<PAGE>
                                 [HANOVER LOGO]





                      2002 ANNUAL REPORT TO SHAREHOLDERS
<PAGE>
                                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 six (6) wholly-owned subsidiaries, Tri-Co. Foods
Corp., Consumers Packing Corporation, d/b/a Hanover Foods - Lancaster Division,
Spring Glen Fresh Foods, Inc., Hanover Insurance Corporation, Ltd., Nittany
Corporation and Bickel's Snack Foods, Inc. Tri-Co. Foods Corp. has three (3)
wholly-owned subsidiaries: Alimentos Congelados Monte Bello, S.A., Sunwise
Corporation and Mayapac, S.A.

         The Corporation is a vertically integrated processor of food products
in one industry segment. It 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 enjoys its strongest retail sales in the mid-Atlantic
states and Florida. Introduction of frozen ethnic blends, specialty vegetables,
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 and DRAPER
KING COLE. 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 CONDITION
                           AND 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
result 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, 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 6 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 June 2, 2002 to the year ended
June 3, 2001, and the fiscal year ended June 3, 2001 to the year ended May 28,
2000. The fiscal year


                                       1
<PAGE>
ended June 3, 2001 was comprised of 53 weeks. The fiscal year ended June 2, 2002
and May 28, 2000, were comprised of 52 weeks.

RESULTS OF OPERATIONS

YEAR ENDED JUNE 2, 2002 COMPARED TO YEAR ENDED JUNE 3, 2001

NET SALES

         Consolidated net sales were $290.1 million for fiscal 2002 compared to
$293.5 million for fiscal 2001, a decrease of $3.4 million, or 1.2%. The
decrease in consolidated net sales was comprised of the following volume and
sales price components:

<TABLE>
<CAPTION>
                                VOLUME     SALES PRICE   COMBINED
                                ------     -----------   --------
<S>                             <C>        <C>           <C>
Frozen Foods ..........          (.8)%        (.1)%        (.9)%
Canned Foods ..........         (1.1)%        1.9%          .8%
Prepared/Snack Foods...          (.5)%        (.6)%       (1.1)%
                                ------     -----------   --------
                                (2.4)%        1.2%        (1.2)%
                                ======     ===========   ========
</TABLE>

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

         The decreased volume in canned sales was principally due to a decrease
in retail branded sales due to a planned decrease in price sensitive promotions.
This decrease was partially offset by increases in food service sales. Canned
prices have increased due to a reduction in price sensitive promotion and an
overall increase in dry bean and potato prices during the current fiscal year.

         Prepared and snack foods showed a decrease in sales volume due to the
elimination of non-profitable snack accounts which was planned. The decreased
sales prices in prepared and snack foods were principally due to a change in the
mix of product sold towards private label versus branded products.

COST OF GOODS SOLD

         Consolidated costs of goods sold represents 81.4% of consolidated net
sales for fiscal 2002 compared to 82.8% for fiscal 2001. The consolidated cost
of sales decreased $6.7 million to $236.3 million in fiscal 2002 compared to
$243.0 million for fiscal 2001. The cost of sales decreased $.6 million
primarily due to reduced energy costs and increased plant productivity, and to a
lesser extent, due to a volume reduction of .5% or $6.1 million for fiscal 2002.

SELLING EXPENSES

         Consolidated selling expenses represented 8.1% of consolidated net
sales for fiscal 2002 and 8.4% for fiscal 2001. Promotion expense decreased $1.3
million to $7.4 million for fiscal year 2002 as compared to $8.7 million for
fiscal 2001 as the Corporation spent less dollars to introduce new items in
branded retail.

         In addition to promotion expense, the Corporation spent $1.9 million on
advertising, including $1.2 million relating to coupons for fiscal 2002,
compared to $1.0 million in advertising, including $257,000 for coupons for
fiscal 2001.

         Management intends to continue to direct promotional dollars to gain
additional market share and increase distribution of its brands profitably.


                                       2
<PAGE>
ADMINISTRATIVE EXPENSES

         Consolidated administrative expenses were $14.6 million for fiscal year
2002, or 5.0% of consolidated net sales, as compared to $13.3 million, or 4.5%
of consolidated net sales in 2001. Increased corporate bonus provision and a
charge to earnings for the contribution to the Corporation's Employee Stock
Ownership Plan accounted for the increase in administration expense for the
fiscal year ended June 2, 2002.

INTEREST EXPENSE

         Consolidated interest expenses for fiscal 2002 decreased $1.0 million
to $3.6 million compared to $4.6 million in fiscal 2001. The decrease reflects
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 $763,000 to $371,000 for fiscal
2002 as compared to other income of $1,134,000 for fiscal 2001. Increased
foreign exchange losses accounted for $118,000 of the decrease and decreased
gains on the sales of investments accounted for $511,000 of the decrease.

INCOME TAXES

         The provision for corporate federal, foreign and state income tax for
fiscal year 2002 was $5.1 million or 41.3% of pretax earnings, as compared to
$2.5 million or 27.3% of pretax earnings for 2001. The increase in the effective
rate was primarily due to income earned in Guatemala that was subject to income
taxes in the current year resulting from the expiration of an export tax
exemption and related adjustment of tax accruals for these taxes. Prior to March
31, 2001, the Corporation's Guatemalan subsidiary Alimentos Congelados Monte
Bello S.A. was generally not subject to income taxes.

NET EARNINGS

         Consolidated net earnings for fiscal year 2002 were $7.3 million, or
2.5% of consolidated net sales as compared to $6.7 million or 2.3% of
consolidated net sales for fiscal 2001 as a result of the factors discussed
above.

YEAR ENDED JUNE 3, 2001 RESULTS OF OPERATIONS COMPARED TO YEAR ENDED
MAY 28, 2000

NET SALES

         Consolidated net sales were $293.5 million for fiscal 2001 compared to
$277.3 million for fiscal 2000, an increase of $16.2 million, or 5.8%. The
increase in consolidated net sales was comprised of the following volume and
sales price components:

<TABLE>
<CAPTION>
                                VOLUME     SALES PRICE   COMBINED
                                ------     -----------   --------
<S>                             <C>        <C>           <C>
Frozen Foods ..........          1.4%         (.8)%         .6%
Canned Foods ..........         (1.3)%         .9%         (.4)%
Prepared/Snack Foods...          6.9%        (1.3)%        5.6%
                                ------     -----------   --------
                                 7.0%        (1.2)%        5.8%
                                ======     ===========   ========
</TABLE>

         The increased volume in frozen sales was principally due to an increase
in sales of frozen mushrooms to industrial customers. This increase in volume
was partially offset by a decrease in branded retail frozen sales. Frozen foods
prices have remained relatively consistent with the prior fiscal year.

         The decreased volume in canned sales was principally due to lower
private label sales levels. Canned prices have remained consistent with the
prior fiscal year.


                                       3
<PAGE>
         Prepared and snack foods showed an increase in sales attributed to
sales of York Foods, Inc., York Snacks, Inc. and Bon Ton Foods, Inc. acquired in
January 2000. The decreased sales prices in prepared foods were principally due
to a change in the mix of product toward private label sales versus branded
products.

COST OF GOODS SOLD

         Consolidated cost of goods sold represents 82.8% of consolidated net
sales for fiscal 2001 compared to 81.2% for fiscal 2000. The consolidated cost
of sales increased $17.7 million to $243.0 million in fiscal 2001 compared to
$225.3 million for fiscal 2000. The addition of York Foods, Inc., York Snacks,
Inc., and Bon Ton Foods, Inc. in January 2000 accounted for $13.6 million of the
dollar increase. Increases in energy, employee health benefits, frozen storage
and wages accounted for the remaining dollars and also the increase in cost of
goods sold as a percentage of net sales for fiscal 2001 compared to fiscal 2000.

SELLING EXPENSES

         Consolidated selling expenses represented 8.4% of consolidated net
sales for fiscal 2001 and 7.8% for fiscal 2000. Promotion expenses which are not
price sensitive increased $1.7 million to $9.2 million for fiscal year 2001 as
compared to $7.5 million for fiscal 2000 as the corporation spent additional
promotion dollars to maintain market share in frozen brands and to launch a new
retail frozen product line during the second quarter of fiscal 2001.

         In addition to promotion expense, the Corporation spent $1.0 million on
advertising, including $257,000 relating to coupons for fiscal 2001, compared to
$703,000 in advertising, including $52,000 for coupons for fiscal 2000.

         The Corporation also spent an additional $2.1 million in selling
expenses due to the acquisition of York Foods, Inc., York Snacks, Inc. and Bon
Ton Foods, Inc. in January 2000.

ADMINISTRATIVE EXPENSES

         Consolidated administrative expenses were $13.3 million for fiscal year
2001 or 4.5% of consolidated net sales, as compared to $13.2 million, or 4.8% of
consolidated net sales in 2000. The consolidation of administrative functions
among all divisions and reduced corporate bonuses contributed to the decrease in
these expenses as a percentage of sales.

INTEREST EXPENSE

         Consolidated interest expenses for fiscal 2001 increased $.6 million to
$4.6 million compared to $4.0 million in fiscal 2000. The increase was due to
additional borrowing during the period to cover inventory increases and plant
acquisitions.

OTHER INCOME (EXPENSE)

         Consolidated other income increased $749,000 to $1.1 million for fiscal
2001 as compared to other income of $385,000 for fiscal 2000. Decreased foreign
exchange losses accounted for $255,000 of the increase and increased gains on
the sales of investments accounted for $474,000 of the increase.

INCOME TAXES

         The provision for corporate federal and state income tax for fiscal
year 2001 was $2.5 million or 27.3% of pretax earnings, as compared to $5.0
million or 36.8% of pretax earnings for 2000. The decrease in the effective rate
was primarily due to increased earnings, that were not subject to income taxes,
in foreign jurisdictions during fiscal 2001 as compared to fiscal 2000.


                                       4
<PAGE>
NET EARNINGS

         Consolidated net earnings for fiscal year 2001 were $6.7 million, or
2.3% of consolidated net sales as compared to $8.6 million or 3.1% of
consolidated net sales for fiscal 2000 as a result of the factors discussed
above.

RELATED PARTY TRANSACTIONS

         During fiscal 2002, the Corporation and its subsidiaries, in the normal
course of business, purchase and sell goods and services to related companies.
These transactions are summarized below.

         During fiscal 2002, the Corporation rented equipment from Park 100
Foods, Inc. The rental payments pursuant to such lease agreements totaled
$14,000 during fiscal 2002. In addition, the Corporation purchased $2,000 of
food ingredients from Park 100 Foods, Inc. and reimbursed Park 100 Foods, Inc.
$9,000 for nonconforming food products. As of June 2, 2002, the Corporation had
an accounts receivable of $164,000 from Park 100 Foods, Inc. for food products
sold and shipped to Park 100 Foods, Inc. During fiscal 2002, the Corporation
sold approximately $1.6 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.

         During fiscal 2002, 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 $49,000.

         During fiscal 2002, the Corporation leased a barn for seed storage,
located in Heidelberg Township, Pennsylvania for $4,000 from Warehime
Enterprises, Inc. In addition, the Corporation purchased used food processing
equipment for $77,000 from Warehime Enterprises, Inc. J. William Warehime, a
shareholder of the Corporation, and John A. Warehime, Chairman of the
Corporation, own 44.4% and 14.8% of the outstanding stock of Warehime
Enterprises, Inc., respectively.

         During fiscal 2002, the Corporation purchased $1.2 million contracted
vegetables from Lippy Brothers, Inc. T. Edward Lippy, a director of the
Corporation, owns approximately 37.0% of the outstanding stock of Lippy
Brothers, Inc.

         During fiscal 2002, the adult children of the Corporation's Chairman,
John Warehime, were employed by the Corporation, including Jennifer Carter,
Director, who is employed as Assistant to the Chairman, Jeffrey Warehime, who is
employed as Director - Brokered Retail Sales, and Andrew Warehime, who is
employed as Special Sales Manager. Jennifer Carter, Jeffrey Warehime and Andrew
Warehime are employed by the Corporation at annual salaries of $89,606, $95,067,
$60,319, respectively. Ms. Carter also receives director compensation customary
for the Corporation's directors. 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. 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
$45,000.

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 $36.5 million at June 2, 2002 and $6.8 million
at June 3, 2001. The current ratio was 1.64 on June 2, 2002 and 1.08 on June 3,
2001.

         Net cash provided by operations for the fiscal year ended June 2, 2002
was $19.0 million, compared to $10.8 million, for the fiscal year ended June 2,
2001. Sources of net cash provided by operations consisted principally of net
earnings of $7.3 million and non-cash depreciation and amortization expense of
$9.4 million and


                                       5
<PAGE>
increases in accounts payable and accrued expenses of $1.2 million. The use of
net cash for operations consisted primarily of increased inventory of $.3
million and increased prepaid expenses of $.6 million.

         Net cash provided by operations for the fiscal year ended June 3, 2001
was $10.8 million, compared to $11.6 million for the fiscal year ended May 28,
2000. Sources of net cash provided by operations consisted principally of net
earnings of $6.7 million and non-cash depreciation and amortization expense of
$8.6 million. The use of net cash for operations consisted primarily of
increased inventory of $2.1 million and decreased accounts payable and accrued
expenses of $2.3 million.

         Net cash used by investing activities for the fiscal year ended June 2,
2002 was $6.9 million as compared to $13.2 million for fiscal year ended June 3,
2001. The principal use of funds was the upgrade of property, plant and
equipment. During the year ended June 2, 2002, $6.8 million was spent on
development and modernization of equipment as compared to $13.6 million in the
fiscal year ended June 3, 2001. These projects were funded by internally
generated funds. The Corporation also used operating leases to meet other
equipment needs. The lease expense for the fiscal year ended June 2, 2002 was
$3.0 million, a decrease of $261,000 from the fiscal year ended June 3, 2001.

         Net cash used by investing activities for the fiscal year ended June 3,
2001 was $13.2 million as compared to $16.8 million for the fiscal year ended
May 28, 2000. The principal use of funds was the upgrade and acquisition of
property, plant and equipment. During the year ended June 3, 2001, $13.6 million
was spent on development and modernization of equipment as compared to $14.2
million in the fiscal year ended May 28, 2000. These projects were funded by
internally generated funds and short-term debt, the Corporation also used
operating leases to meet other equipment needs. The lease expense for the fiscal
year ended June 3, 2001 was $3.3 million, an increase of $560,000 from the
fiscal year ended May 28, 2000.

         Net cash used by financing activities was $11.1 million for the fiscal
year ended June 2, 2002, compared to cash used by financing activities of $2.8
million for the fiscal year ended June 3, 2001. Seasonal borrowing decreased
$33.3 million as of June 2, 2002 compared to June 3, 2001. As of September 1,
2001, the Corporation entered in the Note Purchase Agreement with a group of
lenders led by John Hancock Insurance Company (the "Lenders") and issued 7.01%
Senior Notes (the "Notes") due September 15, 2011 in the aggregate principal
amount of $25.0 million to the Lenders. The Corporation is required to make a
prepayment of $2.5 million of the principal amount of the Notes on September 15,
2002 and on each September 15 thereafter to and including September 15, 2011. In
the event of any change of control of the Corporation, the Corporation has an
obligation to prepay the Notes in the amount equal to 100% of the outstanding
principal amount of the Notes and accrued interest thereon, together with a
premium equal to the applicable Make-Whole Amount, as defined in the Note
Purchase Agreement. The Note Purchase Agreement contains certain limitations on
the Corporation's ability to enter into merger agreements, incur debt, sell its
assets, other than in the ordinary course of business. The Corporation received
$25.0 million on September 1, 2001 from proceeds for the Notes. Payments on
long-term debt were $1.8 million. The weighted average cost of seasonal
borrowing was 4.02% for the fiscal year ended June 2, 2002 compared to 6.53% for
the fiscal year ended June 3, 2001.

         Net cash used by financing activities was $2.8 million for the fiscal
year ended June 3, 2001, compared to cash provided by financing activities of
$9.9 million for the fiscal year ended May 28, 2000. Seasonal borrowings
amounting $357.5 million were used throughout the fiscal year to fund operating
needs. Seasonal borrowing decreased $52,000 as of June 3, 2001 compared to May
28, 2000. Payments on long-term debt were $1.8 million. The weighted average
cost of seasonal borrowing was 6.53% for the fiscal year ended June 3, 2001
compared to 7.02% for the fiscal year ended May 28, 2000.

                                       6
<PAGE>
         At June 2, 2002, the Corporation has 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. Based on the requirements of the
agreements at June 2, 2002, $30,003,000 of retained earnings are restricted from
distribution. The Corporation is in compliance with the restrictive provisions
in the agreements as of June 2, 2002.

         The Corporation paid dividends of $984,000 during fiscal 2002 compared
to $866,000 in fiscal 2001.

         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 June 2, 2002:

<TABLE>
<CAPTION>
                                                                                    PAYMENT DUE BY PERIOD
                                                                                    ---------------------
                                                                                                                      AFTER
  CONTRACTUAL OBLIGATION                   TOTAL             1 YEAR             2-3 YEARS          4-5 YEARS         5 YEARS
  ----------------------                   -----             ------             ---------          ---------         -------
<S>                                    <C>                <C>                <C>                <C>                <C>
Short-Term Notes Payables .....        $18,987,000        $18,987,000               $-0-               $-0-               $-0-
Long-Term Debt ................         33,940,000          4,297,000          8,572,000          8,572,000         12,499,000
Operating Leases ..............            978,000            475,000            394,000            109,000                -0-
                                       -----------        -----------        -----------        -----------        -----------
Total contractual obligations..        $53,905,000        $23,759,000        $ 8,966,000        $ 8,681,000        $12,499,000
                                       ===========        ===========        ===========        ===========        ===========
</TABLE>

         Currently, the Corporation is obligated to purchase 6,000,000 pounds of
tomato paste from California Tomato Products, Colusa, California in each of the
fiscal years from 2003 through 2006, at a price based on annual cost of
production.

         The Corporation's sources of liquidity are primarily funds from
operation and available amounts under seasonal lines of credit expiring (two on
October 31, 2003 and one on January 28, 2003), 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 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.

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


                                       7
<PAGE>
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 $33.9 million of unsecured senior notes payable, $8.9 million bears
interest at an 8.74% fixed rate and is due in 2007, $25.0 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):

<TABLE>
<CAPTION>
                                                                                                                     FAIR
                                      2003       2004       2005       2006       2007     THEREAFTER    TOTAL       VALUE
                                      ----       ----       ----       ----       ----     ----------    -----       -----
<S>                                 <C>         <C>        <C>        <C>        <C>       <C>          <C>         <C>
FIXED RATE
   Unsecured senior notes.......    $ 4,286     $4,286     $4,286     $4,286     $4,286     $12,499     $33,930     $31,625
   Effective interest rate......       7.45%      7.42%      7.37%      7.30%      7.20%       7.01%       7.29%         --
VARIABLE RATE
   Lines of credit..............    $18,987         --         --         --         --          --     $18,987     $18,987
   Effective interest rate......       2.61%        --         --         --         --          --        2.61%         --
</TABLE>

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 2002 in all of its market areas
and management anticipates this competitive environment to continue throughout
fiscal year 2003.

NEW ACCOUNTING STANDARDS

         In July 2001, the FASB issued Statement No. 141, Business Combinations,
and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141
requires that the purchase method of accounting be used for all business
combinations completed after June 30, 2001 and specifies criteria for the
recognition and reporting of intangible assets apart from goodwill. Statement
142 will require that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement 142 will
also require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment. This statement is effective for the Corporation in the
first quarter of fiscal 2003. Adoption of this statement is not expected to have
a material effect on the Corporation's financial statements.

         In August 2001, the FASB issued SFAS No. 144. "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The Statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions", for the disposal of a segment of a business (as
previously defined in that Opinion). The provisions of this Statement are
effective for the Corporation in the first quarter of fiscal 2003. Adoption of
this Statement is not expected to have a material effect on the Corporation's
financial statements.

         In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses the
financial accounting and reporting of expenses related to restructuring
activities initiated after 2002, and applies to costs associated with an exit
activity (including restructuring) or with a disposal of long-lived assets.
Those activities can include eliminating or reducing product lines, terminating
employees and contracts, and relocating plant facilities or personnel. Under
SFAS No. 146, a company will record a liability for a cost associated with an
exit or disposal activity when the liability is incurred and can be measured at


                                       8
<PAGE>
fair value. The provisions of this Statement are effective prospectively for
exit or disposal activities initiated after December 31, 2002. The Corporation
has not determined the impact of adoption of this Statement on future periods.

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.


                                       9
<PAGE>
                         FINANCIAL HIGHLIGHTS FIVE YEARS
                 (IN THOUSANDS EXCEPT SHARE AND PER-SHARE DATA)

<TABLE>
<CAPTION>
                                            JUNE 2,       JUNE 3,       MAY 28,       MAY 30,       MAY 31,
                                             2002          2001          2000          1999          1998
                                             ----          ----          ----          ----          ----
<S>                                        <C>           <C>           <C>           <C>           <C>
Net Sales ...........................      $290,103      $293,503      $277,334      $266,717      $242,996
Earnings before income taxes ........      $ 12,392      $  9,158      $ 13,648      $ 15,443      $ 13,804
Net Earnings ........................      $  7,271      $  6,661      $  8,619      $  9,539      $  8,437
Net Earnings per common share-basic .      $  10.10      $   9.26      $  11.99      $  13.24      $  11.69
Net Earnings per common share-diluted      $   9.97      $   9.15      $  11.82      $  13.03      $  11.62
Basic weighted-average shares .......       716,191       714,565       715,249       716,974       718,712
Diluted weighted-average shares .....       729,577       728,235       729,389       731,895       726,101
Common shares outstanding-year end ..       718,791       714,496       714,670       715,888       717,626
Preferred shares outstanding-year end        24,564        24,724        24,764        25,044        25,044
Working Capital .....................      $ 36,547      $  6,826      $  7,566      $ 10,841      $ 16,799
Property, plant and equipment-net ...      $ 76,639      $ 78,837      $ 73,484      $ 65,992      $ 54,280
Long-term debt ......................      $ 29,643      $  8,940      $ 10,741      $ 12,500      $ 14,359
Stockholders' equity ................      $ 83,991      $ 77,465      $ 72,312      $ 64,454      $ 55,470
Total assets ........................      $179,016      $180,728      $179,512      $157,241      $131,007
Dividend per common share ...........      $   1.10      $   1.10      $   1.21      $  1.265      $   1.10
</TABLE>


                                       10
<PAGE>
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Independent Auditors' Report...............................................  F-2

Consolidated Balance Sheets as of June 2, 2002 and June 3, 2001............  F-3

Consolidated Statements of Earnings for the Years Ended
  June 2, 2002, June 3, 2001, and May 28, 2000.............................  F-5

Consolidated Statements of Comprehensive Income for the
  Years Ended June 2, 2002, June 3, 2001, and  May 28, 2000................  F-6

Consolidated Statements of Cash Flows for the Years Ended
  June 2, 2002, June 3, 2001, and May 28, 2000.............................  F-7

Consolidated Statements of Stockholders' Equity for the
  Years Ended June 2, 2002, June 3, 2001, and May 28, 2000.................  F-8

Notes to Consolidated Financial Statements for the Years
  Ended June 2, 2002, June 3, 2001, and May 28, 2000.......................  F-9



                                      F-1

<PAGE>

                          INDEPENDENT AUDITORS' REPORT



Board of Directors and Stockholders
Hanover Foods Corporation:

We have audited the accompanying consolidated balance sheets of Hanover Foods
Corporation and subsidiaries as of June 2, 2002 and June 3, 2001, and the
related consolidated statements of earnings, comprehensive income, cash flows,
and stockholders' equity for each of the years in the three-year period ended
June 2, 2002. 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 auditing standards generally accepted
in the United States of America. 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 2, 2002 and June 3, 2001 and the results
of their operations and their cash flows for each of the years in the three-year
period ended June 2, 2002, in conformity with accounting principles generally
accepted in the United States of America.



/s/KPMG LLP
Harrisburg, Pennsylvania
July 12, 2002


                                      F-2

<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                          JUNE 2, 2002 AND JUNE 3, 2001

<TABLE>
<CAPTION>
                                                                                                       JUNE 2,           JUNE 3,
                        ASSETS                                                                          2002              2001
                                                                                                    ------------      ------------
<S>                                                                                                 <C>               <C>
Current assets:
        Cash and cash equivalents                                                                   $  2,816,000      $  1,824,000
        Accounts and notes receivable - net of allowance for doubtful
         accounts of $768,000 and $772,000                                                            26,917,000        27,411,000
        Accounts receivable from related parties - net                                                   167,000           115,000
        Inventories:
               Finished goods                                                                         44,933,000        44,387,000
               Raw materials and supplies                                                             16,622,000        16,907,000
        Prepaid expenses                                                                               2,361,000         1,930,000
        Deferred income taxes                                                                            276,000           917,000
                                                                                                    ------------      ------------

Total current assets                                                                                  94,092,000        93,491,000
                                                                                                    ------------      ------------

Property, plant, and equipment - at cost:
        Land and buildings                                                                            52,966,000        52,140,000
        Machinery and equipment                                                                      124,048,000       114,649,000
        Leasehold improvements                                                                           544,000           535,000
                                                                                                    ------------      ------------

                                                                                                     177,558,000       167,324,000

Less accumulated depreciation and amortization                                                       101,749,000        92,924,000
                                                                                                    ------------      ------------

                                                                                                      75,809,000        74,400,000

Construction in progress                                                                                 830,000         4,437,000
                                                                                                    ------------      ------------

                                                                                                      76,639,000        78,837,000
                                                                                                    ------------      ------------

Other assets:
        Intangible assets - less accumulated amortization of
               $3,165,000 and $2,887,000                                                               3,549,000         3,735,000
        Other assets                                                                                   4,736,000         4,665,000
                                                                                                    ------------      ------------

Total assets                                                                                        $179,016,000      $180,728,000
                                                                                                    ============      ============
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      F-3
<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                          JUNE 2, 2002 AND JUNE 3, 2001

<TABLE>
<CAPTION>
                                                                             JUNE 2,             JUNE 3,
       LIABILITIES AND STOCKHOLDERS' EQUITY                                   2002                2001
                                                                         -------------       -------------
<S>                                                                      <C>                 <C>
Current liabilities:
       Accounts payable                                                  $  19,890,000       $  24,062,000
       Notes payable - banks                                                18,987,000          52,328,000
       Accrued expenses                                                     13,189,000           7,835,000
       Current maturities of long-term debt                                  4,297,000           1,801,000
       Income taxes payable                                                  1,182,000             639,000
                                                                         -------------       -------------

Total current liabilities                                                   57,545,000          86,665,000

Long-term debt, less current maturities                                     29,643,000           8,940,000
Deferred income taxes                                                        3,777,000           4,022,000
Other liabilities                                                            4,060,000           3,636,000
                                                                         -------------       -------------

Total liabilities                                                           95,025,000         103,263,000
                                                                         -------------       -------------

Commitments and contingencies (note 10)

Stockholders' equity:
       Series A and B 8-1/4% cumulative convertible preferred stock            776,000             780,000
       Series C cumulative convertible preferred stock                         250,000             250,000
       Common stock, Class A - non-voting                                    8,733,000           8,732,000
       Common stock, Class B - voting                                       15,889,000          15,889,000
       Capital paid in excess of par value                                  15,238,000          15,254,000
       Retained earnings                                                    67,560,000          61,273,000
       Treasury stock, at cost                                              (8,148,000)         (8,148,000)
       Employee Stock trust                                                (16,168,000)        (16,667,000)
       Accumulated other comprehensive income (loss)                          (139,000)            102,000
                                                                         -------------       -------------

       Total stockholders' equity                                           83,991,000          77,465,000
                                                                         -------------       -------------

Total liabilities and stockholders' equity                               $ 179,016,000       $ 180,728,000
                                                                         =============       =============
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       F-4
<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF EARNINGS
            YEARS ENDED JUNE 2, 2002, JUNE 3, 2001, AND MAY 28, 2000

<TABLE>
<CAPTION>
                                                 YEAR                YEAR                YEAR
                                                 ENDED               ENDED               ENDED
                                                JUNE 2,             JUNE 3,             MAY 28,
                                                 2002                2001                2000
                                            -------------       -------------       -------------
<S>                                         <C>                 <C>                 <C>
Net sales                                   $ 290,103,000       $ 293,503,000       $ 277,334,000
Cost of goods sold                            236,267,000         242,989,000         225,294,000
                                            -------------       -------------       -------------
          Gross profit                         53,836,000          50,514,000          52,040,000
Selling expenses                               23,588,000          24,603,000          21,507,000
Administrative expenses                        14,624,000          13,259,000          13,232,000
                                            -------------       -------------       -------------
          Operating profit                     15,624,000          12,652,000          17,301,000
Interest expense                                3,603,000           4,628,000           4,038,000
Other (income) expenses - net                    (371,000)         (1,134,000)           (385,000)
                                            -------------       -------------       -------------
          Earnings before income taxes         12,392,000           9,158,000          13,648,000
Income taxes                                    5,121,000           2,497,000           5,029,000
                                            -------------       -------------       -------------
          Net earnings                          7,271,000           6,661,000           8,619,000
Dividends on preferred stock                       41,000              41,000              43,000
                                            -------------       -------------       -------------
          Net earnings applicable to
          Common stock                      $   7,230,000       $   6,620,000       $   8,576,000
                                            =============       =============       =============
Basic earnings per common share             $       10.10       $        9.26       $       11.99
                                            =============       =============       =============
Diluted earnings per common share           $        9.97       $        9.15       $       11.82
                                            =============       =============       =============
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       F-5
<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
            YEARS ENDED JUNE 2, 2002, JUNE 3, 2001, AND MAY 28, 2000

<TABLE>
<CAPTION>
                                                                     YEAR              YEAR              YEAR
                                                                     ENDED             ENDED             ENDED
                                                                    JUNE 2,           JUNE 3,           MAY 28,
                                                                     2002              2001              2000
                                                                  -----------       -----------       -----------
<S>                                                               <C>               <C>               <C>
Net earnings                                                      $ 7,271,000       $ 6,661,000       $ 8,619,000
                                                                  -----------       -----------       -----------
Other comprehensive income
      Unrealized gain (loss) on securities, net of
                reclassification adjustments (net of taxes
                of $44,000 in 2002 and $88,000 in 2001)              (238,000)         (577,000)          205,000
      Minimum pension liability adjustment (net of
                taxes of $1,000 in 2002 and $35,000 in 2001)           (3,000)          (51,000)               --
                                                                  -----------       -----------       -----------

Other comprehensive income (loss)                                    (241,000)         (628,000)          205,000
                                                                  -----------       -----------       -----------

Comprehensive income                                              $ 7,030,000       $ 6,033,000       $ 8,824,000
                                                                  ===========       ===========       ===========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      F-6
<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
            YEARS ENDED JUNE 2, 2002, JUNE 3, 2001, AND MAY 28, 2000

<TABLE>
<CAPTION>
                                                                       YEAR                YEAR                YEAR
                                                                       ENDED               ENDED               ENDED
                                                                      JUNE 2,             JUNE 3,             MAY 28,
                                                                       2002                2001                2000
                                                                  -------------       -------------       -------------
<S>                                                               <C>                 <C>                 <C>
Cash flows from operating activities:
     Net earnings                                                 $   7,271,000       $   6,661,000       $   8,619,000
     Adjustments to reconcile net earnings to net cash
           provided by operating activities:
              Depreciation and amortization                           9,375,000           8,552,000           7,677,000
              Gain on sale of property, plant, and equipment           (120,000)            (12,000)            (92,000)
              Gain on sale of investments                              (105,000)           (616,000)           (142,000)
              Deferred income taxes                                     396,000            (253,000)            (56,000)
              Non cash charge for ESOP contribution                     480,000                  --                  --
              Change in assets and liabilities:
                 Accounts and notes receivable                          442,000             985,000            (910,000)
                 Inventories                                           (261,000)         (2,102,000)         (4,336,000)
                 Prepaid expenses and other assets                     (649,000)           (520,000)            123,000
                 Accounts payable and accrued expenses                1,182,000          (2,332,000)          1,128,000
                 Income taxes payable                                   543,000            (421,000)         (1,043,000)
                 Other liabilities                                      424,000             837,000             680,000
                                                                  -------------       -------------       -------------
Net cash provided by operating activities                            18,978,000          10,779,000          11,648,000
                                                                  -------------       -------------       -------------
Cash flows from investing activities:
          Purchases of business, net of cash acquired                        --                  --          (4,524,000)
          Purchase of investments                                      (580,000)         (1,553,000)         (1,002,000)
          Sale of investments                                           499,000           1,988,000             810,000
          Acquisitions of property, plant, and equipment             (6,779,000)        (13,645,000)        (14,202,000)
          Proceeds from dispositions of property, plant,
             and equipment                                                   --              30,000           2,123,000
                                                                  -------------       -------------       -------------
Net cash used in investing activities                                (6,860,000)        (13,180,000)        (16,795,000)
                                                                  -------------       -------------       -------------
Cash flows from financing activities:
           Proceeds from notes payable                              212,419,000         357,545,000         321,358,000
           Payment on notes payable                                (245,760,000)       (357,597,000)       (308,607,000)
           Proceeds from issuance of long-term debt                  25,000,000                  --                  --
           Payment on long-term debt                                 (1,801,000)         (1,821,000)         (1,874,000)
           Payment of dividends                                        (984,000)           (866,000)           (908,000)
           Common stock redemptions                                          --             (14,000)            (58,000)
                                                                  -------------       -------------       -------------
Net cash provided by (used in) financing activities                 (11,126,000)         (2,753,000)          9,911,000
                                                                  -------------       -------------       -------------
Net increase (decrease) in cash and cash equivalents                    992,000          (5,154,000)          4,764,000
Cash and cash equivalents, beginning of year                          1,824,000           6,978,000           2,214,000
                                                                  -------------       -------------       -------------
Cash and cash equivalents, end of period                          $   2,816,000       $   1,824,000       $   6,978,000
                                                                  =============       =============       =============
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      F-7
<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
            YEARS ENDED JUNE 2, 2002, JUNE 3, 2001, AND MAY 28, 2000


<TABLE>
<CAPTION>
                                                       CUMULATIVE                 CUMULATIVE
                                                      CONVERTIBLE                CONVERTIBLE
                                                       PREFERRED                  PREFERRED
                                         TOTAL           STOCK                      STOCK                     COMMON
                                      STOCKHOLDERS'     SERIES A                   SERIES C                 STOCK CLASS
                                         EQUITY       AND B SHARES     AMOUNT       SHARES       AMOUNT      A SHARES       AMOUNT
                                      ------------    ------------    --------   ------------   --------   ------------   ----------
<S>                                   <C>             <C>             <C>        <C>            <C>        <C>            <C>
Balance, May 30, 1999 .............   $ 64,454,000          31,536    $788,000         10,000   $250,000        349,210   $8,729,000
                                      ------------    ------------    --------   ------------   --------   ------------   ----------
Net earnings ......................      8,619,000              --          --             --         --             --           --
Cash dividends per share:
    Preferred - $2.0625 annually ..        (43,000)             --          --             --         --             --           --
    Common - $1.21 annually .......       (865,000)             --          --             --         --             --           --
Redemption of common stock -
    Class A 1,066 shares ..........
    Class B 224 shares ............        (58,000)             --          --             --         --             --           --
Stock Conversion ..................             --            (280)     (7,000)            --         --             72        2,000
Other comprehensive income ........        205,000              --          --             --         --             --           --
                                      ------------    ------------    --------   ------------   --------   ------------   ----------
Balance, May 28, 2000 .............   $ 72,312,000          31,256    $781,000         10,000   $250,000        349,282   $8,731,000
                                      ------------    ------------    --------   ------------   --------   ------------   ----------

Net earnings ......................      6,661,000              --          --             --         --             --           --
Cash dividends per share:
    Preferred - $2.0625 annually ..        (41,000)             --          --             --         --             --           --
    Common - $1.10 annually .......       (825,000)             --          --             --         --             --           --
Issuance of common stock to
    Employee Stock Trust
    Class B 142,449 shares ........             --              --          --             --         --             --           --
Redemption of common stock
    Class A 183 shares
    Class B 1 share ...............        (14,000)             --          --             --         --             --           --
Stock Conversion ..................             --             (40)     (1,000)            --         --             10        1,000
Other comprehensive loss ..........       (628,000)             --          --             --         --             --           --
                                      ------------    ------------    --------   ------------   --------   ------------   ----------
Balance, June 3, 2001 .............   $ 77,465,000          31,216    $780,000         10,000   $250,000        349,292   $8,732,000
                                      ------------    ------------    --------   ------------   --------   ------------   ----------


Net earnings ......................      7,271,000
Cash dividends per share:
    Preferred - $2.0625 annually ..        (41,000)             --          --             --         --             --           --
    Common - $1.10 annually .......       (943,000)             --          --             --         --             --           --
Issuance of common stock to
    Employee Stock Ownership Plan
    Class B 4,258 shares ..........        480,000              --          --             --         --             --           --
Stock Conversion ..................             --            (160)     (4,000)            --         --             37        1,000
Other comprehensive loss ..........       (241,000)             --          --             --         --             --           --
                                      ------------    ------------    --------   ------------   --------   ------------   ----------
Balance, June 2, 2002 .............   $ 83,991,000          31,056    $776,000         10,000   $250,000        349,329   $8,733,000
                                      ============    ============    ========   ============   ========   ============   ==========
</TABLE>

<TABLE>
<CAPTION>

                                         COMMON                     CAPITAL PAID
                                       STOCK CLASS                  IN EXCESS OF      RETAINED        TREASURY
                                        B SHARES        AMOUNT        PAR VALUE       EARNINGS      STOCK SHARES      AMOUNT
                                      ------------   ------------   ------------    ------------    ------------   ------------
<S>                                   <C>            <C>            <C>             <C>             <C>            <C>
Balance, May 30, 1999 .............        493,123   $ 12,328,000      2,143,000      47,767,000         142,937   $ (8,076,000)
                                      ------------   ------------   ------------    ------------    ------------   ------------
Net earnings ......................             --             --             --       8,619,000              --             --
Cash dividends per share:
    Preferred - $2.0625 annually ..             --             --             --         (43,000)             --             --
    Common - $1.21 annually .......             --             --             --        (865,000)             --             --
Redemption of common stock -
    Class A 1,066 shares ..........
    Class B 224 shares ............             --             --             --              --           1,290        (58,000)
Stock Conversion ..................             --             --          5,000              --              --             --
Other comprehensive income ........             --             --             --              --              --             --
                                      ------------   ------------   ------------    ------------    ------------   ------------
Balance, May 28, 2000 .............        493,123   $ 12,328,000      2,148,000      55,478,000         144,227   $ (8,134,000)
                                      ------------   ------------   ------------    ------------    ------------   ------------

Net earnings ......................             --             --             --       6,661,000              --             --
Cash dividends per share:
    Preferred - $2.0625 annually ..             --             --             --         (41,000)             --             --
    Common - $1.10 annually .......             --             --             --        (825,000)             --             --
Issuance of common stock to
    Employee Stock Trust
    Class B 142,449 shares ........        142,449      3,561,000     13,106,000              --              --             --
Redemption of common stock
    Class A 183 shares
    Class B 1 share ...............             --             --             --              --             184        (14,000)
Stock Conversion ..................             --             --             --              --              --             --
Other comprehensive loss ..........             --             --             --              --              --             --
                                      ------------   ------------   ------------    ------------    ------------   ------------
Balance, June 3, 2001 .............        635,572   $ 15,889,000   $ 15,254,000    $ 61,273,000         144,411   $ (8,148,000)
                                      ------------   ------------   ------------    ------------    ------------   ------------


Net earnings ......................                                                    7,271,000
Cash dividends per share:
    Preferred - $2.0625 annually ..             --             --             --         (41,000)             --             --
    Common - $1.10 annually .......             --             --             --        (943,000)             --             --
Issuance of common stock to
    Employee Stock Ownership Plan
    Class B 4,258 shares ..........             --             --        (19,000)             --              --             --
Stock Conversion ..................             --             --          3,000              --              --             --
Other comprehensive loss ..........             --             --             --              --              --             --
                                      ------------   ------------   ------------    ------------    ------------   ------------
Balance, June 2, 2002 .............        635,572   $ 15,889,000   $ 15,238,000    $ 67,560,000         144,411   $ (8,148,000)
                                      ============   ============   ============    ============    ============   ============
</TABLE>

<TABLE>
<CAPTION>
                                                                          ACCUMULATED
                                            EMPLOYEE STOCK TRUST             OTHER
                                         -------------------------       COMPREHENSIVE
                                           SHARES         AMOUNT         INCOME (LOSS)
                                         ----------    ------------     --------------
<S>                                      <C>           <C>              <C>
Balance, May 30, 1999 .............              --                     $      525,000
                                         ----------    ------------     --------------
Net earnings ......................              --              --                 --
Cash dividends per share:
    Preferred - $2.0625 annually ..              --              --                 --
    Common - $1.21 annually .......              --              --                 --
Redemption of common stock -
    Class A 1,066 shares ..........
    Class B 224 shares ............              --              --                 --
Stock Conversion ..................              --              --                 --
Other comprehensive income ........              --              --            205,000
                                         ----------    ------------     --------------
Balance, May 28, 2000 .............                                            730,000
                                         ----------    ------------     --------------

Net earnings ......................              --              --                 --
Cash dividends per share:
    Preferred - $2.0625 annually ..              --              --                 --
    Common - $1.10 annually .......              --              --                 --
Issuance of common stock to
    Employee Stock Trust
    Class B 142,449 shares ........         142,449     (16,667,000)                --
Redemption of common stock
    Class A 183 shares
    Class B 1 share ...............              --              --                 --
Stock Conversion ..................              --              --                 --
Other comprehensive loss ..........              --              --           (628,000)
                                         ----------    ------------     --------------
Balance, June 3, 2001 .............         142,449    $(16,667,000)    $      102,000
                                         ----------    ------------     --------------


Net earnings ......................
Cash dividends per share:
    Preferred - $2.0625 annually ..              --              --                 --
    Common - $1.10 annually .......              --              --                 --
Issuance of common stock to
    Employee Stock Ownership Plan
    Class B 4,258 shares ..........          (4,258)        499,000                 --
Stock Conversion ..................              --              --                 --
Other comprehensive loss ..........              --              --           (241,000)
                                         ----------    ------------     --------------
Balance, June 2, 2002 .............         138,191    $(16,168,000)    $     (139,000)
                                         ==========    ============     ==============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-8
<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      (a)   DESCRIPTION OF BUSINESS

            Hanover 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.
            The Company has operations in ten plants in Pennsylvania, one plant
            in Delaware, one plant in Maryland, 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 CONSOLIDATION

            The accompanying consolidated financial statements include the
            accounts of Hanover Foods Corporation 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 - Alimentos Congelados Monte
            Bellos, S.A. (Alcosa), Sunwise Corporation and Mayapac S.A., all of
            which are wholly-owned. During the year ended May 28, 2000, the
            Company purchased certain assets and assumed certain liabilities of
            York Foods, Inc., Bickel's Snack Foods, Inc., York Snacks, Inc., and
            Bon Ton Foods, Inc. which are included as part of Hanover Foods. All
            significant intercompany balances and transactions have been
            eliminated.

      (c)   CONCENTRATION OF CREDIT RISK

            Financial 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%,
            33%, and 28% of the Company's net sales for the years ended June 2,
            2002, June 3, 2001, and May 28, 2000, respectively. The Company's
            ten largest customers account for approximately 32% and 21% of the
            Company's accounts receivable as of June 2, 2002 and June 3, 2001,
            respectively. No single customer accounted for more than 10% of net
            sales for the years ended June 2, 2002, June 3, 2001, and May 28,
            2000.


                                      F-9
<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

      (d)   CASH AND CASH EQUIVALENTS

            Cash equivalents of $618,000 and $728,000 at June 2, 2002 and June
            3, 2001, 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)   INVESTMENTS

            Investments of $3,681,000 and $3,775,000 at June 2, 2002 and June 3,
            2001, respectively, classified as available-for-sale securities, are
            included in other noncurrent assets and measured at fair value. Net
            unrealized gains and losses are reported as a separate component of
            accumulated other comprehensive income (loss) until realized. Net
            unrealized losses were $85,000 at June 2, 2002. Net unrealized gains
            were $153,000 and $730,000 at June 3, 2001 and May 28, 2000,
            respectively.

            The reconciliation of the reclassification adjustments related to
            unrealized gains and losses on securities included in comprehensive
            income for the respective fiscal year are as follows:

<TABLE>
<CAPTION>
                                                                                 2002        2001        2000
                                                                              ---------    --------    --------
<S>                                                                           <C>          <C>         <C>
                 Unrealized holding gains (losses) arising during
                      period...........................................       $(133,000)    (36,000)    347,000
                 Reclassification adjustments for gains included in
                      net income.......................................        (105,000)   (541,000)   (142,000)
                                                                              ---------    --------    --------
                 Net unrealized gain (loss) on securities..............       $(238,000)   (577,000)    205,000
                                                                              =========    ========    ========
</TABLE>

      (f)   FAIR VALUE OF FINANCIAL INSTRUMENTS

            The 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)   INVENTORIES

            Inventories are stated at the lower of cost (determined by average
            cost which approximates the first-in, first-out method) or market.


                                      F-10
<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)


      (h)   PROPERTY, PLANT, AND EQUIPMENT

            Property, 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.

      (i)   INTANGIBLE ASSETS

            The Company amortizes intangible assets, primarily covenants not to
            compete, purchased trademarks and goodwill, over periods ranging
            from 3 to 40 years. The Company assesses the recoverability of
            intangible assets by determining whether the balances can be
            recovered through undiscounted future operating cash flows. The
            amount of impairment, if any, is measured based on projected
            discounted future operating cash flows using a discount rate
            reflecting the Company's average cost of funds. The assessment of
            the recoverability will be impacted if estimated future operating
            cash flows are not achieved.

      (j)   INSURANCE

            The Company, through its wholly-owned insurance subsidiary, is
            self-insured with respect to certain general liability and workers'
            compensation claims. Excess insurance coverage is maintained for
            general liability and workers' compensation claims.

            Outstanding claims include a provision for claims reported as
            advised to the Company by the primary insurer and a provision for
            incurred but not reported claims based upon the advice of the
            primary insurer on the ultimate liability of the Company under the
            reinsurance assumed or, in the absence of such an evaluation, the
            provision is based upon the best estimate of the ultimate liability
            of the Company.

      (k)   INCOME TAXES

            Income taxes are accounted for under the asset and liability method.
            Deferred tax assets and liabilities are recognized for the future
            tax consequences attributable to differences between the financial
            statement carrying amounts of existing assets and liabilities and
            their respective tax bases and operating loss and tax credit
            carryforwards. Deferred tax assets and liabilities are measured
            using enacted tax rates expected to apply to taxable income in the
            years in which those temporary differences are expected to be
            recovered or settled. The effect on deferred tax assets and
            liabilities of a change in tax rates is recognized in income in the
            period that includes the enactment date.


                                      F-11
<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

      (l)   RESEARCH AND DEVELOPMENT

            Research and development costs are expensed as incurred. Research
            and development costs amounted to $600,000, $633,000, and $631,000
            for the years ended June 2, 2002, June 3, 2001, and May 28, 2000,
            respectively.

      (m)   PROMOTIONAL COSTS

            Promotional costs are expensed as incurred. Accounts and notes
            receivable are presented net of allowances for bad debts and
            promotional programs.

      (n)   ADVERTISING COSTS

            Advertising costs are expensed as incurred. Advertising expenses
            amounted to $1,942,000, $1,040,000, and $703,000, for the years
            ended June 2, 2002, June 3, 2001, and May 28, 2000, respectively
            (including manufacturer coupon expense of $1,218,000, $257,000, and
            $52,000, respectively).

      (o)   EARNINGS PER SHARE

            Earnings per share are computed in accordance with Statement of
            Financial Accounting (SFAS) No. 128, Earnings per Share. Basic
            earnings per share excludes dilution and is computed by dividing
            income available to common stockholders by the weighted-average
            number of common shares outstanding for the period. Diluted earnings
            per share reflects the potential dilution that could occur if
            securities or other contracts to issue common stock were exercised
            or converted into common stock or resulted in the issuance of common
            stock that then shared in the earnings of the entity.

      (p)   FISCAL YEAR END

            The Company's fiscal year ends at the close of operations on the
            Sunday nearest to May 31. The fiscal year ended June 3, 2001 was
            comprised of 53 weeks. The fiscal years ended June 2, 2002 and May
            28, 2000, were comprised of 52 weeks.

      (q)   USE OF ESTIMATES

            Management of the Company has made a number of estimates and
            assumptions relating to the reporting of assets, liabilities,
            revenues and expenses, and the disclosure of contingent assets and
            liabilities to prepare these financial statements in conformity with
            generally accepted accounting principles. Actual results could
            differ from those estimates.


                                      F-12
<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

      (r)   NEW ACCOUNTING STANDARDS

            In November 2001, the Emerging Issues Task Force ("EITF") finalized
            Issue No. 01-9 "Accounting for Consideration Given by a Vendor to a
            Customer (Including a Reseller of the Vendor's Products)," which
            codified the matters discussed in Issue No. 00-14, "Accounting for
            Certain Incentives" and Issue No. 00-25, "Vendor Income Statement
            Characterization of Consideration from a Vendor to a Retailer."
            Issue No. 01-9 provides guidance on accounting for certain
            promotional activities, as well as the accounting for certain
            consideration from a vendor to an entity that resells the vendor's
            products. The Company implemented the requirements of this
            pronouncement in the fourth quarter of the year ended June 2, 2002.
            This pronouncement had a significant impact on the manner in which
            certain expenses are recorded in the Company's financial statements.
            Specifically, certain amounts previously reported as selling and
            marketing expense have been reported as a reduction to net sales.
            The effect of Issue No. 01-9 was to reduce net sales and selling and
            marketing expenses by $15,731,000, $24,743,000 and $22,931,000 for
            the years ended June 2, 2002, June 3, 2001 and May 28, 2000,
            respectively.

NOTE 2 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 $18,987,000 was borrowed (including an
            overdraft of $1,054,000) at June 2, 2002 and $52,328,000 was
            borrowed (including an overdraft of $4,128,000) at June 3, 2001. 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 June 2, 2002 and June 3, 2001, was 4.02%
            and 6.53%, respectively. The maximum amount of borrowings
            outstanding under short-term lines of credit at any one time during
            the years ended June 2, 2002, June 3, 2001, and May 28, 2000, was
            approximately $55,513,000, $53,393,000 and $52,380,000.

NOTE 3 LONG-TERM DEBT

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

<TABLE>
<CAPTION>
                                                            JUNE 2, 2002   JUNE 3, 2001
                                                            ------------   ------------
<S>                                                         <C>            <C>
            8.74% unsecured senior notes payable to
                an insurance company, due through 2007      $  8,929,000   $10,714,000

            7.01% unsecured senior notes payable to
                an insurance company, due through 2011        25,000,000             -

            Other                                                 11,000        27,000
                                                            ------------   -----------

            Total long-term debt                              33,940,000    10,741,000
            Less current maturities                            4,297,000     1,801,000
                                                            ------------   -----------

            Long-term debt, excluding current maturities    $ 29,643,000   $ 8,940,000
                                                            ============   ===========
</TABLE>


                                      F-13
<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3 LONG-TERM DEBT (CONT'D)

The term loan agreements with the insurance company and seasonal borrowing with
financial institutions (note 2), 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. Based on the requirements of the agreements at June 2, 2002,
$30,003,000 of retained earnings are restricted from distribution. The Company
is in compliance with the restrictive provisions in the agreements as of June 2,
2002.

      The aggregate long-term debt maturities follow:

<TABLE>
<CAPTION>
         FOR THE FISCAL YEAR ENDING:
<S>                                              <C>
                 2003                            $ 4,297,000
                 2004                              4,286,000
                 2005                              4,286,000
                 2006                              4,286,000
                 2007                              4,286,000
                 Thereafter                       12,499,000
                                                 -----------
                 Total                           $33,940,000
                                                 ===========
</TABLE>

NOTE 4 LEASES

      The Company has several noncancelable operating leases, primarily for
      equipment, that expire over the next three 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
      June 2, 2002, June 3, 2001, and May 28, 2000, amounted to $3,042,000,
      $3,303,000, and $2,743,000 respectively.

      Future minimum lease payments under noncancelable operating leases (with
      initial or remaining lease terms in excess of one year) as of June 2, 2002
      are:

<TABLE>
<CAPTION>
                                                        OPERATING
            FOR THE FISCAL YEAR ENDING:                   LEASES
<S>                                                     <C>
                2003                                    $ 475,000
                2004                                      241,000
                2005                                      153,000
                2006                                       81,000
                2007                                       28,000
                                                        ---------
            Total minimum lease payments                $ 978,000
                                                        =========
</TABLE>


                                      F-14
<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 5 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 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 trustees of the Company's 401(k) Savings Plan (or a
      similar employee benefit plan). 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 ceases five (5) years after its issuance in 1998. 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 the fiscal year, 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, the Corporation 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.
      No shares were transferred from the Trust to the ESOP during the fiscal
      year ended June 3, 2001. During the year ended June 2, 2002, the Company
      transferred 4,258 shares of Class B Common Stock to the ESOP. The shares
      had a fair market value of approximately $112 on that date, and
      accordingly, the Company recorded a charge to earnings of approximately
      $480,000.


                                      F-15
<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 5 CAPITAL STOCK (CONT'D)

      The following summarizes the Company's capital stock at June 2, 2002 and
      June 3, 2001:

<TABLE>
<CAPTION>
                                                     JUNE 2, 2002             JUNE 3, 2001
                                                 --------------------     --------------------
                                                  ISSUED  OUTSTANDING      ISSUED  OUTSTANDING
                                                 -------  -----------     -------  -----------
<S>                                              <C>      <C>             <C>      <C>
      Series A  8 1/4% cumulative
          convertible preferred stock - $25
          Par value, 60,000 shares authorized     14,948      6,228        14,948      6,228
      Series B  8 1/4% cumulative
          convertible preferred stock - $25
          Par value, 60,000 shares authorized     16,108      8,336        16,268      8,496
      Series C 4.4% cumulative convertible
          preferred stock - $25 par value,
          10,000 shares authorized                10,000     10,000        10,000     10,000

      Class A nonvoting common stock  -
          $25 par value, 800,000 shares
          authorized                             349,329    288,284       349,292    288,247

      Class B voting common stock  -
          $25 par value, 880,000 shares
          authorized                             635,572    430,507       635,572    426,249
</TABLE>

      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 June 2, 2002, the outstanding
      Series A and B Preferred Stock could be converted into 3,066 shares of
      Class A Common Stock.


                                      F-16
<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6 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:

<TABLE>
<CAPTION>
                                          YEAR ENDED      YEAR ENDED      YEAR ENDED
                                           JUNE 2,          JUNE 3,        MAY 28,
                                             2002            2001            2000
                                          ----------      ----------      ----------
<S>                                       <C>             <C>             <C>
Revenues:
    Park 100 Foods, Inc.                  $1,555,000      $1,800,000      $2,391,000
Corporate charges:
    Snyder's of Hanover, Inc.                     --              --         151,000
Expenditures:
    Lippy Brothers, Inc.                   1,158,000       1,284,000         675,000
    James G. Sturgill                             --          20,000          26,000
    ARWCO Corporation                             --          73,000          13,000
    Warehime Enterprises, Inc.                81,000           4,000           4,000
    John A. and Patricia M. Warehime          49,000          67,000          65,000
    Park 100 Foods, Inc.                      25,000           9,000          54,000
    Schaier Travel                            10,000           8,000           7,000
Accounts receivable:
    Snyder's of Hanover, Inc.                     --              --          26,000
    Park 100 Foods, Inc.                     164,000         121,000          96,000
    Lippy Brothers, Inc.                       3,000              --           7,000
Accounts payable:
    Patricia M. Warehime                          --           5,000              --
    Schaier Travel                                --           1,000              --
</TABLE>

      Included in other assets is a related party receivable of $877,000 in 2002
      and $724,000 in 2001 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 June 2, 2002, June 3,
      2001, and May 28, 2000 was approximately $65,000, $6,000, and $57,000,
      respectively.

      On April 1, 1996, the Company entered into a stock purchase agreement with
      John R. Miller, Jr. to purchase 1,210 shares of the Company's Voting Class
      B Common Stock and 5,990 shares of the Company's Non-voting Class A Common
      Stock over a four-year period. The April 22, 1997 Voting Agreement
      provides that John R. Miller, Jr. will vote all shares of the Company
      Common Stock, which he is entitled to vote as directed by the Board of
      Directors, provided Clayton J. Rohrbach, Jr., Arthur S. Schaier, and Cyril
      T. Noel, or a majority of them, vote in favor of the


                                      F-17
<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6  RELATED PARTY TRANSACTIONS (CONT'D)

      matter to vote all shares of both classes of common stock beginning April
      1, 1996 and ending March 31, 2001. The Company has purchased 1,210 shares
      of the Company's Voting Class B Common Stock for approximately $88,000 and
      5,990 shares of the Company's Non-voting Class A Common Stock for
      approximately $252,000.

      A portion of rental expense included in note 4 was paid to ARWCO
      Corporation; Park 100 Foods, Inc. and Warehime Enterprises, Inc. all of
      which are related companies through common control. The amounts were
      $14,000, $15,000, and $100,000, for the years ended June 2, 2002, June 3,
      2001, and May 28, 2000, respectively.

      During fiscal 2002, the adult children of the Corporation's Chairman, John
      Warehime, were employed by the Corporation, including Jennifer Carter,
      Director, who is employed as Assistant to the Chairman, Jeffrey Warehime,
      who is employed as Director - Brokered Retail Sales, and Andrew Warehime,
      who is employed as Special Sales Manager. Jennifer Carter, Jeffrey
      Warehime and Andrew Warehime are employed by the Corporation at annual
      salaries of $89,606, $95,067, $60,319, respectively. Ms. Carter also
      receives director compensation customary for the Corporation's directors.
      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 $45,000.


NOTE 7  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
            deferral up to 5%. 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 5). The Company's contribution to the
            401(k) plan for the years ended June 2, 2002, June 3, 2001 and May
            28, 2000 was $663,000, $538,000, and $588,000, respectively.

      (b)   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:

<TABLE>
<CAPTION>
                                                                                  June 2,       June 3,
                                                                                   2002          2001
                                                                               -----------    -----------
<S>                                                                            <C>            <C>
            Change in benefit obligation:
               Benefit obligation at beginning of year                         $(3,759,000)   $(3,150,000)
               Service cost                                                       (115,000)       (87,000)
               Interest cost                                                      (347,000)      (253,000)
               Amortization of transition obligation                               (73,000)       (73,000)
               Plan assumptions                                                 (1,078,000)      (236,000)
               Change in plan                                                      546,000             --
               Benefits paid                                                       227,000        174,000
               Other                                                                    --       (134,000)
                                                                               -----------    -----------
                          Benefit obligation at end of year                     (4,599,000)    (3,759,000)
                                                                               -----------    -----------
            Change in plan assets
               Fair value of plan assets at beginning of year                           --             --
               Contributions                                                       227,000        174,000
               Benefits paid                                                      (227,000)      (174,000)
                                                                               -----------    -----------
                          Fair value of plan assets at end of year                      --             --
                                                                               -----------    -----------
            Funded status:
               Unrecognized net (gain) loss                                      1,541,000        459,000
               Unrecognized prior service cost                                     187,000        795,000
               Unrecognized transition liability, amortized over 20 years          861,000        934,000
                                                                               -----------    -----------
               Accrued postretirement benefit cost                             $(2,010,000)   $(1,571,000)
                                                                               ===========    ===========
</TABLE>


                                      F-18
<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      NOTE 7 BENEFIT PLANS (CONT'D)

      A discount rate of 7.25% for June 2, 2002 and June 3, 2001, 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:

<TABLE>
<CAPTION>
                                             YEAR ENDED  YEAR ENDED  YEAR ENDED
                                               JUNE 2,     JUNE 3,     MAY 28,
                                                2002        2001        2000
                                             ---------   ---------   ---------
<S>                                          <C>         <C>         <C>
      Service cost                           $ 115,000   $  87,000    $102,000
      Interest cost                            347,000     253,000     225,000
      Amortization of transition obligation     73,000      73,000      73,000
      Other amortization and deferral          131,000      61,000      61,000
                                             ---------   ---------    --------
                                             $ 666,000   $ 474,000    $461,000
                                             =========   =========    ========
</TABLE>

      The assumed postretirement health care cost trend rate used in measuring
      the accumulated postretirement benefit obligation was 7.0% for fiscal year
      June 2, 2002, decreasing each year to an ultimate rate of 5.0% in 2005 and
      thereafter. 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 June 2, 2002 by
      $868,000 and the aggregate of the service and interest cost components of
      net periodic postretirement benefit cost for the year ended June 2, 2002
      by $94,000.

(c)   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 2002 and
      2001 was $702,000 and $669,000, 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


                                      F-19
<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 7  BENEFIT PLANS (CONT'D)

      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 Amended
      Employment 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 June 2, 2002, June 3, 2001, and May 28,
      2000, the bonus accrued under this agreement was $298,000, $331,000, and
      $364,000, respectively.

      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 June 2, 2002, June 3, 2001, and May 28,
      2000, the long-term performance bonus accrued under this agreement was
      $157,000, $144,000, and $114,000, 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
      $773,000, $628,000, and $428,000 and for the years ended June 2, 2002,
      June 3, 2001, and May 28, 2000, respectively. The projected benefit
      obligation was approximately $3,584,000, and $2,811,000 at June 2, 2002
      and June 3, 2001, 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.


                                      F-20
<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 7  BENEFIT PLANS (CONT'D)

      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 June 2,
      2002, the aggregate liability of the Company under this agreement for the
      next five years is estimated to be $1,343,000, 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.

      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 $81,000, $108,000, and $45,000, for the years ended June 2,
      2002, June 3, 2001, and May 28, 2000, respectively. The projected benefit
      obligation was approximately $422,000 and $341,000 at June 2, 2002 and
      June 3, 2001, 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


                                      F-21
<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7  BENEFIT PLANS (CONT'D)

              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 June 2, 2002 under circumstances entitling them
              to severance payments pursuant to the agreements, the aggregate
              amount due to them under these agreements would be approximately
              $1,932,000.

              The Company is also committed to another employee, Patricia H.
              Townsend, under a previous employment contract, which provides for
              minimum salary levels, annual adjustments, as well as incentive
              bonuses and for a term, which ends in March 2004. Provisions
              contained in the agreement provide for continuation of the
              remuneration for the remainder of the term of the agreement in the
              event of termination, incapacity, death, or disability. The
              estimated commitment for future salaries through the duration of
              the agreement as of June 2, 2002 was approximately $140,000.

NOTE 8  INCOME TAXES

       Total income taxes for the years ended June 2, 2002, June 3, 2001, and
       May 28, 2000, were attributable to the following:

<TABLE>
<CAPTION>
                                                                JUNE 2,              JUNE 2,              MAY 28,
                                                                 2002                 2001                 2000
                                                                 ----                 ----                 ----
<S>                                                          <C>                   <C>                  <C>
        Earnings from operations                             $  5,121,000          $ 2,497,000          $ 5,029,000
        Stockholders' equity for unrealized gains on
        securities and minimum pension liability                   45,000               53,000                   --
                                                             ------------          -----------          -----------
                                                             $  5,166,000          $ 2,550,000          $ 5,029,000
                                                             ============          ===========          ===========
</TABLE>

                                      F-22
<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8  INCOME TAXES (CONT'D)

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

<TABLE>
<CAPTION>
                                                 Current            Deferred            Total
                                                 -------            --------            -----
<S>                                             <C>                 <C>               <C>
      Year ended June 2, 2002
      U.S. Federal                              $3,230,000           385,000          3,615,000
      State                                        342,000            20,000            362,000
      Foreign                                    1,144,000                --          1,144,000
                                                ----------          --------          ---------
                                                $4,716,000           405,000          5,121,000
                                                ==========          ========          =========

      Year Ended June 3, 2001
      U.S. Federal                              $2,468,000          (235,000)         2,233,000
      State                                        335,000           (71,000)           264,000
                                                ----------          --------          ---------
                                                $2,803,000          (306,000)         2,497,000
                                                ==========          ========          =========

      Year ended May 28, 2000
      U.S. Federal                              $4,690,000          (362,000)         4,328,000
      State                                        804,000          (103,000)           701,000
                                                ----------          --------          ---------
                                                $5,494,000          (465,000)         5,029,000
                                                ==========          ========          =========
</TABLE>

       There is no income tax attributable to the earnings from foreign
       subsidiaries in 2001 and 2000 since the foreign entities were generally
       not subject to taxes on earnings during those years. Prior to April 1,
       2001, the Company's subsidiary, Alimentos Congelados Monte Bello S.A.
       received an income tax exemption on substantially all earnings.

                                      F-23
<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8  INCOME TAXES (CONT'D)

       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:

<TABLE>
<CAPTION>
                                                                             YEAR         YEAR      YEAR
                                                                             ENDED        ENDED     ENDED
                                                                            JUNE 2,       JUNE 3,   MAY 28,
                                                                             2002          2001      2000
                                                                             ----          ----      ----
<S>                                                                          <C>          <C>       <C>
       Federal income tax rate                                               35.0%         35.0%     35.0%
       Increase (decrease) in taxes:
            State taxes - net of federal tax benefit                          1.9           1.9       3.3
            Earnings in foreign subsidiary with no tax                       (0.3)         (7.3)     (4.6)
            Taxes on foreign subsidiary earnings                              3.6            --        --
            Other items - net                                                 1.1          (2.3)      3.1
                                                                             ----          ----      ----
       Effective income tax rate                                             41.3%         27.3%     36.8%
                                                                             ====          ====      ====
</TABLE>

       The tax effects of temporary differences that give rise to significant
       portions of deferred tax liabilities and deferred tax assets at June 2,
       2002 and June 3, 2001 follow:

<TABLE>
<CAPTION>
                                                                                  JUNE 2,            JUNE 3,
                                                                                   2002               2001
                                                                                   ----               ----
<S>                                                                       <C>                  <C>
       Deferred tax liabilities:
          Property, plant and equipment                                   $       (6,058,000)  $     (5,648,000)
          Net unrealized gain on marketable securities                               (45,000)           (88,000)
          Other                                                                   (1,041,000)          (893,000)
                                                                          ------------------   ----------------
                  Total gross deferred tax liabilities                            (7,144,000)        (6,629,000)
                                                                          ------------------   ----------------
       Deferred tax assets:
          Inventory costs                                                            168,000            242,000
          Accrued expenses and other liabilities                                   2,077,000          1,885,000
          Pension and postretirement benefits                                        825,000            687,000
          Net operating loss carryforwards                                           182,000            300,000
          Minimum pension liability                                                   36,000             35,000
          Other                                                                      355,000            375,000
                                                                          ------------------   ----------------
                  Total gross deferred tax assets                                  3,643,000          3,524,000
                                                                          ------------------   ----------------
       Net deferred tax liabilities                                       $       (3,501,000)  $     (3,105,000)
                                                                          ==================   ================
</TABLE>


       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

                                      F-24
<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8  INCOME TAXES (CONT'D)

       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.

       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 $7,800,000 at June 2, 2002.

       At June 2, 2002, the Company has net operating loss carryforwards for
       state income tax purposes of approximately $3,152,000, which are
       available to offset future state taxable income, if any, through 2018.

NOTE 9  ACQUISITIONS

       During the year ended May 28, 2000, the Company via its wholly-owned
       subsidiary, Bickel's Snack Foods, Inc. purchased certain assets and
       assumed certain liabilities of York Foods, Inc., and its wholly-owned
       subsidiaries, Bon Ton Foods, Inc. and York Snacks. This acquisition was
       accounted for under the purchase method and was not considered to be
       material to the Company's results of operations for the year ended May
       28, 2000. The allocation of purchase price is as follows:

<TABLE>
<S>                                                     <C>
       Accounts receivable                              $         1,496,000
       Inventory                                                  1,147,000
       Other current assets                                          82,000
       Property, plant and equipment                              2,737,000
       Goodwill                                                   1,981,000
       Other Assets                                                  13,000
       Accounts Payable                                         (2,855,000)
       Debt                                                        (77,000)
                                                        -------------------
       Total purchase price                             $         4,524,000
                                                        ===================
</TABLE>


NOTE 10  COMMITMENTS AND CONTINGENCIES

       (a)    LETTER OF CREDIT

              As of June 2, 2002, the Company's wholly-owned reinsurance company
              had outstanding two letters of credit in the amount of $148,000
              and $476,000 as security for the reimbursement of losses arising
              from the reinsurance assumed by the Company.

                                      F-25
<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10  COMMITMENTS AND CONTINGENCIES (CONT'D)

(b)    LEGAL MATTERS

       Derivative Action

       On September 13, 1996, certain Class A common stockholders 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 common stockholders 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.

       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 stockholders),
       (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

                                      F-26
<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10  COMMITMENTS AND CONTINGENCIES (CONT'D)

       401(k) Savings Plan (or a similar employee benefit plan), 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. Pursuant to the Company's Bylaws, nominations for directors
       must be submitted to the Company in the manner prescribed by the Bylaws
       no later than June 1 of the year in which the meeting is to occur.

       The Amended and Restated Articles created a Series C Convertible
       Preferred Stock and also classified the terms of the Board of Directors
       commencing with the election at the 1997 annual shareholders' meeting and
       permit directors to be elected for four-year terms as permitted by
       Pennsylvania law.

       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 hereafter described.

       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 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 Company's Amended and
       Restated Articles. On December 2, 1998, a majority panel of the Superior
       Court of Pennsylvania issued a decision holding that

                                      F-27
<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10  COMMITMENTS AND CONTINGENCIES (CONT'D)

       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 Company. The complaint sought a court order
       declaring that the September 1999 election for the Board of Directors of
       the Company be conducted in accordance with the Articles of Incorporation
       of the Company 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
       Company proposed by Michael A. Warehime, Sally Yelland, Elizabeth Stick
       and J. William Warehime be accepted by the Company and listed on the
       ballot to be distributed at the annual meeting of shareholders of the
       Company 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 Incorporation 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 of Incorporation. On
       October 11, 2000, the Supreme Court of Pennsylvania entered an Order
       staying the Order of the Court of Common Pleas of York County. 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 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.

                                      F-28
<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10  COMMITMENTS AND CONTINGENCIES (CONT'D)

       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.

       (c)    STOCK REPURCHASE PLAN

              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 years ended June 2, 2002, June 3, 2001 and May
              28, 2000. As of June 2, 2002, there are 10,557 shares outstanding
              that would be eligible for this plan. The maximum commitment, if
              requested, for all eligible shares would be approximately
              $1,108,000, based on the most recent appraised value per share as
              of March 31, 2002.

       (d)    SALES AND LEASE AGREEMENT

              In February 2001, the Company entered into a renewable Sales and
              Lease agreement to lease the Colusa plant for six (6) years
              beginning July 1, 2001 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. In addition, the Company has
              the option to purchase an additional 6 million pounds if the cost
              basis formula is more favorable than market prices. The Company
              expects to use this annual purchase commitment through normal
              operations.

NOTE 11  FOREIGN OPERATIONS

       The Company's foreign subsidiary, Alimentos Congelados Monte Bello, S.A.
       (ALCOSA) 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:

<TABLE>
<CAPTION>
                                                             JUNE 2,            JUNE 3,            MAY 28,
                                                               2002               2001               2000
                                                               ----               ----               ----
<S>                                                   <C>                  <C>                <C>
      Revenues                                        $        18,699,000  $      13,152,000  $      15,863,000
      Cost of goods sold                                       15,075,000         12,294,000         13,036,000
      Assets                                                    9,092,000          7,907,000         10,580,000
</TABLE>

       ALCOSA maintains its accounting records in quetzals. For financial
       reporting purposes the U.S. dollar is considered the functional currency.
       The financial statements of ALCOSA 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 $178,000, $60,000, and $315,000, for the years ended June 2,
       2002, June 3, 2001, and May 28, 2000, respectively. At June 2, 2002, the
       prevailing exchange rate was Q 8.0 to U.S. $1.00.

                                      F-29
<PAGE>
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 RECONCILIATION OF NUMERATOR AND DENOMINATOR FOR BASIC AND DILUTED
EARNINGS PER SHARE

<TABLE>
<CAPTION>
                                                         YEAR               YEAR               YEAR
                                                        ENDED              ENDED              ENDED
                                                       JUNE 2,            JUNE 3,            MAY 28,
                                                         2002               2001               2000
                                                 -------------------   -----------------  -----------------
<S>                                              <C>                  <C>                 <C>
Numerator for basic earnings per share:
   Net earnings applicable to
    Common stock                                 $         7,230,000  $        6,200,000          8,576,000
Effect of dilutive securities:
 8-1/4% cumulative convertible
    Preferred stock                                           30,000              30,000             31,000
 4.40% cumulative convertible
    Preferred stock                                           11,000              11,000             12,000
                                                  -------------------  ------------------  ------------------

Net earnings assuming dilution                   $         7,271,000   $       6,661,000  $       8,619,000
                                                 ===================   =================  =================

Denominator:
 Basic weighted-average shares                               716,191             714,565            715,249
Effect of dilutive securities:
8-1/4% cumulative convertible
    Preferred stock                                            3,386               3,670              4,140
4.40% cumulative convertible
    Preferred stock                                           10,000              10,000             10,000
                                                 -------------------   -----------------  -----------------

Diluted weighted-average shares                              729,577             728,235            729,389
                                                 ===================   =================  =================

Basic earnings per share                         $             10.10   $            9.26  $           11.99
Diluted earnings per share                                      9.97                9.15              11.82
                                                 ===================   =================  =================
</TABLE>

NOTE 13  STATEMENT OF CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                         YEAR               YEAR               YEAR
                                                         ENDED              ENDED              ENDED
                                                        JUNE 2,            JUNE 3,            MAY 28,
                                                         2002               2001               2000
                                                 -------------------   -----------------  -----------------
<S>                                              <C>                  <C>                 <C>
Supplemental disclosure of cash paid for:

   Interest                                      $         3,292,000  $        4,698,000  $        4,098,000
   Income taxes                                            4,043,000           3,848,000           5,916,000
                                                 ===================  ==================  ==================
Non-cash investing activities, acquisition
   of business:

      Fair value of assets acquired              $                --  $               --  $        7,456,000
      Cash paid                                                   --                  --           4,524,000
                                                 -------------------  ------------------  ------------------

      Liabilities assumed                        $                --  $               --  $        2,932,000
                                                 ===================  ==================  ==================
</TABLE>

                                      F-30
<PAGE>
                            QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
Dollars in thousands                                     First         Second     Third     Fourth
(except per share)                                      quarter        quarter   quarter   quarter
------------------                                      -------        -------   -------   -------
2002
<S>                                                    <C>            <C>      <C>        <C>
Net sales                                              $ 60,120       $82,617  $72,903    $74,463
Gross profit                                           $ 10,767       $16,838  $13,192    $13,039
Net earnings                                           $  1,441       $ 3,858  $ 1,437       $535
Net earnings per common share - Basic                  $   2.00       $  5.38  $  1.99       $.73
Net earnings per common share - Diluted                $   1.98       $  5.30  $  1.97       $.72
Cash Dividends per common share                        $   .275       $  .275  $  .275      $.275

2001

Net sales                                              $ 59,978       $79,838  $75,820    $77,867
Gross profit                                           $ 10,668       $15,739  $12,245    $11,862
Net earnings                                           $  1,174       $ 3,208  $   576    $ 1,703
Net earnings per common share - Basic                  $   1.63       $  4.47  $   .79    $  2.36
Net earnings per common share - Diluted                $   1.61       $  4.41  $   .79    $  2.34
Cash Dividends per common share                        $   .275       $  .275  $  .275    $  .275
</TABLE>

         Net sales and gross profit for the first, second and third quarters of
fiscal 2002 and for each quarter of fiscal 2001 have been reduced by certain
amounts previously recorded as selling and marketing expense in connection with
the implementation of EITF 01-9. The effect was to reduce net sales and gross
profit by $3,260,000, $4,480,000 and 3,954,000 for the first, second and third
quarters of fiscal 2002, respectively, and to reduce net sales and gross profit
by $5,056,000, $6,731,000, $6,392,000 and $6,564,000 for the first, second,
third and fourth quarters of fiscal 2001, respectively.

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

         Although the Corporation's Class A Common Stock is currently traded on
the OTC Bulletin Board under the symbol "HNFSA," trading in the Class A Common
Stock is very sporadic. As a result of the limited market for 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 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.

                                       11
<PAGE>
<TABLE>
<CAPTION>
        Quarter Ended                            High               Low      Dividends
        -------------                            ----               ---      ---------
<S>                                              <C>             <C>            <C>
        May 28, 2000                             $61.00          $61.00         $0.275
        August 27, 2000                          $61.00          $57.00         $0.275
        November 26, 2001                        $57.00          $55.00         $0.275
        February 25, 2001                        $55.50          $51.00         $0.275
        June 3, 2001                             $51.00          $50.00         $0.275
        September 2, 2002                        $51.50          $49.00         $0.275
        December 2, 2002                         $49.00          $48.00         $0.275
        March 3, 2002                            $50.00          $48.00         $0.275
        June 2, 2002                             $51.75          $50.00         $0.275
</TABLE>

         As of August 10, 2002, there were 375 record holders and approximately
210 beneficial holders of the Class A Common Stock.

                                 DIVIDEND POLICY

         The Corporation has maintained a policy of paying a quarterly dividend
of $0.275 per share. 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, as well as other relevant factors. Excludes shares
allocated to the Stock Option Plan, Employee Stock Ownership Plan and 401(k)
Plan.

                            ANNUAL AND OTHER REPORTS

         The Corporation is required to file an annual report on Form 10-K for
its fiscal year ended June 2, 2002 with the Securities and Exchange Commission.
Copies of the Form 10-K annual report and the Corporation's quarterly reports
may be obtained without charge by contacting:

                 Gary T. Knisely
                 Hanover Foods Corporation
                 1486 York Street
                 P.O. Box 334
                 Hanover, PA  17331
                 717-632-6000

                                       12
<PAGE>
                         OFFICERS AND BOARD OF DIRECTORS

                                    OFFICERS

                                JOHN A. WAREHIME
                  Chairman, President & Chief Executive Officer

<TABLE>
<CAPTION>
           GARY T. KNISELY, ESQ.                        PIETRO D. GIRAFFA, JR.                     EDWARD L. BOECKEL, JR.
<S>                                                  <C>                                           <C>
          Chief Financial Officer                    Vice President - Controller                         Treasurer
          Executive Vice President                     Chief Accounting Officer
             Secretary, Counsel
</TABLE>

<TABLE>
<CAPTION>
                          ALAN T. YOUNG                                                  DANIEL E. SCHUCHART
<S>                                                                                    <C>
      Senior Vice President- Purchasing and Transportation                             Vice President of Sales
</TABLE>


                               BOARD OF DIRECTORS

<TABLE>
<CAPTION>
              JOHN A. WAREHIME                            ARTHUR S. SCHAIER                          JAMES A. WASHBURN
<S>                                               <C>                                           <C>
           Chairman of the Board                      Corporate General Manager                   Chief Executive Officer
          Hanover Food Corporation                Earnhardt's Dodge Motor Companies             Park 100 Foods, Inc., a food
                                                 Gilbert, AZ, retail auto dealerships              manufacturing company
                                                                                                         Tipton, IN
</TABLE>

<TABLE>
<CAPTION>
            CLAYTON J. ROHRBACH                            T. EDWARD LIPPY                             CYRIL T. NOEL
<S>                                            <C>                                           <C>
  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
</TABLE>

<TABLE>
<CAPTION>
        JAMES G. STURGILL, CPA, CVA                       JENNIFER W. CARTER                          T. MICHAEL HAUGH
<S>                                                   <C>                                  <C>
              Managing Partner                        Assistant to the Chairman                          President
         Sturgil & Associates LLP,                    Hanover Foods Corporation            Hospitality Management Corporation, a
    an accounting firm, Westminster, MD                                                        contract food service company
                                                                                                      Abbottstown, PA
</TABLE>

<TABLE>
<CAPTION>
                       EXECUTIVE OFFICES                                             CERTIFICATE TRANSFERS MAIL
<S>              <C>                                                 <C>
                 1486 York Street, P.O. Box 334                                  Mellon Investors Services, L.L.C.
                     Hanover, PA 17331-0334                                         Securities Transfer Services
                         (717) 632-6000                                                    P.O. Box 3312
                                                                                  South Hackensack, NJ 07606-1912
                                                                     NOTE: It is recommended that all certificates be sent via
                                                                                          registered mail.
</TABLE>
<PAGE>
<TABLE>
<S>                                                               <C>
SHAREHOLDER INQUIRIES                                             CERTIFICATE TRANSFERS HAND DELIVERIES
Shareholder inquiries should be directed to the following         Mellon Investors Services, L.L.C.
offices and addresses.                                            120 Broadway, 13th Floor
All telephone inquiries should be made by using the toll-free     New York, NY  10271
1-800-756-3353.
Copies of 10-K report are available upon request.

SHAREHOLDER INQUIRIES ADDRESS CHANGES CONSOLIDATING               CLASS A COMMON SHARES
Mellon Investors Services, L.L.C.                                 Class A Common Shares are traded in a local, unlisted market
P.O. Box 3315                                                     via various stockbrokers in Pennsylvania.
South Hackensack, NJ  07606-1915

LOST CERTIFICATES CERTIFICATE REPLACEMENT                         CERTIFIED PUBLIC ACCOUNTANTS
Mellon Investors Services, L.L.C.                                 KPMG LLP, Harrisburg, Pennsylvania
Lost Securities Department
P.O. Box 3317                                                     LEGAL COUNSEL
South Hackensack, NH  07606-1917                                  Blank Rome Comisky & McCauley LLP, Philadelphia, Pennsylvania
</TABLE>