<PAGE>

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

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

                                    FORM 10-K

                                  ANNUAL REPORT
                                   PURSUANT TO
                           SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                     For the fiscal year ended July 31, 2002

                         Commission File Number: 1-14091

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

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

           North Carolina                             56-1349259
   (State or Other Jurisdiction of        (IRS Employer Identification Number)
            Incorporation)

                   1803 Research Blvd., Suite 201
                        Rockville, Maryland              20850
              (Address of Principal Executive Offices) (Zip Code)

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

           Securities Registered Pursuant to Section 12(b) of the Act:
                                      None

           Securities Registered Pursuant to Section 12(g) of the Act:
                      Class A Common Stock, $.01 Par Value

   Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No [_]

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

   The aggregate market value of the voting and non-voting stock held by
non-affiliates of the Registrant as of October 21, 2002 (computed by reference
to the last reported sale price of the Registrant's Common Stock on the American
Stock Exchange on such date) was $8,144,255.

   The number of shares outstanding of Registrant's Class A Common Stock, $.01
par value per share, as of October 21, 2002 was 2,778,375. Number of shares
outstanding of Registrant's Class B Common Stock, $.01 par value per share was
1,000,000. The Class B Common Stock is not publicly traded.

                       DOCUMENTS INCORPORATED BY REFERENCE

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

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

<PAGE>

                              SHERWOOD BRANDS, INC.

                                    FORM 10-K

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
                                     PART I

ITEM 1.  BUSINESS...........................................................   3

ITEM 2.  PROPERTIES.........................................................   9

ITEM 3.  LEGAL PROCEEDINGS..................................................   9

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................   9

                                     PART II

ITEM 5.  MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
           STOCKHOLDER MATTERS..............................................  10

ITEM 6.  SELECTED FINANCIAL DATA............................................  10

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS............................................  12

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........  22

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................  24

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY....................  25

ITEM 11. EXECUTIVE COMPENSATION.............................................  27

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
           MANAGEMENT.......................................................  27

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION......................  27

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
           FORM 8-K.........................................................  28

SIGNATURES..................................................................  30
</TABLE>

                                        2

<PAGE>

                                     PART I.
Item 1.  Business

General

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

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

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

   Sherwood Brands of RI, Inc. is a wholly owned subsidiary of Sherwood Brands,
Inc. that was incorporated in September, 1998 in the state of Rhode Island.
Sherwood Brands of RI, Inc. d/b/a E. Rosen Company manufactures hard candies and
jelly beans and assembles and markets gift items and baskets to chains such as
Wal-Mart, Kmart and CVS.

   Sherwood Acquisition Corporation, a wholly-owned subsidiary of the Company,
was incorporated in April, 2002 in the state of Wyoming. On May 1, 2002 Sherwood
Acquisition merged with and into Asher Candy Acquisition Corporation, a Wyoming
corporation. Asher Candy Acquisition Corporation is a manufacturer of candy
canes and other hard candies under the "Asher" name. The surviving corporation
of the merger is Asher Candy Acquisition Corporation, which has changed its name
to Asher Candy, Inc. The Company issued an aggregate of approximately 270,559
shares of its common stock values at $1,675,000 to the shareholders of Asher
Candy Acquisition Corporation in consideration for the transaction, subject to
escrows for indemnification and adjustments based on a final audit, as well as
warrants exercisable for Sherwood Brands common stock valued at $108,000. Asher
Candy generated no revenue from May 1, 2002 through July 31, 2002.

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 increased from approximately $9 billion in 1990 to $23.8
billion in 2001. The Chocolate Manufacturers Association/National Confectioners
Association has estimated that total retail sales of confectionery products in
the United States in 2001 were approximately $24.0 billion. Despite the growth,
the United States ranks only fifth in per capita candy consumption among the
industrialized nations. Halloween generates the highest volume of sales($2.025
billion in sales), followed by Easter ($1.815 billion), Christmas ($1.500
billion) and Valentines Day ($1.090 billion). The Company believes that the
expanding candy market in the United States presents attractive growth
opportunities for its business, and is focusing on introducing new products in
these holiday 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
United States. The Company believes that the remainder of the market is highly
fragmented, with numerous manufacturers and hundreds of products and
distribution channels, such as mass merchandisers, drug stores, club stores,
vending companies and gourmet distributors. Management believes that the
Company's experience in these markets and distribution channels, coupled with

                                        3

<PAGE>

its expanded manufacturing capabilities, should enable the Company to capitalize
on growth opportunities in these markets.

Products

  Internationally Manufactured Candy, Cookies and Chocolates

   Following is a description of products that the Company sells, which are
purchased from third-party sources located outside of the United States:

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

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

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

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

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

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

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

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

   ZED GUM: On July 9, 2001 the Company entered into its first distribution
agreement for a non-company brand name product. Under the agreement, the Company
is the exclusive distributor of Zed Gum in the United States. As the distributor
of Zed Gum, the Company has the opportunity to increase its presence in the kids
novelty and everyday gum market. The Company and the manufacturer of Zed Gum
plan to develop products specifically for the United States including products
designed and trademarked by the Company under the ZED name. The product line
meets the Company's requirements for high quality, exceptional package design
and value. Since the Company began marketing the product to its customers in
2001, orders for the product have steadily increased.

  Domestically Manufactured Candies and Biscuits

  Following is a description of products the Company manufactures:

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

                                        4

<PAGE>

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

   CANDY CANES: The Company manufactures a variety of packages, sizes, color and
flavors, ranging from traditional peppermint canes to high-end gourmet lines. In
addition, the Company manufactures premium flavor candy canes which include
amaretto, merlot, Irish creme, Dutch chocolate, maraschino cherry and blueberry
cheesecake.

   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 typically designed for a particular holiday
such as Christmas, Valentine's Day or Easter. The gift sets and gift baskets may
contain gourmet food products, candy, novelty items or seasonal merchandise. A
significant portion of the contents of the gift sets and gift baskets are
assembled from components imported from China.

Suppliers

   Some of the Company's products are manufactured by third party sources to
specific recipe and design specifications developed by the Company. These
third party sources are located in Argentina, Austria, Belgium, Holland,
Germany, Italy, and Ireland. 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). Generally, the Company's foreign
suppliers deliver finished products free on board to a freight forwarder, cargo
consolidator or directly to a seaport for ocean transport. The Company assumes
the risk of loss, damage or destruction of products, although the Company
maintains cargo insurance. Upon entry into the United States, the products are
then transported by rail or truck to one of the six regional warehouses used by
the Company.

   The Company has long-term relationships with the manufacturers of ELANA(R)
Belgian chocolates, RUGER Wafers, and PIRATE'S GOLD COINS(TM) milk chocolates.
Generally, these manufacturers have agreed not to export into the United States,
and in certain cases, other countries, any products similar to those produced
for the Company. The Company has no formal commitment to purchase minimum
volumes of these products. However, on an annual basis the Company and the
manufacturer will agree upon volumes and prices and establish a delivery
schedule based upon the Company's forecast.

   Under the terms of the Company's agreement with the manufacturer of ZED gum,
there was no minimum purchase requirement during the first year. Commencing July
2002, the minimum purchase requirement became 1,000,000 Euros.

   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 loss of any one supplier would not
have a material adverse effect on the Company's business.

                                        5

<PAGE>

   The Company purchases the necessary ingredients and packaging materials,
which are used in its products, manufactured at its Pawtucket, RI facility, New
Hyde Park, NY facility and Chase City, VA production facilities from numerous
third-party suppliers. These ingredients and packaging materials include flour,
sugar, shortening, flavorings, butter, folding cartons, shipping cartons and
wrapping film. The purchases are made on an open account basis with competitive
payment terms.

   Most of the components used in the Company's line of holiday gift sets and
gift baskets are assembled at its Central Falls, RI facility and are purchased
from manufacturers located in Asia, principally China. 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, other retail
customers, grocery and drug store chains, club stores, convenience stores,
specialty shops and wholesalers. The Company's mass merchandise customers
include Family Dollar, Target, Dollar General, K-Mart and Wal-Mart. For the year
ended July 31, 2002, Sam's Club and Wal-Mart accounted for 29% and 14% of the
Company's total net sales respectively. For the year ended July 31, 2001, Sam's
Club and Wal-Mart accounted for 27% and 14% of the Company's total net sales.
For the year ended July 31, 2000 Wal-Mart comprised 15% of the Company's total
net sales. The loss of either Sam's Club or Wal-Mart as a customer would result
in a significant decrease in the Company's revenues and profits.

   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 the Company's
products to a wide base of gourmet stores. The Company believes that it has been
able to penetrate this customer 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, Puerto
Rico and Canada. Net sales of the Company's products in the Canadian market
accounted for less than 1% of the Company's total net sales fiscal 2002.

   The Company engages independent food and candy brokers in various regions
throughout the United States for marketing to retail stores. These brokers
account for a majority of the Company's sales. Food and candy brokers are paid
on a commission basis (typically 5% of sales generated by them) and are
generally responsible in their respective geographic markets for identifying
customers, soliciting orders and inspecting merchandise on store shelves. As of
July 31, 2002, the Company had arrangements with approximately 65 food and candy
broker organizations. These arrangements typically prohibit the brokers from
selling competing products during the term of their engagement with the Company.
The Company believes that the use of brokers, enhances the quality and scope of
the Company's sales operations. In addition, the use of brokers permits the
Company to limit the costs associated with creating and maintaining a direct
distribution network. The Company's executive officers and six regional sales
managers work with the 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, their ability to provide prompt customer service and
their efficient and economic delivery. Generally, the Company sells its products
pursuant to customer purchase orders and fills these orders from inventory
within one to two days of receipt.

   Because these purchase 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.

                                        6

<PAGE>

Manufacturing and Assembly Facilities

   The Company has two manufacturing facilities and three assembly facilities.

   The Company currently manufactures hard candy, soft candy, jellies, Demitasse
biscuits and COWSCARAMEL Caramel candies at its Chase City, VA facility. The
Chase City facility consists of a brick building with over 100,000 square feet
(including a 1,750 square foot office) situated on approximately ten acres in
Southern Virginia. The facility recently had approximately 25,000 square feet
added to accommodate the consolidation of the Company's Pawtucket, RI facility
which was closed in May 2002. The facility is equipped with state-of-the-art
equipment for the manufacture and packaging of cookie and candy products and
employs approximately 240 skilled and unskilled workers. The facility is
certified kosher by the Orthodox Union. The Company also has a 73,000 square
foot packaging and storage facility located on approximately 15 acres in
Keysville, VA. 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 411,000 square feet of improved real estate
in Pawtucket and Central Falls, RI at which it assembles holiday gift items,
stores inventory (397,000 square feet) and provides office space (14,000 square
feet). Both Rhode Island facilities have access to both skilled and unskilled
labor, and are readily accessible to common carriers, rail lines and a major
seaport (Boston).

   The Company leases approximately 30,000 square feet of improved real estate
in New Hyde Park, NY. The property is used for manufacturing candy canes. The
location has access to both skilled and unskilled labor, and is readily
accessible to common carriers and a major seaport (New York).

   In May 2000, the Company entered into a capital lease agreement with the New
Bedford Redevelopment Authority to lease a 430,000 square foot building in New
Bedford, MA. The facility is used for assembly and storage of components. Under
the terms of the lease the Company made an initial payment of $400,000 and paid
rent of $25,000 per annum for years one and two and is committed to pay
$41,666.66 per annum for years three through twenty. The Company has an 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 the Virginia, New York 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 to conduct quality control testing at the
facilities through on-site laboratory analysis and quality assurance
inspections. The inspectors evaluate the Company's products on the basis of
subjective factors such as taste and appearance. The Company monitors the
efficiency of the production equipment continuously and its facilities are
climate controlled where required.

Marketing, Sales and Advertising

   The Company believes that product recognition by retail and wholesale
customers, consumers and food brokers is an important factor in the marketing of
its products. Accordingly, the Company promotes its products and brand names
through the use of attractive promotional materials, including full-color
product brochures and newspaper inserts, advertising in trade magazines targeted
to the mass merchandisers, vending industry, gourmet trade and gift basket
markets, and participation in trade shows. For the year ended July 31, 2002, the
Company spent approximately $1,127,000 on advertising and product promotion and
for the years ended July 31, 2001 and 2000 the Company spent approximately
$980,000 and $716,000, respectively.

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

                                        7

<PAGE>

Competition

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

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. The Company's failure
to protect its trademarks and other intellectual property rights could
negatively impact the value of its brand names. The Company is currently
involved in a legal proceeding involving intellectual property rights. The
Company is not aware of any other infringement claims or other challenges to the
Company's rights to use these marks. The Company is applying for the
international registration of all its trademarks.

Government Regulation

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

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.

Employees

   As of October 16, 2002, the Company had approximately 318 full-time employees
and approximately 700 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 240 full and part-time employees in
Virginia and approximately 557 full, part-time and seasonal employees in Rhode
Island and Massachusetts and 200 full, part-time and seasonal employees in its
New Hyde Park, NY facility. Management believes that the Company's relationship
with its employees is good. The employees at the Asher Candy facility are the
Company's only employees represented by labor unions under a collective
bargaining agreement.

                                        8

<PAGE>

Item 2.  Properties

   The following table sets forth, with respect to properties leased and owned
by the Company at July 31, 2002, the location of the property, the size 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 Boulevard         5,500  $ 125,000   January 31, 2009  Executive and General Office
Rockville, MD 20850
1005 Main Street..........     14,000  $ 100,893       October 2004  General Office
Pawtucket, RI 02860
280 Rand Street...........    397,000  $ 384,667       October 2004  Assembly facility, Storage
Central Falls, RI 02863                                              And Distribution facilities
1815 Gilford Avenue            30,000  $ 271,296         March 2004  Manufacturing Plant
New Hyde Park, NY
27 Healy Street...........    430,000  $  25,000          June 2020  Assembly facility, Storage
New Bedford, MA 02745                    (Yr 1-2)                    And Distribution
                                       $  41,667
                                        (Yr 3-20)
Owned Properties:
807 South Main Street.....    100,000                                Manufacturing Plant
Chase City, VA 23924
350 Sherwood Drive........     73,000                                Assembly/Manufacturing Plant
Keysville, VA 23947
</TABLE>

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

Item 3.  Legal Proceedings

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

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

   No matters were submitted to a vote of security holders during the quarter
ended July 31, 2002.

                                        9

<PAGE>

                                     PART II

Item 5.  Market for the Company's 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). The following table shows The high and low sales prices
as reported on the 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, 2001:
                First Quarter............................   $2.50  $1.50
                Second Quarter...........................   $3.25  $1.63
                Third Quarter............................   $3.26  $2.42
                Fourth Quarter...........................   $4.95  $3.00
             Fiscal Year Ended July 31, 2002:
                First Quarter............................   $7.20  $4.36
                Second Quarter...........................   $9.19  $4.90
                Third Quarter............................   $7.25  $5.45
                Fourth Quarter...........................   $6.89  $4.05

   As of October 28, 2002, there were 29 holders of record of the Class A Common
Stock and one holder of record of the Class B Common Stock. The Company believes
that there are more than 263 beneficial holders of its Class A 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.

Equity Compensation Plan Information

   This table summarizes share and exercise price information about our equity
compensation plans as of July 31, 2002.

<TABLE>
<CAPTION>
                                                      Weighted average        Number of securities
                                                      exercise price of       available for future
                             Number of securities    outstanding options,    issuance under equity
     Plan Category               to be issued        warrants and rights       compensation plans
-------------------------    --------------------    --------------------    ----------------------
<S>                               <C>                       <C>                     <C>
Equity compensation plans         1,041,118                 $2.93                   458,882
 approved by security
 holders
Equity compensation plans               ---                   ---                       ---
 not approved by security
 holders
</TABLE>

Item 6.  Selected Financial Data

   The selected financial data set forth below have been derived from the
consolidated financial statements of the Company and the related notes thereto.
The statement of operations data for the five years ended July 31, 2002 and the
balance sheet data as of July 31, 2002, 2001, 2000, 1999 and 1998 are derived
from the consolidated financial statements of the Company which have been
audited by BDO Seidman, LLP, independent certified public accountants. The
following selected financial data should be read in conjunction with the
Company's consolidated financial statements and the related notes thereto and
"Management Discussion and Analysis of Financial Condition and Results from
Operations", which are included elsewhere herein.

                                       10

<PAGE>

<TABLE>
<CAPTION>
For the years ended July 31,                  2002         2001         2000         1999         1998
----------------------------               -----------  -----------  -----------  -----------  -----------
<S>                                        <C>          <C>          <C>          <C>          <C>
Net sales..............................    $52,782,341  $58,316,716  $42,104,645  $25,299,806  $18,084,174
Cost of sales..........................     37,714,680   41,796,184   32,183,885   19,218,718   12,230,757
                                           ===========  ===========  ===========  ===========  ===========
Gross profit...........................     15,067,661   16,520,532    9,920,760    6,081,088    5,853,417
Selling, general and administrative
  expenses.............................      8,313,603    8,006,416    6,675,177    4,922,082    3,139,475
Salaries and related expenses..........      5,100,167    4,806,061    3,285,850    2,450,096    1,515,803
Non-recurring costs-moving.............        707,551           --           --           --           --
Pre-production costs...................             --           --           --      213,112      155,095
                                           ===========  ===========  ===========  ===========  ===========
Total operating expenses...............     14,121,321   12,812,477    9,961,027    7,585,290    4,810,373
                                           ===========  ===========  ===========  ===========  ===========
Income (Loss) from operations..........        946,340    3,708,055      (40,267)  (1,504,202)   1,043,044
                                           ===========  ===========  ===========  ===========  ===========
Other income (expense)
   Interest income.....................          4,881       11,182       36,016       83,258       88,870
   Interest expense....................       (468,687)    (539,971)    (434,978)    (153,832)    (222,947)
   Insurance claim, net................             --           --           --           --      102,223
   Other income (expense)..............         90,535      132,209      693,413      ( 7,821)       9,747
                                           ===========  ===========  ===========  ===========  ===========
Total other income (expense)...........       (373,271)    (396,580)     294,451      (78,395)    ( 25,455)
                                           ===========  ===========  ===========  ===========  ===========
Income (Loss) before provision
  (benefit) for taxes on income........        573,069    3,311,475      254,184   (1,582,597)   1,017,589
                                           ===========  ===========  ===========  ===========  ===========
Provision (Benefit) for taxes on
  income...............................        248,039    1,093,100       98,100     (319,700)     316,400
                                           ===========  ===========  ===========  ===========  ===========
Net income (loss)......................    $   325,030  $ 2,218,375  $   156,084  $(1,262,897) $   701,189
                                           ===========  ===========  ===========  ===========  ===========
   Net income (loss) per share
   --basic.............................    $      0.09  $      0.60  $      0.04  $     (0.34) $      0.28
   --diluted...........................           0.08         0.56         0.04        (0.34)        0.28
                                           ===========  ===========  ===========  ===========  ===========
Weighted average common shares
    outstanding
    --basic............................      3,778,375    3,700,000    3,700,000    3,700,000    2,515,205
   --diluted...........................      4,312,762    3,954,428    3,700,000    3,700,000    2,515,205
</TABLE>

<TABLE>
<CAPTION>
For the years ended July 31,                  2002         2001         2000         1999         1998
----------------------------               -----------  -----------  -----------  -----------  -----------
<S>                                        <C>          <C>          <C>          <C>          <C>
Balance Sheet Data:
   Working Capital.....................    $ 6,218,382  $ 7,485,168  $ 6,020,265  $ 6,992,533  $ 9,244,219
   Total Assets........................     31,390,954   22,804,112   20,618,891   16,575,370   15,066,358
   Total Long Term Debt................      2,266,414    1,221,162    1,755,170    1,604,526    1,870,057
   Total Liabilities...................     18,003,614   11,575,121   11,590,004    7,702,567    4,925,419
   Stockholders' Equity................     13,387,340   11,228,991    9,028,887    8,872,803   10,140,939
</TABLE>

                                       11

<PAGE>

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

IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

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

   You should carefully consider the following risks before making an investment
decision. If any of the following risks occurs, our business, financial
condition or results of operations could be adversely affected. In that case,
the trading price of our common stock could decline, and you might lose all or
part of your investment.

   The loss of a significant customer could have an adverse effect on our
business. We are dependent on a limited number of customers for a significant
portion of our revenues. Sam's Club and Wal-Mart accounted for approximately
29%, 14%, respectively, of our sales year ended July 31, 2002. We do not
maintain agreements with our customers and sell products pursuant to purchase
orders placed from time to time in the ordinary course of business. The loss of
a significant customer could have an adverse effect on our business.

   We face significant competition in the marketing and sale of our products.
Our 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 our
suppliers) with significantly greater financial, manufacturing, marketing,
distribution, personnel and other resources than we have. Some of these
competitors, such as Hershey Food Corporation, M&M Mars, Inc., Nestle, S.A.,
Nabisco, Inc., Keebler Company and Sunshine Biscuits, Inc., dominate the markets
for candy and cookie products, and have substantial promotional budgets which
enable them to implement extensive advertising campaigns. The food industry is
characterized by frequent introductions of new products, accompanied by
substantial promotional campaigns. If we are unable to continue to compete
successfully our business could be adversely affected.

   We face various risks relating to a recent acquisition. We recently acquired
the business of Asher Candy Acquisition Corporation. Asher Candy Acquisition
Corporation manufactured candy canes, a product which we had no prior experience
in manufacturing. If we are unable to successfully produce a quality product,
and maintain or increase the customer base, our profitability could be adversely
affected.

   Our success is highly dependent on consumer preferences and industry factors.
The markets for candy and cookie products are affected by changes in consumer
tastes and preferences and nutritional and health-related concerns. We could be
subject to increased competition from companies whose products or marketing
strategies address these concerns. In addition, the markets for our products may
be subject to national, regional and local economic conditions which affect
discretionary spending, demographic trends and product life cycles, whereby
product sales increase from their introductory stage through their maturity and
then reach a stage of decline over time.

                                       12

<PAGE>

   We have limited historical profitability and may not be profitable in the
future. We have historically, until recently, achieved limited profitability.
Our operating expenses have increased and can be expected to continue to
increase in connection with any expansion activities undertaken by us, including
those relating to advertising and product manufacturing. Accordingly, our
profitability will depend on our ability to improve our operating margins and
increase revenues from operations. Unanticipated expenses, unfavorable currency
exchange rates, increased price competition and adverse changes in economic
conditions could have a material adverse effect on our operating results. If we
are unable to achieve significantly increased levels of revenues, our future
operations may not continue to be profitable.

   We depend on our trademarks. We hold United States trademark registrations
for the "ELANA," "RUGER", "TONGUE TATTOO", "STRIP-O-POP", "SMILE POPS" and
"demitasse" names, and have filed trademark registrations for certain other
names, including "COWS," and use other names for which we have not applied for
registration. We believe that our rights to these names are a significant part
of our business and that our ability to create demand for our products is
dependent to a large extent on our ability to exploit these trademarks. Our
failure to protect our trademarks and other intellectual property rights could
negatively impact the value of our brand names. We are applying for the
international registration of all of our trademarks.

   We are dependent on third party manufacturers and suppliers. We are dependent
on the ability of our manufacturers to adhere to our product, price and quality
specifications and scheduling requirements. Our operations require us to have
production orders in place in advance of shipment to our warehouses (product
deliveries typically take 60 days). Any delay by manufacturers in supplying
finished products to us would adversely affect our ability to deliver products
on a timely and competitive basis. In addition, raw materials necessary for the
manufacture of our products at our facilities, including flour, sugar,
shortening, butter and flavorings, are purchased from third-party suppliers. We
do not maintain agreements with any such suppliers and we are, therefore,
subject to risks of periodic price fluctuations, shortages and delays. If there
is a material interruption in the availability or significant price increases
for raw materials would have a material adverse effect on our operating margins.

   We face various risks relating to foreign manufacturing. During the fiscal
years ended July 31, 2000, 2001 and 2002, approximately 31%, 23% and 23%,
respectively, of our products were manufactured in foreign countries. We have
been and will continue to be subject to risks associated with the manufacture of
products in foreign countries, primarily in Argentina, Austria, Belgium, China,
Holland and Ireland. These risks are material shipping delays, fluctuations in
foreign currency exchange rates, customs duties, tariffs and import quotas and
international political, regulatory and economic developments. We assume the
risk of loss, damage or destruction of products when shipped by a manufacturer.
Because we pay for some of our products manufactured outside the United States
in foreign currencies, any weakening of the United States dollar in relation to
relevant foreign currencies, could result in significantly increased costs to
us. In addition, some products manufactured overseas are subject to import
duties. Deliveries of products from our foreign manufacturers could also be
delayed or restricted by the future imposition of quotas. If quotas were
imposed, it is possible that we would not be able to obtain quality products at
favorable prices from domestic or other suppliers whose quotas have not been
exceeded by the supply of products to their existing customers.

   Our operating results fluctuate and we are subject to seasonality. Our
operating results are subject to fluctuations as a result of new product
introductions, the timing of significant operating expenses and customer orders,
delays in shipping orders, pricing and seasonality. Our sales increase during
the first and second quarters of our fiscal year, due to the holidays that occur
during those quarters. During the fiscal years ended July 31, 2000, 2001 and
2002, approximately 55%, 70% and 70%, respectively, of our annual sales occurred
in the first two quarters of the fiscal year. If we are unable to meet the
delivery schedules of our customers during the first two quarters of our fiscal
year our profitability would be adversely affected during that fiscal year.

   We are subject to government regulation. We are 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 our products are manufactured or sold. Among other
things, such regulation governs the importation, manufacturing, packaging,
storage, distribution and labeling of our products, as well as sanitary
conditions and public health and safety. Applicable statutes and regulations
governing our products include "standards of identity" for the content of
specific types of products, nutritional labeling and serving size requirements
and general "Good Manufacturing Practices" with respect to manufacturing
processes. Our facilities and products are subject to periodic inspection by
federal, state and local authorities. Our failure to comply with applicable laws
and regulations could subject us to civil remedies, including fines,
injunctions, recalls or seizures, as well as potential criminal sanctions.

                                       13

<PAGE>

   We may incur product liability claims that are not fully insured. As a
manufacturer and marketer of food products, we are subject to product liability
claims from consumers. We maintain 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). These insurance amounts may not be sufficient to cover
potential claims and adequate levels of coverage may not be available in the
future at a reasonable cost. In the event of a partially or completely uninsured
successful claim against us, our financial condition and reputation would be
materially affected.

   We are dependent on key personnel and the loss of these key personnel could
have a material adverse effect on our success. Our success is dependent on the
personal efforts of Uziel Frydman, our Chairman, President and Chief Executive
Officer, Amir Frydman, our Vice President of Marketing and Christopher Willi,
our Chief Financial Officer. The loss or interruption of the services of such
individuals could have a material adverse effect on our business. We maintain
"key-man" insurance in the amount of $1 million on the life of Mr. Uziel
Frydman. Our success also depends upon our ability to hire and retain additional
qualified management, marketing and other personnel. Employment and retention of
qualified personnel is important due to the competitive nature of the food
industry. Our failure to hire and retain qualified personnel could adversely
affect our success.

   Our President and Chief Executive Officer controls our company. Mr. Uziel
Frydman, President and Chief Executive Officer of our company, owns 400,000
shares of Class A Common Stock (with a right to acquire an additional 202,984
upon the exercise of options) and 1,000,000 shares of Class B Common Stock,
representing, in the aggregate, approximately 43% of the outstanding Common
Stock of our company and 76% of the voting control of our company, assuming that
all of the warrants are exercised. Accordingly, Mr. Frydman will be able to
direct the election of all of our company's directors, increase the authorized
capital, dissolve, merge or sell the assets of our company, and generally direct
the affairs of our company. In addition, the level of control exercised by Mr.
Frydman may discourage investors from purchasing our Common Stock.

   We may issue "blank check" preferred stock that would prevent a change of
control. Our Articles of Incorporation, as amended, authorize our board of
directors to issue up to 5,000,000 shares of "blank check" preferred stock
without stockholder approval, in one or more series and to fix the dividend
rights, terms, conversion rights, voting rights, redemption rights and terms,
liquidation preferences, and any other rights, preferences, privileges, and
restrictions applicable to each new series of preferred stock. The issuance of
shares of preferred stock in the future could, among other things, adversely
affect the voting power of the holders of common stock and, under certain
circumstances, could make it difficult for a third party to gain control of our
company, prevent or substantially delay a change in control, discourage bids for
the Common Stock at a premium, or otherwise adversely affect the market price of
the Common Stock.

   We are prohibited from paying dividends. We have never paid any cash
dividends on our common stock and do not anticipate paying cash dividends in the
foreseeable future. The payment of cash dividends is prohibited by the terms of
our financing agreements.

             CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

   This prospectus contains some forward-looking statements, within the meaning
of federal securities laws, about our financial condition, results of operations
and business. You can find many of these statements by looking for words like
"will," "should," "believes," "expects," "project," "could," "anticipates,"
"estimates," "intends," "may," "pro forma" or similar expressions used in this
prospectus. These forward-looking statements are subject to numerous
assumptions, risks and uncertainties that may cause our actual results or
performance to be materially different from any future results or performance
expressed or implied by the forward-looking statements. The risks and
uncertainties include those risks and uncertainties identified under the heading
"Risk Factors" in this prospectus. Because these forward-looking statements are
subject to risks and uncertainties, we caution you not to place undue reliance
on these statements, which speak only as of the date of this prospectus. We do
not undertake any responsibility to review or confirm analysts' expectations or
estimates or to release publicly any revisions to these forward-looking
statements to take into account events or circumstances that occur after the
date of this prospectus. Additionally, we do not undertake any responsibility to
update you on the occurrence of unanticipated events which may cause actual
results to differ from those expressed or implied by these forward-looking
statements.

                                       14

<PAGE>

Overview

   The Company is engaged in the manufacture, marketing and distribution of a
diverse line of brand name candies, cookies, chocolates and gifts. Through
fiscal year ending July 31, 2001, the Company had experienced continued revenue
growth. This growth was a direct result of the Company's introduction of gift
items, gift baskets and new candy products. The new gift products enabled the
Company to expand its customer base to include mass-merchandisers.

   With net sales growing from approximately $18 million in fiscal 1998 to over
$58 million in fiscal 2001, management began to take steps to reduce costs in
future years by consolidating operations and continuing to build its
infrastructure. The objective was to establish new production and assembly
facilities with more efficient and effective cost structures. The Company began
implementing these plans during the year ended July 31, 2002.

   In February 2002, Sherwood Brands acquired some intellectual property and
equipment from KR Candy Corporation, in Brooklyn, New York, for $450,000 cash.
Under the Kastin brand name, the Company continues to be a manufacturer of
lollipops and jellies for the mass market. The equipment was initially located
in New York, but was subsequently moved in unison with the move of the Rhode
Island manufacturing equipment down to the Company's Chase City, VA
manufacturing facility.

   On May 1, 2002, Sherwood Acquisition merged with and into Asher Candy
Acquisition Corporation, a Wyoming corporation, with operations located in New
Hyde Park, NY. Asher Candy Acquisition Corporation is a manufacturer of candy
canes and other hard candies under the "Asher" name. The surviving corporation
of the merger is Asher Candy Acquisition Corporation, which has changed its name
to Asher Candy, Inc. The Company issued approximately 270,559 shares of its
common stock valued at $1,675,000 to the shareholders of Asher Candy Acquisition
Corporation in consideration for the transaction, subject to escrows for
indemnification and adjustments based on a final audit, as well as warrants
exercisable for Sherwood Brands common stock having a fair value of $108,000.
Asher Candy generated no revenue from May 1, 2002 through July 31,2002

   During the year ended July 31, 2002, the Company entered into six licensing
agreements to incorporate its products into gift sets and to manufacturing of
candies and wafers. The royalty rates for such licenses are from 2% to 10% of
net sales and expire in range of 2 to 3 years. The products to be incorporated
into the Company's gift set items are primarily for the fourth quarter and
Easter selling season. The Company entered into a licensing agreement to produce
everyday candies and wafers. The Company paid $121,000 in advance fees for the
rights under the licensing agreements. These advance fees will be offset against
any amounts due on royalties. There was no other minimum license fees under
these agreements. The Company did incur minimum royalties during the year ended
July 31, 2002. The Company is currently pursuing other licenses with similar
terms and conditions. The Company expects to see results from the agreements
beginning in the year ending July 31, 2003, but the greatest impact will occur
beginning in the year ending July 31, 2004.

  The Company's Rhode Island manufacturing facility, which occupied five stories
in an old building, closed on May 31, 2002. All the production equipment,
together with the electrical, piping, steam and air-conditioning were
disassembled and transferred to the Company's expanded Chase City, VA facility.
This 75,000 square feet facility, with an additional 25,000 square feet of new
constructed building, and the 73,000 square foot facility at Keysville, VA
(about 20 miles from Chase City, VA), will become a single manufacturing and
distribution facility under one plant management for all products produced at
the Chase City facility. While the plant is expected to be fully operational by
November 2002, the Company anticipates that the transition period will result in
decreased sales for seasonal merchandise for the quarter ending October 31,
2002. The Company expects to regain these lost sales during the year ending July
31, 2003.

  Christmas, Easter gift sets and gift baskets are distributed at the Rhode
Island and Massasusetts facilities. The Company sources product primarily from
the Pacific Rim. The Company is continually looking to further reduce costs by
more efficient sourcing.

Environmental Factors Affecting the Performance in the Year Ending July 31,
2003.

   After September 11, 2001, the total consumer market experienced a major slow
down. As a result major chains that ordered products from the Company delayed
their shipments, and kept inventory at the Company's facilities. The Company was
forced to hold inventory for these chains for a period of up to twelve months.
The Company expects that all the held inventory will be shipped out by the end
of the first quarter of or the beginning of the second quarter of fiscal 2003
(ending January 31, 2003).

                                       15

<PAGE>

   On September 30, 2002, 29 west coast ports were shut down abruptly and
remained closed as contract negotiations between dock-workers and shipping
companies broke off negotiations for new contracts. The shut down occurred
during the Company's peak inventory shipping period for orders for the
holiday season. In mid-October 2002, the President of the United States of
America signed an order under the Taft-Hartley Act to reopen the ports and put a
moratorium on the strike for 60 days. The shut down will have an effect on our
first quarter of shipments to our customers. A large portion of containers,
which were to be received, remained either at ports or on shipping vessels
on the water. In addition, empty containers were not brought back to ports in
the Pacific Rim which we needed to move some of our other products. In
mid-October 2002, our inventory began to be released for shipment to our
facility in New Bedford, MA. A slow down by the long shore-men on shipping
products is still prevalent. The first quarter revenue numbers will be impacted
by the shut down and may result in a delay of sales into the second quarter of
approximately $6 million. However, it is expected that all the revenue will be
booked through the second quarter with no adverse results to total net sales for
fiscal year 2003.

Results of Operations

 Fiscal Year Ended July 31, 2002 Compared to Fiscal Year Ended July 31, 2001

   Net Sales: Net sales for the year ended July 31, 2002 decreased to
$52,782,341 from $58,316,716 , a decrease of 9.5% from the prior year. Lower
sales of Jellies accounted for 5.3% of the decrease in net sales due to orders
lost to competitors in a bidding auction. The Company could not justify selling
product at below profitable levels to maintain this business. The remaining 4.2%
decrease resulted from loss in sales of gift items. The loss in sales is
particularly attributed to decreased consumer confidence and spending and the
weak environment. Approximately $1.5 million in sales which were postponed will
be shipped in the year ending July 31, 2003.

   Gross Profit:  Gross profit for the year ended July 31, 2002 decreased to
$15,067,661 from $16,520,532. The margins as a percent of sales were 28.5% and
28.3% respectively. The increase was attributable to lower raw material and
finished good costs offset by increase overhead and burden, particularly in
direct labor in manufacturing and purchase of repair part and shop supplies for
machinery for our new acquisition of Asher Candy.

   Operating Expenses: Selling, general and administrative expenses for the year
ended July 31, 2002 increased to $8,313,603 from $8,006,416 and increased to
15.8% from 13.7% as a percent of sales. The increase was largely due to an
additional $98,000 general insurance costs, $26,000 in communication costs and
$55,000 in facility costs (i.e., utilities, facility rents, heating oil)
associated with Asher Candy facility. The Company also incurred $145,000
additional advertising expenses associated with the marketing of its licensing
programs and various new gift products.

   Salaries and related expenses for the year ended July 31, 2002 increased to
$5,100,167 from $4,806,061, an increase of 9.7% from the prior year. Of this
increase, approximately $328,000 was due to cost of living raises for existing
management and employees. During the year ended July 31 ,2002 the Company had a
18% increase in its benefits costs, primarily health insurance, which accounted
for approximately $60,000 of the increase in salaries and related expenses.

   Non-recurring costs for the year ended July 31, 2002 increased to $707,551
from $0 for the prior year. The increase was due to the one-time costs relating
to the move of the Rhode Island manufacturing facility to the Chase City, VA
manufacturing facility.

   As a result, operating expenses increased to $14,121,321 from $12,812,477, a
4.8% increase from the prior year. The increase was attributable to $707,551 of
non-recurring expenses relating to the move of the Company's manufacturing
facility from Rhode Island. The increase was also attributable to an increase of
$145,000 in advertising costs, an increase of $388,000 in salaries and benefits
and an increase of $58,000 in travel costs.

   Income from Operations: Income from operations for the year ended July 31,
2002 decrease to $946,340 from $3,708,055, a decrease of 74.4% from prior year.
The decrease was primarily attributable to the Company's $5.5 million decrease
in sales from 2001 to 2002, and the $707,551 non-recurring charges associated
with the move from its Rhode Island manufacturing facility to its Chase City, VA
facility.

   Interest Income:  Interest income for the year ended July 31, 2002 decreased
to $4,881 from $11,182, a decrease of 56.3% from the prior year. The decrease
was attributable to using excess

                                       16

<PAGE>

funds to pay down credit facilities to minimize interest expense during the year
reducing cash on hand for daily overnight investment activity.

   Interest Expense: Interest expense for the year ended July 31, 2002 decreased
to $468,687 from $539,971, a decrease of 13.2% from the prior year. The decrease
was due to a decline in the interest rate from 7.92% in fiscal 2001 to 4.58% in
fiscal 2002. The Company's average borrowings increased from $5,500,000 in
fiscal 2001 to $7,300,000 in fiscal 2002, due to increased working capital needs
to purchase inventory and raw materials to support the peak seasonal needs and
acquisition of Asher Candy.

   Other Income (Expense): Other income (expense) for the year ended July 31,
2002 decreased to $90,535 from $132,209, a decrease of 31.5% from the prior
year. The decrease was primarily due to the receipt of a $75,000 settlement in a
trademark infringement suit the Company initiated in the prior year period.

   Income Taxes:  The income tax rate utilized for the years ended July 31, 2002
and 2001 was 43% and 33%, respectively. The tax rate increased due to the
recognition of dividend income for income tax reporting purposes which was
eliminated for financial reporting purposes. The Company recorded a tax expense
of $248,039 for the year ended July 31, 2002 compared to $1,093,100 for the year
ended July 31, 2001.

   Net Income: As a result of the foregoing, the Company earned net income of
$325,030 in the year ended July 31, 2002 compared to net income of $2,218,375 in
the year ended July 31, 2001, a 85.2% decrease.

Fiscal Year Ended July 31, 2001 Compared to Fiscal Year Ended July 31, 2000

   Net Sales: Net sales for the year ended July 31, 2001 increased to
$58,316,716 from 42,104,645, a 38.3% increase from the prior year. Higher sales
of gift items accounted for 8% of the increase in net sales. The remaining 30.3%
increase primarily resulted from sales of new products, including Kastins
candies, jelly beans and new gift items.

   Gross Profit: Gross profit for the year ended July 31, 2001 increased to
$16,520,532 from $9,920,760, a 67% increase from the prior year. The margins as
a percent of sales were 28% and 24% for the years ended July 31, 2001 and 2000,
respectively. The improved gross profit margin was attributable to improved
production efficiencies, largely associated with decreased costs of sugar which
accounted for saving of approximately $800,000, or 1.4% of net sales. The
introduction of new gift items with higher margin levels accounted for
approximately $1,300,000, or 2.2% of net sales. The increased availability of
labor in the Company's Rhode Island and Massachusetts facilities during peak
seasonal needs in the second half of the year reduced costs associated with
overtime and subcontract labor. Overtime and subcontract labor expense for the
year ended July 31, 2001 decreased to $1,116,368 from $1,735,251 a decrease of
2% from the prior year. The reduction of overtime and subcontract labor expense
was offset partially by increased number of production employees hired during
the year. The impact was a decrease of approximately $500,000 from prior year
period.

   Operating Expenses: Selling, general and administrative expenses for the year
ended July 31 ,2001 increased to $8,006,416 from $6,675,177 and decreased to 14%
from 16% as a percent of Sales from the prior year. The increase was largely due
to $500,000 of additional common carrier freight, $235,000 in additional
commissions, $230,000 of additional advertising expenses associated with the
higher sales volume and $360,000 additional facility costs (i.e., utilities,
facility rents, heating oil) associated with the Massachusetts facility.

   Salaries and related expenses for the year ended July 31 ,2001 increased to
$4,806,061 from $3,285,850 an increase of 46.3% from the prior year. Of this
increase, approximately $1,100,000 was due to new management employees at both
the Maryland and Rhode Island facilities as well as cost of living raises for
existing management . In addition, the Company recognized additional expense of
$500,000 during fiscal 2001 for a company wide performance based bonus program
which was payable at the end of the fiscal year based on earnings performance
criteria which were achieved.

   As a result, operating expenses for the year ended July 31 ,2001 increased to
$12,812,477 from $9,961,027 but decreased to 22% from 24% as a percent of sales
from the prior year. 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.

   Income from Operations:  Income from operations for the year ended July 31,
2001 increased to $3,708,055 compared to a loss $40,267 in the prior year. The
increase was mainly attributable to

                                       17

<PAGE>

the Company's sustained focus on developing efficiency in its manufacturing and
assembly facilities. The infrastructure put in place during the 2000 fiscal year
and operational efficiencies developed led to higher sales and higher margins.

   Interest Income: Interest income for the year ended July 31, 2001 decreased
to $11,182 from $36,016 a decrease of 68.9% from the prior year. The decrease
was attributable to using excess funds to pay down credit facilities to minimize
interest expense during the year reducing cash on hand for daily overnight
investment activity.

   Interest Expense: Interest expense for the year ended July 31, 2001 increased
to $539,971 from $434,978, an increase of 24.1% from the prior year. The
increase was mainly due to working capital needs to purchase inventory and raw
materials to support the increased volume of sales during the peak seasonal
needs. The Company's average borrowings increased from $4,500,000 in fiscal 2000
to $5,500,000 in fiscal 2001. The Company's average interest rate from 7.84% in
Fiscal year 2000 to 7.92% in fiscal 2001.

   Other Income/(Expense): Other income (expense) for the year ended July 31,
2001 decreased to $132,209 from $693,413, a 80.9% decrease from the prior year.
The decrease was primarily due to the receipt of a $350,000 settlement in 2001
in a trademark infringement suit the Company initiated and a $75,000 insurance
claim in the prior year.

   Income Taxes:  The income tax rate utilized for the years ended July 31, 2001
and 2000 was 33% and 39%, respectively. The decrease in the tax rate utilized is
due to the use of net operating losses and job credit carry-forwards. The
Company recorded a tax expense of $1,093,100 for the year ended July 31, 2001
compared to $98,100 for the year ended July 31, 2000.

   Net Income: As a result of the foregoing, the Company earned net income of
$2,218,375 for the year ended July 31, 2001 compared to net income of $156,084
for the prior year.

Financial Condition

  Assets

   Total assets increased to $31,390,954 as of July 31, 2002 from $22,804,112 as
of July 31, 2001, an increase of $8,586,842, or 37.7%. This increase primarily
resulted from higher prepaid expenses, increases in income tax receivables,
inventory, plant, property and equipment and assets relating to the acquisition
of Asher Candy. These increases were due, in part, to the increase in warehouse
capacity and inventory to support future sales volume leading into next fiscal
year. The increase in income taxes receivable is attributable to carryback of
net operating losses related to Asher Candy.

   Current assets increased to $21,730,297 as of July 31, 2002 from $17,841,372
as of July 31, 2001, an increase of $3,888,925, or 21.8%. The increase primarily
reflected increased inventories and income tax, receivables. The increase in
prepaid expenses was principally due to fees related to the Company's new
banking facility, an increase in prepaid rent at its Rhode Island facility and
prepaid royalty fees. The increase in income tax receivable is attributable to
carryback of net operating losses related to Asher Candy.

   Plant, property and equipment increased to $3.1 million as of July 31, 2002,
from $1.1 million as of July 31 ,2001, an increase of $2.0 million or 181%. The
increase was primarily due to capital additions for the Chase City facility of
$2.2 million and $940,000 due to acquisition of Asher Candy.

  Liabilities

   Total liabilities increased to $18,003,614 as of July 31, 2002 from
$11,575,120 as of July 31, 2001, increase of $6,428,494 or 55.5%. the increase
primarily reflects the additional borrowing from the Company's revolving line of
credit, and accounts payable associated with the acquisition of Asher Candy.

  Capital Structure

   The Company has two classes of stock outstanding, Class A Common Stock and
Class B Common Stock (collectively the "Common Stock"), which classes are
substantially identical, except that the Class A Common Stock is entitled to one
vote per share and the Class B Common Stock is entitled to seven

                                       18

<PAGE>

votes per share on all matters, including the election of directors. Uziel
Frydman, Chairman, President and Chief Executive Officer of the Company,
beneficially owns 400,000 shares of Class A Common Stock and all of the
1,000,000 share of Class B Common Stock outstanding and controls the Company.

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. The Company's working capital at July 31, 2002, July 31,
2001 and July 31, 2000 was $6,218,382, $7,485,168 and $6,020,265 respectively.

     In May 2001, the Company entered into a new credit facility with First
Union National Bank for a $20.0 million line of credit. Interest accrues on such
advances at LIBOR plus 2.35% (the rate at July 31, 2001 was 6.09%) and is
payable monthly. The loan agreement expires in June 2004. Advances under the
credit facility are based on a borrowing formula equal to 85% of eligible
domestic accounts receivable plus 60% of eligible finished goods and 30% of
eligible components inventory. Borrowings on inventory are capped based upon the
Company's seasonal requirements and are limited to $9.0 million. The credit
facility is also available for the issuance of letters of credit. The credit
facility is collateralized by the cash and cash equivalents, accounts receivable
and inventories of the Company and its wholly-owned subsidiaries. The agreement
contains business and financial covenants, including, a minimum tangible net
worth of $10,500,000 at July 31, 2001, a fixed charge ratio of 1.75 to 1.0 as of
July 31, 2001 and a limit on capital expenditures of $1,000,000. The Company was
in violation of the capital expenditure limits at July 31, 2001. The bank agreed
to a waiver of the violation. At July 31, 2001, the Company was in compliance
with the other two financial covenants.

     On April 30, 2002, the Company entered into the first amendment and
modification to the original loan and security agreement dated May 2001. The
modification increased the maximum principal amount available under the
revolving line of credit to $25,000,000 from $20,000,000 and extended two
additional term loans in the principal amount of $650,000 each. Advances under
the line of credit remained the same as in the original agreement. The business
and financial covenants requiring a minimum tangible net worth of $12,500,000 at
July 31, 2002, a fixed charge ratio of 1.75 to 1.0 as of July 31, 2002 and a
limit on capital expenditures of $2,000,000 were modified. The Company was in
violation of the minimum tangible net worth, fixed charge ratio and unfunded
capital expenditures at July 31, 2002. The bank agreed to waivers of these
violations. Interest accrues on such advances at LIBOR plus 2.35% (the rate at
July 31, 2002 was 4.16%) and is payable monthly. The loan agreement expires in
June 2004.

     In June 1996 and May 1997, the Company borrowed $935,000 and $580,000,
respectively, from Industrial Development Authority of Mecklenburg County
("IDAMC") for the acquisition and improvement of the Chase City facility and the
purchase and installation of new production equipment, financed through the
issuance of two series of Industrial Revenue Bonds ("IRB") (Series 1996 and
Series 1997). The IRBs were backed by irrevocable letters of credit issued by
Wachovia, NA . Advances on the letters of credit (which expire June 2011 and
2002, respectively) were, 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 between Wachovia and the Company.

     Under the reimbursement agreement, the Company made monthly interest and
sinking fund payments to Wachovia. Annual payments to the sinking fund for the
Series 1997 IRBs were 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
varied from month to month and were subject to variable market tax exempt
interest rates (4.40% at July 31, 2002). The terms of the reimbursement
agreement required, among other things, that the Company maintain certain
financial ratios and adhere to certain covenants, including, without Wachovia's
permission, borrowing additional funds, merging or consolidating, amending its
Articles of Incorporation and repaying subordinated debt. The current loan
amounts at July 31, 2002 were $0.00 for the Series 1997 IRBs and $550,000 for
Series 1996 IRBs. On June 2002, the Series 1997 IRBs were paid in full.

     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. On June 2001 the
IDAMC and LCDC loans were paid in full.

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

                                       19

<PAGE>

Schedule of Contractual Obligations

<TABLE>
<CAPTION>
                                                       Payments Due by Period
                                          --------------------------------------------------
                                                       Less Than
Contractual Obligation                       Total       1 year     1-3 years  After 4 years
----------------------                    ----------- -----------  ----------- -------------
<S>                                       <C>        <C>           <C>         <C>
Long-Term Debt .........................  $ 1,812,000 $   444,389  $ 1,042,611  $   325,000
Capital Lease Obligation ...............      454,414      41,667      125,000      287,747
Licensing Agreements ...................      121,000      81,000       30,000           --
Operating Leases .......................    2,221,223     704,119    1 039,892      477,212
                                          ----------- -----------  -----------  -----------
Total Contractual Obligation ...........  $ 4,608,637 $ 1,271,175  $ 2,237,503  $ 1,089,959
                                          =========== ===========  ===========  ===========
</TABLE>

Schedule of Commercial Commitments

<TABLE>
<CAPTION>
                                                               Amount of Commitment
                                                              expiration per period
                                                      -------------------------------------
                                                      Less Than
Commercial Commitments                       Total      1 Year    1-3 years   After 4 years
----------------------                    ----------- ---------  -----------  -------------
<S>                                       <C>         <C>        <C>          <C>
Line of Credit (*) .....................  $25,000,000        --  $25,000,000             --
Total Contractual Obligation ..........   $25,000,000        --  $25,000,000             --
</TABLE>

--------
(*) The line of credit is available for advances to finance working capital and
the issuance of letter of credits. Advances under the line of credit are based
on a borrowing formula equal to 85% of eligible domestic accounts receivable
plus 60% of eligible finished goods and 30% of eligible components inventory.
The line of credit facility varies from quarter to quarter based on working
capital needs and pay-downs.

Cash Flows:

     Cash Used in Operating Activities: Net cash used from operating activities
for the year ended July 31, 2002 and 2001, respectively was $478,710 compared to
cash provided of $1,618,667. The increase in cash used by operating activities
was due primarily to increases in inventory, accrued expenses, income tax
receivable, accounts receivable offset by decreases in net income and income
taxes payable.

     Net cash provided from operating activities for the year ended July 31,
2001 and 2000, respectively was $1,618,667 compared to cash used of $986,660 in
the prior comparable period. The decrease in cash used by operating activities
was due primarily to decreases in accounts payable and accounts receivable which
were offset by the increase in inventory, income tax receivable and purchasing
activity as well as the increases in net income, taxes payable and accrued
expenses. The increase in inventory was due to higher finished goods of
approximately $1,300,000 and greater raw materials of approximately $700,000.

     Net Cash Used in Investing Activities: Net cash used in investing
activities increased to $2,161,005 for the year ended July 31, 2002 from
$1,064,259, primarily due to equipment purchases and capital improvements for
the Company's move of its manufacturing facility in Rhode Island to its Chase
City facility and the asset acquisition of Asher Candy.

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

     Net Cash Used by Financing Activities: Net cash provided by financing
activities was $2,963,767 compared to cash used of $810,711 in prior period
primarily due to reliance on borrowings on the Company's line of credit to
finance working capital needs and payoff of working operating facility with
acquisition of Asher Candy. At July 31, 2002 and 2001, the Company had borrowed
$8,203,971 and $3,842,297 under the line of credit and had no letters of credit
outstanding.

     The Company has availability of approximately $17,000,000 of its
$25,000,000 line of credit to meet additional seasonal needs to purchase and
manufacture inventory and meet other working capital needs.

                                       20

<PAGE>

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

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

     Principal payments for the Company's long term debt for the year ended July
31, 2002 and 2001 were $254,748 and $534,000 respectively. The Company believes
that cash provided by operations will be sufficient to finance its operations
and fund debt service requirements.

     The Company anticipates that its material capital expenditures for the next
12 months will consist of improvements to the Company's manufacturing facilities
of approximately $1,000,000. In addition, the Company will continue to explore
opportunities to expand the Company's business, including possible acquisitions,
although the Company has no current agreements or commitments and is not
currently engaged in any material negotiations with respect to specific
acquisitions. The Company believes that cash provided from operations and
available borrowing capacity will be sufficient to fund these expenditures.

                                       21

<PAGE>

Item 7a.  Quantitative and Qualitative Disclosures About Market Risks

Accounting Policies and Market Risks Associated with Derivative Instruments

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

Significant Accounting Policies and Estimates

     The Company's preparation of financial statements in conformity with
accounting principals generally accepted within the United States requires
management to make estimates and assumptions in certain circumstances that
effect amounts reported in the accompanying financial statements and related
notes. In preparing these financial statement, management has made its best
estimates and judgments of certain amounts included in the financial statements,
giving due consideration to materiality. The Company does not believe there is a
great likelihood that materially different amounts would be reported related to
the accounting policies described below; however, application of these
accounting policies involves the exercise of judgment and the use of assumptions
as to future uncertainties and, as a result, actual results could differ from
these estimates.

     The Company provides an allowance for uncollectible accounts receivable
based on experience. The Company considers the following factors in developing
an estimate of its allowance for non-payment and the overall economic
environment. Although it is reasonably possible that management's estimate of
uncollectible accounts could change in the near future, management is not aware
of any events that would result in a change to its estimates which would be
material to the Company's financial position or results from operations. At July
31, 2002 and 2001, respectively, the Company had an allowance for doubtful
accounts of approximately $126,000 and $189,000.

     The Company provides an allowance for slow moving inventory based on
experience and aging of products. The Company considers the following factors in
developing an estimate of its allowance for non-moving of inventory and the
overall economic environment. Although it is reasonably possible that
managements estimate of slow moving inventory could change in the near future,
management is not aware of any events that would result in change to its
estimates which would be material to the Company's financial position or results
from operations. At July 31, 2002 and 2001, respectively, the Company had an
allowance for slow moving inventory of approximately $700,800 and $700,000.

     Goodwill represents the excess of consideration over the net assets
acquired resulting from acquisitions of companies accounted for by the purchase
method. The Company utilizes the annual evaluation as required by SFAS 142. At
each Balance Sheet date, management evaluates the recoverability of the goodwill
and reviews goodwill and other ling-lived assets for impairment. As of July 31,
2002 there was no impairment loss.

  Foreign Exchange Contracts

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

     In the fourth quarter of fiscal 2001, the Company adopted Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133) at the time it executed a foreign exchange
forward contract to purchase 766,000 Euros. In accordance with SFAS 133, as
amended, the Company marked the contract to market as of July 31, 2002 and
recorded the loss, net of tax, of $18,270 in other comprehensive income since
the Company designated the contract as a cash flow hedge. The Company recorded a
loss of $31,139 in other comprehensive income as of July 31, 2002 related to a
similar forward exchange contract.

Seasonality and Cylicality; Fluctuation in Quarterly Operating Results

                                       22

<PAGE>

     The Company has experienced and expects to continue variability in revenues
and net income from quarter to quarter as a result of seasonality that may
accompany private or public sector budget cycles. Sales of the Company's
products have historically been higher in the first and second quarters as a
result of patterns of capital spending by our customers.

     The Company also believes that the Confectionary industry is influenced by
general economic conditions and particularly by the level of change. Increase
levels of change can have a favorable impact on the Company's revenues. The
Company also believes that industry tends to experience periods of decline and
recession during economic downturns. The industry could sustain periods of
decline in revenues in the future, and any decline may have a material adverse
effect on the Company.

     The Company could in the future experience quarterly fluctuations in
operating results due to the factors described above and other factors,
including short-term nature of certain client commitments; patterns of capital
spending by customers; loss of a major client; seasonality that may accompany
private or public budget cycles; pricing changes in response to various
competitive factors; market factors affecting availability of qualified
personnel and general economic conditions.

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

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

     In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." The standard requires companies to recognize costs associated with
exit or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by the
standard include lease termination costs and certain employee severance costs
that are associated with a restructuring, discontinued operation, plant closing,
or other exit or disposal activity. Previous accounting guidance provided by
EITF Issue No. 94-3, "Liability Recognition for Certain employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring) is replaced by this Statement. Statement 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. Management does not anticipate that the adoption of this Statement
will have a significant effect on the Company's financial statements.

     SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," was issued and establishes accounting and reporting standards for the
impairment or disposal of long-lived assets. This statement supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed." SFAS No. 144 provides one accounting model to be used
for long-lived assets to be disposed of by sale, whether previously held for use
or newly acquired and broadens the presentation of discontinued operations to
include more disposal transactions. The provisions of SFAS No. 144 are effective
for financial statements issued for fiscal years beginning after December 15,
2001. The Company will adopt the Statement August 1, 2002.

                                       23

<PAGE>

Item 8.  Financial Statements

     The following consolidated financial statements of the Company and
Subsidiaries and the report of independent certified public accountants thereon
are set forth on pages 32 through 54 hereof.

                                       24

<PAGE>

                                    PART III.

Item 10.  Directors, Executive Officers, Promoters and Control Persons;
        Compliance with Section 16(A) of the Exchange Act

Directors and Executive Officers

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

  Name                      Age Position
  ----                      --- --------

  Uziel Frydman ..........  66  Chairman, President and Chief Executive Officer
  Amir Frydman ...........  40  Director, Treasurer and Executive Vice
                                  President--Marketing and Product Development
  Christopher J. Willi ...  42  Chief Financial Officer and Secretary
  Douglas A. Cummins .....  60  Director
  Jean E. Clary ..........  59  Director
  Guy Blynn ..............  55  Director
  Eric A. Richman(1) .....  52  Vice President--Operations
  Paul J. Splitek(1) .....  53  Vice President--Sales
  Arthur Wlodarski(1) ....  46  Vice President--Purchasing

--------
(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
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.

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

     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

                                       25

<PAGE>

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. From 1996 to 2000, Ms. Clary was a member
of 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.

     Guy M. Blynn has served as Vice President and Deputy General Counsel of
R.J. Reynolds Tobacco Company, a manufacturer and distributor of cigarettes,
since October 1989. From 1982 to 1990, Mr. Blynn was a member of the board of
directors of the International Trademark Association. From 1980 to 1993, Mr.
Blynn was a member of the Adjunct Faculty at Wake Forest University School of
Law teaching Unfair Trade Practices. Mr. Blynn currently sits on the board of
directors of the Winston-Salem Urban League and the Anti-Defamation League. Mr.
Blynn earned a Juris Doctorate degree from Harvard Law School in 1970 and a
Bachelor of Science degree in economics with a major in accounting from
University of Pennsylvania in 1967.

     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. From 1997 to 1999, Mr. Richman served as Director of Manufacturing
of E. Rosen, and prior to that, from 1996 to 1997, 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.

     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
until 2000, 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 are in
compliance with all applicable filing requirements.

                                       26

<PAGE>

Item 11.  Executive Compensation

     Information concerning the Executive Compensation of the Company is hereby
incorporated by the reference from the Company's definitive proxy statement
relating to its Annual Meeting of Shareholders to be filed with the Commission
pursuant to Regulation 14A on or before November 29, 2002.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

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

Item 13.  Certain Relationships and Related Transactions

     Information concerning Certain Relationships and Related Transactions of
the Company is hereby incorporated by reference from the Company's definitive
proxy statement relating to its Annual Meeting of Shareholders to be filed with
the Commission pursuant to Regulation 14A on or before November 29, 2002.

                                       27

<PAGE>

                                    PART IV.

Item 14.  Exhibits, Financial Statements and Reports on Form 8-K

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

                   Index to Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                                                         Page
                                                                                                       --------
<S>                                                                                                    <C>
Report of Independent Auditors .....................................................................      33
Consolidated Balance Sheets at July 31, 2002 and 2001 ..............................................      34
Consolidated Statements of Operations for the years ended July 31, 2002, 2001 and 2000 .............      35
Consolidated Statements of Shareholders' Equity for the years ended July 31, 2002, 2001 and 2000 ...      36
Consolidated Statements of Cash Flows for the years ended July 31, 2002, 2001 and 2000 .............      37
Summary of Accounting policies .....................................................................   38 to 42
Notes to Consolidated Financial Statements .........................................................   43 to 54
Schedule II--Valuation and Qualifying Accounts .....................................................      32
</TABLE>

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

     (b) Reports on Form 8-K

         None

     (c) Exhibits

Number                                              Description
------                                              -----------
 3.1   Articles of Incorporation, as amended, of the Registrant. (1)

 3.2   Bylaws, as amended, of the Registrant.(1)

 4.1   Form of Registrant's Class A Common Stock Certificate.(2)

 4.2   Form of Underwriter's Warrant Agreement, including Form of Warrant
        Certificate.(2)

 4.3   Form of Public Warrant Agreement among the Registrant, Paragon Capital
        Corporation, as Underwriter and Continental Stock Transfer & Trust
        Company, as Warrant Agent.(2)

 4.4   Form of Registrant's Public Warrant Certificate.(2)

10.1   Amended and Restated Reimbursement Agreement between Central Fidelity
        National Bank and the Registrant, dated as of May 1, 1997.(1)

10.2   Loan Agreement between Industrial Development Authority of Mecklenburg
        County, Virginia and the Registrant, dated as of May 1, 1997.(1)

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.(1)

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.(1)

10.5   Pledge and Security Agreement between the Registrant and Central Fidelity
        National Bank, dated as of May 1, 1997.(1)

10.6   Guaranty between Uziel Frydman, the Registrant and Central Fidelity
        National Bank, dated as of May 1, 1997.(1)

10.7   Loan Agreement between Industrial Development Authority of Mecklenburg
        County, Virginia and the Registrant, dated as of June 1, 1996.(1)

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.(1)

10.9   Pledge and Security Agreement between the Registrant and Central Fidelity
        National Bank, dated as of June 1, 1996.(1)

                                         28

<PAGE>

Number                                              Description
------                                              -----------
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.(1)

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.(1)

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.(1)

10.13   Promissory Note issued to Ilana Frydman by the Registrant, dated August
         28, 1991.(1)

10.14   Lease, as amended, for the Registrant's Rockville offices, executed
         November 30, 1992.(1)

10.15   1998 Stock Option Plan.(2)

10.16   Employment Agreement between Registrant and Uziel Frydman, dated May 6,
         1998.(2)

10.17   Form of Employment Agreement between Registrant and Anat Schwartz, dated
         May 6, 1998.(2)

10.18   Form of Employment Agreement between Registrant and Amir Frydman, dated
         May 6, 1998.(2)

10.19   Receiver's Bill of Sale by Allen M. Shine, as receiver of E. Rosen
         Company, dated September 24, 1998.(3)

10.20   Loan and Security Agreement between the Registrant and First Union
         National Bank, dated June 12, 2001.(4)

10.21   First Amendment to Loan and Security Agreement between the Registrant
        and Wachovia Bank, National Association, dated April 30, 2001.
        (filed herewith)


21.1    Subsidiaries of the Registrant.(filed herewith)

23.1    Consent of BDO, LLP

99.1    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
        Section 906 of the Sarbanes-Oxley Act of 2002.(filed herewith)

99.2    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
        Section 906 of the Sarbanes-Oxley Act of 2002.(filed herewith)

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

(2) Incorporated herein by reference to Amendment No. 2 to the Company's
    Registration Statement on Form SB-2, dated as of May 4, 1998 (Registration
    No. 333-44655)

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

(4) Incorporated herein by reference to the Registrant's Ammedment No.1 to the
Registration  Statement on Form 3-3/A, dated as of September 2002 (registration
No. 333-92012).

                                       29

<PAGE>

                                  SIGNATURES

   Pursuant to the requirements of 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 on the date indicated.

Date: October 29, 2002


                                            SHERWOOD BRANDS, INC.

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

                                            By:       /s/  AMIR FRYDMAN
                                                ------------------------------
                                                        Amir Frydman
                                                  Executive Vice President,
                                                   Treasurer and Director

                                            By:       /s/  CHRISTOPHER J. WILLI
                                                -------------------------------
                                                        Christopher J. Willi
                                                  Chief Financial Officer,
                                                  Secretary

                                             By:       /s/  DOUGLAS A. CUMMINS
                                                ------------------------------
                                                         Douglas A. Cummins
                                                  Director

                                            By:       /s/  JEAN CLARY
                                                ------------------------------
                                                        Jean Clary
                                                  Director

                                            By:       /s/  GUY BLYNN
                                                ------------------------------
                                                        Guy Blynn
                                                  Director

                                       30

<PAGE>

                        CERTIFICATE PURSUANT TO 18 U.S.C.
                                  SECTION 1350
                      AS ADOPTED PURSUANT TO SECTION 906 OF
                         THE SARBANES-OXLEY ACT of 2002

I, Uziel Frydman, Chairman of the Board, President and Chief Executive Officer
of Sherwood Brands, Inc. (Sherwood), certify that:

     I have reviewed this annual report on Form 10-K of Sherwood;

     Based on my knowledge, this annual report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this annual report; and

     Based on my knowledge, the financial statements, and other financial
     information included in this annual report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     Sherwood as of, and for, the periods presented in this annual report.

Date:  October 29, 2002

                                                     /s/  UZIEL FRYDMAN
                                                  -----------------------------
                                                          Uziel Frydman
                                                  President and Chief Executive
                                                     Officer

I, Christopher J. Willi, Chief Financial Officer of Sherwood Brands, Inc.
(Sherwood), certify that:

     I have reviewed this annual report on Form 10-K of Sherwood;

     Based on my knowledge, this annual report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this annual report; and

     Based on my knowledge, the financial statements, and other financial
     information included in this annual report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     Sherwood as of, and for, the periods presented in this annual report.

Date:  October 29, 2002

                                              By:      /s/  CHRISTOPHER J. WILLI
                                                 -------------------------------
                                                        Christopher J. Willi
                                                  Chief Financial Officer,
                                                   Secretary

                                       31

<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS'

                         ON FINANCIAL STATEMENT SCHEDULE


Sherwood Brands, Inc.

     The audits referred to in our report to Sherwood Brands, Inc. dated October
21, 2002 which is contained in this form 10-K, include the audit of the
financial statement schedule listed in the accompanying index for each of the
three years in the period ended July 31, 2002. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statement schedule based on the audits.

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


Washington, D.C.


October 25, 2002


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, 2000
   Allowance for doubtful accounts...      $ 67,946           $201,293       $(154,239)      $115,000
   Allowance for customer credits ...      $119,976           $120,096       $      --       $240,072
Reserve for slow moving inventory ...      $295,141           $ 19,918       $      --       $315,059
Year ended July 31, 2001
   Allowance for doubtful accounts...      $115,000           $272,290       $(198,690)      $188,600
   Allowance for customer credits ...      $240,072           $     --       $(156,533)      $ 83,539
Reserve for slow moving inventory ...      $315,059           $385,369       $      --       $700,428
Year ended July 31, 2002
   Allowance for doubtful accounts...      $188,600           $227,811       $(290,239)      $126,172
   Allowance for customer credits ...      $ 83,539           $     --       $  (1,960)      $ 81,579
Reserve for slow moving inventory ...      $700,428           $    399       $      --       $700,827
</TABLE>

                                       32

<PAGE>

INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT

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

We have audited the accompanying consolidated balance sheets of Sherwood Brands,
Inc. and Subsidiaries as of July 31, 2002 and 2001 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended July 31, 2002. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sherwood Brands,
Inc. and Subsidiaries at July 31, 2002 and 2001 and the results of its
operations and cash flows for each of the three years in the period ended July
31, 2002 in conformity with accounting principals generally accepted in the
United States of America.

                                                     BDO SEIDMAN, LLP

Washington, D.C.
October 25, 2002

                                       33

<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
For the years ended July 31,                                                        2002              2001
----------------------------                                                     -----------      -----------
<S>                                                                             <C>              <C>
                                Assets
Current assets
   Cash and cash equivalents .................................................   $   709,247      $   385,195
   Accounts receivable, less allowance of $126,000 and $189,000 ..............     2,547,452        1,977,093
   Inventory .................................................................    15,956,145       14,709,515
   Income taxes receivable ...................................................     1,555,078               --
   Other current assets ......................................................       450,375          344,568
   Deferred taxes on income ..................................................       512,000          425,000
                                                                                 -----------      -----------
Total current assets .........................................................    21,730,297       17,841,371
Net property and equipment ...................................................     7,350,488        4,906,350
Goodwill .....................................................................     2,001,330               --
Other assets .................................................................       308,839           56,391
                                                                                 -----------      -----------
Total Assets .................................................................   $31,390,954      $22,804,112
                                                                                 ===========      ===========

                 Liabilities and Stockholders' Equity
Current liabilities
   Line of credit ............................................................   $ 8,203,971      $ 3,842,297
   Current portion of long-term debt .........................................        90,000          215,000
Current portion of subordinated debt .........................................            --               --
   Current portion of capital lease obligation ...............................        15,718           31,245
   Accounts payable ..........................................................     5,833,301        3,986,845
   Accrued expenses ..........................................................     1,368,928        1,558,342
   Income taxes payable ......................................................            --          722,474
                                                                                 -----------      -----------
Total current liabilities ....................................................    15,511,918       10,356,203
Long-term debt ...............................................................     1,722,000          550,000
Capital lease obligation .....................................................       438,696          424,917
Deferred taxes on income .....................................................       331,000          244,000
                                                                                 -----------      -----------
Total Liabilities ............................................................    18,003,614       11,575,120
                                                                                 ===========      ===========
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,
     2,986,809 and 2,700,000 issued and outstanding ..........................        29,869           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 ...................................................     9,816,856        7,973,538
Retained earnings ............................................................     3,561,754        3,236,724
Accumulated other comprehensive income (loss) ................................       (31,139)         (18,270)
                                                                                 -----------      -----------
Total Stockholders' Equity ...................................................    13,387,340       11,228,992
                                                                                 -----------      -----------
Total Liabilities and Stockholders' Equity ...................................   $31,390,954      $22,804,112
                                                                                 ===========      ===========
</TABLE>

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

                                       34

<PAGE>

                     SHERWOOD BRANDS, INC AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                            For years ended July 31,
                                                     -------------------------------------
                                                         2002         2001         2000
                                                     -----------  -----------  -----------
<S>                                                  <C>          <C>          <C>
 Net sales ........................................  $52,782,341  $58,316,716  $42,104,645
 Cost of sales ....................................   37,714,680   41,796,184   32,183,885
                                                     -----------  -----------  -----------
 Gross profit .....................................   15,067,661   16,520,532    9,920,760
 Selling, general and administrative
   expenses .......................................    8,313,603    8,006,416    6,675,177
 Salaries and related expenses ....................    5,100,167    4,806,061    3,285,850
 Non-recurring costs-moving .......................      707,551           --           --
                                                     -----------  -----------  -----------
 Total operating expenses .........................   14,121,321   12,812,477    9,961,027
                                                     -----------  -----------  -----------
 Income (loss) from operations ....................      946,340    3,708,055      (40,267)
                                                     -----------  -----------  -----------
 Other income (expense)
    Interest income ...............................        4,881       11,182       36,016
    Interest expense ..............................     (468,687)    (539,971)    (434,978)
    Other income (expense) ........................       90,535      132,209      693,413
                                                     -----------  -----------  -----------
 Total other (expense) income .....................     (373,271)    (396,580)     294,451
                                                     -----------  -----------  -----------
 Income before provision
             for taxes on income ..................      573,069    3,311,475      254,184
                                                     -----------  -----------  -----------
 Provision for taxes on
   income .........................................      248,039    1,093,100       98,100
                                                     -----------  -----------  -----------
 Net income .......................................  $   325,030  $ 2,218,375  $   156,084
                                                     ===========  ===========  ===========
 Net Income per share
    --basic .......................................  $      0.09  $      0.60  $      0.04
    --diluted .....................................         0.08         0.56         0.04
                                                     ===========  ===========  ===========
 Weighted average common shares
   outstanding
    --basic .......................................    3,778,375    3,700,000    3,700,000
    --diluted .....................................    4,312,762    3,954,428    3,700,000
</TABLE>

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

                                       35

<PAGE>

                          SHERWOOD BRANDS, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                              Common Stock
                               ----------------------------------------------                            Accumulated
                                        Class A           Class B               Additional                  Other
                               ------------------------ ---------------------    Paid-In       Retained  Comprehensive
                                  Shares       Amount     Shares      Amount     Capital       Earnings  Income (Loss)     Total
                               -----------  ----------- ----------  ---------  -----------   ----------- -------------  -----------
<S>                            <C>          <C>         <C>         <C>        <C>            <C>        <C>          <C>
Balance, at July 31, 1999 ....   2,700,000  $    27,000  1,000,000  $  10,000  $ 7,973,538   $   862,265 $        --    $ 8,872,803
Net Income....................          --           --         --         --           --       156,084          --        156,084
                               -----------  ----------- ----------  ---------  -----------   ----------- -----------    -----------
Balance, at July 31, 2000 ....   2,700,000       27,000  1,000,000     10,000    7,973,538     1,018,349          --      9,028,887
Foreign currency (loss) ......          --           --         --         --           --            --     (18,270)            --
Net income ...................          --           --         --         --           --     2,218,375          --             --
Comprehensive income .........          --           --         --         --           --            --          --      2,200,105
                               -----------  ----------- ----------  ---------  -----------   ----------- -----------    -----------
Balance, at July 31, 2001 ....   2,700,000       27,000  1,000,000     10,000    7,973,538     3,236,724     (18,270)    11,228,992
Foreign currency (loss) ......          --           --         --         --           --            --     (12,869)            --
Exercise of stock options ....      16,250          163         --         --       40,931            --          --             --
Vesting restricted stock .....          --           --         --         --       19,401            --          --             --
Issued stock Acquisition .....     270,559        2,706         --         --    1,674,760            --          --             --
Warrants issued Acquisition ..          --           --         --         --      108,226            --          --             --
Net income ...................          --           --         --         --           --       325,030          --             --
Comprehensive income .........          --           --         --         --           --            --          --      2,158,348
                               -----------  ----------- ----------  ---------  -----------   ----------- -----------    -----------
Balance, at July 31, 2002 ....   2,986,809  $    29,869  1,000,000  $  10,000  $ 9,816,856   $ 3,561,754 $   (31,139)   $13,387,340
                               ===========  =========== ==========  =========  ===========   =========== ===========    ===========
</TABLE>

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

                                       36

<PAGE>

                    SHERWOOD BRANDS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                For the years ended July 31,
                                                                     -------------------------------------------------
                                                                        2002               2001                2000
                                                                     -----------        -----------        -----------
<S>                                                                  <C>                <C>                <C>
Cash flows from operating activities
   Net income (loss) ...........................................     $   325,030        $ 2,218,375        $   156,084
   Adjustments to reconcile net income (loss) to net
   Cash provided by (used in) operating activities:
       Depreciation expense ....................................         680,013            403,756            226,871
       Deferred income taxes ...................................              --            (94,000)            48,100
       Restricted stock ........................................          19,401                 --                 --
       Gain (loss) on disposal of equipment ....................          (3,674)                --                 --
       (Gain) loss on foreign currency exchange ................             422             (2,519)            (5,574)
       Provision for inventory allowance .......................             399            385,369             19,918
       Provision for doubtful accounts .........................         227,811            272,290            201,293
       (Increase) decrease in assets
       Accounts receivable .....................................        (798,168)          (154,689)           632,887
       Inventory ...............................................       1,346,920         (2,411,309)        (4,133,913)
       Income taxes receivable .................................        (674,520)           407,237             78,072
       Other current assets ....................................         (87,672)           (55,634)           369,430
       Other assets ............................................        (210,204)             4,715            (32,642)
       Increase (decrease) in liabilities
          Accounts payable .....................................         213,014           (537,054)         1,666,290
          Accrued expenses .....................................        (795,008)           509,656            (49,076)
          Income taxes payable .................................        (722,474)           672,474           (164,400)
                                                                     -----------        -----------        -----------
Net cash provided by (used in) operating activities ............        (478,710)         1,618,667           (986,660)
                                                                     -----------        -----------        -----------
Cash flows from investing activities
   Acquisition costs of Asher Candy ............................         (58,628)                --                 --
   Proceeds from sale of property, plant & equipment ...........          26,058                 --                 --
   Capital expenditures ........................................      (2,128,435)        (1,064,258)          (905,254)
                                                                     -----------        -----------        -----------
Net cash used in investing activities ..........................      (2,161,005)        (1,064,258)          (905,254)
                                                                     -----------        -----------        -----------
Cash flows from financing activities
   Net borrowings on line of credit ............................       3,177,584           (276,703)         2,180,552
   Payments on debt ............................................        (254,748)          (534,008)          (304,932)
   Exercise of Stock options ...................................          40,931                 --                 --
                                                                     -----------        -----------        -----------
Net cash (used in) provided by financing activities ............       2,963,767           (810,711)         1,875,620
                                                                     -----------        -----------        -----------
Net increase (decrease) in cash and cash equivalents ...........         324,052           (256,302)           (16,294)
                                                                     -----------        -----------        -----------
Cash and cash equivalents, at beginning of period ..............         385,195            641,497            657,791
                                                                     -----------        -----------        -----------
Cash and cash equivalents, at end of period ....................     $   709,247        $   385,195        $   641,497
                                                                     ===========        ===========        ===========
Interest Paid ..................................................     $   468,687        $   539,971        $   434,978
Income Taxes Paid ..............................................     $ 1,623,448        $   443,440        $   395,900
</TABLE>

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

                                       37

<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"), Sherwood Brands of RI, Inc. and Asher Candy, Inc.
(collectively, the "Company"). All material inter-company transactions and
balances have been eliminated in consolidation.

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

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

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

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

Sherwood Acquisition Corporation (a wholly-owned subsidiary of the Company) was
incorporated in April 2002 in the state of Wyoming. Sherwood Acquisition merged
with and into Asher Candy Acquisition Corporation, a Wyoming corporation. On May
1, 2002 The Company acquired all of the outstanding common stock of Asher Candy
Acquisition Corporation, a Wyoming corporation with operations located in New
Hyde Park, New York. Asher Candy Acquisition Corporation is a manufacturer of
candy canes and other hard candies under the "Asher" name. The surviving
corporation of the merger is Asher Candy Acquisition Corporation, which has
changed its name to Asher Candy, Inc. Asher generated no revenues from May 1,
2002 through July 31, 2002.

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

                                       38

<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES

             SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)

or market. Cost is determined by the FIFO (first-in, first-out) method.

Property and Equipment

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

Asset Impairment

  The Company periodically evaluates the carrying value of long-lived assets
when events and circumstances warrant such a review. The carrying value of a
long-lived asset is considered impaired when the anticipated undiscounted cash
flow from such asset is separately identifiable and is less than the carrying
value. In that event, a loss is recognized based on the amount by which the
carrying value exceeds the fair market value of the long-lived asset. Fair
market value is determined primarily using the anticipated cash flows discounted
at a rate commensurate with the risk involved.

Revenue Recognition

  Sales are recognized upon shipment of products. Sales discounts and any other
price adjustments are accounted for as a reduction in revenue at the later of
(1) the date at which the related revenue is recognized by the Company or (2)
the date at which the sales incentive is offered.

  In September 2000, the Emerging Issues Task Force issued EITF 00-10,
Accounting for Shipping and Handling Fees and Costs (EITF 00-10). EITF 00-10
requires that shipping and handling fees billed to customers be classified as
revenue and shipping and handling costs be either classified as cost of sales or
disclosed in the notes to the financial statements. The Company includes
shipping and handling fees billed to customers in net sales. Shipping and
handling costs associated with inbound freight are included in cost of sales.
Shipping and handling costs associated with outbound freight are included in
selling, general and administrative expenses and totaled approximately
$2,973,000, $3,437,000 and $3,137,000 in 2002, 2001 and 2000, respectively.

Income Taxes

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

Use of Estimates

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

Financial Instruments

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

                                       39

<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES

             SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)

Derivative Financial Instruments

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

Comprehensive Income

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

Earnings Per Share

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

<TABLE>
<CAPTION>
                                                                For the year ended July 31, 2002
                                                                --------------------------------
                                                                                       Per Share
                                                                  Income      Shares    Amount
                                                                ----------   --------- ---------
     <S>                                                        <C>          <C>       <C>
     Basic earnings per share
     Income available to common stockholders ..............     $  325,030   3,778,375   $0.09
     Effect of dilutive stock options .....................                    534,386
     Diluted earnings per share ...........................     $  325,030   4,312,761   $0.08

<CAPTION>
                                                                For the year ended July 31, 2001
                                                                --------------------------------
                                                                                       Per Share
                                                                  Income      Shares    Amount
                                                                ----------   --------- ---------
     <S>                                                        <C>          <C>       <C>
     Basic earnings per share
     Income available to common stockholders ..............     $2,218,375   3,700,000   $0.60
     Effect of dilutive stock options .....................                    254,428
     Diluted earnings per share ...........................     $2,218,375   3,954,428   $0.56

</TABLE>

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

                                       40

<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES

             SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)

Recent Accounting Pronouncements

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

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

  The Company does not believe either of these pronouncements will have a
material effect on the Company's financial statements.

  In November 2001, the Emerging Issues Task Force ("EITF") issued EITF No.
01-09, "Accounting for Consideration Given by a Vendor to a Customer or a
Reseller of Vendor's Products" which codified and reconciled the Task Forces's
consensuses in EITF No. 00-14 "Accounting for Certain Sales Incentives", and
EITF No. 00-25 "Vendor Income Statement Characterization of Consideration Paid
to a Reseller for the Vendor's Products", among others. These issues presume
that consideration from a vendor to a customer or reseller of the vendor's
products is a reduction of the selling prices of the vendor's products and,
therefore, should be characterized as a reduction of revenue when recognized in
the vendor's income statement. Revenue reduction is required unless
consideration relates to a separate identifiable benefit and the benefit's fair
value can be established. This issue should be applied no later than in annual
or interim financial statements for periods beginning after December 15, 2001,
which is the Company's third quarter ending April 30, 2002.

  The Company offers price adjustments to its larger customers and has
historically accounted for these adjustments as a reduction in revenue at the
later of (1) the date at which the related revenue is recognized by the Company
or (2) the date at which the sales incentive is offered. The Company does not
sell its products to resellers. As a result, the Company's adoption of this
statement, effective February 1, 2002, will not have a material effect on its
consolidated financial statements.

  In June 2002, the Financial Accounting Standards Board (FASB) issued Statement
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The
standard requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. Examples of costs covered by the standard include lease
termination costs and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing, or other exit or
disposal activity. Previous accounting guidance provided by EITF Issue No. 94-3,
"Liability Recognition for Certain employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring) is
replaced by this Statement. Statement 146 is to be applied prospectively to exit
or disposal activities initiated after December 31, 2002. Management does not
anticipate that the adoption of this Statement will have a significant effect on
the Company's financial statements.

    SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," was issued and establishes accounting and reporting standards for the
impairment or disposal of long-lived assets. This statement supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed." SFAS No. 144 provides one accounting model to be used

                                       41

<PAGE>

for long-lived assets to be disposed of by sale, whether previously held for use
or newly acquired and broadens the presentation of discontinued operations to
include more disposal transactions. The provisions of SFAS No. 144 are effective
for financial statements issued for fiscal years beginning after December 15,
2001. The Company will adopt the statement August 1, 2002.

                                       42

<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  INVENTORY

  Inventories consist of the following:

                                                  For years ended July 31,
                                                  ------------------------
                                                      2002         2001
                                                  -----------  -----------

         Raw materials and ingredients.......     $   868,319  $ 1,195,859
         Components used in assembly.........       1,200,576    1,564,878
         Packaging materials.................       3,025,912    2,474,046
         Work-in-process.....................         667,694    1,408,316
         Finished product....................      11,069,471    8,766,844
                                                  -----------  -----------
                                                   16,831,973   15,409,943
         Less reserve for inventory allowance        (875,827)    (700,428)
                                                  -----------  -----------
            Total............................     $15,956,145  $14,709,515
                                                  ===========  ===========

2.  PROPERTY, PLANT AND EQUIPMENT

  Property, plant and equipment consist of the following:

                                                  For years ended July 31,
                                                  ------------------------
                                                      2002        2001
                                                  -----------  -----------

           Land..............................     $    85,282  $    85,282
           Buildings and improvements........       2,543,550    1,879,153
           Machinery and equipment...........       6,031,033    3,753,331
           Furniture and computer equipment..         350,515      192,002
           Transportation equipment..........         102,414       83,914
                                                  -----------  -----------
                                                    9,112,794    5,993,682
              Accumulated depreciation.......      (1,762,306)  (1,087,332)
                                                  -----------  -----------
              Total..........................     $ 7,350,488  $ 4,906,350
                                                  ===========  ===========

  Depreciation expense for the years ended July 31, 2002, 2001 and 2000 and
was $674,973, $403,756 and $226,871, respectively.

                                       43

<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3.   ACQUISITION

On May 1, 2002, the Company acquired all of the outstanding common stock of
Asher Candy Company ("Asher"). The results of Asher's operations have been
included in the consolidated financial statements since that date. Asher
manufactures and markets candy canes and sells primarily to mass merchandisers
and supermarkets through out the United States. The Company acquired Asher to
continue the diversification of its product mix. Also, the Company and Asher
share a similar customer base which it hopes will create marketing efficiencies
and accelerated sales of Asher's products to mass merchandisers.

The purchase price was approximately $1,786,000 consisting of 270,559 shares of
Class A common stock and warrants to purchase 38,562 shares of Class A common
stock. The Company valued the common shares issued at the closing market price
on April 30, 2002 ($1,675,000) and valued the warrants using the Black-Scholes
option pricing model ($108,000).

The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed as of May 1, 2002:

Current assets                                             $  3,424,000
Property and equipment                                        1,060,000
Goodwill                                                      1,775,000
                                                           ------------

Total assets acquired                                         6,259,000

Current liabilities                                          (4,346,000)
                                                           ------------

Net assets acquired                                        $  1,913,000
                                                           ============

The Company expects all of the goodwill associated with the Asher acquisition to
be tax deductible.

The following proforma consolidated results of operations assume the Company
acquired Asher on August 1, 2001 and 2002, respectively.

                                                2002                 2001
                                                ----                 ----
Net sales                                  $ 63,153,000          $70,559,000
Income before provision
for income taxes                                324,000            3,670,000

Net Income                                      234,000            2,542,000

Earnings per share -basic                  $      0.062          $      0.69

Earnings per share-diluted                 $      0.054          $      0.64

4.  CREDIT FACILITY

  In May 2001, the Company entered into a new agreement with First Union
National Bank. The new credit facility is a $20.0 million line of credit to
provide additional working capital to support the Company's additional sales.
The line of credit is available for advances to finance working capital and the
issuance of letters of credit. Advances under the line of credit are based on a
borrowing formula equal to 85% of eligible domestic accounts receivable plus 60%
of eligible finished goods and 30% of eligible components inventory. Borrowings
on inventory are capped based upon the Company's seasonal requirements and are
limited to $9 million. The line of credit is secured by the cash and cash
equivalents, accounts receivable and inventories of Sherwood Brands, Inc. and
its wholly-owned subsidiaries. The line of credit agreement contains various
business and financial covenants, including, among other things, a minimum
tangible net worth, debt service coverage and capital expenditure limits. The
Company was in violation of the capital expenditure limits at July 31, 2002, but
has received a waiver from the bank. For the year interest accrued on such
advances at LIBOR plus 2.35% (the rate at July 31, 2002 was 4.16%) and is
payable monthly. The loan agreement expires in June 2004. At July 31, 2002 and
2001, the Company had borrowed $8,203,971 and $3,842,902, respectively under the
line of credit and had $0 and $0,

                                       44

<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

respectively, in letters of credit outstanding. During the years ended July 31,
2002, 2001 and 2000, the Company incurred and paid approximately $439,473,
$475,827 and $363,255 of interest expense on the line of credit, respectively.

On April 30, 2002, the Company entered into the first amendment and modification
to the original loan and security agreement dated May 2001. The modification was
to increase the maximum principal amount available under the revolving line of
credit to $25,000,000 from $20,000,000 and extensions of two additional term
loans in the principal amount of $650,000 each. Advances under the line of
credit stayed the same as the original agreements. The business and financial
covenants, including, a minimum tangible net worth of $12,500,000 at July 31,
2002, a fixed charge ratio of 1.75 to 1.0 as of July 31, 2002 and a limit on
capital expenditures of $2,000,000 were modified. The Company was in violation
of the minimum tangible net worth, fixed charge ratio and unfunded capital
expenditures at July 31, 2002. The bank agreed to waivers of these violation.
Interest accrues on such advances at LIBOR plus 2.35% (the rate at July 31, 2002
was 4.16%) and is payable monthly. The loan agreement expires in June 2004.

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

<TABLE>
<CAPTION>
                                                                    For years ended July 31,
                                                                 ------------------------------
                                                                    2002               2001
                                                                 -----------        -----------
<S>                                                              <C>                <C>
Borrowings under revolving line of credit at year end ........   $ 8,203,971        $ 3,842,296
Weighted average interest rate ...............................          4.58%              7.92%
Maximum month-end balance during period ......................   $11,828,000        $10,000,000
Average balance during the period ............................   $ 7,318,510         $5,524,902
</TABLE>

5.  LETTERS OF CREDIT

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

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

                                       45

<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>
                                                                                                     For years ended July 31,
                                                                                                     -----------------------
                                                                                                        2002         2001
                                                                                                     ----------    ---------
<S>                                                                                                  <C>           <C>
Mecklenberg County, Virginia Variable Rate Demand Revenue Bonds issued on June 1,
  1996; collateralized by an irrevocable Letter of credit (see Note 5); payable in
  varying annual amounts; To be redeemed in whole by June 1, 2011; interest at
  variable Market tax exempt rates (4.40% at July 31, 2002) .....................................    $  550,000    $ 635,000

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, 2002) .....................................................            --      130,000

Wachovia term loan on April 30, 2002; collateralized by assets of Asher Candy
 (see Note 5); payable in monthly amounts of $19,000; to be paid whole by
 February 1, 2005 interest at Libor Market rate (4.16% at July 31,2002) .........................       612,000           --

Wachovia term loan on April 30, 2002; collateralized by assets of Asher Candy
 (see Note 5); payable in monthly amounts of $18,056 starting in December 31, 2002; to be
 paid whole by December 1, 2006 interest at Libor Market rate (4.16% at July 31, 2002) ..........       650,000           --
                                                                                                     ----------    ---------
                                                                                                      1,812,000      765,000
Less current maturities .........................................................................       (90,000)    (215,000)
                                                                                                     ----------    ---------
Long-term portion ...............................................................................    $1,722,000    $ 550,000
                                                                                                     ==========    =========
</TABLE>

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

                                                              Amount
                                                            ----------

                     Fiscal years ending July 31,
                     2003 ................................  $  444,389
                     2004 ................................     484,667
                     2005 ................................     398,667
                     2006 ................................     159,277
                     2007 ................................      55,000
                     2008 ................................      60,000
                     Thereafter ..........................     210,000
                                                            ----------
                        Total ............................  $1,812,000
                                                            ==========

                                       46

<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.  CAPITAL LEASE OBLIGATION

   On May 2000 the Company entered into a capital lease agreement with the New
Bedford Redevelopment Authority to lease a 430,000 square foot building in New
Bedford, Massachusetts. The facility will be used for assembly and storage of
components. Under the terms of the lease the Company paid $400,000 up front and
has commitments to pay rent of $25,000 per annum for years one and two and
$41,666.66 per annum for years three to twenty. The Company has the option to
purchase the building at any time during the lease for $1,200,000 less any
amounts of rental payments made. Buildings and improvements includes $855,577,
less amortization of $3,590 and $3,590 for the year ended July 31, 2002 and
2001, respectively. Lease amortization is included in depreciation expense.

   Future minimum payments under the capital lease are as follows:

                                                                  Amount
                                                                ----------

           Fiscal years ending July 31,
           2003 ............................................        41,667
           2004 ............................................        41,667
           2005 ............................................        41,667
           2006 ............................................        41,667
           2007 ............................................        41,667
           2008 ............................................        41,667
           Thereafter ......................................       489,581
                                                                ----------
              Total ........................................    $  739,583
              Less amount representing interest ............      (285,169)
                                                                ----------
              Present value of net minimum lease payments ..    $  454,414
                                                                ==========

9.  STOCK TRANSACTIONS

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

                                       47

<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following table relates to options activity in 2000, 2001 and 2002 under the
Plan:



                                                            Weighted average
                                                  Number   Exercise price per
                                                of Shares        Share
                                                ---------  ------------------
       Options outstanding at July 31, 1999       153,750        $5.95
       Granted ............................       146,500        $3.00
       Cancelled ..........................       (10,000)       $5.95
       Options outstanding at July 31, 2000       290,250        $4.46
       Granted ............................       624,918        $1.67
       Cancelled ..........................            --        $  --
       Options outstanding at July 31, 2001       915,168        $2.21
       Granted ............................       142,200        $5.30
       Cancelled ..........................       (16,250)       $2.53
       Options outstanding at July 31, 2002     1,041,118        $2.93
       Options exercisable at July 31, 2000        95,833        $5.95
       Options exercisable at July 31, 2001       657,951        $5.95
       Options exercisable at July 31, 2002       749,718        $2.64



   A summary of stock options outstanding and exercisable as of July 31, 2002 is
as follows:

                                Options Outstanding         Options Exercisable
                          -------------------------------  --------------------
                                      Weighted
                                       Average   Weighted               Weighted
                                      Remaining   Average               Average
                            Number      Life     Exercise    Number     Exercise
  Range of Exercise Price Outstanding  (years)    Price    Exercisable   Price
  ----------------------- ----------- ---------  --------  -----------  --------

      $1.63 to $1.63 ....   592,918      8.0      $1.63     500,885     $1.63
      $2.31 to $3.10 ....   163,500      7.2      $2.98     106,333     $2.96
      $5.95          ....   284,700      7.4      $5.63     142,500     $5.95


   The options under the Plan granted in fiscal 2000 expire in March 2009, those
granted in fiscal year 2001 expire August 2, 2010 and those granted in fiscal
year 2002 expire April 2011.

   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 2002, 2001 and 2000 with the
following assumptions: risk-free interest rate of 4.66%, 6.00% and 6.00%, a
dividend payout rate of zero, and an expected option life of ten years,
respectively. The volatility is 66%. Using these assumptions, the fair value of
stock options granted during fiscal 2002, 2001 and 2000 was $3.76, $2.56 and
$2.71, respectively.

   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.

                                       48

<PAGE>

   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:

                                                  For years ended July 31,
                                              --------------------------------
                                                 2002       2001        2000
                                              ---------- ----------  ---------

   Net Income/(loss)
      As Reported ........................    $ 325,030  $2,218,375  $ 156,084
      Pro Forma ..........................       83,030   1,711,375    (12,609)
   Basic Income/(loss) per Common Share:
      As Reported ........................    $    0.09  $     0.60       0.04
      Pro Forma ..........................         0.02        0.46      (.003)
   Diluted income/(loss) per Common Share:
      As reported ........................    $    0.08  $     0.56  $    0.04
      Pro Forma ..........................         0.02        0.43      (.003)



   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.

   The Company has issued 38,562 warrants exercisable for shares of Class A
common stock exercisable at $6.49 and expire on April 30, 2005.

                                       49

<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


10.  INCOME TAXES

   The provisions for income taxes was as follows:


                                                  For the years ended July 31,
                                              ---------------------------------
                                                  2002       2001        2000
                                              ----------  ----------  ---------

     Current tax provisions (benefit):
            Federal ......................    $  220,039  $  956,400  $  39,000
            State ........................        28,000     230,700     11,000
                                              ----------  ----------  ---------
        Current provision for income taxes.      248,039   1,187,100     50,000
                                              ----------  ----------  ---------
     Deferred Tax ........................            --     (94,000)    48,100
                                              ----------  ----------  ---------
     Total provision on income taxes .....    $  248,039  $1,093,100  $  98,100
                                              ==========  ==========  =========


   During 1999, the IRS examined the tax returns for Sherwood Brands, Inc. and
Sherwood Brands Overseas, Inc. for the tax years ended July 31, 1995 to July 31,
1997. The IRS proposed an adjustment, which the Company contests. The Company
did not agree with the IRS position and had settled the adjustment for the tax
year ended July 31, 1997. Under the settlement with the IRS it paid $90,000 for
the taxes due and filed an amendment, which the Company was able to carry back
an NOL which accounted for a refund due the company of approximately $83,000.

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

<TABLE>
<CAPTION>
                                                                 For the years ended July 31,
                                                                 ---------------------------
                                                                       2002         2001
                                                                    ---------    ---------
<S>                                                              <C>             <C>
 Deferred tax assets
    Purchase price allocation of fixed assets ...........        $       --      $ 167,000
    Officers salary payable .............................            14,000         21,000
    Allowance for doubtful accounts and customer credits.            72,000        100,000
    Inventory obsolescence reserve ......................           382,000        257,000
    Other ...............................................            44,000         47,000
                                                                 ----------      ---------
        Total deferred tax assets .......................           512,000        592,000
                                                                 ----------      ---------
 Deferred tax liabilities
    Accumulated depreciation ............................          (320,000)      (411,000)
    Goodwill ............................................           (11,000)            --
                                                                 ----------      ---------
        Total deferred tax liabilities ..................          (331,000)      (411,000)
                                                                 ----------      ---------
 Net deferred tax asset (liability) .....................        $  181,000      $ 181,000
                                                                 ==========      =========
 Net current deferred tax asset .........................        $  512,000      $ 425,000
                                                                 ==========      =========
 Net long-term deferred tax asset (liabilities) ..........       $ (331,000)     $(244,000)
                                                                 ==========      =========
</TABLE>

                                       50

<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>
                                                                    For the years ended July 31,
                                                                 --------------------------------
                                                                    2002       2001        2000
                                                                 ----------  ----------  --------
<S>                                                              <C>         <C>         <C>
Income taxes at statutory rate
Increase (decrease) in taxes resulting from: ..................  $  194,839  $1,125,900  $ 86,400
   Effect of untaxed income from foreign subsidiary ...........      54,700     (22,500)   (4,200)
   State and local taxes, net of federal income tax benefits.        50,000     120,500        --
   State, net operating losses and credits used ...............     (22,000)   (136,700)   11,000
   Other ......................................................     (29,500)      5,900     4,900
                                                                 ----------  ----------  --------
       Total provision (benefit for taxes) ....................  $  248,039  $1,093,100  $ 98,100
                                                                 ==========  ==========  ========
</TABLE>


11.  COMMITMENTS AND CONTINGENCIES

   The Company leases office space in Maryland, and office, warehouse and
facilities in Rhode Island and manufacturing in New Hyde Park, New York. Rental
expense under these leases aggregated approximately $762,437, $530,637 and
$674,960 for the years ended July 31, 2002, 2001 and 2000, respectively. The
lease for office space in Maryland is subject to annual increases based upon
both certain allocated operating costs and increases in the Consumer Price
Index.

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

   Future minimum rental commitments under operating leases as of July 31, 2002
are summarized in the following table:

                                                     Amount
                                                   ----------

                        Years Ended July 31,
                           2003 ................   $  862,107
                           2004 ................      373,662
                           2005 ................      115,916
                           2006 ................      119,393
                           2007 ................      122,975
                           Thereafter ..........      234,844
                                                   ----------
                               Total ...........   $1,828,897
                                                   ==========
   The Company is currently negotiating a renewal lease on its properties in
Rhode Island.

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

                                       51

<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

On August 1, 2001, the employment agreements for Uziel Frydman and Amir Frydman
were extended for additional three year terms (until July 31, 2004) and the
employment agreement for Anat Schwartz was extended for an additional six month
period with automatic monthly extensions unless cancelled by written notice,
each on substantially the same terms and conditions as in effect under their
respective existing employment agreements. The annual base salaries payable to
Uziel Frydman, Amir Frydman and Anat Schwartz under the amended agreements were
increased to $451,333, $389,149 and $270,795, respectively, effective August 1,
2001 and are subject to annual increases. Under the amendments to the employment
agreements, each of Uziel Frydman, Amir Frydman and Anat Schwartz are entitled
to participate in our 1998 Executive Compensation Incentive Plan. For fiscal
years beginning on or after August 1, 2001, the bonus pool will be increased
proportionately to the extent that earnings before interest, taxes, and
depreciation and amortization (EBITDA) in any year exceeds the EBITDA for the
fiscal year ended July 31, 2001.

12.  EMPLOYEE BENEFIT PLANS

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

   The Money Purchase Pension Plan was terminated and the assets were merged
with the 401(k) Plan. All participants in the Money Purchase Pension Plan were
fully vested in the 401(k) Plan as of August 1, 1997. There were no
contributions made in 2002, 2001 and 2000.

13.  LICENSING AGREEMENTS

   For the year ended July 31, 2002, the Company entered into six licensing
agreements to incorporate products into Gift sets and manufacturing of hard milk
candies and wafers. The royalty rates for such licenses are from 2% to 10% of
net sales and expire in range of 2-3 years.

   The products to be incorporated into the Company's gift set items is during
the Christmas Holiday and Easter seasons and the hard milk candies and wafers
are effective on the selling season of January 2003. The Company paid $121,000
in advance fee to have the rights to incorporate products into its gift set
items. These advance fees will be offset against any amounts due on royalties.
There was no other minimum license fees under these agreements. No royalties
were incurred during the fiscal year ended July 31, 2002. The Company is
currently pursuing other licenses with similar terms and conditions.

14.  SUPPLEMENTAL CASH FLOWS DISCLOSURE

                                             For the years ended July 31,
                                       --------------------------------------
                                          2002            2001         2000
                                       ------------  -------------  ---------
Stock issued for Asher acquisition      $1,675,000           --           --

Warrants issued for Asher acquisition      108,000           --           --

Capital lease of building                       --           --     $456,162

                                       52

<PAGE>


                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

15.  CONCENTRATION OF CREDIT RISK AND EXPORT SALES


   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, 2002 two customers accounted for approximately 29% and 14% of the
Company's net sales. For the year ended July 31, 2001 the same two customers
accounted for approximately 27% and 14% of the Company's total net sales. The
Company had sales to customers in Canada which represent 0.4%, 0.7% and 1.4% of
net sales in fiscal 2002, 2001 and 2000, respectively.

16.  FOREIGN EXCHANGE CONTRACTS

   In the fourth quarter of fiscal 2001, the Company adopted Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133) During Fiscal year ended July 31, 2002 and
2001 executed a foreign exchange forward contract to purchase 766,000 and 1.2
million Euros, respectively. In accordance with SFAS 133, as amended, the
Company marked the contract to market as of July 31, 2002 and 2001 recorded a
loss of $31,139 and $18,270, respectively in other comprehensive income since
the Company designated the contract as a cash flow hedge.

17.   NON-RECURRING COSTS

  During the year ended July 31, 2002 the Company incurred $707,551 of moving
and start-up costs associated with the consolidation of its manufacturing
facility in Rhode Island into its Chase City facility. These costs primarily
consist of freight and dismantling of machinery and equipment in Rhode Island
and courier costs in relocating the machinery and equipment to its Chase City
facility.

18.  ADVERTISING COSTS

   Advertising costs, included in selling, general and administrative expenses,
are expensed as incurred and were $1,127,000, $979,691 and $716,436 for the
years ended July 31, 2002, 2001 and 2000, respectively.

19.  ACCRUED EXPENSES
          Accrued expenses consist of the following:

                                                  July 31,
                                            -------------------
                                              2002       2001
                                            --------  ---------

                  Payroll ...............    362,755    311,744
                  Payroll benefits ......    261,259    201,071
                  Bonuses ...............         --    500,000
                  Professional fees .....     75,906     75,000
                  Commissions ...........    102,030     42,500
                  Inventory costs .......     68,584    162,084
                  Personal property taxes    294,779    136,107
                  Water and sewer .......     76,389     41,481
                  Other .................    127,226     88,355
                                           ---------  ---------
                     Total ..............  1,368,928  1,558,342
                                           =========  =========

                                       53

<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)




20. QUARTERLY DATA

   Summary quarterly results were as follows:



<TABLE>
<CAPTION>
                                                                    Quarter
                                             -------------------------------------------------
Year 2002                                       First       Second        Third       Fourth
---------                                    -----------  -----------  -----------  ----------
<S>                                          <C>          <C>          <C>          <C>
Net Sales ................................   $21,046,884  $15,931,434  $11,312,184  $4,491,839
Gross profit .............................     6,762,325    4,876,904    2,248,762   1,179,670
Net income (loss) ........................     1,728,519      611,490     (693,505) (1,321,474)
Basic earnings (loss) per share ..........   $      0.47  $      0.17  $     (0.19) $    (0.36)
Diluted earnings (loss) per share ........   $      0.41  $      0.22  $     (0.19) $    (0.36)
</TABLE>


<TABLE>
<CAPTION>
                                                                    Quarter
                                             -------------------------------------------------
Year 2001                                       First       Second        Third       Fourth
---------                                    -----------  -----------  -----------  ----------
<S>                                          <C>          <C>          <C>          <C>
Net Sales ................................   $19,733,398  $20,823,008  $14,010,737  $3,749,573
Gross profit .............................     6,201,022    6,380,230    3,007,557     931,723
Net income (loss) ........................     1,486,118      938,497      296,563    (502,803)
Basic earnings (loss) per share ..........   $      0.40  $      0.25  $      0.08  $    (0.14)
Diluted earnings (loss) per share ........   $      0.39  $      0.24  $      0.08  $    (0.14)
</TABLE>



   The Company's sales and net income historically are greater during the first
and second quarters of the fiscal year relative to the third and fourth quarters
due to sales associated with major holidays celebrated during these periods.

                                       54

<PAGE>

                                 Exhibit Index

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

10.21   First Amendment to Loan and Security Agreement between the Registrant
        and Wachovia Bank, National Association, dated April 30, 2001.

21.1    Subsidiaries of the Registrant.

23.1    Consent of BDO, LLP

99.1    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
        Section 906 of the Sarbanes-Oxley Act of 2002.

99.2    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
        Section 906 of the Sarbanes-Oxley Act of 2002.