<PAGE>

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                             -----------------------


                                    FORM 10-K
                 ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934


                     For the fiscal year ended July 31, 2001

                         Commission File Number: 1-14091

                              ---------------------

                              SHERWOOD BRANDS, INC.
               (Exact Name of Issuer as Specified in Its Charter)

         NORTH CAROLINA                                          56-1349259
   ----------------------------                                -------------
   (State or Other Jurisdiction                                (IRS Employer
         of Incorporation)                                Identification Number)

   1803 RESEARCH BLVD., SUITE 201
          ROCKVILLE, MARYLAND                                      20850
----------------------------------------                         ----------
(Address of Principal Executive Offices)                         (Zip Code)

         Issuer's telephone number, including area code: (301) 309-6161

        Securities Registered Pursuant to Section 12(b) of the Act: None
           Securities Registered Pursuant to Section 12(g) of the Act:
                      Class A Common Stock, $.01 Par Value

Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.

                                 Yes (X)   No ( )

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)


The aggregate market value of the voting and non-voting stock held by
non-affiliates of the issuer as of October 18, 2001 (computed by reference to
the last reported sale price of the registrant's Common Stock on the American
Stock Exchange on such date) was $8,642,000.

         The number of shares outstanding of issuer's Class A Common Stock, $.01
par value per share, as of October 16, 2001 was 2,700,000. Number of shares
outstanding of issurer's Class B Common Stock, $.01 par value per share was
1,000,000. Class B Common Stock is not publicly traded.

DOCUMENTS INCORPORATED BY REFERENCE

         Certain portions of the issuer's definitive Proxy Statement pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, which will be
filed with the Commission subsequent to the date hereof, are incorporated by
reference into Part III of this Form 10-K.

<PAGE>

                              SHERWOOD BRANDS, INC.
                                    FORM 10-K
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                              PAGE
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<S>                                                                           <C>
                                     PART I

ITEM 1.     BUSINESS                                                             1
ITEM 2.     PROPERTIES                                                           7
ITEM 3.     LEGAL PROCEEDINGS                                                    7
ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                  7

                                     PART II

ITEM 5.     MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
            STOCKHOLDER MATTERS                                                  8
ITEM 6.     SELECTED FINANCIAL DATA                                            8,9
ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            CONDITION AND RESULTS OF OPERATIONS                                 10
ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK          15
ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                         16
ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
            ACCOUNTING AND FINANCIAL DISCLOSURE                                 16

                                    PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY                  17,18
ITEM 11.    EXECUTIVE COMPENSATION                                              19
ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT                                                          19
ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                      19

                                     PART IV

ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
            FORM 8-K                                                         20,21

SIGNATURES                                                                      22
================================================================================
</TABLE>

<PAGE>

                              PART I.


ITEM 1.     DESCRIPTION OF BUSINESS

GENERAL

Sherwood Brands, Inc. (the "Company") was incorporated in December 1982 in the
state of North Carolina. Sherwood Brands, Inc. is engaged in the manufacture,
marketing and distribution of a diverse line of brand name candies, cookies,
chocolates and gifts. The Company manufactures jelly beans, lollipops, biscuits,
soft and hard candies and assembles seasonal gift items including gift baskets
for Christmas and Easter. The Company's principal branded products are COWS(TM)
butter toffee candies, DEMITASSE(R) biscuits, RUGER(R) wafers, SMILE POPS(R)
lollipops, STRIP-O-POPS(R) lollipops and ELANA(R) Belgian chocolates. The
Company also markets, SOUR FRUIT BURST(TM) fruit-filled hard candies, as well as
certain holiday specialty products, such as PIRATE'S GOLD COINS(TM) milk
chocolates for Christmas and TOKENS OF LOVE(TM) milk chocolates for Valentine's
Day. The Company's marketing strategy, including its packaging of products, is
designed to maximize freshness, taste and visual appeal, and emphasizes highly
distinctive, premium quality products that are sold at prices that compare
favorably to those of competitive products. The Company believes that all of its
operations are part of the confectionery industry and it currently reports as a
single industry segment.

Sherwood Brands, Inc. is the owner of Sherwood Brands, LLC, a Maryland limited
liability company. Sherwood Brands, LLC markets and distributes its own line of
confectionery products in the United States.

Sherwood Overseas, Inc. (a wholly-owned subsidiary of Sherwood Brands, LLC) was
incorporated in July 1993 in the Bahamas to markets and distributes the Sherwood
lines of confectionery products internationally.

Sherwood Brands of RI, Inc. was incorporated in September, 1998 in the state of
Rhode Island. Sherwood Brands of RI, Inc. d/b/a E. Rosen Company is a
manufacturer of hard candies, jelly beans and packer of gift items and baskets.
On September 24, 1998 the Company completed the acquisition of certain assets of
the E. Rosen Company - d/b/a School House Candy Co. ("Rosen"). Rosen was a Rhode
Island manufacturer of hard candy, jelly beans and lollipops and assembled a
variety of holiday gift items including gift baskets. Rosen sold its holiday
gift items to such chains as Wal-Mart, Kmart and CVS. The Company paid $4.0
million in cash for the machinery and equipment, inventory and trade names,
trademarks and customer lists of Rosen. For financial accounting purposes, the
entire purchase price of $4.0 million was allocated to the inventories of raw
material, components and finished product.

MARKET OVERVIEW

Sales of candy and cookie products in the United States have increased
significantly in recent years. According to the United States Department of
Commerce, manufacturers' domestic shipments of confectionery products (excluding
chewing gum) have grown steadily from approximately $9 billion in 1990 to $21.8
billion in 2000. The Chocolate Manufacturers Association/National Confectioners
Association has estimated that total retail sales of confectionery products in
the United States in 2000 were approximately $23.8 billion, and industry trade
reports project continued growth in these markets into the next century. Despite
such growth, the United States ranks only fifth in per capita candy consumption
among the industrialized nations. Halloween generates the highest volume of
sales($1.985 billion in sales); Easter ($1.856 billion); followed by Christmas
($1.407 billion); and Valentines Day ($1.059 billion). The Company believes that
these expanding markets present attractive growth opportunities for its
business, and is focusing its strategy on introducing new products in these
market categories as well as achieving greater brand recognition and market
penetration for all of the Company's products.

The markets for candy and cookie products are dominated by a number of large,
well capitalized corporations. In the candy market, these companies include
Hershey Food Corporation, M&M Mars and Nestle S.A. The cookie and biscuit market
is dominated by Nabisco, Inc., Keebler Company and Sunshine Biscuits, Inc. In
addition to domestic manufacturers, foreign candy and cookie companies, such as
Lindt of Switzerland, Bahlsen KG, and Storck, have established their products in
this market. The Company believes that the remainder of


                                       -1-

<PAGE>

the market is highly fragmented, with numerous manufacturers and hundreds of
products and distribution channels, such as mass merchandisers, drug stores,
club stores, vending companies and gourmet distributors. Management believes
that the Company's experience in these markets and distribution channels,
coupled with its expanded manufacturing capabilities, positions the Company to
capitalize on the growth opportunities in these markets.

PRODUCTS

INTERNATIONALLY MANUFACTURED CANDY, COOKIES AND CHOCOLATES

The following is a description of products sold by the Company which are
purchased from third-party sources located internationally:

COWS(TM): COWS is a line of butter toffee candy offering both a soft and chewy
toffee and a dairy butter and cream hard candy. COWS butter toffee candies are
made with real dairy butter and cream and are sold in 7 oz. bags, in tubs, and
in bulk, and are packed in foil fresh packs to preserve freshness and extend
shelf life. COWS butter toffee candies are also packaged as gift items in
decorative tins and milk jars.

COWPOKES(TM) LOLLIPOPS: COWPOKES are an extension of the COWS line and are made
with a hard dairy butter and cream candy on the outside and a soft, chewy butter
toffee on the inside. Cowpokes are available in 6.4 oz. bags and are also
distributed in 60-count check-out stand display cartons for single-item sales.

SOUR FRUIT BURST(TM) HARD CANDIES: SOUR FRUIT BURST is a line of fruit-filled
hard candies which are available in a variety of flavors are sold in 3 oz. and
12 oz. Bags, and are distributed in a variety of packages. In 2000, the company
introduced Fruit Burst Gourmet Jelly Beans.

RUGER(R) WAFERS: RUGER wafers is a line of wafer cookie available in four
flavors: chocolate, vanilla, lemon and coffee and including sugar free
varieties. The RUGER wafer cookie formula, designed by the Company, utilizes an
aeration process which gives RUGER wafers its very light and delicate filling.
RUGER wafers are distributed in a mylar packaging material that resists sunlight
and humidity and is designed to preserve freshness and extend shelf life.

ELANA(R) BELGIAN CHOCOLATES: ELANA Belgian chocolate bars are sold in a variety
of flavors, including mint, caramel, mocca, truffle, crispers, and almonds.

COUNTDOWN TO CHRISTMAS(TM) CHOCOLATE CALENDARS: COUNTDOWN TO CHRISTMAS chocolate
calendars are advent calendars made with 24 milk-chocolate candies behind
numbered doors. The calendar is marketed domestically for the Christmas holiday
season.

PIRATE'S GOLD COINS(TM) FOIL-WRAPPED CHOCOLATE COINS: PIRATE'S GOLD COINS is a
milk chocolate candy product designed in coin shapes and wrapped in embossed
gold foil. They are offered in two sizes of mesh bags, 2lb. 10oz. Tubs and in
bulk, and are marketed primarily for the Christmas holiday season.

TOKENS OF LOVE(TM) CHOCOLATE CANDIES: TOKENS OF LOVE is a line of milk chocolate
candy product in token shapes, wrapped in foil with expressions of love and
friendship. They are offered in two sizes of mesh bags and in bulk, and are
marketed primarily for Valentine's Day.

ZED GUM: The Company entered into its first agreement to market a non company
brand name product in the USA. This long term agreement with a fast growing gum
manufacturer allows the Company the opportunity to position itself strongly in
the kids novelty and everyday gum market. The strength of this relationship is
to develop products specifically for the United States including development of
products designed and trademarked by the Company under the ZED name. The product
line meets the Company's requirements for high quality, exceptional package
design and value. This product has been well received in every major class of
trade including grocery, drug, discounter and convenience stores.


                                       -2-

<PAGE>

DOMESTICALLY MANUFACTURED CANDIES AND BISCUITS

The following is a description of products manufactured by the Company:

STRIP O POPS(TM) LOLLIPOPS: STRIP O POPS(TM) are a line of hard candy lollipops
merchandised in hanging strips. They are available in a variety of flavors and
are designed for the holiday season as well as year round sales.

SMILE POPS(TM) LOLLIPOPS: SMILE POPS(TM) are a line of candy iced lollipops
individually wrapped and sold in tubs, poly bags or in hanging strips. Each pop
is decorated with a smiling face.

GUMMI SKULLS(TM) JELLY PRODUCTS: GUMMI SKULLS(TM) are a line of soft candies
shaped as a human skull and available in an assortment of flavors such as mint,
orange and spice.

TONGUE TATTOO(TM) LOLLIPOPS: TONGUE TATTOO lollipops are a line of hard candy
lollipops embossed with candy icing images. The iced image transfers when
pressed on the tongue creating a tongue tattoo.

COWSCARAMELS (TM): COWSCARAMELS is a line of caramel candy. Flavored fillings
include vanilla, cappuccino and butter and cream. The candies are offered in
both a soft and chewy toffee and as a dairy butter and cream hard candy. The
COWSCARAMEL production line is certified kosher by the Orthodox Union.

DEMITASSE(R) BISCUITS: DEMITASSE is a line of tea biscuits offered in a variety
of flavors including the traditional tea biscuit, "Petit Beurre" (with real
butter), cinnamon honey, coconut and chocolate. The DEMITASSE biscuit line is
certified kosher by the Orthodox Union.

JELLIES: The Company manufactures a variety of pan cast soft jelly candy know as
"jelly beans" or "jelly eggs". They are available in a variety of flavors,
colors and sizes. Jelly candy may be packaged for individual sale or may be
incorporated into one of the Company's seasonal gift basket offerings, such as
those prepared for Easter sales.

ASSEMBLED HOLIDAY GIFT ITEMS AND GIFT BASKETS

The Company assembles a variety of custom made gift sets and gift baskets. The
gift sets and gift baskets are designed to focus on a particular holiday season
such as Christmas, Valentines Day and Easter. The gift items may contain gourmet
food products, candy, novelty items or seasonal merchandise. A significant
portion of the contents of the gift items and gift baskets are assembled from
components imported from China.

SUPPLIERS

The Company currently purchases most of its contract-manufactured products from
third-party sources located in Argentina, Austria, Belgium, Holland, Germany,
Italy, and Ireland. Many of the Company's products are manufactured to specific
recipe and design specifications developed by the Company. The Company's
operations require it to have production orders in place in advance of shipment
to the Company's warehouses (product deliveries typically take 60 days). Each of
the Company's foreign suppliers generally delivers finished products free on
board to a freight forwarder, cargo consolidator or directly to a seaport for
ocean transport. The Company assumes the risk of loss, damage or destruction of
products, although the Company maintains cargo insurance. Upon entry into the
United States, the products are then transported by rail or truck to one of the
six regional warehouses used by the Company.

The Company has entered into written agreements with the manufacturers of
ELANA(R) Belgian chocolates, RUGER Wafers, ZED gum and PIRATE'S GOLD COINS(TM)
milk chocolates. Generally, under these agreements, the supplier may not export
into the United States, and in certain cases, other countries, any products
similar to those produced for the Company. The agreements require the Company to
purchase annual minimum volumes at specific prices, which minimums are subject
to a reduction and, ultimately, a suspension, in the event of certain price
increases by the supplier. The Company currently exceeds these purchase
requirements. The Company's supplier agreements require the supplier to maintain
product liability insurance with the Company as an additional named insured and
are generally terminable on short notice.


                                       -3-

<PAGE>

The Company purchases the necessary ingredients and packaging materials, which
are used in its products, manufactured at its Pawtucket, RI and Chase City, VA
production facilities from numerous third-party suppliers. Such ingredients and
packaging materials include flour, sugar, shortening, flavorings, butter,
folding cartons, shipping cartons and wrapping film. Such purchases are made on
an open account basis with competitive payment terms. The Company anticipates
that it will become increasingly dependent on these suppliers for necessary
ingredients and packing materials used in the domestic manufacture of its
products.

The primary source of components used in the Company's line of holiday gift
items and gift baskets which are assembled at its Central Falls, RI facility are
from manufacturers located in Asia, principally China. Such purchases require
the use of an irrevocable letter of credit issued by the Company's bank. In
addition, the Company purchases some components from domestic sources on an open
account basis.

CUSTOMERS

The Company sells its products primarily to mass merchandisers and other retail
customers, grocery and drug store chains, club stores, convenience stores,
specialty shops and wholesalers. The Company's mass merchandiser customers
include Family Dollar, Target, Dollar General, K-Mart and Wal-Mart stores. For
the year ended July 31, 2001, Sam's Club and Wal-Mart accounted for 27% and 14%
of the Company's total net sales respectively. For the year ended July 31, 2000,
Wal-Mart comprised 15% of the Company's total net sales. For the year ended July
31, 1999 Sam's Club comprised 12% of the Company's total net sales.

Vending companies are the Company's second largest customer category. ELANA
Belgian chocolates, RUGER wafers, COWS butter toffee candies and SOUR FRUIT
BURST candies are available in vending machines as well as through traditional
outlets. The Company believes that the visibility of its products in vending
channels enhances market acceptance and consumer appeal of the Company's
products in other distribution channels.

The Company also sells its products to numerous gourmet distributors throughout
the United States. These distributors in turn sell products to a wide base of
gourmet stores. The Company believes that it has been able to penetrate this
market segment because of its ability to satisfy consumer demand for premium
quality products at prices that are attractive to these distributors.

DISTRIBUTION CHANNELS

The Company distributes its products throughout the United States and
internationally. The Company's principal market outside the United States is
Canada, which accounts for approximately 73% of the Company's international net
sales for fiscal year 2001. For the year ended July 31, 2001, net sales of the
Company's products in foreign markets accounted for approximately $407,000 of
the Company's total net sales and in July 31, 2000 and 1999 they were $588,000
and $1,120,000, respectively.

The Company engages independent food and candy brokers in various regions
throughout the United States for marketing to retail customers. These brokers
account for a majority of the Company's sales. Food and candy brokers are paid
on a commission basis (typically 5% of sales generated by them) and are
generally responsible in their respective geographic markets for identifying
customers, soliciting customer orders and inspecting merchandise on store
shelves. As of July 31, 2001, the Company had arrangements with approximately 65
food and candy broker organizations. Such arrangements prohibit the brokers from
selling competing products. The Company believes that the use of food and candy
brokers, which typically during the term of their employment with the Company
specialize in specific products and have knowledge of and contracts in
particular markets, enhances the quality and scope of the Company's sales
operations. In addition, the use of brokers permits the Company to limit the
significant costs associated with creating and maintaining a direct distribution
network. The Company's executive officers and six regional sales managers work
with brokers on an individual basis and are responsible for managing the broker
network, identifying opportunities and developing sales in their respective
territories.

The Company uses six regional bonded public warehouses that specialize in food
and confectionery storage. These warehouses are selected based on proximity to
the Company's customers, the ability to provide prompt customer service and
efficient and economic delivery. The Company generally sells its products
pursuant to customer purchase orders and fills these orders from inventory
generally within one to two days of receipt.


                                       -4-

<PAGE>

Because orders are filled shortly after receipt, backlog is not material to the
Company's business. Substantially all of the Company's products are delivered by
common carrier.

MANUFACTURING AND ASSEMBLY FACILITIES

The Company has two manufacturing facilities and three assembly facilities. The
Company currently produces Demitasse biscuits and COWSCARAMEL caramel candies at
its Chase City, VA facility. The Chase City facility consists of a brick
building with over 70,000 square feet (including a 1,750 square foot office)
situated on approximately ten acres in Southern Virginia. The facility is
equipped with state-of-the-art equipment for the manufacture and packaging of
cookie and candy products and employs approximately 112 skilled and unskilled
workers. The facility is certified kosher by the Orthodox Union. In Virginia,
the Company also has a 73,000 square foot facility located on approximately 15
acres in Keysville, VA. The Company is currently utilizing this facility to
package product and store inventory. Both the Chase City and Keysville
facilities have access to a supply of both skilled and unskilled labor. In
addition, the southern Virginia area in which the two plants are located, is
readily accessible to common carriers, rail lines and a major seaport (Newport
News).

The Company leases approximately 528,000 square feet of improved real estate in
Pawtucket and Central Falls, RI. The property is used for the manufacture of
hard and soft candy (117,000 square feet), assembly of holiday gift items and
inventory storage (397,000 square feet) and office space (14,000 square feet).
Both Rhode Island locations have access to both skilled and unskilled labor, and
are readily accessible to common carriers, rail lines and a major seaport
(Boston). The Company employs approximately 217 full-time employees and 505
seasonal employees in Rhode Island.

In May 2000 the Company entered into a capital lease agreement with the New
Bedford Redevelopment Authority to lease a 430,000 square foot building in New
Bedford, MA. The facility will be used for assembly and storage of components.
Under the terms of the lease the Company made an initial payment of $400,000 and
has commitments to pay rent of $25,000 per annum for years one and two and
$41,666.66 per annum for years three through twenty. The Company has the option
to purchase the building at any time during the lease term for $1,200,000 minus
any amounts of rental payments made.

The Company's Vice President - Manufacturing Operations is responsible for the
operations at both the Virginia and Rhode Island facilities. The Company
currently employs technical and production personnel who have working knowledge
of the technical and operational aspects of the Company's production equipment.
The Company also employs personnel responsible for conducting quality control
testing at the facility by conducting on-site laboratory analysis and quality
assurance inspections. The inspectors evaluate the Company's products on the
basis of subjective factors such as taste and appearance. The Company monitors
the efficiency of the production equipment continuously and its facilities are
climate controlled where required.

MARKETING, SALES AND ADVERTISING

The Company believes that product recognition by retail and wholesale customers,
consumers and food brokers is an important factor in the marketing of its
products. Accordingly, the Company promotes its products and brand names through
the use of attractive promotional materials, including full-color product
brochures and newspaper inserts, advertising in trade magazines targeted to the
mass merchandisers, vending industry, gourmet trade and gift basket markets, and
participation in trade shows. For the year ended July 31, 2001, the Company
spent approximately $980,000 on advertising and product promotion and as of July
31, 2000 and 1999 the company spent approximately $716,000 and $698,000,
respectively.

The Company also promotes its products through sales discounts and advertising
allowances. Promotional programs are generally used most during the initial
introduction of a product. As distribution of the new product increases, the
Company gradually shifts from promotion to direct advertising in order to
reinforce trade and consumer repeat purchasing. Management believes that these
promotional programs have shortened the time periods necessary to achieve market
penetration of its products. The Company intends to continue to develop and
implement marketing and advertising programs to increase brand recognition of
its products and to emphasize favorable pricing compared to competing products.


                                       -5-

<PAGE>

COMPETITION

The Company faces significant competition in the marketing and sale of its
products. The Company's products compete for consumer recognition and shelf
space with candies, cakes, cookies, chocolates and other food products which
have achieved international, national, regional and local brand recognition and
consumer loyalty. These products are marketed by companies (which may include
the Company's suppliers) with significantly greater financial, manufacturing,
marketing, distribution, personnel and other resources than the Company. Certain
of these competitors, such as Hershey Food Corporation, M&M Mars, Inc., Nestle,
S.A., Nabisco, Inc., Keebler Company and Sunshine Biscuits, Inc., dominate the
markets for candy and cookie products, and have substantial promotional budgets
which enable them to implement extensive advertising campaigns. The food
industry is characterized by frequent introductions of new products, accompanied
by substantial promotional campaigns. Competitive factors in these markets
include brand identity, product quality, taste and price. The Company's major
competitors for holiday gift items and gift baskets are Houston Harvest Co.,
Smith Enterprises, Inc. and Wonder Treats.

TRADEMARKS

The Company holds United States trademark registrations for the "ELANA,"
"RUGER", "TONGUE TATTOO", "STRIP-O-POP", "SMILE POPS" and "demitasse" names, and
has filed trademark registrations for certain other names, including "COWS," and
uses other names for which it has not applied for registration. The Company
believes that its rights to these names are a significant part of the Company's
business and that its ability to create demand for its products is dependent to
a large extent on its ability to exploit these trademarks. There can be no
assurance as to the adequacy of protection that trademarks will afford the
Company, that any trademark application will result in registered trademarks, or
that trademarks will not be invalidated if challenged. The Company is not aware
of any infringement claims or other challenges to the Company's rights to use
these marks. The Company is applying for the international registration of all
its trademarks.

GOVERNMENT REGULATION

The Company is subject to extensive regulation by the United States Food and
Drug Administration, the United States Department of Agriculture and by other
state and local authorities in jurisdictions in which the Company's products are
manufactured or sold. Among other things, such regulations govern the importing,
manufacturing, packaging, storing, distribution and labeling of the Company's
products, as well as sanitary conditions and public health and safety.
Applicable statutes and regulations governing the Company's products include
"standards of identity" for the content of specific types of products,
nutritional labeling and serving size requirements and general "Good
Manufacturing Practices" with respect to manufacturing processes. The Company's
manufacturing facilities and manufactured products are subject to periodic
inspection by federal, state and local authorities. The Company believes that it
is in compliance with all governmental laws and regulations and maintains all
permits and licenses required for its operations.

Nevertheless, there can be no assurance that the Company will continue to be in
compliance with current laws and regulations or that the Company will be able to
comply with any future laws and regulations and licensing requirements. Failure
by the Company to comply with applicable laws and regulations could subject the
Company to civil remedies, including fines, injunctions, recalls or seizures, as
well as potential criminal sanctions.

INSURANCE

The Company maintains product liability insurance with limits of $2,000,000 in
the aggregate and $1,000,000 per occurrence (with excess coverage of
$10,000,000), which it believes is adequate for the types of products currently
offered by the Company. There can be no assurance, however, that such insurance
will be sufficient to cover potential claims or that, adequate levels of
coverage will be available in the future at a reasonable cost. In the event of a
partially or completely uninsured successful claim against the Company, the
Company's financial condition and reputation would be materially affected.


                                       -6-

<PAGE>

EMPLOYEES

As of October 16, 2001, the Company had approximately 294 full-time employees
and approximately 561 part-time or seasonal employees. Of the Company's
full-time workforce, 21 are located at the Company's principal office in
Rockville, MD. The Company has approximately 112 full and part-time employees in
Virginia and approximately 722 full, part-time and seasonal employees in Rhode
Island and Massachusetts. Management believes that the Company's relationship
with its employees is good. None of the Company's employees are represented by
labor unions under any collective bargaining agreement.

ITEM 2. DESCRIPTION OF PROPERTIES

The following table sets forth, with respect to properties leased and owned by
the Company at July 31, 2001, the location of the property, the amount of square
feet of the property, the annual rent and the year in which the lease expires,
if applicable, and the business use which the Company makes of such facilities:

<TABLE>
<CAPTION>
                             Approximates
                          Square     Annual            Expiration
     Address                Feet      Rent              Of Lease            Business Use
==================================================================================================
<S>                       <C>       <C>                <C>                  <C>
Leased Properties:
1803 Research Boulevard     5,500   $125,000           January 31, 2009     Executive and General Office

Rockville, MD 20850

1005 Main Street          131,000   $206,000           October 2004         Manufacturing Plant and
Pawtucket, RI 02860                                                         General Office

280 Rand Street           397,000   $396,000           October 2004         Assembly facility, Storage
Central Falls, RI 02863                                                     And Distribution
                                                                            facilities

27 Healy Street           430,000   $ 25,000 (Yr 1-2)  June 2020            Assembly facility, Storage
New Bedford, MA 02745               $ 41,667 (Yr 3-20)                      And Distribution

Owned Properties:
807 South Main Street      70,000                                           Manufacturing Plant
Chase City, VA 23924

350 Sherwood Drive         73,000                                           Manufacturing Plant
Keysville, VA 23947
</TABLE>

The Company believes that its existing facilities are well maintained and in
good operating condition.

ITEM 3. LEGAL PROCEEDINGS

The Company is from time to time involved in litigation incidental to the
conduct of its business. The Company is currently involved in several legal
proceedings involving intellectual property rights, collection of receivables,
and other matters. The Company does not believe that the outcome of these
matters would materially affect the Company's operations. There can be no
assurance that the Company will not be a party to other litigation in the
future.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the quarter ended
July 31, 2001.


                                       -7-

<PAGE>

PART II

ITEM 5. MARKET PRICES AND DIVIDENDS

Market Price

The Company's Class A Common Stock is traded on the American Stock Exchange
("AMEX") (symbol: SHD). Prior to the Company's initial public offering and
listing of its Class A Common Stock on AMEX, which occurred on May 8, 1998,
There was no public trading market for such shares. The following table shows
The high and low sales prices as reported on AMEX for the Class A Common Stock
For each quarter within the last two fiscal years:

                      PRICE PERIOD                         HIGH        LOW
================================================================================

         Fiscal Year Ended July 31, 2000:
          First Quarter                                   $3.63       $1.75
          Second Quarter                                  $3.50       $1.38
          Third Quarter                                   $3.25       $1.38
          Fourth Quarter                                  $2.25       $1.25

         Fiscal Year Ended July 31, 2001:
          First Quarter                                   $2.50       $1.50
          Second Quarter                                  $3.25       $1.63
          Third Quarter                                   $3.26       $2.42
          Fourth Quarter                                  $4.95       $3.00


As of October 15, 2001, there were 26 holders of record of the Class A Common
Stock and one holder of record of the Class B Common Stock.

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on the Class A and
Class B Common Stock and has no present intention to declare or pay cash
dividends on the Class A and Class B Common Stock in the foreseeable future but
intends to retain earnings, if any, which it may realize in the foreseeable
future to finance its operations. The Company is subject to various financial
covenants with its lenders that could limit and/or prohibit the payment of
dividends in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The payment of future cash dividends on
the Class A Common Stock will be at the discretion of the Board of Directors and
will depend on a number of factors, including future earnings, capital
requirements, the financial Condition and prospects of the Company and any
restrictions under credit Agreements existing from time to time. There can be no
assurance that the Company will pay any cash dividends on the Class A Common
Stock in the future.

ITEM 6.  SELECTED FINANCIAL DATA

The selected financial data set forth below have been derived from the
consolidated financial statements of the Company and the related note thereto.
The statement of operations data for the five years ended July 31, 2001, 2000,
1999, 1998 and 1997 and the balance sheet data as of July 31, 2001, 2000, 1999,
1998 and 1997 are derived from the consolidated financial statements of the
Company which have been audited by BDO Seidman, LLP, independent certified
public accountants. The following selected financial data should be read in
conjunction with the Company's consolidated financial statements and the related
notes thereto and "Management Discussion and Analysis of Financial Condition and
Results from Operations", which are included elsewhere herein.


                                       -8-

<PAGE>

<TABLE>
<CAPTION>
For years ended July 31,                                            2001          2000         1999 (*)     1998           1997
===================================================================================================================================
<S>                                                             <C>           <C>           <C>          <C>            <C>
Net sales                                                       $58,316,716   $42,104,645   $25,299,806  $18,084,174    $17,487,462

Cost of sales                                                    41,796,184    32,183,885    19,218,718   12,230,757     12,570,606

====================================================================================================================================
Gross profit                                                     16,520,532     9,920,760     6,081,088    5,853,417      4,916,856


Selling, general and administrative expenses                      8,006,416     6,675,177     4,922,082    3,139,475      2,744,116

Salaries and related expenses                                     4,806,061     3,285,850     2,450,096    1,515,803      1,180,522

Pre-production costs                                                  -----         -----       213,112      155,095        769,585


====================================================================================================================================
Total operating expenses                                         12,812,477     9,961,027     7,585,290    4,810,373      4,694,223
====================================================================================================================================


Income/(Loss) from operations                                     3,708,055       (40,267)   (1,504,202)   1,043,044        222,633
====================================================================================================================================


Other income (expense)
   Interest income                                                   11,182        36,016        83,258       88,870         26,073

   Interest expense                                                (539,971)     (434,978)     (153,832)    (222,947)      (273,511)

   Insurance claim, net                                               -----         -----         -----      102,223        364,028


   Other income (expense)                                           132,209       693,413        (7,821)       9,747         51,263


====================================================================================================================================
Total other income (expense)                                       (396,580)      294,451       (78,395)     (25,455)       103,747
====================================================================================================================================


Income/(Loss)  before provision (benefit) for taxes on income     3,311,475       254,184    (1,582,597)   1,017,589        326,380

====================================================================================================================================
Provision (Benefit) for taxes on income                           1,093,100   $    98,100      (319,700)     316,400         23,100


====================================================================================================================================
Net income (loss)                                               $ 2,218,375   $   156,084   $(1,262,897) $   701,189    $   303,280


====================================================================================================================================
Net Income (loss) per share- basic                              $      0.60   $      0.04   $     (0.34) $      0.28    $      0.14

                          - diluted                                    0.56          0.04         (0.34)        0.28           0.14

====================================================================================================================================
Weighted average common shares outstanding-basic                  3,700,000     3,700,000     3,700,000    2,515,205      2,150,000

                                          -diluted                3,954,428     3,700,000     3,700,000    2,515,205      2,150,000
</TABLE>


<TABLE>
<CAPTION>
For the years ended July 31,                                       2001          2000          1999          1998           1997
===================================================================================================================================
<S>                                                             <C>          <C>            <C>          <C>            <C>
Balance Sheet Data:

Working Capital                                                 $7,485,168   $ 6,020,265    $6,992,533   $9,244,219     $2,219,735


Total Assets                                                    22,804,112    20,618,891    16,575,370   15,066,358      8,963,360


Total Long Term Debt                                             1,221,162     1,755,170     1,604,526    1,870,057      2,101,242

Total Liabilities                                               11,575,121    11,590,004     7,702,567    4,925,419      7,270,887


Stockholders' Equity                                            11,228,991     9,028,887     8,872,803   10,140,939      1,692,473
</TABLE>




        (*)In September 1998, the assets of E. Rosen were acquired.


                                       -9-

<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Those statements include
statements regarding the intent, belief or current expectations of the Company
and its management. Such statements are subject to a variety of risks and
uncertainties, many of which are beyond the Company's control, which could cause
actual results to differ materially from those contemplated in such
forward-looking statements, including in particular the risks and uncertainties
described under "Risk Factors" in the Company's Prospectus dated May 6, 1998.
Investors are cautioned not to place undue reliance on those forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to update or revise the information contained in his Annual Report on
Form 10-K, whether as a result of new information, future events or
circumstances or otherwise.

RESULTS FROM OPERATIONS

FISCAL YEAR ENDED JULY 31, 2001 COMPARED TO FISCAL YEAR ENDED JULY 31, 2000

NET SALES:
Net sales for the year ended July 31, 2001 and 2000 were $58,316,716 and
$42,104,645 respectively. Net sales increased 38.3% primarily due to higher
sales of gift baskets, gift items and candies. Sales of new products, including
Kastins candies, jelly beans and new gift items, accounted for approximately 5%,
11% and 14% of the sales for the twelve months respectively.

GROSS PROFIT:
Gross profit for the year ended July 31, 2001 increased to $16,520,532 from
$9,920,760, an increase of 67% from prior year. The margins as a percent of
sales were 28% and 24% respectively. The improved gross profit margin was
attributable to improved production efficiencies, largely associated with
decreased costs of certain major raw materials, primarily sugar, finished goods
for gift items and the increased availability of labor in the Company's Rhode
Island and Massachusetts facilities during peak seasonal needs in the second
half of the year reducing needs for overtime and subcontract labor. Overtime and
subcontract labor expense for fiscal year 2001 was $1,116,368 compared to
$1,735,251 for fiscal year 2000 and decreased 2% as a percent of sales from the
prior year period. The reduction of overtime and subcontract labor expense was
offset partially by increased number of production employees hired during the
year. The annual fiscal 2001 impact was a decrease of approximately $500,000
from prior year period.

OPERATING EXPENSES:
Selling, general and administrative expenses increased to $8,006,416 from
$6,675,177 and decreased to 14% from 16% as a percent of sales. The increase was
largely due to the additional freight, commissions and advertising expenses
associated with the higher sales volume and higher facility costs (i.e.,
utilities, facility rents, heating oil) associated with Massachusetts.

Salaries and related expenses increased to $4,806,061 from $3,285,850 or 8% as a
percent of sales. This increase was due to the addition of new management
employees at both the Maryland and Rhode Island operations as well as higher
management salaries. In addition, the Company accrued $500,000 during fiscal
2001 for a company wide performance based bonus which was payable at the end of
the fiscal year based on earnings performance criteria which were achieved.

As a result, operating expenses increased to $12,812,477 from $9,961,027 but
decreased to 22% from 24% as a percent of sales. The Company believes that it
has put into place the infrastructure, including new management, in the areas of
marketing, sales and operations to support newly expanded and growing product
lines and customer base.


                                       -10-

<PAGE>

INCOME FROM OPERATIONS:
Income from operations for the year ended July 31, 2001 was $3,708,055 compared
to loss $40,267 for the prior year's comparable period. The increase was mainly
attributable to the Company's sustained focus on developing efficiency in its
manufacturing and assembly facilities. The infrastructure put in place during
the 2000 fiscal year and operational efficiencies developed lead to higher sales
and higher margins.

INTEREST INCOME:
Interest income decreased to $11,182 from $36,016. The decrease was attributable
to using excess funds to pay down credit facilities to minimize interest expense
during the year reducing cash on hand for daily overnight investment activity
with the companies bank.

INTEREST EXPENSE:
Interest expenses increased to $539,971 from $434,978 due to working capital
needs to purchase inventory and raw materials to support the increased volume of
sales during the peak seasonal needs.

OTHER INCOME/(EXPENSE):
Other income (expense) decreased to $132,209 from $693,413 primarily due to the
receipt of a $350,000 settlement arising out of a trademark infringement suit
the company initiated and a $75,000 insurance claim in the prior year's period.

INCOME TAXES:
The income tax rate utilized for the twelve-month period was 33% and 39% in 2001
and 2000, respectively based on the Company's estimate of the effective tax rate
for the fiscal year. The change in rate is due to the use of state net operating
losses and job credit carry-forwards. The Company recorded a tax expense of
$1,093,100 for the year ended July 31, 2001 compared to $98,100 for the year
ended July 31, 2000.

NET INCOME:
As a result of the foregoing, the Company earned net income of $2,218,375 for
the twelve months ended July 31, 2001 compared to net income of $156,084 for the
prior comparable period. This resulted in 4% and 0.4% of net sales for July 31,
2001 and 2000.

FISCAL YEAR ENDED JULY 31, 2000 COMPARED TO FISCAL YEAR ENDED JULY 31, 1999

NET SALES:
Net sales for the year ended July 31, 2000 and 1999 were $42,104,645 and
$25,299,806, respectively, an increase of $16,804,839 or 66%. This increase in
net sales is the result of increased sales of gift sets and gift baskets, jelly
beans and lollipops. International sales declined by 48% from $1,119,548 to
$587,620 largely due to a decline in Canadian sales.

GROSS PROFIT:
Gross profit for year ended July 31, 2000 increased to $9,920,760 from
$6,081,088 for the prior year period, but as a percent of sales remained at 24%
for the respective periods. The gross profit margin was primarily affected by
high labor costs associated with a shortage of labor supply during peak seasonal
needs in the second half of the year. Overtime and subcontract labor was
approximately $1,735,000 for the year. In addition, the gross profit margin was
negatively affected by the lower margins associated with jellybean sales which
accounted for approximately 11% of sales for the year.

OPERATING EXPENSES:
Selling, general and administrative expenses for the year ended July 31, 2000
increased to $6,675,177 from $4,922,082 for the prior year period, but decreased
as a percentage of sales to 16% from 20% in the respective periods, largely due
to the relatively fixed nature of administrative costs compared to the 66%
increase in sales revenue.

The Company did not incur any pre-production costs during the fiscal year
compared to $213,112 for the prior year as the company completed the
installation of equipment for product line extensions in its Chase City facility
at the beginning of the prior fiscal year.

Salaries and related expenses for the year ended July 31, 2000 increased to
$3,285,850 from $2,450,096 for the prior year period, or as a percentage of
sales declined to 8% from 10% in the respective periods, due to the increased
volume of sales generated. As a result, operating expenses for the year ended
July 31, 2000 increased to $9,961,027 from $7,585,290

                                      -11-

<PAGE>

for the prior year period, but declined as a percentage of sales to 24% from 30%
in the respective periods. The Company believes that it has put into place the
infrastructure including new management in the areas of marketing, sales and
operations to support newly expanded and growing product lines and customer
base.

LOSS FROM OPERATIONS: Loss from operations for the year ended July 31, 2000 was
$40,267 compared to a $1,504,202 loss from operations for the year ended July
31,1999. The loss was a result of higher volume of sales, which absorbed
overhead expenses but was offset by high labor costs due to a shortage in the
labor supply during peak seasonal periods.

INTEREST EXPENSE: Interest expense for the year ended July 31,2000 increased to
$434,978 from $153,832 for the prior year period due to the increased borrowing
needs as the Company had additional working capital needs to purchase inventory
and raw materials to support the increased volume of sales.

OTHER INCOME (EXPENSE): Other income was $693,413 compared to expense of $7,821
for the prior year period. The change was primarily due to the receipt of a
legal settlement during the current year.

INCOME TAXES: The Company recorded a tax expense of $ 98,100 for the year ended
July 31, 2000 compared to a benefit of $319,700 for the year ended July 31,
1999. During the prior year the Company recorded a total current benefit of
$184,200 in addition to a benefit of $349,900 resulting from the change in
deferred taxes, offset by an IRS examination assessment of $214,400. During the
prior year, the IRS examined the tax returns for Sherwood Brands, Inc. and
Sherwood Brands Overseas, Inc. for tax years ended July 31, 1995 to July
31,1997. As a result of the tax examination, the IRS contends that the Company's
borrowing agreement contained an indirect guarantee by Overseas of the
borrowings of the parent and therefore the parent must include as income the
earnings of Overseas. The Company does not agree with the IRS position and is
currently considering what actions it will take in the future to argue the case.

NET INCOME: As a result of the foregoing, the Company had net income of $156,084
for the year ended July 31,2000 compared to a net loss for the year ended July
31, 1999 of $1,262,897

FINANCIAL CONDITION

The Company's financial condition remained strong during 2001. The
capitalization ratio (total short-term and long-term debt as a percent of
stockholders' equity, short-term and long-term debt) was 10% as of July 31, 2001
and 16% as of July 31, 2000. The ratio of current assets to current liabilities
was 1.72:1 as of July 31, 2001 and 1.58:1 as of July 31, 2000.

Assets

Total assets increased to $22,804,112 from $20,618,891 or an increase of
$2,185,221, or 11% as of July 31, 2001, primarily as a result of higher prepaid
expenses, inventory, plant, property and equipment. These increases were due, in
part, to the increase in warehouse capacity and inventory to support future
sales volume leading into next fiscal year.

Current assets increased to $17,841,372 from $16,311,937 or an increase of
$1,529,435 or 9%, primarily reflecting increased inventories. The increase in
prepaid expenses was principally associated with the company's new banking
facility fees and increase in rent prepaid at it Rhode Island facility.

Plant, Property and Equipment was higher than the prior year primarily due to
capital additions of $1,064,258.

Liabilities

Total liabilities decreased to $11,575,121 from $11,590,004 or decrease of
$14,883, as July 31, 2001, primarily reflecting the payment of all subordinated
debt and reduction of long-term debt, accounts payable and short-term
borrowings. The decrease was offset by increase in accrued liabilities,
primarily due to the incentive bonus accrual.

                                      -12-

<PAGE>

Capital Structure

The Company has two classes of stock outstanding, Class A Common Stock and Class
B Common Stock (collectively the "Common Stock"), which classes are
substantially identical, except that the Class A Common Stock is entitled to one
vote per share and the Class B Common Stock is entitled to seven votes per share
on all matters, including the election of directors. Uziel Frydman, Chairman,
President and Chief Executive Officer of the Company, beneficially owns 400,000
shares of Class A Common Stock and all of the 1,000,000 share of Class B Common
Stock outstanding and controls the Company. Amir Frydman and Anat Schawartz each
own 375,000 shares of Class A Common Stock.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary cash requirements have been to fund the purchase,
manufacture and commercialization of its products. The Company finances its
Operation and manufacturing with cash flow from operations and borrowings,
Primarily from banks.

On May 6, 1998, the Company completed an initial public offering ("IPO") of
1,550,000 shares of its Class A Common Stock at a public offering price of
$5.95. Proceeds to the Company, net of expenses of the offering, amounted to
approximately $7.7 million, $2.5 million of which were used to pay down the
Company's working capital line of credit and a related party loan, and $4.0
million of which were used to acquire certain assets of Rosen. The remaining
proceeds from the IPO have been utilized for general working capital purposes.
The Company's working capital at July 31, 2001, July 31, 2000 and July 31, 1999
was $7,485,168, $6,020,265 and $6,972,533 respectively.

In May 2001, the Company entered into a new agreement with First Union National
bank. The new credit facility is a $20.0 million line of credit. Advances under
the line of credit are based on a borrowing formula equal to 85% of eligible
domestic accounts receivable plus 60% of eligible finished goods and 30% of
eligible components inventory. Borrowings on inventory are capped based upon the
Company's seasonal requirements and are limited to $9.0 million. The line of
credit is also available for the issuance of letter of credits. The line of
credit is secured by the cash and cash equivalents, accounts receivable and
inventories of Sherwood Brands, Inc. and its wholly-owned subsidiaries. The line
of credit agreement contains various business and financial covenants,
including, among other things, a minimum tangible net worth, debt service
coverage and capital expenditure limits. The Company was in violation of the
capital expenditure limits at July 31, 2001. The bank agreed to a waiver of the
violation. Interest accrues on such advances at LIBOR plus 2.35% (the rate at
July 31, 2001 was 6.09%) and is payable monthly. The loan agreement expires in
June 2004.

In June 1996 and May 1997, the Company borrowed $935,000 and $580,000,
respectively, from Industrial Development Authority of Mecklenburg County
("IDAMC") for the acquisition and improvement of the Chase City facility and the
purchase and installation of new production equipment, financed through the
issuance of two series of Industrial Revenue Bonds ("IRB") (Series 1996 and
Series 1997). The IRBs are backed by irrevocable letters of credit issued by
Wachovia, NA ("Wachovia"). Advances on the letters of credit (which expire June
2011 and 2002, respectively) are, in turn, secured by the Company's Chase City
facility and all other real and personal property of the Company pursuant to a
reimbursement agreement ("Reimbursement Agreement") between Wachovia and the
Company.

Under the Reimbursement Agreement, the Company makes monthly interest and
sinking fund payments to Wachovia. Annual payments to the sinking fund for the
Series 1997 IRBs are due June 1 each year in the following amounts: $105,000 in
1999 and $130,000 in each of 2000, 2001 and 2002. The total monthly payments
vary from month to month and are subject to variable market tax exempt interest
rates (4.40% at July 31, 2000). The terms of the Reimbursement Agreement
require, among other things, that the Company maintain certain financial ratios
and adhere to certain covenants, including, without Wachovia's permission,
borrowing additional funds, merging or consolidating, amending its Articles of
Incorporation and repaying subordinated debt. The current loan amounts at July
31, 2001 were $130,000 for the Series 1997 IRBs and $635,000 for Series 1996
IRBs.

                                      -13-

<PAGE>

As part of the financing for the acquisition of the Chase City facility, in May
and June 1996, the Company borrowed $400,000 to finance equipment from IDAMC and
$250,000 for working capital from the Lake Country Development Corporation
("LCDC"), respectively, evidenced by two subordinated notes (the "Subordinated
Notes"). On June 2001 the IDAMC and LCDC loans were paid in full.

In the normal course of business the Company may be exposed to fluctuations in
interest rates. These fluctuations can vary the costs of financing, investing
and operating transactions.

CASH FLOWS:

Cash Used in Operating Activities:
Net cash provided from operating activities for the twelve months ended July 31,
2001 and 2000, respectively was $1,618,667 compared to cash used of $986,660 in
the prior comparable period. The decrease in cash used by operating activities
was due primarily to decreases in accounts payable, accounts receivable and
inventory which were offset by the increase in provision of inventory
allowances, income tax receivable and purchasing activity as well as the
increases in net income, taxes payable and accrued expenses.

Net cash used by operating activities in the year ended July 31, 2000 was
$986,660 compared to $2,441,231 in the prior year period. The decrease in cash
used by operations was a result of improved profits, increased accounts
receivables collections, and increased payables due to higher sales volume as
discussed above. The Company's inventory increased due to purchases to support
additional sales.

Net Cash Used in Investing Activities:
Net cash used in investing activities increased to $1,064,258 for the year ended
July 31, 2001 from $905,254, primarily due to equipment purchases and capital
improvements for the Company's new location in New Bedford, Massachusetts.

Net cash used in investing activities decreased to $905,254 for the year ended
July 31,2000 from $4,656,445 in the prior year period primarily due to the
purchase of inventory from Rosen during the prior period. In the 2000 the most
significant expenditure related to the purchase of additional equipment for the
Company's candy line in Rhode Island.

Net Cash Used by Financing Activities:
Net cash used by financing activities was $810,711 compared to cash provided of
$1,875,620 in prior period where primarily due to reduced reliance on borrowings
on the Company's line of credit to finance working capital needs and repayments
against our credit facility and debt. At July 31, 2001 and 2000, the Company had
borrowed $3,842,297 and $4,119,000 under the line of credit and had $ 0.00 and
$1,667,881 in letters of credit outstanding.

The Company has availability of approximately $16,000,000 of its $20,000,000
line of credit to meet additional seasonal needs to purchase and manufacture
inventory available.

Net cash provided from financing activities in the year ended July 31, 2000
increased to $1,875,620 from $1,667,678 for the prior year period. During the
current year, financing came from additional borrowings on the Company's Line of
credit to finance working capital needs.

Principal payments for the Company's long term debt for the year ended July 31,
2001 and 2000 were $534,008 and $305,000 respectively. The Company believes that
cash provided by operations will be sufficient to finance its operations and
fund debt service requirements.

                                      -14-

<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

ACCOUNTING POLICIES AND MARKET RISKS ASSOCIATED WITH DERIVATIVE INSTRUMENTS

The Company utilizes certain derivative instruments, from time to time, foreign
currency forward contracts and currency exchange rate market price risk
exposures. Foreign currency contracts are entered into for periods consistent
with related underlying exposures and do not constitute positions independent of
those exposures. The Company does not hold or issue derivative instruments for
trading purposes and is not a party to any instruments with leverage or
prepayment features. In entering into these contracts, the Corporation has
assumed risk, which might arise from possible inability of counter-parties to
meet the terms of their contracts. The Company does not expect any losses as a
result of counter-party defaults.

Foreign Exchange Contracts

The Company enters into foreign exchange forward contracts to hedge transactions
primarily related to firm commitments to purchase its contract manufactured
products from foreign manufactures under terms that provide for payment of goods
in foreign currency approximately 60 to 90 days from invoice date. Purchases of
COWS butter toffee candies and other candies from manufacturers located in
Argentina are paid in U.S. dollars. Purchases of RUGER wafers, ELANA Belgian
chocolate products and Zed Gum Specialty Gum products are purchased from
manufacturers located in Austria, Belgium and Ireland respectively, and are paid
for in Euros.

In the fourth quarter of fiscal 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133) at the time it executed a foreign exchange forward
contract to purchase 1.2 million Euros. In accordance with SFAS 133, as amended,
the Company marked the contract to market as of July 31, 2001 and recorded the
loss, net of tax, of $18,270 in other comprehensive income since the Company
designated the contract as a cash flow hedge.

SEASONALITY

The Company's sales typically increase during the first and fourth quarters of
the calendar year principally due to the holiday seasons.

INFLATION

The Company does not believe that inflation has had a significant impact on the
Company's results of operations for the periods presented.

NEW ACCOUNTING PRONOUNCEMENTS

In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 which summarizes certain of the SEC staff's views in
applying accounting principles generally accepted in the United States of
America to revenue recognition in financial statements. The Staff Accounting
Bulletin is effective for the year beginning August 1, 2000. The initial
adoption of the guidance did not have a material impact on the Company's results
of operations or financial position, however, the guidance may impact the way in
which the Company will account for future transactions.

In March 2000, the FASB issued interpretation No 44 ("FIN 44"), "Accounting for
Certain Transaction Involving Stock Compensation, an Interpretation of APB
Opinion NO. 25". FIN 44 clarifies the application of APB NO. 25 for (a) the
definition of employee for purposes of applying APB 25, (b) the criteria for
determining whether a plan qualifies as a non compensatory plan, (c) the
accounting consequences of various modifications to the previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 was effective July 1, 2000 but certain
conclusions cover specific events that occur after either December 15, 1998 or
January 12, 2000. The adoption of FIN 44 did not have a material effect on the
Company's financial statements.

In June 2001, the FASB issued Statements of Financial Accounting Standards No.
141, "Business Combinations" (SFAS No. 141), and No. 142, "Goodwill and Other
Intangible Assets" (SFAS No. 142). SFAS No. 141 changes the accounting for
business combinations, requiring

                                       -15-

<PAGE>

that all business combinations be accounted for using the purchase method and
that intangible assets be recognized as assets apart from goodwill if they arise
from contractual or other legal rights, or if they are separable or capable of
being separated from the acquired entity and sold, transferred, licensed,
rented, or exchanged. SFAS No. 141 is effective for all business combinations
initiated after June 30, 2001. SFAS No. 142 specifies the financial accounting
and reporting for acquired goodwill and other intangible assets. Goodwill and
intangible assets that have indefinite useful lives will not be amortized but
rather will be tested at least annually for impairment. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001.

SFAS No. 142 requires that the useful lives of intangible assets acquired on or
before June 30, 2001 are reassessed and the remaining amortization periods
adjusted accordingly. Previously recognized intangible assets deemed to have
indefinite lives shall be tested for impairment. Goodwill recognized on or
before June 30, 2001, shall be assigned to one or more reporting units and shall
be tested for impairment as of the beginning of the fiscal year in which SFAS
No. 142 is initially applied in its entirety.

Presently the Company is identifying and evaluating potential target companies
with the objective of completing an acquisition in fiscal 2002. If the Company
completes such a transaction, it will apply the new guidelines for accounting
for business combinations and goodwill effective with the closing date.

ITEM 8.   FINANCIAL STATEMENTS

The following consolidated financial statements of the Company and Subsidiaries
and the report of independent certified public accountants thereon are set forth
on pages 23 through 41 hereof.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE

         None.

                                      -16-

<PAGE>

                                  PART III.

ITEM 10.     DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
            COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

DIRECTORS AND EXECUTIVE OFFICERS

The following are the directors and executive officers of the Company, as well
as certain other key employees of the Company:

<TABLE>
<CAPTION>
NAME                                   AGE      POSITION
---------------------------------     ------    -------------------------------------------
<S>                                   <C>       <C>
Uziel Frydman ..................        65      Chairman, President and Chief Executive Officer

Anat Schwartz ..................        41      Executive Vice President - Finance and Secretary

Amir Frydman ...................        39      Director, Treasurer and Executive Vice President -
                                                   Marketing and Product Development

Douglas A. Cummins .............        59      Director

Jean E. Clary ..................        58      Director

Jason Adelman ..................        32      Director

Eric A. Richman.(1) ............        51      Vice President - Operations

Paul J. Splitek.(1) ............        52      Vice President - Sales

Christopher J. Willi.(1) .......        41      Chief Financial Officer

Arthur Wlodarski.(1) ...........        45      Vice President - Purchasing
</TABLE>

(1) Messrs. Richman, Woldarski, Willi and Splitek are key employees, but not
executive officers of the Company.

UZIEL FRYDMAN has been the President and Chief Executive Officer of the Company
and each of its subsidiaries since inception. Mr. Frydman has served as the
Chairman of the Board of Directors of the Company since December 1997. Mr.
Frydman served as Director of Marketing and Planning Sciences at R.J. Reynolds
Tobacco Company from 1977 to 1980, and prior to that, as Manager, Planning and
Operations Improvement at Lever Brothers Company from 1971 to 1977. He also
served as Projects Manager at Sperry & Hutchinson Company and as an independent
consultant to local governments in Turkey, Burma and Sierra Leone from 1962 to
1965. Mr. Frydman was an adjunct professor at the Graduate School of Business at
Rutgers University from 1970 to 1975. Mr. Frydman earned a Masters of Business
Administration, Management Science degree from Case Western Reserve University
in 1968 and a Bachelor of Science degree in Civil Engineering from Technion
Institute of Technology, Haifa, Israel in 1960. Mr. Frydman is the father of
Anat Schwartz and Amir Frydman.

ANAT SCHWARTZ has been Executive Vice President - Finance and Secretary of the
Company since January 1996 and Sherwood Brands, LLC (and its predecessors) since
1988, and has been a director of Sherwood Brands Overseas, Inc. since 1993.
Prior to joining the Company, Ms. Schwartz served as Manager - Loan
Syndication's and Asset Sales for the Bank of Montreal in 1988 and as Team
Leader - Communications/Media Group and Account Officer for such banks
Southeastern United States region from 1983 to 1988. Ms. Schwartz earned a
Masters of Business Administration, Finance/Health Care degree from Bernard
Baruch College in 1983 and a Bachelor of Arts degree from Wake Forest University
in 1981. Ms. Schwartz is the daughter of Uziel Frydman and the sister of Amir
Frydman.

AMIR FRYDMAN has been a director of the Company and has served as Treasurer and
Executive Vice President - Marketing and Product Development since 1985. Prior
to joining the Company, Mr. Frydman was Commercial Branch Manager at NCNB
National Bank of Florida, from 1984 to 1985. Mr. Frydman earned a Bachelor of
Arts degree from the University of North Carolina in 1983. Mr. Frydman is the
son of Uziel Frydman and the brother of Anat Schwartz.

                                      -17-

<PAGE>

DOUGLAS A. CUMMINS has been a director of the Company since December 1997. In
1996, Mr. Cummins served as President and Chief Executive Officer of the Liggett
Group, a manufacturer and distributor of cigarettes. From 1993 to 1996, Mr.
Cummins served as President and Chief Executive Officer of North Atlantic
Trading Co, a cigarette paper manufacturer and distributor. From 1990 to 1993,
Mr. Cummins served as the President and Chief Executive Officer of Decision
Marketing, an advertising and consulting firm. From 1984 to 1990, Mr.
Cummins served as the President and Chief Operating Officer of Salem Carpet
Mills, a carpet manufacturer, and from 1981 to 1984, served as President of
Stellar Group, a consulting firm. From 1973 to 1981, Mr. Cummins was Director of
Marketing - International and Vice President - Foods Marketing at R.J. Reynolds
Industries. Mr. Cummins currently sits on the Boards of Carolina Biological
Supply Company, Smokey Mountain Products, Inc. and the Fort Ticonderoga
Association. Mr. Cummins earned a Masters of Business Administration degree from
Columbia University in 1966 and a Bachelor of Arts degree from Harvard
University in 1964.

JEAN E. CLARY has been a director of the Company since May 1998. Ms. Clary has
been the Chief Executive Officer and President of Century 21 - Clary and
Associates, Inc. since January 1973. Ms. Clary is currently on the Board of
Directors of Virginia Power, a wholly-owned subsidiary of Dominion Resources
Inc., a public company traded on the New York Stock Exchange.

JASON ADELMAN has been a director of the Company since August 1998. Mr. Adelman
is Senior Vice President of Investment Banking at H.C. Wainwright & Co. From
1997 until his employment with H.C. Wainwright in 1999, Mr. Adelman was Managing
Director of Corporate Finance at Drake & Co., Inc. From 1996 to 1997, Mr.
Adelman was affiliated with Spencer Trask Securities, Inc., a New York based
venture capital investment bank. Before that he was with Coopers & Lybrand LLP,
where he worked in the financial services consulting practice from 1994 to 1996.
Mr. Adelman earned his J.D. from Cornell Law School and his B.A. in economics
from the University of Pennsylvania.

ERIC A. RICHMAN has been Vice President of Operations of the Company since
September 1999. Mr. Richman has over 26 years of multi-disciplined manufacturing
experience. Prior to being hired by the Company, Mr. Richman was Director of
Manufacturing of E. Rosen, and prior to that, Plant Manager of E. Rosen. From
1992 to 1996, he was Plant Manger of Richardson Brands Company; from 1989 to
1992, Plant Manager of Conusa Corporation; and from 1973 to 1989, Plant Manager
of Planters Lifesavers Company. Mr. Richman has extensive experience in
manufacturing, management, quality control and labor relations.

PAUL J. SPLITEK has been Vice President of Sales of the Company since September
1999. Mr. Splitek has over 28 years of sales, marketing and manufacturing
experience. From 1996 until being hired by the Company, Mr. Splitek was Vice
President and General Sales Manager of E. Rosen. Prior to joining E. Rosen, from
1991 to 1996, Mr.Splitek was Vice President and General Manager of Mille Lacs MP
Company, a wholesale division of The Wisconsin Cheeseman Inc. ("TWC"), and prior
to that, Operations Manager of TWC.

CHRISTOPHER J. WILLI has been Chief Financial Officer since May 2001. Mr. Willi
has over 19 years of financial and operational experience. Prior to joining
Sherwood Brands he was Chief Financial Officer of CynterCorp, a global IT
service business. From 1992 to 1998, Mr. Willi was Corporate Controller of PGI,
Inc., a global communication services company, where he directed more than a
dozen acquisitions. Prior to that he was Director of Finance for National Trade
Productions, Inc and a Asset Manager with a unit of Canadian Pacific
Corporation. Before that he was with Arthur Anderson & Co., where he worked in
the audit and consulting practice. Mr. Willi earned his J.D. from Southern
Methodist University Law School and his B.S. in accounting and finance from the
University of Utah.

ARTHUR WLODARSKI has been Vice President of Purchasing of the Company since
April 2000. Mr. Wlodarski has over 20 years of purchasing experience. From 1985,
Mr Wlodarski was Vice President of Purchasing of Houston Foods, a leading gift
basket packer responsible for purchasing components and food items from all over
the world.

                                      -18-

<PAGE>

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
certain officers, directors, and beneficial owners of more than ten percent
(10%) of our common stock to file reports of ownership and changes in their
ownership of our equity securities with the Securities and Exchange Commission
and Amex. Based solely on a review of the reports and representations furnished
to us during the last fiscal year, we believe that each of the persons are in
compliance with all applicable filing requirements.

ITEM 11.    EXECUTIVE COMPENSATION

Information concerning the executive compensation of the Company is hereby
incorporated by reference from the Company's definitive proxy statement relating
to its Annual Meeting of Shareholders to be filed by the Company with the
Commission pursuant to Regulation 14A on or before November 29, 2001.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information concerning the security ownership of the Company is hereby
incorporated by reference from the Company's definitive proxy statement relating
to its Annual Meeting of Shareholders to be filed with the Commission pursuant
to Regulation 14A on or before November 29, 2001.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information concerning certain relationships and related transactions of the
Company is hereby incorporated by reference from the Company's definitive proxy
statement relating to its Annual Meeting of Shareholders to be filed by the
Company with the Commission pursuant to Regulation 14A on or before November 29,
2001.

                                      -19-

<PAGE>

                                    PART IV.

ITEM 14.     EXHIBITS, LISTS AND REPORTS ON FORM 8-K

(a) 1. Financial Statements.  The following financial statements, related notes
and the Report of Independent Auditors, are included in response to Item 8
hereof.

                   Index to Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                                            Page
                                                                                            ----
<S>                                                                                      <C>
Report of Independent Auditors ......................................................... 23 to 24
Consolidated Balance Sheets at July 31, 2001 and 2000 ..................................    25
Consolidated Statements of Operations for the years ended July 31,
2001, 2000 and 1999 ....................................................................    26
Consolidated Statements of Shareholders' Equity for the years ended
July 31, 2001, 2000 and 1999 ...........................................................    27
Consolidated Statements of Cash Flows for the years ended July 31,
2001, 2000 and 1999 ....................................................................    28
Summary of Accounting policies ......................................................... 29 to 31
Notes to Consolidated Financial Statements ............................................. 32 to 41

Schedule II - Valuation and Qualifying Accounts ........................................    24
</TABLE>

Schedules other than those listed above have been omitted because they are not
required or are not applicable, or the required information has been included in
the Consolidated Financial Statements or the Notes thereto.

     (A)      EXHIBITS

<TABLE>
<CAPTION>
   NUMBER                             DESCRIPTION
------------   -----------------------------------------------------------------
<S>            <C>
    3.1        Articles of Incorporation, as amended, of the Registrant.*
    3.2        Bylaws, as amended, of the Registrant.*
    4.1        Form of Registrant's Class A Common Stock Certificate.*
    4.2        Form of Underwriter's Warrant Agreement, including Form of
               Warrant Certificate.*
    4.3        Form of Public Warrant Agreement among the Registrant, Paragon
               Capital Corporation, as Underwriter and Continental Stock
               Transfer & Trust Company, as Warrant Agent.*
    4.4        Form of Registrant's Public Warrant Certificate.*
    10.1       Amended and Restated Reimbursement Agreement between Central
               Fidelity National Bank and the Registrant, dated as of May 1,
               1997.*
    10.2       Loan Agreement between Industrial Development Authority of
               Mecklenburg County, Virginia and the Registrant, dated as of May
               1, 1997.*
    10.3       Irrevocable Letter of Credit dated May 15, 1997 issued on behalf
               of the Registrant to the Trustee for the holders of Industrial
               Revenue Bonds (Series 1997) issued by the Industrial Development
               Authority of Mecklenburg County, Virginia.*
    10.4       Amended and Restated Credit Line Deed of Trust and Security
               Agreement, among the Registrant and Trustees, for the benefit of
               Central Fidelity National Bank dated May 1, 1997.*
    10.5       Pledge and Security Agreement between the Registrant and Central
               Fidelity National Bank, dated as of May 1, 1997.*
    10.6       Guaranty between Uziel Frydman, the Registrant and Central
               Fidelity National Bank, dated as of May 1, 1997.*
    10.7       Loan Agreement between Industrial Development Authority of
               Mecklenburg County, Virginia and the Registrant, dated as of June
               1, 1996.*
    10.8       Irrevocable Letter of Credit dated June 20, 1996 issued on behalf
               of the Registrant to the Trustee for the holders of Industrial
               Revenue Bonds (Series 1996) issued by the Industrial Development
               Authority of Mecklenburg County, Virginia.*
    10.9       Pledge and Security Agreement between the Registrant and Central
               Fidelity National Bank, dated as of June 1, 1996.*
</TABLE>

                                      -20-

<PAGE>

<TABLE>
<S>            <C>
    10.10      Company Loan Agreement between the Industrial Development
               Authority of Mecklenburg County, Virginia Loan Agreement through
               the Virginia Small Business Financing Administration and the
               Registrant, dated as of June 20, 1996.*
    10.11      Revolving Loan Fund Agreement between the Registrant and Lake
               Country Development Corporation, $250,000 Promissory Note to Lake
               Country Development Corporation, Guaranty of Note by the
               Registrant and Uziel Frydman, and Deed of Trust between the
               Registrant and Trustee for Lake Country Development Corporation,
               all dated May 15, 1996.*
    10.12      Loan Agreement, Promissory Note, and Security Agreement between
               the Registrant and First Union National Bank, all dated November
               29, 1996, and Guaranty between Uziel Frydman and First Union,
               dated November 29, 1996.*
    10.13      Promissory Note issued to Ilana Frydman by the Registrant, dated
               August 28, 1991.*
    10.14      Lease, as amended, for the Registrant's Rockville offices,
               executed November 30, 1992.*
    10.15      1998 Stock Option Plan.*
    10.16      Employment Agreement between Registrant and Uziel
               Frydman, dated May 6, 1998.*
    10.17      Form of Employment Agreement between Registrant and Anat
               Schwartz, dated May 6, 1998.*
    10.18      Form of Employment Agreement between Registrant and Amir Frydman,
               dated May 6, 1998.*
    10.19      Receiver's Bill of Sale by Allen M. Shine, as receiver of E.
               Rosen Company, dated September 24, 1998.**
    21.1       Subsidiaries of the Registrant.
    24.1       A power of attorney relating to the signing of amendments hereto
               is incorporated in the signature pages of this Annual Report on
               Form 10-K.
</TABLE>


-------------------------

*  Incorporated herein by reference to the Company's Registration Statement on
Form SB-2, dated as of January 21, 1998 (Registration No. 333-44655)

** Incorporated herein by reference to the Company's Current Report on Form 8-K,
dated as of October 9, 1998.

         (b) REPORTS ON FORM 8-K

                  None

                                      -21-

<PAGE>

                                    SIGNATURES

In accordance with Section 13 and 15(d) of the Securities Exchange Act of 1934,
the Company has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized

                                    SHERWOOD BRANDS, INC.

                                    By: /s/  Uziel Frydman
                                        ---------------------------------------
                                        Uziel Frydman
                                        President and Chief Executive Officer

                                POWER OF ATTORNEY

Each person whose signature appears below on this Annual Report on Form 10-K
hereby constitutes and appoints Uziel Frydman, Anat Schwartz and Amir Frydman,
and each of them, as his true and lawful attorney-in-fact and agent, with full
power of substitution and re-substitution for him or her and in his or her name,
place and stead, in any and all capacities (until revoked in writing) to sign
any and all amendments to this Annual Report on Form 10-K of Sherwood Brands,
Inc. and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact full power and authority to do and perform each and every
act and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, each acting
alone or his substitute, may lawfully do or cause to be done by virtue hereof.

In accordance with the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Company in the capacities
and on the dates stated.

<TABLE>
<CAPTION>
                  SIGNATURES                                  TITLE(S)                              DATE
--------------------------------------------     --------------------------------------      ----------------
<S>                                              <C>                                         <C>
/s/ Uziel Frydman                                President, Chief Executive Officer and      October 29, 2001
--------------------------------------------     Director
Uziel Frydman                                    (principal executive officer)

/s/ Anat Schwartz                                Executive Vice President -- Finance and     October 29, 2001
--------------------------------------------     Secretary
Anat Schwartz                                    (principal accounting officer)

/s/ Amir Frydman                                 Executive Vice President, Treasurer and     October 29, 2001
--------------------------------------------     Director
Amir Frydman

/s/ Douglas A. Cummins                           Director                                    October 29, 2001
--------------------------------------------
Douglas A. Cummins

/s/ Jean Clary                                   Director                                    October 29, 2001
--------------------------------------------
Jean Clary

/s/ Jason T. Adelman                             Director                                    October 29, 2001
--------------------------------------------
Jason T. Adelman
</TABLE>

                                      -22-

<PAGE>

INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT

To the Board of Directors and Stockholders
Sherwood Brands, Inc.

We have audited the accompanying consolidated balance sheets of Sherwood Brands,
Inc. and Subsidiaries as of July 31, 2001 and 2000 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended July 31, 2001. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sherwood Brands,
Inc. and Subsidiaries at July 31, 2001 and 2000 and the results of its
operations and cash flows for each of the three years in the period ended July
31, 2001 in conformity with accounting principals generally accepted in the
United States of America.

                                                                BDO SEIDMAN, LLP

Washington, D.C.
October 5, 2001

                                      -23-

<PAGE>

               Report of Independent Certified Public Accountants'
                         On Financial Statement Schedule

Sherwood Brands, Inc.

The audits referred to in our report to Sherwood Brands, Inc. dated October 5,
2001 which is contained in this form 10-K, include the audit of the financial
statement schedule listed in the accompanying index for each of the three years
in the period ended July 31, 2001. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statement schedule based on the audits.

In our opinion, such schedule presents fairly, in all material respects, the
information set forth therein.

                                                        BDO SEIDMAN, LLP

Washington, D.C.
October 5, 2001





SCHEDULE II

                        VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                        BALANCE BEGINNING    CHARGED TO COSTS                        BALANCE AT END
             DESCRIPTION                    OF PERIOD          AND EXPENSES            DEDUCTION          OF PERIOD
================================================================================================================================
<S>                                     <C>                 <C>                     <C>              <C>
Year ended July 31, 1999
   Allowance for doubtful accounts      $         40,000    $         33,570        $     (5,624)    $       67,946

   Allowance for customer credits       $        386,092    $         94,126        $   (360,242)    $      119,976

Reserve for slow moving inventory       $         40,000    $        255,141        $         -      $      295,141

Year ended July 31, 2000
   Allowance for doubtful accounts      $         67,946    $        201,293        $   (154,239)    $      115,000

   Allowance for customer credits       $        119,976    $        120,096        $         -      $      240,072

Reserve for slow moving inventory       $        295,141    $         19,918        $         -      $      315,059

Year ended July 31, 2001
   Allowance for doubtful accounts      $        115,000    $        272,290        $   (198,690)    $      188,600

   Allowance for customer credits       $        240,072    $            -          $   (156,533)    $       83,539

Reserve for slow moving inventory       $        315,059    $        385,369        $         -      $      700,428
</TABLE>

                                      -24-

<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
For the years ended July 31,                                 2001            2000
=======================================================================================
<S>                                                        <C>             <C>
                             Assets
Current assets
   Cash and cash equivalents                               $    385,195    $    641,497
   Accounts receivable, less allowance of $189,000
   and $115,000                                               1,977,093       2,094,694
   Inventory                                                 14,709,515      12,683,575
   Income taxes receivable                                           --         407,237
   Other current assets                                         344,568         288,934
   Deferred taxes on income                                     425,000         196,000
=======================================================================================
Total current assets                                         17,841,372      16,311,937

Net property and equipment                                    4,906,350       4,245,848

Other assets                                                     56,391          61,106
=======================================================================================
TOTAL ASSETS                                               $ 22,804,112    $ 20,618,891
=======================================================================================

              Liabilities and Stockholders' Equity

Current liabilities
   Line of credit                                          $  3,842,297    $  4,119,000
   Current portion of long-term debt                            215,000         210,000
   Current portion of subordinated debt                              --         324,593
   Current portion of capital lease obligation                   31,245          31,245
   Accounts payable                                           3,986,845       4,523,899
   Accrued expenses                                           1,558,342       1,032,935
   Income taxes payable                                         722,474          50,000
=======================================================================================
Total current liabilities                                    10,356,203      10,291,672

Long-term debt                                                  550,000         765,000
Capital lease obligation                                        424,917         424,332
Deferred taxes on income                                        244,000         109,000

=======================================================================================
TOTAL LIABILITIES                                            11,575,121      11,590,004
=======================================================================================

COMMITMENTS AND CONTINGENCIES

Stockholders' equity
  Preferred stock, $.01 par value, 5,000,000 shares
  Authorized; no shares issued or outstanding                        --              --
  Common stock, Class A, $.01 par value, 30,000,000
  Shares authorized, 2, 700,000 issued and outstanding           27,000          27,000
  Common stock, Class B, $.01 par value, 5,000,000 shares
  Authorized, 1,000,000 shares issued and outstanding            10,000          10,000
Additional paid-in-capital                                    7,973,538       7,973,538
Retained earnings                                             3,236,724       1,018,349
Accumulated Other Comprehensive Income/(loss)                   (18,270)             --
=======================================================================================
TOTAL STOCKHOLDERS' EQUITY                                   11,228,992       9,028,887
=======================================================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                 $ 22,804,112    $ 20,618,891
=======================================================================================
</TABLE>

See accompanying summary of accounting policies and notes to consolidated
financial statements

                                      -25-

<PAGE>

                      SHERWOOD BRANDS, INC AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
For years ended July 31,                                           2001            2000            1999
===========================================================================================================
<S>                                                            <C>             <C>             <C>
Net sales                                                      $ 58,316,716    $ 42,104,645    $ 25,299,806

Cost of sales                                                    41,796,184      32,183,885      19,218,718
===========================================================================================================
Gross profit                                                     16,520,532       9,920,760       6,081,088

Selling, general and administrative expenses                      8,006,416       6,675,177       4,922,082
Salaries and related expenses                                     4,806,061       3,285,850       2,450,096
Pre-production costs                                                     --              --         213,112
===========================================================================================================
Total operating expenses                                         12,812,477       9,961,027       7,585,290
===========================================================================================================

Income/(Loss) from operations                                     3,708,055         (40,267)     (1,504,202)
===========================================================================================================

Other income (expense)
   Interest income                                                   11,182          36,016          83,258
   Interest expense                                                (539,971)       (434,978)       (153,832)
   Other income (expense)                                           132,209         693,413          (7,821)
===========================================================================================================
Total other income (expense)                                       (396,580)        294,451         (78,395)
===========================================================================================================

Income/(Loss) before provision (benefit) for taxes on income      3,311,475         254,184      (1,582,597)
===========================================================================================================
Provision (Benefit)  for taxes on income                          1,093,100          98,100        (319,700)
===========================================================================================================
Net income (loss)                                              $  2,218,375    $    156,084    $ (1,262,897)
===========================================================================================================
Net Income (loss) per share- basic                             $       0.60    $       0.04    $      (0.34)
                           - diluted                                   0.56            0.04           (0.34)
===========================================================================================================
Weighted average common shares outstanding-basic                  3,700,000       3,700,000       3,700,000
                                          -diluted                3,954,428       3,700,000       3,700,000
</TABLE>

See accompanying summary of accounting policies and notes to consolidated
financial statements.

                                      -26-

<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                           COMMON STOCK

                                  CLASS A              CLASS B                                           ACCUMULATED
                              ===================   =====================
                                                                             ADDITIONAL                 OTHER COMPRE-
                                                                              PAID-IN         RETAINED  HENSIVE INCOME
                              SHARES      AMOUNT     SHARES        AMOUNT     CAPITAL         EARNINGS     (LOSS)          TOTAL
===================================================================================================================================
<S>                           <C>         <C>        <C>          <C>      <C>            <C>           <C>            <C>
Balance, at July 31, 1998    2,700,000   $ 27,000   1,000,000    $  10,000   $ 7,978,777    $ 2,125,162    $      --    $10,140,939

Net loss                            --         --          --           --            --     (1,262,897)          --     (1,262,897)

Offering costs                      --         --          --           --        (5,239)            --           --         (5,239)
===================================================================================================================================
Balance, at July 31, 1999    2,700,000     27,000   1,000,000       10,000     7,973,538        862,265           --      8,872,803

Net income                          --         --          --           --            --        156,084           --        156,084

===================================================================================================================================
Balance, at July 31, 2000    2,700,000     27,000   1,000,000       10,000     7,973,538      1,018,349           --      9,028,887

Foreign Currency (Loss)             --         --          --           --            --             --      (18,270)            --

Net income                          --         --          --           --            --      2,218,375           --             --

Comprehensive Income                --         --          --           --            --             --           --      2,200,105
===================================================================================================================================
Balance, at July 31, 2001    2,700,000   $ 27,000   1,000,000    $  10,000   $ 7,973,538    $ 3,236,724    $ (18,270)   $11,228,992
===================================================================================================================================
</TABLE>

See accompanying summary of accounting policies and notes to consolidated
financial statements.

                                      -27-

<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASHFLOWS

<TABLE>
<CAPTION>
For the years ended July 31,                              2001           2000           1999
=================================================================================================
<S>                                                    <C>            <C>            <C>
Cash flows from operating activities
   Net income (loss)                                   $ 2,218,375    $   156,084    $(1,262,897)
   Adjustments to reconcile net income (loss) to net
   Cash provided by/(used in) operating activities:
      Depreciation expense                                 403,756        226,871        188,795
      Deferred income taxes                                (94,000)        48,100       (349,900)
      (Gain)/loss on foreign currency exchange              (2,519)        (5,574)         5,870
      Provision for Inventory allowance                    385,369         19,918        255,141
      Provision for doubtful accounts                      272,290        201,293         33,570

      (Increase) decrease in assets
      Accounts receivable                                 (154,689)       632,887       (895,321)
      Inventory                                         (2,411,309)    (4,133,913)      (766,428)
      Income taxes receivable                              407,237         78,072       (435,609)
      Other current assets                                 (55,634)       369,430       (530,547)
      Other assets                                           4,715        (32,642)        22,934
      Increase (decrease) in liabilities
        Accounts payable                                  (537,054)     1,666,290        579,800
        Accrued expenses                                   509,656        (49,076)       660,222
        Income taxes payable                               672,474       (164,400)        53,139
=================================================================================================
Net cash provided by/(used in) operating activities      1,618,667       (986,660)    (2,441,231)

=================================================================================================

Cash flows from investing activities
  Inventory purchased from Rosen                                --             --     (4,000,000)
  Capital expenditures                                  (1,064,258)      (905,254)      (656,445)

=================================================================================================
Net cash used in investing activities                   (1,064,258)      (905,254)    (4,656,445)

=================================================================================================

Cash flows from financing activities
   Net borrowings on line of credit                       (276,703)     2,180,552      1,938,448
   Payments on debt                                       (534,008)      (304,932)      (265,531)
   Offering costs                                               --             --         (5,239)
=================================================================================================
Net cash (used in)/provided by financing activities       (810,711)     1,875,620      1,667,678

=================================================================================================
Net (decrease) in cash and cash equivalents               (256,302)       (16,294)    (5,429,998)

=================================================================================================
Cash and cash equivalents, at beginning of period          641,497        657,791      6,087,789

=================================================================================================
Cash and cash equivalents, at end of period            $   385,195    $   641,497    $   657,791

=================================================================================================

Interest Paid                                          $   539,971    $   434,978    $   153,832
Income Taxes Paid                                      $   443,440    $   395,900    $   328,015
</TABLE>

See accompanying summary of accounting policies and notes to consolidated
financial statements.

                                      -28-

<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES
                   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION, ORGANIZATION AND DESCRIPTION OF BUSINESS

The consolidated financial statements include the accounts of Sherwood Brands,
Inc. and its wholly-owned subsidiaries, Sherwood Brands, LLC, Sherwood Brands
Overseas, Inc. ("Overseas") and Sherwood Brands of RI, Inc. (collectively, the
"Company"). All material inter-company transactions and balances have been
eliminated in consolidation.

Sherwood Brands, Inc. was incorporated in December 1982 in the state of North
Carolina. Sherwood Brands, Inc. is engaged in the manufacture, marketing and
distribution of a diverse line of candies, cookies and chocolates. The Company
also manufactures jelly beans, lollipops, biscuits, soft and hard candies and
assembles seasonal gift items including gift baskets. The Company believes that
all of its operations are part of the confectionery industry and it currently
reports as a single industry segment.

Sherwood Brands, Inc. is the owner of Sherwood Brands, LLC, a Maryland limited
liability company. Sherwood Brands, LLC markets and distributes its own line of
confectionery products in the United States.

Overseas (a wholly-owned subsidiary of Sherwood Brands, LLC) was incorporated in
July 1993 in the Bahamas to market and distribute the Sherwood lines of
confectionery products internationally.

Sherwood Brands of RI, Inc. was incorporated in September, 1998 in the state of
Rhode Island. Sherwood Brands of RI, Inc. d/b/a E. Rosen Company is a
manufacturer of hard candies, jelly beans and packer of gift items and baskets.
On September 24, 1998 the Company completed the acquisition of certain assets of
the E. Rosen Company - d/b/a School House Candy Co. ("Rosen"). Rosen was a Rhode
Island manufacturer of hard candy, jelly beans and lollipops and assembled a
variety of holiday gift items including gift baskets. Rosen sold its holiday
gift items to such chains as Wal-Mart, Kmart and CVS. The Company paid $4.0
million in cash for the machinery and equipment, inventory and trade names,
trademarks and customer lists of Rosen. For financial accounting purposes, the
entire purchase price of $4.0 million was allocated to the inventories of raw
material, components and finished product.

CASH EQUIVALENTS

For purposes of the statement of cash flows, the Company considers highly liquid
investments with maturities at original date of acquisition of three months or
less to be cash equivalents.

INVENTORY

Inventory consists of raw materials, packaging materials, components used in
assembly, work-in-process and finished goods and is stated at the lower of cost
or market. Cost is determined by the FIFO (first-in, first-out) method.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is computed using
accelerated and straight-line methods over the estimated useful lives of the
individual assets which range from five to seven years for machinery and
equipment to thirty-nine years for the building.

REVENUE RECOGNITION

Sales are recognized upon shipment of products.

                                      -29-

<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES
             SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INCOME TAXES

Income taxes are calculated using the liability method specified by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes (SFAS
109)." Under SFAS 109, deferred taxes are determined using the liability method
which requires the recognition of deferred tax assets and liability based on
differences between the financial statement and the income tax basis using
presently enacted tax rates.

USE OF ESTIMATES

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

FINANCIAL INSTRUMENTS

Financial instruments of the Company include long-term debt. Based upon current
borrowing rates available to the Company, estimated fair values of these
financial instruments approximate their recorded amounts.

DERIVATIVE FINANCIAL INSTRUMENTS

The Company utilizes derivative financial instruments to reduce foreign currency
risks. The Company does not hold or issue derivative financial instruments for
trading purposes. In June 1998, the Financial Accounting Standards Board
("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which was amended in June 2000 by SFAS No. 138, SFAS No. 133, as
amended, establishes accounting and reporting standards for derivative
instruments and hedging activities. They require that a company recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. Changes in the fair value
of those instruments will be reported in earnings or other comprehensive income
depending on the use of the derivative and whether it qualifies for hedge
accounting. The accounting for gains and losses associated with changes in the
fair value or the derivative, and the effect on the consolidated financial
statements will depend on its hedge designation and whether the hedge is highly
effective in achieving offsetting changes in the fair value of cash flows of the
asset or liability hedged. The Company adopted SFAS 133, as amended in the
fourth quarter of fiscal 2001. See Note 1.

COMPREHENSIVE INCOME

Comprehensive income (loss) is reported on the Consolidated Statements of
Stockholders' Equity and accumulated other comprehensive (loss) is reported on
the Consolidated Balance Sheets. For the company, other comprehensive income
(loss) consists of changes in the fair market value of derivatives. Prior to the
fourth quarter of 2001, the company had no derivative financial instruments or
items of other comprehensive income.

EARNINGS PER SHARE

The Company accounts for earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128). SFAS 128
requires two presentations of earnings per share-"basic" and "diluted". Basic
earnings per share is computed by dividing net income available to common
stockholders for the period by the weighted average number of common shares
outstanding for the period. The computation of diluted earnings per share is
similar to basic earnings per share, except the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potentially dilutive common shares had been issued.

                                       -30-

<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES
             SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

                                                                     Per Share
For the year ended July 31, 2001         Income        Shares        Amount
==============================================================================

Basic earnings per share
Income available to common stockholders  $2,218,375    3,700,000     $0.60
Effect of dilutive stock options                         254,428
Diluted earnings per share               $2,218,375    3,954,428     $0.56
==============================================================================


Basic and dilutive earnings per share are the same during 2000 and 1999 because
the impact of dilutive securities is anti-dilutive.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 which summarizes certain of the SEC staff's views in
applying accounting principles generally accepted in the United States of
America to revenue recognition in financial statements. The Staff Accounting
Bulletin is effective for the year beginning August 1, 2000. The initial
adoption of the guidance did not have a material impact on the Company's results
of operations or financial position, however, the guidance may impact the way in
which the Company will account for future transactions.

In March 2000, the FASB issued interpretation No 44 ("FIN 44"), "Accounting for
Certain Transaction Involving Stock Compensation, an Interpretation of APB
Opinion NO. 25". FIN 44 clarifies the application of APB NO. 25 for (a) the
definition of employee for purposes of applying APB 25, (b) the criteria for
determining whether a plan qualifies as a non-compensatory plan, (c) the
accounting consequences of various modifications to the previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is effective July 1, 2000 but certain
conclusions cover specific events that occur after either December 15, 1998 or
January 12, 2000. The adoption of FIN 44 did not have a material effect on the
Company's financial statements.

In June 2001, the FASB issued Statements of Financial Accounting Standards No.
141, "Business Combinations" (SFAS No. 141), and No. 142, "Goodwill and Other
Intangible Assets" (SFAS No. 142). SFAS No. 141 changes the accounting for
business combinations, requiring that all business combinations be accounted for
using the purchase method and that intangible assets be recognized as assets
apart from goodwill if they arise from contractual or other legal rights, or if
they are separable or capable of being separated from the acquired entity and
sold, transferred, licensed, rented, or exchanged. SFAS No. 141 is effective for
all business combinations initiated after June 30, 2001. SFAS No. 142 specifies
the financial accounting and reporting for acquired goodwill and other
intangible assets. Goodwill and intangible assets that have indefinite useful
lives will not be amortized but rather will be tested at least annually for
impairment. SFAS No. 142 is effective for fiscal years beginning after December
15, 2001.

SFAS No. 142 requires that the useful lives of intangible assets acquired on or
before June 30, 2001 are reassessed and the remaining amortization periods
adjusted accordingly. Previously recognized intangible assets deemed to have
indefinite lives shall be tested for impairment. Goodwill recognized on or
before June 30, 2001, shall be assigned to one or more reporting units and shall
be tested for impairment as of the beginning of the fiscal year in which SFAS
No. 142 is initially applied in its entirety.

                                      -31-

<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. FOREIGN EXCHANGE CONTRACTS

In the fourth quarter of fiscal 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133) at the time it executed a foreign exchange forward
contract to purchase 1.2 million Euros. In accordance with SFAS 133, as amended,
the Company marked the contract to market as of July 31, 2001 and recorded the
loss of $18,270 in other comprehensive income since the Company designated the
contract as a cash flow hedge.

2. INVENTORY

Inventories consist of the following:

For years ended July 31,                          2001            2000
==========================================================================

Raw materials and ingredients                 $  1,195,859    $    546,006
Components used in assembly                      1,564,878       2,389,504
Packaging materials                              2,474,046       1,715,479
Work-in-process and finished product            10,175,160       8,347,645
==========================================================================
                                                15,409,943      12,998,634
Less reserve for inventory allowance              (700,428)       (315,059)
==========================================================================
                                    Total     $ 14,709,515    $ 12,683,575
==========================================================================



3. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

 For years ended July 31,                           2001          2000
==========================================================================

Land                                          $     85,282    $     85,282
Buildings and improvements                       1,879,153       1,782,918
Machinery and equipment                          3,753,331       2,857,792
Furniture and computer equipment                   192,002         123,267
Transportation equipment                            83,914          80,165
==========================================================================
                                                 5,993,682       4,929,424
                 Accumulated depreciation       (1,087,332)       (683,576)
==========================================================================
Total                                         $  4,906,350    $  4,245,848
==========================================================================

Depreciation expense for the years ended July 31, 2001, 2000 and 1999 and was
$403,756, $226,871 and $188,795, respectively.

4. CREDIT FACILITY

In May 2001, the Company entered into a new agreement with First Union National
Bank. The new credit facility is a $20.0 million line of credit to provide
additional working capital to support the Company's additional sales. The line
of credit is available for advances to finance working capital and the issuance
of letters of credit. Advances under the line of credit are based on a borrowing
formula equal to 85% of eligible domestic accounts receivable plus 60% of
eligible finished goods and 30% of eligible components inventory. Borrowings on
inventory are capped based upon the Company's seasonal requirements and are
limited to $9 million. The line of credit is secured by the cash and cash
equivalents, accounts receivable and inventories of Sherwood Brands, Inc. and
its wholly-owned subsidiaries. The line of credit agreement contains various
business and financial covenants, including, among other things, a minimum
tangible net worth, debt service coverage and capital expenditure limits. The
company was in violation of the capital expenditure limits at July 31, 2001, but
has received a waiver from the bank. For the year interest accrued on such
advances at LIBOR plus 2.35% (the rate at July 31, 2001 was 6.09%) and is
payable monthly. The loan agreement expires in June 2004. At

                                      -32-

<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

July 31, 2001, the Company had borrowed $3,842,297 and $4,119,000, respectively
under the line of credit and had $0 in letters of credit outstanding. During the
years ended July 31, 2001, 2000 and 1999, the Company incurred and paid
approximately $475,827, $363,255 and $92,000 of interest expense on the line of
credit, respectively.

Average short term borrowings and the related interest rates are as follows:

<TABLE>
<CAPTION>
   For years ended July 31,                                         2001             2000
============================================================================================
<S>                                                             <C>             <C>
Borrowings under revolving line of credit at year end           $  3,842,296    $  4,119,000
Weighted average interest rate                                          7.92%           7.84%
Maximum month-end balance during period                         $ 10,000,000    $  8,000,000
Average balance during the period                               $  5,524,902    $  4,495,714
</TABLE>

5. LETTERS OF CREDIT

The Company has available an irrevocable letter of credit of $635,000 with a
bank, to be used for payments of principal portions of Virginia Revenue Bonds in
the event the Company defaults on payment. The letter is collateralized by a
first deed of trust and security interest in the Company's land, building and
equipment. The letter of credit expires in 2011. The letter of credit agreement
has a debt to worth and a debt coverage requirement as well as a limitation on
dividends paid and on borrowings. The letter of credit agreement contains
various business and financial covenants, including, among other things, a
minimum debt coverage.

In addition, the Company has available another irrevocable letter of credit of
$130,000 with a bank, to be used for payment of principal portions of Virginia
Revenue Bonds in the event the Company defaults on payment. The letter is
collateralized by a first deed of trust in the Company's commercial property as
well as a lien on certain assets of the Company. This letter of credit expires
in 2002.

6. LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
  For years ended July 31,                                                               2001           2000
===============================================================================================================
<S>                                                                                 <C>             <C>
Mecklenberg County, Virginia Variable Rate Demand Revenue Bonds issued
  on June 1, 1996; collateralized by an irrevocable Letter of credit
  (see Note 5); payable in varying annual amounts; To be redeemed in
  whole by June 1, 2011; interest at variable
  Market tax exempt rates (4.40% at July 31, 2001).                                 $   635,000     $  715,000

Mecklenberg County, Virginia Revenue Bond issued on May 15, 1997;
  collateralized by an irrevocable letter of credit (see Note 5);
  payable in varying annual amounts; to be redeemed In whole by May 15, 2002;
  interest at variable market tax
  Exempt rates (4.40% at July 31, 2001).                                                130,000        260,000

================================================================================================================
                                                                                        765,000        975,000
Less current maturities                                                                (215,000)      (210,000)
================================================================================================================
Long-term portion                                                                   $   550,000     $  765,000
================================================================================================================
</TABLE>

The scheduled maturities of long-term debt are as follows:

<TABLE>
<CAPTION>
                                                                                       AMOUNT
================================================================================================================
<S>                                                                                 <C>
Fiscal years ending July 31,
2002                                                                                $    215,000
2003                                                                                      90,000
2004                                                                                      40,000
2005                                                                                      45,000
2006                                                                                      50,000
Thereafter                                                                               325,000
================================================================================================================
                           Total                                                    $    765,000
================================================================================================================
</TABLE>

                                      -33-

<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. SUBORDINATED DEBT

Subordinated debt consists of the following:

<TABLE>
<CAPTION>
   For years ended July 31,                                                          2001            2000
====================================================================================================================
<S>                                                                             <C>             <C>
Mecklenberg County, Virginia Industrial Development Authority Note;
  collateralized by second deed of trust on land, building and Equipment;
  payable in monthly installments of $4,644, including Interest of 7%, with a
  final payment of $239,193 due in June, 2001.                                  $     -----     $    266,134

Lake Country Development Corporation Note; collateralized by
  Second deed of trust on land, building and equipment; payable in
  monthly installments of $5,480, including interest of 5.25%
  Beginning on April 1, 1997 and payable in full on June 1, 2001.                     -----           58,459
====================================================================================================================

                                                                                      -----          324,593
Less current maturities                                                               -----         (324,593)
====================================================================================================================

Long-term portion                                                               $     -----     $      -----
====================================================================================================================
</TABLE>

On June 2001 the subordinated notes was paid in full.

8. CAPITAL LEASE OBLIGATION

In May 2000 the Company entered into a capital lease agreement with the New
Bedford Redevelopment Authority to lease a 430,000 square foot building in New
Bedford, Massachusetts. The facility will be used for assembly and storage of
components. Under the terms of the lease the Company paid $400,000 up front and
has commitments to pay rent of $25,000 per annum for years one and two and
$41,666.66 per annum for years three to twenty. The Company has the option to
purchase the building at any time during the lease for $1,200,000 less any
amounts of rental payments made. Buildings and improvements includes $855,577,
less amortization of $3,590 and $1,795 for the year ended July 31, 2001 and
2000, respectively. Lease amortization is included in depreciation expense.

Future minimum payments under the capital lease are as follows:

<TABLE>
<CAPTION>
                                                                                      AMOUNT
======================================================================================================================
<S>                                                                               <C>
Fiscal years ending July 31,
2002                                                                              $       31,245
2003                                                                                      41,667
2004                                                                                      41,667
2005                                                                                      41,667
2006                                                                                      41,667
Thereafter                                                                               570,834
======================================================================================================================
                             Total                                                $      768,747
                             Less amount representing interest                          (312,585)
======================================================================================================================
                             Present value of net minimum lease payments          $      456,162
======================================================================================================================
</TABLE>

9. STOCK TRANSACTIONS

In November 1997, the Company adopted the 1998 Stock Option Plan (the "Plan").
Under the plan, the Company may grant qualified and nonqualified stock options
to selected employees, consultants and directors. Options vest over a three year
period and have a ten year life. The Company had reserved 350,000 shares of
common stock for issuance under the Plan. In August 2000, the Board of Directors
approved increasing the number of shares available by 750,000 for a total of
1,100,000 as part of the Company's ongoing Employee Incentive Compensation Plan.


                                      -34-

<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table relates to options activity in 1999, 2000 and 2001 under the
Plan:

<TABLE>
<CAPTION>
                                                                                    Weighted average
                                                                       Number      Exercise price per
                                                                     of Shares            Share
                                                                    ===========    ==================
            <S>                                                     <C>            <C>
            Options outstanding at July 31, 1998                       143,750            $ 5.95
            Granted                                                     10,000            $ 5.95
            Cancelled                                                      ---            $ ---
            =========================================================================================

            Options outstanding at July 31, 1999                       153,750            $ 5.95
            Granted                                                    146,500            $ 3.00
            Cancelled                                                  (10,000)           $ 5.95
            =========================================================================================

            Options outstanding at July 31, 2000                       290,250            $ 4.46
            Granted                                                    624,918            $ 1.67
            Cancelled                                                      ---            $ ---
            =========================================================================================

            Options outstanding at July 31, 2001                       915,168            $ 2.56
            =========================================================================================

            Options exercisable at July 31, 2001                       657,951            $ 2.68
            =========================================================================================
</TABLE>

A summary of stock options outstanding and exercisable as of July 31, 2001 is as
follows:

<TABLE>
<CAPTION>
                                 Options Outstanding                                              Options Exercisable
======================================================================    ==================================================
                                                        Weighted           Weighted                            Weighted
 Range of                                               Average            Average                             Average
 Exercise                           Number              Remaining          Exercise         Number             Exercise
 Price                              Outstanding         Life (years)       Price            Exercisable        Price
============================================================================================================================
<S>                                 <C>                 <C>                <C>              <C>                <C>
       $ 1.63 To       $ 1.63         599,418                9.0           $1.63             454,868              $1.63
       $ 2.31 To       $ 3.10         172,000                8.2           $2.97              59,333              $2.88
       $ 5.95 To       $ 5.95         143,750                6.7           $5.95             143,750              $5.95
</TABLE>

The options under the Plan granted in fiscal 1999 expire in March 2008, those
granted in fiscal year 2000 expire August 2, 2009 and those granted in fiscal
year 2001 expire April 2010.

The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS

                                      -35-

<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

123"), but it continues to measure compensation cost for the stock options using
the intrinsic value method prescribed by APB Opinion No. 25. As allowable under
SFAS 123, the Company used the Black-Sholes method to measure the compensation
cost of stock options granted in 2001, 2000 and 1999 with the following
assumptions: Risk-free interest rate of 6.00%, 6.00% and 5.11%, a dividend
payout rate of zero, and an expected option life of ten years, respectively. The
volatility is 75%. Using these assumptions, the fair value of stock options
granted during fiscal 2001 is $2.56.

There were no adjustments made in calculating the fair value to account for
vesting provisions, for non-transferability or risk of forfeiture. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

If the Company had elected to recognize compensation cost based on the value at
the grant dates with the method prescribed by SFAS 123, net income and earnings
per share would have been changed to the pro forma amounts indicated in the
following table:

<TABLE>
<CAPTION>
For years ended July 31,                                             2001            2000              1999
============================================================================================================
<S>                                                            <C>              <C>             <C>
Net Income/(loss)
    As Reported                                                $2,218,375       $ 156,084       $(1,262,897)
    Pro Forma                                                   1,711,375         (12,609)       (1,345,484)
============================================================================================================

Basic Income/(loss) per Common Share:
    As Reported                                                $     0.60       $    0.04       $     (0.34)
    Pro Forma                                                        0.46           (.003)            (0.36)

============================================================================================================

Diluted income/(loss) per Common Share:
   As reported                                                 $     0.56       $   (0.34)      $      0.04
   Pro Forma                                                         0.43          (0.003)            (0.36)
===========================================================================================================
</TABLE>

                                      -36-

<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company has issued and outstanding 775,000 warrants to purchase shares of
Class A common stock. The warrants are exercisable at $7.50 and expire on May 6,
2003.

11. INCOME TAXES

The provisions for income taxes was as follows:

<TABLE>
<CAPTION>
For the years ended July 31,                                                 2001             2000            1999
====================================================================================================================
<S>                                                                       <C>              <C>            <C>
Current tax provisions (benefit):
       Federal                                                            $  956,400       $ 39,000       $(151,800)
       State                                                                 230,700         11,000         (32,400)
       IRS Examination                                                          ----           ----         214,400
====================================================================================================================

   Current provision for income taxes                                      1,187,100         50,000          30,200
====================================================================================================================

Deferred Tax                                                                 (94,000)        48,100        (349,900)
====================================================================================================================

Total provision on income taxes                                           $1,093,100       $ 98,100       $(319,700)
====================================================================================================================
</TABLE>

During 1999, the IRS examined the tax returns for Sherwood Brands, Inc. and
Sherwood Brands Overseas, Inc. for the tax years ended July 31, 1995 to July 31,
1997. The IRS proposed an adjustment, which the Company contests. The Company
does not agree with the IRS position and is currently considering what actions
it will take in the future to argue the case.

                                      -37-

<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The tax effects of the significant temporary differences, which comprised the
deferred tax assets and liabilities, were as follows:

<TABLE>
<CAPTION>
For the years ended July 31,                                                 2001           2000
====================================================================================================
<S>                                                                       <C>            <C>
Deferred tax assets
  Purchase price allocation of fixed assets                               $  167,000     $  223,000
  Officers salary payable                                                     21,000         13,000
  Allowance for doubtful accounts and customer credits                       100,000        118,000
  Inventory obsolescence reserve                                             257,000        110,000
  Other                                                                       47,000         36,000
====================================================================================================

               Total deferred tax assets                                     592,000        500,000
====================================================================================================

Deferred tax liabilities
     Accumulated depreciation                                               (411,000)      (332,000)
     Purchase price allocation of inventory                                    -----        (41,000)
     Accounts receivable service costs                                         -----        (40,000)
     Settlement receivable                                                     -----          -----
====================================================================================================

                Total deferred tax liabilities                              (411,000)      (413,000)
====================================================================================================


Net deferred tax asset (liability)                                        $  181,000     $   87,000
====================================================================================================

Net current deferred tax asset                                            $  425,000     $  196,000
====================================================================================================

Net long-term deferred tax asset (liabilities)                            $ (244,000)    $ (109,000)
====================================================================================================
</TABLE>


The following summary reconciles taxes at the federal statutory rate with
recorded tax expense (benefit):

<TABLE>
<CAPTION>
For the years ended July 31,                                                    2001           2000            1999
====================================================================================================================
<S>                                                                       <C>             <C>             <C>
Income taxes at statutory rate
Increase (decrease) in taxes resulting from:                              $1,125,900      $ 86,400        $(538,000)
 Effect of untaxed income from foreign subsidiary                            (22,500)       (4,200)          40,000

 IRS Examination                                                               -----        ------          214,400

 State and local taxes, net of federal income tax  benefits                  120,500        ------            -----

 State, net operating losses and credits used                               (136,700)       11,000          (79,000)
 Other                                                                         5,900         4,900           42,900
====================================================================================================================

           Total provision (benefit for taxes)                            $1,093,100      $ 98,100        $(319,700)
====================================================================================================================
</TABLE>

                                      -38-

<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. COMMITMENTS AND CONTINGENCIES

The Company leases office space in Maryland, and office, warehouse and
manufacturing facilities in Rhode Island. Rental expense under these leases
aggregated approximately $530,637, $674,960 and $309,611 for the years ended
July 31, 2001, 2000 and 1999, respectively. The lease for office space in
Rockville, MD is subject to annual increases based upon both certain allocated
operating costs and increases in the Consumer Price Index.

The Company is from to time to time involved in litigation incidental to the
conduct of its business. The Company is currently involved in several legal
proceedings involving intellectual property rights, collection of receivables,
and other matters. The Company does not believe that the outcome of these
matters would materially affect the Company's operations. There can be no
assurance that the Company will not be a party to other litigation in the
future.

Future minimum rental commitments under operating leases as of July 31, 2001 are
summarized in the following table:

<TABLE>
<CAPTION>
               YEARS ENDED JULY 31,                                 AMOUNT
================================================================================
<S>                                                              <C>
                     2002                                        $  704,119
                     2003                                           711,126
                     2004                                           212,850
                     2005                                           115,916
                     2006                                           115,916
                    Thereafter                                      361,296
================================================================================
                     Total                                       $2,221,223
================================================================================
</TABLE>


The Company is currently negotiating a renewal lease on its properties in Rhode
Island.

The Company has entered into employment agreements with the Chief Executive
Officer, Executive Vice President-Finance and Secretary, and the Executive Vice
President - Marketing and Product Development and Treasurer. The agreements were
renewed and amended on August 1, 2001.

13. EMPLOYEE BENEFIT PLANS

Effective January 15, 1987, the Company established a profit-sharing plan and a
money purchase pension plan covering all full-time employees meeting the minimum
age and service requirements. Under the terms of the Money Purchase Pension
Plan, the Company contributed 5.7% of total wages in the year ended July 31,
1997.

The Money Purchase Pension Plan was terminated and the assets were merged with
the 401(k) Plan. All participants in the Money Purchase Pension Plan were fully
vested in the 401(k) Plan as of August 1, 1997. There were no contributions made
in 2001, 2000 and 1999.

14. SUPPLEMENTAL CASH FLOWS DISCLOSURE

A Building acquired through a capital lease amounted to $456,162 for the year
ended July 31, 2000.

                                      -39-

<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15. CONCENTRATION OF CREDIT RISK AND EXPORT SALES

The Company currently purchases most of its contract-manufactured products from
third-party sources located in Argentina, Austria, Belgium, Ireland and Holland.
The Company has a variety of customers, including mass merchandisers, drug
stores and grocery stores throughout the United States and abroad. For the year
ended July 31, 2001 two customers accounted for approximately 27% and 14% of the
Company's net sales. For the year ended July 31, 2000 one of these customer
accounted for approximately 15% of the Company's total net sales.

16. PRE-PRODUCTION COSTS

During the year ended July 31, 2001 and 2000 the Company did not incur any
pre-production costs. During the year ended July 31, 1999, the Company incurred
$213,112 costs relating to the development of its production facilities for its
Demitasse(R) and candy product lines in Chase City, VA. These costs consist of
parts and supplies, assembly salaries, sub-contract labor, and direct labor.

17. ADVERTISING COSTS

Advertising costs, included in selling, general and administrative expenses, are
expensed as incurred and were $979,691, $716,436 and $698,498 for the years
ended July 31, 2001, 2000 and 1999, respectively.

18. ACCRUED EXPENSES

Accrued expenses consist of the following:

                                                July 31,
                             =====================================
                                         2001               2000
                             =====================================
Payroll                                 311,744           330,160

Payroll benefits                        201,071           176,722

Bonuses                                 500,000             ----

Professional fees                        75,000            68,250

Commissions                              42,500            99,392

Inventory costs                         162,084           139,985

Personal property taxes                 136,107           122,884

Water and sewer                          41,481            54,937

Other                                    88,355            40,605

==================================================================
Total                                 1,558,342         1,032,935
==================================================================

                                      -40-

<PAGE>

19. QUARTERLY DATA

Summary quarterly results were as follows:

<TABLE>
<CAPTION>
                                            Quarter
Year 2001                                    First              Second                Third            Fourth
================================================================================================================
<S>                                      <C>                 <C>                   <C>               <C>
Net Sales                                $ 19,733,398        $20,823,008           $14,010,737       $3,749,573
Gross Profit                                6,201,022          6,380,230             3,007,557          931,723
Net Income (loss)                           1,486,118            938,497               296,563         (502,803)
Basic earnings (loss) per share          $       0.40        $      0.25           $      0.08       $    (0.13)
Diluted earnings (loss) per share        $       0.39        $      0.24           $      0.08       $    (0.15)

<CAPTION>
                                           Quarter
Year 2000                                   First              Second                 Third            Fourth
================================================================================================================
<S>                                      <C>                 <C>                   <C>               <C>
Net Sales                                $ 12,865,846        $10,161,858           $14,365,353       $4,711,588
Gross Profit                                3,969,429          2,819,716             2,415,515          716,100
Net Income (loss)                           1,206,989           (127,705)             (186,517)        (736,683)
Basic earnings (loss) per share          $       0.33        $     (0.03)           $    (0.05)      $    (0.21)
Diluted earnings (loss) per share        $       0.33        $     (0.03)           $    (0.05)      $    (0.21)
</TABLE>

                                      -41-

<PAGE>

Exhibit Index

Exhibit No.            Description
-----------            -----------

21.1                   Subsidiaries of the Registrant.