Exhibit
      13











2004
      Annual Report to Shareholders

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GENERAL
      OVERVIEW

Hanover Foods
      Corporation (as used herein the term Corporation refers to
      Hanover Foods Corporation and its consolidated subsidiaries) was incorporated
      on December 12, 1924 in Harrisburg, Pennsylvania.


The Corporation
      has seven (7) wholly-owned subsidiaries, Tri-Co. Foods Corp., Consumers
      Packing Corporation, Spring Glen Fresh Foods, Inc., Hanover Insurance Corporation,
      Ltd., Nittany Corporation, Bickels Snack Foods, Inc. and Aunt Kittys
      Foods, Inc. Tri-Co. Foods Corp. has two (2) wholly-owned subsidiaries:
      Sunwise Corporation and Mayapac, S.A.


The Corporation
      enjoys the strongest retail sales of its products in the mid-Atlantic states
      and Florida. Introduction of frozen ethnic blends, specialty vegetables
      and fruits, canned pasta, frozen soft pretzels, refrigerated food, canned
      and frozen mushrooms and snack food products has enabled the Corporation
      to increase and expand its distribution throughout the eastern seaboard.
      Distribution in the remainder of the United States is limited to food service,
      military and industrial customers.


The Corporation
      markets its products under the brand names HANOVER, HANOVER FARMS, MYERS,
      PHILLIPS, GIBBS, SUPERFINE, MARYLAND CHIEF, MITCHELLS, DUTCH FARMS,
      SUNWISE, O&C (jarred onions only), SPRING GLEN FRESH FOODS, SUNNYSIDE
      FOODS, NOTTINGHAM, BICKELS, BON TON, YORK SNACKS, CABANA, DRAPER
      KING COLE, VENICE MAID, AUNT KITTYS and HARVEST CHOICE. The products
      sold by the Corporation under these brand names include canned vegetables,
      beans and pasta as well as frozen vegetables, frozen meat products, food
      entrees, refrigerated and fresh foods, canned and frozen mushrooms and
      potato chips.


MANAGEMENTS
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND
  RESULTS OF OPERATIONS

Forward
      Looking Statements

When used
      in this Annual Report, the words or phrases “will likely result,” “are
      expected to,” “will continue,” “is anticipated,” “estimate,” “projected,” or
      similar expressions are intended to identify “forward looking statements” within
      the meaning of the Private Securities Litigation Reform Act of 1995. Such
      statements are subject to certain risks and uncertainties including but
      not limited to quarterly fluctuations in operating results, competition,
      state and federal regulation, environmental considerations, foreign operations,
      and a change of control as a result of the pending Warehime family litigation.
      Such factors, which are discussed in the Annual Report, could affect the
      Corporations financial performance and could cause the Corporations
      actual results for future periods to differ materially from any opinion
      or statements expressed herein with respect to future periods. As a result,
      the Corporation wishes to caution readers not to place undue reliance on
      any such forward looking statements, which speak only as of the date made.


Description
      of Business

The Corporation
      is a vertically integrated processor of food products in one industry segment.
      The Corporation is involved in the growing, processing, canning, freezing,
      freeze-drying, packaging, marketing and distribution of its products under
      its own trademarks as well as other branded, customer and private labels.
      The Corporation has operations in ten plants in Pennsylvania, one plant
      in Maryland, one plant in Delaware, one plant in New Jersey and two plants
      in Guatemala. The Corporation and its subsidiaries, in the normal course
      of business, purchase and sell goods and services to related parties. See
      Note 7 of the notes to the Consolidated Financial Statements.


The Corporations
      fiscal year ends at the close of operations on the Sunday nearest to May
      31. Accordingly, the following discussion compares the results of operations
      for the fiscal year ended May 30, 2004 compared to the year ended June
      1, 2003, and the fiscal year ended June 1, 2003 compared to the year ended
      June 2, 2002.


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RESULTS
      OF OPERATIONS

Year
      Ended May 30, 2004 Compared to Year Ended June 1, 2003

Net
      Sales

Consolidated
      net sales were $318.0 million for fiscal 2004 compared to $290.3 million
      for fiscal 2003. The increase in consolidated net sales comprised of the following
      volume and sales price components:


|                             | Volume |   | Sales
          Price |    | Combined |   
|---------------------------- | ------ | - | --------------------- | -- | -------- | --
|                             |        |   |                       |    |          |   
|Frozen
        Foods         | .3     | % | (.5                   | )% | (.2      | )%
|Canned
        Foods         | 3.8    | % | —                     |    | 3.8      | % 
|Prepared/Snack
        Foods | 4.3    | % | 1.6                   | %  | 5.9      | % 
|                             |        |   |                       |    |          |   
|                             | 8.4    | % | 1.1                   | %  | 9.5      | % 
|                             |        |   |                       |    |          |   

The increased
      volume in frozen food sales was principally due to an increase in retail
      brand sales and industrial sales. These increases were offset by decreases
      in food service and private label sales. Frozen food prices have remained
      relatively consistent with last fiscal year in all major sales areas.


The increased
      volume in canned food sales was principally due to increases in retail
      brand sales, food service and private label sales as well as the canned
      food plant acquisition of the assets of Venice Maid Foods, Vineland, NJ
      made during the fourth quarter of fiscal 2004 which accounted for 35% of
      the total volume increase. Canned food prices have remained relatively
      consistent with last fiscal year in all major sales areas.


The increase
      volume in prepared and snack foods was principally due to increases in
      snack foods as well as the acquisition of snack food plant and business
      of Wege Pretzel Co., Hanover, PA and the fresh prepared food plant acquisition
      of Sunsprout of Lancaster County, Lancaster, PA made during the third and
      fourth quarter of the current fiscal year which accounted for 34% of the
      total volume increase. The prices for snack foods remained consistent with
      last fiscal year. The prices for prepared food increased due to larger
      case sizes sold at higher unit prices at a major customer acquired in May
      2003.


Cost
      of Goods Sold

Consolidated
      cost of goods sold represent 85.2% of consolidated net sales for fiscal
      year 2004 compared to 84.2% for fiscal 2003. The consolidated cost of sales
      increased $26.7 million to $271.0 million in fiscal 2004 compared to $244.3
      million for fiscal 2003. The cost of sales increased $22.4 million due
      to the volume increase of 8.4% for the current fiscal year. The remaining
      increase was due to higher energy, health care and commodity costs during
      the current fiscal year.


Selling
      Expenses

Consolidated
      selling expenses represented 3.8% of consolidated net sales for fiscal
      2004 and 4.2% for fiscal 2003. Consolidated selling expenses decreased
      from $12.2 million in fiscal 2003 to $12.1 million in fiscal 2004. The
      decrease in the amount of selling expenses reflects lower customer advertising
      and Company bonus provision for sales personnel. These decreases were partially
      offset by increased package design and brokerage fees paid during the fiscal
      year.


Administration
      Expenses

Consolidated
      administration expenses were $16.1 million for fiscal year 2004, or 5.1%
      of consolidated net sales, as compared to $15.8 million, or 5.4% of consolidated
      net sales in 2003. The increase in administration expenses reflects increases
      in the provision for the supplemental pension benefits, provision for post-retirements
      benefits as well as increases in the executive bonus provision for the
      current fiscal year. These increases were partially offset by decreases
      in the workmans compensation insurance reserves at Hanover Insurance
      Company, Limited, a wholly-owned subsidiary of Hanover Foods Corporation.


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Interest
      Expense

Consolidated
      interest expense for fiscal 2004 decreased $0.5 million to $2.3 million
      compared to $2.8 million in fiscal 2003. The decrease reflected lower average
      borrowings as well as lower average borrowing rates for the fiscal year
      2004 compared to fiscal year 2003.


Other
      Income (Expense)

Consolidated
      other income increased $204,000 to $474,000 for fiscal 2004 as compared
      to other income of $270,000 for fiscal 2003. The increase was due to income
      generated from the sales of investments. This increase was partially offset
      by an increase in the foreign exchange translation loss during fiscal year
      2004.


Income
      Taxes

The provision
      for corporate federal and state income taxes for the fiscal year 2004 was
      $5.6 million or 32.9% of pretax earnings, as compared to $5.7 million or
      36.4% of pretax earning for 2003. The decrease in the effective rate is
      primarily due to increased earnings in jurisdictions with lower effective
      tax rates for the current fiscal year as compared to the prior fiscal year.
      Refer to Note 9 to the consolidated financial statements for a reconciliation
      of the effective tax rate to the statutory rate.


Net
      Earnings

Consolidated
      net earnings for fiscal year 2004 were $11.4 million, or 3.6% of consolidated
      net sales, as compared to $9.9 million, or 3.4% of consolidated net sales
      for fiscal 2003 as a result of the factors discussed above.


RESULTS
      OF OPERATIONS

Year
      Ended June 1, 2003 Compared to Year Ended June 2, 2002

Net
      Sales

Consolidated
      net sales were $290.3 million for fiscal 2003 compared to $290.2 million
      for fiscal 2002. The increase in consolidated net sales comprised of the
      following volume and sales price components:


|                             | Volume |    | Sales
          Price |    | Combined |   
|---------------------------- | ------ | -- | --------------------- | -- | -------- | --
|                             |        |    |                       |    |          |   
|Frozen
        Foods         | 1.0    | %  | (.7                   | )% | .3       | % 
|Canned
        Foods         | (1.3   | )% | .6                    | %  | (.7      | )%
|Prepared/Snack
        Foods | .1     | %  | .3                    | %  | .4       | % 
|                             |        |    |                       |    |          |   
|                             | (.2    | )% | .2                    | %  | 0        | % 
|                             |        |    |                       |    |          |   

The
      increased volume in frozen food sales was principally due to an increase
      in retail brand sales and private label sales. These increases were partially
      offset by decreases in food service and industrial sales. Frozen food prices
      have remained relatively consistent with last fiscal year, however the
      increase in price sensitive promotions did decrease price, and the increase
      in private label sales was made at a lower price per unit that offset the
      increased price in branded retail sales.


The decreased
      volume in canned food sales was principally due to a decrease in industrial
      and private label sales. Canned food prices have remained relatively consistent
      with last fiscal in all major sales areas.


Prepared
      and snack foods volume was consistent with last fiscal with increases in
      prepared foods and offset by decreases in snack food sales. The prices
      for both prepared and snack foods remained relatively consistent with last
      fiscal year.


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Cost
      of Goods Sold

Consolidated
      cost of goods sold represent 84.2% of consolidated net sales for fiscal
      year 2003 compared to 84.6% for fiscal 2002. The consolidated cost of sales
      decreased $1.4 million to $244.3 million in fiscal 2003 compared to $245.7
      million for fiscal 2002. The cost of sales decreased $0.9 million primarily
      due to a reduction in ingredient costs and to a lesser extent due to the
      volume reduction which decreased cost of goods by $0.5 million for fiscal
      2003.


Selling
      Expenses

Consolidated
      selling expenses represented 4.2% of consolidated net sales for fiscal
      2003 and 4.9% for fiscal 2002. The decrease in the amount of selling expenses
      reflect lower media advertising, customer advertising, free goods marketing
      program, accounts receivable write-off and the elimination of the amortization
      of trademarks.


Administration
      Expenses

Consolidated
      administration expenses were $15.8 million for fiscal year 2003, or 5.4%
      of consolidated net sales, as compared to $14.6 million, or 5.0% of consolidated
      net sales in 2002. The increase in administration expenses reflects increases
      in outside professional fees and services, the provision for the supplemental
      pension benefits, the provision for post-retirement benefits as well as
      increase in the 401(k) contribution and the ESOP contribution.


Interest
      Expense

Consolidated
      interest expense for fiscal 2003 decreased $0.8 million to $2.8 million
      compared to $3.6 million in fiscal 2002. The decrease reflected lower average
      borrowings as well as lower average borrowing rates for the fiscal year
      compared to last fiscal year.


Other
      Income (Expense)

Consolidated
      other income decreased $101,000 to $270,000 for fiscal 2003 as compared
      to other income of $371,000 for fiscal 2002. The decrease was due to lower
      gain on sale of investments and a lower gain on the sales of fixed assets.


Income
      Taxes

The provision
      for corporate federal and state income tax for the fiscal year 2003 was
      $5.7 million or 36.4% of pretax earnings, as compared to $5.1 million or
      41.3% of pretax earning for 2002. The decrease in the effective rate was
      primarily due to the elimination of the income taxes in our Guatemala subsidiary.
      Alcosa lost its income tax exoneration on March 31, 2001, and the government
      granted an income tax exoneration to Mayapac, S.A. beginning January 2002
      and ending January 2012.


Net
      Earnings

Consolidated
      net earnings for fiscal year 2003 were $9.9 million, or 3.4% of consolidated
      net sales, as compared to $7.3 million, or 2.5% of consolidated net sales,
      for fiscal 2002 as a result of the factors discussed above.


RELATED
      PARTY TRANSACTIONS

During fiscal
      2004, the Corporation and its subsidiaries, in the normal course of business,
      purchase and sell goods and services to companies affiliated with the Corporations
      directors and officers. These transactions are summarized below.


During fiscal
      2004, the Corporation rented equipment from Park 100 Foods, Inc. The rental
      payments pursuant to such lease agreements totaled $19,000 during fiscal
      2004. As of May 30, 2004, the Corporation had an accounts receivable of
      $275,000 from Park 100 Foods, Inc. for food products sold and shipped to
      Park 100 Foods, Inc. During fiscal 2004, the Corporation sold approximately
      $1.3 million of frozen food products to Park 100 Foods, Inc., Tipton, Indiana.
      James A. Washburn, a director of the Corporation, owns approximately 80%
      of the outstanding stock of Park 100 Foods, Inc.


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During fiscal
      2004, the Corporation leased a two story farm house, adjoining one story
      guest house and adjoining ground located on Trolley Road, R.D. #3, Hanover,
      Heidelberg Township, Pennsylvania, for customer housing and temporary new
      employee housing from John A. and Patricia M. Warehime for a total of $45,000.


During fiscal
      2004, the Corporation leased a barn for seed storage, located in Heidelberg
      Township, Pennsylvania for $4,000 from Warehime Enterprises, Inc. John
      A. Warehime, Chairman of the Corporation, owns 15% of the outstanding stock
      of Warehime Enterprises, Inc.


During fiscal
      2004, the Corporation purchased $1.1 million of contracted vegetables from
      Lippy Brothers, Inc. As of May 30, 2004, the Corporation owed an amount
      of $32,000 to Lippy Brothers, Inc. for vegetable crops purchased. T. Edward
      Lippy, a director of the Corporation, owns approximately 37% of the outstanding
      stock of Lippy Brothers, Inc.


During fiscal
      2003, the Corporation via its Guatemalan subsidiary, sold its condominium
      real estate located in Naples, FL to John and Patricia M. Warehime for
      $127,500, which approximates fair value.


During fiscal
      2004 the adult children of the Corporations Chairman, John Warehime,
      were employed by the Corporation, including Jennifer Carter, a Director
      of the Corporation, who was employed as Assistant to the Chairman, Jeffrey
      Warehime, who is employed as Director  Fresh Produce, and Andrew
      Warehime, who is employed as Special Sales Manager. Jennifer Carters
      husband, Michael Carter, was employed as Director  Retail Branded
      Sales. Jennifer Carter was and Jeffrey Warehime, Andrew Warehime and Michael
      Carter are employed by the Corporation at annual salaries of $93,845, $100,857,
      $63,993, $75,000 respectively. See Part III  Item 11. Employment
      Agreements and Change in Control Severance Agreements. Ms. Carter
      also receives director compensation customary for the Corporations
      directors which totaled $18,000 during fiscal 2004. See Part III  Item
      10. Directors and Executive Officers of the Corporation  Director
      Compensation. On June 20, 2002, each of Jennifer Carter, Jeffrey
      Warehime, and Andrew Warehime were granted an option to purchase 500 shares
      of Class B common stock. On October 17, 2003, Jennifer Carter, Jeffrey
      Warehime and Andrew Warehime were granted an option to purchase 1,500 shares
      of Class B Common Stock at an exercise price of $117 per share. Michael
      Carter was granted an option to purchase 750 shares of Class B Common Stock
      at an exercise price of $117.00 per share. Andrea Kint, the daughter of
      Pietro Giraffa, Vice President and Controller of the Corporation, is employed
      as Assistant Production Manager  Hanover, PA Frozen Operations at
      an annual salary of $50,923. On October 17, 2003, Andrea Kint was granted
      an option to purchase 500 shares of Class B Common Stock at an exercise
      price of $118 per share.


LIQUIDITY
      AND CAPITAL RESOURCES

The discussion
      and analysis of the Corporations liquidity and capital resources
      should be read in conjunction with the Consolidated Statements of Cash
      Flows, contained elsewhere herein.


Net working
      capital was $41.7 million at May 30, 2004 and $47.0 million at June 1,
      2003. The current ratio was 1.66 on May 30, 2004 and 2.07 on June 1, 2003.


Net cash provided
      by operations for the fiscal year ended May 30, 2004 was $15.6 million,
      compared to $23.1 million, for the fiscal year ended June 1, 2003. Sources
      of net cash provided by operations consisted principally of net earnings
      of $11.4 million adjusted for non-cash depreciation and amortization expense
      of $9.9 million and increases in accounts payable and accrued expenses
      of $4.3 million. The use of net cash for operations consisted primarily
      of increases in inventory and accounts receivable of $8.6 million.


Net cash provided
      by operations for the fiscal year ended June 1, 2003 was $23.1 million,
      compared to $19.0 million, for the fiscal year ended June 2, 2002. Sources
      of net cash provided by operations consisted principally of net earnings
      of $9.9 million and non-cash depreciation and amortization expense of $9.6
      million and decreases in inventory and accounts receivable of $5.7 million.
      The use of net cash for operations consisted primarily of decreased accounts
      payable and accrued expenses of $2.4 million and deferred income taxes
      of $1.3 million.


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Net cash used by investing activities for the fiscal year ended May 30, 2004 was $26.4 million as compared to $5.5 million for fiscal year ended June 1, 2003. The principle use of funds was upgrade of property, plants and equipment as well as acquisitions of businesses. During the year ended May 30, 2004, $13.7 million was spent on development and modernization of equipment as compared to $5.6 million in fiscal year ended June 1,2003. During the fiscal year ended May 30, 2004 the corporation spent $12.2 million to acquire businesses. These projects were funded by internally generated funds and notes payable.


Net cash used
    by investing activities for the fiscal year ended June 1, 2003 was $5.5 million
    as compared to $6.8 million for fiscal year ended June 2, 2002. The principal
    use of funds was the upgrade of property, plants and equipment. During the
    year ended June 1, 2003, $5.6 million was spent on development and modernization
    of equipment as compared to $6.8 million in fiscal year ended June 2, 2002.
    These projects were funded by internally generated funds.


Net cash provided by financing activities was $8.7 million for the fiscal year ended May 30, 2004, compared to cash used by financing activities of $16.4 million for the fiscal year ended June 1, 2003. Seasonal borrowings amounting to $97.8 million were used throughout the fiscal year to fund operating needs and business acquisitions. Seasonal borrowings increased $14.0 million as of May 30, 2004 compared to June 1, 2004. Payments on long-term debt were $4.3 million. The weighted average cost of seasonal borrowing was 1.88% for the fiscal year ended May 30, 2004 compared to 2.28% for the fiscal year ended June 1, 2003.


Net cash used by financing activities was $16.4 million for the fiscal year ended June 1, 2003, compared to cash used by financing activities of $11.1 million for the fiscal year ended June 2, 2002. Seasonal borrowings amounting to $145.3 million were used throughout the fiscal year to fund operating needs. Seasonal borrowing decreased $11.4 million as of June 1, 2003 compared to June 2, 2002. Payments on long-term debt were $4.3 million. The weighted average cost of seasonal borrowing was 2.28% for the fiscal year ended June 1, 2003 compared to 4.02% for the fiscal year ended June 2, 2002.


At May 30, 2004, the Corporation had commitments from financial institutions to provide seasonal lines of credit in the amount of $50.0 million. Borrowing is permitted within prescribed parameters in existing debt agreements, which contain certain performance covenants. The term loan agreements with the Lenders and seasonal borrowing with financial institutions, contain various restrictive provisions including those relating to mergers and acquisitions, additional borrowing, guarantee of obligations, lease commitments, limitations to declare or pay dividends, repurchase stock, and the maintenance of working capital and certain financial ratios and changes in control. Based on the requirements of the agreements at May 30, 2004, $38,576,000 of retained earnings were restricted from distribution. The Corporation was in compliance with the restrictive provisions in the agreements as of May 30, 2004.


The Corporation paid dividends on all classes of capital stock of $763,000 during fiscal 2004 compared to $688,000 in fiscal 2003.


The Corporation believes that it has sufficient working capital and availability from seasonal lines of credit to meet its cash flow needs.


The following table summarizes the Corporations contractual obligations and other commitments as of May 30, 2004


|                              |   |            |  | Payment Due by Period |           
|----------------------------- | - | ---------- |  | --------------------- | ----------
|                              |   |            |  |                       |           
|                              |   |            |  | Less Than             |           
|Contractual Obligation        |   | Total      |  | 1 Year                |           
|                              |   |            |  |                       |           
|Short-Term Debt Obligations   | $ | 21,609,000 |  | $                     | 21,609,000
|Long-Term Debt Obligations    |   | 25,357,000 |  |                       | 4,286,000 
|Operating Lease Obligations   |   | 1,716,000  |  |                       | 808,000   
|Other Obligations             |   | 5,010,000  |  |                       | 1,670,000 
|                              |   |            |  |                       |           
|Total Contractual Obligations | $ | 53,692,000 |  | $                     | 28,373,000
|                              |   |            |  |                       |           

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Currently, the Corporation is obligated to purchase 5,000,000 pounds of tomato paste from The Morning Star Packing Company, L.P., Los Banos, California in each of the fiscal years from 2005 through 2007.


The Corporations sources of liquidity are primarily funds from operation and available amounts under seasonal lines of credit expiring (two of which expire on October 31, 2004 and one will expire January 28, 2005), which are expected to be renewed in the ordinary course of business.


APPLICATION OF CRITICAL ACCOUNTING POLICIES

Preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires the Corporation to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Many of the estimates and assumptions require significant judgment. Future actual results could differ from those estimates and assumptions and could have a significant impact on our consolidated results of operations, financial position and cash flows.


The following accounting policies, estimates and assumptions which have been discussed with the Audit Committee are particularly sensitive because of their significance on the preparation of the Corporations consolidated financial statements:


| | • | The allowance
        for potentially uncollectible receivables and pending deductions requires
        management to make significant judgments in estimating future amounts
        to be received. Our judgments are based upon historical experience and
        current market conditions. Changes in estimates could be impacted as
        a result of events, such as a deterioration of the credit status of customers
    or material reductions in product and sales volumes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | • | Determination
        of liabilities for pension and post-retirement benefits includes significant
        assumptions and estimates relating to compensation and health care cost
        trends, discount rates and rate of return on plan assets. The assumptions
    are based upon current market and health care trends.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | • | Long-lived
        assets are reviewed for impairment whenever events or changes in circumstances
        indicate that the carrying amount of the asset may not be recoverable.
        Recoverability of assets to be held and used is measured by a comparison
        of the carrying amount of the assets to future net cash flows estimated
        to be generated by such assets. If such assets are considered to be impaired,
        the impairment to be recognized is the amount by which the carrying amount
        of the assets exceeds the fair value of the assets. However, determining
        fair value is subject to estimates of both cash flows and interest rates
        and different estimates could yield different results. There are no events
        or changes in circumstances of which management is aware indicating that
        the carrying value of the Corporations long-lived assets may not
    be recoverable.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | • | Effective
        June 1, 2002, the Corporation adopted Statement of Financial Accounting
        Standards No. 142, Goodwill and Other Intangible Assets (SFAS
        142). In accordance with SFAS 142, goodwill and indefinite-lived intangible
        assets are no longer amortized but are reviewed at least annually for
        impairment. As required by SFAS 142, management performed transitional
        impairment testing during the third quarter and annual impairment testing
        of goodwill and indefinite-lived intangible assets during the fourth
        quarter of fiscal year 2003. These tests confirmed that the fair value
        of the Corporations reporting units exceeds their carrying values,
        and that no impairment loss needed to be recognized for goodwill upon
    the adoption of SFAS 142.                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |   | The annual
        evaluation of goodwill and other indefinite-lived intangible assets requires
        the use of estimates about future operating results for each reporting
        unit to determine their estimated fair value. Changes in forecasted operations
        can materially affect these estimates. Additionally, other changes in
        the estimates and assumptions, including the discount rate and expected
        long-term growth rate, which drive the valuation techniques employed
        to estimate the fair value of goodwill and other indefinite-lived intangible
        assets could change and, therefore, impact the assessments of impairment
    in the future.                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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The footnotes to the consolidated financial statements provide additional information on accounting policies and assumptions used by the Corporation.


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Corporation is subject to market risk associated with changes in interest rates. To manage the risk of fluctuations in interest rates, the Corporation’s borrowings are a mix of fixed and floating rate obligations. This includes the $25.3 million of unsecured senior notes payable, $5.3 million bears interest at an 8.74% fixed rate and is due in 2007, $20.0 million bears interest at a 7.01% fixed rate and is due in 2013. The Corporation also maintains short-term unsecured lines of credit that bear interest at floating rates.


The following table presents the expected maturity and effective interest rates of the Corporations debt obligations (dollars in thousands):


|                        |      |        |      |   |       |   |      |       |      |   |       |   |            |       |       |      |       |  |   |       |  |      |        |  | Fair |       
|----------------------- | ---- | ------ | ---- | - | ----- | - | ---- | ----- | ---- | - | ----- | - | ---------- | ----- | ----- | ---- | ----- |  | - | ----- |  | ---- | ------ |  | ---- | ------
|                        | 2004 |        | 2005 |   | 2006  |   | 2007 |       | 2008 |   | 2009  |   | Thereafter |       | Total |      | Value | 
|                        |      |        |      |   |       |   |      |       |      |   |       |   |            |       |       |      |       |  |   |      
|Fixed Rate              |      |        |      |   |       |   |      |       |      |   |       |   |            |       |       |      |       |  |   |       |  |      |        |  |      |       
|Unsecured senior notes  | $    | 4,286  |      | $ | 4,286 |   | $    | 4,286 |      | $ | 4,285 |   | $          | 2,500 |       | $    | 2,500 |  | $ | 7,500 |  | $    | 25,357 |  |      |      
|Effective interest rate | 7.42 | %      | 7.37 | % | 7.30  | % | 7.20 | %     | 7.01 | % | 7.01  | % | 7.01       | %     |       | 7.22 | %     |  |  |      
|Variable Rate           |      |        |      |   |       |   |      |       |      |   |       |   |            |       |       |      |       |  |   |       |  |      |        |  |      |       
|Lines of credit         | $    | 21,609 |      |   |      |   |      |      |      |   |      |   |            |      |       |      |      |  |   |      |  | $    | 21,609 |  | $    | 21,609
|Effective interest rate | 1.81 | %      |      |  |       |   |     |       |      |  |       |   |           |       |       |     |       |  |  |       |  | 1.81 | %      |  |     |       

IMPACT OF EVENTS AND COMMITMENTS OF FUTURE OPERATIONS

Competition in the Marketplace

The Corporation faced stiff competition from national and regional branded companies during the entire fiscal year 2004 in all of its market areas and management anticipates this competitive environment to continue throughout fiscal year 2005.


Impact of Inflation and Changing Prices

The changes in cost and prices within the Corporation’s business due to inflation were not significantly different from inflation in the United States economy as a whole. Levels of capital investment, pricing and inventory investment were not materially affected by the moderate inflation.


New Accounting Standards

In May 2003, the FASB issued SFAS No. 150Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.This statement establishes standards for how an issuer classifies and measure certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument within its scope as a liability (or an asset in some circumstances). The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The statement is not expected to have a material impact on our consolidated financial statements.


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FINANCIAL
HIGHLIGHTS FIVE YEARS
(in thousands except share and per-share data)

The consolidated financial information set forth below should be read in conjunction with the more detailed consolidated financial statements, including related notes, and Managements Discussion and Analysis of Financial Condition and Results of Operations including elsewhere in this Annual Report.


|                                      | May 30, |         | June 1, |         | June 2, |  | June 3, |         | May 28, |        
|------------------------------------- | ------- | ------- | ------- | ------- | ------- |  | ------- | ------- | ------- | -------
|                                      | 2004    |         | 2003    |         | 2002    |  | 2001    |         | 2000    |        
|                                      |         |         |         |         |         |  |         |         |         |        
|Net Sales                             | $       | 318,028 |         | $       | 290,311 |  | $       | 290,227 |         | $      
|Earnings before income taxes          | $       | 17,027  |         | $       | 15,528  |  | $       | 12,392  |         | $      
|Net Earnings                          | $       | 11,441  |         | $       | 9,874   |  | $       | 7,271   |         | $      
|Net Earnings per common share-basic   | $       | 15.74   |         | $       | 13.64   |  | $       | 10.10   |         | $      
|Net Earnings per common share-diluted | $       | 15.51   |         | $       | 13.40   |  | $       | 9.97    |         | $      
|Basic weighted-average shares         |         | 724,186 |         |         | 720,684 |  |         | 716,191 |         |        
|Diluted weighted-average shares       | 737,608 |         |         | 733,750 |         |  | 729,577 |         |         | 728,235
|Common shares outstanding-year end    | 724,972 |         |         | 723,330 |         |  | 718,791 |         |         | 714,496
|Preferred shares outstanding-year end |         | 24,564  |         |         | 24,564  |  |         | 24,564  |         |        
|Working Capital                       | $       | 41,661  |         | $       | 47,027  |  | $       | 36,547  |         | $      
|Property, plant and equipment-net     | $       | 84,105  |         | $       | 72,634  |  | $       | 76,639  |         | $      
|Long-term debt                        | $       | 21,071  |         | $       | 25,357  |  | $       | 29,643  |         | $      
|Stockholders equity                  | $       | 104,100 |         | $       | 93,217  |  | $       | 83,991  |         | $      
|Total assets                          | $       | 199,388 |         | $       | 171,433 |  | $       | 179,016 |         | $      
|Dividend per common share             | $       | 1.10    |         | $       | 1.10    |  | $       | 1.10    |         | $      

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|Reports of Independent Registered Public Accounting Firms                                                                       | F-2  | 
|------------------------------------------------------------------------------------------------------------------------------- | ---- | 
|                                                                                                                                |      | 
|Consolidated
    Balance Sheets as of May 30, 2004 and June 1, 2003                                                             | F-4  | 
|                                                                                                                                |      | 
|Consolidated
           Statements of Earnings for the Years Ended May 30, 2004, June 1, 2003, and
    June 2, 2002             | F-6  | 
|                                                                                                                                |      | 
|Consolidated
           Statements of Comprehensive Income for the Years Ended May 30, 2004,
    June 1, 2003 and June 2, 2002  | F-7  | 
|                                                                                                                                |      | 
|Consolidated
           Statements of Cash Flows for the Years Ended May 30, 2004, June 1,
    2003, and June 2, 2002           | F-8  | 
|                                                                                                                                |      | 
|Consolidated
           Statements of Stockholders Equity for the Years Ended May 30,
    2004, June 1, 2003, and June 2, 2002 | F-9  | 
|                                                                                                                                |      | 
|Notes
           to Consolidated Financial Statements for the Years Ended May 30, 2004,
    June 1, 2003, and June 2, 2002      | F-10 | 

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Report of Independent Registered Public Accounting Firm

Board of Directors
and Stockholders
Hanover Foods Corporation:

We have audited the accompanying consolidated balance sheet of Hanover Foods Corporation and subsidiaries as of May 30, 2004, and the related consolidated statements of earnings, comprehensive income, cash flows, and stockholders equity for the year then ended. These consolidated financial statements are the responsibility of the Corporations management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (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 our audit provides 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 Hanover Foods Corporation and subsidiaries at May 30, 2004, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/BDO Seidman,
LLP
Bethesda, MD
July 23, 2004

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Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders 
Hanover Foods Corporation:

We have audited the accompanying consolidated balance sheet of Hanover Foods Corporation and subsidiaries as of June 1, 2003 and the related consolidated statements of earnings, comprehensive income, cash flows, and stockholders equity for each of the years in the two-year period ended June 1, 2003. These consolidated financial statements are the responsibility of the Corporations management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 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 Hanover Foods Corporation and subsidiaries as of June 1, 2003 and the results of their operations and their cash flows for each of the years in the two-year period ended June 1, 2003, in conformity with U.S. generally accepted accounting principles.

/s/KPMG LLP
Harrisburg, Pennsylvania 
July 23, 2003

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HANOVER FOODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
May 30, 2004 AND JUNE 1, 2003

|                                                                                                                 |   | May
          30, |  |   | June
          1, | 
|---------------------------------------------------------------------------------------------------------------- | - | ----------------- |  | - | ----------------- | 
|Assets                                                                                                           |   | 2004              |  |   | 2003              | 
|                                                                                                                 |   |                   |  |   |                   | 
|                                                                                                                 |   |                   |  |   |                   | 
|Current assets:                                                                                                  |   |                   |  |   |                   | 
|Cash
    and cash equivalents                                                                                    | $ | 3,015,000         |  | $ | 4,128,000         | 
|Accounts
         and notes receivable  net of allowance for doubtful accounts of
    $1,547,000 and $1,393,000 |   | 30,323,000        |  |   | 25,099,000        | 
|Accounts
    receivable from related parties                                                                     |   | 275,000           |  |   | 163,000           | 
|Inventories:                                                                                                     |   |                   |  |   |                   | 
|Finished
    goods                                                                                               |   | 46,779,000        |  |   | 40,746,000        | 
|Raw
    materials and supplies                                                                                   |   | 17,027,000        |  |   | 12,472,000        | 
|Prepaid
    expenses                                                                                             |   | 6,958,000         |  |   | 7,306,000         | 
|Deferred
    income taxes                                                                                        |   | 917,000           |  |   | 917,000           | 
|                                                                                                                 |   |                   |  |   |                   | 
|                                                                                                                 |   |                   |  |   |                   | 
|Total current assets                                                                                             |   | 105,294,000       |  |   | 90,831,000        | 
|                                                                                                                 |   |                   |  |   |                   | 
|                                                                                                                 |   |                   |  |   |                   | 
|Property, plant, and equipment  at cost:                                                                        |   |                   |  |   |                   | 
|Land
    and buildings                                                                                           |   | 63,585,000        |  |   | 53,972,000        | 
|Machinery
    and equipment                                                                                      |   | 135,029,000       |  |   | 128,422,000       | 
|Leasehold
    improvements                                                                                       |   | 544,000           |  |   | 544,000           | 
|                                                                                                                 |   |                   |  |   |                   | 
|                                                                                                                 |   |                   |  |   |                   | 
|                                                                                                                 |   | 199,158,000       |  |   | 182,938,000       | 
|                                                                                                                 |   |                   |  |   |                   | 
|Less accumulated depreciation and amortization                                                                   |   | 121,028,000       |  |   | 111,255,000       | 
|                                                                                                                 |   |                   |  |   |                   | 
|                                                                                                                 |   |                   |  |   |                   | 
|                                                                                                                 |   | 78,130,000        |  |   | 71,683,000        | 
|                                                                                                                 |   |                   |  |   |                   | 
|Construction in progress                                                                                         |   | 5,975,000         |  |   | 951,000           | 
|                                                                                                                 |   |                   |  |   |                   | 
|                                                                                                                 |   |                   |  |   |                   | 
|                                                                                                                 |   | 84,105,000        |  |   | 72,634,000        | 
|                                                                                                                 |   |                   |  |   |                   | 
|                                                                                                                 |   |                   |  |   |                   | 
|Other assets:                                                                                                    |   |                   |  |   |                   | 
|Goodwill                                                                                                         |   | 2,070,000         |  |   | 1,300,000         | 
|Intangible
    assets                                                                                            |   | 2,274,000         |  |   | 2,239,000         | 
|Other
    assets                                                                                                 |   | 5,645,000         |  |   | 4,429,000         | 
|                                                                                                                 |   |                   |  |   |                   | 
|                                                                                                                 |   |                   |  |   |                   | 
|Total assets                                                                                                     | $ | 199,388,000       |  | $ | 171,433,000       | 
|                                                                                                                 |   |                   |  |   |                   | 

See accompanying notes to consolidated financial statements.

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HANOVER FOODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 30, 2004 AND JUNE 1, 2003

|                                                             |   | May
          30, |   |   | June
          1, |  
|------------------------------------------------------------ | - | ----------------- | - | - | ----------------- | -
|Liabilities
              and Stockholders Equity           |   | 2004              |   |   | 2003              |  
|                                                             |   |                   |   |   |                   |  
|                                                             |   |                   |   |   |                   |  
|Current liabilities:                                         |   |                   |   |   |                   |  
|Accounts payable                                             | $ | 23,393,000        |   | $ | 19,745,000        |  
|Accounts payable to related parties                          |   | 32,000            |   |   | 7,000             |  
|Notes payable  banks                                        |   | 21,609,000        |   |   | 7,634,000         |  
|Accrued expenses                                             |   | 14,011,000        |   |   | 10,921,000        |  
|Current maturities of long-term debt                         |   | 4,286,000         |   |   | 4,286,000         |  
|Income taxes payable                                         |   | 302,000           |   |   | 1,211,000         |  
|                                                             |   |                   |   |   |                   |  
|                                                             |   |                   |   |   |                   |  
|Total current liabilities                                    |   | 63,633,000        |   |   | 43,804,000        |  
|                                                             |   |                   |   |   |                   |  
|Long-term debt, less current maturities                      |   | 21,071,000        |   |   | 25,357,000        |  
|Deferred income taxes                                        |   | 2,948,000         |   |   | 3,139,000         |  
|Other liabilities                                            |   | 7,636,000         |   |   | 5,916,000         |  
|                                                             |   |                   |   |   |                   |  
|                                                             |   |                   |   |   |                   |  
|Total liabilities                                            |   | 95,288,000        |   |   | 78,216,000        |  
|                                                             |   |                   |   |   |                   |  
|                                                             |   |                   |   |   |                   |  
|Commitments and contingencies (note 9)                       |   |                   |   |   |                   |  
|                                                             |   |                   |   |   |                   |  
|Stockholders equity:                                        |   |                   |   |   |                   |  
|Series A and B 8-1/4% cumulative convertible preferred stock |   | 776,000           |   |   | 776,000           |  
|Series C cumulative convertible preferred stock              |   | 250,000           |   |   | 250,000           |  
|Common stock, Class A  non-voting                           |   | 8,733,000         |   |   | 8,733,000         |  
|Common stock, Class B  voting                               |   | 21,213,250        |   |   | 16,227,000        |  
|Capital paid in excess of par value                          |   | 34,913,850        |   |   | 16,372,000        |  
|Retained earnings                                            |   | 87,424,000        |   |   | 76,746,000        |  
|Treasury stock, at cost                                      |   | (8,379,000        | ) |   | (8,172,000        | )
|Employee Stock Trust                                         |   | (40,419,100       | ) |   | (17,096,000       | )
|Accumulated other comprehensive loss                         |   | (412,000          | ) |   | (619,000          | )
|                                                             |   |                   |   |   |                   |  
|                                                             |   |                   |   |   |                   |  
|Total stockholders equity                                   |   | 104,100,000       |   |   | 93,217,000        |  
|                                                             |   |                   |   |   |                   |  
|                                                             |   |                   |   |   |                   |  
|Total liabilities and stockholders equity                   | $ | 199,388,000       |   | $ | 171,433,000       |  
|                                                             |   |                   |   |   |                   |  

See accompanying notes to consolidated financial statements.

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HANOVER
  FOODS CORPORATION AND SUBSIDIARIES CONSOLIDATED
  STATEMENTS OF EARNINGS
  YEARS ENDED MAY 30, 2004, JUNE 1, 2003 AND JUNE 2, 2002

|                                        |               | Year
      Ended |   |   | Year
      Ended |   |   | Year
      ended |  
|--------------------------------------- | ------------- | ---------------- | - | - | ---------------- | - | - | ---------------- | -
|May
      30,                           | June
      1, | June
      2,   
|2004                                    | 2003          | 2002            
|                                        |               |                  |   |   |                  |   |   |                  |  
|Net sales                               | $             | 318,028,000      |   | $ | 290,311,000      |   | $ | 290,227,000      |  
|Cost of
      goods sold                |               | 270,979,000      |   |   | 244,302,000      |   |   | 245,673,000      |  
|                                        |               |                  |   |   |                  |   |   |                  |  
|Gross
      profit                      |               | 47,049,000       |   |   | 46,009,000       |   |   | 44,554,000       |  
|Selling
      expenses                  |               | 12,053,000       |   |   | 12,192,000       |   |   | 14,306,000       |  
|Administrative
      expenses           |               | 16,121,000       |   |   | 15,767,000       |   |   | 14,624,000       |  
|                                        |               |                  |   |   |                  |   |   |                  |  
|Operating
      profit                  |               | 18,875,000       |   |   | 18,050,000       |   |   | 15,624,000       |  
|Interest
      expense                  |               | 2,322,000        |   |   | 2,792,000        |   |   | 3,603,000        |  
|Other income
       net                |               | (474,000         | ) |   | (270,000         | ) |   | (371,000         | )
|                                        |               |                  |   |   |                  |   |   |                  |  
|Earnings
      before income taxes      |               | 17,027,000       |   |   | 15,528,000       |   |   | 12,392,000       |  
|Income taxes                            |               | 5,586,000        |   |   | 5,654,000        |   |   | 5,121,000        |  
|                                        |               |                  |   |   |                  |   |   |                  |  
|Net
      earnings                      |               | 11,441,000       |   |   | 9,874,000        |   |   | 7,271,000        |  
|Dividends
      on preferred stock      |               | 41,000           |   |   | 41,000           |   |   | 41,000           |  
|                                        |               |                  |   |   |                  |   |   |                  |  
|Net
      earnings applicable to        |               |                  |   |   |                  |   |   |                  |  
|Common
      stock                      | $             | 11,400,000       |   | $ | 9,833,000        |   | $ | 7,230,000        |  
|                                        |               |                  |   |   |                  |   |   |                  |  
|Basic earnings
      per common share   | $             | 15.74            |   | $ | 13.64            |   | $ | 10.10            |  
|                                        |               |                  |   |   |                  |   |   |                  |  
|Diluted
      earnings per common share | $             | 15.51            |   | $ | 13.46            |   | $ | 9.97             |  
|                                        |               |                  |   |   |                  |   |   |                  |  

See accompanying notes to consolidated financial statements.

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HANOVER
  FOODS CORPORATIONAND
  SUBSIDIARIESCONSOLIDATED
  STATEMENTS OF COMPREHENSIVE INCOME YEARS
  ENDED MAY 30, 2004, JUNE 1, 2003 AND JUNE 2, 2002

|                                        |                                                                                                                                                                  | Year
      Ended |         |   | Year
      Ended |          |   | Year
      Ended |         
|--------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- | ------- | - | ---------------- | -------- | - | ---------------- | --------
|May
      30,                           | June
      1,                                                                                                                                                    | June
      2,   
|2004                                    | 2003                                                                                                                                                             | 2002            
|                                        |                                                                                                                                                                  |                  |         |   |                  |          |   |                  |         
|Net
      earnings                      | $                                                                                                                                                                | 11,441,000       |         | $ | 9,874,000        |          | $ | 7,271,000        |         
|                                        |                                                                                                                                                                  |                  |         |   |                  |          |   |                  |         
|Other
      comprehensive income        |                                                                                                                                                                  |                  |         |   |                  |          |   |                  |         
|                                        | Unrealized
          gain (loss) on securities, net of reclassification adjustments (net
    of taxes of $110,000 in 2004, $29,000 in 2003, and $44,000 in 2002) |                  | 207,000 |   |                  | (22,000  | ) |                  | (238,000
|                                        |                                                                                                                                                                  |                  |         |   |                  |          |   |                  |         
|                                        | Minimum
          pension liability adjustment (net of taxes of $0 in 2004, $328,000
    in 2003, and $1,000 in 2002)                                            |                  | 0       |   |                  | (458,000 | ) |                  | (3,000  
|                                        |                                                                                                                                                                  |                  |         |   |                  |          |   |                  |         
|Other
      comprehensive income (loss) |                                                                                                                                                                  | 207,000          |         |   | (480,000         | )        |   | (241,000         | )       
|                                        |                                                                                                                                                                  |                  |         |   |                  |          |   |                  |         
|Comprehensive
      income              | $                                                                                                                                                                | 11,648,000       |         | $ | 9,394,000        |          | $ | 7,030,000        |         
|                                        |                                                                                                                                                                  |                  |         |   |                  |          |   |                  |         

See accompanying notes to consolidated financial statements.

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HANOVER
  FOODS CORPORATION AND SUBSIDIARIES CONSOLIDATED
  STATEMENTS OF CASH FLOWS
  YEARS ENDED MAY 30, 2004, JUNE 1, 2003 AND JUNE 2, 2002

|                                                           |               | Year
      Ended |   |   | Year
      Ended |   |   | Year
      Ended |  
|---------------------------------------------------------- | ------------- | ---------------- | - | - | ---------------- | - | - | ---------------- | -
|Ended                                                      | ended         | Ended           
|May
      30,                                              | June
      1, | June
      2,   
|2004                                                       | 2003          | 2002            
|                                                           |               |                  |   |   |                  |   |   |                  |  
|Cash flows
      from operating activities:                |               |                  |   |   |                  |   |   |                  |  
|Net
      earnings                                         | $             | 11,441,000       |   | $ | 9,874,000        |   | $ | 7,271,000        |  
|Adjustments
      to reconcile net earnings to net cash    |               |                  |   |   |                  |   |   |                  |  
|provided
      by operating activities:                    |               |                  |   |   |                  |   |   |                  |  
|Depreciation
      and amortization                        |               | 9,919,000        |   |   | 9,604,000        |   |   | 9,375,000        |  
|Gain
      on sale of property, plant, and equipment       |               | (73,000          | ) |   | (126,000         | ) |   | (120,000         | )
|Loss
      (gain) on sale of investments                   |               | 19,000           |   |   | (18,000          | ) |   | (105,000         | )
|Deferred
      income taxes                                |               | (191,000         | ) |   | (1,279,000       | ) |   | 396,000          |  
|Non
      cash charge for ESOP contribution                |               | 204,000          |   |   | 544,000          |   |   | 480,000          |  
|Change
      in assets and liabilities:                    |               |                  |   |   |                  |   |   |                  |  
|Accounts
      and notes receivable                        |               | (2,982,000       | ) |   | 1,822,000        |   |   | 442,000          |  
|Inventories                                                |               | (5,617,000       | ) |   | 3,919,000        |   |   | 2,615,000        |  
|Prepaid
      expenses and other assets                    |               | (1,558,000       | ) |   | (243,000         | ) |   | (3,606,000       | )
|Accounts
      payable and accrued expenses                |               | 4,348,000        |   |   | (2,406,000       | ) |   | 1,182,000        |  
|Income
      taxes payable                                 |               | (1,141,000       | ) |   | 29,000           |   |   | 543,000          |  
|Other
      liabilities                                    |               | 1,270,000        |   |   | 1,417,000        |   |   | 424,000          |  
|                                                           |               |                  |   |   |                  |   |   |                  |  
|Net cash
      provided by operating activities            |               | 15,639,000       |   |   | 23,137,000       |   |   | 18,897,000       |  
|                                                           |               |                  |   |   |                  |   |   |                  |  
|Cash flows
      from investing activities:                |               |                  |   |   |                  |   |   |                  |  
|Acquisition
      of businesses                            |               | (12,173,000      | ) |   | 0                |   |   | 0                |  
|Acquisitions
      of property, plant, and equipment       |               | (13,733,000      | ) |   | (5,614,000       | ) |   | (6,779,000       | )
|Proceeds
      from dispositions of property, plant,       |               |                  |   |   |                  |   |   |                  |  
|and
      equipment                                        |               | 436,000          |   |   | 151,000          |   |   | 0                |  
|                                                           |               |                  |   |   |                  |   |   |                  |  
|Net cash
      used in investing activities                |               | (25,470,000      | ) |   | (5,463,000       | ) |   | (6,779,000       | )
|                                                           |               |                  |   |   |                  |   |   |                  |  
|Cash flows
      from financing activities:                |               |                  |   |   |                  |   |   |                  |  
|Proceeds
      from notes payable                          |               | 97,752,000       |   |   | 145,250,000      |   |   | 212,419,000      |  
|Payment
      on notes payable                             |               | (83,777,000      | ) |   | (156,603,000     | ) |   | (245,760,000     | )
|Proceeds
      from issuance of long-term debt             |               | 0                |   |   | 0                |   |   | 25,000,000       |  
|Payment
      on long-term debt                            |               | (4,286,000       | ) |   | (4,297,000       | ) |   | (1,801,000       | )
|Payment
      of dividends                                 |               | (763,000         | ) |   | (688,000         | ) |   | (984,000         | )
|Common
      stock redemptions                             |               | (208,000         | ) |   | (24,000          | ) |   | 0                |  
|                                                           |               |                  |   |   |                  |   |   |                  |  
|Net cash
      provided by (used in) financing activities  |               | 8,718,000        |   |   | (16,362,000      | ) |   | (11,126,000      | )
|                                                           |               |                  |   |   |                  |   |   |                  |  
|Net (decrease)
      increase in cash and cash equivalents |               | (1,113,000       | ) |   | 1,312,000        |   |   | 992,000          |  
|Cash and
      cash equivalents, beginning of year         |               | 4,128,000        |   |   | 2,816,000        |   |   | 1,824,000        |  
|                                                           |               |                  |   |   |                  |   |   |                  |  
|Cash and
      cash equivalents, end of period             | $             | 3,015,000        |   | $ | 4,128,000        |   | $ | 2,816,000        |  
|                                                           |               |                  |   |   |                  |   |   |                  |  

See accompanying notes to consolidated financial statements.

F-8

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HANOVER
FOODS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity
Years ended May 30, 2004,
June 1, 2003 and June 2, 2002

|                                      |                                         |             |               |        | Cumulative   |   |         |        |        |              |   |         |        |         |               |   |           |        |         |               |   |            |           |   |            |              |   |            |          |         |              |   |            |          |         |                      |   |              |              |   |          |               | 
|------------------------------------- | --------------------------------------- | ----------- | ------------- | ------ | ------------ | - | ------- | ------ | ------ | ------------ | - | ------- | ------ | ------- | ------------- | - | --------- | ------ | ------- | ------------- | - | ---------- | --------- | - | ---------- | ------------ | - | ---------- | -------- | ------- | ------------ | - | ---------- | -------- | ------- | -------------------- | - | ------------ | ------------ | - | -------- | ------------- | 
|                                      |                                         |             |               |        | convertible  |   |         |        |        | Cumulative   |   |         |        |         |               |   |           |        |         |               |   |            |           |   |            |              |   |            |          |         |              |   |            |          |         | Employee Stock Trust |   |              |              |  
|                                      |                                         |             |               |        | preferred    |   |         |        |        | convertible  |   |         |        |         |               |   |           |        |         |               |   |            |           |   |            |              |   |            |          |         |              |   |            |          |         |                      |   |              | Accumulated  |  
|                                      |                                         |             | Total         |        | stock Series |   |         |        |        | preferred    |   |         |        |         | Common        |   |           |        |         | Common        |   |            |           |   |            | Capital paid |   |            |          |         |              |   |            |          |         |                      |   |              |              |   |          | Other         | 
|                                      |                                         |             | Stockholders’ |        | A and B      |   |         |        |        | stock Series |   |         |        |         | stock Class A |   |           |        |         | stock Class B |   |            |           |   |            | in excess of |   |            | Retained |         | Treasury     |   |            |          |         |                      |   |              |              |   |          | Comprehensive | 
|                                      |                                         |             | equity        |        | Shares       |   |         | Amount |        | C Shares     |   |         | Amount |         | Shares        |   |           | Amount |         | Shares        |   |            | Amount    |   |            | par value    |   |            | earnings |         | stock Shares |   |            | Amount   |         | Shares               |   |              | Amount       |   |          | Income (Loss) | 
|                                      |                                         |             |               |        |              |   |         |        |        |              |   |         |        |         |               |   |           |        |         |               |   |            |           |   |            |              |   |            |          |         |              |   |            |          |         |                      |   |              |              |   |          |               | 
|Balance,
          June 3, 2001       | $                                       | 77,465,000  |               | 31,216 |              | $ | 780,000 |        | 10,000 |              | $ | 250,000 |        | 349,316 |               | $ | 8,732,000 |        | 635,572 |               | $ | 15,889,000 |           | $ | 15,254,000 |              | $ | 61,273,000 |          | 144,435 |              | $ | (8,148,000 | )        | 142,449 |                      | $ | (16,667,000  | )            | $ | 102,000  |              
|                                      |                                         |             |               |        |              |   |         |        |        |              |   |         |        |         |               |   |           |        |         |               |   |            |           |   |            |              |   |            |          |         |              |   |            |          |         |                      |   |              |              |   |          |               | 
|Net
          earnings                |                                         | 7,271,000   |               |        |              |   |         |        |        |              |   |         |        |         |               |   |           |        |         |               |   |            |           |   |            |              |   | 7,271,000  |          |         |              |   |            |          |         |                      |   |              |              |   |          |              
|Cash
          dividends per share:   |                                         |             |               |        |              |   |         |        |        |              |   |         |        |         |               |   |           |        |         |               |   |            |           |   |            |              |   |            |          |         |              |   |            |          |         |                      |   |              |              |   |          |              
|                                      | Preferred – $2.0625
          annually  |             | (41,000       | )      | —            |   |         | —      |        | —            |   |         | —      |         | —             |   |           | —      |         | —             |   |            | —         |   |            | —            |   |            | (41,000  | )       | —            |   |            | —        |         | —                    |   |              | —            |   |          | —             | 
|                                      | Common – $1.10
          annually       |             | (943,000      | )      | —            |   |         | —      |        | —            |   |         | —      |         | —             |   |           | —      |         | —             |   |            | —         |   |            | —            |   |            | (943,000 | )       | —            |   |            | —        |         | —                    |   |              | —            |   |          | —             | 
|Issuance
          of common stock to |                                         |             |               |        |              |   |         |        |        |              |   |         |        |         |               |   |           |        |         |               |   |            |           |   |            |              |   |            |          |         |              |   |            |          |         |                      |   |              |              |   |          |              
|                                      | Employee
          Stock Ownership Plan |             |               |        |              |   |         |        |        |              |   |         |        |         |               |   |           |        |         |               |   |            |           |   |            |              |   |            |          |         |              |   |            |          |         |                      |   |              |              |   |          |               | 
|                                      | Class B 4,258
          shares          |             | 480,000       |        | —            |   |         | —      |        | —            |   |         | —      |         | —             |   |           | —      |         | —             |   |            | —         |   |            | (19,000      | ) |            | —        |         | —            |   |            | —        |         | (4,258               | ) |              | 499,000      |   |          | —             | 
|Stock
          Conversion            |                                         | —           |               | (160   | )            |   | (4,000  | )      | —      |              |   | —       |        | 37      |               |   | 1,000     |        | —       |               |   | —          |           |   | 3,000      |              |   | —          |          | —       |              |   | —          |          | —       |                      |   | —            |              |   | —        |              
|Other
          comprehensive loss    |                                         | (241,000    | )             | —      |              |   | —       |        | —      |              |   | —       |        | —       |               |   | —         |        | —       |               |   | —          |           |   | —          |              |   | —          |          | —       |              |   | —          |          | —       |                      |   | —            |              |   | (241,000 | )            
|                                      |                                         |             |               |        |              |   |         |        |        |              |   |         |        |         |               |   |           |        |         |               |   |            |           |   |            |              |   |            |          |         |              |   |            |          |         |                      |   |              |              |   |          |               | 
|Balance,
          June 2, 2002       | $                                       | 83,991,000  |               | 31,056 |              | $ | 776,000 |        | 10,000 |              | $ | 250,000 |        | 349,353 |               | $ | 8,733,000 |        | 635,572 |               | $ | 15,889,000 |           | $ | 15,238,000 |              | $ | 67,560,000 |          | 144,435 |              | $ | (8,148,000 | )        | 138,191 |                      | $ | (16,168,000  | )            | $ | (139,000 | )            
|                                      |                                         |             |               |        |              |   |         |        |        |              |   |         |        |         |               |   |           |        |         |               |   |            |           |   |            |              |   |            |          |         |              |   |            |          |         |                      |   |              |              |   |          |               | 
|Net earnings                          |                                         | 9,874,000   |               | —      |              |   | —       |        | —      |              |   | —       |        | —       |               |   | —         |        | —       |               |   | —          |           |   | —          |              |   | 9,874,000  |          | —       |              |   | —          |          | —       |                      |   | —            |              |   | —        |              
|Cash
          dividends per share:   |                                         |             |               |        |              |   |         |        |        |              |   |         |        |         |               |   |           |        |         |               |   |            |           |   |            |              |   |            |          |         |              |   |            |          |         |                      |   |              |              |   |          |              
|                                      | Preferred – $2.0625
          annually  |             | (41,000       | )      | —            |   |         | —      |        | —            |   |         | —      |         | —             |   |           | —      |         | —             |   |            | —         |   |            | —            |   |            | (41,000  | )       | —            |   |            | —        |         | —                    |   |              | —            |   |          | —             | 
|                                      | Common – $1.10
          annually       |             | (647,000      | )      | —            |   |         | —      |        | —            |   |         | —      |         | —             |   |           | —      |         | —             |   |            | —         |   |            | —            |   |            | (647,000 | )       | —            |   |            | —        |         | —                    |   |              | —            |   |          | —             | 
|Issuance
          of common stock to |                                         |             |               |        |              |   |         |        |        |              |   |         |        |         |               |   |           |        |         |               |   |            |           |   |            |              |   |            |          |         |              |   |            |          |         |                      |   |              |              |   |          |              
|                                      | Employee
          Stock Ownership Plan |             |               |        |              |   |         |        |        |              |   |         |        |         |               |   |           |        |         |               |   |            |           |   |            |              |   |            |          |         |              |   |            |          |         |                      |   |              |              |   |          |               | 
|                                      | Class B 4,761
          shares          |             | 544,000       |        | —            |   |         | —      |        | —            |   |         | —      |         | —             |   |           | —      |         | —             |   |            | —         |   |            | —            |   |            | —        |         | —            |   |            | —        |         | (4,761               | ) |              | 544,000      |   |          | —             | 
|                                      | Employee
          Stock Trust          |             |               |        | —            |   |         | —      |        | —            |   |         | —      |         | —             |   |           | —      |         | 13,500        |   |            | 338,000   |   |            | 1,134,000    |   |            | —        |         | —            |   |            | —        |         | 13,500               |   |              | (1,472,000   | ) |          | —             | 
|Redemption
          of Common Stock  |                                         |             |               |        |              |   |         |        |        |              |   |         |        |         |               |   |           |        |         |               |   |            |           |   |            |              |   |            |          |         |              |   |            |          |         |                      |   |              |              |   |          |              
|                                      | Class B                                 |             | (24,000       | )      | —            |   |         | —      |        | —            |   |         | —      |         | —             |   |           | —      |         | —             |   |            | —         |   |            | —            |   |            | —        |         | 222          |   |            | (24,000  | )       | —                    |   |              | —            |   |          | —             | 
|Other
          comprehensive loss    |                                         | (480,000    | )             | —      |              |   | —       |        | —      |              |   | —       |        | —       |               |   | —         |        | —       |               |   | —          |           |   | —          |              |   | —          |          | —       |              |   | —          |          | —       |                      |   | —            |              |   | (480,000 | )            
|                                      |                                         |             |               |        |              |   |         |        |        |              |   |         |        |         |               |   |           |        |         |               |   |            |           |   |            |              |   |            |          |         |              |   |            |          |         |                      |   |              |              |   |          |               | 
|Balance,
          June 1, 2003       | $                                       | 93,217,000  |               | 31,056 |              | $ | 776,000 |        | 10,000 |              | $ | 250,000 |        | 349,353 |               | $ | 8,733,000 |        | 649,072 |               | $ | 16,227,000 |           | $ | 16,372,000 |              | $ | 76,746,000 |          | 144,657 |              | $ | (8,172,000 | )        | 146,930 |                      | $ | (17,096,000  | )            | $ | (619,000 | )            
|                                      |                                         |             |               |        |              |   |         |        |        |              |   |         |        |         |               |   |           |        |         |               |   |            |           |   |            |              |   |            |          |         |              |   |            |          |         |                      |   |              |              |   |          |               | 
|Net earnings                          |                                         | 11,441,000  |               | —      |              |   | —       |        | —      |              |   | —       |        | —       |               |   | —         |        | —       |               |   | —          |           |   | —          |              |   | 11,441,000 |          | —       |              |   | —          |          | —       |                      |   | —            |              |   | —        |              
|Cash
          dividends per share:   |                                         |             |               |        |              |   |         |        |        |              |   |         |        |         |               |   |           |        |         |               |   |            |           |   |            |              |   |            |          |         |              |   |            |          |         |                      |   |              |              |   |          |              
|                                      | Preferred – $2.0625
          annually  |             | (41,000       | )      | —            |   |         | —      |        | —            |   |         | —      |         | —             |   |           | —      |         | —             |   |            | —         |   |            | —            |   |            | (41,000  | )       | —            |   |            | —        |         | —                    |   |              | —            |   |          | —             | 
|                                      | Common – $1.10
          annually       |             | (722,000      | )      | —            |   |         | —      |        | —            |   |         | —      |         | —             |   |           | —      |         | —             |   |            | —         |   |            | —            |   |            | (722,000 | )       | —            |   |            | —        |         | —                    |   |              | —            |   |          | —             | 
|Issuance
          of common stock to |                                         |             |               |        |              |   |         |        |        |              |   |         |        |         |               |   |           |        |         |               |   |            |           |   |            |              |   |            |          |         |              |   |            |          |         |                      |   |              |              |   |          |              
|                                      | Employee
          Stock Ownership Plan |             |               |        |              |   |         |        |        |              |   |         |        |         |               |   |           |        |         |               |   |            |           |   |            |              |   |            |          |         | —            |   |            | —        |         | —                    |   |              | —            |   |          | —             | 
|                                      | Class B 1,708 shares                    |             | 205,000       |        | —            |   |         | —      |        | —            |   |         | —      |         | —             |   |           | —      |         | —             |   |            | —         |   |            | (7,000       | ) |            | —        |         | —            |   |            | —        |         | (1,708               | ) |              | 212,000      |   |          | —             | 
|                                      | Employee Stock Trust                    |             | —             |        | —            |   |         | —      |        | —            |   |         | —      |         | —             |   |           | —      |         | 199,450       |   |            | 4,986,250 |   |            | 18,548,850   |   |            | —        |         | —            |   |            | —        |         | 199,450              |   |              | (23,535,100) |   |          | —             | 
|Redemption
          of Common Stock  |                                         |             |               |        |              |   |         |        |        |              |   |         |        |         |               |   |           |        |         |               |   |            |           |   |            |              |   |            |          |         |              |   |            |          |         |                      |   |              |              |   |          |              
|                                      | Class B                                 |             | (207,000      | )      | —            |   |         | —      |        | —            |   |         | —      |         | —             |   |           | —      |         | —             |   |            | —         |   |            | —            |   |            | —        |         | 66           |   |            | (207,000 | )       | —                    |   |              | —            |   |          | —             | 
|Other
          comprehensive income  |                                         | 207,000     |               | —      |              |   | —       |        | —      |              |   | —       |        | —       |               |   | —         |        | —       |               |   | —          |           |   | —          |              |   | —          |          | —       |              |   | —          |          | —       |                      |   | —            |              |   | 207,000  |              
|                                      |                                         |             |               |        |              |   |         |        |        |              |   |         |        |         |               |   |           |        |         |               |   |            |           |   |            |              |   |            |          |         |              |   |            |          |         |                      |   |              |              |   |          |               | 
|Balance,
          May 30, 2004       | $                                       | 104,100,000 |               | 31,056 |              | $ | 776,000 |        | 10,000 |              | $ | 250,000 |        | 349,353 |               | $ | 8,733,000 |        | 848,522 |               | $ | 21,213,250 |           | $ | 34,913,850 |              | $ | 87,424,000 |          | 144,723 |              | $ | (8,379,000 | )        | 344,672 |                      | $ | (40,419,100) |              | $ | (412,000 | )            
|                                      |                                         |             |               |        |              |   |         |        |        |              |   |         |        |         |               |   |           |        |         |               |   |            |           |   |            |              |   |            |          |         |              |   |            |          |         |                      |   |              |              |   |          |               | 

See accompanying notes to consolidated financial statements.

F-9

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HANOVER FOODS CORPORATION AND SUBSIDIARIESNotes to Consolidated Financial Statements

Note 1 Summary
of Significant Accounting Policies

| | (a) | Description of BusinessHanover Foods Corporation (the Company) is a vertically integrated processor of food products in one industry segment. The Company is involved in the growing, processing, canning, freeze-drying, packaging, marketing, and distribution of its products under its own trademarks as well as other branded, customer, and private labels primarily to the retail, foodservice and industrial customers primarily in the Eastern United States from Maine to Florida. The Company has operations in ten plants in Pennsylvania, one plant in Delaware, one plant in Maryland, one plant in New Jersey and two plants in Guatemala. The Companys raw materials are readily available and the Company is not dependent on a single supplier or a few suppliers. Revenue is recognized when title transfers pursuant to shipping terms. Separately billed shipping and handling is included in net sales. Shipping and handling costs are included in cost of goods sold.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | (b) | Principles of ConsolidationThe accompanying
     consolidated financial statements include the accounts of the Company and
     its subsidiaries, which are Consumers Packing Company (T/A Hanover Foods Lancaster
     Division), Spring Glen Fresh Foods, Inc., Bickels Snack Foods, Inc.,
     Hanover Insurance Company LTD., The Nittany Corporation, Tri-Co Foods Corp.
     and its subsidiariesAunt
     Kittys Foods, Inc., Sunwise Corporation and Mayapac S.A., all of which
     are wholly-owned. All significant intercompany balances and transactions
    have been eliminated.                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | (c) | Concentration of Credit RiskFinancial instruments that potentially subject the Company to credit risk consist of trade receivables. Wholesale and retail food distributors comprise a significant portion of the trade receivables; collateral is not required. The risk associated with the concentration is generally limited due to the large number of wholesalers and retailers and their geographic dispersion, however, the Companys ten largest customers accounted for approximately 36%, 38%, and 36%, of the Companys net sales for the years ended May 30, 2004, June 1, 2003 and June 2, 2002, respectively. The Companys ten largest customers account for approximately 38% and 30% of the Companys accounts receivable as of May 30, 2004 and June 1, 2003 respectively. No single customer accounted for more than 10% of net sales for the years ended May 30, 2004, June 1, 2003 and, June 2, 2002.                                                                      

F-10

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HANOVER FOODS CORPORATION AND SUBSIDIARIESNotes to Consolidated Financial Statements

Note 1 Summary
of Significant Accounting Policies (Contd)

| | (d) | Cash and Cash EquivalentsCash equivalents
     of $3,015,000 as of May 30, 2004 and $4,128,000 as of June 1, 2003, respectively,
     consist of short-term interest-bearing investments with maturities of less
     than three months. For purposes of the statements of cash flows, the Company
     considers all highly liquid debt instruments with original maturities of
     three months or less to be cash equivalents.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (e) | Trade Accounts ReceivableTrade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Companys best estimate of the amount of probable credit losses in the Companys existing accounts receivable. The company determines the allowance based on historical write-off experience.                                                                         
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (f) | Fair Value of Financial InstrumentsThe carrying value of cash and cash equivalents, accounts and notes receivable, accounts payable and notes payable approximates fair values due to the short-term maturities of these instruments.                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | The
      fair values of each of the Companys long-term debt instruments are
      based on the amount of future cash flows associated with each instrument
      discounted using the Companys current borrowing rate for similar
      debt instruments of comparable maturity. The amount reported in the consolidated
    balance sheet for long-term debt approximates fair value.                                         

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (g) | InventoriesInventories are stated at the lower of cost (determined by average cost which approximates the first-in, first-out method) or market.                                                                                                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | (h) | Property, Plant, and EquipmentProperty, plant, and equipment are stated at cost. Expenditures for maintenance and repairs are expensed as incurred; additions and betterments that materially increase the lives of the related assets are capitalized. Upon retirement, sale, or other disposition of buildings and equipment, cost and accumulated depreciation are eliminated from the accounts and gain or loss is included in operations.                                                                                   
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     | Depreciation
      on property, plant, and equipment is calculated on the straight-line method
      over the estimated useful lives of the assets. Estimated useful lives range
      from approximately 3 years to 12 years for equipment and up to 40 years
      for buildings. Accelerated methods are used for tax reporting purposes.
      Plant and equipment held under capital leases are amortized using the straight-line
      method over the shorter of the lease term or estimated useful life of the
    asset.

F-11

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HANOVER FOODS CORPORATION AND SUBSIDIARIESNotes to Consolidated Financial Statements

|Note
    1Summary
    of Significant Accounting Policies (Contd)
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F-12

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HANOVER
FOODS CORPORATION AND SUBSIDIARIESNotes to Consolidated Financial Statements

|Note
    1Summary
    of Significant Accounting Policies (Contd)
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F-13

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HANOVER
FOODS CORPORATION AND SUBSIDIARIESNotes to Consolidated Financial Statements

|Note
    1Summary
    of Significant Accounting Policies (Contd)
|-----------------------------------------------------------------
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| |                                                                                                                                                             |   |            |  |   |           | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ---------- |  | - | --------- | 
| |                                                                                                                                                             |   | 2004       |  |   | 2003      | 
| |                                                                                                                                                             |   |            |  |   |           | 
| | Net Income  as reported                                                                                                                                    | $ | 11,441,000 |  | $ | 9,874,000 | 
| |                                                                                                                                                             |   |            |  |   |           | 
| | Deduct:
    Total stock-based employee compensation expense    determined
    under fair value based 
    methods for all awards,net of related tax effects |   | 784,000    |  |   | 81,000    | 
| |                                                                                                                                                             |   |            |  |   |           | 
| | Pro forma net income                                                                                                                                        | $ | 10,657,000 |  | $ | 9,793,000 | 
| |                                                                                                                                                             |   |            |  |   |           | 
| | Earnings per share:                                                                                                                                         |   |            |  |   |           | 
| | Basic       as
       reported                                                                                                                             | $ | 15.74      |  | $ | 13.64     | 
| | Basic  pro forma                                                                                                                                           | $ | 14.72      |  | $ | 13.53     | 
| |                                                                                                                                                             |   |            |  |   |           | 
| | Diluted  as reported                                                                                                                                       | $ | 15.51      |  | $ | 13.46     | 
| | Diluted  pro forma                                                                                                                                         | $ | 14.45      |  | $ | 13.29     | 

| |     |                                                                                                                           
| | --- | --------------------------------------------------------------------------------------------------------------------------
| | (t) | Reclassifications                                                                                                         
| |     |                                                                                                                           
| |     | Certain
        amounts in prior periods have been reclassified to conform to classification
    made in the current year.

F-14

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HANOVER
  FOODS CORPORATION AND SUBSIDIARIESNotes
  to Consolidated Financial Statements

Note
  2 Goodwill and Other Intangible Assets

Amortization expense related to goodwill and other intangible assets was $115,000 for June 2, 2002. The following table reconciles previously reported net income as if the provisions of SFAS No. 142 were in effect in the fiscal year ended June 2, 2002.


| |                                        |   | 2002      | 
| | -------------------------------------- | - | --------- | 
| |                                       
| | Reported
      net income              | $ | 7,271,000 | 
| | Add
      back: Goodwill Amortization  |   | 75,000    | 
| | Add
      back: Trademark Amortization |   | 40,000    | 
| |                                        |   |           | 
| | Adjusted
      net income              |   | 7,386,000 | 
| |                                        |   |           | 
| |                                        |   |           | 
| | Basic Earnings
      per share:        |   |           | 
| | Reported
      net income              | $ | 10.10     | 
| | Add
      back: Goodwill Amortization  |   | .10       | 
| | Add
      back: Trademark Amortization |   | .06       | 
| |                                        |   |           | 
| | Adjusted
      net income              |   | 10.26     | 
| |                                        |   |           | 
| |                                        |   |           | 
| | Diluted
      earnings per share:      |   |           | 
| | Reported
      net income              | $ | 9.97      | 
| | Add
      back: Goodwill Amortization  |   | .10       | 
| | Add
      back: Trademark Amortization |   | .05       | 
| |                                        |   |           | 
| | Adjusted
      net income              |   | 10.12     | 
| |                                        |   |           | 

Note
  3 Notes Payable  Banks

The Company maintains short-term unsecured lines of credit with various banks providing credit availability amounting to $50,000,000, of which $21,609,000 was borrowed (including an overdraft of $3,081,000) at May 30, 2004 and $7,634,000 was borrowed (including an overdraft of $892,000) at June 1, 2003. The Company borrows funds under these lines of credit under two methods of cost of funds. The first method used to price the cost of short-term borrowings is based upon LIBOR plus thirty-five to one hundred twenty-five basis points. The second method is based upon the financial institutions calculated cost of funds plus an earnings modification. The weighted-average interest rate on short-term borrowings at May 30, 2004 and June 1, 2003, was 1.88% and 2.29%, respectively. The maximum amount of borrowings outstanding under short-term lines of credit at any one time during the years ended May 30, 2004, June 1, 2003, and June 2, 2002, was approximately $20,823,125, $26,848,000, and $55,513,000.


The Corporations sources of liquidity are primarily funds from operations and available amounts under seasonal lines of credit expiring (two of which expire on October 31, 2004 and one which expires January 28, 2005), which are expected to be renewed in the ordinary course of business.


F-15

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HANOVER
  FOODS CORPORATION AND SUBSIDIARIESNotes
  to Consolidated Financial Statements

Note
  4 Long-term Debt

The long-term debt of the Company and its subsidiaries consists of:


| |                                                    |   | May
      30, 2004 |   |   | June
      1, 2003 |  
| | -------------------------------------------------- | - | ------------------ | - | - | ------------------ | -
| |                                                    |   |                    |   |   |                    |  
| | 8.74% unsecured
      senior notes payable to      |   |                    |   |   |                    |  
| | an
      insurance company, due through 2007       | $ | 5,357,000          |   | $ | 7,143,000          |  
| |                                                    |   |                    |   |   |                    |  
| | 7.01% unsecured
      senior notes payable to      |   |                    |   |   |                    |  
| | an
      insurance company, due through 2011       |   | 20,000,000         |   |   | 22,500,000         |  
| |                                                    |   |                    |   |   |                    |  
| |                                                    |   |                    |   |   |                    |  
| | Total long-term
      debt                         |   | 25,357,000         |   |   | 29,643,000         |  
| | Less current
      maturities                      |   | (4,286,000         | ) |   | (4,286,000         | )
| |                                                    |   |                    |   |   |                    |  
| | Long-term
      debt, excluding current maturities | $ | 21,071,000         |   | $ | 25,357,000         |  
| |                                                    |   |                    |   |   |                    |  

The term loan agreements with the insurance company and seasonal borrowing with financial institutions (note 3), contain various restrictive provisions including those relating to mergers and acquisitions, additional borrowing, guarantee of obligations, lease commitments, limitations to declare or pay dividends, repurchase stock, and the maintenance of working capital and certain financial ratios and change in control. Based on the requirements of the agreements at May 30, 2004, $38,576,000 of retained earnings are restricted from distribution. The Company was in compliance with the restrictive provisions in the agreements as of May 30, 2004.

The aggregate long-term debt maturities follow:


| | For
    the fiscal year ending: |   |            | 
| | ------------------------------- | - | ---------- | 
| |                                 |   |            | 
| | 2005                            |   | 4,286,000  | 
| | 2006                            |   | 4,286,000  | 
| | 2007                            |   | 4,285,000  | 
| | 2008                            |   | 2,500,000  | 
| | 2009                            |   | 2,500,000  | 
| | Thereafter                      |   | 7,500,000  | 
| |                                 |   |            | 
| |                                 |   |            | 
| | Total                           | $ | 25,357,000 | 
| |                                 |   |            | 

Note
  5 Leases

The Company has several noncancelable operating leases, primarily for equipment, that expire over the next five years. These leases generally contain renewal options for periods ranging from three to five years and require the Company to pay all executory costs such as maintenance and insurance. Rental expense for operating leases (except those with lease terms of a month or less that were not renewed) during the periods ended May 30, 2004, June 1, 2003, and June 2, 2002, amounted to $2,544,000, $1,918,000, and $3,042,000, respectively.


Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of May 30, 2004 are:


F-16

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HANOVER
  FOODS CORPORATION AND SUBSIDIARIESNotes
  to Consolidated Financial Statements

Note
  5 Leases (Contd)

|       | For
      the fiscal year ending:  |   | Operating | 
|------ | ---------------------------------- | - | --------- | 
|leases
|       |                                    |  
|       | 2005                               | $ | 808,000   | 
|       | 2006                               |   | 509,000   | 
|       | 2007                               |   | 316,000   | 
|       | 2008                               |   | 77,000    | 
|       | 2009                               |   | 7,000     | 
|       |                                    |   |           | 
|       | Total minimum
      lease payments | $ | 1,717,000 | 
|       |                                    |   |           | 

Note
  6 Capital Stock

The Companys capital stock consists of Class A Nonvoting Common Stock, Class B Voting Common Stock, 8 1/4% Series A and B Cumulative Convertible Preferred Stock, and 4.4% Series C Cumulative Convertible Preferred Stock. Holders of Class B Common Stock have one vote per share. No other classes of stock have voting rights except as discussed below.


The Companys Amended and Restated Articles of Incorporation authorize the Board of Directors to issue up to 10,000 shares of Series C Convertible Preferred Stock to the Companys 401(k) Savings Plan Trust. At least a majority of the trustees of the Companys 401(k) Savings Plan (or similar employee benefit plan), who are appointed by the Board of Directors, must be disinterested directors of the Company. If certain Warehime family Class B shareholders cannot unanimously agree in writing on the composition of the Board of Directors or on other important matters specified below, the Amended and Restated Articles permit each of the 10,000 shares of Series C Convertible Preferred Stock the right to cast 35 votes in the election of directors, and each share of Class A Common Stock would have one-tenth (1/10) of a vote per share, thereby enabling them to influence the ultimate result of the election by the Class B shareholders. The Amended and Restated Articles also permit the trustees and the Class A shareholders to similarly vote on proposals to remove directors, and in connection with any proposal (not previously approved by the Board of Directors) to further amend the Articles of Incorporation or Bylaws or to effectuate a merger, consolidation, division, or sale of substantially all of the assets of the Company. The voting power of the Series C Convertible Preferred Stock ceased in January 2003. Under the Amended and Restated Articles, each of the shares of Series C Convertible Preferred Stock is convertible into one share of Class A Common Stock and is not entitled to vote except in the event that certain Warehime family Class B shareholders cannot agree in writing on the composition of the Board of Directors or on other important matters specified above.


During fiscal
    year 2001, the Corporation established an Employee Stock Trust (the Trust)
    to fund future stock related and other obligations of the Corporations
    compensation and benefit plans, including a concurrently established Employee
    Stock Ownership Plan (ESOP). For financial reporting purposes,
    the Trust is consolidated with the Corporation. On March 1, 2001, theCorporation
    contributed 142,449 shares of Class B Common Stock to the Trust. Upon contribution,
    these shares were recorded at a fair value of $117/per share based upon the
    most recent appraised value of Class B Common Stock as determined by an independent
    valuation. During the years ended May 30, 2004, June 1, 2003 and June 2, 2002
    the Company transferred 1,708, 4,761 and 4,258 shares of Class B Common Stock
    to the ESOP respectively. The shares had a fair market value
    of approximately $120, $114 and $112 on the respective transfer dates and
    accordingly, the Company recorded a charge to earnings of approximately $205,000,
    $544,000 and $480,000 respectively.


F-17

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HANOVER
  FOODS CORPORATION AND SUBSIDIARIESNotes
  to Consolidated Financial Statements

Note
  6 Capital Stock (Contd)

On June 20, 2002,
  the Corporation contributed 13,500 shares of Class B Common Stock to the Trust
  for the purpose of funding stock options under the 2002 Stock Option Plan to
  officers and key employees of the Corporation. Upon contribution, these shares
  were recorded at a fair value of $110 per share based upon the most recent appraised
  value as determined by an independent valuation.


On October 17, 2003, the
Corporations Board of Directors adopted the Hanover Foods Corporation 2003 Stock Option Plan (the 2003 Option Plan).
All full-time employees (excluding employees represented by a collective bargaining agent) of the Corporation and of any present or
future parent or subsidiary of the Corporation who have been employed for at least one year, excluding John A. Warehime, are eligible
to receive options under the 2003 Option Plan. No individual may receive options under the 2003 Option Plan for more than 5% of the
total number of shares of the Corporations Class B common stock authorized for issuance under the 2003 Option Plan. 200,000
shares of the Corporations Class B common stock, par value $25.00 per share, are authorized for issuance under the 2003 Option
Plan.  On October 17, 2003, the Board of Directors of the Corporation voted to make a grant to all full-time, non-union employees of
the Corporation who have been employed by the Corporation for at least one year, other than John A. Warehime  except that if an individual is in the employ of the Corporation or any of its subsidiaries as of October 17, 2003, but has not been
employed for at least one year as of October 17, 2003, once the one year employment requirement has been satisfied, the employee will
receive stock options, with an option price equal to the appraised fair market value at the time of the option grant.  The Board of
Directors granted options for 199,450 shares of Class B common stock to the Trust, to eligible non-union full time employees. The 199,450 shares were issued to the Trust.


F-18

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HANOVER
  FOODS CORPORATION AND SUBSIDIARIES Notes
  to Consolidated Financial Statements

Note
  6 Capital Stock (Contd)

The following summarizes the Companys capital stock at May 30, 2004 and June 1, 2003:


|                                                                                                              | May
      30, 2004 |  | June
      1, 2003 | 
|------------------------------------------------------------------------------------------------------------- | ------------------ |  | ------------------ | 
|                                                                                                              |                    |  |                    | 
|                                                                                                              | Issued             |  | Outstanding        | 
|                                                                                                              |                    |  |                    | 
|Series A
      8 1/4% cumulative convertible preferred stock  $25 Par value, 60,000
      shares authorized  | 14,948             |  | 6,228              | 
|                                                                                                              |                    |  |                    | 
|Series B
      8 1/4% cumulative convertible preferred stock  $ 25 Par value, 60,000
      shares authorized | 16,108             |  | 8,336              | 
|                                                                                                              |                    |  |                    | 
|Series C
      4.4% cumulative convertible preferred stock  $25 par value, 10,000
      shares authorized    | 10,000             |  | 10,000             | 
|                                                                                                              |                    |  |                    | 
|Class A
      nonvoting common stock  $25 par value, 800,000 shares authorized                               | 349,353            |  | 287,996            | 
|                                                                                                              |                    |  |                    | 
|Class B
      voting common stock  $25 par value, 880,000 shares  authorized                                 | 848,522            |  | 781,648            | 

At any time, the holders of the Series A and B Cumulative Convertible Preferred Stock have the option to convert their shares to shares of Class A Nonvoting Common Stock based on the book value of the Class A Nonvoting Common Stock at the time of conversion. At May 30, 2004, the outstanding Series A and B Preferred Stock could be converted into 3.83 shares of Class A Common Stock.


Note
  7 Related Party Transactions

The Company and its subsidiaries, in the normal course of business, purchase and sell goods and services to related parties. Transactions with related parties are summarized below:


|              |                                        |               | Year
      ended |  |   | Year
      ended |  |   | Year
      ended | 
|------------- | -------------------------------------- | ------------- | ---------------- |  | - | ---------------- |  | - | ---------------- | 
|May
      30, | June
      1,                          | June
      2,
|2004          | 2003                                   | 2002         
|              |                                        |               |                  |  |   |                  |  |   |                  | 
|              | Revenues:                              |               |                  |  |   |                  |  |   |                  | 
|              | Park
      100 Foods, Inc.             | $             | 1,321,000        |  | $ | 1,877,000        |  | $ | 1,555,000        | 
|              | Expenditures:                          |               |                  |  |   |                  |  |   |                  | 
|              | Lippy
      Brothers, Inc.             |               | 1,108,000        |  |   | 1,146,000        |  |   | 1,158,000        | 
|              | Warehime
      Enterprises, Inc.       |               | 4,000            |  |   | 4,000            |  |   | 81,000           | 
|              | John
      A. and Patricia M. Warehime |               | 45,000           |  |   | 58,000           |  |   | 49,000           | 
|              | Park
      100 Foods, Inc.             |               | 19,000           |  |   | 12,000           |  |   | 25,000           | 
|              | Schaier
      Travel                   |               | 0                |  |   | 3,000            |  |   | 10,000           | 
|              | Accounts
      receivable:             |               |                  |  |   |                  |  |   |                  | 
|              | Park
      100 Foods, Inc.             |               | 275,000          |  |   | 163,000          |  |   | 164,000          | 
|              | Lippy
      Brothers, Inc.             |               | 0                |  |   | 0                |  |   | 3,000            | 
|              | Accounts
      payable:                |               |                  |  |   |                  |  |   |                  | 
|              | Park
      100 Foods                   |               | 0                |  |   | 7,000            |  |   | 0                | 
|              | Lippy
      Brothers, Inc.             |               | 32,000           |  |   | 0                |  |   | 0                | 

F-19

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HANOVER
  FOODS CORPORATION AND SUBSIDIARIES Notes
  to Consolidated Financial Statements

Note
  7 Related Party Transactions (Contd)

Included in other assets is a related party receivable of $1,183,000 in 2004 and $1,030,000 in 2003 related to two split interest life insurance contracts on the life of Patricia M. Warehime.


In connection with the amended complaint filed by Michael A. Warehime versus John A. Warehime (note 10), pursuant to applicable state law, the Company has agreed to pay directly all expenses (including attorneys fees) and costs in advance of the final disposition of the litigation or any substantially similar or related action, suit, or proceeding. The Company has received an undertaking from John A. Warehime to repay all costs and expenses if it is ultimately determined that he is not entitled to be indemnified by the Company. The amount paid and expensed by the Company under this arrangement for the years ended May 30, 2004, June 1, 2003 and June 2, 2002, was approximately $0, $365, and $65,000, respectively.


A portion of rental expense included in note 5 was paid to Park 100 Foods, Inc. and Warehime Enterprises, Inc. The amounts were $20,000, $14,000, and $15,000, for the years ended May 30, 2004, June 1, 2003, and June 2, 2002, respectively.


During fiscal year 2003, the Corporation via its Guatemalan subsidiary, sold its condominium real estate, located in Naples, Florida to John A. and Patricia M. Warehime for $127,500, which approximates fair value.


Note
  8 Benefit Plans

| | (a) | Defined
      Contribution Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | The
      Company offers a 401(k) plan covering certain of its employees. The Company
      contributes an amount equal to 100% of each employees salary deferral
      up to 5% of the employees annual salary. Effective July 25, 1997,
      the plan was amended to permit matching contributions to be made in cash
      and/or securities of the Company (see note 6). The Companys contribution
      to the 401(k) plan for the years ended May 30, 2004, June 1, 2003, and June
      2, 2002, was $903,000, $694,000, and $759,000, respectively.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | (b) | Pension
      Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | The
      Company offers pension benefits to eligible employees who are members of
      the United Food and Commercial Workers Union 56 at its Vineland NJ plant.                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | (c) | Postretirement
      Benefits other than Pensions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | Certain
      employees receive postretirement benefits other than pensions. This plan
      is currently not funded. The Company accounts for these costs by accruing
      for them over the employee service period. The status of the plan, based
      on the most recent measurement dates, is as follows:                                                                                                                                                                                                                                               

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HANOVER FOODS CORPORATION AND SUBSIDIARIESNotes to Consolidated Financial Statements

Note 8 Benefit Plans (Contd)

| |                                   |                                                |                                          | May
    30, |            | June 1, |           
| | --------------------------------- | ---------------------------------------------- | ---------------------------------------- | ----------- | ---------- | ------- | ----------
| |                                   |                                                |                                          | 2004        |            | 2003    |           
| |                                   |                                                |                                          |             |            |         |           
| | Change
    in benefit obligation: |                                                |                                          |             |            |         |           
| |                                   | Benefit obligation at beginning of year        | $                                        | (7,817,000  | )          | $       | (4,599,000
| |                                   | Service cost                                   |                                          | (203,000    | )          |         | (126,000  
| |                                   | Interest cost                                  |                                          | (453,000    | )          |         | (405,000  
| |                                   | Amortization of transition obligation          |                                          | (73,000     | )          |         | (73,000   
| |                                   | Plan assumptions                               |                                          | (1,055,000  | )          |         | (1,790,000
| |                                   | Change in plan                                 |                                          | 1,249,000   |            |         | (1,062,000
| |                                   | Benefits paid                                  |                                          | (300,000    | )          |         | (238,000  
| |                                   | Other                                          |                                          | 0           |            |         | 0         
| |                                   |                                                |                                          |             |            |         |           
| |                                   |                                                | Benefit obligation at end of year        |             | (8,052,000 | )       |           
| |                                   |                                                |                                          |             |            |         |           
| | Change
    in plan assets         |                                                |                                          |             |            |         |           
| |                                   | Fair value of plan assets at beginning of year |                                          |            |            |         |          
| |                                   | Contributions                                  |                                          | 300,000     |            |         | 238,000   
| |                                   | Benefits paid                                  |                                          | (300,000    | )          |         | (238,000  
| |                                   |                                                |                                          |             |            |         |           
| |                                   |                                                | Fair value of plan assets at end of year |             |           |         |           
| |                                   |                                                |                                          |             |            |         |           
| | Funded
    status:                |                                                |                                          |             |            |         |           
| |                                   | Unrecognized net loss                          |                                          | 4,013,000   |            |         | 4,333,000 
| |                                   | Unrecognized prior service cost                |                                          | 156,000     |            |         | 173,000   
| |                                   | Unrecognized net transition obligation         |                                          | 716,000     |            |         | 789,000   
| |                                   |                                                |                                          |             |            |         |           
| |                                   | Accrued postretirement benefit cost            | $                                        | (3,167,000  | )          | $       | (2,522,000
| |                                   |                                                |                                          |             |            |         |           

A discount rate of 6.00% for May 30, 2004 and 6.25% for June 1, 2003, was used in determining the actuarial present value of the accumulated postretirement benefit obligation.


The cost of postretirement benefits other than pensions consisted of the following components:


| |                                       | Year ended |         | Year ended |   | Year ended | 
| | ------------------------------------- | ---------- | ------- | ---------- | - | ---------- | 
| |                                       | May 30,    |         | June 1,    |   | June 2,    | 
| |                                       | 2004       |         | 2003       |   | 2002       | 
| |                                       |            |         |            |   |            | 
| | Service cost                          | $          | 126,000 |            | $ | 126,000    | 
| | Interest cost                         |            | 453,000 |            |   | 405,000    | 
| | Amortization of transition obligation |            | 73,000  |            |   | 73,000     | 
| | Other amortization and deferral       |            | 215,000 |            |   | 147,000    | 
| |                                       |            |         |            |   |            | 
| |                                       | $          | 867,000 |            | $ | 751,000    | 
| |                                       |            |         |            |   |            | 

The assumed postretirement health care cost trend rates in measuring the accumulated post retirement obligation was as follows:


| | • | Medical:
        6.5% in 2002, decreasing by .5% per year to an ultimate rate of 5.0%
    in 2005 and later           
| | - | ----------------------------------------------------------------------------------------------------------------------
| | • | Prescription
        Drugs: 8.0% in 2002, decreasing by .5% per year to an ultimate rate of
    5.0% in 2008 and later
| | • | Dental:
    4.0% in 2002 and later                                                                                    

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HANOVER FOODS CORPORATION AND SUBSIDIARIESNotes to Consolidated Financial Statements

Note 8 Benefit Plans (Contd)

| |     | The
        health care cost trend rate assumption has a significant effect on the
        amounts reported. For example, increasing the assumed health care cost
        trend rates by one percentage point in each year would increase the accumulated
        postretirement benefit obligation as of February 29, 2004 by $1,569,000
        and the aggregate of the service and interest cost components of net
        periodic postretirement benefit cost for the year ended February 29,
    2004 by $152,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | (d) | Employment
    and Deferred Compensation Agreements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | On
        June 12, 1995, the Company entered into a five-year employment agreement
        with its Chief Executive Officer, John A Warehime, at an annual base
        salary of $650,000 with such compensation payable retroactively from
        April 1, 1994 (the 1995 Employment Agreement). The 1995 Employment
        Agreement was amended on February 13, 1997 (Amended Employment
        Agreement). The principal terms of Mr. Warehimes employment
        arrangements with the Company as amended by the Amended Employment Agreement
    are set forth below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | The
        Amended Employment Agreement provides for annual increases (but not decreases)
        in the employees annual salary equal to the greater of 5% of the
        prior years salary or the annual percentage increase in the Consumer
        Price Index (CPI). Mr. Warehimes annual base salary for fiscal
        2004, 2003 and 2002 was $773,950, $737,000, and $702,000, respectively.
        Unless terminated by either party, the Amended Employment Agreement automatically
        renews annually on each anniversary date so that five years always remain
        on the term of the agreement. In the event the employee is terminated
        without cause, or in the event the employee terminates his employment
        after a reduction (without his written consent) of his duties or authority,
        compensation, or similar events, the Amended Employment Agreement provides
        for the payment of the salary and bonus (including all other benefits)
        over the remaining term of the agreement. In the event of termination
        due to death or disability, the Amended Employment Agreement provides
        for the same payment to the employee (or in the event of the death of
        the employee, his spouse, or descendants) for one year and thereafter
        the payment of supplemental pension benefits as described below. In addition,
        the Amended Employment Agreement provides for the reimbursement by the
        Company of the employees legal and accounting fees up to $75,000
        per year and reasonable business expenses incurred by the employee in
        connection with the business of the Company. The AmendedEmployment
        Agreement also provides the employee with various other benefits including
    the use of an automobile, disability and life insurance, and a club membership.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | The
        annual bonus payable to the employee under the Amended Employment Agreement
        is equal to $100,000 plus 10% of the Companys pretax earnings over
        $5.0 million provided that no annual bonus is payable if pretax earnings
        of the Company are less than $5.0 million. The Amended Employment Agreement
        limits salary and the annual bonus payment described above to an aggregate
        of not more than $1.0 million annually. Annual bonuses can be paid in
        cash or Class A Common (non-voting) Stock at the option of the employee.
        For the years ended May 30, 2004, June 1, 2003, and June 2, 2002, the
        bonus accrued under this agreement was $226,000, $263,000, and $298,000,
    respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F-22

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HANOVER FOODS CORPORATION AND SUBSIDIARIESNotes to Consolidated Financial Statements

Note 8 Benefit Plans (Contd)

| |  | The
        Amended Employment Agreement also provides for the annual payment of
        a long-term performance bonus based upon the Companys performance
        over the prior five-year period as measured by its average sales growth
    and average increase in operating profits as compared to an industry peer
        group over the same period. The bonus payable is calculated based upon
        a formula matrix set forth in the Amended Employment Agreement, with
        such formula being recommended by an independent management consulting
        firm retained by the Company and approved by the Compensation Committee
        of the Board of Directors. For the years ended May 30, 2004, June 1,
        2003, and June 2, 2002, the long-term performance bonus accrued under
    this agreement was $101,000, $169,000, and $157,000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | The
        Amended Employment Agreement provides for annual supplemental pension
        benefits, commencing upon the earlier of (a) five years after termination
        of the employee (or one year following his death or disability) or (b)
        the date of retirement, payable during the life of the employee and upon
        his death for the life of his spouse. Such annual supplemental pension
        benefits are equal to 60% of average total compensation (including bonuses)
        over the latest three-year period prior to retirement, assuming retirement
        at age 65 or later. Supplemental pension benefits are reduced based upon
        an established formula to the extent the employee retires prior to age
        65. The net present value of the cost of providing this future benefit
        is recognized by the Company over the remaining expected years of service.
        The expense recognized under this agreement was approximately $1,158,000,
        $863,000, and $773,000, for the years ended May 30, 2004, June 1, 2003,
        and June 2, 2002, respectively. The projected benefit obligation was
        approximately $5,493,000 and $4,447,000, May 30, 2004 and June 1, 2003,
    respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | The
        Amended Employment Agreement was revised effective as of August 1, 1997
        to make certain clarifying changes and to require that bonus payments
        to Mr. Warehime in any taxable year in excess of $1.0 million would be
        subject to shareholder approval, which shareholder approval was given
    on August 14, 1997.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | On
        January 23, 1997, the Company entered into a five-year employment agreement
        with Gary T. Knisely, Executive Vice President, Secretary, and Counsel
        of the Company, at an annual salary of $175,000 with such compensation
        payable retroactively from June 1, 1996 (the Knisely Agreement).
        Unless terminated by either party, the Knisely Agreement automatically
        renews annually on each anniversary date so that five years always remain
        on the term of the agreement. The Knisely Agreement provides for annual
        salary increases (but not decreases) equal to the greater of 5% of the
        prior years salary or the annual percentage increase in the CPI,
        as well as incentive bonuses and various other benefits. As of May 30,
        2004, the aggregate liability of the Company under this agreement for
        the next five years is estimated to be $1,481,000, excluding annual performance
        bonuses. In the event the employee is terminated without cause, or in
        the event the employee terminates his employment after a reduction (without
        his written consent) of his duties or authority, compensation, or similar
        events, the Knisely Agreement provides for the payment of the salary
        and bonus (including all other benefits) over the remaining term of the
        agreement. In the event of termination due to death or disability, the
        Knisely Agreement provides for the payment of salary and bonus (including
        all other benefits) to the employee (or his spouse or other descendants
        in the event of the employees death) for the later of one year
    from the date of such termination or the death of the employee.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F-23

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HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 8 Benefit Plans (Contd)

| |     | The Knisely
        Agreement also provides for annual supplemental pension benefits equal
        to 60% of the employees average annual compensation (including
        bonuses but excluding other benefits) over the three most recent fiscal
        years prior to the employees termination if the employee is no
        longer employed by the Company and the employee has attained the age
        of 55.
        Such annual supplemental pension benefits are payable for the remainder
        of the lifetime of the employee. The net present value of the cost of
        providing this future pension benefit is recognized by the Company over
        Mr. Kniselys expected remaining years of service. The expense recognized
        for supplemental pension benefits under this agreement was approximately
        $274,000, $171,000, and $81,000, for the years ended May 30, 2004, June
        1, 2003, and June 2, 2002, respectively. The pension liability was approximately
        $1,191,000 and $593,000 and at May 30, 2004 and June
1, 2003, respectively.                                                                                                                                                                                                                             
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     | The Company
        also entered into a change in control severance agreements with several
        officers and executives which provides for termination compensation if
        respective individuals employment is terminated: (i) involuntarily
        within 24 months of a change in control or (ii) voluntarily, following
        a reduction in base salary, duties, and responsibilities within 24 months
        of a change in control. A change in control shall be deemed
        to occur if John A. Warehime ceases to be Chief Executive Officer of
        the Company or ceases to have the power and authority of the Chief Executive
        Officer. Pursuant to the terms of this agreement, any payment due thereunder
        shall be made over a two year period no less frequently than monthly
        and all payments during any twelve month period shall not in the aggregate
        exceed the individuals total cash compensation (salary and bonus)
    received from the Company during fiscal 2000.                                                                                                                                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     | All payments
        made pursuant to this agreement are subject to the further conditions
        that: (i) the individual maintain the confidentiality of the Companys
        trade secrets, customer lists, and other proprietary information of the
        Company; (ii) for a period of two years following the termination of
        the officer, neither the individual or his employer or business associate
        shall enter into or attempt to enter into any business relationship,
        solicit for employment or employ any person, employed by the Company
        or its affiliates at any time within the six months prior to the officers
        termination; and (iii) for a period of two years following the termination,
        the individual shall not directly or indirectly own, manage, operate,
        join, or participate in any capacity, any entity which is primarily engaged
        in a business which competes with any significant business of the Company
        or its affiliates. If all officers and executives subject to agreements
        were terminated on May 30, 2004 under circumstances entitling them to
        severance payments pursuant to the agreements, the aggregate amount due
    to them under these agreements would be approximately $2,072,000.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | (e) | Stock
    Option Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     | On June
        20, 2002, the Corporations Board of Directors adopted the 2002
        Stock Option Plan. 34,600 shares of the Corporations Class B Common
        Stock, par value $25.00 per share, are authorized for issuance under
        the 2002 Stock Option Plan, and options to purchase 13,500 shares were
        granted during fiscal year 2003 with weighted-average exercise price
        of $110 per share. Options vest at the rate of 12.50% per year beginning
        June 20, 2004 and June 20 of each following year up to and including
        June 20, 2011. All officers and key employees of the Corporation and
        of any present or future parent or subsidiary of the Corporation are
        eligible to receive options under the 2002 Stock Option Plan, excluding
        John A. Warehime. No individual may receive options under the 2002 Stock
        Option Plan for more than 15% of the total number of shares of the Corporations
        Class B Common Stock authorized for issuance under the 2002 Stock Option
    Plan.                                                                                                                                                                                                                                               

F-24

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HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note 8 Benefit Plans (Contd)

| |  | On October
        17, 2003, the Corporations Board of Directors adopted the Hanover
        Foods Corporation 2003 Stock Option Plan (the 2003 Option Plan).
        All full-time employees (excluding employees represented by a collective
        bargaining agent) of the Corporation and of any present or future parent
        or subsidiary of the Corporation who have been employed for at least
        one year, excluding John A. Warehime, are eligible to receive options
        under the 2003 Option Plan. No individual may receive options under the
        2003 Option Plan for more than 5% of the total number of shares of the
        Corporations Class B common stock authorized for issuance under
        the 2003 Option Plan. 200,000 shares of the Corporations Class
        B common stock, par value $25.00 per share, are authorized for issuance
        under the 2003 Option Plan. On October 17, 2003, the Board of Directors
        of the Corporation voted to make a grant to all full-time, non-union
        employees of the Corporation who have been employed by the Corporation
        for at least one year, other than John A. Warehime except that if an
        individual is in the employ of the Corporation or any of its subsidiaries
        as of October 17, 2003, but has not been employed for at least one year
        as of October 17, 2003, once the one year employment requirement has
        been satisfied, the employee will receive stock options, with an option
        price equal to the appraised fair market value at the time of the option
        grant. The Board of Directors granted options for 199,450 shares of Class
    B common stock.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | The Stock
        Option Plan will be administered by the Corporations Board of Directors
        or by an option committee appointed by the Corporations Board of
        Directors. The option committee will consist of a minimum of two and
        a maximum of five members of the Board of Directors, each of whom will
        be a non-employee director within the meaning of Rule 16b-3(b)(3)
    under the Exchange Act.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Options
        issued pursuant to the Stock Option plan may be either incentive stock
        options or non-qualified stock options. An incentive stock option is
        an option that satisfies all of the requirements of Section 422(b) of
        the Internal Revenue Code of 1986, as amended, and the regulations thereunder,
        and a non-qualified stock option is an option that either
        does not satisfy all of those requirements of the terms of the option
        provide that it will not be treated as an incentive stock option. The
        option price for options issued under the Stock Option Plan will be equal
        at least to the fair market value of the Corporations Class B Common
        Stock on the date of the grant of the option. Options will not be granted
        pursuant to the Stock Option Plan until after the expiration of the ten
        years from June 20, 2002. The number of shares available for award under
        the Stock Option Plan is subject to adjustment in the event of any change
        in the outstanding shares of Class B Common Stock as a result of, among
        other circumstances, a stock dividend, stock split, recapitalization,
    merger, transfer of assets or reorganization.                                                                                                                                                                                                                                                                                                                                                                                                                                             

F-25

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HANOVER
FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note
8 Benefit Plans (Contd)

The
following summarizes the transaction pursuant to the two plans:




|                                             | 2004              |         | 2003 |                  
|-------------------------------------------- | ----------------- | ------- | ---- | -----------------
|                                             |                   |         |      |                  
|                                             |                   |         |      | Weighted         
|                                             | Average
    Price |         |      | Average
    Price
|Options                                      | Per Share         | Options |      | Per Share        
|                                             |                   |         |      |                  
|Options
    outstanding at beginning of year | 13,500            |         | $    | 110.00           
|Options
    issued during year               | 199,450           |         | $    | 118.00           
|Options
    outstanding at end of year       | 212,950           |         | $    | 117.49           
|Options
    exercisable at end of year       | 0                 |         | $    | 117.49           

The following table summaries information for stock options outstanding at May 30, 2004:


|                   |  | Options Outstanding |  |             |  |               |  | Options Exercisable |  |                  
|------------------ |  | ------------------- |  | ----------- |  | ------------- |  | ------------------- |  | -----------------
|                   |  |                     |  |             |  |               |  |                     |  |                  
|                   |  |                     |  | Weighted    |  |               |  |                     |  |                  
|                   |  |                     |  | Average     |  |               |  |                     |  |                  
|                   |  |                     |  | Remaining   |  | Weighted      |  |                     |  | Weighted         
|                   |  | Number              |  | Contractual |  | Average Price |  | Number              |  | Average
    Price
|Exercise
    Price |  | Outstanding         |  | Life        |  | Per Share     |  | Exercisable         |  | Per
    Share    
|                   |  |                     |  |             |  |               |  |                     |  |                  
|$110.00            |  | 13,500              |  | 8           |  | $110.00       |  | 0                   |  | $110.00          
|$118.00            |  | 199,450             |  | 9.42        |  | $118.00       |  | 0                   |  | $118.00          
|$110.00-118.00     |  | 212,950             |  | 9.33        |  | $117.49       |  | 0                   |  | $117.49          

| |  |                                                                                                                                                                                                                                                      
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The per share weighted average fair value of stock options granted during 2003 is calculated as $26.23 on the date of grant using the Black-Scholes option-pricing model. The weighted average assumptions based on the date of grant are as follows:

| |                         | 2004    |   |  | 2003    |  
| | ----------------------- | ------- | - |  | ------- | -
| |                         |         |   |  |         |  
| | Divided yield           | 1       | % |  | 1       | %
| | Volatility              | 8.6     |   |  | 8.6     | %
| | Risk-free interest rate | 3.5     | % |  | 3.5     | %
| | Expected life           | 9 years |   |  | 9 years |  
| |                         |         |   |  |         |  
| |                         |         |   |  |         |  

| | (f) | Employee
    Stock Ownership Plan                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     | The Company
        has a noncontributory employee stock ownership plan in which substantially
        all non-union employees are eligible to participate. The Company makes
        annual contributions to the plan in an amount determined by a resolution
        of the Board of Directors. Compensation expense is recorded for the amount
        of the annual contribution to the plan as determined by resolution of
    the Board of Directors of the Company.




F-26

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HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note
      8Benefits
Plans ( Contd)

| | (g) | Defined
    Benefit Plan                                                                                                                                                                      
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                               
| |     | On April
        1, 2004, the Company acquired the assets of Venice Maid Foods. In connection
        with the acquisition, the Company assumed the existing defined benefit
    pension plan.
| |     |                                                                                                                                                                                               

| |                                                | May 30, 2004 |      
| | ---------------------------------------------- | ------------ | -----
| |                                                |              |      
| | Change in benefit obligation                   |              |      
| | Benefit obligation at beginning of year        | $            |     
| | Acquisition                                    |              | 3,273
| |                                                |              |      
| | Benefit obligation at end of year              | $            | 3,273
| |                                                |              |      
| | Change in plan assets                          |              |      
| | Fair value of plan assets at beginning of year | $            |     
| | Acquisition                                    |              | 2,524
| |                                                |              |      
| | Fair value of plan assets at end of year       |              | 2,524
| |                                                |              |      
| | Funded status                                  |              | (749 
| |                                                |              |      
| | Accrued benefit cost                           | $            | (749 
| |                                                |              |      
| | Weighted-average assumptions as of             |              |      
| | March 31, 2004                                 |              |      
| | Discount Rate                                  |              | 6.25 
| | Expected return on plan assets                 |              | 8.50 
| | Rate of compensation increase                  |              | 0    

Note
      9Income
Taxes

Total income taxes for the years ended May 30, 2004, June 1, 2003, and June 2, 2002, were attributable to the following:


|     |                                                                                                            |      | May 30,   |  |   | June 1,   |   |   | June 2,   |  
|---- | ---------------------------------------------------------------------------------------------------------- | ---- | --------- |  | - | --------- | - | - | --------- | -
|2004 | 2003                                                                                                       | 2002
|     |                                                                                                            |      |           |  |   |           |  
|     | Earnings from operations                                                                                   | $    | 5,586,000 |  | $ | 5,654,000 |   | $ | 5,121,000 |  
|     | Stockholders equity
       for unrealized gains(losses)
       on securities and minimum pensionliability |      | 110,000   |  |   | (357,000  | ) |   | (45,000   | )
|     |                                                                                                            |      |           |  |   |           |   |   |           |  
|     |                                                                                                            | $    | 5,696,000 |  | $ | 5,297,000 |   | $ | 5,076,000 |  
|     |                                                                                                            |      |           |  |   |           |   |   |           |  

F-27

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HANOVER
FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements

Note
      9Income
  Taxes (Contd)

Income tax expense (benefit) attributable to earnings from operations consists of:


| |                         | Current |           | Deferred |   |          | Total |  
| | ----------------------- | ------- | --------- | -------- | - | -------- | ----- | -
| |                         |         |           |          |  
| | Year ended May 30, 2004 |         |           |          |   |          |       |  
| | U.S. Federal            | $       | 4,240,000 |          | $ | (169,000 | )     | $
| | State                   |         | 1,537,000 |          |   | (22,000  | )     |  
| |                         |         |           |          |   |          |       |  
| |                         | $       | 5,777,000 |          | $ | (191,000 | )     | $
| |                         |         |           |          |   |          |       |  
| | Year ended June 1, 2003 |         |           |          |   |          |       |  
| | U.S. Federal            | $       | 5,758,000 |          | $ | (809,000 | )     | $
| | State                   |         | 1,049,000 |          |   | (122,000 | )     |  
| | Foreign                 |         | (222,000  | )        |   | 0        |       |  
| |                         |         |           |          |   |          |       |  
| |                         | $       | 6,585,000 |          | $ | (931,000 | )     | $
| |                         |         |           |          |   |          |       |  
| | Year Ended June 2, 2002 |         |           |          |   |          |       |  
| | U.S. Federal            | $       | 3,230,000 |          | $ | 385,000  |       | $
| | State                   |         | 342,000   |          |   | 20,000   |       |  
| | Foreign                 |         | 1,144,000 |          |   | 0        |       |  
| |                         |         |           |          |   |          |       |  
| |                         | $       | 4,716,000 |          | $ | 405,000  |       | $
| |                         |         |           |          |   |          |       |  

The Guatemala government has granted an income tax exemption to the Companys subsidiary Mayapac beginning 2001 through 2012.


A reconciliation of the Companys effective tax rate to the amount computed by applying the federal income tax rate of 35% to earnings before taxes attributable to earnings from operations expressed in percentages, follows:


F-28

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HANOVER FOODS CORPORATION AND SUBSIDIARIESNotes to Consolidated Financial Statements

Note 9 Income
Taxes (Contd)

|        |                                          | Year
    Ended |   | Year
    Ended |   | Year
    Ended |  
|------- | ---------------------------------------- | -------------- | - | -------------- | - | -------------- | -
|May 30, | June 1,                                  | June 2,       
|2004    | 2003                                     | 2002          
|        |                                          |                |   |               
|        | Federal income tax rate                  | 35.0           | % | 35.0           | % | 35.0           | %
|        | Increase (decrease) in taxes:            |                |   |                |   |                |  
|        | State taxes  net of federal tax benefit | 5.8            |   | 3.9            |   | 1.9            |  
|        |                                          |                |   |                |   |                |  
|        | Taxes related to foreign subsidiaries    | (3.1           | ) | (1.5           | ) | 3.3            |  
|        | Other items  net                        | (4.9           | ) | (0.9           | ) | 1.1            |  
|        |                                          |                |   |                |   |                |  
|        | Effective income tax rate                | 32.8           | % | 36.5           | % | 41.3           | %
|        |                                          |                |   |                |   |                |  

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at May 30, 2004 and June 1, 2003 follow:


|     |                                              |   | May 30,    |   |   | June 1,    |  
|---- | -------------------------------------------- | - | ---------- | - | - | ---------- | -
|2004 | 2003                                        
|     | Deferred tax assets:                         |   |            |   |  
|     | Inventory costs                              | $ | 209,000    |   | $ | 243,000    |  
|     | Accrued expenses and other liabilities       |   | 3,060,000  |   |   | 2,828,000  |  
|     | Pension and postretirement benefits          |   | 1,251,000  |   |   | 1,014,000  |  
|     | Net operating loss carryforwards             |   | 145,000    |   |   | 70,000     |  
|     | Minimum pension liability                    |   | 0          |   |   | 364,000    |  
|     | Other                                        |   | 959,000    |   |   | 546,000    |  
|     |                                              |   |            |   |   |            |  
|     | Total gross deferred tax assets              | $ | 5,624,000  |   | $ | 5,065,000  |  
|     |                                              |   |            |   |   |            |  
|     | Deferred tax liabilities:                    |   |            |   |   |            |  
|     | Property, plant and equipment                | $ | (6,083,000 | ) | $ | (6,534,000 | )
|     | Net unrealized gain on marketable securities |   | 0          |   |   | (59,000    | )
|     | Other                                        |   | (1,572,000 | ) | $ | (694,000   | )
|     |                                              |   |            |   |   |            |  
|     | Total gross deferred tax liabilities         |   | (7,655,000 | ) |   | (7,287,000 | )
|     |                                              |   |            |   |   |            |  
|     | Net deferred tax liabilities                 | $ | (2,031,000 | ) | $ | (2,222,000 | )
|     |                                              |   |            |   |   |            |  

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced.


F-29

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HANOVER
  FOODS CORPORATION AND SUBSIDIARIES Notes
  to Consolidated Financial Statements

Note
  9 Income Taxes (Contd)

The Company has not recognized a deferred tax liability for the undistributed earnings and tax basis differences of its investment in foreign subsidiaries since the earnings and investment are considered to be permanently invested in the businesses and, under the tax laws, are not subject to such taxes until distributed. The accumulated amount of such undistributed earnings was approximately $9,035,000 at May 30, 2004.


At May 30, 2004, the Company has net operating loss carryforwards for state income tax purposes of approximately $1,722,000, which are available to offset future state taxable income, if any, through 2020.


Note
  10 Commitments and Contingencies

| | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Letter
      of Credit                                                                                                                                                                                                                                                  
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | As
      of May 30, 2004, the Companys wholly-owned reinsurance company had
      outstanding two letters of credit in the amount of $131,000 and $985,000
      as security for the reimbursement of losses arising from the reinsurance
      assumed by the Company.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                         
| | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Legal
      Matters                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                         
| | Derivative
      Action                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | On
      September 13, 1996, certain Class A shareholders filed a complaint in equity
      against six of the Corporations directors and the estate of a former
      director in the Court of Common Pleas of York County, Pennsylvania (the
      complaint). The suit also names the Corporation as a nominal defendant.
      The suit sought various forms of relief including, but not limited to, rescission
      of the boards April 28, 1995 approval of John A. Warehimes 1995
      Employment Agreement and the boards February 10, 1995 adjustment of
      directors fees. (Since the filing of this lawsuit, John A. Warehimes
      1995 Employment Agreement was amended.) In addition, the plaintiffs sought
      costs and fees incident to bringing suit. On November 4, 1996, the complaint
      was amended to add additional plaintiffs. On June 24, 1997, the Court dismissed
      the amended complaint for failure to make a prior demand. An appeal was
      filed on the Courts June 24, 1997 Order. On December 2, 1998, the
      Superior Court of Pennsylvania held that the derivative plaintiffs had made
      adequate demand.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                         
| | On
      May 12, 1997, a written demand was received by the Corporation from the
      attorney for those Class A shareholders containing similar allegations and
      the allegations raised by the Class A common stockholders were investigated
      by a special independent committee of the Board of Directors and found to
      be without merit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                         
| | The
      director defendants filed an Answer and New Matter to the amended complaint
      on March 17, 1999. On September 5, 2001, director defendants filed a Motion
      to Dismiss the Derivative Action. On September 20, 2001, plaintiffs filed
      an answer to director defendants Motion to Dismiss. On May 17, 2002,
      the court entered an order denying defendants Motion to Dismiss.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                         
| | On
      May 14, 2002, Albert Blakey, Esquire, counsel for certain of the derivative
      plaintiffs filed a Petition for Fees seeking an award of $1,585,716 in attorneys
      fees. Defendants filed a response in opposition to the request for fees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

F-30

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HANOVER
  FOODS CORPORATION AND SUBSIDIARIES Notes
  to Consolidated Financial Statements

Note
       10 Commitments and Contingencies (Cont’d)

| | On
      January 29, 2003, Albert Blakey, Esquire, counsel for certain derivative
      plaintiffs filed a Motion for Reconsideration of the Courts December
      31, 2002 denial of the Petition for Fees. A Response in Opposition to the
      Motion for Reconsideration of Plantiffs Petition for Fees was filed
      with the Court on February 12, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Warehime
      Family Litigation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | On
      February 13, 1997, the Board of Directors proposed an amendment and restatement
      of the Corporations Articles of Incorporation (the Amended and
      Restated Articles) which provides that if all of the following Class
      B shareholders (or their estates upon the death of such shareholders), Michael
      A. Warehime, John A. Warehime, Sally W. Yelland, J. William Warehime, and
      Elizabeth W. Stick (all members of the Warehime family), do not agree in
      writing to the composition of the Board of Directors or other important
      matters specified below on or after the 1998 annual shareholders meeting,
      the trustees of the Corporations 401(k) Savings Plan (or a similar
      employee benefit plan), who qualify as disinterested directors acting as
      fiduciaries for the employees who participate in the Plan, and the Class
      A shareholders may become entitled to vote in the manner described in the
      document.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The
      Amended and Restated Articles created a Series C Convertible Preferred Stock
      , which, in case of a dispute among the above mentioned members of the Warehime
      family on Board of Directors composition or other important matters, would
      be entitled to 35 votes per shares (a total of 350,000 votes based on 10,000
      shares of Series C Convertible Preferred Stock issued to and held by the
      trustees of the Corporations 401(k) Savings Plan); if Series C Convertible
      Preferred Stock were entitled to vote because of such dispute, each share
      of Class A Common Stock would be entitled to 1/10thof a vote per share.                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The
      Amended and Restated Articles also classified the terms of the Board of
      Directors commencing with the election at the 1997 annual shareholders
      meeting and permitted directors to be elected for four-year term as permitted
      by Pennsylvania law. Pursuant to the Corporations Bylaws, as then
      in effect, nominations for directors must be submitted to the Corporation
      in the manner prescribed by the Bylaws no later than June 1 of the year
      in which the meeting is to occur.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | On
      February 21, 1997, Michael A. Warehime, a Class B shareholder, and certain
      Class A shareholders filed motions for a preliminary injunction against
      the Corporation, John A. Warehime, in his capacity as voting trustee, and
      certain directors of the Corporation in the Court of Common Pleas of York
      County, Pennsylvania against a Proposal of the Board of Directors to amend
      and restate the Corporations Articles of Incorporation in the manner
      described herein.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The
      motions for a preliminary injunction were dismissed by the Court on June
      24, 1997. The Class B shareholders on June 25, 1997 approved the Amended
      and Restated Articles (John A. Warehime, being the sole Class B shareholder
      voting affirmatively in his capacity as voting trustee) and the Amended
      and Restated Articles became effective June 25, 1997. In August 1997, the
      Board of Directors proposed a further amendment (the Amendment)
      to the Amended and Restated Articles to expand the definition of disinterested
      directors in the manner described below, and to approve certain performance
      based compensation for John A. Warehime solely for the purpose of making
      the Corporation eligible for a federal income tax deduction pursuant to
      Section 162(m) of the Internal Revenue Code of 1986, as amended. A special
      meeting was                                                                   

F-31

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HANOVER
  FOODS CORPORATION AND SUBSIDIARIES Notes
  to Consolidated Financial Statements

Note
  10 Commitments and Contingencies (Contd)

| | scheduled
      for August 14, 1997 (the Special Meeting) to vote on these proposals.
      On August 8, 1997, Michael A. Warehime filed a motion in the Court of Common
      Pleas of York County, Pennsylvania to prevent John A. Warehime, in his capacity
      as voting trustee from voting on these proposals and to enjoin the Amendment.
      This motion was denied by the Court on August 11, 1997. The Amendment and
      the proposal under Section 162(m) were approved by Class B shareholders
      (John A. Warehime was the sole Class B shareholder to vote affirmatively,
      in his capacity as voting trustee) on August 14, 1997 and the Amendment
      became effective on August 14, 1997.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Under the
      Amendment, the definition of disinterested directors means a
      person who, in the opinion of counsel for the Corporation, meets any of
      the following criteria: (i) disinterested directors as defined in Section
      1715(e) of the Pennsylvania Business Corporations Law of 1988, as amended;
      (ii) persons who are not interested directors as defined in
      Section 1.23 of The American Law Institute Principles of Corporate
      Governance: Analysis and Recommendations (1994); or (iii) persons
      who qualify as members of the Audit Committee pursuant to Section 303.00
      of the New York Stock Exchanges Listed Company Manual.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Michael
      A. Warehime filed an appeal from the denial of his motion to enjoin the
      previously described Amendment to the Corporations Amended and Restated
      Articles. On December 2, 1998, a majority panel of the Superior Court of
      Pennsylvania issued a decision holding that although John A. Warehime had
      acted in good faith in voting for the Amendment to the Amended and Restated
      Articles as trustee of the Warehime voting trust, he had breached his fiduciary
      duty to the beneficiaries of the Warehime voting trust in voting for the
      Amendment. On November 29, 1999, the Supreme Court of Pennsylvania granted
      a petition for allowance of appeal, filed by John A. Warehime, and granted
      a cross-petition for appeal filed by Michael A. Warehime.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | On August
      13, 1999, Michael A. Warehime filed a complaint in equity in the Court of
      Common Pleas of York County, Pennsylvania, naming as defendants Arthur S.
      Schaier, Cyril T. Noel, Clayton J. Rohrbach, Jr., John A. Warehime, and
      the Corporation. The complaint sought a court order declaring that the September
      1999 election for the Board of Directors of the Corporation be conducted
      in accordance with the Articles of Incorporation of the Corporation as they
      existed prior to June 25, 1997, an order declaring that the Series C Convertible
      Preferred Stock cannot be voted, and an order that the following candidates
      for the Board of Directors of the Corporation proposed by Michael A. Warehime,
      Sally Yelland, Elizabeth Stick and J. William Warehime be accepted by the
      Corporation and listed on the ballot to be distributed at the annual meeting
      of shareholders of the Corporation to be held on September 16, 1999: Michael
      A. Warehime, Daniel Meckley, Elizabeth Stick, Sonny Bowman, and John Denton.
      The basis for the complaint was the December 2, 1998 decision of the Superior
      Court of Pennsylvania which held that John A. Warehime breached his fiduciary
      duties in voting for the Amended and Restated Articles as trustee of the
      Warehime voting trust. The requested relief was denied by the Court of Common
      Pleas of York County and Michael Warehime appealed to the Superior Court
      of Pennsylvania.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | On September
      12, 2000, the Superior Court of Pennsylvania stated, in a Memorandum decision,
      that the June 25, 1997 shareholder vote, which adopted the Amended and Restated
      Articles of the Corporation should be set aside, and remanded the case to
      the Court of Common Pleas of York County to determine what further relief
      would be appropriate. On remand, the Court of Common Pleas of York County
      entered an Order on October 10, 2000 declaring that the Amended and
      Restated Articles
      of Incorporation were set aside and that an election should be held without
      the Amended or Restated Articles. On October 11, 2000, the Supreme Court
      of Pennsylvania entered an Order staying the Order of the Court of Common
      Pleas of York County.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-32

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HANOVER FOODS CORPORATION AND SUBSIDIARIESNotes to Consolidated Financial Statements

Note 10 Commitments
and Contingencies (Contd)

| | On
        November 27, 2000, the Supreme Court of Pennsylvania reversed and remanded
        the Order of the Superior Court issued on December 2, 1998 and, in effect,
        the Order of the Superior Court issued September 12, 2000. In reversing
        the Superior Courts Order, the Supreme Court of Pennsylvania held
        that John A. Warehime, the trustee of the voting trust, did not breach
        his fiduciary duties in voting the trust shares in favor of the Amended
        and Restated Articles of Incorporation. The Supreme Court remanded the
        case to the Superior Court of Pennsylvania to consider other issues raised
        by Michael A. Warehime. On September 17, 2002, the Supreme Court of Pennsylvania
    granted defendants petition for Allowance of Appeal.                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | On
          May 4, 2001, the Superior Court of Pennsylvania, on remand from the
          Supreme Court of Pennsylvania to decide several remaining issues, held
          that the 1997 amendments to the Corporations Amended and Restated
          Articles of Incorporation violated principles of corporate democracy and
          should be invalidated even though the Superior Court found the directors
          acted in good faith and their actions in approving the amendments did
          not result in a breach of their fiduciary duties. A petition for allocatur
          was filed with the Supreme Court of Pennsylvania requesting that the
          Supreme Court of Pennsylvania review the Superior Courts May
          4, 2001 ruling. On September 17, 2002, the Supreme Court of Pennsylvania
          granted the petition for allocatur and oral argument was heard in the
          matter on May 13, 2003.                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | On
        December 12, 2002, Michael Warehime filed an Emergency Application for
        Expedited Relief with the Pennsylvania Supreme Court in theWarehime
        v. Warehimeappeal
        concerning the election of directors noticed for December 23, 2002. The
        Pennsylvania Supreme Court denied Michael Warehimes emergency application
    on December 20, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | On
          December 12, 2002, Michael Warehime filed a Motion for Relief under
          theWarehimev.Schaiercaption
          in the York County Court of Common Pleas. Michael Warehimes motion
          requested,interalia,that
          Hanover Foods Corporations December 23, 2002 election be conducted
          according to the Articles of Incorporation as they existed prior to
          June 25, 1997. Following a hearing on December 20, 2002, the York County
          Court of Common Pleas denied Michael Warehimes Motion for Relief.
          On January 17, 2003 Michael Warehime appealed the Courts denial
          of his Motion for Relief to the Superior Court of Pennsylvania. Oral
          argument was heard in this matter before the Superior Court of Pennsylvania
          on January 13, 2004. On April 22, 2004, the Superior Court of Pennsylvania
          issued a memorandum reversing the December 22, 2002 decision by the
          York Court of Common Pleas and remanding for further proceedings.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The
        Corporation is involved in various other claims and legal actions arising
        in the ordinary course of business. In the opinion of management, the
        ultimate disposition of these matters will not have a material adverse
        effect on the Corporations consolidated financial position, results
    of operations or liquidity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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HANOVER FOODS CORPORATION AND SUBSIDIARIESNotes to Consolidated Financial Statements

Note 10 Commitments
and Contingencies (Contd)

| | (c) | Stock Repurchase Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | Sixty-six
      (66) shares of the Companys Class A Common Stock were repurchased
      under the plan for the fiscal year ended May 30, 2004. The Company has
      agreed to purchase the Companys Class A Common Stock purchased or
      owned by employees prior to April 20, 1988 at appraised value. This guarantee
      of repurchase by the Company is for an indefinite period of time. No shares
      were repurchased under this plan for the year ended June 1, 2003. As of
      May 30, 2004, there are 8,983 shares outstanding that would be eligible
      for this plan. The maximum commitment, if requested, for all eligible shares
      would be approximately $1,051,000 based on the most recent appraised value
    per share as of March 31, 2004.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (d) | Sales and Lease Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | In
      February 2004, the Company entered into a Lease Agreement and Tomato Paste
      Purchase Agreement to lease the Colusa plant for three (3) years beginning
      July 1, 2004 and to purchase 6 million pounds of tomato paste on a cost
      basis formula from the lessee during the second through sixth year of the
      agreement The Company expects to use this annual purchase commitment through
    normal operations.                                                                                                                                                                                                                                                                                                                                      

Note 11 Foreign
Operations

The
    Companys
      foreign subsidiary, Mayapac, S.A. produces food products in Guatemala,
    which are sold to Sunwise Corporation in the United States. The revenues
    generated
      by the operations in Guatemala and the assets employed in generating those
revenues are as follows:


| |                    | May 30, |            | June 1, |   | June 2,    | 
| | ------------------ | ------- | ---------- | ------- | - | ---------- | 
| |                    | 2004    |            | 2003    |   | 2002       | 
| |                    |         |            |         |   |            | 
| | Revenues           | $       | 20,539,000 |         | $ | 19,072,000 | 
| | Cost of goods sold |         | 18,324,000 |         |   | 16,911,000 | 
| | Assets             |         | 12,459,000 |         |   | 9,964,000  | 

Maya Pac maintains
    its accounting records in quetzals. For financial reporting purposes the
    U.S. dollar is considered the functional currency. The financial statements
    of MAYAPAC, S.A. have been translated to their U.S. dollar equivalents prior
    to being consolidated. Assets and liabilities have been translated to their
    U.S. dollar equivalents based on rates of exchange prevailing at the end
    of the period except for inventories, fixed assets, deferred and prepaid
    expenses, and other assets, which have been translated at historical rates.
    Revenue and expense accounts have been translated at average exchange rates
    during the period except for depreciation of fixed assets, which is based
    on the historical rate. The aggregate exchange gains and losses arising from
    the translation of foreign assets and liabilities and from foreign currency
    transactions are included in income under the caption of Other income  net,
    and amount to a loss of $115,000, $15,000, and $178,000, or the years ended
    May 30, 2004, June 1, 2003, and June 2, 2002, respectively. At May 30, 2004
the prevailing exchange rate was Q 8.0 to U.S. $1.00.


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HANOVER FOODS CORPORATION AND SUBSIDIARIESNotes to Consolidated Financial Statements

Note 12 Reconciliation
of Numerator and Denominator for Basic and Diluted Earnings per Share

| |                                         | Year
    Ended   |            | Year
    ended   |   | Year
    ended   | 
| | --------------------------------------- | ---------------- | ---------- | ---------------- | - | ---------------- | 
| |                                         | May
    30, 2004 |            | June
    1, 2003 |   | June
    2, 2002 | 
| |                                         |                  |            |                  |   |                  | 
| | Numerator for basic earnings per share: |                  |            |                  |   |                  | 
| | Net earnings applicable to              |                  |            |                  |   |                  | 
| | Common stock                            | $                | 11,400,000 |                  | $ | 9,833,000        | 
| | Effect of dilutive securities:          |                  |            |                  |   |                  | 
| | 8 1⁄4% cumulative convertible             |                  |            |                  |   |                  | 
| | Preferred stock                         |                  | 30,000     |                  |   | 30,000           | 
| | 4.40% cumulative convertible            |                  |            |                  |   |                  | 
| | Preferred stock                         |                  | 11,000     |                  |   | 11,000           | 
| |                                         |                  |            |                  |   |                  | 
| | Net earnings assuming dilution          | $                | 11,441,000 |                  | $ | 9,874,000        | 
| |                                         |                  |            |                  |   |                  | 
| |                                         |                  |            |                  |   |                  | 
| | Denominator:                            |                  |            |                  |   |                  | 
| | Basic weighted-average shares           |                  | 994,848    |                  |   | 720,684          | 
| | Effect of dilutive securities:          |                  |            |                  |   |                  | 
| | 8 1⁄4% cumulative convertible             |                  |            |                  |   |                  | 
| | Preferred stock                         |                  | 3,422      |                  |   | 3,066            | 
| | 4.40% cumulative convertible            |                  |            |                  |   |                  | 
| | Preferred stock                         |                  | 10,000     |                  |   | 10,000           | 
| |                                         |                  |            |                  |   |                  | 
| | Diluted weighted-average shares         |                  | 1,008,270  |                  |   | 733,750          | 
| |                                         |                  |            |                  |   |                  | 
| | Basic earnings per share                | $                | 11.46      |                  | $ | 13.64            | 
| | Diluted earnings per share              |                  | 11.35      |                  |   | 13.46            | 
| |                                         |                  |            |                  |   |                  | 

Stock options of 13,500 shares in 2002 are not included in the earnings per share computation as their effect would have been anti-dilutive.

Note 13 Statement
of Cash Flow Information

| |                                           | Year
    Ended   |           | Year
    Ended   |   | Year
    Ended   | 
| | ----------------------------------------- | ---------------- | --------- | ---------------- | - | ---------------- | 
| |                                           | May
    30, 2004 |           | June
    3, 2003 |   | June
    2, 2002 | 
| |                                           |                  |           |                  |   |                  | 
| | Supplemental disclosure of cash paid for: |                  |           |                  |   |                  | 
| | Interest                                  | $                | 2,404,858 |                  | $ | 2,874,000        | 
| | Income taxes                              |                  | 6,686,000 |                  |   | 5,004,000        | 
| |                                           |                  |           |                  |   |                  | 

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QUARTERLY
  FINANCIAL DATA

|                                                    |  |                     |        |                      |   |        |                     |   |        |                      |  
|--------------------------------------------------- |  | ------------------- | ------ | -------------------- | - | ------ | ------------------- | - | ------ | -------------------- | -
|Dollars
      in thousands
      (except per share) |  | First
      quarter |        | Second
      Quarter |   |        | Third
      quarter |   |        | Fourth
      quarter |  
|                                                    |  |                     |        |                      |   |        |                     |   |        |                      |  
|2004                                                |  |                     |        |                      |   |        |                     |   |        |                      |  
|Net sales                                           |  | $                   | 66,900 |                      | $ | 84,223 |                     | $ | 83,009 |                      | $
|Gross profit                                        |  | $                   | 9,639  |                      | $ | 13,568 |                     | $ | 11,443 |                      | $
|Net earnings                                        |  | $                   | 1,812  |                      | $ | 4,306  |                     | $ | 2,351  |                      | $
|Net earnings
      per common share  Basic         |  | $                   | 2.49   |                      | $ | 4.43   |                     | $ | 2.19   |                      | $
|Net earnings
      per common share  Diluted       |  | $                   | 2.46   |                      | $ | 4.39   |                     | $ | 2.17   |                      | $
|Cash Dividends
      per common share               |  | $                   | .275   |                      | $ | .275   |                     | $ | .275   |                      | $
|                                                    |  |                     |        |                      |   |        |                     |   |        |                      |  
|2003                                                |  |                     |        |                      |   |        |                     |   |        |                      |  
|Net sales                                           |  | $                   | 63,427 |                      | $ | 79,897 |                     | $ | 73,161 |                      | $
|Gross profit                                        |  | $                   | 10,340 |                      | $ | 12,770 |                     | $ | 12,504 |                      | $
|Net earnings                                        |  | $                   | 1,772  |                      | $ | 3,682  |                     | $ | 2,354  |                      | $
|Net earnings
      per common share  Basic         |  | $                   | 2.47   |                      | $ | 5.12   |                     | $ | 3.26   |                      | $
|Net earnings
      per common share  Diluted       |  | $                   | 2.43   |                      | $ | 5.05   |                     | $ | 3.22   |                      | $
|Cash Dividends
      per common share               |  | $                   | .275   |                      | $ | .275   |                     | $ | .275   |                      | $
|                                                    |  |                     |        |                      |   |        |                     |   |        |                      |  

MARKET
  FOR THE REGISTRANTS COMMON EQUITY AND RELATED
  STOCKHOLDER MATTERS

Although the Corporations Class B Common Stock is currently quoted on the OTC Bulletin Board under the symbol HNFSB and the Corporations Class A Common Stock is currently on the OTC Bulletin Board under the symbol HNFSA trading in the Class B and Class A Common Stock is very sporadic. As a result of the limited market for Class B and Class A Common Stock, shareholders are cautioned not to place undue reliance on bid prices contained herein as indicators of the true value of the shares of Class B Common and Class A Common Stock.


The following table sets forth the high and low bid prices per share of the Class A Common Stock on a quarterly basis of the past two fiscal years as provided by NASDAQ, as well as dividends paid per share. Over-the-Counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.


|                        |  | Class
      A Common Stock |       | Class
      B Common Stock |  
|----------------------- |  | -------------------------- | ----- | -------------------------- | -
|                        |  |                            |       |                            |  
|Quarter
      Ended     |  | High                       |       | Low                        |  
|                        |  |                            |       |                            |  
|September
      1, 2002 |  | $                          | 53.00 |                            | $
|December
      1, 2002  |  | $                          | 50.75 |                            | $
|March 2,
      2003     |  | $                          | 52.75 |                            | $
|June 1,
      2003      |  | $                          | 61.00 |                            | $
|August 31,
      2003   |  | $                          | 70.50 |                            | $
|November
      30, 2003 |  | $                          | 75.00 |                            | $
|February
      29, 2004 |  | $                          | 94.00 |                            | $
|May 30,
      2004      |  | $                          | 95.00 |                            | $

Class B Common
  Stock started being listed on the Bulletin Board as of October 3, 2002. Therefore
  information for the high and low bid prices per shares of Class B Common Stock
  for the quarter ended December 1, 2002 is available only starting from October
  9, 2002.


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As of August 11, 2004, there were 334 record holders of the Class A Common Stock and there were 43 record holders and approximately 495 beneficial holders of Class B Common Stock.


The Company has agreed to purchase the Corporations Class A Common Stock purchased or owed by employees prior to April 20, 1988 at appraised value. The appraised value is determined by an independent appraiser on a quarterly basis. This guarantee of purchase is for an indefinite period of time.


Issuer
  Purchases of Equity Securities

|Period                      |  | (a)
      Total number of
      Shares (or units)
      Purchased |  | (b)
      Average Price Paid
      per Shares (or Unit) |           | (c)
      Total Number of
      Shares (or Units)
      Purchased as Part of 
      Publicly Announced 
      Plans or Programs |      | (d)
      Maximum Number
      (or Approximate Dollar
      Value) of Shares (or 
      Units) that May Yet be 
      Purchased Under the 
      Plans or Programs
|--------------------------- |  | ----------------------------------------------------------------- |  | ------------------------------------------------------- | --------- | ------------------------------------------------------------------------------------------------------------------------------- | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                            |  |                                                                   |  |                                                         |           |                                                                                                                                 |      |                                                                                                                                                                   
|February
      1  28, 2004 |  | 44                                                                |  | $                                                       | 114/share |                                                                                                                                 | None |                                                                                                                                                                   
|April 1
       30, 2004    |  | 22                                                                |  | $                                                       | 114/share |                                                                                                                                 | None |                                                                                                                                                                   
|                            |  |                                                                   |  |                                                         |           |                                                                                                                                 |      |                                                                                                                                                                   
|Total                       |  | 66                                                                |  | $                                                       | 114/share |                                                                                                                                 | None |                                                                                                                                                                   
|                            |  |                                                                   |  |                                                         |           |                                                                                                                                 |      |                                                                                                                                                                   

DIVIDEND POLICY

The Corporation has maintained a policy of paying a quarterly dividend of $0.275 per share for both Class A and Class B Common Stock. The continuing payment by the Corporation of dividends in the future is at the sole discretion of its Board of Directors and will depend, among other things, upon the Corporations earnings, its capital requirements and financial condition, restrictive covenants in the Corporations credit facilities, as well as other relevant factors.


CHANGES
  IN AND DISAGREEMENTS WITH ACCOUNTANTS
  ON ACCOUNTING AND FINANCIAL DISCLOSURE

On December 16, 2003, the audit committee of the Company engaged BDO Seidman, LLP as the Companys independent auditor to audit the Companys consolidated financial statements for the year ending May 30, 2004. KPMG LLP who had been engaged by the Company as the independent accountants to audit the Companys consolidated financial statements was dismissed effective December 16, 2003. The decision to change the Companys independent accountants from KPMG LLP to BDO Seidman, LLP was approved by the audit committee of the Board of Directors.


The reports of KPMG LLP, on the financial statements of the Company during the two-year period ended June 1, 2003, did not contain an adverse opinion, or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope, or accounting principles.  During the two-year period ended June 1, 2003, and interim period from June 1, 2003 through December 16, 2003, the Company did not have any disagreements with KPMG LLP, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG LLP, would have caused it to make a reference to the subject matter of the disagreements in connection with its reports.


F-37

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ANNUAL AND OTHER REPORTS

The Corporation is required to file an annual report on Form 10-K for its fiscal year ended May 30, 2004 with the Securities and Exchange Commission. Copies of the Form 10-K annual report, including exhibits, and the Corporations quarterly reports may be obtained without charge by contacting:


| | Gary T. Knisely Executive
        Vice President, Secretary, Counsel
        Hanover Foods Corporation
        1486 York Street
        P.O. Box 334
        Hanover, PA 17331 717-632-6000
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





F-38

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OFFICERS AND BOARD OF DIRECTORS

---

OFFICERS

JOHN A. WAREHIMEChairman,
President & Chief Executive Officer

|GARY T. KNISELY, ESQ.    | PIETRO
    D. GIRAFFA, JR.   | STEVEN E. ROBERTSON
|------------------------ | ---------------------------- | -------------------
|Chief Financial Officer  | Chief Accounting
    Officer | Treasurer          
|Executive Vice President | Vice President  Controller  |                    
|Secretary, Counsel       |                              |                    
|                         |                              |                    

|ALAN T. YOUNG                                        | DANIEL E. SCHUCHART    
|---------------------------------------------------- | -----------------------
|Senior Vice President- Purchasing and Transportation | Vice President of Sales
|                                                     |                        
|BOARD
    OF DIRECTORS                              
|                                                    

|JOHN A. WAREHIME                        | ARTHUR
    S. SCHAIER                        | JAMES A. WASHBURN                    
|--------------------------------------- | -------------------------------------------- | -------------------------------------
|Chairman of the Board                   | President & Chief
    Executive Officer      | Chief Executive Officer              
|Hanover Food Corporation                | Schaier
    Nissan, Schaier Honda            | Park 100 Foods, Inc., a food         
|                                        | Long Beach,
    CA, a retail auto dealership | manufacturing company                
|                                        |                                              | Tipton, IN                           
|                                        |                                              |                                      
|CLAYTON J. ROHRBACH                     | T.
    EDWARD LIPPY                          | CYRIL T. NOEL                        
|Retired Vice President of Marketing CPC | Vice President                               | Retired Vice President of Finance    
|International, a food company           | Lippy Brothers,
    Inc., a farming company  | Hanover Foods Corporation            
|Englewood Cliffs, NJ                    | Hampstead,
    MD                            |                                      
|                                        |                                              |                                      
|JAMES G. STURGILL, CPA, CVA             | JENNIFER
    W. CARTER                       | T. MICHAEL HAUGH                     
|Managing Partner                        | Retired
    Assistant to the Chairman        | President                            
|Sturgill & Associates LLP,              | Hanover
    Foods Corporation                | Hospitality Management Corporation, a
|an accounting firm, Westminster, MD     |                                              | contract food service company        
|                                        |                                              | Abbottstown, PA                      



---





|EXECUTIVE
    OFFICES                                                                    | CERTIFICATE
    TRANSFER MAIL                                                     
|---------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------
|1486 York
    Street, P.O. Box 334, Hanover, PA 17331-0334                               | MELLON
    INVESTORS SERVICES, L.L.C.                                             
|(717) 632-6000                                                                           | Securities
    Transfer Services                                                  
|                                                                                         | P.O. Box
    3300                                                                 
|SHAREHOLDER
    INQUIRIES                                                                | South Hackensack,
    NJ 07606-1910                                               
|Shareholder
    inquiries should be directed to the following
    offices and addresses. | NOTE: It
    is recommended that all certificates be sent via
    registered mail.
|All telephone
    inquiries should be made by using the toll-free                        |                                                                                   
|1-800-756-3353.                                                                          | CERTIFICATE
    TRANSFERS HAND DELIVERIES                                         
|Copies
    of 10-K report are available upon request.                                    | Mellon
    Investors Services, L.L.C.                                             
|                                                                                         | 120 Broadway,
        13thFloor                                                   
|                                                                                         | New York,
    NY 10271                                                            
|SHAREHOLDER
    INQUIRIES ADDRESS CHANGES                                                |                                                                                   
|CONSOLIDATING                                                                            | CLASS
    A COMMON STOCK                                                          
|Hanover
    Foods Corporation                                                            | Class A
    Common Stock are quoted on the OTC bulletin board                     
|P.O. Box
    3316                                                                        |                                                                                   
|South Hackensack,
    NJ 07606-1916                                                      | CLASS
    B COMMON STOCK                                                          
|www.melloninvestor.com                                                                   | Class B
    Common Stock are quoted on the OTC bulletin board.                    
|                                                                                         |                                                                                   
|LOST
    CERTIFICATES CERTIFICATE                                                        | CERTIFIED
    PUBLIC ACCOUNTANTS                                                  
|REPLACEMENT                                                                              | BDO Seidman
    LLP, Bethesda, Maryland                                           
|Mellon
    Investors Services, L.L.C.                                                    |                                                                                   
|Lost Securities
    Department                                                           | LEGAL
    COUNSEL                                                                 
|P.O. Box
    3317                                                                        | Blank Rome
    LLP, Philadelphia, Pennsylvania                                    
|South Hackensack,
    NH 07606-1917                                                      |                                                                                   
|                                                                                         |                                                                                   

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