PART I

Item 1. Business

                      This Annual Report on Form 10-K contains forward-looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Additional written or oral forward-looking statements may be made by us from time to time, in filings with the Securities Exchange Commission or otherwise. Statements contained in this report that are not historical facts are forward-looking statements made pursuant to these safe harbor provisions. Forward-looking statements may include projections of revenue, income or loss and capital expenditures; statements regarding future operations, financing needs, compliance with financial covenants in loan agreements, plans for acquisition or sale of assets or businesses and consolidation of operations of newly acquired businesses, and plans relating to products or services; assessments of materiality; and predictions of future events and the effects of pending and possible litigation, as well as assumptions relating to these statements. In addition, when we use the words "anticipates," "believes," "estimates," "expects," and "intends," and "plans," and variations thereof and similar expressions, we intend to identify forward-looking statements.

                     Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified based on current expectations. Consequently, future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements contained in this report. Statements in this report, particularly in "Item 1. Business", "Item 3. Legal Proceedings", the Notes to Consolidated Financial Statements and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," describe certain factors that could contribute to or cause such differences. Other factors that could contribute to or cause such differences include unanticipated developments in any one or more of the following areas:

as well as other risks factors which may be detailed from time to time in our Securities and Exchange Commission filings.

                     You are cautioned not to place undue reliance on any forward-looking statements contained in this report, which is accurate only as of the date of this report. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unexpected events.

Introduction

                     Pharmaceutical Formulations, Inc. (PFI), a Delaware corporation, is a publicly-traded private label manufacturer and distributor of nonprescription (sometimes called "over-the-counter" or "OTC") solid dose pharmaceutical products (which are referred to in this report as "generic OTC products") in the United States. Such products, which are made in tablet, caplet or capsule form are primarily sold under our customers' store brands or other private labels, manufactured under contract for national brand pharmaceutical companies or sold in bulk to others who repackage them for sale to small, typically independent, retailers and to other manufacturers who do not have government approval to manufacture certain formulas such as ibuprofen. We also sell and market a line of antifungal aerosols. To a limited extent, we also sell generic OTC products under our own brand names, including Health+Cross® and Health Pharm ®, which sales account for less than 1% of our total revenues.

                     We believe that the therapeutic benefits of our generic OTC products are comparable to those of equivalent national brand name products because the chemical compositions of the active ingredients of the brand name products on which our products are patterned are identical to those of our products. We are subject to regulation by the U.S. Food and Drug Administration (FDA). Our largest customers include Dollar General Stores, Costco Wholesale (Costco), K-Mart (K-Mart) and CVS Corp. (CVS), which in May 1997 merged with Revco D.S., Inc. (Revco).

Certain Relationships with ICC

                      In September 1991, we entered into an agreement with ICC Industries, Inc. (ICC) pursuant to which ICC was granted a series of options and related preemptive rights to acquire a total of approximately 66.7% of the outstanding shares of our common stock. ICC is a major international manufacturer and marketer of chemical, plastic and pharmaceutical products which had calendar 2000 sales in excess of $1.6 billion. ICC and its subsidiaries have offices in key business centers around the world and own numerous manufacturing plants. ICC has exercised all of its options and certain of the related preemptive rights and currently owns an aggregate of 19,635,894 shares of common stock, representing approximately 64.7% of our outstanding common stock. In fiscal 1996, we sold 2,500,000 shares of Series A Cumulative Redeemable Convertible Preferred Stock to ICC. The preferred stock is currently convertible into common stock at the option of ICC on three months notice to the Company. Each share of preferred stock is convertible to such number of shares of common stock as equals the then-current liquidation preference for such shares of preferred stock (currently $1.00) divided by the lower of the current market price for the common stock (as defined) at the conversion date (as defined) or $2.00 per share (subject to certain antidilution adjustments). (The current market price is defined as the average of the daily market prices (as defined) for the common stock for 30 consecutive trading days commencing 45 days prior to the conversion date, which is the third monthly anniversary date of the date of notice of conversion). On June 25, 2001 ICC gave notice to the Company of its intent to convert its preferred stock and unpaid dividends to common stock. With the applicable current market price equal to the average of the high and low asked price for the common stock on the third month anniversary of the notice of conversion (i.e. September 21, 2001) of $.075, the 2,500,000 shares of preferred stock would convert into 33,333,333 shares of common stock. After such conversion ICC would then own 66,969,227 shares of common stock, which would be 86.2% of the outstanding common stock. On September 18, 2001, PFI asked for and ICC has agreed to a 60 day delay. At this time there are not enough authorized but unissued shares to effect such a conversion. We currently intend to seek stockholder approval at the next annual meeting to an increase in the number of authorized shares. If the market price for the common stock is greater than $0.75 per share at the conversion date, ICC would own fewer shares, and if the market price is less than $0.75 per share ICC would own more shares, after any such conversion.

                     In addition, the Company purchases certain raw materials from ICC and previously leased equipment from ICC, and its affiliates. See "Certain Relationships and Related Transactions." On April 1, 1999, ICC provided a term loan of $3,000,000, which was increased to $7,752,000 on July 1, 2000 and further increased to $11,837,000 on September 30, 2000 and $16,404,000 on December 31, 2000. It also provided a guarantee of $2,000,000 in advances under a line of credit and $4,000,000 under a term loan from two lending institutions. The term loan is secured by a subordinated pledge of all the assets behind other secured indebtedness of the Company and is repayable in 12 monthly installments of $100,000 each commencing in February 2002 with the balance due in February 2003.

Products

                     Currently, we market more than 80 different types of generic OTC products (including different dosage strengths of the same chemical composition). These include analgesics (such as ibuprofen, acetaminophen and naproxen sodium), cough-cold preparations, sinus/allergy products and gastrointestinal relief products. Sales of ibuprofen accounted for 26% in fiscal 2001, 36% in fiscal 2000 and 34% in fiscal 1999 of our total revenues.

                     Generic pharmaceutical products are drugs which are sold under chemical names rather than brand names and possess chemical compositions (and, we believe, therapeutic benefits), equivalent to the brand name drugs on which they are patterned. OTC drugs are drugs which can be obtained without a physician's prescription. Generic drug products are subject to the same governmental standards for safety and efficacy (effectiveness) as their brand name equivalents and are typically sold at prices substantially below the brand name drug. We manufacture generic OTC products which we believe are chemically and therapeutically equivalent to such brand name products as Advil®, Aleve®, Anacin®, Tylenol®, Bufferin®, Ecotrin®, Motrin®, Excedrin®, Sominex®, Sudafed®, Comtrex®, Sinutab®, Dramamine®, Actifed®, Benadryl®, Allerest® and Tagamet® HB™, among other products.1

_________________

                     In November 1997 we entered into a joint venture with APG, Inc., through Healthcare Industries, LLC (formerly PFI LLC), a limited liability company owned in equal portions by APG, Inc. and the Company, to develop, manufacture and market certain healthcare products. APG, Inc. is the second largest privately-owned contract packager of aerosol products in the United States. The primary product marketed by this joint venture was a line of anti-fungal aerosols, which were first sold in July 1998.

Manufacturing

                     In order to manufacture generic OTC products, we acquire raw materials from suppliers located in the United States and abroad, including ICC, an affiliate of the Company. During fiscal 2001, we purchased $2,163,000 of raw materials from ICC.

                     To date, we have obtained the raw materials we need and expect that such raw materials will continue to be readily available in the future. Our raw materials are first placed in quarantine so that samples of each lot can be assayed for purity and potency by a team of our trained chemists and technicians. Incoming materials are tested to assure that they are free of objectionable microorganisms and that they meet chemical and physical testing requirements. Throughout the manufacturing process, samples are taken by quality assurance inspectors for quality control testing. The raw materials must meet standards established by the United States Pharmacopoeia, the National Formulary and the FDA, as well as by us and our customers.

                     To produce capsules and tablets, we utilize specialized equipment which compresses tablets and fills powder and granules into hard gelatin capsules. At this stage, certain tablets are film or sugar coated to achieve an aesthetically appealing tablet. The customer chooses whether its order of generic OTC products will be delivered in bulk containers or in packages. Typically, we assist our customers in developing the size, design and graphics of the folding carton, label and container for the products. The package can be automatically placed into shipping containers of the customer's selection.

                     In response to drug tampering problems affecting the industry generally, we have instituted certain tamper-evident features in our packaging operation. A tamper-evident package is one which readily reveals any violation of the packaging or possible contamination of the product. These include a foil inner-seal which is electronically sealed after the capping operation and, for some customers, a neck band or outer safety seal applied to the bottle and cap as an additional tamper-evident feature. In addition, we manufacture a banded capsule which contains a gelatin band in the center to deter ease of opening and/or closing the capsule product. Although we take steps to make our products tamper-resistant, we believe that no product is "tamper-proof." There can be no assurance that our products will not be tampered with. Any such tampering, even if it occurs in the retail outlets, may have a material adverse effect on our business. See "Insurance."

Customers

                     Our customers consist of over 50 retailers (including major national and regional drug, supermarket and mass-merchandise chains), wholesalers, club stores, distributors and brand-name pharmaceutical companies. Sales to our various categories of customers in fiscal 2001, 2000 and 1999 by percentage of total sales were as follows:

                                                      Percentage of Sales
                                                  -------------------------
     Category                                     2001       2000      1999
     --------                                     ----       ----      ----

     Retail drug and supermarket chains and mass   86%        89%      93%
       merchandisers
     Wholesalers and distributors (in bulk)         8%        8%        5%
     Brand-name pharmaceutical companies            6%        3%        2%

Virtually all of these sales consisted of products which our customers sell under their own store brand or other labels.

                     Sales to customers which represented more than 10% of sales in any one or more of the years 2001, 2000 and 1999 were as follows:

                           Sales ($ and percentage of total sales)
                   -----------------------------------------------------
    Customer           2001                  2000                  1999
    --------           ----                  ----                  ----

    Costco       $ 6,692,000 (13%)     $13,778,000 (17%)     $12,522,000 (14%)
    Walgreens    $ 2,461,000 ( 5%)     $10,037,000 (12%)     $15,412,000 (17%)
    CVS          $ 6,566,000 (13%)     $ 7,458,000  (9%)     $ 7,903,000 (9%)

                     Other retail customers include American Stores, a grocery chain; BJ Wholesale Club, a warehouse discounter; Dollar General, a discount chain; Drug Mart, a drug store chain; Eckerd, a drug store chain; Family Dollar, a discount chain; Fleming Cos., a food wholesaler; H.E. Butt, a food chain; Kmart, a mass merchandise chain; Rite Aid, a drug store chain; Save-A-Lot, a discount chain; Food Lion/Hannaford, a food chain; Wakefern/Shoprite, a grocery store co-op; Wal-Mart, a mass merchandise chain; and Winn-Dixie, a grocery store chain.

                     The amounts of backlog orders at the end of fiscal 2001 and 2000 were not significant. International sales are not significant at this time.

Sales and Marketing

                     We have 15 employees in sales and customer service. This staff and over 14 independent brokers sell our generic OTC pharmaceutical products and our marketing services to current and potential customers. There are account teams servicing different geographic areas of the U.S., each headed by a sales director. A team is assigned to each retail customer, to focus on servicing that customer and making recommendations to help build retail store brand business.

Governmental Regulation

                     Pharmaceutical companies are subject to extensive regulation by the Federal government, primarily by the FDA, under the Federal Food, Drug and Cosmetic Act, the Controlled Substance Act and other federal statutes and regulations. These regulations govern or influence the testing, manufacture, safety, labeling, storage, recordkeeping, approval, pricing, advertising and promotion of our drug products. Failure to comply with FDA and other governmental requirements can result in a variety of adverse regulatory actions, including but not limited to the seizure of company products, demand for a product recall, total or partial suspension of manufacturing/production, refusal by FDA to approve new products, and withdrawal of existing product approvals.

                     The FDA requires all new pharmaceutical products to be proven safe and effective before they may be commercially distributed in the United States. In order to prove the safety and efficacy of most new pharmaceutical products, pharmaceutical companies are often required to conduct extensive preclinical (animal) and clinical (human) testing. Such testing is extensively regulated by the FDA.

                     Most prescription drug products obtain FDA marketing approval via either the "new drug application" (NDA) process or the "abbreviated new drug application" (ANDA) process. An NDA is submitted to the FDA in order to prove that a drug product is safe and effective. NDAs typically contain data developed from extensive clinical studies. The filing of an NDA with the FDA provides no assurance that the FDA will approve the applicable drug product for marketing.

                     Generic drug products are capable of being approved for marketing by the FDA via the ANDA process. An ANDA is submitted to the FDA in order to demonstrate that a drug product is "bioequivalent" to a drug product that has already been approved by the FDA for safety and effectiveness (i.e. an "innovator" drug product). Unlike an NDA, an ANDA is not required to contain evidence of safety and effectiveness. Instead, ANDAs for orally administered dosage forms typically contain "bioavailability" studies to demonstrate "bio-equivalence." FDA approvals of ANDAs generally take 18 to 24 months to obtain. As with NDAs, the filing of an ANDA with the FDA provides no assurance that the FDA will approve the applicable drug product for marketing.

                     The current regulatory framework that governs generic drug approvals via the ANDA process was enacted in 1984 and is commonly known as the "Waxman-Hatch Act." Under the Waxman-Hatch Act, companies are permitted to conduct studies required for regulatory approval notwithstanding the existence of patent protection relevant to the substance or product under investigation. Thus, "bioavailability" studies for a generic drug product may be conducted regardless of whether the related "innovator" product has patent protection.

                     A company generally may file an ANDA application with the FDA at any point in time. There are certain exceptions, however, such as when an "innovator's" drug product was granted five years of "marketing exclusivity" under the Waxman-Hatch Act. In such case, the ANDA application may not be filed with FDA until the five years of "marketing exclusivity" have expired. Such prohibition on filing does not apply, however, if the period of marketing exclusivity is three years.

                     When an ANDA application is filed, the FDA may immediately review the application regardless of whether the "innovator's" product has patent protection or is subject to "marketing exclusivity." The FDA's ANDA approval, however, is conditional and does not become effective until the expiration of any applicable patent or "marketing exclusivity" periods. After the expiration of these periods, a generic product that has received conditional ANDA approval may be marketed immediately.

                     Some drug products that are intended for over-the-counter marketing require NDA or ANDA approval. Most OTC drug products, however, may be commercially distributed without obtaining FDA approval of an NDA or ANDA application. The FDA established the OTC Drug Review in the early 1970's, which led to the creation of OTC drug monographs that indicate whether certain drug ingredients are safe and effective for specific intended uses. Final OTC drug monographs have the force of law. Products that conform with the requirements of a final OTC drug monograph do not require NDA or ANDA approval, whereas OTC products not covered by a monograph must be approved via an NDA or ANDA.

                     Many OTC drug monographs have not yet been finalized. The FDA, however, generally permits the marketing of OTC drug products that conform to the proposed requirements of a non-final monograph. The FDA also permits the marketing of OTC products that do not conform to a non-final monograph subject to certain limitations. Normally, such products may be marketed, pending the effective date of the applicable final OTC drug monograph, if they are substantially similar to OTC drug products that were marketed OTC in the United States prior to December 4, 1975.

                     If the final drug monographs require us to expend substantial sums to maintain FDA compliance, we could be materially adversely affected. In the past, our generic OTC products (with the exception of ibuprofen) have not required approval of NDAs or ANDAs. Certain products which we recently introduced or are under development, however, require such approvals. The FDA has approved ANDAs in 200 mg., 300 mg., 400 mg., 600 mg. and 800 mg. dosage strengths for our ibuprofen product (although, at present, we sell our ibuprofen products in the 200 mg. strength only). We have also obtained FDA approval of certain different colors and shapes for our 200 mg. ibuprofen product. Our naproxen sodium product received ANDA approval in fiscal 1997 and our cimetidine product received ANDA approval in fiscal 1998. In addition, we received ANDA approval for an ibuprofen capsule in July 1998.

                     All drug products, whether prescription or OTC, are required to be manufactured and processed in compliance with the FDA's "good manufacturing practices" (GMPs). GMPs are "umbrella" regulations that prescribe, in general terms, the methods to be used for the manufacture, packing, processing and storage of drug products to ensure that such products are safe and effective. Examples of GMP regulatory requirements include record-keeping requirements and mandatory testing of in-process materials and components. FDA inspectors determine whether a company is in compliance with GMPs. Failure to comply with GMPs may render a drug "adulterated" and could subject the company to adverse regulatory actions.

                     The FDA regulates many other aspects of pharmaceutical product development and marketing, including but not limited to product labeling and, for prescription drug products, product advertising. The Federal Trade Commission is the primary Federal agency responsible for regulating OTC drug product advertising.

                     In addition to Federal regulation, pharmaceutical companies are subject to state regulatory requirements, which may differ from one state to another.

                     We believe that we are currently in compliance with FDA regulations. However, in anticipation of more stringent and extensive requirements by FDA, we undertook a major renovation and upgrade of our manufacturing plant. We believe that these improvements, which were substantially completed in 1996 at a cost of approximately $4,500,000, will help to satisfy both present and future FDA regulations and guidelines as well as facilitate our ability to produce state-of-the-art products for our customers.

                     Federal and/or state legislation and regulations concerning various aspects of the health care industry are under almost constant review and we are unable to predict, at this time, the likelihood of passage of additional legislation, nor can we predict the extent to which we may be affected by legislative and regulatory developments concerning our products and the health care field generally.

Environmental Matters

                     The prior owner of our Edison, New Jersey manufacturing facility, Revco, conducted a soil and groundwater cleanup of such facility, under the New Jersey Industrial Site Recovery Act (ISRA), as administered by the New Jersey Department of Environmental Protection (NJDEP). NJDEP determined that the soil remediation was complete and approved the groundwater remediation plan, subject to certain conditions. Revco began operating a groundwater remediation treatment system in 1995. Although CVS (as the successor to Revco) is primarily responsible for the entire cost of the cleanup, we guaranteed the cleanup. In addition, we agreed to indemnify the owner of the facility under the terms of the 1989 sale lease-back. If CVS defaults in its obligations to pay the cost of the clean-up, and such costs exceed the amount of the bond posted by Revco, we may be required to make payment for any cleanup. The likelihood of CVS being unable to satisfy any claims which may be made against it in connection with the facility, however, are remote in our opinion. Accordingly, we believe that we will not have to bear any costs associated with remediation of the facility and we will not need to make any material capital expenditures for environmental control facilities.

Research and Development; New Products and Products in Development

                     We are engaged in a research and development program which seeks to develop and gain regulatory approval of products which are comparable to national brand products under the FDA OTC Drug Monograph process or the ANDA process. We are also engaged in R&D efforts related to certain prescription (sometimes referred to as ethical) products and are exploring potential acquisition candidates or joint ventures to facilitate entry into other drug categories.

                     We maintain an experienced staff of five employees in our product development department, as well as other support staff to assist our customers. Our research and development activities are primarily related to the determination of the formula and specifications of the products desired by customers, as well as the potency, dosage, flavor, quality, efficacy, color, hardness, form (i.e. tablet, caplet or capsule) and packaging of such products, as well as costs related to new products in development including costs associated with regulatory approvals. Our research and development expenditures were $443,000 in fiscal 2001, $537,000 in fiscal 2000 and $667,000 in fiscal 1999. The rate of R&D expenditures fluctuates significantly from year to year depending primarily on what branded products are coming off patent in the near future and whether or not such products are appropriate for development by us. Expenditures in one year are not necessarily indicative of expenditures in future years. We expect to spend in fiscal 2002 between $500,000 and $1,000,000 on research and development activities consistent with our goal of continually increasing and improving our product line.

Patents and Trademarks

                     Allerfed®, Leg Ease®, Health+Cross® and Health Pharm® are federally registered trademarks owned by us. To the extent that our packaging and labeling of generic OTC products may be considered similar to the brand name products to which they are comparable, and to the extent that a court may determine that such similarity may constitute confusion over the source of the product, we may be subject to legal actions under state and Federal statutes and case law to enjoin the use of the packaging and for damages.

Insurance

                     We may be subject to product liability claims by persons damaged by the use of our products. We maintain product liability insurance for our generic OTC products covering up to $10,000,000. Although there have been no material product liability claims made against us to date, there can be no assurance that such coverage will adequately cover any claims which may be made or that such insurance will not significantly increase in cost or become unavailable in the future. The inability to maintain necessary product liability insurance would significantly restrict our ability to sell any products and could result in a cessation of our business.

Competition

                     We compete not only with numerous manufacturers of generic OTC products, but also with brand name drug manufacturers, most of which are well known to the public. In addition, our products compete with a wide range of products, including well-known name brand products, almost all of which are manufactured or distributed by major pharmaceutical companies. Some of our competitors, including all of the manufacturers and distributors of brand name drugs, have greater financial and other resources than we have, and are therefore able to expend more effort than we do in areas such as product development and marketing. The crucial competitive factors are price, product quality, customer service and marketing. Although we believe that our present equipment and facilities render our operations competitive as to price and quality, many competitors may have far greater resources than we have, which may enable them to perform high quality services at lower prices than the services performed by the Company. Additionally, some of our customers may acquire the same equipment and technology used by us and perform for themselves the services which we now perform for them.

Employees

                     As of June 30, 2001, we employed approximately 344 full-time employees. Of such employees, approximately 253 are engaged in manufacturing and operational activities and approximately 217 are covered by a collective bargaining agreement between the Company and Local 522 affiliated with the International Brotherhood of Teamsters of New Jersey, which expires in October 2001. Additionally, three employees are represented by Local 68 of the International Union of Operating Engineers, affiliated with the AFL-CIO. We had 15 persons employed in sales, customer service and graphic arts, 28 administrative and 48 laboratory technicians and scientists. We believe that our relations with our employees are satisfactory.

Operational Plan

                      The Company's revenues continued to be effected by the deteriorated customer relationships resulting in part from the Company's computer and system's conversion and product delivery problems which occurred in fiscal 1999.

                     The Company is addressing customer relationship issues and has begun the process of rebuilding its sales base through the initiatives detailed below. On a quarter to quarter comparison, sales have grown for the quarter ended June 30, 2001 for the first time in six quarters since the quarter ended January 1, 2000. Furthermore, sales for the quarter ended September 29, 2001 (the first quarter of the fiscal year ending June 29, 2002) are projected to increase from the previous quarter. The Company has begun implementing its plan to increase revenues and improve operational efficiencies to restore profitability. As part of these initiatives, the Company has undertaken the following:

                     These objectives, along with sustaining market share and increasing sales are projected to be driven by the following:

                      The Company believes that cash flow from operations, together with revolving credit and equipment and term loan financing plus continued financial support from ICC will be sufficient to fund the Company's currently anticipated working capital, capital spending and debt service requirements during the 2002 fiscal year. The Company's revolving credit facility with a lending institution has been extended through December 31, 2001 and ICC continues to provide additional financial support. While no assurance can be given that any further extension, renewal, replacement or refinancing can be successfully accomplished, ICC has committed to provide the Company with the necessary financing to continue its operations through December 31, 2002.

Item 2. Properties

                      We lease approximately 214,000 square feet of office, manufacturing and warehousing space in Edison, New Jersey, under a lease which expires in 2004 with two five-year renewal options. The monthly rental is currently $159,136 per month and will increase on each 30th month after February 1997 by a cost of living increase. The rental during each of the renewal options, if any, will be the higher of the "fair rental value" (as that term is defined in the lease) of the premises at the commencement of each renewal option or the rent in effect at the end of the lease. In addition, we are obligated to pay all utilities, real estate taxes, assessments, repairs, improvements, maintenance costs and expenses in connection with the premises, comply with certain environmental obligations and maintain certain minimum insurance protection.

                     In March 1995, we entered into a ten-year lease for a 91,200 square foot building located adjacent to our present manufacturing facility. We have two additional five-year renewal options. Rent payments are $26,600 per month for the first five years and $28,500 per month for the balance of the initial ten-year term. In addition, we are obligated to pay all utilities, real estate taxes, assessments, repairs, improvements, maintenance costs and expenses in connection with the premises, comply with certain environmental obligations and maintain certain minimum insurance protection.

                      We believe that both of these facilities provide the potential for increased expansion of manufacturing capacity, if necessary.

Item 3. Legal Proceedings

                      Claims Related to Max Tesler. In July 1997, the Company received an arbitration demand from the estate of Dr. Max Tesler, a former President of the Company, who died in 1996. For breaches of employment and other agreements between the Company and Dr. Tesler, the estate claimed an award of compensatory damages, punitive damages, a certain number of shares of common stock of the Company and attorneys' fees. The Company also brought counterclaims against the estate.

                      In March 2000, the American Arbitration Association panel in New York awarded amounts to both the estate of Dr. Tesler and the Company. The arbitration panel awarded the Tesler estate the amount of Tesler's salary for approximately two years, which salary amount had been accrued in 1995. The arbitration panel also awarded the estate a portion of its legal fees. The award dismissed all other of the estate's claims and also ruled in favor of the Company on certain of its counterclaims. The net result of the arbitrators' award is that the Company paid the Tesler estate approximately $45,000 plus $75,000 of the estate's legal fees. The accrual recorded by the Company in 1995 more than offset the amount paid to the estate. The final outcome did not have a material effect upon the Company's financial position, liquidity or operating results.

                      In May 1998, the Company brought an action against one of its former outside corporate counsels arising out of matters related to Dr. Tesler seeking damages for conflict of interest, breaches of fiduciary duty and loyalty, negligence and malpractice during its representation of the Company. The action is still pending.

                      Apotex Corporation and Torpharm v. PFI. In July 2000, an action was instituted in the Circuit Court of Cook County, Illinois County Department, Chancery Division, against us by Apotex Corporation and Torpharm Inc. seeking an unspecified amount in damages and specific performance in the nature of purchasing a certain product from Apotex. The complaint alleges that PFI agreed to purchase a certain product exclusively from Apotex. The counts specified in the complaint include breach of contract, negligent misrepresentation, breach of implied covenant of good faith and fair dealing, breach of implied covenant to use best efforts, specific performance, breach of fiduciary duty, reformation and a UCC action for the price of 3 million tablets. Management believes the lawsuit is without merit and is vigorously defending against it.

                      The Company is a party to various other legal proceedings arising in the normal conduct of business. Management believes that the final outcome of these proceedings will not have a material adverse effect upon the Company's financial position or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders. Not applicable.

PART II

Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters

                      Our common stock is registered under Section 12(g) of the Securities Exchange Act of 1934 and was traded on the over-the-counter market (OTC Bulletin Boardsm, Pink Sheets(tm) symbol: PHFR) until November 20, 2000. Effective November 20, 2000 the Company's common stock ceased to be quoted on the OTC Bulletin Board. While there may be isolated sales of the stock, there are no regular published quotations at this time. The Company is seeking to have one or more market makers reapply to have the stock quoted. There can be no assurance that the stock will be quoted on the OTC Bulletin Board or on any other issuer listing service, market or exchange. Trading on the OTC Bulletin Board has been limited. There can be no assurance that an active trading market will ever develop for the common stock. As of June 30, 2001, there were 1,485 holders of record of the common stock. The following table sets forth the range of high and low closing bid quotations for the common stock as reported by Pink Sheets LLC through June 30, 2001. These quotations represent prices between dealers, without adjustments for retail mark-ups, mark-downs or other fees or commissions, and may not represent actual transactions.

                                              High Bid     Low Bid
                                              --------     -------

Year Ended July 1, 2000
   First Quarter...........................   $ .35        $ .21
   Second Quarter..........................     .31          .18
   Third Quarter...........................     .81          .20
   Fourth Quarter..........................     .45          .20

Year Ending June 30, 2001
   First Quarter...........................   $ .26         $.20
   Second Quarter..........................     .25          .14
   Third Quarter...........................     .13          .01
   Fourth Quarter..........................     .25          .01

                      We have never paid dividends on our common stock. We anticipate that for the foreseeable future any earnings will be retained for use in our business or for other corporate purposes, and we do not anticipate that cash dividends will be paid. Furthermore, the agreement with our institutional lender prohibits the payment of dividends without the lender's consent. Also, any dividends must first be paid on preferred stock, to the extent in arrears, prior to payment of any common stock dividend.

Item 6. Selected Financial Data

                     The selected consolidated financial data presented below for each of the five-years in the period ended June 30, 2001 are derived from the consolidated financial statements of the Company which financial statements have been audited by BDO Seidman, LLP, independent certified public accountants, whose report for each of the three years in the period ended June 30, 2001 appears elsewhere herein. During 1999 the Company changed its fiscal year end from June 30 to a 52-53 week period ended on the last Saturday closest to June 30. The selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report.

                                        June 30,  July 1,   July 3,   June 30,  June 30,
years ended                               2001     2000      1999       1998      1997
----------------------------------------------------------------------------------------
                                           (in thousands, except per share amounts)
Statement of Operations Data;

     Gross sales                        $51,777   $82,869   $89,821   $85,179   $75,013
     Net sales                           49,157    76,579    82,174    80,829    71,117
     Net income (loss)                  (14,592)   (7,918)   (6,565)    1,867     1,332
     Net income (loss) per share
       of common stock:
          Basic                            (.49)     (.26)     (.22)      .06       .04
          Diluted                          (.49)     (.26)     (.22)      .05       .04
     Weighted average common
       shares and dilutive securities
       outstanding:
          Basic                          30,330    30,260    30,253    30,199    29,559
          Diluted                        30,330    30,260    30,253    36,710    36,242
Balance Sheet Data:

     Current assets                     $19,174   $27,779   $38,003   $36,658   $29,939
     Current liabilities                 36,944    25,214    29,615    25,952    18,550
     Working capital (deficiency)       (17,770)    2,565     8,388    10,706    11,389
     Total assets                        32,923    44,565    59,653    59,864    48,734
     Long-term debt and
       capital lease obligations         21,952    30,732    33,548    30,536    28,734
     Stockholders' equity (deficiency)  (25,973)  (11,381)   (3,510)    3,055     1,077

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Financial Condition at June 30, 2001

                      The net decrease in cash used during the fiscal year ended June 30, 2001 was $47,000.

                      Total funds used in operating activities were $3,565,000 for the fiscal year ended June 30, 2001. This amount was attributable to the loss of $14,592,000, a decrease in accounts payable and accrued expenses of $849,000 and an increase in other current assets of $377,000, offset by non-cash items of $3,480,000, a decrease in accounts receivable of $4,913,000 and a decrease in inventories of $3,860,000.

                      Net cash provided by investing activities for the fiscal year ended June 30, 2001 was $63,000, attributable to a decrease in other assets (sale of some fixed equipment) off set by an increase in capital expenditures.

                      Net cash provided by financing activities for the fiscal year ended June 30, 2001 was $3,455,000, which was used primarily to support the operating needs of the Company. The Company refinanced certain of its capital equipment, generating net proceeds of $2,142,000, and received additional proceeds from debt borrowings, net of repayments of $1,313,000.

                     Current assets at June 30, 2001 include $7,034,000 of accounts receivable as compared to $11,947,000 at July 1, 2000. The accounts receivable decrease of $4,913,000 is primarily a result of improved collections and a decrease in sales. Current assets also include $10,950,000 of inventory as compared to $14,810,000 at July 1, 2000. The decrease is related to the improved management of physical quantities and reduced sales volume. Current liabilities also include $13,709,000 of accounts payable and accrued expenses as compared to $17,192,000 at July 1, 2000. The decrease is primarily due to payment of accounts payable and the effects of reduced purchases.

                      On August 7, 1998, the Company modified its line of credit and equipment term loan with its financial institution. The maximum amount of the line of credit and term loan is $25,000,000. At June 30, 2001, borrowings were $8,917,000. Borrowings under the modified agreement, which expired August 7, 2001, bore interest at the prime rate less 3/4%. Such borrowing rate was increased by 2% effective April 1, 1999. In addition, on May 19, 2000 the line was further increased up to $2,500,000 over eligible receivables and inventories, as defined, up to the contractual limit. Such increase was guaranteed by ICC. In August 2001, the line of credit agreement was modified and extended through December 31, 2001. The borrowing rate was increased to prime + 2% (8.75% at June 30, 2001) and the maximum credit limit was reduced to $10 million. ICC has partially guaranteed this modification and extension. In addition, the Company has convertible subordinated debentures and capitalized lease obligations, which together with the line of credit borrowings have a substantial impact on the working capital requirements in terms of principal and interest payments.

                      The Company has outstanding 2,500,000 shares of Series A cumulative redeemable convertible preferred stock sold to ICC. Dividends from the date of issue (April 8, 1996) through June 30, 2001 totaling $1,050,000 have accumulated and are in arrears. There is no obligation or intention to pay dividends currently on the preferred stock. Dividends will continue to accrue at the rate of $200,000 per year until declared and paid or converted. On July 1, 2000 the Company entered into a loan agreement with ICC for $7,752,000 with interest at 1% above the prime rate (7.75% at June 30, 2001) which loan was increased to $11,837,000 on September 30, 2000 and further increased to $16,404,000 on December 31, 2001 with interest at 1% above the prime rate (7.75% at June 30, 2001).

                     The Company has a deferred tax asset of $11,266,000, before the valuation allowance at June 30, 2001, which consists of future tax benefits of net operating loss carry forwards and various other temporary differences. Based on the assessment of all available evidence including the loss for fiscal 2001, its inconsistent operating results in prior years, the current status of the Company's business and the uncertainty with respect to generating taxable income in future years, management has recorded a valuation allowance on the total of the deferred tax assets.

                      The Company intends to spend an estimated $500,000 to $1,000,000 on capital improvements in the fiscal year ending June 30, 2002 to increase manufacturing capacity and reduce costs. The Company anticipates that these capital expenditures will be funded through equipment lease financing and working capital. While the Company has in the past had no difficulty in obtaining such financing, there can be no assurance the Company will obtain the equipment lease financing in the future.

                      ICC has supported the Company by the provision of loans, replacing loans from its asset-based lenders, and providing the Company with working capital.

                      The Company continues its initiatives to improve operational efficiencies to restore profitability. As part of these efforts, the Company has taken the following initiatives:

                      The Company believes that cash flow from its revolving credit and equipment and term loan financing, plus continued financial support from ICC, will be sufficient to fund the Company's currently anticipated working capital, capital spending and debt service requirements through June 30, 2002. The company has extended its working capital facility through December 31, 2001. It expects the aforementioned working capital needs will require it to obtain new revolving credit facilities by December 31, 2001, when the credit facility matures, whether by extending, renewing, replacing or otherwise refinancing the facility. While no assurance can be given that any such extension, renewal, replacement or refinancing can be successfully accomplished, ICC has committed to provide the Company with the necessary financing to continue its operations through calendar 2002.

Results of Operations for Fiscal 2001 Compared to Fiscal 2000

                     Gross sales for the fiscal year ended June 30, 2001 were $51,777,000 as compared to $82,869,000 in the prior fiscal year. A substantial portion of the decrease of $31,092,000 or 38% resulted from lost business and customers due to the after effects of production and shipping problems and other difficulties experienced by the Company during the installation of the new computer system in fiscal 1999. Sales to two customers, Walgreen Company and Costco Wholesale, were $9,153,000 or 18% of sales as compared to $23,815,000 or 29% of sales in the comparable period in the prior fiscal year.

                     Net sales for the fiscal year ended June 30, 2001 were $49,157,000 as compared to $76,579,000 in the prior year. The decrease was due to a reduction in gross sales, offset by a decrease in discounts and allowances. Additionally, the decrease was offset by a reduction in the number of customer rebate programs.

                     Cost of sales as a percentage of net sales was 95.4% for the fiscal year ended June 30, 2001 as compared to 82.8% in the prior fiscal year. This increase resulted primarily from the reduced level of production resulting from a decrease in sales. Although the Company has improved the efficiency of its manufacturing operation, the cost of sales percentage increased because the total fixed costs were allocated to the reduced number of units produced.

                     Selling, general and administrative expenses were $10,961,000 or 22% of net sales for the fiscal year ended June 30, 2001 as compared to $11,892,000 or 15.5% of net sales for the prior fiscal year. The decrease of $931,000 was mainly a result of decreased sales, legal and distribution expenses.

                     Research and development costs were $443,000 for fiscal 2001 as compared to $537,000 for the prior fiscal year.

                     Interest expense was $5,208,000 for the fiscal year ended June 30, 2001 as compared to $4,904,000 in the prior fiscal year. The net increase of $304,000 resulted primarily from increased borrowings from ICC, partly offset by a decrease in long-term debt and the Company's revolving credit facility.

                     No provision for income tax was made for fiscal 2001.

                     Net loss for the fiscal year ended June 30, 2001 was $14,592,000 or $.49 per share as compared to $7,918,000 or $.26 per share in the prior fiscal year.

Results of Operations for Fiscal 2000 Compared to Fiscal 1999

                     Gross sales for the fiscal year ended July 1, 2000 were $82,869,000 as compared to $89,821,000 in the prior fiscal year. The decrease of $6,952,000 was mainly due to a decrease in the private label sector of the business. Private label sales were $73,733,000 as compared to $83,222,000 in the prior year. The bulk/contract manufacturing sector had sales of $9,136,000 as compared to $6,599,000 in the prior year. Sales to two customers, Walgreen Company and Costco Wholesale, were $23,815,000 or 28.7% of sales as compared to $27,934,000 or 31.1% of sales in the comparable period in the prior fiscal year.

                     Net sales for the fiscal year ended July 1,2000 were $76,579,000 as compared to $82,174,000 in the prior year. The decrease was due to a reduction in gross sales which was partially offset by a decrease in discounts and allowances.

                     Cost of sales as a percentage of net sales was 82.8% for the fiscal year ended July 1, 2000 as compared to 86.4% in the prior fiscal year. The decrease was partly due to the change in sales mix as mentioned above whereby less of the Company's business is in the private label (store brand) sector, which has a higher cost of sales percentage than the bulk/contract manufacturing business. To improve operating efficiencies and insure year 2000 compliance, during fiscal 1999 the Company installed and implemented a new integrated computer system. This major system conversion caused serious disruptions in inventory control, shipping, production and planning resulting in reduced sales and increased cost of sales. Cost of sales was also affected by the increased cost of packaging due to new equipment installed in fiscal 1998 which caused production inefficiencies and higher waste due to the beginning trials of the equipment during fiscal 1999. The Company estimates that costs incurred relating to the computer system conversion and other related disruptions which occurred during fiscal year 1999 were approximately $7,000,000. The disruptions which resulted from the computer system conversion also had a negative effect on fiscal 2000 sales, as certain customers reduced their levels of purchases.

                     Selling, general and administrative expenses were $11,892,000 or 15.5% of net sales for the fiscal year ended July 1, 2000 as compared to $14,547,000 or 17.7% of net sales for the prior fiscal year. The decrease of $2,655,000 was mainly a result of decreased sales, legal and distribution expenses.

                     Research and development costs were $537,000 for fiscal 2000 as compared to $667,000 for the prior fiscal year.

                     Interest expense was $4,904,000 for the fiscal year ended July 1, 2000 as compared to $4,675,000 in the prior fiscal year. The net increase of $229,000 resulted primarily from increased borrowings from ICC, partly offset by a decrease in long-term debt.

                     In fiscal 1999, the Company settled claims relating to the children and a former spouse of Dr. Tesler, a former President of the Company who died in December 1996. Accordingly, the Company recorded a lawsuit settlement expense of $1,179,000 for the fiscal year ended July 3, 1999.

                     Income tax expense for fiscal 2000 was $3,868,000 compared to a benefit of $3,171,000 for fiscal 1999. As a result of the pre-tax loss of $4,050,000 for fiscal 2000 and its inconsistent operating results in prior years, the current status of the Company's business and the uncertainty with respect to generating taxable income in future years, management recorded a one time charge for income tax expense. This charge was made to recognize the uncertainty with respect to realization of future benefits of deferred tax assets which had been recorded in prior years.

                      Net loss for the fiscal year ended July 1, 2000 was $7,918,000 or $.26 per share as compared to $6,565,000 or $.22 per share in the prior fiscal year.

Effects of Inflation

                      We do not believe that inflation had a material effect on our operations for the fiscal years 2001, 2000 and 1999.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

                     Not applicable

Item 8. Financial Statements and Supplementary Data

                                                                   JUNE 30, 2001       July 1, 2000
----------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
   Cash                                                          $        83,000     $      130,000
   Accounts receivable, net of allowance for doubtful
      accounts of $706,000 and $406,000                                7,034,000         11,947,000
   Inventories                                                        10,950,000         14,810,000
   Prepaid expenses and other current assets                           1,107,000            892,000
----------------------------------------------------------------------------------------------------
         TOTAL CURRENT ASSETS                                         19,174,000         27,779,000
PROPERTY, PLANT AND EQUIPMENT, NET                                    13,110,000         15,917,000
OTHER ASSETS                                                             639,000            869,000
----------------------------------------------------------------------------------------------------
                                                                    $ 32,923,000       $ 44,565,000
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY)
CURRENT LIABILITIES:
   Current portion of capital lease obligations                    $   2,009,000      $   2,280,000
   Current portion of long-term debt                                  14,693,000          1,684,000
   Due to ICC Industries Inc.                                          6,533,000          4,058,000
   Accounts payable                                                   11,134,000         14,488,000
   Accrued expenses                                                    2,575,000          2,704,000
----------------------------------------------------------------------------------------------------
         TOTAL CURRENT LIABILITIES                                    36,944,000         25,214,000
----------------------------------------------------------------------------------------------------
LONG-TERM CAPITAL LEASE OBLIGATIONS, LESS CURRENT MATURITIES           6,048,000          4,464,000
----------------------------------------------------------------------------------------------------
Long-term debt, less current maturities:

   Revolving/term loans                                                                  14,187,000
   Convertible debentures                                                                 4,329,000
   Note payable to ICC Industries Inc.                                15,904,000          7,752,000
----------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT, LESS CURRENT MATURITIES                         15,904,000         26,268,000
----------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
----------------------------------------------------------------------------------------------------
STOCKHOLDERS' (DEFICIENCY):
   Preferred stock, par value $1.00 per share;
      10,000,000 shares authorized; 2,500,000 shares
      issued and outstanding                                           2,500,000          2,500,000
   Common stock, par value $.08 per share; 40,000,000
      shares authorized; 30,329,671 shares issued and
      outstanding;                                                     2,427,000          2,427,000
   Capital in excess of par value                                     37,534,000         37,534,000
   Accumulated deficit                                               (68,434,000)       (53,842,000)
----------------------------------------------------------------------------------------------------
         TOTAL STOCKHOLDERS' (DEFICIENCY)                            (25,973,000)       (11,381,000)
----------------------------------------------------------------------------------------------------
                                                                    $ 32,923,000       $ 44,565,000
----------------------------------------------------------------------------------------------------

                                         SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED                                        JUNE 30, 2001  July 1, 2000  July 3, 1999
---------------------------------------------------------------------------------------------
GROSS SALES                                          $51,777,000   $82,869,000   $89,821,000
LESS: SALES DISCOUNTS AND ALLOWANCES                   2,620,000     6,290,000     7,647,000
---------------------------------------------------------------------------------------------
NET SALES                                             49,157,000    76,579,000    82,174,000
---------------------------------------------------------------------------------------------
COST AND EXPENSES:
   Cost of goods sold                                 46,887,000    63,390,000    70,970,000
   Selling, general and administrative                10,961,000    11,892,000    14,547,000
   Research and development                              443,000       537,000       667,000
---------------------------------------------------------------------------------------------
                                                      58,291,000    75,819,000    86,184,000
---------------------------------------------------------------------------------------------
         INCOME (LOSS) FROM OPERATIONS                (9,134,000)      760,000    (4,010,000)
---------------------------------------------------------------------------------------------
OTHER EXPENSES (INCOME):
   Interest expense                                    5,208,000     4,904,000     4,675,000
   Lawsuit settlement                                                              1,179,000
   Other, net                                            250,000       (94,000)     (128,000)
---------------------------------------------------------------------------------------------
                                                       5,458,000     4,810,000     5,726,000
---------------------------------------------------------------------------------------------
         (LOSS) BEFORE INCOME TAXES (BENEFIT)        (14,592,000)   (4,050,000)   (9,736,000)
INCOME TAXES (BENEFIT)                                               3,868,000    (3,171,000)
---------------------------------------------------------------------------------------------
NET (LOSS)                                           (14,592,000)   (7,918,000)   (6,565,000)
PREFERRED STOCK DIVIDEND REQUIREMENT                     200,000       200,000       200,000
---------------------------------------------------------------------------------------------
NET (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS      $(14,792,000) $ (8,118,000) $ (6,765,000)
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Net (loss) per common share:
   Basic and diluted                                $      (0.49)       $(0.26)       $(0.22)
---------------------------------------------------------------------------------------------
Basic and diluted average common shares outstanding   30,330,000    30,265,000    30,253,000

---------------------------------------------------------------------------------------------                                                   SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

Years ended June 30, 2001, July 1, 2000, and July 3, 1999
---------------------------------------------------------------------------------------------------------------
                               Preferred Stock               Common Stock
                          -------------------------   --------------------------    Capital in
                                          Amount at                    Amount at   Excess of Par   Accumulated
                          Shares issued   par value   Shares issued    Par Value       Value         Deficit
---------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1998      2,500,000    $2,500,000    30,253,320     $2,421,000    $37,493,000   $(39,359,000)
Net loss                                                                                            (6,565,000)
---------------------------------------------------------------------------------------------------------------
BALANCE, JULY 3, 1999       2,500,000     2,500,000    30,253,320      2,421,000     37,493,000    (45,924,000)
Conversion of debentures                                   76,351          6,000         41,000
Net loss                                                                                            (7,918,000)
---------------------------------------------------------------------------------------------------------------
BALANCE, JULY 1, 2000       2,500,000     2,500,000    30,329,671      2,427,000     37,534,000    (53,842,000)
NET LOSS                                                                                           (14,592,000)
---------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2001      2,500,000    $2,500,000    30,329,671     $2,427,000    $37,534,000   $(68,434,000)
---------------------------------------------------------------------------------------------------------------

                                                   SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

YEARS ENDED                                                 JUNE 30, 2001   July 1, 2000   July 3, 1999
--------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
   Net (loss)                                                $(14,592,000)   $(7,918,000)   $(6,565,000)
   Adjustments to reconcile net (loss) to net cash
      provided by (used in) operating activities:
        Depreciation and amortization                           3,086,000      3,193,000      2,895,000
        Amortization of bond discount and deferred
          financing costs                                         553,000        405,000        300,000
        Amortization of deferred gain on sale of
          building                                               (159,000)       (94,000)       (95,000)
        Deferred income taxes                                                  3,756,000     (2,224,000)
   Changes in current assets and liabilities:
      (Increase) decrease in accounts receivable                4,913,000      4,653,000     (1,739,000)
      Decrease in inventories                                   3,860,000      3,106,000      2,180,000
      (Increase) decrease in other current assets                (377,000)       376,000       (476,000)
      (Increase) decrease in income tax receivable                               947,000       (947,000)
      Increase in deferred gain on sale / leaseback                                             170,000
      Increase (decrease) in accounts payable, accrued
        expenses and income taxes payable                        (849,000)    (3,474,000)     1,588,000
--------------------------------------------------------------------------------------------------------
        NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES    (3,565,000)     4,950,000     (4,913,000)
--------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
   Purchase of property, plant and equipment, net                (117,000)      (474,000)       (90,000)
   Decrease (increase) in other assets                            180,000       (461,000)       126,000
--------------------------------------------------------------------------------------------------------
        NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES        63,000       (935,000)        36,000
--------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
   Borrowings (repayments) of long-term debt
     and line of credit                                         2,142,000     (1,258,000)     5,349,006
   Borrowings (repayments) of capital leases                   (2,687,000)    (2,749,000)    (2,958,000)
   Refinancing of capital leases                                4,000,000                     2,000,000
--------------------------------------------------------------------------------------------------------
        NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES     3,455,000     (4,007,000)     4,391,000
--------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH                                   (47,000)         8,000       (486,000)
CASH AND EQUIVALENTS, BEGINNING OF YEAR                           130,000        122,000        608,000
--------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS, END OF YEAR                            $     83,000    $   130,000    $   122,000
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------

                            SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                Years Ended                   June 30, 2001   July 1, 2000  July 3, 1999
                                -------------------------------------------------------------------------------
                                Inventory purchases           $ 2,163,000      $3,145,000   $2,667,000
                                Services and finance fees       1,656,000         720,000      277,000
                                Accounts payable                6,533,000       3,598,000    2,639,000
                                Note payable                   16,404,000       7,752,000    3,000,000
                                -------------------------------------------------------------------------------
                                -------------------------------------------------------------------------------

                                                      June 30, 2001           July 1, 2000
                       ------------------------ ---------------------- ----------------------
                       Raw materials                  $   3,664,000           $  3,967,000
                       Work in process                      735,000                914,000
                       Finished goods                     6,551,000              9,929,000
                       ------------------------ ---------------------- ----------------------
                                                       $ 10,950,000            $14,810,000
                       ------------------------ ---------------------- ----------------------
                       ------------------------ ---------------------- ----------------------

                                                              June 30, 2001           July 1, 2000
                       ------------------------------------------------------- ----------------------------
                       Land and building                      $   8,348,000           $  8,348,000
                       Leasehold improvements                     5,851,000              6,783,000
                       Machinery and equipment                   24,272,000             23,346,000
                       Other                                        365,000                296,000
                       ------------------------------------------------------- ----------------------------
                                                                 38,836,000             38,773,000
                       Less:  Accumulated depreciation and
                                 amortization                    25,726,000             22,856,000
                       ------------------------------------------------------- ----------------------------
                                                               $ 13,110,000            $15,917,000
                       ------------------------------------------------------- ----------------------------
                       ------------------------------------------------------- ----------------------------

                                                             June 30, 2001                July 1, 2000
                        -------------------------------------------------------------------------------------------
                                                          Long-term      Capital     Long-Term      Capital
                                                            Debt          Leases       Debt          Leases
                        -------------------------------------------------------------------------------------------
                        Revolving/term loans (a)           $8,917,000               $15,347,000
                        Term loan due ICC (b)              16,404,000                 7,752,000
                        Convertible subordinated
                          debentures, $1,000 face value
                          less unamortized discount
                          of $798,000 and $1,300,000 (c)    4,263,000                 3,760,000
                        Convertible subordinated
                          debentures, $528,000 face
                          value (d)                           613,000                   613,000
                        New Jersey Economic
                          Develop-ment Authority Loan
                          (e)                                 400,000                   480,000
                        Building sale/leaseback (f)                       $3,236,000                 $4,033,000
                        Capital equipment lease
                          obligations (g)                                  4,821,000                  2,711,000
                        ----------------------------------------------------------------------------------------------
                                                           30,597,000      8,057,000 27,952,000       6,744,000
                        Less Current portion:              14,693,000      2,009,000  1,684,000       2,280,000
                        ----------------------------------------------------------------------------------------------
                                                          $15,904,000     $6,048,000$26,268,000      $4,464,000
                        ----------------------------------------------------------------------------------------------
                        ----------------------------------------------------------------------------------------------

                                                          Capital Lease     Long-Term Debt
                                                          Obligations
                       ---------------------------------------------------------------------
                       2002                                $ 2,901,000        $14,693,000
                       2003                                  2,760,000         15,904,000
                       2004                                 2,521,000
                       2005                                 1,105,000
                       2006                                   500,000
                       --------------------------------------------------------------------
                       Total Payments                       9,787,000         $30,597,000
                       -------------------------------                    -----------------
                                                                          -----------------
                       Less: Amount representing interest  (1,730,000)
                       ------------------------------------------------
                       Present value of net minimum
                         lease payments                   $ 8,057,000
                       ------------------------------------------------
                       ------------------------------------------------

                                                  June 30,         July 1,            July 3,
                       YEARS ENDED                  2001            2000               1999
                       -------------------------------------------------------------------------
                       Current                     $   -        $   112,000        $  (947,000)
                       Deferred                        -          3,756,000         (2,224,000)
                       -------------------------------------------------------------------------
                       Total income tax expense
                       (benefit)                   $   -         $ 3,868,000        $(3,171,000)
                       -------------------------------------------------------------------------
                       -------------------------------------------------------------------------

                                                                June 30,       July 1,        July 3,
                     YEARS ENDED                                 2001           2000           1999
                     -----------------------------------------------------------------------------------
                     Statutory U.S. tax (benefit)            $(4,961,000)    $(1,241,000)   $(3,310,000)
                     Increase (decrease) resulting from:
                       Expiration of state net operating
                        loss carry forwards                      -                71,000              -
                       Net change in valuation account         5,871,000       4,731,000        364,000
                       Other                                    (910,000)        307,000       (225,000)
                     -----------------------------------------------------------------------------------
                     Effective income tax expense (benefit)  $   -            $3,868,000    $(3,171,000)
                     -----------------------------------------------------------------------------------
                     -----------------------------------------------------------------------------------

                                                                       June 30, 2001       July 1, 2000
                       --------------------------------------------------------------------------------------
                       Tax benefit of state income tax net
                        operating loss carry forwards                   $  3,020,000         $1,238,000
                       Tax benefit of federal income tax net
                        operating loss carry forwards                      8,090,000          3,698,000
                       Depreciation                                         (472,000)            40,000
                       Deferred gain on sale/leaseback of building            70,000            102,000
                       Basis difference 8 1/4% debentures as a
                        result of restructuring                               29,000             29,000
                       Inventory valuation                                   (40,000)            46,000
                       Allowance for doubtful accounts                       465,000            138,000
                       Alternative minimum tax carry forward                 104,000            104,000
                       ----------------------------------------------------------------------------------------
                       Deferred tax asset                                 11,266,000          5,395,000
                       Valuation allowance                               (11,266,000)        (5,395,000)
                       ----------------------------------------------------------------------------------------
                       Net deferred tax asset                           $      -            $      -
                       ----------------------------------------------------------------------------------------
                       ----------------------------------------------------------------------------------------

                                                                     Weighted Average
                                                                           Exercise
                                                           Shares          Price
                       --------------------------------------------------------------
                       Outstanding - June 30, 1998         1,747,000        $.77
                       Issued                                346,000        $.39
                       Forfeited                            (849,700)       $.65
                       --------------------------------------------------------------
                       Outstanding - July 3, 1999          1,243,300        $.72
                       Issued                                360,300        $.27
                       Forfeited                            (748,600)       $.77
                       --------------------------------------------------------------
                       Outstanding - July 1, 2000            855,000        $.49
                       Issued                                568,000        $.27
                       Forfeited                            (216,800)       $.48
                       --------------------------------------------------------------
                       Outstanding - June 30, 2001         1,206,200        $.36
                       --------------------------------------------------------------
                       Exercisable  - June 30, 2001          567,450        $.63
                       --------------------------------------------------------------

                                           Options Outstanding                           Options Exercisable
                       -----------------------------------------------------------------------------------------
                                          Number         Weighted        Weighted        Number        Weighted
                                        Outstanding      Average         Average      Exercisable      Average
                       Range of          at June 30,     Remaining       Exercise      at June 30,     Exercise
                       Exercise Prices     2001         Life (Years)      Price          2001           Price
                       -----------------------------------------------------------------------------------------
                             $0.85         60,450           0.2            $0.85          60,450         $0.85
                              0.84         82,500           1.4             0.84          82,500          0.84
                              0.80          7,000           1.2             0.80           7,000          0.80
                              0.41         79,500           2.4             0.41          79,500          0.41
                      0.22 to 0.89        153,000           3.1             0.33         153,000          0.33
                              0.75        110,000           2.8             0.75         110,000          0.75
                              0.23         75,000           3.5             0.23          75,000          0.23
                              0.27        638,750           4.0             0.27
                      -----------------------------------------------------------------------------------------
                                        1,206,200                                        567,450
                      -----------------------------------------------------------------------------------------
                      -----------------------------------------------------------------------------------------

                                                      June 30, 2001       July 1, 2000      July 3, 1999
                       ----------------------------------------------------------------------------------------
                       Net (loss) - as reported    $(14,592,000)       $(7,918,000)       $(6,565,000)
                       Net (loss) - pro forma      $(14,645,000)       $(7,948,000)       $(6,568,000)
                       -----------------------------------------------------------------------------------------
                       -----------------------------------------------------------------------------------------

                       Fiscal Years                     2001           2000        1999
                       -----------------------------------------------------------------------------
                       Cash paid during the year:
                         Interest                       $4,816,000   $4,470,000  $4,195,000
                         Income taxes                                               150,000
                       -----------------------------------------------------------------------------
                       -----------------------------------------------------------------------------

                                                  Three Months Ended
                               September 30       December 30           March 31           June 30
                                  (In thousands, except per share data)
2001

Net sales                       $13,160             $11,892             $11,880             $12,225

Gross profit (loss)               1,495                 189               1,231                (645)

Operating (loss)                 (1,196)             (2,330)             (1,455)             (4,153)

Net (loss)                       (2,504)             (3,603)             (2,601)             (5,884)

Net (loss) attributable
to common shareholders           (2,554)             (3,653)             (2,651)             (5,934)

(Loss) per common share,
basic and diluted                 (0.08)              (0.12)              (0.09)              (0.20)

2000

Net sales                        20,978              23,059              19,045              13,497

Gross profit (loss)               4,730               5,520               4,292              (1,353)

Operating income (loss)           1,525               1,706               1,541              (4,012)

Net income (loss)                   201                 284                 156              (8,559)

Net income (loss)
attributable to common
shareholders                        151                 234                 106              (8,609)

Earnings (loss) per common
share, basic and diluted           0.01                0.01                0.01               (0.29)

Allowance for doubtful      Balance at       Additions          Deductions       Balance at end
  accounts                  beginning of     charged to         write-offs         of period
                             period         costs & expenses    uncollectible
                                                                 accounts
--------------------------------------------------------------------------------------------------
Year ended June 30, 2001     $406,000         $422,000           $122,000           $706,000
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
Year ended July 1, 2000      $255,000         $212,000           $ 61,000           $406,000
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
Year ended July 3, 1999      $238,000         $125,000           $108,000           $255,000
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------

     Name                          Positions
     ----                          ---------

     John Oram                     Chairman, Chief Executive Officer, Director

     James Ingram                  President, Chief Operating Officer, Director

     Susan Baer                    Vice President, General Counsel, Secretary
                                   She has left the Company as of July 31, 2001.

     Walter Kreil                  Chief Financial Officer
                                   Hired On August 23, 2001

     Brian Barbee                  Vice President, Scientific Affairs

     Ward Barney                   Vice President, Operations

     Anthony Cantaffa              Vice President, New Business Development

                                    Annual Compensation                 Long-Term Compensation
                                -----------------------------   -------------------------------------
                                                                         Awards            Payouts
                                                                 ------------------------  -------
                                                      Other      Restricted    Securities               All
                                                      Annual       Stock       Underlying    LTIP      Other
Name and                         Salary    Bonus   Compensation    Awards       Options    Payouts  Compensation
Principal Position      Year        $        $          $             $            #          $          $
------------------      ----    -------- --------  ------------  ----------    ----------  -------  ------------

John Oram               2001       ---      ---        ---           ---          ---        ---        ---
  Chairman, CEO         2000       ---      ---        ---           ---          ---        ---        ---
                        1999       ---      ---        ---           ---          ---        ---        ---

James Ingram            2001    $141,541    ---        ---           ---         75,000      ---        ---
  President, COO

Ward Barney             2001    $180,000    ---       $6,000 1       ---        100,000      ---        ---
  Vice President,       2000     180,000    ---        6,000 1       ---          ---        ---        ---
  Operations            1999       ---      ---                      ---         50,000      ---        ---

Anthony Cantaffa        2001    $170,000    ---        ---           ---         75,000      ---        ---
  Vice President,       2000     148,462    ---        ---           ---         50,000      ---        ---
  New Business          1999     126,635    ---        ---           ---          ---        ---        ---
  Development

Brian Barbee            2001    $128,615   $7,500      ---           ---         25,000      ---        ---
  Vice President,       2000     113,538    ---        ---           ---         18,000      ---        ---
  Scientific Affairs    1999     111,000    ---        ---           ---          7,000      ---        ---

Susan Baer              2001    $147,308    ---        ---           ---         25,000 4    ---        ---
  Vice President and    2000     105,961    ---        ---           ---         40,000 4    ---        ---
  General Counsel       1999       ---      ---        ---           ---           ---       ---        ---

Charles E. LaRosa 2     2001    $  ---      ---      171,041 3       ---           ---       ---        ---
  former President      2000     181,147    ---      118,841 3       ---           ---       ---        ---
  and Chief Executive   1999     299,988    ---        ---           ---           ---       ---        ---
  Officer

____________________
1    Mr. Barney's car allowance
2    Mr. LaRosa's employment ended in February 2000;
3    Severance paid as a result of termination of employment
4    The stock options terminated after employment ended

                                     Individual Grants
                         -----------------------------------------
                           Number of      Percent of                              Potential Realizable Value at
                         Securities     Total Options                                Assumed Annual Rates of
                          Underlying      Granted to      Exercise                 Stock Price Appreciation for
Name and                  Options       Employees in      Price     Expiration              Option Term 1
Principal Position        Granted        Fiscal Year   ($/Share) 2      Date      -------------------------------
------------------        --------     ---------------  ----------      ----           5%($)              10%($)
                                                                                      -----              ------

John Oram                    ---             ---            ---          ---            ---                ---

James Ingram                75,000           13%           $.27         07/05          $5,600            $11,200

Ward Barney                100,000           18%           $.27         07/05          $7,500            $15,000

Anthony Cantaffa           75,000            13%           $.27         07/05          $5,600            $11,200

Brian Barbee               25,000             4%           $.27         07/05          $1,900             $3,730

Susan Baer 3               25,000             4%           $.27         07/05           ---                ---

                                                         Number of                    Value of
                                                   Unexercised Securities      Unexercised In-the-Money
                                                        Underlying                    Options
                                                    Options at 6/30/01             at 6/30/01($)1
                                                   ----------------------      ------------------------
                      Shares       Realized
                    Acquired on     Value
Name                Exercise(#)       ($)       Exercisable  Unexercisabe     Exercisable  Unexercisable
----                -----------   ----------    -----------  ------------     -----------  -------------

John Oram               ---           ---          ---             ---            ---          ---
James Ingram            ---           ---         75,000           ---            ---          ---
Ward Barney             ---           ---        150,000           ---            ---          ---
Anthony Cantaffa        ---           ---        167,333           ---            ---          ---
Brian Barbee            ---           ---         77,750           ---            ---          ---
Susan Baer              ---           ---          ---             ---            ---          ---
Charles E. LaRosa       ---           ---          ---             ---            ---          ---

     Name and Address of              Amount and Nature of       Percentage
     Beneficial Owner                 Beneficial Ownership1       of Class
     ----------------------           --------------------       ----------
     ICC Industries Inc.                  19,635,894 2              64.7%
     Dr. John Farber                      19,635,894 2              64.7%
     John L. Oram                            161,536                  *
     James Ingram                             75,000 3
     Ward Barney                             150,000 3
     Ray W. Cheesman                         275,000 3                *
     Anthony Cantaffa                        237,788 3                *
     Brian Barbee                             82,750 3                *
     Officers and Directors as
       a Group (6 persons)                   982,073                 3.2%

     Date of Report      Item Number (Summary)
     --------------      ---------------------

     June 21, 2001       5 (regarding delay in payment of interest on debentures)
     July 11, 2001       5 (regarding delay in payment of interest on debentures)
     July 19, 2001       5 (regarding delay in payment of interest on debentures)
     July 31, 2001       5 (regarding delay in payment of interest on debentures)