<TABLE>
                                            Five-Year Financial Highlights

<CAPTION>
===============================================  ====================================================================
(Dollars and shares in thousands, except per                            Fiscal Year (a) (b) (c) (d)
share data)
-----------------------------------------------  --------------------------------------------------------------------
                                                  Restated       Restated      Restated       Restated      Restated
                                                    2001           2000          1999           1998          1997
-----------------------------------------------  ----------     ----------    ----------     ----------    ----------
<S>                                              <C>            <C>           <C>            <C>           <C>
Consolidated statement of earnings data:
  Net sales                                      $ 580,201      $ 502,056     $ 496,959      $ 484,885     $ 473,006
  Gross profit                                     103,375         82,606        80,149         78,070        73,907
  Earnings before income taxes                      12,312         12,615        13,455         13,916        12,418
  Provision for income taxes                         4,676          4,792         5,220          5,398         4,781
  Net earnings                                       7,636          7,823         8,235          8,518         7,637
  Earnings per share - basic                          1.46           1.32          1.30           1.26          1.11
  Earnings per share - diluted                        1.45           1.31          1.28           1.23          1.06
  Cash dividends per share                            0.36           0.36          0.34           0.30          0.27
  Weighted average shares and equivalents
   outstanding - diluted                             5,269          5,951         6,438          6,923         7,148
  Net earnings-to-sales ratio                         1.32%          1.56%         1.66%          1.76%         1.61%
Consolidated balance sheet data
(at fiscal year-end):
  Working capital                                $  19,112      $  31,026     $  30,192      $  33,402     $  29,735
  Total assets                                     138,320        104,222        93,097        103,987        98,537
  Current obligations under capital leases and
   current maturities of long-term debt              1,515            954           842            792           866
  Long-term debt                                    16,569          2,685         2,865          3,021         3,165
  Long-term obligations under capital leases        20,808          8,284         9,069          9,764        11,177
  Total shareholders' investment                    50,580         49,818        48,364         53,603        50,902
Other data:
  Capital expenditures                           $   5,983      $   5,345     $   3,551      $   3,815     $   4,868
  Depreciation and amortization                      6,913          5,282         4,617          5,107         4,517

NOTES:    (a)  Our fiscal year ends on the Saturday closest to December 31. The 1997 fiscal year was a 53-week period.
               All other fiscal years presented were 52-week periods.

          (b)  All data should be read in conjunction with our audited consolidated financial statements and
               "Management's discussion and analysis of financial condition and results of operations" as set forth
               in this Annual Report.

          (c)  All data should be read in conjunction with Note 1 "Restatement" of our Notes to Consolidated
               Financial Statements as set forth in this amended Annual Report.

          (d)  The information provided for 2001 through 1999 within the schedule above is derived from our restated
               audited consolidated financial statements as included herein. The financial information provided for
               1998 and 1997 is derived from our restated consolidated financial statements.
</TABLE>

<PAGE>

MANAGEMENT'S RESPONSIBILITIES FOR FINANCIAL REPORTING


The management of Fresh Brands, Inc. is responsible for the preparation,
objectivity and integrity of the Company's consolidated restated financial
statements. The consolidated restated financial statements have been prepared in
accordance with generally accepted accounting principles and include amounts
that are based on management's best estimates and informed judgments.

To help assure that financial information is reliable and assets are
safeguarded, management maintains a system of internal controls and procedures
which it believes is effective in accomplishing these objectives. These controls
and procedures are designed to provide reasonable assurance, at appropriate
costs, that transactions are executed and recorded in accordance with
management's authorization.

The Company's consolidated 2001, 2000 and 1999 financial statements have been
audited by its independent auditors, KPMG LLP, whose report was based on audits
conducted in accordance with generally accepted auditing standards in the United
States of America. As part of their audits, they performed a review of the
Company's system of internal controls for the purpose of determining the amount
of reliance to place on those controls relative to the audit tests they
performed.

The Audit Committee of the Board of Directors, composed of directors who are not
officers or employees of the Company, meets periodically with KPMG LLP and
management to inquire as to whether each is properly discharging its
responsibilities. The independent auditors have direct access to the Audit
Committee.



/s/ Elwood F. Winn                               /s/ S. Patric Plumley
Elwood F. Winn                                   S. Patric Plumley
President and Chief Executive                    Senior Vice President, Chief
Officer                                          Financial Officer, Treasurer
                                                 and Secretary


<PAGE>

                          Independent Auditors' Report



The Board of Directors and Shareholders
Fresh Brands, Inc.:

On February 24, 2003 we reported on the consolidated balance sheets of Fresh
Brands, Inc. (the "Company") as of December 28, 2002 and December 29, 2001, and
the related consolidated statements of earnings, shareholders' investment, and
cash flows for each of the years in the three-year period ended December 28,
2002, which report appears in the December 2002 annual report on Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement schedule as listed
in Item 16. The financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statement schedule based on our audits.

In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.

Our reports refer to the Company's adoption of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" effective December 30,
2001.



/s/ KPMG LLP

KPMG LLP


Milwaukee, Wisconsin
February 24, 2003

<PAGE>

<TABLE>
                                 CONSOLIDATED BALANCE SHEETS
               As of December 29, 2001, December 30, 2000 and January 1, 2000

<CAPTION>
(In thousands, except share and per share data)
--------------------------------------------------------  ----------------------------------
                                                           Restated    Restated    Restated
Assets                                                       2001        2000        1999
--------------------------------------------------------  ----------  ----------  ----------
<S>                                                       <C>         <C>         <C>
Current assets:
   Cash and equivalents                                   $  11,501   $  31,309   $  22,433
   Receivables, net                                          10,884      11,428       6,513
   Inventories                                               34,538      23,845      25,899
   Land and building held for resale                          4,770         647       1,088
   Other current assets                                       2,220       2,269       2,322
   Deferred income taxes                                      4,459       4,102       3,900
--------------------------------------------------------  ---------   ---------   ---------

    Total current assets                                     68,372      73,600      62,155
--------------------------------------------------------  ---------   ---------   ---------

Noncurrent receivable under capital subleases                 9,278       4,163       4,531
Property and equipment, net                                  26,513      19,393      20,285
Property under capital leases, net                           10,604       3,051       3,462
Goodwill, net                                                20,280         717         777
Other noncurrent assets, net                                  3,273       3,298       1,887
--------------------------------------------------------  ---------   ---------   ---------
Total assets                                              $ 138,320   $ 104,222   $  93,097
========================================================  =========   =========   =========

Liabilities and Shareholders' Investment
--------------------------------------------------------  ---------   ---------   ---------
Current liabilities:
   Accounts payable                                       $  33,293   $  27,012   $  18,857
   Accrued salaries and benefits                              7,845       5,673       5,284
   Accrued insurance                                          2,665       2,547       2,517
   Other accrued liabilities                                  3,942       6,388       4,463
   Current obligations under capital leases                   1,192         785         696
   Current maturities of long-term debt                         323         169         146
--------------------------------------------------------  ---------   ---------   ---------
    Total current liabilities                                49,260      42,574      31,963
--------------------------------------------------------  ---------   ---------   ---------

Long-term obligations under capital leases                   20,808       8,284       9,069
Long-term debt                                               16,569       2,685       2,865
Deferred income taxes                                         1,103         861         836
Shareholders' investment:
   Common stock, $0.05 par value, authorized
    20,000,000 shares, issued 8,750,342 shares in
    2001, 2000 and 1999                                         438         438         438
   Additional paid-in capital                                15,371      15,174      14,961
   Retained earnings                                         75,840      70,072      64,390
   Treasury stock at cost, 3,584,897 shares in 2001,
    3,165,213 shares in 2000 and 2,808,997 shares in
    1999                                                    (41,069)    (35,866)    (31,425)
--------------------------------------------------------  ---------   ---------   ---------

   Total shareholders' investment                            50,580      49,818      48,364
--------------------------------------------------------  ---------   ---------   ---------

Total liabilities and shareholders' investment            $ 138,320   $ 104,222   $  93,097
========================================================  =========   =========   =========

See notes to consolidated financial statements.
</TABLE>



<PAGE>

<TABLE>
                              CONSOLIDATED STATEMENTS OF EARNINGS
                              For fiscal years 2001, 2000 and 1999

<CAPTION>
(In thousands, except share and per share data)
-----------------------------------------------------------  ----------------------------------
                                                              Restated    Restated    Restated
                                                                2001        2000        1999
-----------------------------------------------------------  ----------  ----------  ----------
<S>                                                          <C>         <C>         <C>
Net sales                                                    $ 580,201   $ 502,056   $ 496,959
Cost of products sold                                          476,826     419,450     416,810
-----------------------------------------------------------  ---------   ---------   ---------
Gross profit                                                   103,375      82,606      80,149
Operating and administrative expenses                           90,300      70,488      67,108
-----------------------------------------------------------  ---------   ---------   ---------
Operating income                                                13,075      12,118      13,041
Interest income                                                    605       1,349       1,175
Interest expense                                                (1,368)       (852)       (761)
-----------------------------------------------------------  ---------   ---------   ---------
Earnings before income taxes                                    12,312      12,615      13,455
Provision for income taxes                                       4,676       4,792       5,220
-----------------------------------------------------------  ---------   ---------   ---------
Net earnings                                                 $   7,636   $   7,823   $   8,235
-----------------------------------------------------------  ---------   ---------   ---------
Earnings per share - basic                                       $1.46       $1.32       $1.30
===========================================================  =========   =========   =========
Earnings per share - diluted                                     $1.45       $1.31       $1.28
===========================================================  =========   =========   =========
See notes to consolidated financial statements.
</TABLE>

<TABLE>
<CAPTION>
                             CONSOLIDATED STATEMENTS OF CASH FLOWS
                              For fiscal years 2001, 2000 and 1999

(In thousands)
-----------------------------------------------------------  ----------------------------------
                                                              Restated    Restated    Restated
                                                                2001        2000        1999
-----------------------------------------------------------  ----------  ----------  ----------
<S>                                                          <C>         <C>         <C>
Cash flows from operating activities:
Net earnings                                                 $   7,636   $   7,823   $   8,235
Adjustments to reconcile net earnings to net cash
 provided by operating activities:
   Depreciation and amortization                                 6,913       5,282       4,617
   Deferred income taxes                                          (115)       (177)        481
   Changes in assets and liabilities, net of acquisition:
     Receivables                                                 1,462      (4,915)       (975)
     Inventories                                                (4,450)      2,054      (2,362)
     Other current assets                                       (3,818)        544        (630)
     Accounts payable                                              744       8,155      (4,473)
     Accrued liabilities                                        (3,014)      2,555         232
-----------------------------------------------------------  ---------   ---------   ---------
Net cash provided by operating activities                        5,358      21,321       5,125
-----------------------------------------------------------  ---------   ---------   ---------
Cash flows from investing activities:
   Acquisition, net of cash acquired                           (27,505)          -           -
   Capital expenditures                                         (5,983)     (5,345)     (2,867)
   Receipt of principal amounts under capital subleases            367         326         407
   Sale of assets and other                                      2,188           8         311
-----------------------------------------------------------  ---------   ---------   ---------
Net cash used in investing activities                          (30,933)     (5,011)     (2,149)
-----------------------------------------------------------  ---------   ---------   ---------
Cash flows from financing activities:
   Net change in revolver activity                              13,650           -           -
   Payment for acquisition of treasury stock                    (9,662)     (6,067)    (12,864)
   Receipt for private placement sale of treasury stock          3,300           -           -
   Payment of cash dividends                                    (1,868)     (2,141)     (2,155)
   Exercise of stock options                                     1,078       1,602         924
   Principal payments on capital lease obligations                (905)       (696)       (655)
   Long-term debt borrowing                                        335           -           -
   Principal payments on long-term debt                           (242)       (156)       (146)
   Other financing activities                                       81          24          19
-----------------------------------------------------------  ---------   ---------   ---------
Net cash flows provided by (used in) financing activities        5,767      (7,434)    (14,877)
-----------------------------------------------------------  ---------   ---------   ---------
Cash and equivalents:
   Net change                                                  (19,808)      8,876     (11,901)
   Balance, beginning of year                                   31,309      22,433      34,334
-----------------------------------------------------------  ---------   ---------   ---------
Balance, end of year                                         $  11,501   $  31,309   $  22,433
===========================================================  =========   =========   =========
</TABLE>
See notes to consolidated financial statements.


<PAGE>

<TABLE>
                                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
                                       For fiscal years 2001, 2000 and 1999

<CAPTION>
(In thousands, except share and per share data)
------------------------------------------------------------------------------------------------------------------
                                                   Common       Additional                               Total
                                                Stock $0.05      Paid-in     Retained    Treasury    Shareholders'
                                                 par value       Capital     Earnings     Stock       Investment
------------------------------------------------------------------------------------------------------------------

<S>                                               <C>            <C>         <C>         <C>           <C>
Balances at January 2, 1999 (restated)            $   438        $ 14,359    $ 58,310    $(19,504)     $ 53,603
------------------------------------------------------------------------------------------------------------------
   Net earnings (restated)                              -               -       8,235           -         8,235
   Cash dividends, common stock
    $0.34 per share                                     -               -      (2,155)          -        (2,155)
   Acquisition of 821,600 shares of
    treasury stock                                      -               -           -     (12,864)      (12,864)
   Issuance of 166,750 shares of treasury
    stock upon exercise of stock options                -               -           -         924           924
   Tax benefits from exercise of stock
    options                                             -             602           -           -           602
   Other                                                -               -           -          19            19
------------------------------------------------------------------------------------------------------------------

Balances at January 1, 2000 (restated)                438          14,961      64,390     (31,425)       48,364
------------------------------------------------------------------------------------------------------------------
   Net earnings (restated)                              -               -       7,823           -         7,823
   Cash dividends, common stock
    $0.36 per share                                     -               -      (2,141)          -        (2,141)
   Acquisition of 558,540 shares of
    treasury stock                                      -               -           -      (6,067)       (6,067)
   Issuance of 200,100 shares of treasury
    stock upon exercise of stock options                -               -           -       1,602         1,602
   Tax benefits from exercise of stock
    options                                             -             213           -           -           213
   Other                                                -               -           -          24            24
------------------------------------------------------------------------------------------------------------------

Balances at December 30, 2000 (restated)              438          15,174      70,072     (35,866)       49,818
------------------------------------------------------------------------------------------------------------------
   Net earnings (restated)                              -               -       7,636           -         7,636
   Cash dividends, common stock $0.36 per
    share                                               -               -      (1,868)          -        (1,868)
   Acquisition of 742,998 shares of treasury
    stock                                               -               -           -      (9,662)       (9,662)
   Issuance of 200,000 shares of treasury
    stock in private placement sale                     -               -           -       3,300         3,300
   Issuance of 117,000 shares of treasury
    stock upon exercise of stock options                -               -           -       1,078         1,078
   Tax benefits from exercise of stock
    options                                             -             197           -           -           197
   Other                                                -               -           -          81            81
------------------------------------------------------------------------------------------------------------------

Balances at December 29, 2001 (restated)          $   438        $ 15,371    $ 75,840    $(41,069)     $ 50,580
==================================================================================================================
</TABLE>

See notes to consolidated financial statements.


<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      For fiscal years 2001, 2000 and 1999

Note 1
Restatement
     Our previously issued consolidated balance sheets as of December 29, 2001,
December 30, 2000 and January 1, 2000 and the related consolidated statements of
earnings, stockholders' investment, and cash flows for the three years ending
December 29, 2001 have been restated for the items described below.

Receivables, net
     As more fully described within the caption addressing cost of products
sold, we understated our cost of products sold due to an error related to a
unique supply relationship we have with one of our direct store delivery meat
vendors. Accurately stating cost of products sold resulted in an adjustment to
receivables, net, in fiscal years 2001, 2000 and 1999.
     Additionally, we corrected an error to recognize patronage dividends on an
accrual basis rather than the cash basis. This correction resulted in an
increase in receivables, net, in fiscal years 2000 and 1999.

Inventories
     Inventory balances were adjusted to recognize the reduction in inventory
values reflecting cash discounts received by us from our vendors. The correction
reduced inventory balances in fiscal years 2001, 2000 and 1999.
     We did not fully eliminate intercompany profit recorded within our
inventory balance. Correction of this error resulted in a reduction in the
reported inventory balance in fiscal years 2000 and 1999.

Accounts payable
     Accounts payable were reduced to reflect our estimate of the underlying
vendor liability based on the best information available at the balance sheet
date. Correction of this error impacted fiscal years 2001, 2000 and 1999.

Accrued insurance
     Accrued insurance was reduced to reflect our estimate of the underlying
employee health insurance liability based on the best information available at
the balance sheet date. Correction of this error impacted fiscal years 2001,
2000 and 1999.

Other accrued liabilities
     The originally reported tax liabilities were restated to reflect the impact
of the adjustments described in this note, impacting fiscal years 2001, 2000 and
1999.

Cost of products sold
     We understated our cost of products sold due to an error related to a
unique supply relationship we have with one of our direct store delivery meat
vendors. Orders from nine supermarkets were delivered by the vendor to our meat
distribution center and shipped by us to these stores. Sales were properly
recorded, but we inadvertently failed to record accurately the corresponding
cost of products sold. Correction of this error resulted in adjustments in
fiscal years 2001, 2000 and 1999.
     In addition, the we restated our 2001 cost of products sold to include
labor costs related to our deli and bakery manufacturing operation which were
previously recorded as operating and administrative expenses.

Operating and administrative expenses
     We incorrectly included 2001 labor costs related to our deli and bakery
manufacturing operation within operating and administrative expenses. This
amount was adjusted to accurately reflect these amounts as a component of cost
of products sold.

Provision for income taxes
     The tax provision for all years disclosed was restated for the impact of
adjustments described above.
     The following tables present the changes that have been made to the
consolidated balance sheets as of December 29, 2001, December 30, 2000 and
January 1, 2000 and the related consolidated statements of earnings and
stockholders' investment for the three years ending December 29, 2001 as a
result of the restatement. There were no changes in operating, financing or
investing cash flows for the three years ending December 29, 2001.


<PAGE>

<TABLE>
<CAPTION>
(In thousands except per share data)
------------------------------------------------------------------------------------------------------------
                                                2001                   2000                        1999
--------------------------------------- ---------------------  ----------------------  ---------------------
                                            As                     As                      As
                                        Previously      As     Previously       As     Previously      As
                                         Reported    Restated   Reported     Restated   Reported    Restated
--------------------------------------- ----------  ---------  ----------  ----------  ----------  ---------
<S>                                     <C>         <C>        <C>         <C>         <C>         <C>
Balance Sheet Components:
Receivables, net                        $   11,385  $  10,884  $   11,691  $  11,428   $    6,629  $   6,513
Inventories                                 34,952     34,538      24,259     23,845       26,313     25,899
Total current assets                        69,287     68,372      74,277     73,600       62,685     62,155
Total assets                               139,235    138,320     104,899    104,222       93,627     93,097
Accounts payable                            33,981     33,293      27,700     27,012       19,545     18,857
Accrued insurance                            3,150      2,665       3,032      2,547        3,002      2,517
Other accrued liabilities                    3,844      3,942       6,197      6,388        3,765      4,463
Total current liabilities                   50,335     49,260      43,556     42,574       32,888     31,963
Retained earnings                           75,680     75,840      69,767     70,072       63,995     64,390
Total shareholders' investment              50,420     50,580      49,513     49,818       47,969     48,364
Total liab. and shareholders' invest.      139,235    138,320     104,899    104,222       93,627     93,097
Earnings Components:
Cost of products sold                      474,565    476,826     419,303    419,450      416,609    416,810
Gross profit                               105,636    103,375      82,753     82,606       80,350     80,149
Operating and administrative exp.           92,323     90,300      70,488     70,488       67,108     67,108
Operating income                            13,313     13,075      12,265     12,118       13,242     13,041
Earnings before income taxes                12,550     12,312      12,762     12,615       13,656     13,455
Provision for income taxes                   4,769      4,676       4,849      4,792        5,298      5,220
Net earnings                                 7,781      7,636       7,913      7,823        8,358      8,235
Earnings per share - basic                    1.49       1.46        1.33       1.32         1.32       1.30
Earnings per share - diluted                  1.48       1.45        1.33       1.31         1.30       1.28
------------------------------------------------------------------------------------------------------------
</TABLE>

Note 1a
Description of Business
     At the Schultz Sav-O Stores, Inc. annual shareholder meeting held on May
30, 2001 the shareholders approved a plan of share exchange to create a holding
company, Fresh Brands, Inc. ("FBI"). After the share exchange, each Schultz
Sav-O Stores, Inc. shareholder received one share of Fresh Brands, Inc. stock
for every share of Schultz Sav-O Stores, Inc. stock that he or she owned. On
June 4, 2001, the stock began trading on the Nasdaq National Market System under
the symbol "FRSH".
     Fresh Brands Distributing, Inc. ("FBDI"), a wholly owned subsidiary of FBI
located in Sheboygan, Wisconsin is engaged in the food distribution business
through franchised and corporate Piggly Wiggly(R) retail supermarkets and as a
supplier to independent food stores. Dick's(R) Supermarkets, Inc. ("DSI"), a
wholly owned subsidiary of FBI located in Platteville, Wisconsin operates
corporate Dick's retail supermarkets and is a wholesale supplier of bakery and
deli goods. FBDI provides delivery of wholesale goods to corporate retail stores
and other customers through PW Trucking, Inc., a wholly owned subsidiary of
FBDI. The corporate-owned and franchised retail supermarkets operating under the
Piggly Wiggly and Dick's Supermarkets brands, and independent food stores we
supply are located throughout Wisconsin and northern Illinois.

Note 2
Summary of Significant Accounting Policies
Fiscal year
     Our fiscal year ends on the Saturday closest to December 31. The 2001, 2000
and 1999 fiscal years were 52-week periods ended December 29, 2001, December 30,
2000, and January 1, 2000, respectively.

Principles of consolidation
     The consolidated financial statements include the accounts of Fresh Brands,
Inc. and its wholly-owned subsidiaries Fresh Brands Distributing, Inc., Dick's
Supermarkets, Inc. (from the date of acquisition on June 18, 2001) and PW
Trucking, Inc. Intercompany accounts and transactions have been eliminated.

Revenue recognition
     Wholesale revenue is recognized at the time products are shipped, as
shipments are F.O.B. shipping point. Retail revenue is recognized at the point
of sale.


<PAGE>

Cash and equivalents
     Cash and equivalents consist of demand deposits at commercial banks and
highly liquid investments with a maturity of three months or less when
purchased. Cash equivalents are stated at cost which approximates market value.

Receivables
     We record receivables primarily from our wholesale customers, most of which
are franchised customers. We continuously monitor the financial viability of our
customers and provide an allowance for doubtful accounts related to both credit
worthiness and retail subsidies that are provided to these customers.
Receivables are shown net of the allowance for doubtful accounts of $3,450,000,
$3,850,000 and $4,300,000 at December 29, 2001, December 30, 2000 and January 1,
2000, respectively.

Inventories
     Inventories, substantially all of which consist of food, groceries and
related products for resale, are stated at the lower of cost or market value.
Cost is determined primarily on the last-in, first-out (LIFO) method. At Fresh
Brands Distributing, Inc., for meat and produce, cost is determined on the
first-in, first-out (FIFO) method. At December 29, 2001, December 30, 2000 and
January 1, 2000, 84%, 79% and 81%, respectively, of all inventories were
accounted for under the LIFO method.
     The excess of current cost over the stated LIFO cost of inventory was
$9,704,000, $10,284,000 and $9,872,000 at December 29, 2001, December 30, 2000
and January 1, 2000, respectively.

Goodwill
     Goodwill is comprised of amounts paid in excess of the fair value of
acquired net assets and is amortized on a straight-line basis over the estimated
life of 20 years. Goodwill accumulated amortization was $775,000, $174,000 and
$115,000 at December 29, 2001, December 30, 2000 and January 1, 2000,
respectively. The amortization of goodwill in 2001 increased by approximately
$540,000 over 2000 due to the Dick's acquisition. Goodwill amortization expense
was $601,000, $59,000 and $59,000 for 2001, 2000 and 1999, respectively. For
fiscal 2002, we will adopt Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets". Under SFAS No. 142, goodwill
and intangible assets deemed to have indefinite lives will no longer be
amortized, but will be subject to impairment tests at least annually in
accordance with this statement. During fiscal 2002, we will perform the first of
the required impairment tests of goodwill. Management expects no goodwill
impairment as a result of the tests to be performed. Additionally, this
accounting change is expected to have a positive impact on pre-tax operating
earnings in 2002 of approximately $1.0 million.

Other current assets
     Other current assets at December 29, 2001, December 30, 2000 and January 2,
2000 consisted of the following:

     (In thousands)
     ---------------------------------------   --------  --------  --------
                                                 2001      2000      1999
     ---------------------------------------   --------  --------  --------
     Prepaid expenses                          $ 1,268   $ 1,417   $ 1,500
     Receivable under capital subleases            526       368       326
     Retail systems and supplies for resale        426       484       496
     ---------------------------------------   --------  --------  --------
     Other currentassets                       $ 2,220   $ 2,269   $ 2,322
     =======================================   ========  ========  ========

     Receivables under capital subleases represent amounts due to us under
sublease agreements with our franchised supermarkets. The subleases are
established with the franchisees using terms similar to those existing under the
primary lease agreement we have with the original lessor.

Land and building held for resale
     Land and building held for resale consists of costs incurred for retail
facility projects which complete in less than one year. Project costs which we
fund are accumulated until project completion. Upon project completion, and the
subsequent sale of the facility, lease arrangements are established.

Property and equipment, net
     Property and equipment are stated at cost, net of depreciation and
amortization. Depreciation and amortization is computed using the straight-line
method over the estimated useful lives of the assets. Equipment generally has a
useful life of 4 to 7 years; computer hardware and software have a useful life
of 3 to 5 years; buildings and land improvements have a useful life of 10 to 35
years; and leasehold improvements generally have a useful life of 10 to 20
years. Facility remodeling and upgrade costs on leased stores are capitalized as
leasehold improvements and are amortized over the shorter of the remaining lease
term or the useful life of the asset. Upon disposal, the appropriate asset cost
and accumulated depreciation and amortization are retired. Gains and losses on
disposition are included in earnings. Periodically, we evaluate all long-lived
assets for impairment using the guidelines of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets". Asset cost is reduced when an impairment is
identified. In 2001 an impairment loss of $200,000


<PAGE>

was recorded. No assets were determined to be impaired in 2000 or 1999.
     Property and equipment, net of accumulated depreciation and amortization at
December 29, 2001, December 30, 2000, and January 1, 2000 consisted of the
following:

 (In thousands)
-----------------------------------------------  ---------  ---------  ---------
                                                    2001       2000       1999
-----------------------------------------------  ---------  ---------  ---------
Land and buildings                               $ 15,639   $ 18,939   $ 18,842
Leasehold
improvements                                        8,344      5,609      5,772
Equipment and
fixtures                                           46,469     37,012     35,375
-----------------------------------------------  ---------  ---------  ---------
                                                 $ 70,452   $ 61,560   $ 59,989
Less accumulated depreciation and amortization    (43,939)   (42,167)   (39,704)
-----------------------------------------------  ---------  ---------  ---------
Property and equipment, net                      $ 26,513   $ 19,393   $ 20,285
===============================================  =========  =========  =========

Other noncurrent assets

     Other noncurrent assets, net of accumulated amortization of $3,273,000,
$3,298,000 and $2,716,000, at December 29, 2001, December 30, 2000 and January
1, 2000 consisted of the following:

          (In thousands)
          --------------------------  ---------  ---------  --------
                                         2001       2000      1999
          --------------------------  ---------  ---------  --------
          Capitalized software, net    $  3,036   $  2,983  $  1,475
          Other intangibles, net             45        136       227
          Other                             192        179       185
          --------------------------  ---------  ---------  --------
          Total                        $  3,273   $  3,298  $  1,887
          ==========================  =========  =========  ========

     When events and circumstances warrant, we review the carrying value of
capitalized software costs. Capitalized software generally has a useful life of
3 to 5 years. A loss may be recognized when the value of estimated undiscounted
cash flow benefit related to the asset falls below the unamortized cost.

Accounts payable
     Accounts payable includes $10,709,000, $11,537,000 and $6,277,000 at
December 29, 2001, December 30, 2000 and January 1, 2000, respectively, of
issued checks that have not cleared the Company's disbursing bank accounts.

Retail repositioning reserve
     Estimated repositioning and termination expenses associated with the
closure, replacement or disposal of stores, consisting primarily of lease
payments, related facility costs (taxes, utilities and maintenance) and
severance payments are charged to operating and administrative expenses upon the
decision to close, replace or dispose of a store as soon as the amounts are
reasonably estimated. At December 29, 2001, December 30, 2000 and January 1,
2000, the remaining retail repositioning reserve was $300,000, $495,000 and
$450,000, respectively. These amounts are included in other accrued liabilities
on the consolidated balance sheets. It is expected that these costs will be
completely expended by the end of 2003.

Financial instruments
     Our financial instruments consist of various debt facilities and cash
equivalents. At December 29, 2001, the fair market value of our financial
instruments was not materially different from the carrying value based on market
quotes, where available, and market yields for similar instruments.

Supplementary disclosure of cash flow information
     Interest and taxes paid included in our cash flow from operations were as
follows:

          (In thousands)
          -----------------   ----------   ----------   ----------
                                2001         2000         1999
          -----------------   ----------   ----------   ----------
          Interest paid        $  1,352     $    851     $    760
          Taxes paid              5,523        4,873        4,649
          -----------------   ----------   ----------   ----------

Non-cash investing and financing activities include capital lease obligations
incurred for properties of $13,933,000, $0 and $0 for 2001, 2000 and 1999,
respectively. Offsetting capital sublease receivables for 2001 were $5,772,000.

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

Advertising costs
     Costs incurred for producing and communicating advertising are generally
expensed when incurred.

Shipping and handling fees and costs
     We have historically presented shipping revenues as a component of net
sales and the related costs of transporting goods to the warehouse as part of
cost of products sold and the costs of shipping goods to customers as part of
operating and administrative expenses. Shipping and handling costs included in
operating and administrative expenses were $6,660,000, $5,567,000 and
$5,355,000, in 2001, 2000, and 1999, respectively.

<PAGE>

Reclassifications
     Certain 2000 and 1999 amounts previously reported have been reclassified to
conform to the 2001 presentation.

New accounting pronouncements
     In May 2000, the Emerging Issues Task Force ("EITF") issued No. 01-09,
"Accounting for Certain Sales Incentives". Issue 01-09 addresses the
recognition, measurement, and income statement classification for sales
incentives offered voluntarily by a vendor without charge to customers that can
be used in, or that are exercisable by a customer as a result of, a single
exchange transaction. This pronouncement will be adopted during fiscal 2002. We
feel this will reduce sales and cost of sales by approximately $6,000,000 in
fiscal 2002.
     In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for Impairment of Disposal of Long-Lived Assets" effective for
years beginning after December 15, 2001. SFAS No. 144 establishes a single
accounting model for long-lived assets to be disposed of by sale and provides
additional implementation guidance for assets to be held and used and assets to
be disposed of other than by sales. SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of". The Company believes that the adoption of SFAS 144 will not
have a significant impact on our consolidated financial statements.

Note 3
Acquisition
     On June 16, 2001, we acquired all of the outstanding common stock of Dick's
Supermarkets, Inc. for approximately $30.2 million in cash (including assumption
of funded debt). This acquisition has been accounted for under the purchase
method of accounting, and the results of Dick's Supermarkets, Inc. have been
included in our results from the date of acquisition. The purchase price was
allocated to the fair market value of the assets acquired and the liabilities
assumed. The purchase price allocation included the write-up to fair value of
inventory and fixed assets of $1.7 million and $4.7 million, respectively, and
resulted in goodwill of approximately $20.2 million.
     The following unaudited pro forma consolidated results of continuing
operations present the companies as if they had been combined at the beginning
of the periods presented. These pro forma results are based on assumptions
considered appropriate by management. These pro forma results have been prepared
for limited comparative purposes only and do not purport to be indicative of
results which would have actually been reported had the acquisition taken place
on January 2, 2000, or which may be reported in the future.

(In thousands, except per share data)
-----------------------------------------------------------------------------
                                              Restated           Restated
                                                2001               2000
-----------------------------------------------------------------------------
Net sales                                    $  624,254         $  608,480
Net earnings                                 $    7,061         $    7,710
-----------------------------------------------------------------------------
Basic and diluted earnings per share
-----------------------------------------------------------------------------
   Basic                                     $     1.35         $     1.30
   Diluted                                   $     1.34         $     1.30
=============================================================================

Note 4
Long-Term Debt
     We entered into a new loan agreement in June 2001 providing unsecured
revolving credit facilities totaling $35,000,000 which expires April 30, 2004.
This arrangement provides for borrowings at interest rates based on either the
bank's prime rate or adjusted LIBOR plus 1%. Quarterly commitment fees are also
paid at a rate of .0625% based on the average daily unused amount of the
revolving credit facility. At December 29, 2001, the interest rate was 3.12%.
There are no compensating balance requirements. At December 29, 2001 we had
related debt outstanding from the revolving line of credit of $13,650,000. There
were no borrowings under this agreement during 2000.
     Long-term debt at December 29, 2001, December 30, 2000 and January 1, 2000
consisted of the following:


<PAGE>

(In thousands)
--------------------------------------------------------------------------------
                                                2001         2000         1999
--------------------------------------------------------------------------------
Revolving line of credit                     $ 13,650      $     -

Mortgage note, 9.675%, due in monthly
 installments of $33 including interest
 due through June 2012                          2,618        2,754        2,878
Note payable, 3.0%, due in monthly
 installments of $5 including interest
  due through July 2006                           304            -            -
Note payable, 2.0%, due in monthly
 installments of $8 including interest
 due through 2004                                 254            -            -
Land contract, 10.0%, due in annual
 installments of $33 through March 2003            66          100          133
--------------------------------------------------------------------------------
                                               16,892        2,854        3,011
 Less current maturities                         (323)        (169)        (146)
--------------------------------------------------------------------------------
 Long-term debt                              $ 16,569      $ 2,685      $ 2,865
================================================================================

     The revolving credit and term note agreements contain various covenants
including, among others, the maintenance of defined working capital, net worth
requirements, certain fixed charge coverage ratios, restrictions against
pledging of or liens upon certain assets, mergers, significant changes in
ownership and limitations on restricted payments. At December 29, 2001 we were
in compliance with the requirements of all of our debt covenants.

     The total amount of long-term debt due in each of the fiscal years 2002
through 2006 will be $323,000, $351,000, $13,956,000, $250,000 and $234,000
respectively, and $1,778,000 from 2007 and thereafter.

     Interest expense consisted of the following:

(In thousands)
-----------------------------------------------------------------------------
                                               2001        2000        1999
-----------------------------------------------------------------------------
Imputed interest-capital leases               $  726      $  565      $  445
Interest on long-term debt                       584         287         302
Other                                             58          -           14
-----------------------------------------------------------------------------
Interest expense                              $1,368      $  852      $  761
=============================================================================

Note 5
Income Taxes
     The difference between the statutory federal income tax rate and the
effective rate is summarized as follows:

     ---------------------------------------------------------------
                                             2001     2000     1999
     ---------------------------------------------------------------
     Federal income tax                      34.0%    34.0%    34.0%
     State income taxes, net of federal
      income tax benefit                      4.7      4.8      4.5
     Other, net                              (0.7)    (0.8)     0.3
     ---------------------------------------------------------------
     Effective income tax rate               38.0%    38.0%    38.8%
     ===============================================================

     The components of the provision for income taxes consisted of the
following:

     (In thousands)
     ----------------------------------------------------------------
                                Restated      Restated      Restated
                                  2001          2000          1999
     ----------------------------------------------------------------
     Currently payable
        Federal                  $3,888        $4,019        $3,856
        State                       903           950           883
     Deferred                      (115)         (177)          481
     ----------------------------------------------------------------
     Provision for
     income taxes                $4,676        $4,792        $5,220
     ================================================================

     The components of deferred income tax assets and liabilities at December
29, 2001, December 30, 2000 and January 1, 2000 were as follows:

(In thousands)
------------------------------------------------------------------------------
                                             2001         2000         1999
------------------------------------------------------------------------------
Deferred income tax assets:
  Bad debt reserve                           $1,346       $1,502       $1,677
  Accrued insurance                           1,238        1,195        1,182
  Capital leases                                770          743          727
  Vacation pay                                  964          718          652
  Retail repositioning reserve                  117          193          176
  Other                                         895          585          747
------------------------------------------------------------------------------
Total deferred
   income tax assets                          5,330        4,936        5,161
------------------------------------------------------------------------------
Deferred income tax
liabilities:
  Property and equipment                     (1,887)      (1,618)      (2,025)
   Pension                                      (87)         (77)         (72)
------------------------------------------------------------------------------
Total deferred income tax liabilities        (1,974)      (1,695)      (2,097)
------------------------------------------------------------------------------
Net deferred income tax assets               $3,356       $3,241        $3,064
==============================================================================


<PAGE>

     We currently have no requirements for a valuation allowance for our
deferred income tax assets. The net deferred income tax assets as of December
29, 2001, December 30, 2000 and January 1, 2000 were classified in the balance
sheet as follows:

(In thousands)
-------------------------------------------------------------------------------
                                                   2001       2000       1999
-------------------------------------------------------------------------------
Current deferred income tax asset               $  4,459   $  4,102   $  3,900
Noncurrent deferred income tax liability          (1,103)      (861)      (836)
-------------------------------------------------------------------------------
Net deferred income tax assets                  $  3,356   $  3,241   $  3,064
===============================================================================

Note 6
Commitments and Contingent Liabilities
     As of December 29, 2001, we were contingently liable under guarantees of
bank note agreements of wholesale customers totaling $14,779,000. All of the
loan guarantees are substantially collateralized, principally with equipment and
inventory, and to a lesser extent, with building facilities.
     Capital expenditure commitments made by the Company as of December 29, 2001
were approximately $15,000,000.

Note 7
Retirement Plans
     We have a trusteed retirement savings defined contribution plan, which
includes provisions of Section 401(k) of the Internal Revenue Code, for the
benefit of our non-union eligible employees. For FBDI, annual provisions are
based on a mandatory 5% of eligible participant compensation and additional
amounts at the sole discretion of the Board of Directors. For DSI, annual
provisions are based on 1% of eligible participant compensation. Provisions for
2001, 2000 and 1999 were $1,317,000, $975,000 and $930,000, respectively. Both
plans allow participants to make pretax contributions. We then match certain
percentages of employee contributions. Our matching contributions for 2001, 2000
and 1999 were $230,000, $95,000 and $90,000, respectively.
     We have union-administered multi-employer pension plans covering all hourly
paid employees represented by collective bargaining agreements. Total pension
expense was $2,010,000, $1,814,000 and $1,696,000 in 2001, 2000 and 1999,
respectively.

Note 8
Leases
     We lease most of our retail stores under lease agreements with original
lease periods of 15 to 20 years and typically with five-year renewal options.
Exercise of such options is dependent on, among others, the level of business
conducted at the location. Executory costs, such as maintenance and real estate
taxes, are generally our responsibility. In a majority of situations, we will
enter into a lease for a store and sublease the store to a wholesale customer.
When leases of this type are established, the future minimum lease payments due
under the capital lease arrangements with our customers are recorded on our
consolidated balance sheets as sublease receivables. Additionally, we lease
transportation equipment, principally tractors and trailers, corporate office
space and certain office equipment. Some real estate leases contain contingent
rental provisions based on sales volume at retail stores and some equipment
leases contain contingent rental provisions based on miles traveled for tractors
and trailers.
     Capitalized leases were calculated using interest rates appropriate at the
inception of each lease. A summary of real property utilized by us under capital
leases at December 29, 2001, December 30, 2000 and January 1, 2000 was as
follows:

(In thousands)
-------------------------------------------------------------------------------
                                               2001         2000         1999
-------------------------------------------------------------------------------
Investments in leased property
 under capital leases                       $ 14,675     $  6,514     $  6,514
Less accumulated amortization                 (4,071)      (3,463)      (3,052)
-------------------------------------------------------------------------------
Property under capital leases, net          $ 10,604     $  3,051     $  3,462
===============================================================================

     Amortization of leased property under capital leases, included in operating
and administrative expenses, amounted to $619,000, $411,000 and $287,000 in
2001, 2000 and 1999, respectively.


<PAGE>

     The following is a schedule of future minimum lease payments under capital
leases and subleases and the present value of such payments as of December 29,
2001:

(In thousands)
------------------------------------------------------------------------------
                                                    Capital        Capital
                                                     Lease        Sublease
                                                  Obligations    Receivables
------------------------------------------------------------------------------
2002                                               $  3,130       $  1,473
2003                                                  3,106          1,484
2004                                                  2,910          1,490
2005                                                  2,952          1,499
2006                                                  2,863          1,394
2007-2021                                            23,249         10,164
-------------------------------------------------------------------------------
Total minimum lease payments                         38,210         17,504
Less interest                                       (16,210)        (7,700)
-------------------------------------------------------------------------------
Present value of minimum lease payments
 and amounts receivable                              22,000          9,804
Less current portion                                 (1,192)          (526)
-------------------------------------------------------------------------------
Long-term obligations and receivable               $ 20,808       $  9,278
===============================================================================

     The following is a schedule of future minimum lease payments required under
operating leases for retail stores, transportation equipment, corporate office
space and office equipment that have noncancelable operating lease terms in
excess of one year as of December 29, 2001:

     (In thousands)
     ----------------------------------------------------------------
     2002                                                $   13,188
     2003                                                    12,955
     2004                                                    12,496
     2005                                                    11,717
     2006                                                    10,956
     2007-2020                                               81,636
     ----------------------------------------------------------------
     Total minimum lease payments                        $  142,948
     Less minimum amounts receivable
       under noncancelable subleases                       (100,306)
     ----------------------------------------------------------------
     Net minimum lease payments                          $   42,642
     ----------------------------------------------------------------

     Rental expenses, net of rental income from subleases, for all operating
leases amounted to $6,166,000, $5,260,000 and $5,010,000 in 2001, 2000 and 1999,
respectively. These amounts include $1,215,000, $1,035,000 and $1,054,000,
respectively, for contingent rentals.
     In October of 2001, we entered into an arrangement to sell and leaseback an
existing Sheboygan, Wisconsin corporate supermarket for conversion into an
additional distribution center. The new 20 year capital lease will expire in
2021.

Note 9
Stock Option Plans
     We have stock option plans which provide for the grant of either incentive
or nonqualified stock options to key employees and nonqualified options to
directors. The exercise price of each option is equal to the market price of our
stock on the date of grant. Options granted prior to year 2000, are exercisable
for seven years from the date of grant. Options granted beginning in January
2000, are now exercisable for ten years from the date of grant. Most options
vest ratably over the first three years. Such vesting may be accelerated by the
Stock Option Committee of the Board of Directors or upon a change in control of
the Company, as defined by the plans.
     We adopted the disclosure requirements of SFAS No. 123. Had we determined
compensation cost based on the fair value at the grant date for our stock
options under SFAS No. 123, our net earnings would have been reduced to the
following pro forma amounts below:

     (In thousands)
     -------------------------------------------------------------------
                                        Restated    Restated    Restated
                                          2001        2000        1999
     -------------------------------------------------------------------
     Net earnings
       As reported                       $7,636      $7,823      $8,235
       Pro forma                          7,241       7,487       7,889
     -------------------------------------------------------------------
     Earnings per share-diluted
       As reported                        $1.45       $1.31       $1.28
       Pro forma                          $1.37       $1.26       $1.23
     ===================================================================

     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2001, 2000 and 1999:

     (In thousands)
     ------------------------------------------------------------------
                                    2001          2000          1999
     ------------------------------------------------------------------
     Dividend yield                 2.25%         2.00%         2.00%
     Expected volatility           28.22%        25.01%        25.91%
     Risk-free interest rate        5.05%         6.57%         4.75%
     Expected term of grant       7.0 years     5.5 years     5.5 years
     ==================================================================

     The fair values of each option granted in 2001, 2000 and 1999 were $3.85,
$3.48 and $4.27, respectively.

     As of December 29, 2001, no incentive stock options have been granted.
Following is a summary of the status of nonqualified stock options for the
fiscal years 2001, 2000 and 1999:


<PAGE>

(In thousands)
--------------------------------------------------------------------------------
                                                     Number     Weighted Average
                                                    of shares    Exercise prices
--------------------------------------------------------------------------------
Shares under option at January 2, 1999              672,750          $ 9.21
   Granted                                          165,700           16.13
   Exercised                                       (166,750)           5.54
    Forfeited                                       (27,500)          14.81
--------------------------------------------------------------------------------
Shares under option at January 1, 2000              644,200           11.70
   Granted                                          187,200           11.84
   Exercised                                       (200,100)           8.01
   Forfeited                                        (28,600)          14.38
--------------------------------------------------------------------------------
Shares under option at December 30, 2000            602,700           12.85
   Granted                                          332,000           12.56
   Exercised                                       (117,000)           9.22
   Forfeited                                       (189,000)          14.38
--------------------------------------------------------------------------------
Shares under option at December 29, 2001            628,700           12.91
================================================================================
Shares reserved for grant at December 29, 2001      781,600
================================================================================

The range of options outstanding at December 29, 2001 is as follows:

-------------------------------------------------------------------------------
Price Range per Share                 $9.67-$14.25     $15.00-$18.85     Total
-------------------------------------------------------------------------------
Number of options outstanding            466,200           162,500      628,700
Weighted average exercise price
 outstanding                              $11.78            $16.15       $12.91
Number of options exercisable            107,866           135,667      243,533
Weighted average exercise price
 exercisable                              $11.63            $16.15       $14.15
Weighted average remaining
 contractual life (in years)                8.26              4.64         7.33
===============================================================================

     When options are exercised, we realize certain income tax benefits. These
benefits resulted in a decrease in current income taxes payable and a
corresponding increase in additional paid-in capital.
     Nonqualified stock options were exercisable at the weighted average per
share prices of $14.15, $12.09 and $9.29 at December 29, 2001, December 30, 2000
and January 1, 2000, respectively.

Note 10
Common Stock
     On October 11, 2001, the Board of Directors of Fresh Brands, Inc. declared
a dividend of one common share purchase right for each outstanding share of
common stock, par value $.05, of the Company. The dividend was payable on
November 23, 2001 to the shareholders of record on November 9, 2001. The rights
will be exercisable only if a person or group acquires 20% or more of our common
stock or announces a tender offer, consummation of which would result in
ownership by a person or group of 20% or more of the common stock. Each right
will initially entitle shareholders to buy one share of our common stock at an
initial exercise price of $50.00 per share, subject to adjustment. The rights do
not have any voting rights or receive dividends and may be redeemed at a price
of $.001 per right. If any person becomes a 20% or more shareholder of the
Company, each right, other than those owned by the 20% shareholder, will
(subject to certain limitations) entitle its holder to purchase, at the rights'
then-current exercise price, a number of common shares of the Company or of the
acquirer having a market value at that time of twice the rights' per share
exercise price. The Board of Directors is also authorized to reduce the 20%
threshold to not less than 10%. The rights expire on November 9, 2011, subject
to extension.

Note 11
Earnings Per Share
     Basic earnings per share is computed by dividing net earnings by the
weighted average number of shares of common stock outstanding during the year.
Diluted earnings per share is computed by dividing net earnings by the weighted
average number of shares of common stock outstanding and common stock
equivalents during the year. Common stock equivalents used in computing diluted
earnings per share related to stock options which, if exercised, would have a
dilutive effect on earnings per share. We had antidilutive shares for 2001, 2000
and 1999 of 217,500, 441,000 and 153,700, respectively.


<PAGE>

     Our calculations of earnings per share-basic and earnings per share-diluted
were as follows:

(In thousands)
--------------------------------------------------------------------------------
                                                  Restated   Restated   Restated
                                                    2001       2000       1999
--------------------------------------------------------------------------------
Net earnings available for common shareholders     $ 7,636    $ 7,823   $ 8,235
Weighted average shares outstanding                  5,228      5,935     6,336
Earnings per share-basic                             $1.46      $1.32     $1.30
--------------------------------------------------------------------------------
Net earnings available for common shareholders     $ 7,636    $ 7,823   $ 8,235
Weighted average shares outstanding                  5,228      5,935     6,336
Stock options' dilutive effect                          41         16       102
Weighted average shares and equivalents
 outstanding                                         5,269      5,951     6,438
Earnings per share-diluted                           $1.45      $1.31     $1.28
--------------------------------------------------------------------------------

Note 12
Segment Reporting
     Our operations are classified into two reportable business segments,
wholesale and retail. The operational performance of both wholesale and retail
segments are managed and evaluated by management.
     The wholesale segment represents our business activities relating to food
wholesale distribution. At December 29, 2001, we provided products to 72
franchised units, 27 corporate stores and a number of independent retail stores.
The wholesale segment includes warehousing, transportation, manufacturing and
other logistical functions, and derives its revenues primarily from the sale of
groceries, produce, dairy, meat and cigarette products to our franchised,
corporate and independent retail customers. Topco LLC was a major supplier to
our wholesale segment in 2001 providing nearly 12% of total inventory purchases
for each of the last three years. Inventory purchases from Topco for 2001, 2000
and 1999 were $55,703,000, $50,442,000 and $50,338,000, respectively. The retail
segment relates to our retail supermarket activities. Revenues are realized
through the sale of groceries, dairy, produce, meat, bakery, deli and other
merchandise by our corporate retail stores to retail consumers.
     The accounting policies of the two segments are the same as those described
in the Summary of Significant Accounting Policies. Our management utilizes
several measurement tools in evaluating each segment's performance and each
segment's resource requirements. However, the principal measurement tools are
consistent with our consolidated financial statements and accordingly are
reported on a similar basis. Wholesale operating profits on sales through our
corporate stores are allocated to the retail segment. The "corporate" heading
includes corporate-related items, principally cash and equivalents. As it
relates to operating income, the "corporate" heading includes corporate-related
items allocated to the appropriate segments.
     Summarized financial information concerning our reportable segments is
shown in the following table:

<TABLE>
<CAPTION>
(In thousands)
--------------------------------------------------------------------------------------
Sales                                         2001             2000            1999
--------------------------------------------------------------------------------------
<S>                                        <C>              <C>             <C>
Wholesale sales                            $ 451,934        $ 409,437       $ 411,913
Inter/Intracompany
Sales                                       (143,156)        (114,910)       (123,376)
--------------------------------------------------------------------------------------
Net wholesale sales                          308,778          294,527         288,537
Retail sales                                 271,423          207,529         208,422
--------------------------------------------------------------------------------------
Total                                      $ 580,201        $ 502,056       $ 496,810
======================================================================================

--------------------------------------------------------------------------------------
                                            Restated         Restated        Restated
Earnings before income taxes                  2001             2000            1999
--------------------------------------------------------------------------------------
Wholesale                                  $   9,969        $   9,204       $   9,669
Retail                                         3,106            2,914           3,372
--------------------------------------------------------------------------------------
Total operating income                        13,075           12,118          13,041
Interest income                                  605            1,349           1,175
Interest expense                              (1,368)            (852)           (761)
--------------------------------------------------------------------------------------
Earnings before income taxes               $  12,312        $  12,615       $  13,455
======================================================================================

--------------------------------------------------------------------------------------
Capital Expenditures                          2001             2000            1999
--------------------------------------------------------------------------------------
Wholesale                                  $   1,569        $     378       $     199
Retail                                         3,175            2,214           1,869
Corporate                                      1,221            2,686           1,141
--------------------------------------------------------------------------------------
Total                                      $   5,965        $   5,278       $   3,209
======================================================================================

--------------------------------------------------------------------------------------
Depreciation and Amortization                 2001             2000            1999
--------------------------------------------------------------------------------------
Wholesale                                  $     926        $     829       $     820
Retail                                         4,705            3,001           2,450
Corporate                                      1,264            1,385           1,689
--------------------------------------------------------------------------------------
Total                                      $   6,895        $   5,215       $   4,959
======================================================================================

--------------------------------------------------------------------------------------
                                            Restated         Restated        Restated
Identifiable Assets                           2001             2000            1999
--------------------------------------------------------------------------------------
Wholesale                                  $  38,556        $  31,185       $  33,509
Retail                                        69,403           28,077          28,363
Corporate                                     30,361           44,960          31,225
--------------------------------------------------------------------------------------
Total                                      $ 138,320        $ 104,222       $  93,097
======================================================================================
</TABLE>


<PAGE>

<TABLE>
Restated Quarterly Financial Information (Unaudited)
     We generally include sixteen weeks in our first quarter and twelve weeks in each subsequent quarter. Summarized
quarterly and annual financial information for fiscal years 2001, 2000 and 1999 follows:

<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data)                 Fiscal Year Ended December 29, 2001
-------------------------------------------------------------------------------------------------------------------------
                                                              First       Second        Third       Fourth        Year
-------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>          <C>          <C>          <C>          <C>
Net sales                                                   $ 155,724    $ 131,899    $ 145,488    $ 147,090    $ 580,201
Gross profit                                                   26,006       23,064       28,321       25,984      103,375
Net earnings                                                    1,856        1,741        1,490        2,549        7,636
Earnings per share - basic                                       0.34         0.33         0.30         0.50         1.46
Earnings per share - diluted                                     0.34         0.33         0.29         0.50         1.45
Weighted average shares and equivalents outstanding             5,518        5,251        5,097        5,133        5,269
-------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data)                 Fiscal Year Ended December 30, 2000
-------------------------------------------------------------------------------------------------------------------------
                                                              First       Second        Third       Fourth        Year
-------------------------------------------------------------------------------------------------------------------------
Net sales                                                   $ 147,688    $ 116,459    $ 116,341    $ 121,568    $ 502,056
Gross profit                                                   24,423       19,432       18,801       19,950       82,606
Net earnings                                                    1,846        1,879        1,529        2,569        7,823
Earnings per share - basic                                       0.31         0.32         0.26         0.44         1.32
Earnings per share - diluted                                     0.31         0.31         0.26         0.43         1.31
Weighted average shares and equivalents outstanding             5,999        5,989        5,951        5,916        5,951
-------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data)                 Fiscal Year Ended January 1, 2000
-------------------------------------------------------------------------------------------------------------------------
                                                              First       Second        Third       Fourth        Year
-------------------------------------------------------------------------------------------------------------------------
Net sales                                                   $ 146,951    $ 115,124    $ 113,406    $ 121,478    $ 496,959
Gross profit                                                   23,763       18,688       18,290       19,408       80,149
Net earnings                                                    1,811        2,001        1,635        2,788        8,235
Earnings per share - basic                                       0.28         0.31         0.26         0.46         1.30
Earnings per share - diluted                                     0.27         0.30         0.25         0.46         1.28
Weighted average shares and equivalents outstanding             6,756        6,601        6,421        6,095        6,438
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
     The following tables reconcile our previously filed quarterly financial information to the restated quarterly financial
information included herein for restatements described more fully in Note 1.

<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data)                        16-weeks Ended April 21, 2001
-------------------------------------------------------------------------------------------------------------------------
                                                                         As Previously                             As
                                                                           Reported           Adjustment        Restated
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                  <C>             <C>
Net sales                                                                  $155,724             $    -          $155,724
Cost of products sold                                                       129,662                 56           129,718
Gross profit                                                                 26,062                (56)           26,006
Operating income                                                              2,944                (56)            2,888
Earnings before income taxes                                                  3,048                (56)            2,992
Provision for income taxes                                                    1,158                (22)            1,136
Net earnings                                                                  1,890                (34)            1,856
Earnings per share - basic                                                     0.34                  -              0.34
Earnings per share - diluted                                                   0.34                  -              0.34
Weighted average shares and equivalents outstanding                           5,518                                5,518
-------------------------------------------------------------------------------------------------------------------------
</TABLE>


<PAGE>


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data)                        12-weeks Ended July 14, 2001
-------------------------------------------------------------------------------------------------------------------------
                                                                         As Previously                             As
                                                                           Reported           Adjustment        Restated
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                  <C>             <C>
Net sales                                                                  $131,899             $   -           $131,899
Cost of products sold                                                       108,778                 57           108,835
Gross profit                                                                 23,121                (57)           23,064
Operating income                                                              2,919                (57)            2,862
Earnings before income taxes                                                  2,865                (57)            2,808
Provision for income taxes                                                    1,089                (22)            1,067
Net earnings                                                                  1,776                (35)            1,741
Earnings per share - basic                                                     0.34              (0.01)             0.33
Earnings per share - diluted                                                   0.34              (0.01)             0.33
Weighted average shares and equivalents outstanding                           5,251                                5,251
-------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data)                        12-weeks Ended October 6, 2001
-------------------------------------------------------------------------------------------------------------------------
                                                                         As Previously                             As
                                                                           Reported           Adjustment        Restated
-------------------------------------------------------------------------------------------------------------------------
Net sales                                                                  $145,488             $   -           $145,488
Cost of products sold                                                       117,092                 75           117,167
Gross profit                                                                 28,396                (75)           28,321
Operating income                                                              2,807                (75)            2,732
Earnings before income taxes                                                  2,482                (75)            2,407
Provision for income taxes                                                      947                (30)              917
Net earnings                                                                  1,535                (45)            1,490
Earnings per share - basic                                                     0.30                  -              0.30
Earnings per share - diluted                                                   0.30              (0.01)             0.29
Weighted average shares and equivalents outstanding                           5,097                                5,097
-------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data)                        12-weeks Ended December 29, 2001
-------------------------------------------------------------------------------------------------------------------------
                                                                         As Previously                             As
                                                                           Reported           Adjustment        Restated
-------------------------------------------------------------------------------------------------------------------------
Net sales                                                                  $147,090            $    -           $147,090
Cost of products sold                                                       119,033              2,073           121,106
Gross profit                                                                 28,057             (2,073)           25,984
Operating and administrative expenses                                        23,414             (2,023)           21,391
Operating income                                                              4,643                (50)            4,593
Earnings before income taxes                                                  4,155                (50)            4,105
Provision for income taxes                                                    1,575                (19)            1,556
Net earnings                                                                  2,580                (31)            2,549
Earnings per share - basic                                                     0.51              (0.01)             0.50
Earnings per share - diluted                                                   0.50                  -              0.50
Weighted average shares and equivalents outstanding                           5,133                                5,133
-------------------------------------------------------------------------------------------------------------------------

     In the fourth quarter of 2001, we restated our cost of products sold to include labor costs related to our deli and
bakery manufacturing operation which were previously recorded as operating and administrative expenses.
</TABLE>


<PAGE>

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data)                        16-weeks Ended April 22, 2000
-------------------------------------------------------------------------------------------------------------------------
                                                                         As Previously                             As
                                                                           Reported           Adjustment        Restated
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                  <C>             <C>
Net sales                                                                  $147,688             $   -           $147,688
Cost of products sold                                                       123,229                 36           123,265
Gross profit                                                                 24,459                (36)           24,423
Operating income                                                              2,999                (36)            2,963
Earnings before income taxes                                                  3,013                (36)            2,977
Provision for income taxes                                                    1,145                (14)            1,131
Net earnings                                                                  1,868                (22)            1,846
Earnings per share - basic                                                     0.31                  -              0.31
Earnings per share - diluted                                                   0.31                  -              0.31
Weighted average shares and equivalents outstanding                           5,999                                5,999
-------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data)                        12-weeks Ended July 15, 2000
-------------------------------------------------------------------------------------------------------------------------
                                                                         As Previously                             As
                                                                           Reported           Adjustment        Restated
-------------------------------------------------------------------------------------------------------------------------
Net sales                                                                  $116,459             $   -           $116,459
Cost of products sold                                                        96,988                 39            97,027
Gross profit                                                                 19,471                (39)           19,432
Operating income                                                              2,964                (39)            2,925
Earnings before income taxes                                                  3,069                (39)            3,030
Provision for income taxes                                                    1,166                (15)            1,151
Net earnings                                                                  1,903                (24)            1,879
Earnings per share - basic                                                     0.32                  -              0.32
Earnings per share - diluted                                                   0.32              (0.01)             0.31
Weighted average shares and equivalents outstanding                           5,989                                5,989
-------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data)                        12-weeks Ended October 7, 2000
-------------------------------------------------------------------------------------------------------------------------
                                                                         As Previously                             As
                                                                           Reported           Adjustment        Restated
-------------------------------------------------------------------------------------------------------------------------
Net sales                                                                  $116,341             $   -           $116,341
Cost of products sold                                                        97,498                 42            97,540
Gross profit                                                                 18,843                (42)           18,801
Operating income                                                              2,333                (42)            2,291
Earnings before income taxes                                                  2,508                (42)            2,466
Provision for income taxes                                                      953                (16)              937
Net earnings                                                                  1,555                (26)            1,529
Earnings per share - basic                                                     0.26                  -              0.26
Earnings per share - diluted                                                   0.26                  -              0.26
Weighted average shares and equivalents outstanding                           5,951                                5,951
-------------------------------------------------------------------------------------------------------------------------
</TABLE>


<PAGE>

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data)                        12-weeks Ended December 30, 2000
-------------------------------------------------------------------------------------------------------------------------
                                                                         As Previously                             As
                                                                           Reported           Adjustment        Restated
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                  <C>             <C>
Net sales                                                                  $121,568             $   -           $121,568
Cost of products sold                                                       101,588                 30           101,618
Gross profit                                                                 19,980                (30)           19,950
Operating income                                                              3,969                (30)            3,939
Earnings before income taxes                                                  4,172                (30)            4,142
Provision for income taxes                                                    1,585                (12)            1,573
Net earnings                                                                  2,587                (18)            2,569
Earnings per share - basic                                                     0.44                  -              0.44
Earnings per share - diluted                                                   0.44              (0.01)             0.43
Weighted average shares and equivalents outstanding
                                                                              5,916                                5,916
-------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data)                        16-weeks Ended April 24, 1999
-------------------------------------------------------------------------------------------------------------------------
                                                                         As Previously                             As
                                                                           Reported           Adjustment        Restated
-------------------------------------------------------------------------------------------------------------------------
Net sales                                                                  $146,951             $   -           $146,951
Cost of products sold                                                       123,155                 33           123,188
Gross profit                                                                 23,796                (33)           23,763
Operating income                                                              2,831                (33)            2,798
Earnings before income taxes                                                  2,992                (33)            2,959
Provision for income taxes                                                    1,161                (13)            1,148
Net earnings                                                                  1,831                (20)            1,811
Earnings per share - basic                                                     0.28                  -              0.28
Earnings per share - diluted                                                   0.27                  -              0.27
Weighted average shares and equivalents outstanding                           6,756                                6,756
-------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data)                        12-weeks Ended July 17, 1999
-------------------------------------------------------------------------------------------------------------------------
                                                                         As Previously                             As
                                                                           Reported           Adjustment        Restated
-------------------------------------------------------------------------------------------------------------------------
Net sales                                                                  $115,124             $   -           $115,124
Cost of products sold                                                        96,376                 60            96,436
Gross profit                                                                 18,748                (60)           18,688
Operating income                                                              3,262                (60)            3,202
Earnings before income taxes                                                  3,330                (60)            3,270
Provision for income taxes                                                    1,292                (23)            1,269
Net earnings                                                                  2,038                (37)            2,001
Earnings per share - basic                                                     0.32              (0.01)             0.31
Earnings per share - diluted                                                   0.31              (0.01)             0.30
Weighted average shares and equivalents outstanding                           6,601                                6,601
-------------------------------------------------------------------------------------------------------------------------
</TABLE>



<PAGE>

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data)                        12-weeks Ended October 9, 1999
-------------------------------------------------------------------------------------------------------------------------
                                                                         As Previously                             As
                                                                           Reported           Adjustment        Restated
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                  <C>             <C>
Net sales                                                                  $113,406             $   -           $113,406
Cost of products sold                                                        95,053                 63            95,116
Gross profit                                                                 18,353                (63)           18,290
Operating income                                                              2,579                (63)            2,516
Earnings before income taxes                                                  2,733                (63)            2,670
Provision for income taxes                                                    1,060                (25)            1,035
Net earnings                                                                  1,673                (38)            1,635
Earnings per share - basic                                                     0.27              (0.01)             0.26
Earnings per share - diluted                                                   0.26              (0.01)             0.25
Weighted average shares and equivalents outstanding                           6,421                                6,421
-------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data)                        12-weeks Ended January 1, 2000
-------------------------------------------------------------------------------------------------------------------------
                                                                         As Previously                             As
                                                                           Reported           Adjustment        Restated
-------------------------------------------------------------------------------------------------------------------------
Net sales                                                                  $121,478             $   -           $121,478
Cost of products sold                                                       102,025                 45           102,070
Gross profit                                                                 19,453                (45)           19,408
Operating income                                                              4,570                (45)            4,525
Earnings before income taxes                                                  4,601                (45)            4,556
Provision for income taxes                                                    1,785                (17)            1,768
Net earnings                                                                  2,816                (28)            2,788
Earnings per share - basic                                                     0.47              (0.01)             0.46
Earnings per share - diluted                                                   0.46                  -              0.46
Weighted average shares and equivalents outstanding                           6,095                                6,095
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

Common Stock Information

     Our common stock is traded over-the-counter on the Nasdaq Stock Market
under the symbol FRSH. There are approximately 1,400 shareholders of our common
stock. An analysis of high and low stock prices by quarter and for the last
three years are as follows:

<TABLE>
<CAPTION>
       ----------------------------------------------------------------------------------------------------------
                       First Quarter      Second Quarter     Third Quarter      Fourth Quarter         Year
                       High      Low      High      Low      High      Low      High      Low      High      Low
       ----------------------------------------------------------------------------------------------------------
       <S>            <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>
       2001           $13.00   $ 9.75    $14.75   $11.75    $16.75   $13.70    $18.99   $14.00    $18.99   $ 9.75
       2000            13.00     9.88     12.00    10.13     12.38    10.50     12.00    10.63     13.00     9.88
       1999            17.38    15.75     17.13    16.00     16.75    15.75     15.75    11.25     17.38    11.25
       ----------------------------------------------------------------------------------------------------------
</TABLE>

     Cash dividends paid per share were:

<TABLE>
<CAPTION>
       ----------------------------------------------------------------------------------------------------------
                    First Quarter      Second Quarter      Third Quarter      Fourth Quarter        Year
       ----------------------------------------------------------------------------------------------------------
       <S>              <C>                 <C>                <C>                <C>              <C>
       2001             $0.09               $0.09              $0.09              $0.09            $0.36
       2000              0.09                0.09               0.09               0.09             0.36
       1999              0.08                0.08               0.09               0.09             0.34
       ----------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements

     Certain matters discussed in this report are "forward-looking statements"
intended to qualify for the safe harbors from liability established by the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements can generally be identified as such because the context of the
statement will include words such as we believe, anticipate, expect or words of
similar import. Similarly, statements that describe our future plans,
objectives, strategies or goals are also forward-looking statements.
Specifically, forward-looking statements include statements about (a) our
five-year compound annual sales growth goals; (b) our expectations regarding
changes in our sales, gross margin, operating expenses and other measures of our
performance in 2002; (c) our plans to remodel existing supermarkets, open
additional supermarkets and convert existing supermarkets to franchised
supermarkets; (d) the effect that our business information technology systems
replacement project is expected to have upon our earnings; (e) the possibility
that we might incur additional repositioning costs associated with
underperforming and non-competitive supermarkets; (f) the likelihood that we
will not continue to repurchase as many shares of our common stock as we have in
the past; and (g) the impact that new accounting pronouncements regarding the
amortization of goodwill and the treatment of certain coupons will have upon our
earnings, sales, gross margin and cost of goods sold. Such forward-looking
statements are subject to certain risks and uncertainties that may materially
adversely affect the anticipated results. Such risks and uncertainties include,
but are not limited, to the following: (1) the presence of intense competitive
market activity in our market areas, including competition from warehouse club
stores and deep discount supercenters; (2) the cost and results of our new
business information technology systems replacement project; (3) our ability to
identify and develop new market locations and/or acquisition candidates for
expansion purposes; (4) our continuing ability to obtain reasonable vendor
marketing funds for promotional purposes; (5) the potential purchase of a
significant number of our franchised supermarkets; (6) our continuing ability to
purchase merchandise, equipment and supplies through a purchasing cooperative at
prices lower than what are otherwise available; (7) our ability to continue to
recruit, train and retain quality franchise and corporate supermarket operators;
(8) the potential recognition of repositioning charges resulting from potential
closures, conversions and consolidations of our supermarkets due principally to
the competitive nature of the industry and to the quality of our supermarket
operators; and (9) our ability to integrate and assimilate the acquisition of
Dick's Supermarkets, Inc. and to achieve, on a timely basis, its anticipated
benefits and synergies. Shareholders, potential investors and other readers are
urged to consider these factors carefully in evaluating the forward-looking
statements made herein and are cautioned not to place undue reliance on such
forward-looking statements. The forward-looking statements made herein are only
made as of the date of this report and we disclaim any obligation to publicly
update such forward-looking statements to reflect subsequent events or
circumstances.

Restatement

     Our previously issued consolidated balance sheets as of December 29, 2001,
December 30, 2000 and January 1, 2000 and the related consolidated statements of
earnings, shareholders' investment and cash flows for the years then ended have
been restated.

     The following "Management's Discussion and Analysis" has been restated to
reflect the changes more fully described within note 1 of the notes to restated
consolidated financial statements.

New Format

     As a result of several new pronouncements by the Securities and Exchange
Commission, we have presented our "MD&A" in a new format this year. The new
sections that we have added are titled "Critical Accounting Policies," "Other
Capital Commitments - Contractual Obligations" and "Other Capital Commitments -
Other Commercial Commitments." While much of the information included in these
sections has been historically included in our financial statement footnotes,
adding these sections to our MD&A is intended to better highlight these areas of
financial statement disclosure and accompany them with an expanded written
explanation. Hopefully, you will find this format more informative, and also
clearer and easier to read and understand.


<PAGE>

Our Business

General

     As of the beginning of 2002, we owned 27 supermarkets and franchised an
additional 72 supermarkets. Nineteen of our corporate supermarkets operated
under the Piggly Wiggly banner, 8 of them operated under the Dick's Supermarkets
banner and all of our franchised supermarkets operated under the Piggly Wiggly
banner. We are the primary supplier to our 99 supermarkets and also serve as a
wholesaler to a number of smaller, independently operated supermarkets and
convenience stores. All of our supermarkets and other wholesale customers are
located in Wisconsin and northern Illinois.

     Our operations are classified into two segments, wholesale and retail. Our
wholesale business derives its revenues primarily from the sale of groceries,
produce, dairy, meat and other products to our franchised supermarkets and
independent retail customers. We also supply these products to our corporate and
franchised supermarkets, but those sales to our corporate supermarkets are
eliminated for accounting purposes in consolidation. We supply grocery, frozen
food, dairy and produce to our supermarkets through two distribution centers in
Sheboygan, Wisconsin, which have an aggregate square footage of approximately
425,000 square feet. We also provide our supermarkets with fresh, frozen and
processed meats, eggs and deli items through a third-party distribution facility
in Milwaukee, Wisconsin. Additionally, we distribute items made in our
Platteville, Wisconsin centralized bakery/deli production facility.

     Our retail business consists of our 27 corporate supermarkets. We earn our
retail revenues by selling products purchased from our wholesale segment and
other merchandise to retail consumers. Compared to our wholesale segment, our
retail segment generates higher gross profit margins, but has higher operating
and administrative expenses.

Our Growth Goals and Initiatives

     Prior to this past year, our revenue growth came in one of three ways.
First, we increased our retail sales by expanding the size of our corporate
supermarkets and replacing some of our corporate supermarkets with new, larger
and more competitive supermarkets. Second, our wholesale business grew as some
of our franchisees similarly expanded or replaced their supermarkets. Finally,
we converted independent supermarkets in and around our market areas to our
Piggly Wiggly brand name. This approach led to a compound annual sales growth
rate of approximately 2.7% during the five-year period ending at the end of
2000.

     In 2001, our new management team, under the guidance of our Board of
Directors, adopted a new strategic plan which included a goal of trying to
achieve a 15% compound annual growth rate in sales over the next five years.
Because the types of expansion opportunities that we pursued in the past are
relatively limited in and around our existing market areas and only resulted in
nominal historical revenue growth, we decided to actively explore acquisitions
of multiple-store supermarket chains, both within and outside of our current
market areas, to help us achieve our revenue growth goals. In June 2001, we
completed the acquisition of Dick's Supermarkets, Inc., our first multiple-store
supermarket chain acquisition. To accomplish our growth goals in 2002 and
beyond, we believe we need to acquire at least two more multiple-store
supermarket chains. While we have identified several potential acquisition
candidates that appear to fit our criteria, there is no assurance that we will
be able to acquire any of them or, if we do, that such acquisitions will allow
us to achieve our growth goals.

     Our other growth-oriented plans include the strengthening of our existing
supermarkets and supermarket brands. These plans include opening two new
corporate supermarkets in 2002. The first such supermarket, a replacement
corporate supermarket in Zion, Illinois, was successfully opened in January
2002. This new supermarket is approximately 40% larger than the supermarket it
replaced. The second such supermarket is a 50,000 square-foot new market
supermarket in Kenosha, Wisconsin we expect to open in the fall. We believe that
these two new corporate supermarkets will add a total of about $9.6 million to
our 2002 retail sales. In addition, to strengthen our franchisee group, we
anticipate that in 2002, we will:

o    Complete the renovation and expansion of our franchised supermarkets in
     Mequon and Waunakee, Wisconsin in the spring;


<PAGE>

o    Complete the construction of a new market franchised supermarket in
     Oostburg, Wisconsin in the fall; and

o    Replace existing franchised supermarkets in West Bend and Howard, Wisconsin
     with new, larger and more competitive supermarkets in the fall.

Our five franchised supermarket projects scheduled for completion throughout
2002 will increase aggregate selling space by over 50,000 square feet and are
expected to increase our 2002 net wholesale sales by approximately $5.0 million.

     In addition to the supermarket projects currently underway, we are also
evaluating plans to expand our business in other ways. Two specific areas of
potential expansion we are investigating and testing are opening gas stations
and pharmacies at one or more of our existing supermarkets. We do not expect
either of these initiatives to have a material impact upon our 2002 revenues.

2001 Growth Initiatives

     In June 2001, we completed the acquisition of Dick's Supermarkets, Inc. for
$30.2 million in cash (including our assumption of debt and payment of $3.5
million of funded debt). Dick's owns seven supermarkets in Wisconsin, one in
Illinois and a centralized bakery/deli production facility located in
Platteville, Wisconsin. All eight of these supermarkets operate under the Dick's
Supermarkets banner. This acquisition represented a milestone for us because it
was our first multiple-store supermarket chain acquisition, and also because we
decided to continue to operate the supermarkets we acquired under a banner other
than Piggly Wiggly. Although the Dick's acquisition only had a nominal impact
upon our earnings in 2001, we expect the acquisition to increase our 2002 net
earnings by about $0.8 million to $1.0 million from what they otherwise would
be. As a result of this acquisition, our mix of retail sales to total sales in
2001 increased to 46.8%, compared to 41.3% in 2000. We expect that our mix of
retail sales to total sales will further increase in 2002, when we recognize a
full year of retail sales from Dick's.

     In 2001, we decided that our distribution center capacity needed to be
increased to support our retail growth plans. As a result, in May 2001, we began
an extensive remodeling of our existing distribution center in Sheboygan,
Wisconsin. This remodeling included the expansion of our freezer space by
approximately 50%. In October 2001, we also converted an existing Sheboygan,
Wisconsin corporate supermarket (which we had previously replaced with a new
corporate supermarket) into an additional distribution center. These initiatives
will allow us to increase the selection of items we sell and will help us
distribute items made at our centralized bakery/deli production facility. In
addition, our increased distribution center capacity will enhance our ability to
achieve our growth plans by increasing the maximum volume of wholesale sales
that can be supported by our existing distribution centers by approximately 25%.

     Some of our other significant growth-related accomplishments in 2001
included:

o    Converting formerly independent operators into Piggly Wiggly franchised
     supermarkets in Kohler, Howard and Nekoosa, Wisconsin in April, October and
     November 2001, respectively;

o    Adding our first "Pig Stop" gas station at our franchised supermarket
     located in Crivitz, Wisconsin in December 2001;

o    Closing an older corporate supermarket and replacing it with a new, larger
     and more competitive supermarket in Sheboygan, Wisconsin in August 2001;
     and

o    Closing older franchised supermarkets and replacing them with new, larger
     and more competitive supermarkets in Slinger and Campbellsport, Wisconsin
     in January and April 2001, respectively.


<PAGE>

Results of Operations

     The following table sets forth certain items from our Consolidated
Statements of Earnings as a percent of net sales and the year-to-year percentage
change in the dollar amounts of such line items.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                                         Percent of net sales            Percentage change
-----------------------------------------------------------------------------------------------------------
                                                                                         2001        2000
                                                     2001        2000         1999     vs. 2000    vs. 1999
-----------------------------------------------------------------------------------------------------------
<S>                                                 <C>         <C>         <C>         <C>          <C>
Net sales                                           100.0%      100.0%      100.0%      15.6%        1.0%
Retail sales                                         46.8%       41.3%       41.9%      30.8%       (0.4%)
Net wholesale sales                                  53.2%       58.7%       58.1%       4.8%        2.1%
Gross margin (restated)                              17.8%       16.5%       16.1%      25.1%        3.1%
Operating and administrative expenses (restated)     15.6%       14.0%       13.5%      28.1%        5.0%
Operating income (restated)                           2.3%        2.4%        2.6%       7.9%       (7.1%)
Earnings before income taxes (restated)               2.1%        2.5%        2.7%      (2.4%)      (6.2%)
Net earnings (restated)                               1.3%        1.6%        1.7%      (2.4%)      (5.0%)
-----------------------------------------------------------------------------------------------------------
</TABLE>

2001 vs. 2000

Net Sales

     Information regarding our 2001 and 2000 sales is set forth in the following
table (in thousands):

           --------------------------------------------------------
                                           2001             2000
           --------------------------------------------------------
           Net wholesale sales           $308,778         $294,527
           Retail sales                   271,423          207,529
           --------------------------------------------------------
           Total sales                   $580,201         $502,056
           ========================================================

     During 2001, our annual sales were a record $580.2 million, compared to
$502.1 million for 2000. The increase of $78.1 million, or 15.6%, was due to
increases in both wholesale and retail sales volume. Based on our internal
wholesale price index, inflation did not have a significant effect on our sales
in 2001. Same store sales for our corporate and franchised supermarkets
increased 3.4% in 2001. Same store sales represent sales of all corporate and
franchised Piggly Wiggly supermarkets that were open throughout 2001 and 2000.

Retail Sales

     Retail sales increased $63.9 million, or 30.8%, to $271.4 million in 2001,
compared to $207.5 million in 2000. Our retail sales improved because:

o    The acquisition of Dick's Supermarkets added $54.7 million to our retail
     sales. This acquisition was the primary factor contributing to our retail
     sales growth in 2001.

o    The sales at our new flagship corporate supermarket in Sheboygan, Wisconsin
     that opened in August 2001 were significantly higher than sales at the
     supermarket it replaced.

o    The success of the Piggly Wiggly Preferred Power Pricing marketing and
     promotional program, which was initiated in January 2001, increased our
     retail sales.

o    The replacement of a corporate supermarket in Racine, Wisconsin with a new,
     larger and more competitive supermarket in 2000 increased our retail sales
     in 2001, the first full year that it was open.

o    Supermarket closures by competitors over the past year helped improve the
     results of our corporate supermarkets in these markets.


<PAGE>

     A new accounting pronouncement will change the way that we treat certain
coupons. As a result of this new accounting rule, based on our current level of
coupon redemptions, we expect our retail sales to decrease by approximately $6.0
million in fiscal 2002 compared to what sales were under the old rules. In
addition, our cost of goods sold will also decrease by the same amount as a
result of this new treatment. As a result, this accounting pronouncement will
have no impact on our gross profits or earnings. Our gross margin percentage
will, however, increase nominally because of a decrease in our sales without a
corresponding decrease in our gross profit.

Net Wholesale Sales

     Net wholesale sales increased $14.3 million, or 4.8%, to $308.8 million in
2001, compared to $294.5 million in 2000. Wholesale sales to all of our
corporate supermarkets are deducted from our total wholesale sales to calculate
our "net" wholesale sales. A major reason that our net wholesale sales increased
in 2001 is that we opened three new market franchised supermarkets in 2001.
These three new supermarkets added nearly $2.7 million, or 0.9%, to our 2001 net
wholesale sales. In addition, our two replacement franchised supermarkets
increased our wholesale sales by approximately $2.4 million, or 0.8%, compared
to 2000.

     Net wholesale sales were, however, negatively impacted by the loss of $4.6
million, or 1.6%, of our 2000 net wholesale sales as a result of the April 2001
closing of two underperforming and non-competitive franchised supermarkets and
the July 2001 closing of one of our independent wholesale customers.

Gross Margin

     Our gross margin increased from 16.5% in 2000 to 17.8% in 2001. This
significant improvement was attributable to the increase in our mix of retail
sales to total sales that resulted from the Dick's acquisition. Excluding the
impact of the Dick's acquisition, our 2001 gross margin was 16.1%. We anticipate
a further increase in our gross margin in 2002 due to the expected further
increase in our mix of retail sales to total sales resulting from our
recognizing a full year of Dick's retail sales in 2002.

Operating and Administrative Expenses

     Our operating and administrative expenses, as a percent of sales, increased
to 15.6% in 2001, compared to 14.0% in 2000. This increase of 28.1% was
attributable to a number of factors. Most importantly, the increase in our mix
of retail sales to total sales resulting from the Dick's acquisition led to a
corresponding and anticipated increase in our operating and administrative
expenses. Further, our depreciation and amortization in 2001 was $6.9 million,
including nearly $0.5 million of goodwill amortization and an additional $0.5
million of other depreciation that resulted from the Dick's acquisition.
However, as a result of two new accounting pronouncements, our amortization of
goodwill will be eliminated in 2002. Instead, goodwill will be subject to at
least an annual impairment assessment. This accounting change is expected to
decrease our operating and administrative expenses in 2002 by approximately $1.0
million compared to what would have otherwise been reported under the old
goodwill amortization rules and by approximately $0.5 million compared to 2001.

     In addition, we continue to experience significant increases in our
employee health care costs. These cost increases include costs related to our
corporate supermarket union employees, who are covered by a multi-employer
health and welfare plan. This multi-employer health plan may, from time to time,
experience a shortfall because its costs exceed the payments it receives from
participating employers. When this happens, all participating employers may be
required to make a supplemental payment to fund the shortfall. In 2001, we were
required to make a supplemental payment of approximately $0.5 million to cover
such a shortfall. In addition, our self-funded health plan that covers our
non-union employees and our union employees who work at our distribution centers
experienced significant cost increases. In 2001, we took certain steps to try to
reduce the recent cost increases of this plan. For example, we introduced an
employee premium cost-sharing element to our self-funded health plan. However,
we anticipate that we will continue to incur further health care cost increases
in 2002.

     Due to the competitive nature of the supermarket industry, some of our
supermarkets are no longer competitive in their marketplaces. Some of these
underperforming supermarkets have experienced a variety of



<PAGE>

significant operational problems and poor financial performance for a period of
several years. In order to further improve our overall financial results, we
continue to actively evaluate various business alternatives to these operations.
These alternatives include selling these supermarkets, converting franchised
supermarkets into corporate supermarkets (and vice versa), closing supermarkets
and implementing other operational changes. It is possible that one or more of
these actions may be taken in 2002. While we did not incur any significant
retail repositioning expenses in 2001 or 2000, implementing any of these
alternatives could result in our incurring significant repositioning or
restructuring charges in 2002.

     From time to time, we incur significant realization charges or write-offs
related to our underperforming supermarkets and wholesale customers. Our total
2001 and 2000 realization charges relating to wholesale bad debts and retail
subsidies were $2.1 million and $1.7 million, respectively. These charges were
included as a part of operating and administrative expense in our consolidated
statements of earnings. The retail subsidy part of these charges was $1.1
million for 2001 and $1.5 million for 2000.

Earnings

     Our 2001 operating income increased $1.0 million, or 7.9%, to $13.1
million, compared to $12.1 million in 2000. As a percent of sales, our operating
income in 2001 was 2.3%, compared to 2.4% in 2000. After allocating wholesale
operating profits on sales to our corporate supermarkets to our retail segment,
our wholesale segment generated operating income of $10.0 million in 2001, an
increase of $0.8 million, or 8.3%, compared $9.2 million to 2000. Our retail
segment generated operating income of $3.1 million, an increase of $0.2 million,
or 6.9%, compared to $2.9 million in 2000.

     Our 2001 earnings before income taxes decreased $0.3 million, or 2.4%, to
$12.3 million, compared to $12.6 million in 2000. As a percent of sales,
earnings before income taxes decreased to 2.1% in 2001, compared to 2.5% in
2000. Net earnings for 2001 decreased $0.2 million, or 2.4%, to $7.6 million,
compared to $7.8 million in 2000. As anticipated, the Dick's acquisition
resulted in only a nominal increase in our 2001 net earnings.

     We expect the Dick's acquisition to increase our 2002 net earnings by about
$0.8 million to $1.0 million in 2002. Additionally, we expect that our earnings
and earnings per share could be affected as a result of the implementation of
our business information systems project over the next several years. In 2001,
the impact of our systems project on our earnings and earnings per share was
nominal because the project was in its early stages. The impact of this project
on our earnings and earnings per share in the future is uncertain and will be
dependent upon our ability to successfully achieve our strategic growth
initiatives and realize the expected efficiencies and cost savings from our new
business information systems.

     Many of our peer companies measure the profitability of their sales using
the net earnings to sales ratio. This ratio represents the net earnings margin
realized from each dollar of sales. Our 2001 net earnings to sales ratio was
1.3%, compared to 1.7% in 2000. The decrease in our net earnings to sales ratio
was primarily due to the increase of approximately $54.7 million of retail sales
that resulted from the Dick's acquisition without a corresponding proportional
increase in earnings. We expect our net earnings to sales ratio to increase in
2002 primarily because we expect the Dick's acquisition to begin increasing our
earnings in 2002.

     As a result of continued stock repurchases in 2001, our diluted earnings
per share for 2001 increased 10.7% to $1.45 from $1.31 in 2000. Our weighted
average common shares and equivalents were 5,269,000 and 5,951,000 for 2001 and
2000, respectively. Since our stock repurchase program commenced in January
1992, we have repurchased nearly 4,300,000 shares, or approximately half of our
common stock that was then outstanding. As of the end of 2001, $1.9 million
remained available under our Board-authorized $25.0 million share repurchase
plan. Because we intend to try to grow our business more rapidly than in the
past, depending upon market conditions, the prevailing price of our shares, our
cash requirements, the terms of our credit agreements and other factors, it is
likely that we will repurchase fewer shares of our common stock in the future.


<PAGE>

2000 vs. 1999

Net Sales

     Information regarding our 2000 and 1999 sales is set forth in the following
table (in thousands):

           ----------------------------------------------------------
                                            2000              1999
           ----------------------------------------------------------
           Net wholesale sales            $294,527          $288,537
           Retail sales                    207,529           208,422
           ----------------------------------------------------------
           Total sales                    $502,056          $496,959
           ==========================================================

     Net sales for 2000 increased $5.1 million, or 1.0%, to $502.1 million. This
increase was solely due to increased net wholesale sales.

Net Wholesale Sales

     Net wholesale sales in 2000 increased $6.0 million, or 2.1%, to $294.5
million, compared to $288.5 million in 1999. One of the major causes of this
increase was our successful conversion of two new market franchised supermarkets
during January 2000 and two new market conversions in the third quarter of 1999.
In addition, a nominal increase in the price of the goods sold by our wholesale
business contributed to our growth in net wholesale sales. A decrease of net
wholesale sales resulting from the conversion of one franchised supermarket into
a corporate supermarket in November 1999 offset some of the net wholesale sales
volume increases from the addition of these new supermarkets. The impact of
these factors was partially offset by a nominal decrease in the quantity of
items sold by our wholesale business in 2000, caused in large part by additional
competitive activities in certain franchised market areas.

Retail Sales

     Retail sales decreased nominally to $207.5 million in 2000, compared to
$208.4 million in 1999. This decrease was principally attributable to several of
our supermarkets experiencing intense competitive pressures and a decrease in
the quantity of items sold by our retail business. These factors were partially
offset by an increase of approximately 2% in the cost of products sold by our
retail business.

Gross Margin

     Our gross margin increased from 16.1% in 1999 to 16.5% in 2000. The
improvement in gross margin was primarily related to merchandising and
promotional changes initiated early in 2000. In addition, our 1999 retail gross
margin was adversely affected by certain promotional events, including the 50th
anniversary of Piggly Wiggly supermarkets in Wisconsin. Wholesale gross margins
remained virtually unchanged between 2000 and 1999 and were not impacted by a
change in the mix of goods sold.

Operating and Administrative Expenses

     Our operating and administrative expenses, as a percent of sales, increased
to 14.0% in 2000, compared to 13.5% in 1999. Our operating and administrative
expenses increased $3.4 million, or 5.0%, principally:

o    Due to three retail union health and accident rate increases between
     September 1, 1999 and February 1, 2000, our health and accident insurance
     expenses increased by 33%, or $1.1 million, in 2000.

o    Due to the extremely tight labor market in Wisconsin, especially in
     Sheboygan, additional overtime hours were necessary to operate our
     distribution center. This resulted in increased distribution payroll costs
     of approximately $0.5 million.


<PAGE>

o    We incurred one-time professional fees in excess of $0.4 million related to
     the evaluation of various strategic alternatives.

     Total 2000 and 1999 realization charges relating to wholesale bad debts and
retail subsidies were $1.7 million and $2.3 million, respectively. The retail
subsidy part of these charges was $1.5 million for both 2000 and 1999. We did
not incur any significant repositioning expenses during either 2000 or 1999.

Earnings

     Our 2000 operating income decreased $0.9 million, or 7.1%, to $12.1
million, compared to $13.0 million in 1999. After allocating wholesale operating
profits on sales to our corporate supermarkets to our retail segment, our
wholesale segment generated operating income of $9.2 million of operating income
in 2000, a decrease of $0.5 million, or 4.8%, compared to $9.7 million in 1999.
Our retail segment generated operating income of $2.9 million, a decrease of
$0.4 million, or 13.6%, compared to $3.4 million in 1999. Our 2000 earnings
before income taxes decreased 6.2% to $12.6 million, compared to $13.5 million
in 1999. As a percent of sales, earnings before income taxes decreased to 2.5%
in 2000 from 2.7% in 1999.

     Net earnings for 2000 decreased $0.4 million, or 5.0%, to $7.8 million,
compared to $8.2 million in 1999. Due principally to the intense competitiveness
in certain market areas, our net earnings to sales ratio decreased nominally to
1.56% in 2000, compared to 1.66% in 1999. As a result of significant stock
repurchases in 2000 and 1999, diluted earnings per share for 2000 increased 2.3%
to $1.31 from $1.28 in 1999. Our weighted average common shares and equivalents
were 5,951,000 and 6,438,000 for 2000 and 1999, respectively.

     No related party transactions had a material effect on our results of
operations or financial condition in 2001, 2000 or 1999. One related party
transaction that occurred in 2001 is discussed in our 2001 proxy statement.

1999 vs. 1998

Net Sales

     Information regarding our 1999 and 1998 sales is set forth in the following
table (in thousands):

           --------------------------------------------------------
                                             1999           1998
           --------------------------------------------------------
           Net wholesale sales             $288,537       $280,135
           Retail sales                     208,422        204,750
           --------------------------------------------------------
           Total sales                     $496,959       $484,885
           ========================================================

     Net sales for 1999 were $497.0 million, compared to $484.9 million for
1998. The increase of $12.1 million, or 2.5%, was due to increased wholesale and
retail sales volume.

Net Wholesale Sales

     Net wholesale sales in 1999 increased 3.0% to $288.5 million, compared to
$280.1 million in 1998. The wholesale sales improvement was attributable to the
following:

o    The completion of two Wisconsin franchise store facility projects during
     the second quarter of 1998;
o    The completion of five Wisconsin franchise store facility projects during
     the first half of 1999;
o    The opening of one new market franchise store in May 1999;
o    The successful conversion to the Piggly Wiggly program of two new market
     franchise stores from other wholesalers during the third quarter of 1999;
     and
o    A series of successful marketing events, including the 50th anniversary of
     Piggly Wiggly in Wisconsin held in October and November of 1999.

     Net wholesale sales were, however, negatively impacted by the Company's two
consolidations which were completed in November 1998 and January 1999 resulting
in two franchise store closures.


<PAGE>

Retail Sales

     Retail sales increased 1.8% to $208.4 million in 1999, compared to $204.8
million in 1998. This improvement in retail sales volume was primarily
attributable to the Company's opening of its replacement corporate store in
Appleton, Wisconsin in August 1998 and the continued success of various
marketing and promotional events. To a lesser extent, retail sales also
increased due to the conversion of one franchise store into a corporate store in
November 1999. Competitive pressures in certain market areas, however, had an
adverse impact on the Company's retail sales in 1999. For a more detailed
financial information about the breakdown of our wholesale and retail operations
see the discussion set forth in note 11 under "Notes to Consolidated Financial
Statements" below.

     During 1999 the Company had seven facility projects, all but one of which
were completed in 2000. These projects included expansions in Kaukauna and
Jackson, Wisconsin; one corporate replacement store in Racine, Wisconsin; two
replacement supermarkets in Pardeeville and New Holstein, Wisconsin; and one new
market store in Kewaskum, Wisconsin.

Gross Margin

     Our gross margin remained unchanged at 16.1% for both 1998 and 1999.
Wholesale and retail gross margins both changed nominally between 1999 and 1998.

Operating and Administrative Expenses

     Operating and administrative expenses, as a percent of sales, increased to
13.5% in 1999, compared to 13.3% in 1998. This increase of 0.2%, or $2.5
million, was principally attributable to a number of factors. From the retail
business segment, the Company incurred additional expenses of approximately
$850,000 relating to both the Appleton store that was opened in August 1998 and
to the Oshkosh store that was converted from a franchise store to a corporate
store in November 1999. From the wholesale business segment, the Company
incurred additional realization charges of nearly $800,000 in 1999 compared to
1998. Additionally, the Company incurred and expensed more than $500,000 for its
comprehensive analysis and evaluation of the Company's ongoing core business
(non-Y2K related) requirements.

     Due to the continuing competitive nature of the industry, certain franchise
operators and corporate retail stores experienced operational difficulties in
their respective marketplaces. As a result, the Company continued to incur
significant realization charges from a number of underperforming franchise
operators. Total 1999 and 1998 realization charges relating to wholesale bad
debts and retail subsidies were $2.3 million and $1.5 million, respectively.
Although certain franchise retail operations improved, the Company continued to
evaluate various business initiatives relating to the operations of its
underperforming and noncompetitive stores. These initiatives included, but were
not limited to, the sale and subsequent conversion of these stores, the closure
of these supermarkets or the implementation of other operational changes. During
1999, the Company did not incur any repositioning charges, compared to $200,000
for 1998.

Earnings

     The Company's fiscal 1999 operating income decreased 3.3% to $13.0 million,
compared to $13.5 million in 1998. After allocating wholesale operating profits
on sales through the Company's corporate stores to retail, the wholesale segment
yielded $9.7 million in operating income while the retail segment contributed
$3.3 million. Fiscal 1999 earnings before income taxes decreased 3.3% to $13.5
million, compared to $13.9 million in 1998. As a percent of sales, earnings
before income taxes decreased to 2.7% in 1999 from 2.9% in 1998.

     Net earnings for 1999 decreased 3.3% to $8.2 million, compared to $8.5
million in 1998. Due principally to the intense competitiveness in certain
market areas, the Company's net earnings-to-sales ratio decreased to 1.66% in
1999, compared to 1.76% in 1998. Diluted earnings per share for 1999 increased
4.1% to $1.28 from $1.23 in 1998. Although net earnings decreased nominally in
1999 compared to 1998, diluted earnings per share increased due to the Company's
repurchases of 821,600 shares which reduced the weighted average shares and
equivalents outstanding.


<PAGE>

Liquidity and Capital Resources

Summary

     Historically, we have funded our working capital requirements out of cash
flow generated from our operations. In 2001, we adopted a more aggressive growth
plan, which led to the Dick's acquisition. Due primarily to this acquisition,
our cash and equivalents for 2001 decreased $19.8 million, resulting in a
year-end balance of $11.5 million (including $10.7 million of checks that we had
written, but which had not yet "cleared" our accounts). In addition, in 2001,
our long-term debt increased significantly from $2.9 million to $16.9 million.
Finally, our growth plan and our business information technology systems project
have resulted in a 2002 capital budget that is significantly higher than our
recent previous capital budgets.

     As a result, we have significantly greater debt, as well as increased
capital budget and working capital requirements, than in previous years.
Nevertheless, we believe that our working capital and debt-to-equity positions
continue to compare very favorably to most of our competitors. We further
believe that our financial condition, cash flow from operations and amounts
available under our existing credit facility will continue to provide adequate
short and long-term flexibility to finance our anticipated non-acquisition
related capital requirements in 2002 without adversely impacting our financial
position or liquidity. Finally, we believe that our financial condition and our
existing sources of cash are adequate to ensure that we have the working capital
necessary to meet our short- and long-term liquidity needs. However, if we are
successful in acquiring another multiple-store supermarket chain, we will likely
fund substantially all of the purchase price through additional borrowings. This
would likely involve our entering into a new or amended credit facility that is
larger than our existing credit facility. The terms of any such new or amended
credit facility could be less favorable to us than the terms of our current
facility.

Cash flows from operating activities

     During 2001, net cash generated from operations was $5.4 million, compared
to $21.3 million in 2000. One of the primary reasons for the decrease in our
operating cash flow in 2001 was a $3.6 million increase in our wholesale
inventory levels required to supply the eight Dick's Supermarkets we acquired in
June 2001. In addition, in 2001 we invested approximately $4.0 million in our
new Zion, Illinois supermarket construction project, which was finished in
January 2002. The remainder of the decrease in the cash flow between years was
due principally to timing of cash receipts, cash payments and changes in
short-term financing to our wholesale customers.

Cash flow from investing activities

     Net cash outflows from investing activities increased $26.0 million to
$30.9 million in 2001, compared to $5.0 million in 2000. The acquisition of
Dick's accounted for nearly $27.5 million of our 2001 investing cash outflows. A
cash inflow of $2.2 million from the sale and leaseback of our Wilson Avenue,
Sheboygan, Wisconsin distribution center partially offset this cash outflow.

Cash flows from financing activities

     Net cash inflows from financing activities totaled $5.8 million in 2001,
compared to cash outflows of $7.4 million in 2000. In the second quarter of
2001, we entered into a new $35.0 million bank revolving credit facility. Our
bank lenders under the new facility are the same as the banks under our former
$16.0 million credit agreement. We borrowed $12.5 million under our new
revolving credit facility to fund a portion of the purchase price of Dick's
Supermarkets, Inc. in the second quarter of 2001. Subsequently, we borrowed
additional amounts to fund our working capital requirements, including our
increased working capital requirements due to the Dick's acquisition. We owed
approximately $13.7 million under the revolving credit facility at the end of
2001. This increase in our debt is the main reason that our ratio of total
liabilities to shareholders' investment increased from 1.09 to 1.73 in 2001.

     Our new revolving facility requires us to maintain certain minimum levels
of working capital and net worth. The facility also requires us to meet or
exceed certain ratios intended to measure our ability to repay amounts we



<PAGE>

may borrow under the facility. Finally, the credit facility contains limitations
upon our ability to take certain other actions, such as borrowing additional
funds from other lenders. We believe that these covenants and restrictions are
typical for this type of credit facility.

     We repurchased approximately 743,000 shares of our own stock in 2001 for an
aggregate price of $9.7 million (an average per share price of $13.00), compared
to approximately 559,000 shares for an aggregate of $6.1 million (an average per
share price of $10.83) during 2000. This outflow of funds was partially offset
by cash inflow received as a result of the sale of 200,000 shares of our common
stock to two local investors for $3.3 million (a per share price of $16.50).

Major 2002 Commitments

     During the second quarter of 2001, we announced a $15.0 million, three-year
capital expenditure project to replace and expand our current business
information systems. The new systems are expected to support our growth plans
and provide improved operational efficiencies and cost savings. The project,
which is expected to be rolled-out over a three-year period, includes four
critical phases. The first two phases, the core infrastructure and the systems
related to our wholesale business operations, are expected to be completed
during the first quarter of 2003. The final two phases, related to our retail
pricing and promotional card marketing, and human resources, payroll and
financial reporting systems, are projected to be completed between the end of
2003 and the third quarter of 2004. This project is expected to be funded
partially with cash generated by our operations. As additional funding
requirements are identified, other financing sources are available to us,
including borrowings under our existing revolving credit agreement. Expenditures
and commitments for the systems project during 2001 were approximately $3.0
million.

     Our 2002 capital budget is approximately $23.0 million, compared to our
$15.0 million 2001 capital budget. Approximately $2.9 million of our 2002 budget
has been committed for corporate retail replacement supermarkets, $3.6 million
for distribution center additions, $8.0 million has been committed to our
business systems project and $0.5 million has been committed for other
technology-related project and office renovations. Our 2002 capital budget does
not include any amounts that may be required to acquire any multiple-store
supermarket chains or fund any similar opportunities.

Other Capital Commitments - Contractual Obligations

     The following chart sets forth information regarding our major contractual
obligations (in thousands):
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
                                                  Payments Due by Period
-----------------------------------------------------------------------------------
                                               Less Than   Years    Years   After 5
Contractual Obligations                Total     1 Year      1-3      4-5     Years
-----------------------------------  --------  ---------  -------  -------  -------
<S>                                  <C>        <C>       <C>      <C>      <C>
Operating lease obligations          $142,948   $13,188   $37,168  $21,830  $70,762
Capital lease obligations              38,210     3,130     8,968    5,668   20,444
Long-term debt                         16,892       323    14,557      452    1,560
Total contractual cash obligations   $198,050   $16,641   $60,693  $27,950  $92,766
-----------------------------------------------------------------------------------
</TABLE>

Operating Lease Obligations

     We have operating leases for both real estate and equipment used by our
wholesale and retail segments. The majority of our operating lease obligations
are related to leases of our supermarkets. We lease all of our corporate
supermarkets and approximately 80% of our franchised supermarkets. We sublease
each of our franchised supermarkets to one of our franchisees under a sublease
with terms similar to those that we have with our landlords. We enter into these
transactions because they serve as "credit enhancements" that allow our
franchisees, most of whom own only one or two supermarkets, to obtain lease
terms through us that are more favorable to them than if we did not effectively
guaranty their rent payments. Our other operating lease obligations relate to
leases for corporate office space, transportation equipment (including tractors
and trailers) and certain office equipment.


<PAGE>

     In 2001, our operating lease obligations (which included both real estate
and equipment subleases) decreased nominally from $143.2 million to $142.9
million. The amount owed to us in 2001 by our franchisees under real estate
subleases decreased from $106.8 million to $100.3 million. Forty-nine different
franchisees have entered into subleases with us and no single franchisee (or
group of related franchisees) owes us more than $8.0 million under subleases. In
addition to the amounts set forth in the table above, some of our operating
leases contain contingent rent provisions based on sales volume (for
supermarkets) or miles traveled (for transportation equipment). Contingent rent
paid in 2001 and 2000 was $1.2 million and $1.0 million, respectively.

Capital Lease Obligations

     Under generally accepted accounting principles, leases are categorized as
"capital leases" if any of these conditions occur: (a) the lease transfers
ownership to us; (b) the lease contains a purchase option with a price that is
well below the expected market price; (c) the lease term is equal to 75% or more
of the estimated life of the asset being leased; or (d) the present value of the
lease payments on the date the lease is entered into equals or exceeds 90% of
the market value of the leased property. Our lease for one of our distribution
centers and 11 of our 82 supermarket leases are accounted for as capital leases
because the present value of the total rent payments equaled or exceeded 90% of
the market value of the leased property on the date that the leases were first
entered into.

     In 2001, the amount we owed under our supermarket and distribution center
capital leases increased 167.1% from $14.3 million to $38.2 million, and the
amount owed to us by our franchisees under related supermarket subleases
increased 143.1% from $7.2 million to $17.5 million. These increases were due to
three new supermarket leases that we entered into in 2001 being categorized as
capital leases. In the past, such leases would have likely been treated as
operating leases. Our new leases were accounted for as capital leases because of
the substantial decrease in the interest rate that we used to calculate the
present value of the payments under our leases. This decreased interest rate was
the result of a decrease in our borrowing rate.

     Under generally accepted accounting principles, obligations under capital
leases, but not operating leases, are recorded as long-term liabilities on our
balance sheet. The present value of our long-term obligations under our capital
leases, as of December 29, 2001, was $20.8 million. In addition, $1.2 million of
rent payments are due under our capital leases in 2002. The liabilities related
to our capital leases recorded on our December 29, 2001 balance sheet is $16.2
million lower than the total amounts due under these leases because, under
generally accepted accounting principles, we must record the present value of
these payments in our balance sheet.

Long-Term Debt

     Approximately $13.7 million of the debt included in the table above are
amounts we borrowed under our $35.0 million revolving credit facility. Because
our revolving credit facility expires on April 30, 2004, we have included the
amounts we owe under this agreement as a debt that must be repaid in the next
1-3 years. However, as is customary with revolving loan agreements, it is likely
that we would seek to extend the term of this facility prior to its expiration
date. If the term of this facility is extended, we will not have to repay the
amounts due under this facility date until the new expiration date.

Other Capital Commitments - Other Commercial Commitments

     The following chart sets forth information regarding certain of our
contingent commercial commitments (in thousands):
<TABLE>
<CAPTION>

----------------------------------------------------------------------------------
                                        Amount of Commitment Expiration by Period
----------------------------------------------------------------------------------
                                              Less Than   Years    Years   After 5
Other Commercial Commitments          Total    1 Year      1-3      4-5     Years
-----------------------------------  -------  ---------  -------  -------  -------
<S>                                  <C>        <C>      <C>        <C>       <C>
Standby Letters of Credit            $ 2,607    $    0   $ 2,607    $  0      $0
Guarantees                            14,779     4,927     9,107     745      $0
Total Commercial Commitments         $17,386    $4,927   $11,714    $745      $0
----------------------------------------------------------------------------------
</TABLE>


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Standby Letters of Credit

     We self-insure a portion of our workers' compensation and general liability
claims. We currently have two standby letters of credit for $1.5 million and
$1.1 million, both of which were established in connection with these
self-insurance programs. Our letters of credit provide funds to cover claims if
we are unable to pay. Letters of credit of this type are common when a company
self-insures these types of liability. Although both of our letters of credit
expire on December 31, 2002, we expect to renegotiate these letters of credit or
enter into one or more letters of credit effective as of January 1, 2003.

Wholesale Customer Guarantees

     We typically provide short-term financing to our franchisees and some of
our wholesale customers for costs associated with the purchase of facilities and
equipment for new or remodeled franchised supermarkets. This financing is
typically refinanced within one to two months following project completion with
bank loans guaranteed by us. All of these loan guarantees are collateralized,
principally by the franchisee's equipment and inventory and, in some cases, with
their building facilities.

Critical Accounting Policies

     The following are certain important accounting policies we used to prepare
our financial statements. You should also review our notes to consolidated
financial statements for information regarding our other accounting polices.

Receivables

     The majority of our receivables are from our wholesale customers, most of
which are our franchisees. We record our receivables net of the allowance for
doubtful accounts. We establish reserves for doubtful accounts whenever we
believe that we may not be paid in full by one or more of our customers. Our
allowances for doubtful accounts were $3.5 million at the end of 2001 compared
to $3.9 million at the end of 2000. There is no alternative accounting approach
to valuing our receivables or allowances for doubtful accounts.

Inventory

     Many companies value their inventory based upon the lower of their cost or
market value. Most companies use one of two methods to determine their inventory
cost. The first such method is the "last-in, first-out," or LIFO, method. Under
the LIFO method, the cost assigned to the items sold is based upon the cost of
the most recent items purchased. As a result, the first such items purchased
remain in inventory and the cost of these items are used to value ending
inventory. The second method is the "first-in, first-out," or FIFO, method.
Under the FIFO method, the value of items sold is based upon the cost of the
first such items purchased. As a result, the last such items purchased remain in
inventory and the cost of these items are used to value ending inventory. During
periods of inflation, the use of the LIFO method will result in higher costs of
goods sold, lower ending inventory values and lower earnings compared to the
FIFO method.

     We value our inventory at the lower of our cost or market value. At
December 29, 2001, the cost of approximately 84% of our inventory was valued
using the LIFO method and 16% of our inventory was valued using the FIFO method.
During 2001, our "LIFO reserve" decreased from $10.3 million to $9.7 million.
This means that if we used the FIFO method rather than the LIFO method, our 2001
earnings would have been reduced by approximately $0.6 million. The decrease in
our LIFO reserve was primarily due to a one-time adjustment associated with
inventory purchased in our acquisition of Dick's Supermarkets.

Retail Repositioning Reserve

     We estimate our future retail repositioning expenses associated with
underperforming, non-competitive supermarkets based upon our evaluation of the
performance of each of our supermarkets and establish an appropriate reserve for
such amounts. At the end of 2001, our retail repositioning reserve was $0.3
million. The majority of this reserve represents our estimate of the cost of
disposing of the real estate on which one of our recently closed supermarkets
was located. It is possible that the cost of disposing of this real estate will
exceed



<PAGE>

our estimates. In addition, we may implement operational changes with respect to
one or more of our supermarkets (such as converting one or more franchised
supermarkets into corporate supermarkets (or vice versa), closing them or
implementing other operational changes) in 2002. If any of these possibilities
occur, our actual costs would exceed this reserve. There is no alternative
accounting approach to establishing this reserve.