The following table sets forth some of the over-the-counter pharmaceutical products marketed by us under store brand or private labels. Each retailer may have its own name for a store brand product. Also, as set forth, where meaningful, are the names of certain of the national brands with which these products compete.

                                                  ILLUSTRATIVE COMPETING
          THE PRODUCTS                            NATIONAL BRANDS
          ------------                            ------------------------
          Analgesics:
              Ibuprofen                           Advil(R), Motrin(R)
              Naproxen Sodium                     Aleve(R)
              Aspirin                             Bayer(R)
              Acetaminophen                       Tylenol(R)
          Menstrual Pain Relief                   Midol(R), Pamprin(R)
          Cough/Cold                              Tylenol(R), Sudafed(R)
          Allergy/Sinus                           Sudafed(R)
          Anti-Diarrheal/Acid Blockers/           Tagament HB(R), Mylanta Gelcap(R)
               Anti-Gas/Antacid
          Colon Health                            Correctol(R), Metamucil, Citracel(R)
          Antifungal Aerosol                      Tinactin(R)
          Alert/Sleep Aids/Travel Sickness        Vivarin(R), Somnitabs(R), Dramamine(R)

Manufacturing

           Our manufacturing facility in Edison, NJ currently operates two shifts on a five-day per week work schedule and produces approximately one and a half million solid dose tablets/capsules per hour, representing about 60% of capacity as currently configured. The manufacturing equipment operates very efficiently with little or no disruptions during the manufacturing process. The equipment has the ability to manufacture five to six different formulations concurrently at the initial stages of production and about 20 different formulations at various stages throughout the production process. The Konsyl manufacturing facility in Easton, MD operates one shift on a five-day per week work schedule, representing about 70% of capacity as currently configured. The equipment is used for the manufacture of powdered natural dietary supplements.

           Average lead-time for a new customer from the time of submission of initial artwork to the final design of the packages, ordering of boxes, and delivery of the first orders of product to the customer is usually about one month. Turnaround of orders for existing customers usually ranges anywhere between 24 to 48 hours. In situations where customers need products replenished in a faster time frame, we usually have the staff and available capacity to fulfill this requirement. We employ approximately 386 people in the manufacturing process. We believe that we are in full compliance with all FDA and other federal regulations applicable to the business. See discussion below regarding “Governmental Regulation.”

           In order to manufacture our products, we acquire raw materials from suppliers located in the United States and abroad. To date, we have had no significant difficulties obtaining the raw materials we need and expect that such raw materials will continue to be readily available in the future. The raw materials are first placed in quarantine so that samples of each lot can be assayed for purity and potency. Incoming materials are also 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 the 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.

           To produce Konsyl products, we use a variety of equipment including a grain mill for psyllium milling, two blenders, several fill tanks, a bottle unscrambler, a rotary fill head, a bottle capping machine, torquer, in-line check weigher, bottle labeler and cap labeler and three packet filling machines.

           In response to drug tampering problems affecting the industry generally, we have instituted certain tamper-evident features in the 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 the products tamper-resistant, we believe that no product is "tamper-proof." There can be no assurance that the products will not be tampered with. Any such tampering, even if it occurs in the retail outlets, may have a material adverse effect on the 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 the various categories of customers in fiscal 2004, fiscal 2003, transition 2002 and fiscal 2002 by percentage of total sales were as follows:

                                                           Percentage of Sales
                                             --------- ----------- --------------- ----------
                                             Fiscal      Fiscal    Transition       Fiscal
          Category                            2004        2003        2002           2002
          ---------                           ----       ------      ------         ------
          Retail drug and supermarket
            chains and
            mass merchandisers                 64%        82%           83%           79%
          Brand-name pharmaceutical
            companies                          21%         8%           10%           12%
          Wholesalers and distributors         15%        10%            7%            9%

Virtually all of these sales, except for Konsyl products, consisted of products that our customers sell under their own store brand or other labels.

           Sales to customers which represented more than 10% of consolidated gross sales in any one or more of fiscal 2004, fiscal 2003, transition 2002 or fiscal 2002 were as follows:

                                           Sales ($, in thousands, and percentage of total gross sales)
                        ------------------------------------------------------------------------------------------
                             Fiscal                 Fiscal                 Transition                 Fiscal
Customer                      2004                   2003                     2002                     2002
- ---------                    ------                 ------                   ------                   ------
Target                    $9,070 (12%)           $8,289 (11%)             $4,010 (12%)              $ 152 ( 0%)
Dollar General            $8,550 (11%)           $7,975 (10%)             $3,282 ( 9%)             $4,283 ( 8%)
Costco                    $4,955 ( 7%)           $6,310 ( 8%)             $4,054 (12%)             $7,234 (14%)

           Other retail customers include CVS, a drug store chain; BJ’s Wholesale Club, a warehouse discounter; Drug Mart, a drug store chain; Eckerd, a drug store chain; Family Dollar, a discount chain; H.E. Butt, a food chain; Save-A-Lot, a discount chain; Wegmans, a food chain; and Wal-Mart, a mass merchandise chain.

Sales and Marketing

           We had 24 employees in sales and customer service as of January 1, 2005. This staff and several independent brokers sell our 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, record keeping, approval, pricing, advertising and promotion of the 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 the 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 and ANDAs typically contain data developed from extensive clinical studies. The filing of an NDA or ANDA 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’s” 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 as the Drug Price Competition and Patent Term Restoration Act of 1984 (commonly known as the Hatch-Waxman Act), which amended the Federal Food, Drug and Cosmetic Act. Under the Hatch-Waxman 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 Hatch-Waxman 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.

           Manufacturers of patented drugs, however, will often list additional patents on drugs in the FDA’s “Orange Book” as the original patent is due to expire and thereby prevent the marketing of generic drugs after the original patent has expired and even delay the ANDA approval process by an additional 30 months. A 2001 case in the Federal Circuit (Mylan v. Thompson) held that generic drug manufacturers have no right to protest the listing of the new patent even if the new patent has no relevance to the drug, which serves to allow the owner of the patent to bring an action for infringement if the generic drug manufacturer continues with the approval process and/or markets the drug. The generic drug manufacturer’s only recourse is to raise the impropriety of the new patent as a defense to the infringement action.

           Additionally, drug manufacturers may cause so-called citizen petitions to be filed with the FDA raising safety questions about potential competitors, thereby delaying introduction of the competitive products.

           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, the generic OTC products (with the exception of ibuprofen) have not required approval of NDAs or ANDAs. Certain products which we have 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 the ibuprofen product (although, at present, we sell the ibuprofen products in the 200 mg. strength only). We have also obtained FDA approval of certain different colors and shapes for the 200 mg. ibuprofen product. Other products which have ANDA approval are a naproxen sodium product, a cimetidine product, an ibuprofen capsule and in 2002, an ibuprofen-pseudophedrine product. In September 2004 the FDA approved our supplemental new drug application for orange ibuprofen.

           The principal components of the products are active and inactive pharmaceutical ingredients and certain packaging materials. Many of these components are available only from a single source and the government approvals may be based on a single supplier, even in instances when multiple sources exist. Because FDA approval of drugs requires manufacturers to specify their proposed suppliers of active ingredients and certain packaging materials in their applications, FDA approval of any new supplier would be required if active ingredients or such packaging materials were no longer available from the specified supplier. The qualification of a new supplier could delay the development and marketing efforts.

           All drug products, whether prescription or OTC, are required to be manufactured and processed in compliance with the FDA’s current “good manufacturing practices” (cGMPs). CGMPs 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 cGMP 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 cGMPs. Failure to comply with cGMPs may render a drug “adulterated” and could subject us 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.

           We believe that we are currently in compliance with FDA regulations.

           Our facilities are subject to periodic inspection by the Food and Drug Administration for, among other things, conformance to cGMP requirements. Following an inspection, the FDA typically provides its observations, if any, in the form of a Form 483 (Notice of Inspectional Observations). In January 2004, the FDA initiated an inspection of our Edison, New Jersey manufacturing facility. Following the inspection, the FDA issued to us a Form 483 notice concerning our compliance with cGMP, including observations related to training, personnel and control systems. Although we responded to the Form 483 to address and correct the deficiencies, the FDA further issued a warning letter in May 2004 relating to these observations. In June 2004, we responded to the FDA with a plan of the corrective actions that we have taken or proposed to take. In that response, we committed to further developing and implementing, in a timely manner, the principles and strategies of systems-based quality management for improved cGMP compliance, operational performance and efficiencies. While there can be no assurance that an adverse determination of any of the matters identified in the FDA’s warning letter could not have a material adverse impact on our business in any future period, management does not believe, based on the information currently known to it, that the warning letter, or the actions that need to be taken in response to such letter, will materially adversely affect our operations. In November 2004 the FDA acknowledged our corrective action plans. On March 14, 2005 the FDA initiated a follow-up inspection of our facility, which concluded on March 30, 2005.

           We remain subject to periodic FDA inspections and there can be no assurances that we will not be required to undertake additional actions to comply with the Federal Food, Drug and Cosmetic Act and any other applicable regulatory requirements.

           Any failure by us to comply with applicable regulatory requirements could have a material adverse effect on our ability to continue to manufacture and distribute our products. The FDA has many enforcement tools including recalls, seizures, injunctions, civil fines and/or criminal prosecutions. During the pendancy of any FDA action it is also possible that the FDA will not approve any NDAs or ANDAs that we may submit for products to be manufactured at this facility. At this time, the FDA has not taken any action other than to issue the Form 483 and warning letter. Any additional actions that the FDA may take could have a material adverse effect on our business, results of operations or financial condition.

           We are also subject to the requirements of the Comprehensive Methamphetamine Control Act of 1996, a law designed to allow the DEA to monitor transactions involving chemicals that may be used illegally in the production of methamphetamine. This act establishes certain registration and record keeping requirements for manufacturers of OTC cold, allergy, asthma and diet medicines that contain ephedrine, pseudoephedrine or PPA. While certain of our OTC drug products contain pseudoephedrine, our products contain neither ephedrine, a chemical compound that is distinct from pseudoephedrine, nor PPA. Pseudoephedrine is a common ingredient in decongestant products manufactured by us and other pharmaceutical companies. We believe that our products are in compliance with all applicable DEA requirements.

           In addition to Federal regulation, pharmaceutical companies are subject to state regulatory requirements, which may differ from one state to another. 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 the products and the health care field generally.

           Certain states are enacting legislation in reaction to nationwide concerns over the control of chemicals that may be used illegally in the production of methamphetamine. This legislation may result in the removal of certain products containing pseudoephedrine from the retail shelf to a more controlled position of sale behind the pharmacy counter of a retailer. Additionally, such legislation may require special product packaging, enhanced record keeping and limits on the amount of product a consumer may purchase. Products that we manufactured containing pseudoephedrine generated $8.5 million of sales in 2004. We expect these products to contribute similarly to total revenues in the future. We cannot predict whether further legislation will be passed or, if it is passed, its impact on future revenues of these products.

Environmental Matters

           The prior owner of the 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 leaseback. If CVS defaults in its obligations to pay the cost of the cleanup, 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 in the industry 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 four employees in the product development department, as well as other support staff to assist 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 $290,000 in fiscal 2004, $323,000 in fiscal 2003, $148,000 in transition 2002 and $282,000 in fiscal 2002. 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 calendar 2005 approximately $300,000 on research and development activities consistent with the goal of continually increasing and improving the product line.

Patents and Trademarks

           Allerfed^®, Leg Ease^®, Health+Cross^®, Health Pharm^® and Konsyl^® are federally registered trademarks owned by us. To the extent that the 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 the generic OTC products covering up to $10,000,000. Although there have been no successful 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 the business.

Competition

           We compete not only with numerous manufacturers of generic OTC products, but also with brand name drug manufacturers and consumer goods manufacturers, most of which are betterknown 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 or consumer goods manufacturers. Some of the 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 the 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 us. Additionally, some of the customers may acquire the same equipment and technologies used by us and perform for themselves the services which we now perform for them.

Employees

           As of January 1, 2005, we employed approximately 484 full-time employees. Of such employees, approximately 386 are engaged in manufacturing and operational activities and approximately 306 are covered by our collective bargaining agreement with Local 522 affiliated with the International Brotherhood of Teamsters of New Jersey, which expires in October 2007. Such union entered into an agreement with us on October 29, 2004 for a period of three years ending October 23, 2007. The changes implemented with the new agreement include increases in wages and medical payments and changes in policy regarding attendance policy, classifications and titles, job performance, job bids, bereavement and company shut-down. Additionally, three employees are represented by Local 68 of the International Union of Operating Engineers, affiliated with the AFL-CIO, which agreement expires October 31, 2005. We had approximately 24 persons employed in sales, marketing, customer service and graphic arts, 25 administrative employees and 49 laboratory technicians and scientists. We believe that our relations with our employees are satisfactory.

Item 2.     Properties

           We lease approximately 214,000 square feet of office, manufacturing and warehousing space in Edison, New Jersey, under a lease that expires in 2019. The monthly rental is currently $147,500 per month and will increase on each 30th month after August 2009 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.

           We also lease a 91,200 square foot building located adjacent to the present manufacturing facility, under a lease which expires in April 2005. We are currently negotiating an extension of this lease. Rent payments are $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 also lease Konsyl’s manufacturing facility in Maryland pursuant to a lease expiring in May 2008 from ANDA Investments Ltd., a company partially owned by Mr. Frank X. Buhler, the former majority stockholder of Konsyl and currently a director of the Company. Annual rent is $200,000, payable quarterly. In addition, Konsyl has an option to purchase the facility for $2,250,000, which expires on May 14, 2006.

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

Item 3.     Legal Proceedings

           Fiorito vs. PFI, In March 2002, action was brought against us in the United States District Court for the Southern District of New York seeking $20 million in damages and $40 million in punitive damages related to the sales of allegedly defective products. Our insurer is defending the case at the insurer’s cost.

           Case relating to Max Tesler, In May 1998, we brought an action in Middlesex County Superior Court, NJ against one of its former outside corporate counsels seeking damages for conflict of interest, breaches of fiduciary duty and loyalty, negligence and malpractice during its representation of us. The action has been sent to binding arbitration, which is expected to commence in the spring of 2005.

           Apotex Corporation and Torpharm vs. PFI, In July 2000, an action was instituted in the Circuit Court of Cook County, Illinois against us by Apotex Corporation (“Apotex”) 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 we would 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 Uniform Commercial Code action for the price of approximately 3 million tablets. Apotex’s expert testified that Apotex suffered damages of approximately $3.1 million as a result of the alleged breaches. Management believes the lawsuit is without merit and is vigorously defending against it. Several counts of Apotex’s complaint have now been dismissed by the Court, and Apotex has requested that the action be stayed pending appellate review of those dismissed counts.

           We are a party to various other legal proceedings arising in the normal conduct of business. We believe that the final outcome of all current legal matters will not have a material adverse effect upon our financial position or results of operations.

Item 4.      Submission of Matters to a Vote of Security Holders

           None.

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 is traded on the OTC Bulletin Board, symbol: PHFR. As of January 1, 2005, there were 1,349 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 through January 1, 2005 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 January 3, 2004
          First Quarter........................         $.22              $.10
          Second Quarter.......................          .40               .15
          Third Quarter........................          .63               .30
          Fourth Quarter.......................          .66               .51

     Year Ended January 1, 2005
          First Quarter........................         $.68              $.52
          Second Quarter.......................          .62               .45
          Third Quarter........................          .56               .35
          Fourth Quarter.......................          .45               .30

           On April 15, 2005, the high and low bids for our common stock on the OTC Bulletin Board were $.14 and $.13 per share. As of April 1, 2005, we had 1,349 stockholders of record.

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

Item 6.      Selected Financial Data

           During December 2002, we changed our fiscal year-end from the 52-53 week period which ends on the Saturday closest to June 30 to the 52-53 week period which ends on the Saturday closest to December 31. The just-completed 2004 fiscal year was the 52 week period which ended January 1, 2005. The 2003 fiscal year was the 53 week period which ended January 3, 2004. The prior fiscal period consisted of the six-month transition period from June 30, 2002 to December 28, 2002 and is sometimes referred to as transition 2002. The 2002 fiscal year consisted of the 52 week period which ended June 29, 2002. The 2001 fiscal year consisted of the 52 week period which ended on June 30, 2001. Konsyl’s fiscal year ends on December 31. The information for the year ended December 28, 2002 and as of and for the six months ended December 29, 2001 is unaudited.

           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.

                                      Fiscal Year    Fiscal Year    Fiscal     Six Months    Six Months   Fiscal
                                         Ended          Ended        Year        Ended         Ended      Year      Fiscal Year
                                      January 1,      January 3,     Ended     December 28,   December    Ended       Ended
                                         2005          2004       December 28,    2002        29, 2001    June 29,    June 30,
                                                                    2002                     (Unaudited)   2002        2001
                                                                 (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                        (in thousands, except per share amounts)
Statement of Operations Data:
         Gross sales                    $75,763     $74,519      $60,653       $33,756        $26,680      $53,577    $51,777
         Net sales                       72,696      72,501       59,555        33,223         26,125       52,457     49,157
         Net income (loss)               (7,889)     (1,841)      (1,398)          544         (4,946)      (6,888)    (4,592)
         Net income (loss) per share
         of common stock:
             Basic and diluted             (.09)       (.02)        (.02)          .01           (.14)        (.12)      (.49)
         Weighted average common
         shares and dilutive
         securities
         outstanding:
             Basic and diluted           85,930      85,382       85,267        85,278         36,641       59,078     30,330

Balance Sheet Data:                        As of        As of         As of         As of         As of        As of      As of
                                         January 1,   January 3,   December 28,   December 28,  December 29,  June 29,   June 30,
                                           2005         2004          2002           2002         2001         2002       2001
                                                                                              (Unaudited)
                                       ------------- ----------- ------------- ------------- ------------- ----------- ---------
         Current assets                 $20,937        $25,450      $24,029       $24,029     $ 19,810       $21,883     $19,174
         Current liabilities             28,239         27,265       23,234        23,234       31,671        21,510      36,944
         Working capital (deficiency)    (7,302)        (1,815)         795           795     (11,861)           373     (17,770)
         Total assets                    39,361         44,979       37,961        37,961       34,820        36,277      32,923
         Long-term debt and capital
         lease                           36,692         36,426       32,032        32,032       19,063        32,621      21,952
         obligations
         Stockholders' deficiency       (25,570)       (18,712)     (17,305)      (17,305)     (15,914)       (17,854)   (25,973)

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

           During December 2002, we changed the fiscal year-end from the 52-53 week period which ends on the Saturday closest to June 30 to the 52-53 week period which ends on the Saturday closest to December 31. The just-completed 2004 fiscal year was the 52 week period which ended January 1, 2005. The 2003 fiscal year was the 53 week period which ended January 3, 2004. The prior fiscal period consisted of the six-month transition period from June 29, 2002 to December 28, 2002 and is sometimes referred to as transition 2002. For fiscal 2002, the fiscal year ended on the Saturday closest to June 30. Konsyl’s fiscal year ends on December 31.

           Operations of Konsyl have been included in the results from the May 15, 2003 date of acquisition.

Critical Accounting Policies and Estimates

           Our critical accounting policies are more fully described in the Summary of Significant Accounting Policies in the notes to the consolidated financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying financial statements and related notes. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We believe that the following are the critical accounting policies and estimates used in the preparation of our financial statements. Management has discussed the development and selection of the critical accounting policies and estimates discussed below with the audit committee of the Board of Directors, and the audit committee has reviewed our disclosures relating to these estimates.

Revenue Recognition

           Revenue from product sales is recognized when merchandise is received by an unrelated third party, net of estimated provisions, pursuant to Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements.” Accordingly, revenue is recognized when all of the following criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery of the product has occurred; (iii) the selling price is both fixed and determinable and (iv) collectibility is reasonably assured. Our customers consist primarily of large retailers. Provisions for sales discounts, allowances and returns are established as a reduction of product sales revenues at the time such revenues are recognized. These revenue reductions are established by us as our best estimate at the time of sale based on its historical experience adjusted to reflect known changes in the factors that impact such reserves. These revenue reductions are generally reflected either as a direct reduction to accounts receivable through an allowance or as an addition to accrued expenses if the payment will be settled through a direct payment to the customer.

           We do not provide any price protection to its customers and generally accept returns only if the goods are damaged.

Accounts Receivable and Concentration of Credit Risk

           Financial instruments that potentially subject us to credit risk consist principally of trade receivables. Trade receivables consist of sales of products to retail customers. We extend credit to a substantial number of our customers and perform ongoing credit evaluations of those customers’ financial condition while, generally, requiring no collateral. Customers that have not been extended credit by us are on a cash in advance basis only.

           We review accounts receivable on a monthly basis to determine if any accounts receivable will potentially be uncollectible. Factors used in assessing collectibility include timeliness of payments, trend analysis, trade publications and credit reports. We include any accounts receivable balances that are determined to be uncollectible, in the overall allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available to us, we believe the allowance for doubtful accounts as of January 1, 2005 and January 3, 2004 is adequate. However, actual write-offs might exceed the recorded allowance.

           Substantially all accounts receivable serves as collateral for the loan agreements.

Income Taxes

           We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires the recognition of deferred tax liabilities and assets at currently enacted tax rates for differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. A valuation allowance is established when we believe that it is more likely than not that some portion of our deferred tax assets will not be realized. Future changes in the valuation allowance will be recognized in the period of change. Since December 21 2001, when ICC’s ownership of our stock reached 87%, we have filed a consolidated Federal income tax return with ICC, and will continue to do so as long as ICC continues to own more than 80% of our common stock. As a result, we entered into a tax sharing agreement whereby we will be credited for the cash savings generated by ICC’s utilization of the current tax losses or utilization of tax loss carryforwards. Such compensation shall be as an offset against amounts due to ICC from us.

Goodwill and Other Intangible Assets.

           We follow SFAS No. 142, “Goodwill and Other intangible Assets”, which eliminated the amortization of purchased goodwill and intangible assets with indefinite lives. As a result, we are not amortizing the goodwill resulting from the Konsyl acquisition. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are tested annually and more frequently if an event occurs which indicates the goodwill and intangible assets with indefinite lives may be impaired. SFAS No. 142 requires companies to use a fair value approach to determine whether there is an impairment event. We perform an annual impairment test at fiscal year-end for goodwill and other indefinite-lived intangible assets.

Long-Lived Assets

           As of January 1, 2002, we adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets” which supersedes SFAS No. 121, “Accounting for the Impairment of Long-lived Assets to be Disposed of”. Under SFAS No. 144, long-lived assets other than those covered by SFAS 142 are reviewed on a periodic basis for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. Such events or changes in circumstances include, but are not limited to: (a) a significant decrease in the market price of a long-lived asset (or asset group); (b) a significant adverse change in the extent or manner in which a long-lived asset (or asset group) is being used or in its physical condition; (c) a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (or asset group), including an adverse action or assessment by a regulator; (d) an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (or asset group); (e) a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (or asset group); and (f) a current expectation that, more likely than not, a long-lived asset (or asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the fair value of such assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. No impairments were recorded in any of the periods presented.

Purchase Price Allocation

           The fair values of assets acquired and liabilities assumed were based upon management's estimates with the assistance of independent professional valuation firms. Certain of the acquired assets were intangible in nature, including trademarks. The excess purchase price over the amounts allocated to the assets was recorded as goodwill.

           All such valuation methodologies, including the determination of subsequent amortization periods, involve significant judgments and estimates. Different assumptions and subsequent actual events could yield materially different results.

Inventory Valuation

           Inventories are stated at the lower of cost or market with cost determined on a first in, first out (FIFO) basis. An allowance is established when management determines that certain inventories may not be saleable at normal sales prices. These allowances are based on management’s judgments and may be subject to changes in the near term. Any changes in estimate would be recorded in the period of change.

Commitments

           As of January 1, 2005, our commitments are as follows:

Fiscal year ended:                             Operating Lease    Capital Lease
                                                 Obligations       Obligations1     Long-Term Debt         Total
- --------------------------------------------- ------------------ ----------------- ----------------- -----------------
2005                                             $  2,078,000           $735,000       $  6,365,000   $   9,178,000
2006                                                1,964,000            718,000         32,805,000      35,487,000
2007                                                1,964,000            638,000          1,864,000       4,466,000
2008                                                1,856,000            472,000             96,000       2,424,000
2009                                                1,764,000            279,000                 -        2,043,000

Thereafter                                         17,052,000                  -                 -       17,052,000
=======================================================================================================================
Total Payments                                    $26,678,000        $ 2,842,000         $41,130,000   $ 70,650,000
=======================================================================================================================

                  1 Amounts include interest payments of $302,000.

Liquidity and Capital Resources

For purposes of the following discussion, “PFI” means the Company excluding Konsyl.

           At January 1, 2005, we had a working capital deficiency of $7,302,000 compared with a working capital deficiency of $1,815,000 at January 3, 2004. Cash at January 1, 2005 was $47,000 compared with $363,000 at January 3, 2004. Total assets were $39,361,000 at January 1, 2005 compared with $44,979,000 at January 3, 2004.

           Current assets at January 1, 2005 included $9,696,000 of accounts receivable, of which $1,301,000 were Konsyl’s, as compared to $9,662,000 at January 3, 2004 of which $1,268,000 were Konsyl’s. The increase in the trade accounts receivable of $34,000 was primarily attributable to higher Konsyl receivables due to strong fourth quarter sales. Current assets also include $10,962,000 of inventory, of which $1,470,000 was Konsyl’s, as compared to $14,052,000 of which $1,617,000 were Konsyl’s at January 3, 2004. The decrease in inventory of $3,090,000 is related to closely managing inventory levels. Current liabilities include accounts payable and accrued expenses of $10,700,000, as compared to $10,239,000 at January 3, 2004. The current portion of long-term debt and capital lease obligations was $2,608,000 (not including monies due to ICC) compared with $5,170,000 (not including monies due to ICC) at January 3, 2004. The increases in current liabilities and in long-term debt/capital lease obligations resulted primarily from additional funds from ICC and an increase in accounts payable.

           Cash decreased $316,000 during the fiscal year ended January 1, 2005.

           Total cash provided by operating activities were $2,052,000 for the fiscal year ended January 1, 2005. Cash used by the net loss for the year of $7,889,000 was offset by non-cash charges of $3,497,000 for depreciation, amortization, stock-based compensation, amortization of bond discount and deferred financing costs. Sources of cash included a decrease in inventories of $3,090,000 related to tightly managing inventory levels. Also, cash was provided by an increase of $1,860,000 in amounts due to ICC resulting from purchases of raw materials (offset by benefits from the tax sharing agreement), a decrease in prepaid expenses of $1,057,000 and an increase in accounts payable and accrued expenses of $476,000 reduced by an increase in accounts receivable of $34,000.

           Net cash used in investing activities for the fiscal year ended January 1, 2005 was $308,000, which was used for capital expenditures.

           Net cash used in financing activities for the fiscal year ended January 1, 2005 was $2,060,000. We received $2,815,000 in loans from ICC during the period and repaid $1,450,000 to ICC. During the fiscal year, we repaid an aggregate of $3,586,000 of capital lease obligations and repaid $3,487,000 under the line of credit and other long-term debt. Additionally, we borrowed $3,593,000 on long term debt, and received proceeds of $55,000 from exercise of stock options.

           Total shareholders’ deficiency at January 1, 2005 was $25,570,000 compared to a deficiency of $18,712,000 at January 3, 2004. We recorded a net loss of $7,889,000 for the fiscal year ended January 1, 2005.

           On December 31, 2004, we modified our term loan and security agreement with ICC. The loan principal under this agreement was $22,654,000. Principal payments are due commencing in January, 2005 at $300,000 per month and in increasing amounts thereafter with a final payment of $18,604,000 in January 2006. Interest is payable monthly at 1% above the prime rate (6.75% at January 1, 2005). The loan is secured by a secondary security interest in all of our assets.

           On December 30, 2004, we paid the principal due under our outstanding 8% Convertible Subordinated Debentures Due 2002 and 8.25% Convertible Subordinated Debentures Due 2002, totaling $1,105,000. The debenture holders had previously agreed to forebear the right to force payment on the due date of the debentures so long as they were paid on or before June 15, 2005. ICC, provided bridge financing for the principal payments. The Company recognized a loss of $511,000 on extinguishment of debt relating to this debt repayment.

           In July and August 2004, we borrowed $1,039,000 under capital leases to fund the acquisition of machinery and equipment. The capital leases are payable over five years with monthly payments of $21,000 and bear interest of 7.8%.

           On December 31, 2004, we entered into a new three-year loan agreement with General Electric Capital Corporation for $3,147,000, bearing interest at 6.76% per annum, which loan was secured by our equipment. The loan is repayable in 35 monthly installments of principal and interest of $97,000 with a final monthly installment equal to the balance of principal and interest due. We used proceeds of this equipment loan to repay bridge financing from ICC of $1,000,000 and the balance was utilized to refinance existing GE equipment leases.

           We have capitalized lease obligations and line of credit borrowings that have a substantial impact on the cash requirements in terms of principal and interest payments.

           We have a deferred tax asset of approximately $15,040,000 against which we have applied a valuation allowance of $14,165,000 at January 1, 2005. The net deferred tax asset of $875,000 consists of various temporary differences that are realizable through the tax sharing agreement with ICC. We have recorded a valuation allowance for state, federal and capital loss carryforwards which are not realizable through the tax sharing agreement with ICC; therefore we do not believe that it is more likely than not that these carryforwards will be realized. Reductions in the valuation allowance, which could benefit results of operations in the future, will be recorded when, in the opinion of management, the ability to generate taxable income is considered more likely than not. Any utilization of net operating loss carry-forwards will reduce our future tax obligation. We also have a net deferred tax liability of $1,028,000 arising from tax basis differences from the Konsyl acquisition.

           We intend to spend an estimated $1,000,000 for capital improvements in the 52-week period ending December 31, 2006 to increase manufacturing capacity and reduce costs. We anticipate that these capital expenditures will be funded through equipment lease financing and cash flow generated from future operations. While we have in the past had no difficulty in obtaining such financing, there can be no assurance that we will be able to obtain the lease financing in the future.

           We continue to address customer relationship issues and are continuing the process of rebuilding the sales base through the actions detailed below. We continue to pursue our plan to increase revenues and improve operational efficiencies to restore profitability. To carry out these plans, we have set forth the following objectives:

           These objectives, along with our objectives of sustaining market share and increasing sales, are projected to be driven by the following actions that we aim to take:

           We believe that cash flow from operations, our revolving credit facility and equipment and term loan financing, plus continued financial support from ICC, will be sufficient to fund our currently anticipated operations, working capital, capital spending and debt service through March 31, 2006.

           While no assurance can be given that cash flow will be sufficient to fund operations, ICC has committed to provide us with the necessary financing to continue our operations through March 31, 2006. ICC has supported us in the past by providing loans, replacing loans from the asset-based lenders and providing us with working capital. There can, however, be no assurance that ICC’s assurance of support will be renewed after March 31, 2006.

           As of January 1, 2005, we were in violation of certain financial covenants (specifically the minimum tangible net worth, EBITDA, and the maximum accounts payable covenants) and other provisions within the agreement with CIT as amended. We have obtained a waiver dated April 15, 2005 from CIT waiving such identified events of default under the agreement as amended. In addition to the defaults as of January 1, 2005, CIT also waived defaults under the same sections of the agreement as of January 29, 2005, February 26, 2005 and April 2, 2005. As a condition of this waiver, we must deliver consolidated financial statements to CIT no later than April 20, 2005, and our failure to deliver these financial statements would render the waiver null and void. We paid CIT fees of approximately $15,000 related to this waiver. Additionally, as a condition of the waiver, we agreed to provide revised monthly financial projections to CIT, on or prior to May 31, 2005, and the failure to deliver such projections would constitute an event of default under the agreement. We also agreed to deliver monthly financial reports to CIT as required under the agreement on a timely basis beginning with the month of April 2005. On April 15, 2005, ICC signed this waiver reaffirming their guarantee of our debt with CIT. CIT waives only the specific events of default noted in the waiver and does not waive any other existing events of default or future events of default. We do not believe that there are any other events of default under the agreement with CIT.

           Additionally, our loan agreement with ICC contains certain negative covenants including cross-default provisions which were waived by ICC through April 2, 2005.

Results of Operations for Fiscal 2004 Compared to Fiscal 2003

           Gross sales for fiscal 2004 were $75,763,000 compared with $74,519,000 for fiscal 2003, an increase of 2%. Konsyl’s sales increased from last year by $4,370,000 or an increase of 69% due to fiscal 2004 being the first full year of Konsyl sales under our ownership. PFI’s sales decreased $2,997,000 or 5% due to lost distribution at a mass merchandiser and distributor in addition to a reduction in contract manufacturing orders. Net sales for fiscal 2004 were $72,696,000, which approximated the net sales for fiscal 2003 of $72,501,000. Sales discounts and allowances increased by $1.1 million when comparing fiscal 2004 to fiscal 2003. This increase was a result of increased competition as well as consolidation among retail drugstore chains.

           Cost of sales increased to 87% of net sales in fiscal 2004 compared to 82% in fiscal 2003. The increase was due to lower than anticipated sales, pricing pressure, and higher than projected raw material and labor costs, at PFI.

           Selling, general and administrative expenses were $16,981,000 or 23% of net sales for fiscal 2004 as compared to $13,032,000 or 18% of net sales in fiscal 2003. The increase in expenses reflects $2,300,000 from a full year of Konsyl activity, higher audit and consulting fees due to preparation for compliance with the Sarbanes-Oxley Act of $480,000 and Federal Drug Administration regulations and increased distribution costs resulting from higher fuel surcharges of $608,000.

           Interest expense for fiscal 2004 was $3,567,000 compared with $3,527,000 in fiscal 2003. Additionally, interest expense includes $410,000 of non-cash amortization of the beneficial conversion feature on our debentures discussed below. Such beneficial conversion feature arose from our modification of the conversion feature on such bonds in June 2004 from $0.34 to $0.30.

           On December 30, 2004 we paid the principal due under our outstanding 8% Convertible Subordinated Debentures Due 2002 and 8.25% Convertible Subordinated Debentures Due 2002, totaling $1,105,000. The debenture holders had previously agreed to forebear the right to force payment on the due date of the debentures so long as they were paid on or before June 15, 2005. ICC, our largest stockholder, provided bridge financing for the principal payments. We recognized a loss of $511,000 on extinguishment of debt relating to this debt repayment.

           We file a consolidated tax return with ICC. In accordance with a tax sharing agreement between the two companies, we are reimbursed for the tax savings generated from ICC’s use of the losses. In addition, the agreement provides for an allocation of the group’s tax liability, based upon the ratio that each member’s contribution of taxable income bears to the consolidated taxable income of the group. In connection with this tax sharing agreement, we recorded a tax benefit of $3,775,000 in fiscal 2004 as compared to $1,861,000 for fiscal 2003.

           The net loss for fiscal 2004 was $7,889,000 or $0.09 per share compared to a net loss in fiscal 2003 of $1,841,000 or $0.02 per share.

Results of Operations for Fiscal 2003 Compared to Fiscal 2002

           Gross sales for fiscal 2003 were $74,519,000 compared with $60,653,000 for fiscal 2002, an increase of 23%. Of this increase, $6,568,000 is attributable to the inclusion of Konsyl from May 16, 2003. In addition, in July 2002 we significantly enhanced our relationship with a major national retailer to whom shipments were $8,289,000 in fiscal 2003 compared with $4,010,000 in transition 2002 and $152,000 in fiscal 2002. The remainder of the increase has come from organic growth in PFI’s existing solid dose pharmaceutical business with existing customers, particularly the various “dollar” stores. Net sales for fiscal 2003 were $72,501,000 compared to $59,555,000 in the comparable period of the prior year, an increase of 22% due to the increase in gross sales. Sales discounts and allowances increased to $2.0 million in fiscal 2003 compared to $1.1 million in the prior year. This is reflective, in part, of the increasing price competition for business in the private label retail markets.

           Cost of sales declined to 82.1% of net sales in fiscal 2003 compared to 84.4% in the fiscal year ended December 28, 2002. The decrease is principally attributable to the inclusion of Konsyl with its higher margin products. Cost of sales as a percentage of gross sales was 79.9% in fiscal 2003 compared with 82.9% in fiscal 2002.

           Selling, general and administrative expenses were $13,032,000 or 18.7% of net sales for fiscal 2003 as compared to $9,357,000 or 15.7% of net sales in the 2002 period. The increase in costs reflects $2,100,000 from Konsyl, non-cash stock based compensation of $181,000, and the remainder of the increase principally resulted from higher commission expenses due to increased volume and higher legal expenses, especially related to the Apotex case.

           Interest expense for fiscal 2003 was $3,527,000 compared with $3,872,000 in the 2002 period. The decrease is primarily attributable to lower interest rates offset by increased debt levels to finance the Konsyl acquisition.

           In December 2001, ICC became an 85.6% owner of the common stock. As a result of the increase in ICC’s ownership of PFI, we file a consolidated tax return with ICC. In accordance with a tax sharing agreement between the two companies, we will be reimbursed for the tax savings generated from ICC’s use of the losses. In addition, the agreement provides for an allocation of the group’s tax liability, based upon the ratio that each member’s contribution of taxable income bears to the consolidated taxable income of the group. In connection with this tax sharing agreement, we recorded a tax benefit of $1,861,000 for fiscal 2003 compared with a benefit of $2,350,000 for the fiscal year ended December 28, 2002

           The net loss for fiscal 2003 was $1,841,000 or $0.02 per share compared to a net loss of $1,398,000 or $0.02 per share for the fiscal year ended December 28, 2002.

Results of Operations for the Six Months Ended December 28, 2002 Compared to the Six Months Ended December 29, (unaudited)

           Gross sales for the six months ended December 28, 2002 were $33,756,000 compared with $26,680,000 in the same period of the prior year, an increase of 26.5%. In July 2002, we significantly enhanced our relationship with a major national retailer to whom shipments were $4,010,000 in the six months ended December 28, 2002. Also, during the six months ended December 28, 2002, sales to brand name pharmaceutical companies rose to 10% of total sales, compared with 6% in the prior year period. Net sales for the six months ended December 28, 2002 were $33,223,000 compared with $26,125,000 in the comparable prior period, an increase of 27.2%. The increase in net sales reflected the higher gross sales and a continued reduction in the relative impact of customer discount and rebate programs.

           Cost of sales declined to 82.7% of net sales in the six months ended December 28, 2002 compared to 90.8% in the six months ended December 29, 2001. The decrease is attributable to a shift in product mix to higher margin products, lower material costs due in significant part to the increased purchases from ICC, improved manufacturing efficiency from higher volumes and longer production runs, and reduced product obsolescence costs. Cost of sales as a percentage of gross sales was 81.4% in the six months ended December 28, 2002 compared with 88.9% in the six months ended December 29, 2001.

           Selling, general and administrative expenses were $4,543,000 or 13.7% of net sales for the six months ended December 28, 2002 as compared to $4,900,000 or 18.8% of net sales for the six months ended December 29, 2001. The respective decreases, in expense and percentages, reflect higher sales while controlling legal and consulting costs.

           Interest expense was $1,786,000 for the six months ended December 28, 2002 compared to $2,623,000 for the six months ended December 29, 2001. The six months ended December 28, 2002 had the benefit of lower interest rates and lower debt levels as ICC converted $15 million debt into equity in December 2001.

           In December 2001, ICC became an 85.6% owner of our common stock. As a result of the increase in ICC’s ownership of PFI, we file a consolidated tax return with ICC. In accordance with a tax sharing agreement between the two companies, we will be reimbursed for the tax savings generated from ICC’s use of the losses. In addition, the agreement provides for an allocation of the group’s tax liability, based upon the ratio that each member’s contribution of taxable income bears to the consolidated taxable income of the group. In connection with this tax sharing agreement, we recorded a tax benefit of $1,113,000 for the six months ended December 28, 2002 compared with a benefit of $123,000 for the six months ended December 29, 2001. The tax benefit recorded in the six months ended December 28, 2002 is disproportionate due to a reduction in our deferred tax asset valuation reserve of $715,000.

           Net income for the six months ended December 28, 2002 was $544,000 or $0.01 per share compared to a net loss of $4,946,000 or $.14 per share for the six months ended December 29, 2001.

Results of Operations for Fiscal 2002 Compared to Fiscal 2001

           Gross sales for the fiscal year ended June 29, 2002 were $53,577,000, an increase of 3.5% as compared to $51,777,000 in the prior fiscal year. During the year, sales to brand name pharmaceutical companies rose to 12% of total sales compared to 6% in the prior year, as we expanded our contract manufacturing activities to additional products, while sales to retail customers declined to 79% of the total from 86% in the prior year. During 2002, sales to two customers, CVS and Walgreens, were $4,470,000 or 8% of sales compared to $9,027,000 or 18% in the prior year. This reduction reflected the lingering problems from lost business and customers due to the after effects of production and shipping problems and other difficulties experienced by us during the installation of the new computer system in fiscal 1999. Net sales for the fiscal year ended June 29, 2002 were $52,457,000 as compared to $49,157,000 in the prior fiscal year. The increase in net sales reflected the higher gross sales and a continued reduction in customer discount and rebate programs.

           Cost of sales declined to 88.7% of net sales in the fiscal year ended June 29, 2002 as compared to 95.4% in the prior fiscal year. The decrease is attributable to a shift in product mix to higher margin products, improved manufacturing efficiency from higher volumes and reduced product obsolescence costs. In addition, a reduction of sales discounts and allowances had a favorable effect. Cost of sales as a percentage of gross sales was 86.8% in the current year compared with 90.6% in the prior year.

           Selling, general and administrative expenses were $9,714,000 or 18.5% of net sales for the fiscal year ended June 29, 2002 as compared to $10,961,000 or 22.3% of net sales for the prior fiscal year. The decrease was primarily the result of lower bad debt expense of $521,000, lower consulting fees of approximately $480,000, and staff reductions saving approximately $200,000.

           Interest expense was $4,709,000 for the fiscal year ended June 29, 2002 as compared to $5,208,000 in the prior fiscal year. The net decrease resulted from lower debt levels due to ICC’s conversion of debt into equity and lower interest rates.

           Other income for the year ended June 29, 2002 was $511,000 compared with an expense of $250,000 in the prior year. The improvement resulted from $312,000 of additional income from subleasing a portion of our distribution center. In addition, the prior year included approximately $300,000 of various accruals for one-time non-operating items such as sales taxes.

           In connection with the tax sharing agreement with ICC, we recorded a tax benefit of $1,360,000 for the current year. No provision for income tax was made for fiscal 2001.

           Net loss for the fiscal year ended June 29, 2002 was $6,888,000 or $.12 per share as compared to $14,592,000 or $.49 per share in the prior fiscal year.

Recent Accounting Pronouncements

           Share-Based Payment- In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”, which is a revision of SFAS No. 123 and supersedes Accounting Principles Board (“APB”) Opinion No. 25. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be valued at fair value on the date of grant, and to be expensed over the applicable vesting period. This statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The adoption of this Interpretation is not expected to have a material impact on our financial position or results of operations.

           Exchanges of Nonmonetary Assets – In December 2004, the FASB issued SFAS No.153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29.” The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. This statement amends APB No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets that do not have commercial substance. This statement is effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of this Interpretation is not expected to have a material impact on our financial position or results of operations.

           In November 2004, the Financial Accounting Standards Board issued Statement 151, Inventory Costs, an amendment of ARB no. 43, Chapter 4, which is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The amendments made by Statement 151 will improve financial reporting by clarifying that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and by requiring the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. We have not completed our evaluation of this statement’s impact and therefore cannot conclude on the impact that this statement will have on our financial position or results of operations.

Effects of Inflation

           We do not believe that inflation had a material effect on our operations for fiscal years 2004, 2003 or 2002 or for transition 2002.

Item 7A.      Quantitative and Qualitative Disclosures About Market Risk

           We would be adversely affected by an increase in interest rates. Each 1% change in the prime rate will change our annual expenditure by approximately $380,000.

Item 8.      Financial Statements and Supplementary Data

Financial Statements for the Fiscal Years Ended January 1, 2005 and January 3, 2004, the Six Months Ended December 28, 2002 and the Fiscal Year Ended June 29, 2002 respectively for Pharmaceutical Formulations, Inc. and Subsidiaries

     Report of Independent Registered Public Accounting firm                                 F-1

     Report of Independent Registered Public Accounting Firm                                 F-2

     Consolidated Financial Statements

     Balance Sheets at January 1, 2005 and January 3, 2004                                   F-3

     Statements of Operations for the Fiscal Years Ended January 1, 2005 and
     January 3, 2004, the Six Months Ended December 28, 2002, and the Fiscal
     Year Ended June 29, 2002                                                                F-4

     Statements of Changes in Stockholders' (Deficiency) for the Fiscal
     Year ended January 1, 2005 and January 3, 2004, the Six Months Ended
     December 28, 2002 and the Fiscal Year Ended June 29, 2002.                              F-5

     Statements of Cash Flows for the Fiscal Years Ended January 1, 2005 and
     January 3, 2004, the Six Months Ended December 28, 2002, and the Fiscal
     Year Ended June 29, 2002                                                                F-6

     Notes to Consolidated Financial Statements                                              F-7 thru F-38

Financial Statement Schedule

Schedule II - Valuation and Qualifying Accounts                                              S-1

Item 9.      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

           As previously reported in a Form 8-K dated December 10, 2003 (as amended) on December 10, 2003 we retained the services of Grant Thornton LLP as our independent auditors and dismissed BDO Seidman LLP as our independent auditors. This engagement and dismissal was approved by the Board of Directors on the recommendation of its Audit Committee. During the two most recent fiscal years and any subsequent interim period to December 10, 2003, we did not consult with Grant Thornton regarding any matters noted in Items 304(a)(2)(i) and (ii) of Regulation S-K.

           There have been no “disagreements” within the meaning of Item 304(a)(1)(iv) of Regulation S-K, or any events of the type listed in Item 304(a)(1)(v)(A) through (D) of Regulation S-K, involving BDO Seidman that occurred within the two most recent fiscal years and the interim period to December 10, 2003. BDO Seidman‘s reports on the financial statements for the past two years did not contain any adverse opinions or disclaimers of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles.

           We provided BDO Seidman with a copy of the disclosures made pursuant to the Form 8-K (which disclosures are consistent with the disclosures noted above) and BDO Seidman furnished us with a letter addressed to the Commission stating that it agrees with the statements made by us in the Form 8-K filing, a copy of which was filed as an exhibit to the Form 8-K.

Item 9A.      Controls and Procedures.

           We carried out an evaluation under the supervision of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of January 1, 2005, the disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is assembled and reported to the management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

           Our independent registered public accounting firm, Grant Thornton LLP, has advised management and the audit committee of the board of directors of two matters that they considered to be material weaknesses in our internal controls as that term is defined under standards established by the Public Company Accounting Oversight Board (United States): (i) the lack of adequate preparation of account reconciliation’s and analysis necessary to accurately prepare annual financial statements and (ii) the lack of sufficient qualified personnel in the accounting department.

           We considered these matters in connection with our year-end closing process and the preparation of our consolidated financial statements for the fiscal year ended January 1, 2005 included in this Form 10-K and believe that the concerns identified by the auditors have not impaired or prevented the ability to report accurately our financial condition and results of operation for the periods covered by this report. Management is actively working to assess and correct the conditions reported by the auditors and we plan to implement certain enhancements to the disclosure controls and the internal control over financial reporting in 2005 which we believe should address the issues identified by Grant Thornton.

           Our efforts to-date have included reinforcing existing policies and procedures, undertaking timely accounting reconciliations, and hiring additional personnel in the accounting department. The additional personnel include a Corporate Controller who has focused on consolidations, financial reporting, financial analysis and initiating new accounting policies and procedures as well as a Divisional Controller for Konsyl.