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

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


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


     For the fiscal year ended July 31, 2000 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-B 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-KSB or any
amendment to this Form 10-KSB. (X)

         The issuer's revenues for the fiscal year ended July 31, 2000 were
$42,104,645.

         The aggregate market value of the voting stock held by non-affiliates
of the issuer as of October 24, 2000 (computed by reference to the last reported
sale price of the registrant's Common Stock on the American Stock Exchange on
such date) was $2,906,250.

         The number of shares outstanding of issuer's Class A Common Stock, $.01
par value per share, as of October 24, 2000 was 2,700,000.

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-KSB.

<PAGE>

                                     PART I.

ITEM 1.     DESCRIPTION OF BUSINESS

GENERAL

         Sherwood Brands, Inc. (the "Company") is engaged in the manufacture,
marketing and distribution of a diverse line of brand name candies, cookies, and
chocolates. The Company manufactures jelly beans, lollipops, biscuits, soft and
hard candies and assembles seasonal gift items including gift baskets. 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.

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 $15.2
billion in 1998. The Chocolate Manufacturers Association/National Confectioners
Association has estimated that total retail sales of confectionery products in
the United States in 1998 were approximately $23.5 billion, and industry trade
reports project continued growth in these markets into the next century. Despite
such growth, the United States ranks only ninth in per capita candy consumption
among the industrialized nations. 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 the market is otherwise 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.

                                       -2-
<PAGE>

PRODUCTS

     CONTRACT MANUFACTURED CANDY, COOKIES AND CHOCOLATES

         The following is a description of the Company's products 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 LOLLIPOPS is a new product first
introduced in the fall of 1997. 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 in a variety of flavors sold in 3 oz. and 12 oz. bags
and distributed in a variety of packages.

         RUGER(R) WAFERS: RUGER wafers is a line of wafer cookie available in
three flavors: chocolate, vanilla, and strawberry and in two sugar free
varieties. RUGER wafers are offered in a 7oz. grocery size as well as a 2 1/8
oz. size in two different shapes in order to assure a proper fit in vending
machine slots. 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, White Truffle,
Honey Almond, Crispers, and Almonds, and are offered in two sizes (25 grams and
45 grams) for retail stores and vending, and also in a variety of package
combinations.

         COUNTDOWN TO CHRISTMAS(TM) CHOCOLATE CALENDARS: COUNTDOWN TO CHRISTMAS
chocolate calendars are recently introduced 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 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 and containing
removable/reusable stickers with expressions of love and friendship. They are
offered in two sizes of mesh bags and in bulk, and marketed primarily for
Valentine's Day.

                                       -3-
<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 specifically 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 Easter.

     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 and
Holland. 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.

                                       -4-

<PAGE>

         The Company has entered into agreements with the manufacturers of
ELANA(R) Belgian chocolates, 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.

         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, Bradlees, Target, Dollar General, K-Mart,
Wal-Mart, Dollar Tree and 99 Cents Only stores. For the year ended July 31,
2000, WalMart comprised 15.4% of the Company's total sales. For the year ended
July 31, 1999, Sam's Club comprised 12.1% of the Company's total 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
sales. For the year ended July 31, 2000, sales of the Company's products in
foreign markets accounted for approximately 1.4% of the Company's total
revenues.

         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%) and are generally responsible in
their respective geographic markets for identifying customers, soliciting

                                       -5-
<PAGE>

customer orders and inspecting merchandise on store shelves. For the fiscal year
ended July 31, 2000, 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 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. 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 two assembly
facilities, and recently entered into a capital lease arrangement for a new
facility which will be used for assembly.

           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 75 skilled and unskilled
workers. The facility is certified kosher by the Orthodox Union. In Virginia,
the Company also has 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 658,000 square feet of improved real
estate in Pawtucket and Central Falls, RI. The property is used for the
manufacture of hard and soft candy (120,000 square feet), assembly of holiday
gift items and inventory storage (531,000 square feet) and office space (7,000
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 350 full-time
employees and 200 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, Massachusetts. 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.

                                       -6-


<PAGE>

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, 2000, the
Company spent approximately $716,000 on advertising and product promotion.

         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.

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 such 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 Foods 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 breadth or degree of protection which trademarks
may afford the Company or that any trademark applications 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

                                 -7-
<PAGE>

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.

EMPLOYEES

         As of October 24, 2000, the Company had approximately 468 full-time
employees and approximately 193 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 67 full and part-time employees
in Virginia and approximately 573 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, 2000, 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>
                                   APPROXIMATE

                                ------------------------
                                 SQUARE       ANNUAL            EXPIRATION
          ADDRESS                  FEET        RENT             OF  LEASE                BUSINESS USE
-----------------------------   ----------  ------------  ----------------------  ----------------------------
<S>                               <C>       <C>           <C>                     <C>
LEASED PROPERTIES:
1803 Research Blvd.                10,000      $125,000   January 31, 2009        Executive and General
Rockville,  MD  20850                                                             Offices

1005 Main Street (1)              250,000       $37,500   October 1, 2000         Manufacturing Plant and
Pawtucket, RI  02860                                                              General Offices

280 Rand Street (1)               500,000      $112,500   October 1, 2000         Assembly Facility,
Central Falls, RI 02863                                                           Storage  and  Distribution
                                                                                  Facilities

27 Healy Street                   430,000   $25,000 (Yr1,2)   June 2020           Assembly facility, Storage
New Bedford, MA                             $41,667 (Yr3-20)                      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>

------------
(1) The Company is currently negotiating an extension of these leases.

                                            -8-
<PAGE>

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, 2000.

                                    PART II.

ITEM 5.     MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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, 1999:
              First Quarter                           $4.00         $2.00
              Second Quarter                          $3.44         $2.25
              Third Quarter                           $4.38         $2.50
              Fourth Quarter                          $3.63         $2.44

         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

         As of October 23, 2000, there were 24 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.

                                   -9-


<PAGE>

ITEM 6.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATIONS

IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

         This Annual Report on Form 10-KSB 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 these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to update or revise the information contained in this Annual Report
on Form 10-KSB, whether as a result of new information, future events or
circumstances or otherwise.

RESULTS OF OPERATIONS

     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
jelly bean 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 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.

                                            -10-

<PAGE>

         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

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, 2000 and
1999 was $6,020,265 and $6,972,533, respectively.

         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 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 current
period the most significant expenditure related to the purchase of additional
equipment for the Company's candy line in Rhode Island.

         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. In June, 1999, the Company
entered into a loan agreement with its primary bank which provides for
borrowings under a line of credit of up to $7.5 million. The agreement was
amended in September, 2000 increasing the line of credit to $12 million to
provide for additional working capital to support the Company's increased sales.
Advances under the line of credit are based on a borrowing formula equal to 80%
of eligible domestic accounts receivable plus 70% of domestically-owned finished
goods and 30% of components eligible inventory. Borrowings on inventory are
capped based upon the Company's seasonal requirements and are limited to $7
million. Advances under the line of credit are further reduced by the aggregate
amount of outstanding letters of credit

                                      -11-


<PAGE>

which may not exceed $2.0 million. Interest for fiscal 2000 accrued on such
advances at a rate of LIBOR plus 1.85% (the rate was amended in the September
agreement to LIBOR plus 2.50%) and is payable monthly. The loan agreement
expires in March 2001. At July 31, 2000, the Company had borrowed $4,119,000
under the line of credit and had $1,667,881 in letters of credit outstanding.
The line of credit is secured by the cash and cash equivalents, accounts
receivable and inventories of Sherwood Brands, Inc., Sherwood Brands, LLC and
Sherwood Brands of RI, Inc. The line of credit agreement contains various
business and financial covenants, including, among other things, a minimum
tangible net worth of $8,800,000 and a funds flow coverage in excess of 1.50.
The Company was in violation of the funds flow covenant at July 31, 2000. The
bank has granted the Company a waiver of this covenant for the periods ending
July 31, 2000 and October 31, 2000. The Company believes that it will be in
compliance with this covenant subsequent to October 31, 2000. In addition to
financial covenants, the Company's loan agreement with the Bank limits or
prohibits the Company, without the Bank's consent, from incurring additional
indebtedness, which could, under certain circumstances, limit the Company's
ability to expand its operations.

         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
Central Fidelity Bank of Virginia ("Fidelity"). Advances on the letters of
credit (which expire June 2006 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 Fidelity and the Company.

         Under the Reimbursement Agreement, the Company makes monthly interest
and sinking fund payments to Fidelity. Interest is calculated at the rate of 10%
per annum. The sinking fund payments for the Series 1996 IRBs are based upon a
15-year straight line amortization of $640,000 advanced for the purchase of the
Chase City facility and a 7-year straight line amortization for approximately
$295,000 advanced for manufacturing equipment. 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 Fidelity's
permission, borrowing additional funds, merging or consolidating, amending its
Articles of Incorporation and repaying subordinated debt.

         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"). The IDAMC Subordinated Note has a five-year
term, amortized over a ten year period at an interest rate of 7% per annum,
payable in monthly installments of $4,644 in principal and interest with a
balloon payment of $239,193 due June 2001. The LCDC Subordinated Note is pari
passu with the IDAMC Subordinated Note in terms of security, and has a five-year
term bearing interest at 5.25% per annum, payable in monthly installments of
interest only for the first nine payments and thereafter payable in equal
monthly payments of $5,480 in principal and interest until June 2001. The IDAMC
Subordinated Note is secured by the Company's equipment and the LCDC
Subordinated Note is secured by the real property, fixtures and equipment
located at the Chase City facility. The Subordinated Notes limit the Company's
capital expenditures, prohibit a change in ownership greater than 50% and
require the Company to create 50 full-time jobs at the Chase City facility
within two years of the date of the Subordinated Notes. The Company has
fulfilled both requirements. The IDAMC loan is personally guaranteed by Uziel
Frydman.

                                      -12-

<PAGE>

         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.

         Principal payments for the Company's long term debt for the year ended
July 31, 2000 were $305,000.

FOREIGN CURRENCY FLUCTUATIONS

         The Company currently purchases its contract manufactured products from
foreign manufactures under terms that provide for the payment of goods in
foreign currency approximately 60 to 90 days from the 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 and ELANA Belgian
chocolates products are purchased from manufacturers located in Austria and
Belgium, respectively, and are paid for in local currencies. These goods are
recorded at cost in equivalent U.S. dollars at the exchange rate in effect on
the invoice date. The difference between the recorded cost and the amount
required for payment is reflected as a realized foreign currency transaction
gain or loss. From time to time, the Company hedges its exposure to foreign
currency rate changes by purchasing forward contracts based upon analysis of
foreign current markets. All sales of the Company's products in foreign markets
are made in U.S. dollars, except for a portion of Canadian sales which are in
Canadian dollars. See Note 1 in Notes to Consolidated Financial Statements.

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 June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS 133") which revises the
accounting for derivative financial instruments. SFAS 133 establishes accounting
and reporting standards for derivative instruments and for hedging activities.
SFAS 133 requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair market value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the change in the fair value of
the hedged asset or liability that are attributable to the hedged risk or
(ii)the earnings effect of the hedged forecasted transaction. For a derivative
not designated as a hedged instrument , the gain or loss is recognized in income
in the period of change. SFAS No. 133, as amended by SFAS No.137 is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. The
Company will be required to adopt SFAS 133 in fiscal year 2001 and believes that
adoption of SFAS 133 will have no impact on its financial position or results of
operations.

         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 noncompensatory 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 2, 2000
but certain conclusions cover specific events that occur after either December
15, 1998 or January 12, 2000. The Company believes that adoption of FIN 44 will
not have an effect on the Company's financial statements but may impact the
accounting for grants or awards in future periods.

                                      -13-
<PAGE>

ITEM 7.     FINANCIAL STATEMENTS

         The Consolidated Financial Statements of the Company, the accompanying
notes thereto and the independent auditor's report are included as part of this
Form 10-KSB and immediately follow the signature page hereof.

ITEM 8.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
            FINANCIAL DISCLOSURE

         None.



                                    PART III.

ITEM 9.     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......................................        64     Chairman, President and Chief Executive Officer

Anat Schwartz......................................        40     Executive Vice President - Finance and Secretary

Amir Frydman.......................................        38     Director, Treasurer and Executive Vice President -
                                                                  Marketing and Product Development

Douglas A. Cummins.................................        58     Director

Jean E. Clary......................................        57     Director

Jason Adelman......................................        31     Director

Eric A. Richman(1).................................        50     Vice President - Operations

Paul J. Splitek(1).................................        51     Vice President - Sales

Arthur Wlodarski(1)................................        44     Vice President - Purchasing

</TABLE>
------------
(1) Messrs. Richman, Woldarski 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 Syndications and Asset Sales for the Bank of Montreal in 1988 and as Team
Leader - Communications/Media Group and Account Officer for such bank's
Southeastern United States region from 1983 to 1988. Ms. Schwartz earned a

                                      -14-
<PAGE>

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.

         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.


                                      -15-


<PAGE>

         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.

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
is in compliance with all applicable filing requirements.

ITEM 10.    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 with the Commission
pursuant to Regulation 14A on or before November 30, 1999.

ITEM 11.    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 30, 1999.

ITEM 12.    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 with
the Commission pursuant to Regulation 14A on or before November 30, 1999.

                                    PART IV.

ITEM 13.          EXHIBITS, LISTS AND REPORTS ON FORM 8-K

         (A)      EXHIBITS

   NUMBER                             DESCRIPTION
------------   -----------------------------------------------------------------
    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.*

                                      -16-

<PAGE>

    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.*

    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      Form of 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.**

    10.20      Form of Employment Agreement between Registrant and Gordon F.
               Nahas, dated August 27, 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-KSB.

    27.1       Financial Data Schedule.

------------
*   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.

*** Incorporated herein by reference to the Company's Annual Report on Form
    10-KSB, dated as of October 30, 1998.

         (b) REPORTS ON FORM 8-K

                  None


                                      -17-
<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-KSB 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 resubstitution for him and in his 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-KSB 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 30, 2000
--------------------------------------------     Director
Uziel Frydman                                    (principal executive officer)

/s/ Anat Schwartz                                Executive Vice President -- Finance and     October 30, 2000
--------------------------------------------     Secretary
Anat Schwartz                                    (principal accounting officer)

/s/ Amir Frydman                                 Executive Vice President, Treasurer and     October 30, 2000
--------------------------------------------     Director
Amir Frydman

/s/ Douglas A. Cummins                           Director                                    October 30, 2000
--------------------------------------------
Douglas A. Cummins

/s/ Jean Clary                                   Director                                    October 30, 2000
--------------------------------------------
Jean Clary

/s/ Jason T. Adelman                             Director                                    October 30, 2000
--------------------------------------------
Jason T. Adelman
</TABLE>

                                      -18-
<PAGE>

                       SHERWOOD BRANDS, INC. AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

                       YEARS ENDED JULY 31, 2000 AND 1999

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

Consolidated Financial Statements

     Consolidated balance sheets.............................................F-3

     Consolidated statements of operations...................................F-4

     Consolidated statements of stockholders' equity.........................F-5

     Consolidated statements of cash flows...................................F-6

     Summary of significant accounting policies.......................F-7 to F-9

     Notes to consolidated financial statements.....................F-10 to F-17

     Valuation and Qualifying Accounts - Schedule II........................F-18


                                      F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
Sherwood Brands, Inc.
   and Subsidiaries
Rockville, Maryland  20850

We have audited the accompanying consolidated balance sheets of Sherwood Brands,
Inc. and Subsidiaries as of July 31, 2000 and 1999 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended. We have also audited the schedule listed in the accompanying index. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. 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 and schedule. 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, 2000 and 1999 and the results of its
operations and cash flows for the years then ended, in conformity with generally
accepted accounting principles. Also, in our opinion, the schedule presents
fairly, in all material respects, the information set forth therein for the
years ended July 31, 2000 and 1999.

                                                                BDO SEIDMAN, LLP

Washington, D.C.
September 29, 2000

                                      F-2
<PAGE>
                    SHERWOOD BRANDS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                      JULY 31,
                                                             ------------------------
                                                                2000         1999
                                                             -----------  -----------
<S>                                                          <C>          <C>
ASSETS
Current assets
   Cash and cash equivalents                                 $   641,497  $   657,791
   Accounts receivable trade, less allowance of
   $115,000 and $67,946                                        2,094,694    2,928,874
   Inventory                                                  12,683,575    8,569,580
   Income taxes receivable                                       407,237      485,309
   Other current assets                                          288,934      658,364
   Deferred taxes on income                                      196,000       72,100
                                                             -----------  -----------
Total current assets                                          16,311,937   13,372,018

Deferred taxes on income                                              --       63,000
Net property and equipment                                     4,245,848    3,110,220
Other assets                                                      61,106       30,132
                                                             -----------  -----------
TOTAL ASSETS                                                 $20,618,891  $16,575,370
                                                             ===========  ===========
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
   Line of credit                                            $ 4,119,000  $ 1,938,448
   Current portion of long-term debt                             210,000      205,000
   Current portion of subordinated debt                          324,593       96,444
   Current portion of capital lease obligation                    31,245           --
   Accounts payable                                            4,523,899    2,863,182
   Accrued expenses                                            1,032,935    1,082,011
   Income taxes payable                                           50,000      214,400
                                                             -----------  -----------
Total current liabilities                                     10,291,672    6,399,485

Long-term debt                                                   765,000      975,000
Subordinated debt                                                     --      328,082
Capital lease obligation                                         424,332           --
Deferred taxes on income                                         109,000           --
                                                             -----------  -----------

TOTAL LIABILITIES                                             11,590,004    7,702,567
                                                             -----------  -----------

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                                              1,018,349      862,265
                                                             -----------  -----------
TOTAL STOCKHOLDERS' EQUITY                                     9,028,887    8,872,803
                                                             -----------  -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                   $20,618,891  $16,575,370
                                                             ===========  ===========
</TABLE>


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

                                       F-3
<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                             YEARS ENDED JULY 31,
                                                       ------------------------------
                                                           2000               1999
                                                       ------------      ------------
<S>                                                    <C>               <C>
Net sales                                              $ 42,104,645      $ 25,299,806

Cost of sales                                            32,183,885        19,218,718
                                                       ------------      ------------
Gross profit                                              9,920,760         6,081,088
                                                       ------------      ------------
Selling, general and administrative expenses              6,675,177         4,922,082
Pre-production costs                                             --           213,112
Salaries and related expenses                             3,285,850         2,450,096
                                                       ------------      ------------
Total operating expenses                                  9,961,027         7,585,290
                                                       ------------      ------------
Income (Loss) from operations                               (40,267)       (1,504,202)
                                                       ------------      ------------
Other income (expense)
   Interest income                                           36,016            83,258
   Interest expense                                        (434,978)         (153,832)
   Other income (expense)                                   693,413            (7,821)
                                                       ------------      ------------
Total other income (expense)                                294,451           (78,395)
                                                       ------------      ------------
Income (Loss) before provision (benefit) for taxes          254,184        (1,582,597)
Provision (Benefit) for taxes                                98,100          (319,700)
                                                       ------------      ------------
Net income (loss)                                      $    156,084      $ (1,262,897)
                                                       ------------      ------------
Basic and diluted (loss) earnings per share            $       0.04      $      (0.34)
                                                       ------------      ------------
Weighted average common shares outstanding                3,700,000         3,700,000
                                                       ============      ============
</TABLE>


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

                                       F-4
<PAGE>

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


<TABLE>
<CAPTION>
                                            COMMON STOCK
                          --------------------------------------------------
                                  CLASS A                     CLASS B
                          --------------------------------------------------
                                                                               ADDITIONAL
                                                                                 PAID-IN      RETAINED
                            SHARES        AMOUNT       SHARES         AMOUNT     CAPITAL      EARNINGS       TOTAL
                          ---------      -------     ---------       -------   ----------     ---------     ----------
<S>                       <C>            <C>         <C>             <C>         <C>         <C>            <C>
Balance at August 1,      1,150,000      $11,500     1,000,000       $10,000     $247,000    $1,423,973     $1,692,473
   1997                   ---------      -------     ---------       -------   ----------    ----------     ----------

Issuance of common        1,550,000       15,500             -             -    7,731,777             -      7,747,277
   stock

Net income                        -            -             -             -            -       701,189        701,189
                          ---------      -------     ---------       -------   ----------    ----------     ----------

Balance, at July 31,      2,700,000       27,000     1,000,000        10,000    7,978,777     2,125,162     10,140,939
   1998                   ---------      -------     ---------       -------   ----------    ----------     ----------

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

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

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

Balance, at July 31,      2,700,000      $27,000     1,000,000       $10,000   $7,973,538    $1,018,349     $9,028,887
   2000                   =========      =======     =========       =======   ==========    ==========     ==========
</TABLE>


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

                                       F-5
<PAGE>

                      SHERWOOD BRANDS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                               YEARS ENDED JULY 31,
                                                           ----------------------------
                                                               2000             1999
                                                           -----------      -----------
<S>                                                        <C>              <C>
Cash flows from operating activities
   Net income (loss)                                       $   156,084      $(1,262,897)
   Adjustments to reconcile net income (loss) to net
   cash provided by (used in) operating activities
   Depreciation and amortization                               226,871          188,795
   Deferred income taxes                                        48,100         (349,900)
   Unrealized (gain) loss on foreign currency exchange          (5,574)           5,870
   Provision for inventory allowance                            19,918          255,141
   Provision for doubtful accounts                              47,054           27,946
   (Increase) decrease in assets
       Accounts receivable                                     787,126         (889,697)
       Inventory                                            (4,133,913)        (766,428)
       Income taxes receivable                                  78,072         (435,609)
       Other current assets                                    369,430         (530,547)
       Other assets                                            (32,642)          22,934
   Increase (decrease) in liabilities
       Accounts payable                                      1,666,290          579,800
       Accrued expenses                                        (49,076)         660,222
       Income taxes payable                                   (164,400)          53,139
                                                           -----------      -----------
Net cash (used in) provided by operating activities           (986,660)      (2,441,231)

Cash flows from investing activities
   Inventory purchased from Rosen                                   --       (4,000,000)
   Capital expenditures                                       (905,254)        (656,445)
                                                           -----------      -----------
Net cash used in investing activities                         (905,254)      (4,656,445)
                                                           -----------      -----------
Cash flows from financing activities
   Net borrowings (repayments) on line of credit             2,180,552        1,938,448
   Payments on debt                                           (304,932)        (265,531)
   Offering costs                                                   --           (5,239)
                                                           -----------      -----------
Net cash provided by financing activities                    1,875,620        1,667,678
                                                           -----------      -----------
Net increase (decrease) in cash and cash equivalents           (16,294)      (5,429,998)

Cash and cash equivalents, at beginning of period              657,791        6,087,789
                                                           -----------      -----------
Cash and cash equivalents, at end of period                $   641,497      $   657,791
                                                           ===========      ===========
</TABLE>


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


                                       F-6
<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, and had approximately $42
million in sales for its most recent fiscal year ended March 31, 1998. Rosen
filed a receivership proceeding before the Rhode Island Superior Court on July
31, 1998. The Company paid $4.0 million in cash for the machinery and equipment,
inventory and tradenames, 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 twenty years for machinery and
equipment to thirty-nine years for the building.


                                       F-7
<PAGE>

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

REVENUE RECOGNITION

Sales are recognized upon shipment of products.

INCOME TAXES

Income taxes are calculated using the liability method specified by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and 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.

FOREIGN EXCHANGE CONTRACTS

The Company has foreign exchange contracts which are designated as hedges of
identifiable foreign currency firm commitments. Gains and losses on these
contracts are deferred and included in the measurement of the related foreign
currency transaction.

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 shares
outstanding. 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.

RECLASSIFICATIONS

Certain reclassifications have been made to conform the prior year's amounts to
the current year's presentation.

NEW PRONOUNCEMENTS

         In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS 133") which revises the
accounting for derivative financial instruments. SFAS 133 establishes accounting
and reporting standards for derivative instruments and for hedging activities.
SFAS 133 requires that an entity recognize all derivatives as either assets or

liabilities and measure those instruments at fair market value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the change in the fair value of
the hedged asset or liability that are attributable to the hedged risk or
(ii)the earnings effect of the hedged forecasted transaction. For a derivative
not designated as a


                                       F-8
<PAGE>

hedged instrument , the gain or loss is recognized in income in the period of
change. SFAS No. 133, as amended by SFAS No.137 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company will be
required to adopt SFAS 133 in fiscal year 2001 and believes that adoption of
SFAS 133 will have no impact on its financial position or results of operations.

         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 noncompensatory 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 2, 2000
but certain conclusions cover specific events that occur after either December
15, 1998 or January 12, 2000. The Company believes that adoption of FIN 44 will
not have an effect on the Company's financial statements but may impact the
accounting for grants or awards in future periods.


                                       F-9
<PAGE>


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

1.          FOREIGN CURRENCY TRANSACTIONS

The Company purchases products from foreign manufacturers under terms that
provide for the payment of goods in foreign currency approximately 60 to 90 days
from the invoice date. The goods are recorded at cost in equivalent United
States dollars at the exchange rate in effect on the invoice date. The
difference between the recorded cost and the amount required for payment is
reflected as a realized foreign currency transaction gain or loss. Based on
exchange rates in effect at July 31, 2000 and 1999, a provision for unrealized
foreign currency transaction gain of $5,574 and a loss of $5,870, respectively,
on the future payment of open invoices is included in the financial statements
as other income.

From time to time the Company may enter into foreign currency contracts that are
based on purchase orders for finished goods. As of July 31, 2000, the Company
did not have any contracts to purchase foreign currency.

2.          INVENTORY

Inventories consist of the following:
<TABLE>
<CAPTION>
                                                                           JULY 31,
                                                             --------------------------------------
                                                                   2000                 1999
                                                             -----------------    -----------------
<S>                                                          <C>                 <C>
Raw materials and ingredients                                $        546,006    $         299,325
Components used in assembly                                         2,389,504            1,643,879
Packaging materials                                                 1,715,479            1,380,525
Work-in-process and finished product                                8,347,645            5,540,992
                                                             -----------------    -----------------
                                                                   12,998,634            8,864,721
Less reserve for inventory allowance                                 (315,059)            (295,141)
                                                             -----------------    -----------------
                                  Total                      $     12,683,575     $      8,569,580
                                                             =================    =================
</TABLE>



3.          PROPERTY, PLANT  AND EQUIPMENT

Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
                                                                           JULY 31,
                                                             --------------------------------------
                                                                   2000                 1999
                                                             -----------------    -----------------
<S>                                                         <C>                   <C>
Land                                                        $          85,282     $         85,282
Buildings and improvements                                          1,782,918              852,622
Machinery and equipment                                             2,857,792            2,520,794
Furniture and computer equipment                                      123,267              104,119
Transportation equipment                                               80,165              145,339
                                                             -----------------    -----------------
                                                                    4,929,424            3,708,156
                 Accumulated depreciation                            (683,576)            (597,936)
                                                             =================    =================
  Total                                                      $      4,245,848     $      3,110,220
                                                             =================    =================
</TABLE>

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


                                      F-10
<PAGE>

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

4.          CREDIT FACILITY

In September, 2000 the Company's line of credit was increased to $12,000,000
from a $7,500,000. The line of credit was increased 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 80% of eligible domestic accounts receivable plus 70% of domestically-owned
eligible inventory and 30% of components used for the assembly of gift items and
baskets. Borrowings on inventory are capped based upon the Company's seasonal
requirements and are limited to $7 million. Advances under the line of credit
are further reduced by the aggregate amount of outstanding letters of credit
which may not exceed $2.0 million. For the year interest accrued on such
advances at LIBOR plus 1.85% (the rate at July 31, 2000 was 8.47%) and is
payable monthly. The amended loan agreement accrues interest at LIBOR plus 2.50%
and expires in March 2001. At July 31, 2000, the Company had borrowed $4,119,000
under the line of credit and had $1,667,881 in letters of credit outstanding.
The line of credit is secured by the cash and cash equivalents, accounts
receivable and inventories of the Company. During the years ended July 31, 2000
and 1999, the Company incurred and paid approximately $363,255 and $92,000 of
interest expense on the line of credit, respectively.

The line of credit agreement contains various business and financial covenants,
including, among other things, a minimum tangible net worth of $8,800,000 and a

funds flow coverage in excess of 1.50. The Company was in violation of the funds
flow coverage covenant at July 31, 2000. The bank has granted the Company a
waiver of this covenant for the periods ending July 31, 2000.The Company
believes that it will be in compliance with this covenant on October 31, 2000.

Average short term borrowings and the related interest rates are as follows:
<TABLE>
<CAPTION>
                                                                  JULY 31, 2000       JULY 31, 1999
                                                                -----------------    -----------------
<S>                                                             <C>                  <C>
Borrowings under revolving line of credit at year end           $       4,119,000    $       1,938,448
Weighted average interest rate                                              7.84%                7.81%
Maximum month-end balance during period                         $       8,000,000    $       1,938,448
Average balance during the period                               $       4,495,714    $         761,957
</TABLE>

5.          LETTERS OF CREDIT

The Company has available an irrevocable letter of credit of $935,000 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 2006. 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 of 1.50 to 1.00. The Company was in violation of this
covenant at July 31, 2000. The bank has granted the Company a waiver of this
covenant for the year ended July 31, 2000. The Company believes that it will be
in compliance with this covenant subsequent to July 31, 2000.

In addition, the Company has available another irrevocable letter of credit of
$580,000 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.


                                      F-11
<PAGE>

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

6.          LONG-TERM DEBT

Long-term debt consists of the following:
<TABLE>
<CAPTION>
                                                                                                JULY 31,
                                                                                --------------------------------------
                                                                                      2000                  1999
                                                                                -----------------      ---------------
<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, 2006; interest at variable
  Market tax exempt rates (4.40% at July 31, 2000).                              $      715,000        $     790,000

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, 2000).                                                260,000              390,000
                                                                                -----------------      ---------------
                                                                                        975,000            1,180,000
Less current maturities                                                                (210,000)            (205,000)
                                                                                -----------------      ---------------
Long-term portion                                                               $       765,000         $    975,000
                                                                                =================      ===============

</TABLE>

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

                                                                AMOUNT
                                                           -----------------
Fiscal years ending July 31,
2001                                                        $      210,000
2002                                                               215,000
2003                                                                90,000
2004                                                                40,000
Thereafter                                                         420,000
                                                           -----------------
                             Total                          $      975,000
                                                           =================

7.          SUBORDINATED DEBT

Subordinated debt consists of the following:

<TABLE>
<CAPTION>
                                                                                                JULY 31,
                                                                                --------------------------------------
                                                                                      2000                  1999
                                                                                -----------------      ---------------
<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         $    304,872

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              119,654
                                                                                -----------------      ---------------
                                                                                        324,593              424,526

Less current maturities                                                                (324,593)             (96,444)
                                                                                -----------------      ---------------
Long-term portion                                                                $            0         $    328,082
</TABLE>

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.


                                      F-12
<PAGE>


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

Buildings and improvements includes $855,577, less amortization of $1,795 for
the property lease that has been capitalized as of July 31, 2000. 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,
2001                                                                              $       25,000
2002                                                                                      27,778
2003                                                                                      41,667
2004                                                                                      41,667
Thereafter                                                                               659,721
                                                                                -----------------
                             Total                                                $      795,833
                             Less amount representing interest                          (344,420)
                                                                                -----------------


                             Present value of net minimum lease payments          $      451,413
                                                                                =================
</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 has 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.

The following summary represents the activity under the Plan:
<TABLE>
<CAPTION>
                                                                YEARS ENDED JULY 31,
                                          -----------------------------------------------------------------
                                                       2000                             1999
                                          -------------------------------  --------------------------------
                                                              AVERAGE                          AVERAGE
                                                             EXERCISE                          EXERCISE
                                             SHARES            PRICE           SHARES           PRICE
                                          --------------   --------------  ---------------  ---------------
<S>                                             <C>            <C>                <C>           <C>
Under option, beginning of year                 153,750        $5.95              143,750       $5.95
Granted                                         146,500        $3.00               10,000       $5.95
Exercised                                        -                                   -
Cancelled                                        10,000        $5.95                 -
                                          --------------                   ---------------
Under option, end of year                       290,250        $4.41              153,750       $5.95
                                          ==============                   ===============
Exercisable at end of year                       95,833        $5.95
                                          ==============
</TABLE>

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

The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
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 2000 with the following assumptions: Risk-free
interest rate of 6.00%, 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 2000 is $2.71.


                                      F-13
<PAGE>

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

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>
                                                                       YEARS ENDED JULY 31,
                                                    ---------------------------------------------------------------
                                                                 2000                             1999
                                                    ---------------------------------------------------------------
                                                         AS               PRO              AS              PRO
                                                      REPORTED           FORMA          REPORTED          FORMA
                                                    --------------   --------------  ---------------   ------------
<S>                                                 <C>              <C>             <C>               <C>
Net income(loss)                                    $     156,084    $    (12,609)   $   (1,262,897)   $(1,345,484)

Basic and dilutive earnings(loss) per share         $        0.04    $       0.00    $        (0.34)   $     (0.36)
</TABLE>

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.

10.         EARNINGS PER SHARE OF COMMON STOCK

The numerator in calculating both basic and diluted earnings per share for each
period is reported net income. Common equivalent shares representing the common
shares that would be issued on exercise of outstanding stock options and
warrants reduced by the number of shares which could be purchased from the
related exercise proceeds are not included in the denominator since their effect
would be anti-dilutive.

11.          INCOME TAXES

The provision for income taxes in the statement of operations for the years
ended July 31, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
                                                                            JULY 31,
                                                              --------------------------------------
                                                                    2000                 1999
                                                              -----------------    -----------------
<S>                                                            <C>                   <C>
Current tax provision (benefit):
         Federal                                               $     39,000          $    (151,800)
         State                                                       11,000                (32,400)
         IRS Examination                                                  -                214,400
                                                              -----------------    -----------------
         Total current                                               50,000                 30,200

         Deferred tax                                                48,100               (349,900)
                                                               -----------------    -----------------
                Total taxes on income                          $     98,100          $    (319,700)
                                                              =================    =================
</TABLE>

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. The IRS has 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.


                                      F-14
<PAGE>

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

The following summary reconciles taxes at the federal statutory rate with
recorded tax expense (benefit):
<TABLE>
<CAPTION>
                                                                                      JULY 31,
                                                                      ----------------------------------
                                                                            2000               1999
                                                                      ---------------    ---------------
<S>                                                                    <C>               <C>
Income taxes at the statutory rate                                    $       86,400     $     (538,000)
Increase (decrease) in taxes resulting from:
   Effect of untaxed income from foreign subsidiary                           (4,200)            40,000
   IRS Examination                                                               -              214,400
   State and local taxes, net of federal income tax benefit                   11,000            (79,000)
   Other                                                                       4,900             42,900
                                                                      ---------------    ---------------
            Total provision (benefit) for taxes                       $       98,100     $     (319,700)
                                                                      ===============    ===============
</TABLE>

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.

The principal items giving rise to the Company's net deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
                                                                                    JULY 31,
                                                                      ------------------------------------
                                                                           2000                1999
                                                                      --------------       ---------------
<S>                                                                    <C>                  <C>
Deferred tax assets
   Net operating loss carryforwards                                   $         -          $      257,000
   Purchase price allocation of fixed assets                                223,000               312,000
   Officers salary payable                                                   13,000                 9,000
   Allowance for doubtful accounts                                           34,000                22,000
   Allowance for customer credits                                            84,000                44,000
   Inventory obsolescence reserve                                           110,000               103,000
   Other                                                                     36,000                20,100
                                                                      --------------       ---------------
           Total deferred tax assets                                        500,000               767,100
                                                                      --------------       ---------------
Deferred tax liabilities
    Accumulated depreciation                                               (332,000)             (249,000)
    Purchase price allocation of inventory                                  (41,000)             (229,000)
    Accounts receivable service costs                                       (40,000)              (80,000)
    Settlement receivable                                                       -                 (74,000)
                                                                      --------------       ---------------
           Total deferred tax liabilities                                  (413,000)             (632,000)
                                                                      --------------       ---------------
Net deferred tax asset (liability)                                    $      87,000        $      135,100
                                                                      ==============       ===============
Net current deferred tax asset                                        $     196,000        $       72,100
                                                                      ==============       ===============
Net long-term deferred tax asset (liability)                          $    (109,000)       $       63,000
                                                                      ==============       ===============
</TABLE>

At July 31, 2000 the Company had no net operating loss carryforwards for federal
income tax purposes.

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 $674,960 and $309,611 for the years ended July 31, 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.


                                      F-15
<PAGE>

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

Future minimum rental commitments under operating leases as of July 31, 2000 are
summarized in the following table:

               YEARS ENDED JULY 31,                                       AMOUNT
               --------------------                                       ------

                     2001                                               $127,477
                     2002                                                147,519
                     2003                                                150,384
                     2004                                                153,636
                     Thereafter                                          547,096
                                                                      ----------
                     Total                                            $1,126,112
                                                                      ==========

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

expire on July 31, 2001. During the current fiscal year the agreements provided
for annual base salaries of $315,000, $189,000 and $271,000, respectively. The
base salary shall be increased each year by the greater of the percentage
increase in sales for the last year or 5% and may be reviewed for merit
increases by the Compensation Committee of the Board of Directors. In addition,
such employment agreements entitle the executives to a portion of a bonus pool
as determined by the Board of Directors equal to 15% of Company pre tax net
income in excess of certain incremental earnings targets. If any of these
executives is terminated without cause or upon a change in control of the
Company, each is entitled to continue to receive his or her annual base salary
for a period of three years, any accrued incentive compensation through the date
of termination and certain other benefits. Each of the above listed executives
is prohibited from competing with the Company for the duration of his or her
respective employment agreement, and if terminated or upon voluntary
resignation, for one year thereafter.

The Company has filed claims against the receiver of the E. Rosen Company to
compel payment of certain administrative claims and expenses. The Company
records amounts for recoveries from certain third parties when those amounts are
probable of realization. The Company has recorded a receivable of $90,000 at
July 31, 2000, based on the allocation of certain expenses which it believes are
recoverable. These amounts are included in Other Current Assets in the
accompanying consolidated balance sheet.

13.         EMPLOYEE BENEFIT PLANS

The Company has established a 401(k) and Profit Sharing Plan ("401(k) Plan") for
all eligible employees. There were no contributions in 2000 or 1999.


                                      F-16
<PAGE>

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

14.         SUPPLEMENTAL CASH FLOWS DISCLOSURE

Cash paid for interest amounted to $434,978 and $153,832 for the years ended
July 31, 2000 and 1999, respectively.

Cash paid for income taxes amounted to $395,900 and $328,015 for the years ended
July 31, 2000 and 1999, respectively.

Building acquired through capital lease amounted to $445,577 for the year ended
July 31, 2000.

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 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, 2000 a single customer accounted for approximately 15% of the Company's
net sales. For the year ended July 31, 1999 a different customer accounted for
approximately 12% of the Company's total sales.

Export sales for the years ended July 31, 2000 and 1999, were approximately
$588,000 and $1,120,000 respectively. The majority of export sales are made to
Canada.

16.         PRE-PRODUCTION COSTS

During the year ended July 31, 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 $716,436 and $698,498 for the years ended July 31,
2000 and 1999, respectively.


                                      F-17
<PAGE>

                                   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, 1998
   Allowance for doubtful accounts      $         23,400    $         83,100    $        (66,500)      $  40,000

Reserve for slow moving inventory       $         18,200    $         21,800    $             -        $  40,000

Year ended July 31, 1999
   Allowance for doubtful accounts      $         40,000    $         33,570    $         (5,624)      $  67,946

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

Reserve for slow moving inventory       $        295,141    $         19,918    $             -        $ 315,059
</TABLE>


                                      F-18
<PAGE>

                                 EXHIBIT INDEX

EXHIBIT                 DESCRIPTION
-------                 -----------

 21.1                   Subsidiaries of the Registrant

 27.1                   Financial Data Schedule