<PAGE>   1

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

                                    FORM 10-K

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                                       OR

[ ]   Transition report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934
          For the transition period from _____________ to ____________

                           COMMISSION FILE NO. 0-18339

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

            NEVADA                                        25-1603408
            ------                                        ----------
   (State or other jurisdiction of            (IRS Employer Identification No.)
   incorporation or organization)

 333 MAIN STREET, P.O. BOX 249, SAXONBURG, PA                     16056-0249
 --------------------------------------------                     ----------
   (Address of principal executive offices)                       (Zip Code)

       Registrant's telephone number, including area code: (724) 352-7520

Securities registered pursuant to                    Name of each exchange on
   Section 12(b) of the Act:                             which registered:

      Title of each class                                 Not applicable
      -------------------
            None

           Securities registered pursuant to Section 12(g) of the Act:
                     COMMON STOCK, PAR VALUE $.001 PER SHARE
                                (Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]

The aggregate market value of voting stock held by non-affiliates of the
registrant at February 28, 2001 was approximately $34,871,200. On that date, the
last sale price of registrant's common stock was $10.25 per share. Solely for
purposes of this calculation, shares beneficially owned by directors and
executive officers have been excluded. However, such exclusion is not intended
to be, nor is it to be deemed, a determination or an admission by the registrant
that such directors and officers are, in fact, affiliates of the registrant.

Indicated below is the number of shares outstanding of each of the registrant's
classes of common stock as of February 28, 2001.

                                                         Outstanding on
                  Class                                 February 28, 2001
                  -----                                 -----------------
 COMMON STOCK, PAR VALUE $.001 PER SHARE                    5,514,919

                       DOCUMENTS INCORPORATED BY REFERENCE

                                                  Part of Form 10-K into which
                    Document                      the Document is Incorporated
                    --------                      ----------------------------
DEFINITIVE PROXY STATEMENT TO SHAREHOLDERS     PART III, ITEMS 10, 11, 12 AND 13

<PAGE>   2

                                     PART I

ITEM 1.  BUSINESS

Sylvan Inc. (Sylvan, the company) is the successor to the business of a
Pennsylvania corporation which was chartered in 1937, and consists of a number
of subsidiaries which are engaged principally in the production and distribution
of mushroom spawn, spawn-related products and fresh mushrooms. The company was
organized as a Delaware corporation on March 27, 1989, under the name of Sylvan
Foods Holdings, Inc. The company became a Securities and Exchange Commission
registrant in August 1990 pursuant to the irrevocable distribution by the
company's then majority shareholder, The Prospect Group, Inc., of the shares of
the company that it owned to its shareholders. The company changed its name to
Sylvan Inc. in July 1994 in conjunction with the change of its state of
incorporation to Nevada from Delaware. The company's principal executive offices
are at 333 Main Street, P.O. Box 249, Saxonburg, PA 16056-0249.

Sylvan operates in two reportable business segments. It is the leading worldwide
producer of mushroom spawn (the equivalent of seed for mushrooms) and a major
distributor of a variety of other value-added products and services for use by
mushroom growers. The company is also an important U.S. producer of fresh
mushrooms. Its growth strategy calls for devoting increased capital and
management resources to supplying its spawn and related products and services to
suitable markets throughout the world and leveraging its production technology
for products outside of the mushroom industry.

Spawn Operations: Spawn products accounted for 75% of the company's total sales
in 2000 and 86% of its operating income. Spawn is produced by a process whereby
carefully maintained mushroom cultures are introduced into specific nutrient
media to produce inoculum suitable for commercial spawn production. The inoculum
is then combined with a sterile, grain-based substrate in a manner that promotes
the colonization of the mushroom cultures throughout the substrate. The
resulting culture-enriched substrate is measured into sterilized containers and
the filled containers are incubated in environmentally controlled growing rooms.
Once the incubation is complete, the containers are refrigerated until they are
shipped to customers who then initiate their crop production cycle by adding
this seed-like material to the composted growing medium from which the mushrooms
grow.

The company conducts its operations through subsidiaries in the United States,
Europe, Australia and South Africa, and is a leading producer and distributor of
mushroom spawn and various spawn-related products in each of the markets in
which it has a presence. End-stage spawn production in most of the company's
manufacturing facilities takes place in specialized pressure vessels in plants
that are operated pursuant to rigorous quality-control standards. Three plants
are located in the United States and one each in England, Ireland, the
Netherlands, France, Hungary, Australia and South Africa. Sylvan's Dutch and
Australian plants function under arrangements whereby certain prominent mushroom
growers in each respective country possess minority ownership of the operating
company.

The company also operates two state-of-the-art spawn inoculum production plants.
These facilities, located in Kittanning, Pennsylvania, and Langeais, France,
incorporate the industry's most advanced production techniques and each is
capable of supplying all of the company's inoculum requirements. In addition,
the company produces nutritional supplements for mushroom compost at a plant in
Des Moines, Iowa. The value of backlog orders for spawn products is
insignificant.

The company's investment in biotechnical research has resulted in refinements of
techniques for genetic analysis of mushroom strains and its research programs
have produced some strains that possess commercial suitability. Another
successful product is Sylvan's casing inoculum (CI), a mushroom production
additive that is applied to the top layer of mushroom compost. It enables
mushroom farmers to get more crops per year from their investment in raw
materials and equipment by shortening the mushroom growing cycle and reducing a
crop's exposure to disease. In addition, Sylvan has distribution rights for
products manufactured by others, such as disease-control agents, that are
targeted for use by mushroom growers.

The company's production experience and research capabilities lend themselves to
a variety of commercially viable microbial production applications. Sylvan is
supplying a Japanese company with dried Agaricus mushrooms for use in a beverage
that is marketed in the Far East and it collaborates with chemical,
biotechnological and pharmaceutical companies for the purpose of evaluating and
promoting its capabilities beyond the mushroom industry. The value of backlog
orders for biological products is insignificant.


                                       2
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Fresh Mushroom Operations: The mushrooms segment of Sylvan's business accounted
for 25% of the company's total sales in 2000 and 14% of its operating income.
Sylvan operates a mushroom farm located in Quincy, Florida, which is one of the
most modern and efficient mushroom production operations in North America. It
serves a strategic role for Sylvan as a resource for production process
innovations. The facility includes an advanced computer-controlled production
system with which compost is processed more efficiently than with conventional
systems. The mushrooms produced through mid-January 2000 were sold to
supermarkets, food processors and distributors principally in the mid-eastern
and southeastern United States. Effective January 16, 2000, all of Quincy's
mushrooms were sold to a leading U.S. mushroom marketing organization that
packages and distributes them throughout the eastern United States.

Mushrooms are grown indoors in a continuous production process that employs a
temperature- and humidity-controlled environment. Compost, produced from a
carefully formulated and monitored mixture of hay or straw, water and various
organic supplements, is pasteurized and spawn is added to it. The spawn
colonizes the compost and, after about four to five weeks, grows into
harvestable mushrooms that are packaged and shipped to customers. The value of
backlog orders for mushroom products is insignificant.

PERSONNEL

On December 31, 2000, Sylvan had approximately 964 full-time employees, of whom
about 798 were engaged in production activities and 166 in supervision, sales
and administration. On January 2, 2000, Sylvan had approximately 995 full-time
employees, of whom about 814 were engaged in production activities and 181 in
supervision, sales and administration.

The employees of the company's French subsidiary are subject to a national,
industry-wide collective bargaining agreement. In addition, harvesting and
packaging employees of its Quincy subsidiary are subject to a collective
bargaining agreement with the United Farm Workers. The remainder of the
company's workforce is not subject to collective bargaining arrangements.
Management believes that its employee relations are good.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

The amounts of revenue, operating income and asset-related expenditures
attributable to each of the company's industry segments are set forth in Note 9
of the consolidated financial statements that are filed as part of this annual
report.

FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES

The amounts of revenue and long-lived assets attributable to each of the
company's geographic areas are set forth in Note 9 of the company's consolidated
financial statements that are filed as part of this annual report.

MAJOR CUSTOMER

Most of Sylvan's fresh mushrooms segment sales in 2000 were to one customer. C
And C Carriage Mushroom Company became the sole purchaser and marketer of
Quincy's mushrooms beginning in January 2000. The $20.8 million of fresh
mushrooms that C And C purchased from Quincy represented 24% of Sylvan's
consolidated net sales. C And C is not affiliated with Sylvan or any of its
subsidiaries and the purchase and marketing arrangement carries an initial term
of five years.

COMPETITIVE CONDITIONS

Spawn and Spawn-Related Products: Sylvan believes that there are seven firms in
the United States and three firms in Canada that produce and market almost all
of the spawn used by North American mushroom growers. Among these firms,
Sylvan's principal North American competitor is Lambert Spawn Company. In
addition, Amycel, Inc. (a division of Monterey Mushrooms, Inc.) is a major spawn
producer in the United States, but much of its production is consumed by its
mushroom production affiliates. Sylvan believes that its principal European
competitors are Italspawn and Le Lion. In addition, numerous smaller spawn
producers operate in the United States, Canada and in almost every European
country. Sylvan competes in the spawn market with strict quality, consistency
and reliability standards and through its availability of broad-based, post-sale
product support services to mushroom growers. Sylvan has, and is further
developing, the network by which it distributes its products and services
throughout the world.


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<PAGE>   4

Fresh Mushrooms: Sylvan believes that currently the top producer of mushrooms in
the United States is Monterey Mushrooms, Inc. Sylvan's production levels are
comparable to those of a group of 12 regional producers of substantial size. The
balance of the U.S. industry is fragmented, comprised of about 135 smaller
producers throughout the country. Quality, supply consistency and price are the
principal competitive factors in the mushroom business. Although brand names
have been established, competition is principally at the grocery retailer or
wholesaler level, rather than at the consumer level. Many mushroom farms have
entered into marketing agreements concentrating the ability to market the
production. Sylvan believes that currently five to seven marketing organizations
coordinate the sales of more than 50% of the North American fresh mushroom
market. Competition outside of North America is characterized primarily by the
importation of processed mushroom products into the United States and Canada.
However, processed mushrooms are not a material factor in Sylvan's current
operations because Sylvan's mushrooms compete primarily in the fresh mushroom
market. Due to the fragility of fresh mushrooms, Sylvan believes that the fresh
mushroom market in the United States is somewhat protected from direct non-North
American competition. Fresh mushrooms have limited shelf life, which, together
with the relatively high cost of refrigerated transportation, causes markets to
be regional in nature. However, for the same reasons, imbalances of supply and
demand, from time to time, can and do induce price fluctuations.

Money's Mushrooms, Ltd., a Canadian company that operated eight mushroom farms
in the United States, was one of the top two producers of mushrooms in 2000.
However, in November 2000, its U.S. subsidiaries filed a voluntary petition for
relief under Chapter 11 of the U.S. Bankruptcy Code and initiated the closure of
four of the eight farms. Most of Money's operating assets have been offered for
sale in connection with the ongoing bankruptcy proceedings.

SEASONALITY

Spawn and spawn-related product sales are not seasonal, except to the extent
that they correlate to a mushroom grower's expectations of consumer demand for
mushrooms. Since mushrooms are grown indoors, mushroom production is not
particularly sensitive to many of the problems normally associated with
agricultural crops, such as production seasonality and dependence on weather.
However, mushrooms are susceptible to bacterial, fungal and viral contamination
that can reduce yields and affect sales and earnings for periods of weeks or
months. In addition, mushroom prices are typically softened by the increased
availability of a variety of fresh fruits and vegetables during the summer
months.

RESEARCH

In 2000, Sylvan's research and development expenditures totaled $1.8 million, as
compared with $1.6 million in 1999 and $1.7 million in 1998. These expenditures
were focused on improving the consistency, reliability and customer satisfaction
for the company's existing products, the development of new products, and the
support of Sylvan's emerging bioproducts operations. The company also utilizes
contracted research efforts for specific studies that may be commercially
useful, but fall outside of the scope of its expertise or capabilities. None of
these projects currently constitute a material proportion of the company's
ongoing business.

PATENTS

The company does not believe that its ability to maintain or improve its
competitive position is dependent upon its patents. However, the company holds
several non-U.S. patents that cover a process and apparatus for the cultivation
of cells on solid substrates. The patents were issued in various years from 1982
to 1986. In addition, Sylvan was granted patents in 1994, 1996, 1997 and 1999
for several mushroom strains and for technologies and processes that facilitate
mushroom breeding and may be capable of enhancing the company's strain
development and improvement efforts. The company also holds two process patents
relating to the production of its compost nutritional supplements. They were
issued in 1988 and 1991.

The company holds several Swiss patents that embody a process for commercially
producing spawn and spawn-related products and using a variety of nutrient
substrates as incubation material for spawn. The process is not currently
employed by the company.


                                       4
<PAGE>   5



ENVIRONMENTAL MATTERS

Certain phases of the mushroom production process create discharges of
conventional pollutants and other organic materials. Expenditures will routinely
be required in order to enable the company's Quincy subsidiary to comply with
existing and future environmental laws and regulations.

FINANCIAL INFORMATION

Information regarding Sylvan's financial performance is set forth herein
beginning on page 22.

ITEM 2.  PROPERTIES

The following table lists by business segment the locations and floor areas of
Sylvan's principal operating properties. The company believes that each of these
properties is in good condition and suitable for the purposes for which they are
being utilized.

<TABLE>
<CAPTION>
     SPAWN AND SPAWN-RELATED PRODUCTS SEGMENT
                                                                               Floor         Acquired/    Expanded/
                                                       Location              area (ft.2)    constructed   renovated
                                                       --------              ----------     -----------   ----------
<S>                                         <C>                               <C>             <C>           <C>
        Spawn production:                   Kittanning, Pennsylvania            50,000          1981          1990
                                            Dayton, Nevada                      42,000          1992          1994
                                            Kennett Square, Pennsylvania        41,000          1999           -
                                            Langeais, France                   115,000          1991           -
                                            Yaxley, England                     74,000          1992          1995
                                            Horst, the Netherlands              54,500          1994          1997
                                            Budapest, Hungary                   26,200          1997           -
                                            Navan, Ireland                      26,000          1998          1999
                                            Pretoria, South Africa              15,500          1999           -
                                            Windsor, Australia                  12,000          1996           -

        Inoculum production and research:   Kittanning, Pennsylvania            18,000          1996           -
                                            Langeais, France                    15,000          1998           -

        Bioproducts production:             Cabot, Pennsylvania                 40,000          1994           -

        Quality assurance:                  Kittanning, Pennsylvania            20,000          1997           -

        Compost supplement production:      Des Moines, Iowa                    18,000          1997           -

        Mushroom casing production:         Budapest, Hungary                   16,000          2000           -


     FRESH MUSHROOMS SEGMENT

         Fresh mushroom production:         Quincy, Florida                    368,000          1981          1991
</TABLE>

The spawn plants in the Netherlands and Australia are owned by the company along
with joint venture partners in each country. The company owns all of its
principal operating properties except for those in Cabot, Pennsylvania, Des
Moines, Iowa, and Budapest, Hungary (mushroom casing production) that it leases.
The company also leases several small administrative and/or sales offices in
Pennsylvania and California and some supplemental cold storage facilities to
serve several North American and overseas market areas. The spawn plants in
England, Ireland and the Netherlands are the only properties that have been
mortgaged. The mortgages collateralize various construction loans.


                                       5
<PAGE>   6


ITEM 3.  LEGAL PROCEEDINGS

There are no material pending legal proceedings to which Sylvan or any of its
subsidiaries is a party, or of which any of their property is subject, other
than ordinary, routine litigation incidental to their respective businesses.

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

No matters were submitted to a vote of security holders in the last quarter of
the 2000 fiscal year.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following is a list of the names and ages of the executive officers of the
company indicating the positions and offices currently held by each person.
There is no arrangement or understanding between any executive officer and any
other person pursuant to which he was selected as an officer and no family
relationship exists among the company's officers and directors. The annual
appointment of officers is scheduled to occur on June 8, 2001 at the
organizational meeting of the board of directors, following the annual meeting
of shareholders.

           Name               Age                Position
           ----               ---                --------
      Dennis C. Zensen         62   Chairman of the Board,
                                    President and Chief Executive
                                    Officer of Sylvan

      Donald A. Smith          39   Chief Financial Officer of Sylvan

      Fred Y. Bennitt          56   Secretary/Treasurer of Sylvan

      Monir K. Elzalaki        45   President of Sylvan America, Inc.

      Gregory J. Verhagen      40   President of Quincy Farms

      Gary D. Walker           53   President of Sylvan Bioproducts, Inc.

      Michael A. Walton        51   Managing Director of Sylvan's European
                                    Operations


Biographical Information

Mr. Zensen was elected chairman of Sylvan in July 1990 and has served as a
director, president and chief executive officer of Sylvan since April 1989.

Mr. Smith was appointed chief financial officer of Sylvan in December 1998. He
joined the company in 1996 as manager of financial planning and analysis and was
named corporate controller in October 1997. Prior to that, he served as chief
financial officer of the company's Sylvan America, Inc. subsidiary from 1994 to
1996 and as controller of the company's former Moonlight Mushrooms, Inc.
subsidiary from 1989 through 1993.

Mr. Bennitt has served as secretary/treasurer of Sylvan since April 1989. His
service with Sylvan's predecessor company began in 1971.

Mr. Elzalaki was named president of the company's Pennsylvania spawn production
subsidiary in March 1992 and president of the company's Nevada spawn production
subsidiary in December 1992 at the time of its creation. He joined the
Pennsylvania company as its director of sales and marketing in April 1990 and
served as vice president and general manager from September 1990 until his
appointment as president.


                                       6
<PAGE>   7

Mr. Verhagen was appointed president of the company's Quincy Farms subsidiary in
January 2000, having served as Quincy's general manager since May 1999. For the
four years prior to that time, he served in various senior management positions
for Money's Mushrooms, Ltd.

Mr. Walker was appointed president of Sylvan Bioproducts in 1998, after serving
as manager and developer of the company's bioproducts business since the
beginning of 1994. He joined Sylvan in 1992 as president of its Moonlight
subsidiary until Moonlight closed in December 1993.

Mr. Walton was named managing director of Sylvan's European operations in 1995.
He joined Sylvan in connection with its acquisition of Hauser Champignonkulturen
AG (Hauser) in June 1992. At the time, he was serving as managing director of
Hauser's UK subsidiaries and continued in that capacity until his present
appointment.


                                     PART II

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

(a)  Market Information

Sylvan's common stock trades on The Nasdaq Stock Market under the symbol
"SYLN." Set forth below are the high and low sales prices for Sylvan's common
stock for 2000 and 1999, as reported by The Nasdaq Stock Market.

       2000                  High Price                 Low Price
       ----                  ----------                 ---------
      1st Qtr.                10                          7 9/16
      2nd Qtr.                10 1/4                      7 15/16
      3rd Qtr.                10 3/4                      8 7/16
      4th Qtr.                10                          8

       1999                  High Price                 Low Price
       ----                  ----------                 ---------
      1st Qtr.                15                          9 3/4
      2nd Qtr.                11 13/16                    9 5/8
      3rd Qtr.                13                          9 7/8
      4th Qtr.                11 1/8                      7 7/8

(b)  Holders of Common Equity

At year-end 2000, there were approximately 1,950 shareholders of record of
Sylvan common stock.

(c)  Dividends

Sylvan has never paid cash dividends and currently has a policy of retaining its
earnings to fund operations, expansion and the purchase of treasury shares. The
company's revolving credit agreement contains financial covenants that permit,
but limit, the payment of dividends by Sylvan.

ITEM 6.  SELECTED FINANCIAL DATA

Set forth below are a Five-Year Summary of Selected Financial Data and Quarterly
Results of Operations with respect to Sylvan.


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<PAGE>   8


                  FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                              ---------------------------  Fiscal Year Ended  ---------------------------
(In millions except share data)                   2000           1999           1998            1997           1996
-------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>            <C>            <C>             <C>            <C>
INCOME STATEMENT DATA:
  Net sales                                   $     85.9     $     89.8     $     89.8      $     81.6     $     79.1
  Operating income                                  11.5           10.6           11.1            11.5           10.6
  Net income                                         6.7            6.1            6.3             6.5            7.8
  Net income per common share - basic               1.18           1.00           0.98            1.01           1.23 (a)
  Net income per common share - diluted             1.18           1.00           0.97            1.01           1.23 (a)
  Weighted average shares - basic              5,658,860      6,112,007      6,440,287       6,395,971      6,344,609
  Weighted average shares - diluted            5,665,974      6,130,694      6,533,740       6,406,544      6,354,379

BALANCE SHEET DATA:
  Total assets                                $    105.8     $    109.5     $    102.6      $     93.7     $     86.9
  Long-term debt and other
    long-term liabilities                           47.7           51.8           38.4            36.4           34.3
  Shareholders' equity                              49.5           47.2           50.3            44.0           41.2
  Working capital                                   23.0           22.8           18.9            16.9           12.7
  Net cash provided by operations                    9.7           13.0           10.2            10.4            6.4
  Cash dividends per common share                     --             --             --              --             --
</TABLE>

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

(a) See Notes 1 and 6 to the December 29, 1996 Consolidated Financial
    Statements regarding the settlement of certain postretirement medical
    and other benefit obligations.


                         QUARTERLY RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                          First         Second           Third         Fourth
(Unaudited, in thousands except share data)             Quarter        Quarter         Quarter        Quarter
------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>            <C>             <C>           <C>
2000:
  Net sales                                           $   22,459     $   20,740      $   20,988     $   21,762
  Gross profit                                            10,184          9,229           9,290          9,310
  Net income                                               1,414          1,296           1,586          2,388
  Net income per common share - basic                       0.25           0.23            0.28           0.42
  Net income per common share - diluted                     0.25           0.23            0.28           0.42
  Weighted average shares - basic                      5,690,424      5,663,883       5,666,718      5,614,415
  Weighted average shares - diluted                    5,690,424      5,666,211       5,672,815      5,621,674

1999:
  Net sales                                           $   22,172     $   21,363      $   22,279     $   24,027
  Gross profit                                             9,167          8,740           9,174         10,038
  Net income                                               1,271          1,320           1,502          2,035
  Net income per common share - basic                       0.20           0.21            0.25           0.35
  Net income per common share - diluted                     0.20           0.21            0.25           0.35
  Weighted average shares - basic                      6,360,284      6,269,388       6,021,483      5,796,873
  Weighted average shares - diluted                    6,388,075      6,290,613       6,048,062      5,800,590
</TABLE>


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<PAGE>   9


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS

                              RESULTS OF OPERATIONS
                          COMPARISON OF 2000 WITH 1999

NET SALES

Net sales for 2000 were $85.9 million, a 4% decrease when compared with 1999 net
sales of $89.8 million. This $3.9 million change is the result of increased
spawn and spawn-related product sales, net of international currency translation
fluctuations, and operational changes in the fresh mushrooms segment.
International sales, as a percentage of net sales, decreased to 48% in 2000, as
compared with 50% for 1999. During 2000, the U.S. dollar strengthened by 14%, on
average, against the company's major foreign trading currencies. This had the
effect of reducing net sales by $8.0 million, operating income by $0.9 million
and the diluted earnings per share by approximately eleven cents.

Spawn and Spawn-Related Products: Net sales of spawn and spawn-related products
were $63.9 million in 2000, a 5% increase when compared with net sales of $60.7
million for 1999. Excluding the effect of the strengthened U.S. dollar during
2000, the segment sales increased by 19% during the year. Overall spawn product
sales volume increased 15%, with a 33% increase in the Americas, primarily due
to the November 1999 Swayne acquisition, and a 5% increase in overseas markets.
The overseas U.S. dollar equivalent selling price was 13% lower, primarily due
to the strengthening of the U.S. dollar. The average selling price in the
Americas was 4% lower than in 1999 due to the inclusion of the sales of the J.B.
Swayne Spawn Company, which has an overall lower pricing structure. In addition,
consolidation of the mushroom industry, as evidenced by the acquisition of
Vlasic Farms by a Canadian company and the formation of regional marketing
alliances, has generated increased volume discounts, resulting in a lower
average net selling price. Sales of disease-control agents and nutritional
supplements increased 10%, accounting for 15% and 13% of consolidated net sales
for 2000 and 1999, respectively.

Fresh Mushrooms: Net sales of fresh mushrooms decreased during 2000 by 24% to
$22.0 million. This decrease was due to two offsetting factors. First, marketing
changes occurred within the fresh mushrooms segment beginning on January 16,
2000. On this date, Quincy entered into a marketing arrangement to sell all of
the mushrooms directly from its harvesting area to a third party, which then
packages and distributes the mushrooms on its own behalf. Since Quincy no longer
performs value-added commercial enhancements, such as slicing and packaging, and
does not distribute its products to wholesalers and retailers, it receives a
lower price per pound of mushrooms sold. This new structure resulted in an $8.8
million decrease in sales. Second, during 2000 Quincy experienced improved
production yields as compared with 1999, which provided an increase of 8% in the
number of pounds sold. After adjusting for the effect of the marketing change,
Quincy's sales would have increased by $1.7 million.

The United States Department of Agriculture reported little change in fresh
mushroom sales in the United States for the 1999-2000 season, reflecting a 2%
increase in pounds sold and a 1% decrease in the average selling price. The USDA
crop reports also indicated that sales of processed mushrooms decreased by 3% in
the 1999-2000 period over the 1998-1999 period.

COST OF SALES

The company's cost of sales, expressed as a percentage of net sales, was 55.8%
for 2000 and 58.7% for 1999. Increased production efficiencies were realized in
the fresh mushrooms segment, on a year-versus-year basis, due to higher
production yields and the new marketing arrangement.

Spawn and Spawn-Related Products: The cost of sales, as a percentage of net
sales, was 50.5% for 2000, as compared with 49.7% for 1999. The increase is due
to two factors. First, the Swayne spawn production facility, which was acquired
on November 30, 1999, was operational during all of 2000 versus one month in
1999. The production method at this facility has a much higher cost structure
due to a more labor-intensive process. Second, the higher proportion of
nutritional supplement and disease-control agent sales has a higher cost of
sales percentage than spawn products. During 2000, the overall discard rate for
spawn production was 5.8% as compared with 6.0% for 1999.

Fresh Mushrooms: The cost of sales percentage was 68.1% for 2000 and 75.2% for
1999. With the new marketing arrangement, mushrooms are sold directly from the
harvesting area; therefore, Quincy is no longer performing commercial



                                       9
<PAGE>   10

enhancement and distribution activities. Quincy also had improved yield
efficiencies, spreading a growing area cost structure that is primarily fixed in
nature over more pounds.

SELLING AND ADMINISTRATIVE EXPENSES

Selling and administrative expenses, as a percentage of net sales, were 22.7%
and 21.7% for 2000 and 1999, respectively. Most of this increase relates to
three items recorded in the spawn segment during the first quarter of 2000: a
write-off of pre-construction costs associated with scope revisions and a
management change in the company's Hungarian composting project ($0.2 million),
a loss on the sale of a small mushroom farm ($0.1 million) that was acquired as
part of the May 1998 purchase of International Mushrooms Ltd., and a
nonrecurring expense ($0.1 million) for non-income related taxes. In addition,
ongoing costs have been incurred by operating the sales and administrative
facilities of Swayne, which was acquired in November 1999.

The fresh mushrooms segment realized annual cost savings of $0.8 million related
to wages, employee benefits, and general building overhead that were assumed by
an outside party under the terms of the marketing arrangement.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses increased by 11% in 2000 to $1.8 million, when
compared with $1.6 million in 1999. Sylvan intends to devote a larger portion of
its research and development expenditures to its Bioproducts operation in 2001
and beyond.

DEPRECIATION EXPENSE

Depreciation expense was $5.2 million in 2000, a 5% decrease over the $5.5
million reported for 1999. This change is primarily due to the strengthening of
the U.S. dollar which had the effect of decreasing depreciation expense by $0.3
million.

INTEREST EXPENSE

Net interest expense for 2000 was $2.5 million, as compared with $2.2 million
for 1999. The increase resulted from higher interest rates and higher average
borrowings for 2000. The average effective borrowing rate for 2000 was 6.9%, as
compared with 6.4% for 1999.

OTHER INCOME (EXPENSE)

The company reported a net $0.2 million other expense total for 2000. Most of
this expense relates to foreign exchange losses on cross-currency intercompany
transactions.

INCOME TAX EXPENSE

The company's overall effective tax rate for 2000 was 22%. This rate includes
the $0.5 million net operating loss carryforward benefit from the merger of two
subsidiaries. Excluding the effect of this benefit, the company's effective tax
rate for 2000 was 28%, as compared with 26% for 1999. A higher effective tax
rate is expected for 2001 because a larger portion of the company's taxable
income is expected from U.S. operating units.


                              RESULTS OF OPERATIONS
                          COMPARISON OF 1999 WITH 1998

NET SALES

The 1999 net sales were $89.8 million, virtually equal to the 1998 net sales.
International sales increased to 50% of total net sales from 48% in 1998.
Increases in international sales expose the company to larger currency
translation fluctuations. During 1999, the U.S. dollar strengthened by 6% on
average against the company's major foreign trading currencies. This 1999
strengthening had the effect of reducing net sales by $3.3 million.


                                       10
<PAGE>   11

Spawn and Spawn-Related Products: Net sales of spawn and spawn-related products
increased by 3% to $60.7 million when compared with net sales of $59.1 million
for 1998. Part of this increase was due to higher sales from Sylvan's
Bioproducts division. The strengthening of the U.S. dollar continued to mask
Sylvan's overseas sales growth. All of the company's $3.3 million currency
effect was within the spawn and spawn-related products segment. Overall spawn
product sales volume increased by 5%, with a 2% increase in the Americas and a
7% increase in the company's overseas markets. Average spawn selling prices were
1% lower in the Americas in 1999 versus 1998, primarily due to the continued
consolidation of the North American mushroom industry. The overseas average
selling price decreased by 5% when compared with 1998, due to the strengthening
of the U.S. dollar. Overseas local selling prices increased modestly over the
prior-year levels. Sales of nutritional supplements and disease-control agents
for 1999 were essentially equal to 1998 levels, and accounted for 13% of the
company's total net sales.

Fresh Mushrooms: Net mushroom sales decreased by 5% to $29.2 million when
compared with the $30.7 million for 1998. This decrease was the result of
production inefficiencies, primarily during the first half of 1999, which
reduced total pounds sold for the full-year 1999 by 4%. The average selling
price per pound for 1999 decreased by 1% when compared with 1998. The percentage
of total pounds sold to the fresh market in 1999 was 91%, slightly lower than
the 92% in 1998. This percentage calculation fluctuates with variations in
quality, availability of supply and other competitive conditions. In 1999,
Quincy produced a lower percentage of high-quality mushrooms, which contributed
to the lower fresh market percentage.

The United States Department of Agriculture reported a 6% increase in fresh
mushroom sales in the United States for the 1998-99 season, reflecting a 5%
increase in pounds sold. Average selling prices were comparable with the prior
year. The USDA crop reports also indicated that sales of processed mushrooms
increased by 15% in the 1998-99 period over the 1997-98 period.

COST OF SALES

Expressed as a percentage of net sales, the company's cost of sales was 58.7%
for 1999, as compared with 59.0% for 1998. The 1999 decrease was caused
primarily by improved production efficiencies in the fresh mushroom business in
the second half of the year.

Spawn and Spawn-Related Products: The cost of sales percentage for 1999 was
49.7%, as compared with 48.6% for 1998. The increase was primarily due to a
decreased margin on sales of nutritional supplements and disease-control agents.
Sylvan's cost structure benefited from the opening of additional production
capacity in South Africa, which eliminated the need to ship spawn from the
Netherlands. The South African facility began production in the third quarter of
1999. Discard percentages in both North America and Europe were comparable with
1998. Sylvan's Australian facility experienced substantial improvement in its
production discard rate due to the replacement of its blender in the first
quarter of 1999.

Fresh Mushrooms: The cost of sales percentage was 75.2% for 1999, as compared
with 76.4% for 1998. The decrease was due to production efficiency improvements
that occurred primarily in the second half of 1999. The efficiencies contributed
to production yield improvements, spreading a growing area cost structure that
is primarily fixed in nature over more pounds.

SELLING AND ADMINISTRATIVE EXPENSES

Selling and administrative expenses were 21.7% of net sales for 1999, as
compared with 20.8% for 1998. The higher 1999 percentage was due to higher
levels of bad debt expense, the resumption of executive bonus payments, and the
full-year inclusion of the 1998 acquisition of International Mushrooms Ltd. The
company recorded a nonrecurring expense of $0.6 million in 1998 to reflect the
settlement of two lawsuits.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses decreased by 8% in 1999 to $1.6 million, as
compared with $1.7 million for 1998. Most of the decrease was due to the
consolidation of some R&D functions within the company's European operations.


                                       11
<PAGE>   12


DEPRECIATION EXPENSE

The 1999 depreciation expense increased by 5% to $5.5 million, as compared with
$5.3 million for 1998. The increase was a result of capital expenditures that
totaled $7.7 million in 1999 and $8.2 million in 1998, diminished by the
strengthening of the U.S. dollar.

INTEREST EXPENSE

Net interest expense for both 1999 and 1998 was $2.2 million. Sylvan had higher
levels of average borrowing in 1999; however, the average effective interest
rate decreased to 6.4%, as compared with 6.8% for 1998.

INCOME TAX EXPENSE

The company's effective income tax rate for 1999 and 1998 was 26%.


                         LIQUIDITY AND CAPITAL RESOURCES

Sylvan evaluates its liquidity and capital resources position by comparing its
investment opportunities with its cash position, operating cash flow trends and
credit availability. Available credit under the company's $55.0 million
revolving credit agreement was $19.0 million as of December 31, 2000. The
arrangement provides for a reduction of the total credit amount over a six-year
period, with the first reduction to $50 million effective August 6, 2003.

Net cash provided by operating activities was $9.7 million in 2000, as compared
with $13.0 million in 1999 and $10.2 million in 1998. The 1999 unusually high
$13.0 million is not representative of cash flows from on-going operations
because of events such as tax refunds received in several tax jurisdictions and
changes in the funding of certain employee benefits. Sylvan's net investment in
working capital (defined as the period-to-period change in the difference
between current assets and current liabilities) increased by $0.2 million to
$23.0 million, which was primarily comprised of accounts receivable and
inventories. The decrease of cash provided from operating activities is
attributable to the timing of payments during 2000, as compared with 1999, in
satisfying construction invoices that had been accrued at the prior year-end.

Cash used by investing activities was $6.2 million for 2000, as compared with
$12.2 million and $9.8 million during 1999 and 1998, respectively. Most of the
decrease in 2000, as compared with the two previous years, resulted from no
acquisition activity. During 2000, the company made an earn-out payment of $0.1
million related to the Swayne acquisition. Cash paid for the Swayne acquisition
in 1999 was $4.6 million and cash paid for International Mushrooms Ltd. in 1998
was $1.6 million. Capital expenditures, net of proceeds from the sale of assets,
totaled $6.1 million in 2000, $7.7 million in 1999, and $8.2 million in 1998.
Most of the decrease in capital expenditures between 2000 and 1999 was due to
the receipt of proceeds from the sale of Quincy's packaging and distribution
equipment ($270,000) and of a small Irish mushroom farm that was ancillary to a
1998 acquisition ($435,000). During 2000, $3.4 million was spent on growth
opportunities and $3.6 million was expended on maintenance capital. The growth
capital expenditures for 2000 included a production expansion in Ireland
($633,000), partial expenditures for a Canadian production facility ($423,000),
expanded U.S. research and development facilities ($790,000) and replacement of
chilling equipment at Quincy ($537,000). Net capital expenditures in 2001 are
expected to total between $6 million and $8 million for existing operations,
with additional expenditures as required for any acquisitions or new
initiatives.

During 2000, cash of $5.2 million was used in financing activities, as compared
with $1.4 million and $0.1 million provided by financing activities during 1999
and 1998, respectively. During 2000, the company purchased 215,235 shares of
Sylvan stock at an average price of $9.37 per share. By comparison, 716,900 and
109,425 shares were purchased at average prices of $10.95 and $13.94 during 1999
and 1998, respectively. Management expects to continue the purchase program
during 2001, subject to price and share availability conditions that make such
purchases financially beneficial and appropriate.

Term debt and revolving credit obligations decreased by $3.3 million in 2000,
compared with increases of $8.9 million in 1999 and $1.1 million in 1998. Most
of the decrease in 2000 related to the positive cash flows of operations in
excess of capital additions and Sylvan share purchases. Most of the increase in
1999 related to the acquisition of Swayne and the purchase of Sylvan stock,
offset by the positive cash flow of operations after capital additions. The
company routinely assesses its



                                       12
<PAGE>   13

requirements for additional capital investments as it experiences continued
growth in its operations. The revolving credit facility and net operating cash
flows are expected to provide sufficient funding for projected 2001
expenditures.

Sylvan currently does not pay a dividend on its common stock. Management may, in
the future, propose dividend payments after evaluating Sylvan's current and
projected liquidity and financing arrangements, subject to net worth covenants
contained in its revolving credit agreement.

EURO CURRENCY

A single currency, the Euro, was introduced in Europe on January 1, 1999. Of the
15 member countries of the European Union, 11 agreed to adopt the Euro as their
legal currency on that date. Fixed conversion rates between the existing
currencies of these 11 countries and the Euro were established as of that date.
The existing currencies are scheduled to remain legal tender as denominations of
the Euro until at least January 1, 2002. During this transition period, parties
may settle transactions using either the Euro or a participating country's legal
currency. Currently, Sylvan does not believe that the conversion to the Euro
will have a material impact on its business or financial condition.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The company is exposed to market risk from changes in foreign currency exchange
rates and interest rates. In order to manage this risk, the company enters into
various contracts and options. A discussion of accounting policies for
derivative instruments is included in Note 1 to Sylvan's consolidated financial
statements that are filed herewith and further disclosure is provided in Note
11.

Foreign Currency Exchange Rate Risk: Note 9 of the consolidated financial
statements sets forth revenues for three years based on the location of the
company's customers. Sylvan has foreign currency exposures related to buying,
selling, and financing in currencies other than the U.S. dollar. This exposes
the company's future earnings, assets, liabilities, cash flow and financial
instruments that are denominated in foreign currencies.

Sylvan believes that its most significant financial instrument rate exposure
relates to its activities in the Netherlands. As of December 31, 2000, the net
fair value liability of Dutch guilder denominated financial instruments was
approximately $4.7 million. The potential fair value loss of a hypothetical 10%
adverse change in the currency exchange rate would be approximately $470,000.

Interest Rate Risk: The company is subject to market risk from exposure to
changes in interest rates based on its financing practices. This risk is managed
by entering into a variety of financial instruments to maintain a desired level
of exposure. The net fair value liability at December 31, 2000 of all financial
instruments subject to interest rate exposures was approximately $36.0 million.
The table below provides information about the company's financial instruments
that are sensitive to interest rates. For debt obligations, the table presents
principal cash flow and related weighted average interest rates according to
their expected maturity dates. For interest rate swaps, the table presents
notional amounts and weighted average interest rates according to their expected
maturity dates. Weighted average interest rates are based on the LIBOR rate in
effect at the reporting date. No future rate assumptions have been made.

<TABLE>
<CAPTION>
                                      Expected Maturity Date for Periods Ended December 31,
                               -----------------------------------------------------------------------
                               2001        2002         2003         2004         2005      Thereafter    Total      Fair Value
                               ----        ----         ----         ----         ----      ----------    -----      ----------
<S>                          <C>         <C>          <C>           <C>          <C>         <C>         <C>          <C>
(In thousands)

Liabilities
Long-term debt
   Fixed rate                $   192     $ 2,612      $   158       $  88        $  451      $   528     $ 4,029       $ 4,029

   Average interest rate        7.52%       6.93%        7.41%       5.30%         6.68%        6.20%
   Variable rate                   -           -            -           -             -      $36,034     $36,034       $36,034
   Average interest rate           -           -            -           -             -         7.47%
Interest rate swaps
   Fixed-to-variable rate    $ 5,000     $ 5,000                                             $10,000     $20,000       $    84
   Average pay rate             6.43%       5.02%                                               5.48%       5.60%
   Average receive rate         6.62%       6.62%                                               6.62%

</TABLE>

                                       13
<PAGE>   14


FORWARD-LOOKING AND CAUTIONARY STATEMENTS

From time to time in this report, references are made to expectations regarding
future performance of the company. Investors must recognize that events could
turn out to be significantly different from what is expected. The following
factors, among others, in some cases have affected and in the future could
affect the company's financial performance and could cause actual results to
differ materially from those expressed or implied in such forward-looking
statements: o pricing or product initiatives of the company's competitors; o
changes in exchange risks with respect to currencies used in the company's
markets; o the loss of key executives or other employees of the company; o
failure to achieve production yield and quality expectations; o the loss of a
major customer and; o changes in a specific country's or region's political or
economic conditions.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required is set forth as Exhibits beginning on page 19.


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

None


                                       14
<PAGE>   15


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a) Identification of Directors

The information required by this item is set forth under the caption "Election
of Directors" in Sylvan's definitive Proxy Statement to be filed pursuant to
Regulation 14A and is incorporated herein by reference.

(b)  Identification of Executive Officers

The information required by this item is set forth in Part I of this Form 10-K.


ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is set forth under the caption "Management
Compensation and Benefit Plans" in Sylvan's definitive Proxy Statement to be
filed pursuant to Regulation 14A and is incorporated herein by reference.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is set forth under the caption "Security
Ownership of Certain Beneficial Owners and Management" in Sylvan's definitive
Proxy Statement to be filed pursuant to Regulation 14A and is incorporated
herein by reference.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is set forth under the caption
"Transactions with the Company" in Sylvan's definitive Proxy Statement to be
filed pursuant to Regulation 14A and is incorporated herein by reference.




                                       15
<PAGE>   16



                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

(A) (1) AND (2).  FINANCIAL STATEMENTS AND SCHEDULES

     The financial statements and financial statement schedule listed in the
     accompanying Index to Financial Statements, Schedules and Exhibits are
     filed as part of this annual report.

     (3).  EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K

     3.3       Articles of Incorporation of S. F. Nevada, Inc., previously filed
               as Exhibit 3.3 on November 12, 1999 with the company's Form 10-Q
               Quarterly Report for the period ended October 3, 1999 and
               incorporated herein by reference

     3.4       Articles of Merger of S. F. Nevada, Inc. and Sylvan Foods
               Holdings, Inc. with exhibit, previously filed as Exhibit 3.4 on
               November 12, 1999 with the company's Form 10-Q Quarterly Report
               for the period ended October 3, 1999 and incorporated herein by
               reference

     3.5       Bylaws, previously filed as Exhibit 3.5 on November 12, 1999 with
               the company's Form 10-Q Quarterly Report for the period ended
               October 3, 1999 and incorporated herein by reference

               Compensation Plans and Arrangements

     10.1.2    Sylvan Foods, Inc. Target Benefit Annuity Purchase Plan,
               previously filed as Exhibit 3.3.2 on April 2, 1993 with the
               company's Form 10-K Annual Report for the fiscal year ended
               January 3, 1993 and incorporated herein by reference

     10.1.3    Sylvan Foods Holdings, Inc. 1993 Stock Option Plan for
               Nonemployee Directors, previously filed on April 1, 1994 with the
               company's Form 10-K Annual Report for fiscal year ended January
               2, 1994 and incorporated herein by reference

     10.12     Sylvan Inc. 1990 Stock Option Plan (amended and restated),
               previously filed on November 12, 1999 with the company's Form
               10-Q Quarterly Report for the period ended October 3, 1999 and
               incorporated herein by reference

               Material Contracts

     10.2.1    Revolving Credit Agreement, dated as of August 6, 1998, by and
               among Sylvan Inc., a Nevada corporation, Sylvan Foods
               (Netherlands) B.V., a Dutch corporation, as Borrowers, the Banks
               party thereto from time to time and Mellon Bank, N.A., a national
               banking association, as issuing bank and as agent for the Banks
               thereunder, previously filed as Exhibit 10.1 on November 10, 1998
               with Sylvan's Form 10-Q Quarterly Report for the period ended
               September 27, 1998 and incorporated herein by reference

     10.2.2    Revolving Credit Note, dated August 6, 1998, payable to Mellon
               Bank, N.A. in the amount of $25,000,000, previously filed on
               November 10, 1998 as Exhibit 10-2 with the company's Form 10-Q
               Quarterly Report for the period ended September 27, 1998 and
               incorporated herein by reference

     10.2.3    Revolving Credit Note, dated August 6, 1998, payable to ABN AMRO
               Bank, Pittsburgh Branch, in the amount of $25,000,000, previously
               filed on November 10, 1998 as Exhibit 10-3 with the company's
               Form 10-Q Quarterly Report for the period ended September 27,
               1998 and incorporated herein by reference


                                       16
<PAGE>   17


     10.2.4    Promissory Note, dated August 6, 1998, payable to Mellon Bank,
               N.A. in the amount of $5,000,000, previously filed on November
               10, 1998 as Exhibit 10-4 with the company's Form 10-Q Quarterly
               Report for the period ended September 27, 1998 and incorporated
               herein by reference

     10.2.5    Mellon Global Cash Management ABS Agreement, dated August 6,
               1998, by and between Sylvan Inc. and Mellon Bank, N.A.,
               previously filed on November 10, 1998 as Exhibit 10-5 with the
               company's Form 10-Q Quarterly Report for the period ended
               September 27, 1998 and incorporated herein by reference

     10.2.6    Guaranty and Suretyship Agreement, dated August 6, 1998, by and
               between Sylvan Inc. and Mellon Bank, N.A., previously filed on
               November 10, 1998 as Exhibit 10-6 with the company's Form 10-Q
               Quarterly Report for the period ended September 27, 1998 and
               incorporated herein by reference

     10.2.7    Guaranty and Suretyship Agreement, dated August 6, 1998, by and
               between Sylvan Foods, Inc. and Mellon Bank, N.A., previously
               filed on November 10, 1998 as Exhibit 10-7 with the company's
               Form 10-Q Quarterly Report for the period ended September 27,
               1998 and incorporated herein by reference

     10.2.8    Guaranty and Suretyship Agreement, dated August 6, 1998, by and
               between Sylvan America, Inc. (a Pennsylvania corporation) and
               Mellon Bank, N.A., previously filed on November 10, 1998 as
               Exhibit 10-8 with the company's Form 10-Q Quarterly Report for
               the period ended September 27, 1998 and incorporated herein by
               reference

     10.2.9    Guaranty and Suretyship Agreement, dated August 6, 1998, by and
               between Sylvan America, Inc. (a Nevada corporation) and Mellon
               Bank, N.A., previously filed on November 10, 1998 as Exhibit 10-9
               with the company's Form 10-Q Quarterly Report for the period
               ended September 27, 1998 and incorporated herein by reference

     10.2.10   Guaranty and Suretyship Agreement, dated August 6, 1998, by and
               between Quincy Corporation and Mellon Bank, N.A., previously
               filed on November 10, 1998 as Exhibit 10-10 with the company's
               Form 10-Q Quarterly Report for the period ended September 27,
               1998 and incorporated herein by reference

     10.2.11   Index of Other Exhibits to the Revolving Credit Agreement,
               previously filed on November 10, 1998 as Exhibit 10.11 with
               Sylvan's Form 10-Q Quarterly Report for the period ended
               September 27, 1998 and incorporated herein by reference

     10.4.1    Asset Purchase Agreement, dated November 30, 1999, by, between
               and among J. B. Swayne Spawn Company, John B. Swayne, III and
               Worthington Holdings, Inc., previously filed on March 27, 2000
               with the company's Form 10-K annual report for the fiscal year
               ended January 2, 2000 and incorporated herein by reference

     10.4.2    Index of Exhibits to the Asset Purchase Agreement referenced
               above, previously filed on March 27, 2000 with the company's Form
               10-K annual report for the fiscal year ended January 2, 2000 and
               incorporated herein by reference

     10.5.1    Agreement, dated January 14, 2000, by and between C And C
               Carriage Mushroom Co., t/a Modern Sales Company, and Quincy
               Corporation, previously filed on March 27, 2000 with the
               company's Form 10-K annual report for the fiscal year ended
               January 2, 2000 and incorporated herein by reference

     10.5.2    Index of Exhibits to the C And C Agreement referenced above,
               previously filed on March 27, 2000 with the company's Form 10-K
               annual report for the fiscal year ended January 2, 2000 and
               incorporated herein by reference

     10.40     Collective Bargaining Agreement, dated January 21, 2001, between
               Quincy Corporation and the United Farm Workers of America,
               AFL-CIO



                                       17
<PAGE>   18

     11        Statement re computation of per share earnings is not required
               because the relevant computation can be clearly determined from
               the material contained in the financial statements included
               herein

     21        Subsidiaries of the Registrant


(B)      REPORTS ON FORM 8-K

None

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 7th day of March
2001.


                                        By      /s/   DENNIS C. ZENSEN
                                           ---------------------------
                                                 Dennis C. Zensen
                                                 President and CEO

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

<TABLE>
<CAPTION>
          Signature                         Title                         Date
          ---------                         -----                         ----
<S>                                <C>                              <C>
/s/   DENNIS C. ZENSEN             Chairman of the Board of          March  7, 2001
------------------------------     Directors, President and          ---------------
Dennis C. Zensen                   Chief Executive Officer
                                   (Principal Executive Officer)


/s/  DONALD A. SMITH               Chief Financial Officer           March  7, 2001
------------------------------     (Principal Financial and          ---------------
Donald A. Smith                    Accounting Officer)


/s/   WILLIAM L. BENNETT           Director                          March  7, 2001
------------------------------                                       ---------------
William L. Bennett


/s/   MONIR K. ELZALAKI            President, Sylvan America, Inc.   March  7, 2001
------------------------------     Director                          ---------------
Monir K. Elzalaki


/s/   VIRGIL H. JURGENSMEYER       Director                          March  7, 2001
------------------------------                                       ---------------
Virgil H. Jurgensmeyer


/s/   NELSON OBUS                  Director                          March  7, 2001
------------------------------                                       ---------------
Nelson Obus


/s/   DONALD T. PASCAL             Director                          March  7, 2001
------------------------------                                       ---------------
Donald T. Pascal
</TABLE>


                                       18
<PAGE>   19

              INDEX TO FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS


<TABLE>
<CAPTION>
Exhibit No.                             Description                                                          Page No.
-----------                             -----------                                                          --------
<S>           <C>                                                                                            <C>
              Consent of Independent Public Accountants                                                        21

              Report of Independent Public Accountants                                                         22

              Consolidated Balance Sheets at December 31, 2000 and January 2, 2000                             23

              Consolidated Statements of Income for the Years Ended
              December 31, 2000, January 2, 2000 and January 3, 1999                                           25

              Consolidated Statements of Changes in Shareholders' Equity
              for the Years Ended December 31, 2000, January 2, 2000 and January 3, 1999                       26

              Consolidated Statements of Cash Flows for the Years Ended
              December 31, 2000, January 2, 2000 and January 3, 1999                                           27

              Notes to Consolidated Financial Statements                                                       28

              Schedule II - Valuation and Qualifying Accounts for the Years
              Ended December 31, 2000, January 2, 2000 and January 3, 1999                                     43

              Report of Independent Public Accountants on Financial Statement
              Schedule                                                                                         44

   3.3        Articles of Incorporation of S. F. Nevada, Inc.                                                  (a)

   3.4        Articles of Merger of S. F. Nevada, Inc. and Sylvan Foods Holdings, Inc. with exhibit            (a)

   3.5        Bylaws                                                                                           (a)

   10.1.2     Sylvan Foods, Inc. Target Benefit Annuity Purchase Plan                                          (b)

   10.1.3     Sylvan Foods Holdings, Inc. 1993 Stock Option Plan for Nonemployee Directors                     (c)

   10.12      Sylvan Inc. 1990 Stock Option Plan, as amended and restated                                      (a)

   10.2.1     Revolving Credit Agreement, dated as of August 6, 1998, by and among Sylvan Inc.,
              a Nevada corporation, and Sylvan Foods (Netherlands) B.V., a Dutch
              corporation, as Borrowers; the Banks party thereto from time to time and Mellon
              Bank, N.A., a national banking association, as issuing bank and as agent for the
              Banks thereunder, together with various annexes, exhibits, and schedules                         (d)

   10.2.2     Revolving Credit Note, dated August 6, 1998, payable to Mellon Bank, N.A. in the
              amount of $25,000,000                                                                            (d)

   10.2.3     Revolving Credit Note, dated August 6, 1998, payable to ABN AMRO Bank,
              Pittsburgh Branch, in the amount of $25,000,000                                                  (d)

</TABLE>


                                       19
<PAGE>   20

<TABLE>
<S>           <C>                                                                                          <C>
   10.2.4     Promissory Note, dated August 6, 1998, payable to Mellon Bank, N.A. in the
              amount of $5,000,000                                                                             (d)

   10.2.5     Mellon Global Cash Management ABS Agreement, dated August 6, 1998, by and
              between Sylvan Inc. and Mellon Bank, N.A.                                                        (d)

   10.2.6     Guaranty and Suretyship Agreement, dated August 6, 1998, by and between
              Sylvan Inc. and Mellon Bank, N.A.                                                                (d)

   10.2.7     Guaranty and Suretyship Agreement, dated August 6, 1998, by and between
              Sylvan Foods, Inc. and Mellon Bank, N.A.                                                         (d)

   10.2.8     Guaranty and Suretyship Agreement, dated August 6, 1998, by and between
              Sylvan America, Inc. (a Pennsylvania corporation) and Mellon Bank, N.A.                          (d)

   10.2.9     Guaranty and Suretyship Agreement, dated August 6, 1998, by and between
              Sylvan America, Inc. (a Nevada corporation) and Mellon Bank, N.A.                                (d)

   10.2.10    Guaranty and Suretyship Agreement, dated August 6, 1998, by and between
              Quincy Corporation and Mellon Bank, N.A.                                                         (d)

   10.2.11    Index of Other Exhibits to the Revolving Credit Agreement referenced in Exhibit 10.2.1           (d)

   10.4.1     Asset Purchase Agreement, dated November 30, 1999, by, between and among
              J.B. Swayne Spawn Company, John B. Swayne, III and Worthington Holdings, Inc.                    (e)

   10.4.2     Index of Exhibits to the Asset Purchase Agreement referenced in Exhibit 10.4.1                   (e)

   10.5.1     Agreement, dated January 14, 2000, by and between C And C Carriage
              Mushroom Co., t/a Modern Sales Company and Quincy Corporation                                    (e)

   10.5.2     Index of Exhibits to the Agreement referenced in Exhibit 10.5.1                                  (e)

   10.40      Collective Bargaining Agreement, dated January 21, 2001, between Quincy Corporation
              and the United Farm Workers of America, AFL-CIO                                                  45

   21         Subsidiaries of the Registrant                                                                   63
</TABLE>

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

     (a)  This exhibit was previously filed on November 12, 1999 with the
          company's Form 10-Q Quarterly Report for the period ended October 3,
          1999 and is incorporated herein by reference.

     (b)  This exhibit was previously filed on April 2, 1993 with the company's
          Form 10-K Annual Report for the fiscal year ended January 3, 1993 and
          is incorporated herein by reference.

     (c)  This exhibit was previously filed on April 1, 1994 with the company's
          Form 10-K Annual Report for fiscal year ended January 2, 1994 and is
          incorporated herein by reference.

     (d)  This exhibit was previously filed on November 10, 1998 as one of
          Exhibits 10-1 through 10-11 with the company's Form 10-Q Quarterly
          Report for the period ended September 27, 1998 and is incorporated
          herein by reference.

     (e)  This exhibit was previously filed on March 27, 2000 with the company's
          Form 10-K annual report for the fiscal year ended January 2, 2000 and
          is incorporated herein by reference.


                                       20

<PAGE>   21

                   CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS


As independent public accountants, we hereby consent to the incorporation by
reference in Sylvan Inc.'s Form 10-K of our reports dated February 2, 2001
included or incorporated by reference in the Company's previously filed
registration statements on Form S-8 (No. 33-46797 and No. 33-86332), including
the prospectuses therein, relating to the Company's 1990 Stock Option Plan and
on Form S-8 (No. 33-83962), including the prospectus therein, relating to the
Company's 1993 Stock Option Plan for Nonemployee Directors.

                                             /s/ ARTHUR ANDERSEN LLP

Pittsburgh, Pennsylvania,
March 23, 2001


                                       21
<PAGE>   22




REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Board of Directors and Shareholders of
Sylvan Inc.:

We have audited the accompanying consolidated balance sheets of Sylvan Inc. (a
Nevada corporation) and Subsidiaries as of December 31, 2000 and January 2,
2000, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three fiscal years in the
period ended December 31, 2000. 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. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sylvan Inc. and
Subsidiaries as of December 31, 2000 and January 2, 2000, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.

                                             /s/ ARTHUR ANDERSEN LLP

Pittsburgh, Pennsylvania,
February 2, 2001



                                       22

<PAGE>   23


                          SYLVAN INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                 (in thousands)


<TABLE>
<CAPTION>
                                                                                December 31,        January 2,
                                  ASSETS                                            2000               2000
                                                                                  ---------          ---------
<S>                                                                             <C>                 <C>
CURRENT ASSETS:
     Cash and cash equivalents                                                    $   5,371          $   7,601
     Trade accounts receivable, net of allowance for doubtful
       accounts of $497 and $826, respectively                                       12,740             12,347
     Inventories                                                                     10,398             10,110
     Prepaid income taxes and other expenses                                          1,420              1,537
     Other current assets                                                             1,634              1,621
                                                                                  ---------          ---------

                  Total current assets                                               31,563             33,216
                                                                                  ---------          ---------

PROPERTY, PLANT AND EQUIPMENT:
     Land and improvements                                                            3,693              3,028
     Buildings                                                                       35,540             35,007
     Equipment                                                                       48,072             48,605
                                                                                  ---------          ---------
                                                                                     87,305             86,640

     Less- Accumulated depreciation                                                 (34,769)           (32,391)
                                                                                  ---------          ---------

                  Total property, plant and equipment, net                           52,536             54,249
                                                                                  ---------          ---------

INTANGIBLE ASSETS, net of accumulated amortization of
     $2,925 and $2,449, respectively                                                 11,899             12,797

OTHER ASSETS, net of accumulated amortization of $407
     and $316, respectively                                                           9,776              9,233
                                                                                  ---------          ---------

TOTAL ASSETS                                                                      $ 105,774          $ 109,495
                                                                                  =========          =========
</TABLE>






         The accompanying notes to consolidated financial statements are
                     an integral part of these statements.




                                       23
<PAGE>   24



                          SYLVAN INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                        (in thousands except share data)


<TABLE>
<CAPTION>
                                                                December 31,        January 2,
         LIABILITIES AND SHAREHOLDERS' EQUITY                       2000               2000
                                                                 ---------          ---------
<S>                                                              <C>                <C>
CURRENT LIABILITIES:
     Current portion of long-term debt                           $     192          $     418
     Accounts payable - trade                                        4,108              4,647
     Accrued salaries, wages and employee benefits                   2,653              2,970
     Other accrued liabilities                                         896              1,703
     Income taxes payable                                              690                697
                                                                 ---------          ---------

                  Total current liabilities                          8,539             10,435
                                                                 ---------          ---------

LONG-TERM AND REVOLVING-TERM DEBT                                   39,871             43,544
                                                                 ---------          ---------

OTHER LONG-TERM LIABILITIES:
     Other employee benefits                                         1,056              1,053
     Other                                                           5,215              5,826
                                                                 ---------          ---------

                  Total other long-term liabilities                  6,271              6,879
                                                                 ---------          ---------

MINORITY INTEREST                                                    1,559              1,413

SHAREHOLDERS' EQUITY:
     Common stock, voting, par value $.001, 10,000,000
       shares authorized, 6,681,601 and 6,671,601 shares
       issued in 2000 and 1999, respectively                             7                  7
     Additional paid-in capital                                     16,885             16,801
     Retained earnings                                              54,467             47,785
     Less-Treasury stock, at cost, 1,156,682 and 966,765
       shares in 2000 and 1999, respectively                       (11,917)           (10,166)
                                                                 ---------          ---------
                                                                    59,442             54,427

     Cumulative translation adjustment                              (9,908)            (7,203)
                                                                 ---------          ---------

                  Total shareholders' equity                        49,534             47,224
                                                                 ---------          ---------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                       $ 105,774          $ 109,495
                                                                 =========          =========
</TABLE>

         The accompanying notes to consolidated financial statements are
                      an integral part of these statements.




                                       24
<PAGE>   25



                          SYLVAN INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME

                        (in thousands except share data)


<TABLE>
<CAPTION>
                                                         2000                 1999                 1998
                                                     -----------          -----------          -----------
<S>                                                  <C>                  <C>                  <C>
Net Sales                                            $    85,947          $    89,841          $    89,795
                                                     -----------          -----------          -----------

Operating Costs and Expenses:
     Cost of sales                                        47,937               52,722               52,989
     Selling and administrative                           19,500               19,474               18,710
     Research and development                              1,763                1,583                1,717
     Depreciation                                          5,233                5,506                5,268
                                                     -----------          -----------          -----------

                                                          74,433               79,285               78,684
                                                     -----------          -----------          -----------

Operating Income                                          11,514               10,556               11,111

Interest Expense, Net                                      2,529                2,231                2,170

Other Income (Expense)                                      (155)                  (1)                (116)
                                                     -----------          -----------          -----------

Income Before Income Taxes                                 8,830                8,324                8,825
                                                     -----------          -----------          -----------

Provision for Income Taxes:
       Current                                             2,206                1,823                1,935
       Deferred                                             (226)                 308                  344
                                                     -----------          -----------          -----------
                                                           1,980                2,131                2,279

Income Before Minority Interest in Income of
   Consolidated Subsidiaries                               6,850                6,193                6,546
                                                     -----------          -----------          -----------

Minority Interest in Income of Consolidated
   Subsidiaries                                              168                   65                  209
                                                     -----------          -----------          -----------

Net Income                                           $     6,682          $     6,128          $     6,337
                                                     ===========          ===========          ===========

Weighted Average Number of Common Shares               5,658,860            6,112,007            6,440,287
                                                     ===========          ===========          ===========
Weighted Average Number of Common and
   Common Equivalent Shares                            5,665,974            6,130,694            6,533,740
                                                     ===========          ===========          ===========

Net Income Per Share - Basic                         $      1.18          $      1.00          $      0.98
                                                     ===========          ===========          ===========
Net Income Per Share - Diluted                       $      1.18          $      1.00          $      0.97
                                                     ===========          ===========          ===========
</TABLE>


         The accompanying notes to consolidated financial statements are
                     an integral part of these statements.




                                       25
<PAGE>   26

                          SYLVAN INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

                        (in thousands except share data)


<TABLE>
<CAPTION>
                                                                                                  Accumulated
                                                     Additional                                      Other          Total
                                         Common       Paid-In        Retained        Treasury    Comprehensive   Shareholders'
                                         Stock        Capital        Earnings         Stock         Deficit         Equity
                                         -----        -------        --------         -----         -------         ------
<S>                                    <C>          <C>             <C>           <C>             <C>            <C>
BALANCE, December 28, 1997               $    7       $ 15,638        $35,320       $   (792)       $(6,182)       $ 43,991

  Net income                                 --             --          6,337             --             --           6,337

  Foreign currency translation
    adjustment                               --             --             --             --            910             910
  Minimum pension liability
    adjustment                               --             --             --             --           (253)           (253)
                                         ------       --------        -------       --------        -------        --------
     Comprehensive income                                                                                             6,994

  Exercise of 47,417 stock options
    and stock option compensation
    expense                                  --            805             --             --             --             805
  Purchase of treasury stock                 --             --             --         (1,526)            --          (1,526)
                                         ------       --------        -------       --------        -------        --------

BALANCE, January 3, 1999                      7         16,443         41,657         (2,318)        (5,525)         50,264

  Net income                                 --             --          6,128             --             --           6,128

  Foreign currency translation
    adjustment                               --             --             --             --         (5,081)         (5,081)
  Minimum pension liability
    adjustment                               --             --             --             --          3,403           3,403
                                         ------       --------        -------       --------        -------        --------
     Comprehensive income                                                                                             4,450

  Exercise of 34,400 stock options           --            358             --             --             --             358
  Purchase of treasury stock                 --             --             --         (7,848)            --          (7,848)
                                         ------       --------        -------       --------        -------        --------

BALANCE, January 2, 2000                      7         16,801         47,785        (10,166)        (7,203)         47,224

  Net income                                 --             --          6,682             --             --           6,682

  Foreign currency translation
    adjustment                               --             --             --             --         (2,705)         (2,705)
                                         ------       --------        -------       --------        -------        --------
     Comprehensive income                                                                                             3,977
  Exercise of 10,000 stock options
    and compensation expense                 --            104             --             53             --             157
  Purchase of treasury stock                 --             --             --         (2,017)            --          (2,017)
  Issuance of treasury stock                 --            (20)            --            213             --             193
                                         ------       --------        -------       --------        -------        --------

BALANCE, December 31, 2000               $    7       $ 16,885        $54,467       $(11,917)       $(9,908)       $ 49,534
                                         ======       ========        =======       ========        =======        ========
</TABLE>


         The accompanying notes to consolidated financial statements are
                      an integral part of these statements.




                                       26
<PAGE>   27


                          SYLVAN INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (in thousands)


<TABLE>
<CAPTION>
                                                                         2000             1999              1998
                                                                       -------          --------          --------
<S>                                                                    <C>              <C>               <C>
CASH FLOWS FROM OPERATIONS:
   Net income                                                          $ 6,682          $  6,128          $  6,337
   Adjustments to reconcile net income to net cash provided by
     operations-
      Depreciation and amortization                                      5,998             6,226             6,107
      Employee benefits                                                   (193)              706            (1,488)
      Trade accounts receivable                                           (183)             (248)            1,557
      Inventories                                                         (697)             (562)             (757)
      Prepaid expenses and other assets                                   (900)             (427)             (810)
      Accounts payable, accrued expenses and other liabilities          (1,072)             (860)           (1,311)
      Minority interest                                                    319               111               302
      Other                                                               (212)            1,879               285
                                                                       -------          --------          --------
              Net cash provided by operations                            9,742            12,953            10,222
                                                                       -------          --------          --------

CASH FLOWS FROM INVESTING:
   Expenditures for property, plant and equipment                       (7,012)           (7,813)           (8,291)
   Proceeds from sale of fixed assets                                      908               144                96
   Payment for acquisition, net of cash acquired                            --            (4,574)           (1,619)
   Earn-out payment on prior period acquisition                           (125)               --                --
                                                                       -------          --------          --------
              Net cash used in investing                                (6,229)          (12,243)           (9,814)
                                                                       -------          --------          --------

CASH FLOWS FROM FINANCING:
   Principal payments on long-term debt                                    (72)             (823)             (679)
   Proceeds from long-term debt borrowings                                 172                --                --
   Net (repayments) borrowings under revolving credit loan              (3,350)            9,756             1,756
   Proceeds from exercise of stock options                                  87               293               547
   Purchase of treasury shares                                          (2,017)           (7,848)           (1,526)
                                                                       -------          --------          --------
              Net cash (used in) provided by financing                  (5,180)            1,378                98
                                                                       -------          --------          --------

EFFECT OF EXCHANGE RATES ON CASH                                          (563)             (984)              424
                                                                       -------          --------          --------

NET (DECREASE) INCREASE IN CASH AND                                     (2,230)            1,104               930
  AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of period                           7,601             6,497             5,567
                                                                       -------          --------          --------

CASH AND CASH EQUIVALENTS, end of period                               $ 5,371          $  7,601          $  6,497
                                                                       =======          ========          ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
   Interest paid                                                       $ 2,651          $  2,429          $  1,964
   Income taxes paid                                                     2,153             1,190             2,478

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCIAL
  ACTIVITIES:
   Acquisition of businesses-
     Fair value of assets acquired                                     $    --          $  4,879          $  4,492
     Cash paid for assets or capital stock                                  --            (4,574)           (1,619)
                                                                       -------          --------          --------
                  Liabilities assumed                                  $    --          $    305          $  2,873
                                                                       =======          ========          ========
</TABLE>

         The accompanying notes to consolidated financial statements are
                      an integral part of these statements.




                                       27
<PAGE>   28


                          SYLVAN INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Accounting Period

The company maintains its accounting records on a 52-53 week fiscal year ending
the Sunday nearest December 31. The 2000 and 1999 fiscal years were 52 weeks and
the 1998 fiscal year was 53 weeks.

Principles of Consolidation

The accounts of majority owned or controlled subsidiaries are included in the
company's statements only for the period subsequent to their acquisition. All
material intercompany transactions and balances have been eliminated in
consolidation.

Basis of Presentation

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

Cash and Cash Equivalents

All cash equivalents are stated at cost, which approximates market. The company
considers all highly liquid investments purchased with a maturity of three
months or less to be cash equivalents. In addition, the company maintains a
French-franc denominated cash balance of approximately FF16.2 million with a
U.S. bank in support of a loan advanced by a European bank. This balance is
reported under "Other Assets" in the accompanying consolidated balance sheets.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or
market.

Property, Plant and Equipment

The company's property, plant and equipment are stated at cost and are
depreciated using the straight-line method over their estimated useful lives.

Upon disposal of property items, the asset and related accumulated depreciation
accounts are relieved of the amounts recorded therein for such items and any
resulting gain or loss is reflected in income.



                                       28
<PAGE>   29

For financial reporting purposes, the company considers its depreciable assets
to have the following useful lives:

                   Land improvements      10-20 years
                   Buildings              30-40 years
                   Equipment               2-15 years

Intangible Assets

Intangible assets consist of the excess of cost over net assets of acquired
companies and are being amortized over 30 years or less. Subsequent to its
acquisitions, the company continually evaluates whether later events and
circumstances have occurred that indicate that the remaining estimated useful
life of intangible assets may warrant revision or that the remaining balance of
intangible assets may not be recoverable. When factors indicate that intangible
assets should be evaluated for possible impairment, the company will use an
estimate of the relevant undiscounted cash flows over the remaining life of the
intangible assets in measuring whether the intangible assets are recoverable.
The company's evaluations have not resulted in any revision to intangible assets
or their related amortization periods.

Research and Development

Research and development costs are expensed as incurred.

Earnings Per Common Share

Earnings per share were calculated using the weighted average number of shares
outstanding during the period and including the effect of stock options
outstanding.

The following table reflects the calculation of earnings per share (in thousands
except share data):

<TABLE>
<CAPTION>
                                           Year Ended      Year Ended        Year Ended
                                          December 31,      January 2,        January 3,
                                              2000             2000             1999
                                           ----------       ----------       ----------
<S>                                        <C>              <C>              <C>
Basic Earnings Per Share:
  Net income                               $    6,682       $    6,128       $    6,337

  Average shares outstanding                5,658,860        6,112,007        6,440,287
                                           ----------       ----------       ----------
  Earnings per share                       $     1.18       $     1.00       $     0.98
                                           ==========       ==========       ==========

Diluted Earnings Per Share:
  Net income                               $    6,682       $    6,128       $    6,337

  Average shares outstanding                5,658,860        6,112,007        6,440,287
  Effect of stock options                       7,114           18,687           93,453
                                           ----------       ----------       ----------
  Diluted average shares outstanding        5,665,974        6,130,694        6,533,740
                                           ----------       ----------       ----------
  Earnings per share                       $     1.18       $     1.00       $     0.97
                                           ==========       ==========       ==========
</TABLE>





                                       29
<PAGE>   30


Options to purchase approximately 638,000, 570,000 and 88,000 shares of common
stock for the fiscal years ended 2000, 1999 and 1998, respectively, were
outstanding, but were not included in the computation of diluted earnings per
share because the options' exercise prices were greater than the average market
price of the company's common shares for the respective years.

Foreign Currency Translation

The financial statements of all foreign operations are translated using the
standards established by Statement of Financial Accounting Standards (SFAS) No.
52, "Foreign Currency Translation."

Assets and liabilities of non-U.S. operations are translated into U.S. dollars
using year-end exchange rates, while revenues and expenses are translated at the
average exchange rates for the year. The resulting net translation adjustments
are recorded as a separate component of shareholders' equity.

Transaction gains and losses are reflected in income.

Foreign Currency Exchange Risk Management

The company evaluates and hedges foreign currency exchange risk exposure on a
transaction-by-transaction basis. As of December 31, 2000, the company had no
outstanding foreign currency exchange contracts.

Highly Inflationary Currency

Beginning in 1998, the company categorized the Turkish economy as highly
inflationary and, therefore, the U.S. dollar is the functional currency. Turkish
operations are not material to the company as a whole.

Interest Rate Risk Management

The company uses interest rate swap agreements to convert a portion of its
floating rate debt to a fixed-rate basis, thus reducing the impact of interest
rate changes on future results. The company has these agreements with its banks
as counterparties. The agreements replace the floating (Euro-rate) LIBOR basis
with a 90-day fixed LIBOR basis as described in the table below. At the end of
each 90-day period, the company and its counterparties make appropriate payments
to settle the difference between the floating rate LIBOR and the fixed rate
LIBOR. When the floating rate LIBOR exceeds the fixed rate LIBOR at the
beginning of a 90-day term, the counterparties will pay the difference between
the rates for the appropriate notional amount to the company. Conversely, when
the fixed rate exceeds the floating rate, the company will pay its
counterparties. Amounts receivable or payable under these swap agreements are
recorded as an adjustment to interest expense. The company's contractual swap
agreements as of December 31, 2000 are as follows:





                                       30
<PAGE>   31




<TABLE>
<CAPTION>
                                                                    Fair                        LIBOR
  Notional            Effective             Expiration             Market           Fixed      Maximum
   Amount               Date                   Date                 Value            Rate        Rate
   ------               ----                   ----                 -----            ----        ----
<S>               <C>                     <C>                     <C>              <C>         <C>
$10,000,000       February 25, 2000       August 25, 2007         $ 42,961           5.48%       7.00%
  5,000,000       December 29, 2000       December 31, 2001        (29,578)          6.43%         --%
  5,000,000       October 4, 1999         October 4, 2002           70,926           5.02%         --%
</TABLE>


Recent Pronouncements

In June 1998, SFAS No. 133 was issued (and amended by SFAS No. 138), which
establishes accounting and reporting standards requiring all derivative
instruments (including certain derivative instruments imbedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at their fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged item in
the income statement, and requires that a company must formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. The effect of adopting SFAS No. 133 on January 1, 2001 is not
material. The company currently has three interest rate swap arrangements that
convert a portion of its floating rate debt to a fixed rate basis, two of which
will not qualify for hedge accounting under SFAS No. 133. Those swaps will be
valued at fair value and changes in fair value will be consequently reflected in
earnings.

Reclassifications

Certain reclassifications have been made to the prior year financial statements
to be consistent with the current year presentation.


2. ACQUISITIONS:

In November 1999, the company acquired most of the assets of the J.B. Swayne
Spawn Company of Kennett Square, Pennsylvania, a modern production facility that
distributes its product within North America. The purchase price, after the
first contingent consideration payment of $125,000, was $4.7 million. This
acquisition has been accounted for as a purchase transaction. As a result of the
first contingent payment and the completion of the final purchase allocations,
the purchase price exceeded the fair value of the net assets acquired by $1.4
million and will be amortized over 20 years. Additional contingent consideration
of $125,000 may be made during 2001 based on certain conditions and would
increase the excess purchase price, if paid.

In May 1998, the company acquired 90% of the capital stock of International
Mushrooms Limited, a company incorporated in Ireland that produces and
distributes mushroom spawn. The purchase price was $1.6 million. This
acquisition has been accounted for as a purchase transaction. As a result of
purchase price allocations, the purchase price exceeded the fair value of net
assets acquired by $0.9 million, which will be amortized over 20 years. During
2000, Sylvan purchased the remaining 10% of the capital stock.

Had the acquisitions taken place at the beginning of 1999 and 1998,
respectively, the pro forma impact on sales, net income and diluted earnings per
share would not be materially different from the amounts reported.




                                       31
<PAGE>   32


3. INVENTORIES:

Inventories are summarized as follows (in thousands):

                                              December 31,  January 2,
                                                 2000          2000
                                               -------       -------

      Growing crops and compost material       $ 5,521       $ 5,021
      Stores and other supplies                  1,410         1,794
      Mushrooms and spawn on hand                3,467         3,295
                                               -------       -------
                                               $10,398       $10,110
                                               =======       =======


4. LONG-TERM DEBT, BORROWING AND LEASE ARRANGEMENTS:

The company has a Revolving Credit Agreement with two commercial banks, dated
August 6, 1998. It provides for revolving credit loans on which the aggregate
outstanding balance available to the company may not initially exceed $55.0
million. This aggregate outstanding balance will decline over the life of the
agreement as follows:

                                       Maximum Aggregate
        Period Beginning              Outstanding Balance
        ----------------              -------------------

          August 6, 2003                 $50.0 million
          August 6, 2004                  45.0 million

Outstanding borrowings under the agreement bear interest at either the Prime
Rate or LIBOR (plus an applicable margin), at the company's option. On December
31, 2000, the company had outstanding borrowings under the agreement of $36.0
million. The revolving credit loans mature on August 5, 2005. The company
intends to extend the terms of the revolving credit agreement or secure a
similar arrangement through August 2007, which is concurrent with the expiration
date of the longest-term interest rate swap.

The agreement provides for the maintenance of various financial covenants and
includes limitations as to incurring additional indebtedness and the granting of
security interests to third parties. Obligations under the agreement are
guaranteed by certain wholly owned subsidiaries of the company.

In 1995, the company obtained Dutch guilder financing for the acquisition of
plant and machinery in the Netherlands. As of December 31, 2000, approximately
$0.8 million is outstanding on this loan which has a term of 15 years and a
fixed rate of interest of 6.2%. The company has granted a security interest over
certain Dutch assets to secure these borrowings.

The company has a French-franc denominated loan of FF16.2 million. Interest is
payable based on a formula that utilizes a Paris Interbank Offer Rate plus an
applicable margin. Repayment is due in January 2002. The loan is supported by a
compensating cash balance maintained at a U.S. bank.




                                       32
<PAGE>   33



The company incurred approximately $2.6 million in gross interest expense during
2000, reflecting a weighted average interest rate of 6.86%. The contractual
principal payments due under the company's loan agreements are as follows (in
thousands):

                        2001                  $   192
                        2002                    2,612
                        2003                      158
                        2004                       88
                        2005                      451
                        Thereafter             36,562
                                              -------
                        Total                 $40,063
                                              =======

The company has entered into various noncancelable operating leases expiring at
various dates through August 31, 2005, primarily for production and office
space. During the years ended December 31, 2000, January 2, 2000 and January 3,
1999, rental expense included in the statements of income was $222,000, $229,000
and $313,000, respectively.

Future minimum lease commitments for all noncancelable leases are as follows
(in thousands):

                        2001                    $335
                        2002                     169
                        2003                      85
                        2004                      73
                        2005                      25
                        Thereafter                --
                                                ----
                        Total                   $687
                                                ====

5. ACCRUED SALARIES, WAGES AND EMPLOYEE BENEFITS:
   ----------------------------------------------

Accrued salaries, wages and employee benefits are composed of the following (in
thousands):

                                    December 31,   January 2,
                                       2000          2000
                                       ----          ----

       Accrued compensation            $1,798       $2,028
       Accrued vacation                   648          673
       Other                              207          269
                                       ------       ------

       Total                           $2,653       $2,970
                                       ======       ======






                                       33
<PAGE>   34


6. INCOME TAXES:

The company files a consolidated U.S. federal income tax return with its wholly
owned U.S. subsidiaries. The company does not provide for federal income taxes
on unremitted earnings of non-U.S. subsidiaries.

The amounts of income before income taxes attributable to domestic and foreign
operations are as follows (in thousands):

                Year Ended      Year Ended      Year Ended
                December 31,     January 2,      January 3,
                   2000            2000            1999
                  ------          ------          ------

Domestic          $3,308          $1,992          $2,417
Foreign            5,522           6,332           6,408
                  ------          ------          ------

Total             $8,830          $8,324          $8,825
                  ======          ======          ======


The provision (benefit) for income taxes consists of the following (in
thousands):

                               Year Ended       Year Ended        Year Ended
                              December 31,      January 2,        January 3,
                                 2000              2000              1999
                                ------            ------            ------
Current-
  Federal                      $   861           $   388           $   150
  State                            (78)             (112)              (31)
  Foreign                        1,423             1,547             1,816

Deferred-
  Federal                          193               372               354
  State                             73                35               (10)
  Change in valuation
   allowance                      (492)              (99)               --
  Foreign                           --                --                --
                               -------           -------           -------

                               $ 1,980           $ 2,131           $ 2,279
                               =======           =======           =======





                                       34
<PAGE>   35


A reconciliation between income taxes computed by applying the statutory U.S.
federal income tax rate to income before income taxes and the actual provision
for income taxes is as follows (in thousands):

<TABLE>
<CAPTION>
                                              Year Ended        Year Ended        Year Ended
                                              December 31,       January 2,       January 3,
                                                 2000              2000              1999
                                                 ----              ----              ----

<S>                                           <C>               <C>               <C>
Income tax at U.S. federal statutory
  rate                                          $ 3,002           $ 2,830           $ 3,000
State income taxes, net of federal
  income tax benefit                                 (5)              (74)              (21)
Foreign taxes at rates other than
  effective U.S. rates                             (462)             (471)             (490)
Net (permanent benefits) nondeductible
  charges                                           (67)              (34)             (259)
Reduction in state income tax
   valuation allowance                             (492)              (99)               --
Other, net                                            4               (21)               49
                                                -------           -------           -------

Total provision for income taxes
                                                $ 1,980           $ 2,131           $ 2,279
                                                =======           =======           =======
</TABLE>

Temporary differences which generate significant portions of the company's
deferred tax assets and liabilities as of December 31, 2000 and January 2, 2000
were as follows (in thousands):


                                               December 31,       January 2,
                                                   2000             2000
                                                 -------           -------

Postretirement benefits other than pensions      $  (371)          $  (408)
Depreciation                                       3,522             3,606
Prepaid pension asset                              2,007             1,786
Net operating loss carryforwards                  (1,853)           (1,061)
Other, net                                          (489)             (585)
                                                 -------           -------

  Total                                            2,816             3,338

Less- Valuation allowance                          1,188               962
                                                 -------           -------

Net deferred tax liability                       $ 4,004           $ 4,300
                                                 =======           =======



                                       35
<PAGE>   36


Included in net deferred tax liabilities at December 31, 2000 are unrealized tax
benefits amounting to $1.9 million related to net operating loss carryforwards.
The realization of these tax benefits is contingent on future taxable net income
being generated by certain foreign and domestic operations. A $0.5 million state
tax benefit resulted from the merger of two of the company's subsidiaries in the
fourth quarter of 2000. The life of the carryforwards is determined by various
foreign and state taxation jurisdictions. Approximately $0.3 million of the net
operating losses has an indefinite carryforward period. The remaining $1.6
million of net operating losses will expire between 2002 and 2015. The company
has recognized a valuation allowance that reduces the carrying value of
unrealized net deferred tax benefits relating to net operating loss
carryforwards to offset the deferred tax benefits that may not be realized.


7. STOCK OPTIONS:

In June 1991, the shareholders approved a stock option plan (the 1990 Plan) for
employees and others who perform substantial services for the company. In April
1999, the shareholders approved an amendment and restatement of the 1990 Plan to
provide for an increase to 1,700,000 in the number of shares of the company's
stock which are available for the granting of options. In June 1993, the
shareholders approved a stock option plan (the 1993 Plan) for nonemployee
directors of the company, covering 100,000 shares of common stock. The company
accounts for both plans under the Accounting Principles Board Opinion No. 25,
under which no compensation cost is recognized for options granted at fair
market value. Had compensation cost for these plans been determined in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the
company's net income and earnings per share (EPS) would have been reduced to the
following pro forma amounts (in thousands, except per share data):

                                   Year Ended    Year Ended     Year Ended
                                      2000          1999           1998
                                     ------        ------         ------
   Net Income:   As Reported         $6,682        $6,128         $6,337
                 Pro Forma            5,964         5,500          5,938
   Diluted EPS:  As Reported         $ 1.18        $ 1.00         $ 0.97
                 Pro Forma             1.05          0.90           0.91

The company's Board of Directors, through its Stock Option and Compensation
Committee (the Board) may grant options under the 1990 Plan. Grants under the
1993 Plan are nondiscretionary. The Board has granted options (net of
cancellations) for 1,293,749 shares through December 31, 2000, under the 1990
Plan and 84,000 shares have been granted under the 1993 Plan. Under both plans,
the option exercise price equals the stock's market price on the date of grant.
The 1990 Plan options are exercisable one year from the grant date in
installments over a period of three years and expire after ten years. The 1993
Plan options are exercisable six months from the grant date and expire ten years
after the grant.

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants made in 2000, 1999 and 1998, respectively: risk-free
interest rates of 5.74%, 5.85% and 5.08%; no expected dividend yields; expected
lives of 8.0 years; expected volatility of 34%, 32% and 31%.



                                       36
<PAGE>   37


A summary of the status of the company's stock option plans at December 31,
2000, January 2, 2000 and January 3, 1999, and changes during the years then
ended is presented in the table and narrative below (shares in thousands):





<TABLE>
<CAPTION>
                                                2000                      1999                      1998
                                      ------------------------- -------------------------- --------------------------
                                                      Weighted                  Weighted                 Weighted
                                                      Average                   Average                   Average
                                                      Exercise                  Exercise                  Exercise
                                        Shares          Price     Shares         Price      Shares         Price
                                        ------          -----     ------         -----      ------         -----
<S>                                     <C>           <C>         <C>          <C>          <C>          <C>
Outstanding at beginning of year          859          $11.54       769          $11.69       614          $10.88
Granted                                   132            8.75       136            9.99       212           13.82
Exercised                                 (10)           8.75       (34)           8.53       (47)          10.50
Forfeited                                (140)          11.08       (12)          12.62       (10)          12.88
                                        -----          ------      ----          ------      ----          ------
Outstanding at end of year                841           11.21       859           11.54       769           11.69
                                        -----          ------      ----          ------      ----          ------
Exercisable at end of year                570           11.64       556           11.27       462           10.60

Weighted average fair value of
  options granted                                      $ 4.50                    $ 5.04                    $ 6.60
</TABLE>

Both plans had an aggregate of 840,941 options outstanding as of December 31,
2000. 646,941 of these options have exercise prices of between $8.625 and
$12.875 per share, with a weighted average exercise price of $10.41 and a
weighted average remaining contractual life of 6.5 years. 194,000 of these
options have exercise prices of between $13.00 and $15.00 per share, with a
weighted average exercise price of $13.89 and a weighted average remaining
contractual life of 7.6 years. 570,072 of these options are exercisable. The
remaining 270,869 options have exercise prices between $8.625 and $15.00 per
share, with a weighted average exercise price of $10.30 and a weighted average
contractual life of 9.0 years.


8. EMPLOYEE BENEFITS:

The company has a noncontributory defined benefit pension plan covering
substantially all of the former employees of a former operation and certain
employees of Sylvan Foods, Inc. and Sylvan America, Inc., wholly owned
subsidiaries of the company. The company's funding policy is to contribute
annually an amount that satisfies the minimum funding requirement under the
Employee Retirement Income Security Act and that is also deductible for federal
income tax purposes.

The accumulated benefit obligation at December 31, 2000 and January 2, 2000 was
$30.3 million and $30.1 million, respectively, all of which was fully vested.
The plan's assets consist primarily of U.S. government obligations, temporary
deposits, common stocks and corporate obligations.

The plan's funded status and amounts recognized in the company's consolidated
financial statements, together with certain accumulated postretirement medical
benefit obligations, are set forth in the following tables:



                                       37
<PAGE>   38


<TABLE>
<CAPTION>
                                                             Pension Benefits                          Other Benefits
                                                  ---------------------------------------   --------------------------------------
                                                  December 31,   January 2,    January 3,    December 31,  January 2,  January 3,
             (in thousands)                           2000          2000          1999          2000         2000         1999
                                                    --------      --------      --------       -------      -------      -------
<S>                                               <C>            <C>           <C>           <C>           <C>         <C>
Change in benefit obligation:
  Benefit obligation at beginning of
     year                                           $ 30,109      $ 33,886      $ 33,413       $ 1,044      $   716      $   714

  Interest cost                                        2,176         2,132         2,093            71           71           47
  Plan amendments                                         --            --            --            --           --           --
  Actuarial (gain) loss                                  302        (3,595)          726           (41)         357           27
  Benefits paid                                       (2,335)       (2,314)       (2,346)          (89)        (100)         (72)
                                                    --------      --------      --------       -------      -------      -------
  Benefit obligation at end of year                 $ 30,252      $ 30,109      $ 33,886       $   985      $ 1,044      $   716
                                                    ========      ========      =======        =======      =======      =======

Change in plan assets:
  Fair value of plan assets at
   beginning of year                                $ 34,362      $ 33,867      $ 33,089       $    --      $    --      $    --
  Actual return on plan assets                         1,822         2,809         3,124            --           --           --
  Employer contributions                                  --            --            --            89          100           72
  Benefits paid                                       (2,335)       (2,314)       (2,346)          (89)        (100)         (72)
                                                    --------      --------      --------       -------      -------      -------
  Fair value of plan assets at end of year          $ 33,849      $ 34,362      $ 33,867       $    --      $    --      $    --
                                                    ========      ========      =======        =======      =======      =======

Reconciliation of funded status:
  Funded status                                     $  3,597      $  4,253      $    (19)      $  (985)     $(1,044)     $  (716)
  Unrecognized net actuarial (gain) or
   loss                                                2,307         1,003         4,704            60          100         (251)
  Unrecognized prior service cost                         --            --            --           (56)         (61)         (68)
                                                    --------      --------      --------       -------      -------      -------
  Prepaid (accrued) benefit liability               $  5,904      $  5,256      $  4,685       $  (981)     $(1,005)     $(1,035)
                                                    ========      ========      ========       =======      =======      =======

Weighted-average assumptions as of end of
  fiscal year:
  Discount rate                                         7.50%         7.50%         6.50%         7.50%        7.50%        7.00%
  Expected return on plan assets                        9.00%         9.00%         9.00%           --           --           --
  Rate of compensation increase                           --            --            --            --           --           --

Components of net periodic pension
  cost (income):
  Interest cost                                     $  2,176      $  2,132      $  2,093       $    71      $    71      $    47
  Expected return on plan assets                      (2,824)       (2,755)       (2,689)           --           --           --
  Amortization of prior service cost                      --            --            --            (6)          (6)          (6)
  Recognized net actuarial loss (gain)                    --            52            37            --            5          (15)
                                                    --------      --------      --------       -------      -------      -------
  Net periodic benefit cost (income)                $   (648)     $   (571)     $   (559)      $    65      $    70      $    26
                                                    ========      ========      ========       =======      =======      =======

Amounts recognized in the consolidated
 balance sheet consist of:
  Prepaid benefit cost                              $  5,904      $  5,256      $     --       $    --      $    --      $    --
  Accrued benefit liability                               --            --           (19)         (981)      (1,005)      (1,035)
  Accumulated other comprehensive income                  --            --         4,704            --           --           --
                                                    --------      --------      --------       -------      -------      -------
  Net amount recognized at year-end                 $  5,904      $  5,256      $  4,685       $  (981)     $(1,005)     $(1,035)
                                                    ========      ========      ========       =======      =======      =======

  Other comprehensive income
   attributable to change in
   additional  minimum liability
   recognition                                      $     --      $ (4,704)     $    253       $    --      $    --      $    --
</TABLE>




                                       38
<PAGE>   39


<TABLE>
<CAPTION>
                                           ------------------------------------------     -----------------------------------------
                                                       Pension Benefits                                Other Benefits
                                           ------------------------------------------     -----------------------------------------
                                           December 31,     January 2,     January 3,     December 31,     January 2,    January 3,
            (in thousands)                     2000            2000           1999            2000            2000          1999
                                           ------------     ----------     ----------     ------------     ----------    ----------
<S>                                        <C>              <C>            <C>            <C>              <C>           <C>
Additional year-end information for
 pension plans with accumulated benefit
 Obligations in excess of plan assets:
   Projected benefit obligation                                             $33,886
   Accumulated benefit obligation                                            33,886
   Fair value of plan assets                                                 33,867

Assumed health care cost trend:
Initial trend rate                                                                            6.95%           7.34%         7.12%
Ultimate trend rate                                                                           5.00%           5.00%         5.25%
Year ultimate trend reached                                                                   2005            2005          2003

A one-percentage-point change in the
  assumed health care cost trend rates
  would have the following effects:
</TABLE>


                                          One Percentage       One Percentage
                                          Point Increase       Point Decrease
                                          --------------       --------------
  Effect on total of service and
   interest cost components for 2000          $ 6                  $ (5)
  Effect on 2000 postretirement
   benefit obligation                          81                   (72)

Additionally, during 1999 certain hourly-paid workers at the company's Quincy
Farms subsidiary became participants in a union-sponsored, collectively
bargained, multi-employer pension plan to which the company makes negotiated
contributions based on fixed amounts per hour per employee. Expense recorded in
connection with this plan for fiscal years 2000 and 1999 was $30,000 and
$33,000, respectively.


9. NATURE OF OPERATIONS AND BUSINESS SEGMENT INFORMATION:

Sylvan is a worldwide producer and distributor of mushroom products,
specializing in spawn (the equivalent of seed for mushrooms) and spawn-related
products and services, and is a major grower of fresh mushrooms in the United
States. The company has two reportable business segments: spawn products, which
includes spawn-related products and the company's bioproducts operation, and
fresh mushrooms. Spawn-related products include casing inoculum, nutritional
supplements and disease-control agents. The fresh mushrooms business segment is
comprised of a large, regional producer of fresh mushrooms.

The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The company evaluates the
performance of each segment based on profit or loss from operations. The company
accounts for intersegment sales at a transfer price that approximates an
arms-length sale to an unrelated third party.

The company's reportable segments are strategic business units that offer
different products and serve different customers. They are managed separately
since each business requires different technology, techniques and marketing
strategies.




                                      39
<PAGE>   40




<TABLE>
<CAPTION>
      (in thousands)                      Spawn Products    Fresh Mushrooms    Total Reportable
                                             Segment            Segment            Segments
                                          --------------    ---------------    ----------------
<S>                             <C>       <C>               <C>                <C>
Total Revenues                   2000        $65,199            $22,035            $ 87,234
                                 1999         61,945             29,176              91,121
                                 1998         60,208             30,708              90,916

Intersegment Revenues            2000        $ 1,287            $    --            $  1,287
                                 1999          1,280                 --               1,280
                                 1998          1,121                 --               1,121

Depreciation Expense             2000        $ 3,578            $ 1,623            $  5,201
                                 1999          3,824              1,624               5,448
                                 1998          3,626              1,569               5,195

Operating Income                 2000        $13,368            $ 2,135            $ 15,503
                                 1999         12,930              1,425              14,355
                                 1998         12,850              1,107              13,957

Net Fixed Asset Expenditures     2000        $ 5,191            $   911            $  6,102
                                 1999          7,171                487               7,658
                                 1998          7,545                563               8,108

Assets                           2000        $76,462            $21,565            $ 98,027
                                 1999         79,166             23,385             102,551
                                 1998         79,464             21,584             101,048
</TABLE>

                  Reconciliation to Consolidated Financial Data



<TABLE>
<CAPTION>
(in thousands)                                            2000               1999                1998
                                                        ---------          ---------          ---------
<S>                                                     <C>                <C>                <C>
Revenues:
Total for reportable segments                           $  87,234          $  91,121          $  90,916
Elimination of intersegment revenues                       (1,287)            (1,280)            (1,121)
                                                        ---------          ---------          ---------
Total consolidated revenues                             $  85,947          $  89,841          $  89,795
                                                        =========          =========          =========

Depreciation Expense:
Total for reportable segments                           $   5,201          $   5,448          $   5,195
Unallocated corporate expenses                                 32                 58                 73
                                                        ---------          ---------          ---------
Total consolidated depreciation expense                 $   5,233          $   5,506          $   5,268
                                                        =========          =========          =========

Operating Income:
Total for reportable segments                           $  15,503          $  14,355          $  13,957
Unallocated corporate expenses                             (3,989)            (3,799)            (2,846)
                                                        ---------          ---------          ---------
Total consolidated operating income                     $  11,514          $  10,556          $  11,111
                                                        =========          =========          =========

Net Fixed Asset Expenditures:
Total for reportable segments                           $   6,102          $   7,658          $   8,108
Unallocated corporate expenditures                              2                 11                 87
                                                        ---------          ---------          ---------
Total consolidated net fixed asset expenditures         $   6,104          $   7,669          $   8,195
                                                        =========          =========          =========

Assets:
Total for reportable segments                           $  98,027          $ 102,551          $ 101,048
Prepaid pension asset from former operation                 5,904              5,256                 --
Unallocated corporate assets                                1,843              1,688              1,502
                                                        ---------          ---------          ---------
Total consolidated assets                               $ 105,774          $ 109,495          $ 102,550
                                                        =========          =========          =========
</TABLE>


                                       40
<PAGE>   41


          Geographic Analysis of Revenues Based on Location of Customer



<TABLE>
<CAPTION>
(in thousands)                   United                     Other Foreign
               United States     Kingdom      Netherlands     Countries         Total
               -------------     -------      -----------     ---------         -----
<S>            <C>               <C>          <C>           <C>              <C>
    2000         $41,703         $5,776         $8,778         $29,690         $85,947
    1999          43,543          8,875          9,822          27,601          89,841
    1998          46,012          9,838          9,768          24,177          89,795
</TABLE>


                  Geographic Analysis of Net Long-Lived Assets

<TABLE>
<CAPTION>
(in thousands)                                              Other Foreign
              United States      France       Netherlands     Countries         Total
              -------------      ------       -----------     ---------         -----
<S>           <C>               <C>           <C>           <C>             <C>
    2000         $25,225         $8,560         $5,089         $13,662         $52,536
    1999          25,669          8,683          5,624          14,273          54,249
    1998          25,090          9,462          6,277          12,610          53,439
</TABLE>

Most of Sylvan's fresh mushrooms segment sales in 2000 were to C And C Carriage
Mushroom Company. C And C began purchasing and marketing all of Quincy's
production in January 2000. The $20.8 million of fresh mushrooms purchased from
Quincy represented 24% of Sylvan's consolidated net sales. C And C is not
affiliated with Sylvan or any of its subsidiaries and the purchase and marketing
arrangement carries an initial term of five years.

No other single customer accounted for 10% or more of Sylvan's sales during the
years ended December 31, 2000, January 2, 2000 or January 3, 1999. The majority
of the company's $12.7 million in trade accounts receivable are from regional
mushroom growers and composters. Many of these customers are privately held
businesses with limited capital resources. Approximately $2.1 million of the
receivable is due from C And C and is partially secured by a letter of credit
for $1.25 million.


10. RELATED-PARTY TRANSACTIONS:

During fiscal years 2000, 1999 and 1998, a nonemployee director's business
interests purchased spawn and spawn-related products at fair market value
totaling $621,000, $659,000, and $668,000, respectively, and purchased mushrooms
at fair market value totaling $83,000 in 1999 and $33,000 in 1998, in trading
with the company's subsidiaries.


11. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS AND SIGNIFICANT GROUP
    CONCENTRATIONS OF CREDIT RISK:

The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value. Fair value is defined as the amount at which the instrument could be
exchanged in a transaction between willing parties.

Cash and Cash Equivalents

The carrying amount approximates fair value because of the short maturity of
these instruments.



                                       41
<PAGE>   42


Long-Term Debt

The fair value of the company's long-term debt is estimated based on the quoted
market prices for the same or similar issues or on the current rates offered to
the company for debt of the same remaining maturities. The company is satisfied
that the stated value of its variably priced long-term debt approximates fair
market value.


Interest Rate Swaps

The fair value of these instruments is based on the difference between the
interest rates either received or paid on the notional amount of the underlying
liabilities. The calculation of fair value was computed on a net present value
basis as if the financial instruments were terminated on the balance sheet date.
A relationship spread was developed based on the difference between the
three-month LIBOR and quoted three-month treasuries. This spread was added to
the quoted treasury yield for the respective maturity period of the financial
instruments and used to compute the net present value. The negative or positive
fair value is an estimate of the amounts that the company would either pay or
receive to cancel the contracts outstanding at the balance sheet date. The
instruments had fair value benefits of $84,000 and $613,000 as of December 31,
2000 and January 2, 2000, respectively.






                                       42
<PAGE>   43

                                                                     Schedule II



                          SYLVAN INC. AND SUBSIDIARIES

                       VALUATION AND QUALIFYING ACCOUNTS

   For the Years Ended December 31, 2000, January 2, 2000 and January 3, 1999
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                   Additions
                                                           ------------------------
                                             Balance at    Charged to                  Deductions                Balance
                                             Beginning     Costs and                     from                    at End
Description                                  of Period     Expenses      Recoveries    Reserves(a)   Other(b)   of Period
-----------                                  ---------     --------      ----------    -----------   --------   ---------
<S>                                         <C>           <C>           <C>           <C>           <C>        <C>
Year ended December 31, 2000--
  Allowance for doubtful accounts.......       $826           $251         $0            ($558)        ($22)       $497
                                               ====           ====         ==            ======        =====       ====

Year ended January 2, 2000--
  Allowance for doubtful accounts.......       $710           $524         $0            ($379)        ($29)       $826
                                               ====           ====         ==            ======        =====       ====

Year ended January 3, 1999--
  Allowance for doubtful accounts.......       $812           $495         $0            ($526)        ($71)       $710
                                               ====           ====         ==            ======        =====       ====
</TABLE>

(a) Represents uncollected accounts charged against the allowance.

(b) Represents the effect of currency translation adjustments.


                                       43
<PAGE>   44

    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and
Shareholders of Sylvan Inc.

We have audited, in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements included in Sylvan Inc.'s
annual report to shareholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated February 2, 2001. Our audits were made for
the purpose of forming an opinion on those statements taken as a whole. The
schedule listed in the index in Item 14(a)2 of this Form 10-K is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

                                                  /s/ ARTHUR ANDERSEN LLP

Pittsburgh, Pennsylvania,
February 2, 2001


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