annual report. Readers are cautioned not to place
undue reliance on these forward-looking statements. The Company will not
publicly revise these forward-looking statements unless required to do so under
applicable securities laws.

         Results of Operations

         Year Ended December 31, 2001

         Sales for the year ended December 31, 2001 were $42.4 million, which
represented an increase of approximately $28.8 million over sales of $13.6
million in 2000. This increase was almost exclusively the result of the increase
in the volume of products handled, but also partially due to a change in the mix
of products sold in favor of higher priced items. As the diversity of services
that the Company offers continues to grow, customers are increasing both the
range of products as well as the quantity ordered.

         Cost of goods sold for the year ended December 31, 2001 was $40.7
million which resulted in a gross profit of approximately $1.7 million or 3.9%
of sales. The Company's cost of goods sold is comprised of three main
components: meat, direct payroll and supplies. These items accounted for
approximately 69%, 15% and 11% of sales, respectively, in the year ended
December 31, 2001 as compared to 69%, 19% and 14% of sales in the prior year.
Direct payroll and supplies declined as a percentage of sales in 2001 compared
to 2000 due to increasing labor efficiencies and economies of scale.

         Operating expenses for the year ended December 31, 2001 were $4.1
million (9.7% of sales) as compared to $4.2 million (30.8% of sales) for the
year ended December 31, 2000. This decrease of $0.1 million resulted from
increased indirect payroll expenses, increased depreciation expenses, increased
maintenance expenses, increased insurance expenses, and increased freight and
commissions expenses, offset however by decreased consulting fees. Excluding the
$1.65 million charged to consulting fees in the year ended December 31, 2000
arising out of a pending dispute with a shareholder of the Company (see Item 3.
"Legal Proceedings"), operating expenses for that year were $2.53 million, or
18.6 % of sales. The decline in percentage of sales in 2001 as compared to 2000
was due to increasing operating efficiencies and economies of scale.

         Interest expense for the year ended December 31, 2001 was approximately
$0.2 million compared to approximately $0.4 million in 2000. This decrease in
interest expense is due to the repayment of loans in late 2000. The net loss for
the year ended December 31, 2001 was approximately $2.7 million or $0.14 per
share as compared to $5.0 million or $0.52 per share for 2000.




                                       15
<PAGE>

         The Company's losses have resulted from the fact that gross profit has
thus far been insufficient to cover overheads. Management believes that gross
profits can be improved in only three possible ways. First, additional
automation of the production process should increase gross margin. Second,
volume increases should produce correspondingly higher gross profits. Finally, a
change in mix of products in favor of more profitable cuts of meat would also
enhance gross profit. However, the Company's existing operations severely limit
its ability to implement these changes. First, the amount of meat processed is
limited by the physical space of the Pottstown facility, and space limitations
there also preclude installation of additional automation equipment. Moreover,
because the Company is in a service business, it must respond to its customers'
requested mix of products and it has virtually no ability to affect the mix of
products requested.

         The proposed move to the Tabor Road facility (See, Item 2,
"Properties.") is intended to address the space and automation issues.
Management believes that the new facility will allow the Company to increase
volume substantially and, after accounting for the increased costs associated
with the move (such as higher debt service expense), management expects that
such increased volume will lead to higher gross profits. In addition, the new
plant offers the physical layout to improve the Company's automation which,
after accounting for the costs of equipment acquisition, installation, and
training, should also increase gross profits. These projected increases in gross
profit, in turn, will help cover Company overheads.

         Year Ended December 31, 2000

         Sales for the year ended December 31, 2000 were $13.6 million. Sales
steadily increased since December 31, 1999 and the Company experienced a
dramatic increase in sales in the final quarter of the year. Although a portion
of the increase in sales in the fourth quarter was the result of a temporary
agreement to produce case-ready pork for Smithfield (which provided revenues of
approximately $3.0 million), rising sales to other customers have since replaced
the revenues generated by such agreement. The Company believes the catalyst for
the increase in sales was the announcement by Wal-Mart in 2000 of its intention
to transform its meat operations completely to a case-ready operation. Although
Wal-Mart is not one of the Company's customers, the Company believes that this
announcement accelerated the retail industry's transition to case-ready
operations and increased demand for case-ready MAP products.

         Cost of sales for the year ended December 31, 2000 was $14.0 million,
which resulted in a gross loss of $0.4 million. An increase in manufacturing
overhead associated with the opening of the Pottstown facility contributed to
this increase. This increase comprised approximately $110,000 in increased labor
costs. During the summer of 2000, the Company added approximately 200 employees
at the Pottstown facility to accommodate an anticipated increase in sales that
would occur in the fourth quarter of 2000. The Company believes its costs of
sales during this period reflects higher labor costs per unit of sales volume
than it expects in the future for two main reasons: first, the Company
maintained a larger work-force than was necessary to support its sales during
this period, and, second, the Company believed the efficiency of its employees
would improve as they gained more experience with the production process. (With
the benefit of hindsight, management believes these efficiencies have been




                                       16
<PAGE>

achieved in part.) The Company does not believe that the cost of meat supplies
contributed significantly to the increase in cost of sales during this period.

         Operating expense for the year ended December 31, 2000 was $4.2
million. During the year ended December 31, 2000, the Company continued a
comprehensive effort to educate and expand the work force to meet projected
sales volume increases. Meat handlers and managers alike required training in
the specialized process necessary to achieve a product shelf life acceptable to
the Company's customers. Some of the Company's employees required training to
enhance and maintain food safety standards pursuant to the Company's HACCP plan.
These education costs contributed to the increase in operating expense incurred
during this period.

         During this period, the Company completed renovations to the Pottstown
facility necessary to comply with USDA requirements. Although most of the cost
of such renovations was capitalized, some features of the renovation were
completed by the Company's own employees to expedite the process and to defray
the cost of outside labor. This internal compensation expense of approximately
$110,000 was not capitalized. Operating Expense was higher than it otherwise
would have been for this twelve-month period, in part, due to this uncapitalized
expense.

         Interest expense, net for the year ended December 31, 2000 was $0.4
million, and the net loss for the period was $5.0 million or $0.52 per share.

         Liquidity and Capital Resources

         The Company's minimal equity position of $300 at December 31, 2000
resulted from start-up expenses that were funded through operations and private
offerings of capital stock or convertible debt. The Company currently has no
convertible debt outstanding.

         Until the closing of the Smithfield transactions, the Company had been
chronically undercapitalized. Although the Company had a line of credit with a
small bank for a short time period, the line was supported by personal
guarantees of shareholders or officers. On May 17, 2001 Smithfield loaned the
Company $2 million, which the Company repaid on the closing date of the
Smithfield transactions, on June 27, 2001.

         Generally, the Company maintains an inventory of meat supplies equal to
approximately 75% of estimated weekly sales volume. Purchases are made using the
trade credit programs of suppliers, which allow the Company to purchase meat
supplies with payment due within seven days. Inventory is purchased generally on
a daily basis and in advance (i.e., in anticipation) of customer orders. The
Company's liquidity difficulty prior to the closing of the Smithfield
transactions was exacerbated by the requirement that it pay for meat supplies
sooner than it was able to get paid by its customers, and because, in the case
of the Company's largest customer, its meat supplier was also the paying agent
for the customer. This paying agent deducted current meat purchases from prior
amounts owed to the Company by the customer before remitting payment to the
Company.

         At December 31, 2001, the Company had $2.4 million of cash (and cash
equivalents). The Company's current ratio at December 31, 2001 was 2.44.
Although the Company's liquidity problem prior to the closing of the Smithfield
transactions had not prevented the Company from filling orders (i.e. by




                                       17
<PAGE>

preventing the Company from purchasing necessary raw materials or paying its
workforce) it had caused the Company to seek capital infusions repeatedly since
commencement of business and has required the indulgence periodically of other
vendors.

         By completing the Smithfield transactions, the Company addressed its
liquidity problem in two ways. First, the Company's immediate need for capital
was addressed by the $6 million purchase price paid by Smithfield for its equity
stake in the Company. Second, the Company obtained a $30 million line of credit
through Smithfield on terms that the Company had not been able to achieve before
forging a relationship with Smithfield. The Smithfield transactions should allow
the Company to meet its ongoing need for sufficient capital. However, if
revenues do not increase sufficiently so that gross profit is sufficient to
cover overheads, there is no assurance that the Smithfield transactions will
provide sufficient capital for the Company to operate successfully.

         The Company is preparing to move into a new and larger facility to
automate its process more fully. See Item 2, "Properties." The Company's
preliminary estimate to purchase, renovate, and equip the new facility is as
follows:


                  Purchase Price            $2.0 million

                  Renovation Cost           $2.0 million to $3.0 million

                  Equipment Costs           $6.5 million to $10.0 million
                                            ------------------------------

                  Total                     $10.5 million to $15.0 million
                                            ==============================

In addition, the Company will incur moving expenses and other costs associated
with the proposed move to the new facility. Although employment will be offered
to the existing work force, the Company believes that it will have to replace
that portion of the work force which chooses not to relocate from Pottstown. As
a result, the Company will probably experience, at least temporarily, certain
lost efficiencies among workers, and will incur additional costs to train new
employees.

         Smithfield has agreed to allow the Company to purchase, renovate, and
equip the facility with borrowings under its existing $30 million credit line of
up to $2 million, $2 million, and $6.5 million, respectively. If the actual
costs exceed these amounts, Pennexx will have to fund the difference from cash
flow or will need to obtain additional financing. The amount outstanding on the
Smithfield line of credit was as follows on the dates indicated:

<TABLE>
<CAPTION>
                         Description                          December 31, 2001              March 25, 2002

<S>                                                               <C>                           <C>
                  Principal Advances                              $ 2,500,000                   $2,500,000

                  Accrued Interest                                   $ 58,000                     $ 91,000
                                                              ----------------            -----------------

                  Total                                           $ 2,558,000                   $2,591,000
                                                              ----------------            -----------------
</TABLE>

         The Company has also applied for certain economic development related
financing for the new facility in the aggregate amount of up to $2.75 million.
To the extent received, these amounts would be used to repay the advances made
by Smithfield on the line of credit. The economic development loans, if
obtained, would bear below market interest rates.



                                       18
<PAGE>

Item 7.  Financial Statements.

         The Company's financial statements are appended to this Annual Report
on Form 10-KSB beginning at page F-1.

Item 8.  Changes in and Disagreements With Accountants on Accounting and
         Financial Disclosure.

         The Company engaged Larson, Allen, Weishair & Co., LLP ("LarsenAllen")
to audit the Company's financial statements for the period ended December 31,
1999. Subsequent to the completion of that audit, Pennexx decided to change
accountants from LarsonAllen to Kronick Kalada Berdy and Co., P.C. ("KKB"). When
the decision to change accountants was made by the Board of Directors, on or
about September 1, 2000, the Company knew of no disagreements between the
Company and LarsenAllen on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure. Furthermore,
LarsenAllen's report on the Company's financial statements (for the period
ending December 31, 1999) did not contain an adverse opinion or disclaimer of
opinion nor was it modified as to uncertainty, audit scope or accounting
principles.

         Because LarsenAllen's audit of the Company's financial statements for
the period ended December 31,1999 did not meet the SEC's requirements for
auditor independence, when the Company was preparing its Registration Statement
on Form 10-SB in 2001, the Company engaged KKB to re-audit the Company's
financial statements for the period ended December 31, 1999. LarsenAllen
reimbursed the Company for the cost of the audit performed by KKB.

         Except in the limited manner described above, there are no
disagreements between the Company on the one hand and LarsenAllen or KKB on the
other hand on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure. KKB's reports on the
Company's financial statements (for the periods ended December 31, 1999, 2000,
and 2001) did not contain an adverse opinion or disclaimer of opinion nor was
either modified as to uncertainty, audit scope or accounting principles.

                                    PART III

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

         Incorporated by reference to the Company's definitive proxy statement
for the shareholder meeting to be held on June 13, 2002 which will be filed with
the Securities and Exchange Commission within 120 days of the end of the
Company's fiscal year ended December 31, 2001.

Item 10. Executive Compensation.

         Incorporated by reference to the Company's definitive proxy statement
for the shareholder meeting to be held on June 13, 2002 which will be filed with
the Securities and Exchange Commission within 120 days of the end of the
Company's fiscal year ended December 31, 2001.




                                       19
<PAGE>

Item 11. Security Ownership of Certain Beneficial Owners and Management.

         Incorporated by reference to the Company's definitive proxy statement
for the shareholder meeting to be held on June 13, 2002 which will be filed with
the Securities and Exchange Commission within 120 days of the end of the
Company's fiscal year ended December 31, 2001.

Item 12. Certain Relationships and Related Transactions.

         Incorporated by reference to the Company's definitive proxy statement
for the shareholder meeting to be held on June 13, 2002 which will be filed with
the Securities and Exchange Commission within 120 days of the end of the
Company's fiscal year ended December 31, 2001.

Item 13. Exhibits List and Reports on Form 8-K.

         3(ii)    Amended and Restated By-laws *

         10.1     Employment Agreement by and between Pinnacle Foods, Inc. and
                  Michael D. Queen dated March 1, 2001 *

         10.2     Termination Agreement by and between Pinnacle Foods, Inc. and
                  Samuel Lundy dated June 9, 2000 *

         10.3     Agreement by and between Pinnacle Foods, Inc. and United Food
                  & Commercial Workers Union Local 56, AFL-CIO dated October 1,
                  1999 (as amended February 1, 2001) *

         10.4     Agreement by and between Pinnacle Foods, Inc. and Robert V.
                  Matthews dated November 22, 2000 *

         10.5     Loan Agreement by and between Pinnacle Foods, Inc. and Robert
                  V. Matthews dated June 29, 2000 *

         10.6     Amended and Restated Lease Agreement between Pinnacle Foods,
                  Inc. and Theodore C. Asousa and Theodore Asousa, Jr., T/A
                  Asousa Partnership dated April 1, 2000 with respect to
                  Pottstown Facility *

         10.7     Lease Agreement by and between Pinnacle Foods, Inc. and S.
                  Lundy & Sons, Inc. dated August 1, 1999 with respect to
                  Philadelphia Facility *

         10.8     Stock Purchase Agreement by and between Pinnacle Foods, Inc.
                  and Smithfield Foods, Inc. dated May 31, 2001 *

         10.9     Warrant Certificate of Pinnacle Foods, Inc. issued to
                  Smithfield Foods, Inc. dated June 27, 2001 *

         10.10    The Standstill Agreement by and between Pinnacle Foods, Inc.,
                  Smithfield Foods, Inc., Ellis M. Shore and Michael D. Queen
                  dated June 27, 2001 *



                                       20
<PAGE>

         10.11    Registration Rights Agreement between Pinnacle Foods, Inc. and
                  Smithfield Foods, Inc. dated June 27, 2001*

         10.12    Credit Agreement between Pinnacle Foods, Inc. and Smithfield
                  Foods, Inc. dated June 27, 2001 *

         10.13    Indemnification Agreement between Pinnacle Foods, Inc. and
                  Ellis M. Shore dated June 27, 2001 *

         10.14    Consulting Agreement between Pinnacle Foods, Inc. and Ellis M.
                  Shore dated March 1, 2001 *

         10.15    Employment Agreement between Pinnacle Foods, Inc. and Dennis
                  Bland dated June 28, 2001 **

         10.16    Agreement of Sale by and between Pinnacle Foods, Inc. and PIDC
                  Financing Corporation dated January 28, 2002 ***

         10.17    First Amendment to Credit Agreement between Pennexx Foods,
                  Inc. and Smithfield Foods, Inc. dated March 28, 2002 ***

         16.1     Letter on Change in Certifying Accountant dated March 15, 2002
                  ***

         *        Incorporated by reference to Amendment No. 1 to the
                  Registration Statement on Form 10-SB (filed with the
                  Commission July 9, 2001).

         **       Incorporated by reference to Amendment No. 2 to the
                  Registration Statement on Form 10-SB (filed with the
                  Commission August 31, 2001).

         ***      Filed herewith

         No Current Reports on Form 8-K were filed during the fourth calendar
quarter of 2001.




                                       21
<PAGE>



                                   SIGNATURES

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

                               PENNEXX FOODS, INC.
 -------------------------------------------------------------------------------
                                  (Registrant)

         By:      /s/ Michael D. Queen
                ----------------------------------------------------------------
                Michael D. Queen, President

         Date:                          March 28, 2002
                ----------------------------------------------------------------

         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>
            Name                  Position                         Signature                    Date
<S>                   <C>                               <C>                             <C>
Michael D. Queen      President, Director, and
                      Principal Executive Officer          /s/ Michael D. Queen         March 28, 2002
                                                         ------------------------
Thomas K. McGreal     Principal Financial Officer,
                      Principal Accounting Officer,
                      and Director                       /s/ Thomas K. McGreal          March 28, 2002
                                                         ---------------------
C. Brent Moran        Director
                                                             /s/ C. Brent Moran         March 28, 2002
                                                         --------------------------
Joseph W. Luter, IV   Director
                                                          /s/ Joseph W. Luter, IV       March 28, 2002
                                                         ------------------------
Michael H. Cole       Director
                                                            /s/ Michael H. Cole         March 28, 2002
                                                         --------------------------

</TABLE>





                                       22
<PAGE>


                          Independent Auditors' Report





Board of Directors
Pennexx Foods, Inc.
Pottstown, Pennsylvania

We have audited the accompanying balance sheets of Penexx Foods, Inc. as of
December 31, 2001 and December 31, 2000, and the related statements of
operations, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provides 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 Pennexx Foods, Inc. as of
December 31, 2001 and December 31, 2000, and the results of its operations and
its cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.



/s/ KRONICK KALADA BERDY & CO.
Kingston, Pennsylvania
February 6, 2002




                                      F-1
<PAGE>


                                              PENNEXX FOODS, INC.
                                                 BALANCE SHEETS
                                           DECEMBER 31, 2001 AND 2000

                                                     ASSETS

<TABLE>
<CAPTION>
                                                                              2001                 2000
                                                                       -------------------    ----------------
<S>                                                                         <C>
Current Assets:                                                             $ 2,415,785                -
         Cash
         Receivables:
              Trade, net of allowance for doubtful accounts                   2,595,495           $ 1,290,194
                of $25,595
              Other                                                                                    95,410
         Inventory                                                            1,142,223               477,765
         Prepaid expenses                                                       201,843                49,834
                                                                           -----------------    ----------------
              Total current assets                                            6,355,346             1,913,203

Property and equipment                                                        4,186,944             3,030,574
Less accumulated depreciation                                                   947,232               369,846
                                                                           -----------------    ----------------
              Net property and equipment                                      3,239,712             2,660,728


Other assets                                                                     61,772                38,698
                                                                           -----------------    ----------------

                                                                            $ 9,656,830           $ 4,612,629
                                                                           =================    ================

                                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
        Notes payable                                                             -                $  400,000
        Current installments of capital lease obligations                       $233,000              254,179
        Accounts payable                                                       2,100,254            2,887,875
        Accrued expenses                                                         266,784              276,305
                                                                           ----------------     -----------------
               Total current liabilities                                       2,600,038            3,818,359

Capital lease obligations, less current installments                             677,790              793,891
Note Payable                                                                   2,500,000               -
                                                                           ----------------     -----------------
                                                                               3,177,790              793,891
Stockholders' equity:
        Common stock                                                             264,249              133,673
        Additional paid-in capital                                            12,097,881            5,768,372
        Deficit                                                               (8,169,140)          (5,483,016)
        Deferred compensation                                                   (313,988)            (418,650)
                                                                           ----------------     -----------------
                                                                               3,879,002                  379
                                                                           ----------------     -----------------

                                                                             $ 9,656,830          $ 4,612,629
                                                                           ================     =================
</TABLE>

See notes to financial statements.



                                                      F-2
<PAGE>

                                              PENNEXX FOODS, INC.
                                            STATEMENTS OF OPERATIONS
                                 FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                                                        2001                          2000
                                                                   ----------------             ----------------
<S>                                                                    <C>
Sales, net                                                             $42,331,808                 $ 13,595,490
Cost of sales:
       Meat                                                             29,205,156                    9,327,104
       Labor                                                             6,448,694                    2,548,031
       Supplies                                                          4,679,435                    1,849,842
       Other                                                               332,926                      289,362
                                                                   ---------------               ---------------

Total cost of sales                                                     40,666,211                   14,014,339
                                                                   ---------------               ---------------

Gross profit (loss)                                                      1,665,597                     (418,849)
                                                                   ---------------               ---------------

Operating expenses:
     Professional Fees:
            Consulting                                                     286,727                    2,030,007
            Other                                                          280,338                      251,136
     Salaries, wages and related expenses                                  803,542                      429,157
     Depreciation                                                          595,992                      333,866
     Cleaning                                                              284,070                      152,455
     Utilities                                                             261,408                      135,977
     Facilities rent                                                       152,407                      130,774
     Freight out                                                           202,657                      129,598
     Insurance                                                             287,854                      101,033
     Travel and entertainment                                              126,075                       79,354
     Office                                                                 54,896                       68,352
     Commissions                                                           257,269                       63,493
     Repairs and maintenance                                               248,351                       57,536
     Taxes                                                                  49,861                       43,762
     Waste removal                                                          44,127                       39,654
     Telephone                                                              67,563                       38,979
     Advertising and promotion                                              14,100                       38,227
     Provision for doubtful accounts                                          --                         25,595
     Equipment rental                                                       66,405                       18,729
     Miscellaneous                                                          29,145                       15,584
                                                                   ---------------               ---------------

Total operating expenses                                                 4,112,787                    4,183,268
                                                                   ---------------               ---------------

Loss from operations                                                    (2,447,190)                  (4,602,117)

Interest expense                                                           238,934                      351,458
                                                                   ---------------               ---------------

Net loss                                                               $(2,686,124)                 $(4,953,575)
                                                                   ---------------               ---------------

Loss per share                                                             (0.14)                $        (0.52)
                                                                   ===============               ===============

Average shares outstanding                                              18,823,255                    9,467,707
                                                                   ===============               ===============
</TABLE>

                                       See notes to financial statements.





                                                      F-3
<PAGE>


                               PENNEXX FOODS, INC.
                            STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                                                           2001                   2000
                                                                       -----------           -----------
Cash flows used for operating activities:
<S>                                                                    <C>                   <C>
         Net loss                                                      $(2,686,124)          $(4,953,575)
         Adjustments:
           Provision for doubtful accounts                                    --                  25,595
           Depreciation                                                    595,992               333,866
           Amortization of compensatory options                            104,662                  --
           Common stock issued for:
              Compensation                                                    --                 125,600
              Interest                                                      31,318               226,130
              Consulting services                                          128,000             1,896,600
           Changes in assets and liabilities
              Receivables                                               (1,209,891)           (1,311,097)
              Inventory                                                   (664,458)             (465,277)
              Prepaid expenses                                            (152,009)              (38,452)
              Accounts payable                                            (787,621)            2,678,730
              Accrued expenses                                              (9,521)              236,227
                                                                       -----------           -----------
Net cash used for operating activities                                  (4,649,652)           (1,245,653)

Net cash used for investing activities:
     Purchase of property and equipment                                 (1,011,378)             (812,962)
     Other assets                                                          (23,074)              (27,366)
                                                                       -----------           -----------
Net cash used for investing activities:                                 (1,034,452)             (840,328)

Cash flows from financing activities:
     Proceeds from issuance of common stock                              5,900,767             1,238,500
     Proceeds from issuance of debt                                      2,500,000             1,515,240
     Repayments on debt                                                       --                (482,454)
     Repayments on capital lease obligations                              (300,878)             (277,576)
                                                                       -----------           -----------
Net cash provided by financing activities                                8,099,889             1,993,710

Net increase (decrease) in cash                                          2,415,785               (92,271)

Cash, beginning of year                                                       --                  92,271
                                                                       -----------           -----------

Cash, end of year                                                      $ 2,415,785           $      --
                                                                       ===========           ===========

Supplemental disclosures of cash flow information:
     Interest paid during the year                                     $   209,274           $   114,125
                                                                       ===========           ===========

     Non-cash items:
         Forgiveness of debt from a shareholder/officer                $      --             $   270,000
         Common stock issued for equipment                                    --                 311,325
         Purchase of equipment under capital lease agreements              163,598               834,749
         Debt converted into common stock                                  400,000               995,240
         Increase in additional paid in capital
              and deferred compensation                                       --                 418,650
</TABLE>


                                        See notes to financial statements.



                                                      F-4
<PAGE>



<TABLE>
<CAPTION>
                                                        PENNEXX FOODS, INC.
                                                 STATEMENT OF STOCKHOLDERS' EQUITY
                                           FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2002

                                    Common stock
                                    ------------------------------
                                    $.01 par value
                                    ------------------------------
                                    50,000,000 shares authorized
                                    ------------------------------
                                       Shares                       Additional
                                      issued or                      paid-in                         Deferred
                                       issuable       Amount         capital          Deficit      compensation           Total
                                    ----------------------------------------------------------------------------------------------
<S>                                  <C>             <C>            <C>             <C>                               <C>
Balance, January 1, 2000              $8,250,000      $82,500        $337,500        $(529,441)                        $(109,441)
Net loss                                                                            (4,953,575)                       (4,953,575)
Grant of compensatory options                                         418,650                       $ (418,650)                 -
Common stock issued or issuable for:
   Cash                                1,275,000       12,750       1,225,750                                           1,238,500
   Compensation                          785,000        7,850         117,750                                             125,600
   Equipment                             202,300        2,023         309,302                                             311,325
   Consulting                          1,505,000       15,050       1,881,550                                           1,896,600
   Interest                              209,998        2,100         224,030                                             226,130
   Convertible debt                    1,140,000       11,400         983,840                                             995,240

Shareholder/officer debt forgiveness                                  270,000                                             270,000
                                    ----------------------------------------------------------------------------------------------

Balance, December 31, 2000            13,367,298     $133,673      $5,768,372      $(5,483,016)     $ (418,650)              $379

Net loss                                                                            (2,686,124)                       (2,686,124)
Amortization of compensatory options                                                                    104,662           104,662
Common stock issued or issuable for:
   Cash, net                          12,510,161      125,102       5,775,665                                           5,900,767
   Consulting                            160,000        1,600         126,400                                             128,000
   Interest                               20,696          207          31,111                                              31,318
   Convertible debt                      366,667        3,667         396,333                                             400,000
                                    ----------------------------------------------------------------------------------------------
Balance, December 31, 2001            26,424,822    $ 264,249     $12,097,881      $(8,169,140)     $ (313,988)        $3,879,002
                                    ==============================================================================================


                                                             See notes to financial statements.

</TABLE>


                                                                F-5
<PAGE>



                               PENNEXX FOODS, INC.

                      NOTES TO AUDITED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 2001 AND 2000


         1. Business description and summary of significant accounting policies:

         Pennexx Foods, Inc. (the Company), incorporated on July 20, 1999 in the
         Commonwealth of Pennsylvania under the name Pinnacle Foods, Inc.,
         prepares case-ready meat for distribution to food retailers in the
         Northeastern United States. The Company grants credit to its customers
         without requiring collateral. Prior to December 31, 2001, the Company
         was formerly known as Pinnacle Foods, Inc.

         Inventory:
         The Company's inventories are valued at the lower of cost or market.
         The first-in, first-out method is used for materials and standard cost
         is used for labor and overhead. Inventories consist of the following:

                                                2001               2000
                                                ----               ----
               Beef, pork, veal, lamb        $682,000          $272,000
               Packaging supplies             344,000           200,000
               Finished goods                 116,000             6,000
                                           ----------          --------
                                           $1,142,000          $478,000
                                           ==========          ========

         Property and equipment:
         Items capitalized as property and equipment are recorded at cost and
         depreciated over the estimated useful lives of the assets by the
         straight line method. Maintenance and repair cost are expensed as
         incurred. Improvements that materially extend the life of an asset are
         capitalized.

         Revenue recognition:
         Revenues from sales are recorded upon delivery of the product to
         customers.

         Advertising costs:
         Advertising expenses are recorded when incurred. Advertising expense
         for 2001 and 2000 were $14,000 and $38,000, respectively.

         Start-up costs:
         In accordance with Statement of Position 98-5 "Reporting on the Costs
         of Start-Up Activities," costs of start-up activities, including
         organization costs, are expensed as incurred. Prior to SOP 98-5,
         start-up costs were capitalized and amortized into operations over a
         period of time.




                                      F-6
<PAGE>
                               PENNEXX FOODS, INC.

                      NOTES TO AUDITED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 2001 AND 2000

         Fair value:
         The fair value of the Company's financial instruments approximate the
         amounts recorded in the financial statements.

         Use of estimates:
         Management uses estimates and assumptions in preparing financial
         statements. Those estimates and assumptions affect the reported amounts
         of assets and liabilities, the disclosure of contingent assets and
         liabilities and the reported revenues and expenses. Actual results
         could differ from these estimates.

         2. Loss per share:

         Basic loss per share is computed by dividing the loss applicable to
         common shareholders by the weighted average number of common shares
         outstanding. Diluted loss per share is computed by dividing the loss
         applicable to common shareholders by the weighted average of common
         shares outstanding plus the number of additional common shares that
         would have been outstanding if the dilutive potential common shares had
         been issued. There were no dilutive potential common shares in 2001 or
         2000 because the assumed exercise of the options or convertible debt
         would be anti-dilutive.

         3. Cash concentrations:

         The Company maintains its principal cash accounts in commercial banks
         located in Pennsylvania. Accounts at each bank are insured by the
         Federal Deposit Insurance Corporation (FDIC) up to $100,000. At
         December 31, 2001, cash balances in commercial banks exceeded the FDIC
         insurance coverage by $3,017,000.

         4. Significant customers:

         For the year ended December 31, 2001, the Company had two customers
         that accounted for approximately 58% and 28% of the Company's sales.
         These customers accounted for 57% and 27% of Company's accounts
         receivable at December 31, 2001.

         For the year ended December 31, 2000, the Company had three customers
         that accounted for approximately 51%, 27% and 16% of the Company's
         sales. These customers accounted for 59%, 5% and 30% of Company's
         accounts receivable at December 31, 2000.





                                      F-7
<PAGE>
                               PENNEXX FOODS, INC.

                      NOTES TO AUDITED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 2001 AND 2000

         5. Property and equipment:

         Property and equipment at December 31 is comprised of the following:

<TABLE>
<CAPTION>
                                                2001                 2000          Depreciable Lives
                                                ----                 ----          -----------------
<S>                                          <C>                  <C>                <C>
              Equipment                      $3,605,000           $ 2,683,000        5-7 Years
              Leasehold improvements            396,000               304,000         3 Years
              Vehicles                           59,000                               5 Years
              Furniture and fixtures             47,000                29,000        3-7 Years
              Computer                           80,000                15,000         5 Years
                                            -----------          ------------
                                              4,187,000             3,031,000
              Accumulated depreciation      (  947,000)          (   370,000)
                                            -----------          -----------

                                             $3,240,000            $2,661,000
                                             ==========            ==========
</TABLE>

         Included in equipment and accumulated depreciation are $1,553,000 and
         $382,000 for assets that were purchased via capital leases at December
         31, 2001 and $1,376,000 and $157,000 for assets that were purchased via
         capital leases at December 31, 2000.

6.       Notes payable:

         Notes payable consists of the following at December 31, 2001 and 2000:

                                                   2001             2000
                                                ----------      ---------
                Note payable (a)                $2,500,000
                Note payable (b)                                $ 300,000
                Note payable (c)                                  100,000
                                                ----------      ---------
                                                $2,500,000      $ 400,000
                                                ==========      =========

         Note payable (a) represents an advance against a $30,000,000 revolving
         loan. This revolving loan is provided by Smithfield Foods, Inc., a
         shareholder, and bears interest at 1% above prime, is secured by all of
         the Company's assets, and matures in 2006. This loan contains the
         following financial covenants: net worth ratio, capital expenditure
         limitations and borrowing base limitations. At December 31, 2001, the
         Company was in violation of the capital expenditure limitation.
         Smithfield has waived this covenant violation.

         Note payable (b) was unsecured, bore interest at 10% per year from date
         of issuance (June 29, 2000) until November 22, 2000 (when it stopped




                                      F-8
<PAGE>
                               PENNEXX FOODS, INC.

                      NOTES TO AUDITED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 2001 AND 2000

         accruing interest) and matured on August 1, 2001. The Company issued
         common stock at a conversion ratio of $1 a share in repayment of this
         debt but has not delivered the share certificate for these shares as a
         result of pending litigation between the Company and former noteholder
         (Note 11). Note payable (c) was unsecured and matured on June 30, 2001.
         This note was repaid with common stock at a conversion ratio of $1.50 a
         share.

         7. Capital lease obligations:

         The Company is a lessee under capital leases for various equipment.

         Maturities under capital leases for the four years subsequent to
         December 31, 2001 are as follows:

                  2002                                          $ 325,000
                  2003                                            322,000
                  2004                                            337,000
                  2005                                            118,000
                                                                ---------
                  Total capital leases payable                  1,102,000
                  Less amounts representing interest              191,000
                                                                ---------

                  Present value of net minimum lease payments   $ 911,000
                                                                =========

         8. Stockholders' equity:

         Common stock:

         There are 50,000,000 shares of common stock, $.01 par value,
         authorized; 26,424,822 shares issued or issuable and outstanding at
         December 31, 2001. During 2001, the Company issued 160,000, 20,696 and
         366,667 shares of common stock for consulting, interest and loan
         conversions, respectively. The amounts charged to operations were
         $128,000 for consulting and $31,000 for interest. In accordance with
         Financial Accounting Standard Board Statement No. 123 "Accounting for
         Stock-Based Compensation," the valuation of the stock issuances was
         determined by the services rendered, liability foregone or the market
         value of the stock at the time of issuance. The stock issued for the
         loan conversions was determined by the conversion rights included in
         the debt agreements.

         In June 2001, the Company entered into an agreement with Smithfield
         Foods, Inc. ("Smithfield") in which Smithfield purchased shares of the
         Company which resulted in Smithfield's owning 50% of the outstanding
         shares for $6,000,000.




                                      F-9
<PAGE>
                               PENNEXX FOODS, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 2001 AND 2000

         In addition, the Company issued Smithfield a stock warrant. The warrant
         gives Smithfield the right to purchase, from time to time, the number
         of shares of common stock issued to any person other than Smithfield,
         if such issuance has not been approved by at least one director of the
         Company who was nominated by Smithfield or was not otherwise in
         compliance with the Standstill Agreement. In particular, Smithfield
         will have the right to purchase additional shares of the common stock
         when any person who currently holds an option to purchase shares of
         common stock exercises that option.

         The exercise price under the warrant depends on the circumstances under
         which the Company issues the common stock. When the Company issues
         shares of the common stock other than issuances of stock in accordance
         with or as permitted by the terms of the Standstill Agreement, the
         purchase price will be $.01 per share. The discount will strongly
         discourage the Company from issuing shares of common stock other than
         pursuant to the exercise of an existing option or otherwise in
         accordance with the Standstill Agreement. The term of the warrant
         expires after the later of: (1) the date on which the last currently
         existing option expires or 30 days after its exercise, and (2) the date
         on which the limitation period, as defined, expires.

         Additional paid-in capital:
         Included in additional paid-in capital in 2000 was debt forgiveness
         from a former shareholder/officer in the amount of $270,000. In
         accordance with Accounting Principles Board Opinion No. 26 "Early
         Extinguishment of Debt," this transaction was treated as a capital
         transaction. This transaction was completed in conjunction with the
         shareholder/officer termination from the Company, sale of his stock and
         release from his personal guarantee of Company debt. This debt arose in
         1999 ($250,000) and 2000 ($20,000). Interest was due monthly and
         calculated at 1% above the prime rate. The proceeds of this debt were
         used for working capital. The original maturities were July 2001 and
         June 2000, respectively. No gain or loss was recognized on this
         transaction.




                                      F-10
<PAGE>
                               PENNEXX FOODS, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 2001 AND 2000

         Stock options:
         In 1999 and 2001, The Board of Directors and shareholders approved
         stock option plans in which incentive stock options and non-qualified
         stock options may be granted. The plans provide for the grant of
         options to purchase up to 1,500,000 and 1,000,000 shares of Company
         common stock, respectively. Upon the termination or expiration of any
         stock options granted, the shares covered by such terminated or expired
         stock options will be available for further grant; 870,000 options were
         available for grant at December 31, 2001. The Board of Directors, at
         the date of grant of an option, determines the number of shares subject
         to the grant and the terms of such option. In addition, the Board of
         Directors granted 200,000 options outside of the 1999 stock option
         plan. All outstanding options vest over four years and terminate
         between five and ten years, after grant.

         Changes in outstanding common stock options granted are summarized
         below:

<TABLE>
<CAPTION>
                                                                 2001                           2000
                                                     ------------------------------    ------------------------

                                                                       Average                        Average
                                                        Number         exercise        Number        exercise
                                                       of shares         price        of shares        price
                                                       ---------      ----------      ---------      -------
<S>                                                     <C>                 <C>           <C>           <C>
         Balance at beginning of year                   1,565,000        $  .36           50,000      $  .16
         Options granted                                  375,000          1.07        1,665,000         .36
         Options forfeited                              ( 110,000)          .51         (150,000)        .16
                                                        ---------      --------        ---------      ------
         Balance at end of year                         1,830,000       $   .50        1,565,000      $  .36
                                                        =========      ========        =========      ======
         Options exercisable at year-end                  376,000       $   .34           13,000      $  .16
                                                        =========      ========        =========      ======
</TABLE>


         Exercise prices and weighted average remaining contractual lives are
         summarized below:

<TABLE>
<CAPTION>
                    Number of Options                 Option Price                 Remaining Life
                    -----------------                 ------------                 --------------
<S>                      <C>                             <C>                            <C>
                         320,000                         $ .16                          7.31
                         450,000                         $ .30                          8.68
                         550,000                         $ .33                          8.66
                         385,000                         $1.00                          9.20
                         125,000                         $1.25                          9.83
</TABLE>

         In accordance with the an election under accounting principles
         generally accepted in the United States of America for stock options
         the Company has recorded no compensation




                                      F-11
<PAGE>
                               PENNEXX FOODS, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 2001 AND 2000

         cost, except for those shares, the respective exercise prices of which
         were less than the fair market value on the measurement date, for its
         stock options. The excess between the fair market value of the shares
         on the measurement date over the exercise price is recorded as deferred
         compensation and will be charged to operations over the vesting period
         of four years.

         Had compensation cost for stock options been determined based on the
         fair value at the grant dates for awards under the plans, the Company's
         net loss and per share amounts would have been changed to the pro forma
         amounts set forth below:

                                            2001              2000
                                            ----              ----
             Net loss:
               As reported                $(2,686,000)       $(4,954,000)
                                          ============       ============
               Pro forma                   (2,803,000)        (4,984,000)
                                           ===========        ===========
             Basic loss per share:
               As reported            $         (0.14)   $(         0.52)
                                      ================   ================
               Pro forma              $         (0.15)   $(         0.53)
                                      ================   ================


         The fair values were determined using the Black-Scholes option-pricing
         model with the following weighted average assumptions:

                    Dividend yield                     0.0%              0.0%
                    Risk free interest rate           3.41%             6.08%
                    Expected life                  10 years          10 years
                    Volatility                          66%              107%

9.       Income taxes:

         The Company has $6,488,000 in Federal and state net operating loss
         carryovers, which can be used to offset future taxable income. The
         Federal and state net operating loss carryforwards begin to expire in
         the year 2019 and 2009, respectively.




                                      F-12
<PAGE>
                               PENNEXX FOODS, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 2001 AND 2000

         In 2001 and 2000, the tax benefit of the current years' net operating
         loss carryforwards of $2,758,000 and $2,131,000, respectively, were
         offset by valuation provisions. The reconciliation between income tax
         benefit at the Federal statutory rate of 34% and tax on the Statements
         of Operations is as follows:

<TABLE>
<CAPTION>
                                                                            2001                    2000
                                                                        ----------              ----------
<S>                                                                    <C>                    <C>
        Federal income tax benefit at the statutory rate                $  913,000              $1,684,000
        State income tax benefit                                           245,000                 446,000
        Other                                                           (   3,000)                   1,000
                                                                        ----------              ----------
                                                                         1,155,000               2,131,000
        Valuation allowance                                              1,155,000               2,131,000
                                                                        ----------              ----------
        Tax benefit for the statements of operations                    $        0              $        0
                                                                        ==========              ==========
</TABLE>


         The tax effects of the carryforwards and the deductible and taxable
         temporary differences that give rise to deferred tax assets and
         liabilities at December 31 are as follows:

                                                   2001               2000
                                               -----------        -----------

Deferred tax assets:
     Allowance for doubtful accounts           $    11,000        $    11,000
     Compensation                                  801,000            764,000
     Inventory                                       8,000              3,000
     Net operating loss carryforwards            2,790,000          1,604,000
                                               -----------        -----------

         Total gross deferred tax assets         3,610,000          2,382,000

Deferred tax liabilities:
     Premises and Equipment                       (149,000)           (76,000)
Valuation allowance                             (3,461,000)        (2,306,000)
                                               -----------        -----------

                 Net deferred tax assets       $         0        $         0
                                               ===========        ===========

         10. Lease commitments:

         The Company leases its Philadelphia and Pottstown locations (see Note
         12). The Philadelphia lease is for a term of 37 months ending August
         31, 2002 and requires monthly payments of approximately $6,000. This
         property is leased from individuals were are related to a former
         shareholder/officer. The Pottstown lease is for an initial term of one
         year ending April 30, 2001 with an automatic renewal of three
         consecutive periods of one year each unless 60 day notification is
         given by the Company prior to the end of the initial term or renewal
         term and requires monthly payments of $8,000. This





                                      F-13
<PAGE>
                               PENNEXX FOODS, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 2001 AND 2000

         notification was given in the first quarter of 2002. Total rent expense
         under these leases was approximately $158,000.

         11. Related party transactions:

         During 2000, the Company engaged a shareholder to assist the Company in
         obtaining debt financing to be used for a potential expansion into New
         England and for working capital purposes. The shareholder was also the
         holder of note payable (b) referred to in footnote 6. The agreement
         provides that the Company would issue to the shareholder 1.1 million
         shares of Company common stock on February 1, 2001, and upon the
         closing of debt financing in the amount of at least $9.5 million
         procured pursuant to the agreement, a second group of 1.1 million
         shares of Company common stock.

         The agreement also provides that if, prior to the completion of such
         debt financing and prior to the termination of the agreement, more than
         30% of the Company's outstanding shares of common stock shall be sold
         in a single transaction or a series of related transactions, the
         shareholder would be entitled to receive the second group of 1.1
         million shares. The agreement further provides that if the Company
         sells new shares at a price of less than $2.50 per share at any time
         after the shareholder becomes entitled to receive the second group of
         1.1 million shares, the number of shares otherwise deliverable pursuant
         to the agreement is increased in accordance with a formula that varies
         inversely with the sales price for such newly sold shares. Finally, the
         agreement granted the shareholder an option to acquire for no
         additional consideration up to 2,000,000 additional shares of Company
         common stock if any such debt financing were forgiven by the lender(s)
         under specified circumstances. The Company terminated the agreement on
         April 6, 2001 in accordance with its terms.

         The shareholder has brought suit against the Company. In the complaint,
         the shareholder has demanded that the Company issue and deliver to him
         (a) 2.2 million shares of Pennexx Common Stock, (b) an option to
         purchase for no additional consideration 2.0 million shares of Pennexx
         Common Stock, and (c) shares of Pennexx Common Stock in payment of his
         $0.3 million loan. In addition, the shareholder has accused the Company
         of unfair and deceptive business practices.

         Finally, the shareholder asserts that he is entitled to an unspecified
         number of additional shares of Pennexx Common Stock under the
         anti-dilution provisions of the agreement which, he further alleges,
         will result in the required additional issuances of shares to
         Smithfield and to him ad inifinitem thereby effectively diluting other
         common shareholders of their interest in the Company. The shareholder
         has also demanded interest, costs and attorneys' fees.




                                      F-14
<PAGE>
                               PENNEXX FOODS, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 2001 AND 2000

         The Company denies the allegations in the complaint and intends to
         contest them vigorously. The Company has numerous defenses to the
         complaint including that the agreement is void and unenforceable. Under
         the agreement, the Company's $0.3 million debt to the shareholder
         stopped accruing interest and was required to be converted to shares of
         Company Common Stock at a conversion price of $1 per share. In 2001 a
         certificate was issued for shares on account of this debt and accrued
         interest, but the share certificate has not been delivered because of
         uncertainties regarding the extent of the Company's obligations, which
         will ultimately be resolved in the pending litigation.

         Because of the pendency of the dispute, the Company is unable to
         determine with certainty the actual number of shares, if any, which it
         will be required to issue to the shareholder; however, the Company is
         nonetheless required to treat the matter in some manner to complete its
         financial statements. Accordingly, the Company has chosen to include
         the initial group of 1.1 million shares in the foregoing Statement of
         Stockholders' Equity and has charged $1.65 million (representing the
         1.1 million shares at a price of $1.50 per share) to operations for the
         year ended December 31, 2000 on account of the consulting services
         allegedly provided by the shareholder pursuant to the agreement.
         Despite this presentation, the Company disputes its obligation to
         deliver any such shares, and when the matter is ultimately resolved, an
         appropriate accounting entry will be made to reflect the difference
         between the shares actually issued as a result of such resolution, if
         any, and the number of shares recorded on the foregoing financial
         statements.

         For the years ended December 31, 2001 and 2000, the Company purchased
         $5,902,000 and $3,507,000 of material from Smithfield. As of December
         31, 2001 and 2000, $273,000 and $18,000 is included in accounts payable
         for these purchases. Sales to Smithfield were $3,680,000 for the year
         ended December 31, 2000. As of December 31, 2000, $65,000 was included
         in accounts receivables for these sales. Note 6 discloses a financing
         arrangement between the Company and Smithfield.

         12. Subsequent event:

         Subsequent to December 31, 2001, the Company entered into an agreement
         to purchase a new facility in Philadelphia, Pennsylvania. It is the
         Company's intention to move all production to this facility at the end
         of the second quarter of 2002. The purchase price of this facility is
         $2,000,000 and management expects to spend at least an additional
         $8,500,000 for equipment and renovations. The Company is in the process
         of obtaining financing for the facility and equipment.

         13. Litigation:

         In the normal course of business, there are various outstanding legal
         proceedings in addition to the matter disclosed in Note 11. In the
         opinion of management, after consultation with legal counsel, the




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<PAGE>
                               PENNEXX FOODS, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 2001 AND 2000

         financial statements of the Company will not be materially affected by
         the outcome of such legal proceedings.






















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