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

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


                                  FORM 10-KSB/A
                                 AMENDMENT NO. 1
                 ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934


     For the fiscal year ended July 31, 1999 Commission File Number: 1-14091

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

                              SHERWOOD BRANDS, INC.
               (Exact name of issuer as specified in its charter)

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

   1803 RESEARCH BLVD.,  SUITE 201
          ROCKVILLE, MARYLAND                                      20850
----------------------------------------                         ----------
(Address of principal executive offices)                         (Zip Code)

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

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

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

                                 Yes (X)   No

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

         The issuer's revenues for the fiscal year ended July 31, 1999 were
$25,299,806.

         The aggregate market value of the voting stock held by non-affiliates
of the issuer as of October 28, 1999 (computed by reference to the last reported
sale price of the registrant's Common Stock on the American Stock Exchange on
such date) was $5,400,000.

         The number of shares outstanding of issuer's Class A Common Stock, $.01
par value per share, as of October 29, 1999 was 2,700,000.

DOCUMENTS INCORPORATED BY REFERENCE

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

<PAGE>

                                    PART I.

ITEM 1.     DESCRIPTION OF BUSINESS

GENERAL

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

         On September 24, 1998, the Company completed the acquisition of certain
assets of the E. Rosen Company, d/b/a School House Candy Co. ("Rosen"). Rosen
was a Rhode Island manufacturer of hard candy, jelly beans and lollipops and
assembled a variety of holiday gift items including gift baskets. Rosen sold its
holiday gift items to such chains as Wal-Mart, Kmart and CVS, and had
approximately $42 million in sales for its most recent fiscal year ended March
31, 1998. Rosen filed a receivership proceeding before the Rhode Island Superior
Court on July 31, 1998. The Company paid $4.0 million in cash for the machinery
and equipment, inventory and tradenames, trademarks and customer lists of Rosen.
For financial accounting purposes, the entire purchase price of $4.0 million was
allocated to the inventories of raw material, components and finished product.

MARKET OVERVIEW

         Sales of candy and cookie products in the United States have increased
significantly in recent years. According to the United States Department of
Commerce, manufacturers' domestic shipments of confectionery products (excluding
chewing gum) have grown steadily from approximately $9 billion in 1990 to $13.4
billion in 1997. The Chocolate Manufacturers Association/National Confectioners
Association has estimated that total retail sales of confectionery products in
the United States in 1997 were approximately $22.7 billion, and industry trade
reports project continued growth in these markets into the next century. Despite
such growth, the United States ranks only ninth in per capita candy consumption
among the industrialized nations. The Company believes that these expanding
markets present attractive growth opportunities for its business, and is
focusing its strategy on introducing new products in these market categories as
well as achieving greater brand recognition and market penetration for all of
the Company's products.

         The markets for candy and cookie products are dominated by a number of
large, well capitalized corporations. In the candy market, these companies
include Hershey Food Corporation, M&M Mars and Nestle S.A. The cookie and
biscuit market is dominated by Nabisco, Inc., Keebler Company and Sunshine
Biscuits, Inc. In addition to domestic manufacturers, foreign candy and cookie
companies, such as Lindt of Switzerland, Bahlsen KG, and Storck, have
established their products in this market. The Company believes that the
remainder of the market is otherwise highly fragmented, with numerous
manufacturers and hundreds of products and distribution channels, such as mass
merchandisers, drug stores, club stores, vending companies and gourmet
distributors. Management believes that the Company's experience in these markets
and distribution channels, coupled with its expanded manufacturing capabilities,
positions the Company to capitalize on the growth opportunities in these
markets.

                                      -2-
<PAGE>

PRODUCTS

     CONTRACT MANUFACTURED CANDY, COOKIES AND CHOCOLATES

         The following is a description of the Company's products purchased from
third-party sources located internationally:

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

         COWPOKES(TM) LOLLIPops: COWPOKES LOLLIPops is a new product first
introduced in the fall of 1997. Cowpokes are an extension of the COWS line and
are made with a hard dairy butter and cream candy on the outside and a soft,
chewy butter toffee on the inside. Cowpokes are available in 6.4 oz. bags and
are also distributed in 60-count check-out stand display cartons for single-item
sales.

         SOUR FRUIT BURST(TM) HARD CANDIES: SOUR FRUIT BURST is a line of
fruit-filled hard candies in a variety of flavors sold in 3 oz. and 12 oz. bags
and distributed in a variety of packages.

         RUGER(R) WAFErs: RUGER wafers is a line of wafer cookie available in
three flavors: chocolate, vanilla, and strawberry and in two sugar free
varieties. RUGER wafers are offered in a 7oz. grocery size as well as a 2 1/8
oz. size in two different shapes in order to assure a proper fit in vending
machine slots. The RUGER wafer cookie formula designed by the Company utilizes
an aeration process which gives RUGER wafers its very light and delicate
filling. RUGER wafers are distributed in a mylar packaging material that resists
sunlight and humidity and is designed to preserve freshness and extend shelf
life.

         ELANA(R) BELGIAN CHOCOLATES: ELANA Belgian chocolate bars are sold in a
variety of flavors, including Mint, Caramel, Mocca, Truffle, White Truffle,
Honey Almond, Crispers, and Almonds, and are offered in two sizes (25 grams and
45 grams) for retail stores and vending, and also in a variety of package
combinations.

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

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

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


                                      -3-
<PAGE>

     DOMESTICALLY MANUFACTURED CANDIES AND BISCUITS

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

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

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

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

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

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

         DEMITASSE(R) BISCUITS: DEMITASse is a line of tea biscuits offered in a
variety of flavors including the traditional tea biscuit, "Petit Beurre" (with
real butter), Cinnamon Honey, Coconut and Chocolate. The DEMITASSE biscuit line
is certified kosher by the Orthodox Union.

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

     ASSEMBLED HOLIDAY GIFT ITEMS AND GIFT  BASKETS

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

SUPPLIERS

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

                                      -4-
<PAGE>

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

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

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

CUSTOMERS

         The Company sells its products primarily to mass merchandisers and
other retail customers, grocery and drug store chains, club stores, convenience
stores, specialty shops and wholesalers. The Company's mass merchandiser
customers include Family Dollar, Bradlees, Target, Dollar General, K-Mart,
Wal-Mart, Dollar Tree and 99 Cents Only stores. For the year ended July 31,
1999, Sam's Club comprised 12.1% of the Company's total sales. For the year
ended July 31, 1998, Dollar General comprised of 9.0% of the Company's total
sales.

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

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

DISTRIBUTION CHANNELS

         The Company distributes its products throughout the United States and
internationally. The Company's principal market outside the United States is
Canada, which accounts for approximately 79% of the Company's international
sales. For the year ended July 31, 1999, sales of the Company's products in
foreign markets accounted for approximately 4.4% of the Company's total
revenues. The Company has recently introduced its products in certain countries
in South America and the Caribbean, and management intends to continue to expand
its international marketing efforts by selling products to

                                      -5-
<PAGE>

distributors in these geographic markets. In each country, the Company targets
distributors that purchase large quantities of products for mass distribution.

         The Company engages independent food and candy brokers in various
regions throughout the United States for marketing to retail customers. These
brokers account for a majority of the Company's sales. Food and candy brokers
are paid on a commission basis (typically 5%) and are generally responsible in
their respective geographic markets for identifying customers, soliciting
customer orders and inspecting merchandise on store shelves. For the fiscal year
ended July 31, 1999, the Company had arrangements with approximately 65 food and
candy broker organizations. Such arrangements prohibit the brokers from selling
competing products. The Company believes that the use of food and candy brokers,
which typically specialize in specific products and have knowledge of and
contracts in particular markets, enhances the quality and scope of the Company's
sales operations. In addition, the use of brokers permits the Company to limit
the significant costs associated with creating and maintaining a direct
distribution network. The Company's executive officers and six regional sales
managers work with brokers on an individual basis and are responsible for
managing the broker network, identifying opportunities and developing sales in
their respective territories.

         The Company uses six regional bonded public warehouses that specialize
in food and confectionery storage. These warehouses are selected based on
proximity to the Company's customers, the ability to provide prompt customer
service and efficient and economic delivery. The Company generally sells its
products pursuant to customer purchase orders and fills these orders from
inventory generally within one to two days of receipt. Because orders are filled
shortly after receipt, backlog is not material to the Company's business.
Substantially all of the Company's products are delivered by common carrier.

MANUFACTURING AND ASSEMBLY FACILITIES

         Currently, the Company has two manufacturing facilities and one
assembly facility, and recently acquired a new facility which will be used for
manufacturing and assembly. The Company currently produces Demitasse biscuits
and COWSCARAMEL caramel candies at its Chase City, VA facility. The Chase City
facility consists of a brick building with over 70,000 square feet (including a
1,750 square foot office) situated on approximately ten acres in Southern
Virginia. The facility is equipped with state-of-the-art equipment for the
manufacture and packaging of cookie and candy products and employs approximately
120 skilled and unskilled workers. The facility is certified kosher by the
Orthodox Union.

         In April, 1999, the Company purchased a 73,000 square foot
manufacturing facility located on approximately 15 acres in Keysville, VA at a
cost of $160,000. The Company is currently utilizing this facility to package
product and store inventory. The Company has spent approximately $50,000 as of
July 31, 1999 to improve the Keysville facility. Both the Chase City and
Keysville facilities have access to an abundant 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).

                                      -6-
<PAGE>

         The Company leases approximately 658,000 square feet of improved real
estate in Pawtucket and Central Falls, RI. The property is used for the
manufacture of hard and soft candy (120,000 square feet), assembly of holiday
gift items and inventory storage (531,000 square feet) and office space (7,000
square feet). Both Rhode Island locations have ready access to an abundant
supply of both skilled and unskilled labor, and are readily accessible to common
carriers, rail lines and a major seaport (Boston). The Company employs
approximately 289 full-time employees and seasonal employees in Rhode Island.

         The Company's Vice President - Manufacturing Operations is responsible
for the operations at both the Virginia and Rhode Island facilities. The Company
currently employs technical and production personnel who have working knowledge
of the technical and operational aspects of the Company's production equipment.
The Company also employs personnel responsible for conducting quality control
testing at the facility via 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
the Company's 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, 1999, the
Company spent approximately $698,000 on advertising and product promotion.

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

COMPETITION

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

TRADEMARKS

         The Company holds United States trademark registrations for the
"ELANA," "RUGER", "TONGUE TATTOO", "STRIP-O-POP", "SMILE POPS" and "demitasse"
names, and has filed trademark registrations for certain other names, including
"COWS," and uses other names for which it has not applied for registration. The
Company believes that its rights to these names is a significant part of the
Company's business and that its ability to create demand for its products is
dependent to a large extent on its ability to exploit these trademarks. There
can be no assurance as to the breadth or degree of

                                      -7-
<PAGE>

protection which trademarks may afford the Company or that any trademark
applications will result in registered trademarks or that trademarks will not be
invalidated if challenged. The Company is not aware of any infringement claims
or other challenges to the Company's rights to use these marks. The Company is
applying for the international registration of all its trademarks.

GOVERNMENT REGULATION

         The Company is subject to extensive regulation by the United States
Food and Drug Administration, the United States Department of Agriculture and by
other state and local authorities in jurisdictions in which the Company's
products are manufactured or sold. Among other things, such regulation governs
the importation, manufacturing, packaging, storage, distribution and labeling of
the Company's products, as well as sanitary conditions and public health and
safety. Applicable statutes and regulations governing the Company's products
include "standards of identity" for the content of specific types of products,
nutritional labeling and serving size requirements and general "Good
Manufacturing Practices" with respect to manufacturing processes. The Company's
manufacturing facilities and manufactured products are subject to periodic
inspection by federal, state and local authorities. The Company believes that it
is in compliance with all governmental laws and regulations and maintains all
permits and licenses required for its operations. Nevertheless, there can be no
assurance that the Company will continue to be in compliance with current laws
and regulations or that the Company will be able to comply with any future laws
and regulations and licensing requirements. Failure by the Company to comply
with applicable laws and regulations could subject the Company to civil
remedies, including fines, injunctions, recalls or seizures, as well as
potential criminal sanctions.

INSURANCE

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

EMPLOYEES

         As of October 29, 1999, the Company had approximately 243 full-time
employees and approximately 187 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 120 full and part-time employees
in Virginia and approximately 289 full, part-time and seasonal employees in
Rhode Island. Management believes that the Company's relationship with its
employees is good. None of the Company's employees are represented by labor
unions under any collective bargaining agreement.

                                      -8-
<PAGE>

ITEM 2.     DESCRIPTION OF PROPERTIES

         The following table sets forth, with respect to properties leased and
owned by the Company at July 31, 1999, the location of the property, the amount
of square feet of the property, the annual rent and the year in which the lease
expires, if applicable, and the business use which the Company makes of such
facilities:

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

1005 Main Street                  250,000       $37,500   October 1, 1999         Manufacturing Plant and
Pawtucket, RI  02860                                                              General Offices

280 Rand Street                   500,000      $112,500   October 1, 1999         Assembly Facility,
Central Falls, RI 02863                                                           Storage  and  Distribution
                                                                                  Facilities

OWNED PROPERTIES:
807 South Main Street              70,000                                         Manufacturing Plant
Chase City,  VA   23924

350 Sherwood Drive                 73,000                                         Manufacturing Plant
Keysville,  VA   23947

</TABLE>

         The Company is currently negotiating a new lease with the landlord of
the Rhode Island properties.

ITEM 3.     LEGAL PROCEEDINGS

         The Company is from time to time involved in litigation incidental to
the conduct of its business. Although the Company is not currently a defendant
in any legal proceedings, it is a plaintiff in certain matters 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 ordinary course of business 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, 1999.

                                      -9-
<PAGE>

                                    PART II.

ITEM 5.     MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET PRICE

         The Company's Class A Common Stock is traded on the American Stock
Exchange ("AMEX") (symbol: SHD). Prior to the Company's initial public offering
and listing of its Class A Common Stock on AMEX, which occurred on May 8, 1998,
there was no public trading market for such shares. The following table shows
the high and low sales prices as reported on AMEX for the Class A Common Stock
for the period from inception to the end of fiscal 1999:

<TABLE>
<CAPTION>
                          PRICE PERIOD                                HIGH          LOW
            -----------------------------------------               -------       -------
            <S>                                                      <C>           <C>
            Fiscal Year Ended July 31, 1998:
              Fourth Quarter                                         $5.38         $3.00
              (May 8 to July 31, 1998)
            Fiscal Year Ended July 31, 1999:
              First                                                  $4.00         $2.00
              Quarter
              Second Quarter                                         $3.44         $2.25
              Third Quarter                                          $4.38         $2.50
              Fourth Quarter                                         $3.63         $2.44
</TABLE>

         As of July 31, 1999, and October 27, 1999, there were 25 and 23 holders
of record, respectively, of the Class A Common Stock.

DIVIDEND POLICY

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

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

IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

         This Annual Report on Form 10-KSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Those statements
include statements regarding the intent, belief or current expectations of the
Company and its management. Such statements are subject to a variety of risks
and uncertainties, many of which are beyond the Company's control, which could
cause actual results to differ materially from those contemplated in such
forward-looking statements, including in particular the risks and uncertainties
described under "Risk Factors" in the Company's Prospectus dated May 6, 1998.
Investors are cautioned not to place undue reliance on these forward-looking
statements, which speak

                                      -10-
<PAGE>

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

RESULTS OF OPERATIONS

     FISCAL YEAR ENDED JULY 31,1999 COMPARED TO FISCAL YEAR ENDED JULY 31,1998

         NET SALES: Net sales for the year ended July 31, 1999 and 1998 were
$25,299,806 and $18,084,174, respectively, an increase of $7,215,632 or 40%.
This increase in net sales is the result of the addition of new product lines,
including, gift sets and gift baskets, jelly beans and lollipops, as well as the
addition of a new customer. International sales declined by 32% from $1,646,979
to $1,119,548 largely due to a decline in Canadian sales.

         GROSS PROFIT: Gross profit for year ended July 31, 1999 increased to
$6,081,088 from $5,853,417 for the prior year period, but as a percent of sales
declined to 24% from 32% in the respective periods. The decline of gross profit
as a percentage of sales was primarily due to production inefficiencies during
the first half of the year at the Chase City facility, the effect of fixed
overhead expenses incurred relative to the low volume of sales in Rhode Island
during the period, and higher labor costs as a percent of sales needed to
maintain certain skilled production and assembly employees in anticipation of
the ramp up of production into the 1999 holiday season.

         OPERATING EXPENSES: Selling, general and administrative expenses for
the year ended July 31, 1999 increased to $4,922,082 from $3,139,475 for the
prior year period, or as a percentage of sales to 20% from 17% in the respective
periods, largely due to the additional selling, general and administrative
expenses associated with the new operation in Rhode Island as well as additional
costs related to operating as a public company. Pre-production costs increased
to $213,112 from $155,095 as the company completed the installation of equipment
for product line extensions in its Chase City facility at the beginning of the
fiscal year.

         Salaries and related expenses for the year ended July 31, 1999
increased to $2,450,096 from $1,515,803 for the prior year period, or as a
percentage of sales to 10% from 8% in the respective periods, due to the
addition of new management employees at both the Maryland and Rhode Island
locations as well as higher management salaries. New management includes, among
others, new sales managers, operations, accounting and MIS personnel hired to
develop and support current and future marketing and operational needs of the
Company.

         As a result, operating expenses for the year ended July 31, 1999
increased to $7,585,290 from $4,810,373 for the prior year period, or as a
percentage of sales to 30% from 27% in the respective periods. The Company
believes that it has put into place the infrastructure including new management
in the areas of marketing, sales and operations to support newly expanded and
growing product lines and customer base. These additional operating costs are
high in proportion to the current period sales.

         LOSS FROM OPERATIONS: Loss from operations for the year ended July 31,
1999 was $1,504,202 compared to income from operations for the year ended July
31,1998 of $1,043,044. The loss was a result of production inefficiencies at the
Chase City facility during the first half of the year, the effect of fixed
overhead expenses incurred relative to the low volume of sales in Rhode Island,
the new management hired to develop and support additional sales and operational
needs of the Company, and the additional costs related to being a public
company.

                                      -11-
<PAGE>

         INTEREST EXPENSE: Interest expense for the year ended July 31,1999
declined to $153,832 from $222,947 for the prior year period due to the reduced
borrowing needs of the Company in the first part of the current year as a result
of the repayment of the line of credit from the proceeds of the public offering.
The Company increased its borrowing in the second part of the current year as it
began to ramp up its Rhode Island operation.

         OTHER INCOME (EXPENSE): Other expense was $7,821 for the year ended
July 31, 1999 compared to income of $6,399 in the prior year period. The change
was primarily due to the receipt of an insurance claim during the prior
comparable year.

         INCOME TAXES: The Company recorded a tax benefit of $319,700 for the
year ended July 31, 1999, compared to income tax expense of $316,400 for the
year ended July 31, 1998. A total current benefit of $184,200 was recorded in
addition to a benefit of $349,900 resulting from the change in deferred taxes,
offset by an IRS examination assessment of $214,400. During the current year,
the IRS examined the tax returns for Sherwood Brands, Inc. and Sherwood Brands
Overseas, Inc. for tax years ended July 31, 1995 to July 31,1997. As a result of
the tax examination, the IRS contends that the Company's borrowing agreement
contained an indirect guarantee by Overseas of the borrowings of the parent and
therefore the parent must include as income the earnings of Overseas. The
Company does not agree with the IRS position and is currently considering what
actions it will take in the future to argue the case.

         NET LOSS: As a result of the foregoing, the Company incurred a net loss
for the year ended July 31, 1999 of $1,262,897 compared to income of $701,189
for the prior year period.

LIQUIDITY AND CAPITAL RESOURCES

         The Company's primary cash requirements have been to fund the purchase,
manufacture and commercialization of its products. The Company finances its
operation and manufacturing with cash flow from operations and borrowings,
primarily from banks. On May 6, 1998, the Company completed an initial public
offering ("IPO") of 1,550,000 shares of its Class A Common Stock at a public
offering price of $5.95. Proceeds to the Company, net of expenses of the
offering, amounted to approximately $7.7 million, $2.5 million of which was used
to pay down the Company's working capital line of credit and a related party
loan, and $4.0 million of which was used to acquire certain assets of Rosen. The
remaining proceeds from the IPO have been utilized for general working capital
purposes. The Company's working capital at July 31,1999 and 1998 was $6,992,533
and $9,244,219, respectively.

         Net cash used by operating activities in the year ended July 31, 1999
was $2,441,231 compared to net cash provided of $951,923 in the prior year
period. The decrease in cash from operations was a result of reduced profit
margins and the additional expenses incurred as discussed above. The Company's
accounts receivable increased due to additional sales.

         Net cash used in investing activities increased to $4,656,445 in the
year ended July 31, 1999 from $446,566 in the prior year period primarily due to
the purchase of inventory from Rosen, equipment purchases for the Company's
candy line in Chase City and the acquisition of a new building in Keysville.

         Net cash provided from financing activities in the year ended July 31,
1999 decreased to $1,667,678 from $4,968,323 for the prior year period. During
the current year, financing came from additional borrowings on the Company's
line of credit to finance working capital needs. In the prior year, the Company
received net proceeds of $7,747,277 from a public offering of its common stock,
a portion of which was used to pay down the line of credit.

                                      -12-
<PAGE>

         In June, 1999, the Company entered into a loan agreement with its
primary bank which provides for borrowings under a line of credit of up to $7.5
million. Advances under the line of credit are based on a borrowing formula
equal to 80% of eligible domestic accounts receivable plus the smaller of 70% of
domestically-owned eligible inventory or a seasonal inventory cap. Borrowings on
inventory are capped based upon the Company's seasonal requirements and are
limited to $5 million for the period April 1 through November 1 and $3 million
for the period November 2 through March 31. Advances under the line of credit
are further reduced by the aggregate amount of outstanding letters of credit
which may not exceed $2.5 million. Interest accrues on such advances at a rate
of LIBOR plus 1.85% and is payable monthly. The loan agreement expires in
November 2000. At July 31, 1999, the Company had borrowed $1,938,448 under the
line of credit and had $1,196,695 in letters of credit outstanding. The line of
credit is secured by the cash and cash equivalents, accounts receivable and
inventories of Sherwood Brands, Inc., Sherwood Brands, LLC and Sherwood Brands
of RI, Inc. The line of credit agreement contains various business and financial
covenants, including, among other things, a minimum tangible net worth of
$9,500,000 and a funds flow coverage in excess of 1.50. The Company was in
violation of these two covenants at July 31, 1999. The bank has granted the
Company a waiver of these two covenants for the periods ending July 31, 1999 and
October 31, 1999. The Company believes that it will be in compliance with these
two covenants subsequent to October 31, 1999. In addition to financial
covenants, the Company's loan agreement with the Bank limits or prohibits the
Company, without the Bank's consent, from incurring additional indebtedness,
which could, under certain circumstances, limit the Company's ability to expand
its operations.

         In June 1996 and May 1997, the Company borrowed $935,000 and $580,000,
respectively, from Industrial Development Authority of Mecklenburg County
("IDAMC") for the acquisition and improvement of the Chase City facility and the
purchase and installation of new production equipment, financed through the
issuance of two series of Industrial Revenue Bonds ("IRB") (Series 1996 and
Series 1997). The IRBs are backed by irrevocable letters of credit issued by
Central Fidelity Bank of Virginia ("Fidelity"). Advances on the letters of
credit (which expire June 2006 and 2002, respectively) are, in turn, secured by
the Company's Chase City facility and all other real and personal property of
the Company and personally guaranteed by Uziel Frydman pursuant to a
reimbursement agreement ("Reimbursement Agreement") between Fidelity and the
Company.

         Under the Reimbursement Agreement, the Company makes monthly interest
and sinking fund payments to Fidelity. Interest is calculated at the rate of 10%
per annum. The sinking fund payments for the Series 1996 IRBs are based upon a
15-year straight line amortization of $640,000 advanced for the purchase of the
Chase City facility and a 7-year straight line amortization for approximately
$295,000 advanced for manufacturing equipment. Annual payments to the sinking
fund for the Series 1997 IRBs are due June 1 each year in the following amounts:
$105,000 in 1999 and $130,000 in each of 2000, 2001 and 2002. The total monthly
payments vary from month to month and are subject to variable market tax exempt
interest rates (3.65% at July 31, 1999). The terms of the Reimbursement
Agreement require, among other things, that the Company maintain certain
financial ratios and adhere to certain covenants, including, without Fidelity's
permission, borrowing additional funds, merging or consolidating, amending its
Articles of Incorporation and repaying subordinated debt.

         As part of the financing for the acquisition of the Chase City
facility, in May and June 1996, the Company borrowed $400,000 to finance
equipment from IDAMC and $250,000 for working capital from the Lake Country
Development Corporation ("LCDC"), respectively, evidenced by two subordinated
notes (the "Subordinated Notes"). The IDAMC Subordinated Note has a five-year
term, amortized over a ten year period at an interest rate of 7% per annum,
payable in monthly installments of $4,644 in principal and interest with a
balloon payment of $239,193 due June 2001. The LCDC Subordinated Note is pari
passu with the IDAMC Subordinated Note in terms of security, and has a five-year
term bearing interest at 5.25% per annum, payable in monthly installments of
interest only for the first nine payments

                                      -13-
<PAGE>

and thereafter payable in equal monthly payments of $5,480 in principal and
interest until June 2001. The IDAMC Subordinated Note is secured by the
Company's equipment and the LCDC Subordinated Note is secured by the real
property, fixtures and equipment located at the Chase City facility. The
Subordinated Notes limit the Company's capital expenditures, prohibit a change
in ownership greater than 50% and require the Company to create 50 full-time
jobs at the Chase City facility within two years of the date of the Subordinated
Notes. The Company has fulfilled both requirements. Both loans are personally
guaranteed by Uziel Frydman.

         As of September, 1999 both Fidelity and Lake Country Development
Corporation have agreed to release Uziel Frydman from the personal guarantee.

         Principal payments for the Company's long term debt for the year ended
July 31, 1999 were $266,000.

FOREIGN CURRENCY FLUCTUATIONS

         The Company currently purchases its contract manufactured products from
foreign manufactures under terms that provide for the payment of goods in
foreign currency approximately 60 to 90 days from the invoice date. Purchases of
COWS butter toffee candies and other candies from manufacturers located in
Argentina are paid in U.S. dollars. Purchases of RUGER wafers and ELANA Belgian
chocolates products are purchased from manufacturers located in Austria and
Belgium, respectively, and are paid for in local currencies. These goods are
recorded at cost in equivalent U.S. dollars at the exchange rate in effect on
the invoice date. The difference between the recorded cost and the amount
required for payment is reflected as a realized foreign currency transaction
gain or loss. Prior year fluctuations in gross margin were attributable in large
part to the changes in value of the U.S. dollar. From time to time, the Company
hedges its exposure to foreign currency rate changes by purchasing forward
contracts based upon analysis of foreign current markets. All sales of the
Company's products in foreign markets are made in U.S. dollars, except for a
portion of Canadian sales which are in Canadian dollars. See Note 2 to Notes to
Consolidated Financial Statements.

SEASONALITY

         The Company's sales typically increase toward the second half of the
calendar year principally due to the holiday season.

INFLATION

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

YEAR 2000 COMPUTER ISSUE

         The Company recognizes the potential problems for many computer systems
relating to the Year 2000. The Company's systems are purchased from outside
vendors. Those installed systems which are not currently able to function in the
Year 2000 have new versions which are Year 2000 compliant and which the Company
is in the process of completing the installation of such new software. The
Company is currently in the final stages of upgrading and installing new
computer software that it has been advised will be compliant with the Year 2000
requirements. In addition, the Company is assessing the impact of vendors'
compliance to Year 2000 and what the impact will be on the Company's ongoing
results of operations.

                                      -14-
<PAGE>

NEW ACCOUNTING PRONOUNCEMENTS

         In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS 133") which revises the
accounting for derivative financial instruments. SFAS 133 establishes accounting
and reporting standards for derivative instruments and for hedging activities.
SFAS 133 requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair market value. Under certain
circumstances, a portion of the derivative's gain or loss is initially reported
as a component of other comprehensive income and subsequently reclassified into
income when the transaction affects earnings. For a derivative not designated as
a hedging instrument, the gain or loss is recognized in income in the period of
change. The Company will be required to adopt SFAS 133 in fiscal year 2001 and
believes that adoption of SFAS 133 will have no impact on its financial position
or results of operations.

ITEM 7.     FINANCIAL STATEMENTS

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

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

         None.

                                      -15-
<PAGE>

                                   PART III.

ITEM 9.     DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
            COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

DIRECTORS AND EXECUTIVE OFFICERS

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

<TABLE>
<CAPTION>

NAME                                                      AGE     POSITION
-----------------------------------------------------    -----    --------------------------------------------------
<S>                                                        <C>    <C>
Uziel Frydman......................................        63     Chairman, President and Chief Executive Officer

Anat Schwartz......................................        39     Executive Vice President - Finance and Secretary

Amir Frydman.......................................        37     Director, Treasurer and Executive Vice President -
                                                                     Marketing and Product Development

Douglas A. Cummins.................................        57     Director

Jean E. Clary......................................        56     Director

Jason Adelman......................................        30     Director

Eric A. Richman....................................        49     Vice President - Operations

Paul J. Splitek....................................        50     Vice President - Sales

</TABLE>

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

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

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

                                      -16-
<PAGE>

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

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

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

         ERIC A. RICHMAN has been Vice President of Operations of the Company
since September 1999. Mr. Richman has over 26 years of multi-disciplined
manufacturing experience. From 1998 until being hired by the Company after the
acquisition of E. Rosen Company, Mr. Richman was Director of Manufacturing of E.
Rosen, and prior to that, Plant Manager of E. Rosen. From 1992 to 1996, he was
Plant Manger of Richardson Brands Company; from 1989 to 1992, Plant Manager of
Conusa Corporation; and from 1973 to 1989, Plant Manager of Planters Lifesavers
Company. Mr. Richman has extensive experience in manufacturing, management,
quality control and labor relations.

         PAUL J. SPLITEK has been Vice President of Sales of the Company since
September 1999. Mr. Splitek has over 28 years of sales, marketing and
manufacturing experience. From 1996 until being hired by the Company after the
acquisition of E. Rosen 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.

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 these
persons is in compliance with all applicable filing requirements.

                                      -17-
<PAGE>

ITEM 10.    EXECUTIVE COMPENSATION

         Information concerning the executive compensation of the Company is
hereby incorporated by reference from the Company's definitive proxy statement
relating to its Annual Meeting of Shareholders to be filed with the Commission
pursuant to Regulation 14A on or before November 30, 1999.

ITEM 11.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information concerning the security ownership of the Company is hereby
incorporated by reference from the Company's definitive proxy statement relating
to its Annual Meeting of Shareholders to be filed with the Commission pursuant
to Regulation 14A on or before November 30, 1999.

ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information concerning certain relationships and related transactions
of the Company is hereby incorporated by reference from the Company's definitive
proxy statement relating to its Annual Meeting of Shareholders to be filed with
the Commission pursuant to Regulation 14A on or before November 30, 1999.

                                      -18-
<PAGE>

                                    PART IV.

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

         (A)      EXHIBITS

   NUMBER                             DESCRIPTION
------------   -----------------------------------------------------------------
    3.1        Articles of Incorporation, as amended, of the Registrant.*
    3.2        Bylaws, as amended, of the Registrant.*
    4.1        Form of Registrant's Class A Common Stock Certificate.*
    4.2        Form of Underwriter's Warrant Agreement, including Form of
               Warrant Certificate.*
    4.3        Form of Public Warrant Agreement among the Registrant, Paragon
               Capital Corporation, as Underwriter and Continental Stock
               Transfer & Trust Company, as Warrant Agent.*
    4.4        Form of Registrant's Public Warrant Certificate.*
    10.1       Amended and Restated Reimbursement Agreement between Central
               Fidelity National Bank and the Registrant, dated as of May 1,
               1997.*
    10.2       Loan Agreement between Industrial Development Authority of
               Mecklenburg County, Virginia and the Registrant, Dated as of May
               1, 1997.*
    10.3       Irrevocable Letter of Credit dated May 15, 1997 issued on behalf
               of the Registrant to the Trustee for the holders of Industrial
               Revenue Bonds (Series 1997) issued by the Industrial Development
               Authority of Mecklenburg County, Virginia.*
    10.4       Amended and Restated Credit Line Deed of Trust and Security
               Agreement, among the Registrant and Trustees, for the benefit of
               Central Fidelity National Bank dated May 1, 1997.*
    10.5       Pledge and Security Agreement between the Registrant and Central
               Fidelity National Bank, dated as of May 1, 1997.*
    10.6       Guaranty between Uziel Frydman, the Registrant and Central
               Fidelity National Bank, dated as of May 1, 1997.*
    10.7       Loan Agreement between Industrial Development Authority of
               Mecklenburg County, Virginia and the Registrant, Dated as of June
               1, 1996.*
    10.8       Irrevocable Letter of Credit dated June 20, 1996 issued on behalf
               of the Registrant to the Trustee for the holders of Industrial
               Revenue Bonds (Series 1996) issued by the Industrial Development
               Authority of Mecklenburg County, Virginia.*
    10.9       Pledge and Security Agreement between the Registrant and Central
               Fidelity National Bank, dated as of June 1, 1996.*
    10.10      Company Loan Agreement between the Industrial Development
               Authority of Mecklenburg County, Virginia Loan Agreement through
               the Virginia Small Business Financing Administration and the
               Registrant, dated as of June 20, 1996.*
    10.11      Revolving Loan Fund Agreement between the Registrant and Lake
               Country Development Corporation, $250,000 Promissory Note to Lake
               Country Development Corporation, Guaranty of Note by the
               Registrant and Uziel Frydman, and Deed of Trust between the
               Registrant and Trustee for Lake Country Development Corporation,
               all dated May 15, 1996.*
    10.12      Loan Agreement, Promissory Note, and Security Agreement between
               the Registrant and First Union National Bank, all dated November
               29, 1996, and Guaranty between Uziel Frydman and First Union,
               dated November 29, 1996.*
    10.13      Promissory Note issued to Ilana Frydman by the Registrant, dated
               August 28, 1991.*
    10.14      Lease, as amended, for the Registrant's Rockville offices,
               executed November 30, 1992.*
    10.15      1998 Stock Option Plan.*
    10.16      Form of Employment Agreement between Registrant and Uziel
               Frydman, dated May 6, 1998.*

                                      -19-
<PAGE>

    10.17      Form of Employment Agreement between Registrant and Anat
               Schwartz, dated May 6, 1998.*
    10.18      Form of Employment Agreement between Registrant and Amir Frydman,
               dated May 6, 1998.*
    10.19      Receiver's Bill of Sale by Allen M. Shine, as receiver of E.
               Rosen Company, dated September 24, 1998.**
    10.20      Form of Employment Agreement between Registrant and Gordon F.
               Nahas, dated August 27, 1998.***
    21.1       Subsidiaries of the Registrant.
    24.1       A power of attorney relating to the signing of amendments hereto
               is incorporated in the signature pages of this Annual Report on
               Form 10-KSB.
    27.1       Financial Data Schedule.

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

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

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

         (b) REPORTS ON FORM 8-K

                  None

                                      -20-
<PAGE>

                                   SIGNATURES

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

                                    SHERWOOD BRANDS, INC.

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

                                POWER OF ATTORNEY

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

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

<TABLE>

<CAPTION>
                  SIGNATURES                                  TITLE(S)                              DATE
--------------------------------------------     --------------------------------------      ----------------
<S>                                              <C>                                         <C>
/s/  Uziel Frydman                               President, Chief Executive Officer and      November 4, 1999
--------------------------------------------     Director
Uziel Frydman                                    (principal executive officer)

/s/ Anat Schwartz                                Executive Vice President -- Finance and     November 4, 1999
--------------------------------------------     Secretary
Anat Schwartz                                    (principal accounting officer)

/s/ Amir Frydman                                 Executive Vice President, Treasurer and     November 4, 1999
--------------------------------------------     Director
Amir Frydman

/s/ Douglas A. Cummins                           Director                                    November 4, 1999
--------------------------------------------
Douglas A. Cummins

/s/ Jean Clary                                   Director                                    November 4, 1999
--------------------------------------------
Jean Clary

/s/ Jason T. Adelman                             Director                                    November 4, 1999
--------------------------------------------
Jason T. Adelman

</TABLE>


                                      -21-
<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS
                       YEARS ENDED JULY 31, 1999 AND 1998

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

Consolidated Financial Statements

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

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

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

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

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

     Notes to consolidated financial statements.....................F-10 to F-18

     Valuation and Qualifying Accounts - Schedule II........................F-19

                                       F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated balance sheets of Sherwood Brands,
Inc. and Subsidiaries as of July 31, 1999 and 1998 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended. We have also audited the schedule listed in the accompanying index. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sherwood Brands,
Inc. and Subsidiaries at July 31, 1999 and 1998 and the results of its
operations and cash flows for the years then ended, in conformity with generally
accepted accounting principles. Also, in our opinion, the schedule presents
fairly, in all material respects, the information set forth therein for the
years ended July 31, 1999 and 1998.

                                                                BDO SEIDMAN, LLP

Washington, D.C.
October  22, 1999

                                      F-2
<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                          JULY 31,
                                                                ---------------------------
                                                                    1999            1998
                                                                -----------     -----------
ASSETS
<S>                                                             <C>             <C>
Current assets
   Cash and cash equivalents                                    $   657,791     $ 6,087,789
   Accounts receivable trade, less allowance of $67,946 and
   $40,000                                                        2,928,874       2,067,123
   Inventory                                                      8,569,580       4,058,293
   Income taxes receiveable                                         435,609               -
   Other current assets                                             658,364         127,817
   Deferred taxes on income                                         141,800          29,700
                                                                -----------     -----------
Total current assets                                             13,392,018      12,370,722

Deferred taxes on income                                             43,000               -
Net property and equipment                                        3,110,220       2,642,570

Other assets                                                         30,132          53,066
                                                                -----------     -----------
TOTAL ASSETS                                                    $16,575,370     $15,066,358
                                                                ===========     ===========
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
   Line of credit                                               $ 1,938,448     $         -
   Current portion of long-term debt                                205,000         175,000
   Current portion of subordinated debt                              96,444          90,941
   Accounts payable                                               2,863,182       2,277,512
   Accrued expenses                                               1,082,011         421,789
   Income taxes payable                                             214,400         161,261
                                                                -----------     -----------
Total current liabilities                                         6,399,485       3,126,503

Long-term debt                                                      975,000       1,180,000
Subordinated debt                                                   328,082         424,116
Deferred taxes on income                                                  -         194,800
                                                                -----------     -----------

TOTAL LIABILITIES                                                 7,702,567       4,925,419
                                                                -----------     -----------

Stockholders' equity
    Preferred stock, $.01 par value, 5,000,000 shares
       authorized; no shares issued or outstanding                        -               -
    Common stock, Class A, $.01 par value, 30,000,000
       shares authorized, 2,700,000 issued and outstanding           27,000          27,000
    Common stock, Class B, $.01 par value, 5,000,000 shares
      authorized, 1,000,000 shares issued and outstanding            10,000          10,000
Additional paid-in-capital                                        7,973,538       7,978,777
Retained earnings                                                   862,265       2,125,162
                                                                -----------     -----------
TOTAL STOCKHOLDERS' EQUITY                                        8,872,803      10,140,939

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                      $16,575,370     $15,066,358
                                                                ===========     ===========
</TABLE>

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

                                      F-3
<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                             YEARS ENDED JULY 31,
                                                       ------------------------------
                                                           1999               1998
                                                       ------------      ------------
<S>                                                    <C>               <C>
Net sales                                              $ 25,299,806      $ 18,084,174

Cost of sales                                            19,218,718        12,230,757
                                                       ------------      ------------
Gross profit                                              6,081,088         5,853,417
                                                       ------------      ------------
Selling, general and administrative expenses              4,922,082         3,139,475
Pre-production costs                                        213,112           155,095
Salaries and related expenses                             2,450,096         1,515,803
                                                       ------------      ------------
Total operating expenses                                  7,585,290         4,810,373
                                                       ------------      ------------
(Loss) income from operations                            (1,504,202)        1,043,044
                                                       ------------      ------------
Other income (expense)
   Interest income                                           83,258            88,870
   Interest expense                                        (153,832)         (222,947)
   Insurance claim, net                                           -           102,223
   Other income (expense)                                    (7,821)            6,399
                                                       ------------      ------------
Total other income (expense)                                (78,395)          (25,455)
                                                       ------------      ------------
(Loss) income before (benefit) provision for taxes       (1,582,597)        1,017,589
(Benefit) provision for taxes                              (319,700)          316,400
                                                       ------------      ------------
Net (loss) income                                      $ (1,262,897)     $    701,189
                                                       ------------      ------------
Basic and diluted (loss) earnings per share            $      (0.34)     $       0.28
                                                       ------------      ------------
Weighted average common shares outstanding                3,700,000         2,515,205
                                                       ============      ============
</TABLE>

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

                                      F-4
<PAGE>

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

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

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

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

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

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

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

</TABLE>

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

                                      F-5
<PAGE>

                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                               YEARS ENDED JULY 31,
                                                                           ----------------------------
                                                                               1999             1998
                                                                           -----------      -----------
<S>                                                                        <C>              <C>
Cash flows from operating activities
   Net (loss) income                                                       $(1,262,897)     $   701,189
   Adjustments to reconcile net (loss) income to net
   cash provided by (used in) operating activities
   Depreciation expense                                                        188,795          139,551
   Deferred income taxes                                                      (349,900)         227,200
   Unrealized loss on foreign currency exchange                                  5,870            3,348
   Provision for inventory allowance                                           255,141           21,800
   Provision for doubtful accounts                                              33,570           83,100
   Write-off of accounts receivable                                             (5,624)         (66,500)
   (Increase) decrease in assets
       Accounts receivable                                                    (889,697)          18,227
       Inventory                                                              (766,428)        (667,131)
       Income taxes receivable                                                (435,609)               -
       Insurance settlement receivable                                               -          262,574
       Other current assets                                                   (530,547)         (81,755)
       Other assets                                                             22,934          (33,619)
   Increase (decrease) in liabilities
        Accounts payable                                                       579,800          149,401
        Accrued expenses                                                       660,222          223,777
        Income taxes payable                                                    53,139          (29,239)
                                                                           -----------      -----------
Net cash (used in) provided by operating activities                         (2,441,231)         951,923

Cash flows from investing activities
   Inventory purchased from Rosen                                           (4,000,000)               -
   Capital expenditures                                                       (656,445)        (446,566)
                                                                           -----------      -----------
Net cash used in investing activities                                       (4,656,445)        (446,566)
                                                                           -----------      -----------
Cash flows from financing activities
   Net borrowings (repayments) on line of credit                             1,938,448       (1,644,589)
   Payments on debt                                                           (265,531)        (231,185)
   Payments to related parties                                                       -         (903,180)
   Offering costs                                                               (5,239)               -
   Proceeds from initial public offering of stock                                    -        7,747,277
                                                                           -----------      -----------
Net cash provided by financing activities                                    1,667,678        4,968,323
                                                                           -----------      -----------
Net increase (decrease) in cash and cash equivalents                        (5,429,998)       5,473,680

Cash and cash equivalents, at beginning of period                            6,087,789          614,109
                                                                           -----------      -----------
Cash and cash equivalents, at end of period                                $   657,791      $ 6,087,789
                                                                           ===========      ===========
</TABLE>

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

                                      F-6
<PAGE>

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

BASIS OF PRESENTATION, ORGANIZATION AND DESCRIPTION OF BUSINESS

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

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

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

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

Sherwood Brands of RI, Inc. was incorporated in September, 1998 in the state of
Rhode Island. Sherwood Brands of RI, Inc. d/b/a E. Rosen Company is a
manufacturer of hard candies, jelly beans and packer of gift items and baskets.
On September 24, 1998 the Company completed the acquisition of certain assets of
the E. Rosen Company - d/b/a School House Candy Co. ("Rosen"). Rosen was a Rhode
Island manufacturer of hard candy, jelly beans and lollipops and assembled a
variety of holiday gift items including gift baskets. Rosen sold its holiday
gift items to such chains as Wal-Mart, Kmart and CVS, and had approximately $42
million in sales for its most recent fiscal year ended March 31, 1998. Rosen
filed a receivership proceeding before the Rhode Island Superior Court on July
31, 1998. The Company paid $4.0 million in cash for the machinery and equipment,
inventory and tradenames, trademarks and customer lists of Rosen. For financial
accounting purposes, the entire purchase price of $4.0 million was allocated to
the inventories of raw material, components and finished product.

CASH EQUIVALENTS

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

INVENTORY

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

PROPERTY AND EQUIPMENT

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

                                      F-7
<PAGE>

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

REVENUE RECOGNITION

Sales are recognized upon shipment of products.

INCOME TAXES

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

USE OF ESTIMATES

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

FINANCIAL INSTRUMENTS

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

FOREIGN EXCHANGE CONTRACTS

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

EARNINGS PER SHARE

The Company accounts for earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share.

Common equivalent shares representing the common shares that would be issued on
exercise of outstanding stock options and warrants reduced by the number of
shares which could be purchased from the related exercise proceeds are not
included since their effect would be anti-dilutive.

RECLASSIFICATIONS

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

                                      F-8
<PAGE>
                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES
             SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NEW PRONOUNCEMENTS

In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133). SFAS 133 establishes accounting
and reporting standards for derivative instruments and hedging activities. SFAS
133 requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair market value. Under certain
circumstances, a portion of the derivative's gain or loss is initially reported
as a component of other comprehensive income and subsequently reclassified into
income when the transaction affects earnings. For a derivative not designated as
a hedging instrument, the gain or loss is recognized in income in the period of
change. The Company will be required to adopt SFAS 133 in fiscal year 2001 and
believes that adoption of SFAS 133 will have no impact on its financial position
or results of operations.

                                      F-9
<PAGE>

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

1.          FOREIGN CURRENCY TRANSACTIONS

The Company purchases products from foreign manufacturers under terms that
provide for the payment of goods in foreign currency approximately 60 to 90 days
from the invoice date. The goods are recorded at cost in equivalent United
States dollars at the exchange rate in effect on the invoice date. The
difference between the recorded cost and the amount required for payment is
reflected as a realized foreign currency transaction gain or loss. Based on
exchange rates in effect at July 31, 1999 and 1998, a provision for unrealized
foreign currency transaction loss of $5,870 and $3,347, respectively, on the
future payment of open invoices is included in the financial statements as cost
of goods sold.

As of July 31, 1999, the Company has contracted to purchase foreign currency
during 1999 at contract values totaling $68,909. Each contract was entered into
in order to fulfill specific purchase orders for finished goods.

2.          INVENTORY

Inventories consist of the following:

<TABLE>

<CAPTION>
                                                                           JULY 31,
                                                             --------------------------------------
                                                                   1999                 1998
                                                             -----------------    -----------------
<S>                                                          <C>                  <C>
Raw materials and ingredients                                $      1,238,786     $        136,614
Components used in assembly                                           542,459              180,000
Packaging materials                                                 1,380,525              264,108
Work-in-process and finished product                                5,407,810            3,477,571
                                                             =================    =================
                                  Total                      $      8,569,580     $      4,058,293
                                                             =================    =================

</TABLE>


3.          PROPERTY, PLANT  AND EQUIPMENT

Property, plant and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                           JULY 31,
                                                             --------------------------------------
                                                                   1999                 1998
                                                             -----------------    -----------------
<S>                                                         <C>                   <C>
Land                                                        $          85,282     $         65,000
Buildings and improvements                                            852,622              635,000
Machinery and equipment                                             2,520,794            2,212,147
Furniture and computer equipment                                      104,119               74,482
Transportation equipment                                              145,339              139,564
                                                             -----------------    -----------------
                                                                    3,708,156            3,126,193
                 Accumulated depreciation                            (597,936)            (483,623)
                                                             =================    =================
  Total                                                      $      3,110,220     $      2,642,570
                                                             =================    =================
</TABLE>

Depreciation expense for the years ended July 31, 1999 and 1998 was $188,795 and
$139,551, respectively.

                                      F-10
<PAGE>

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

4.          CREDIT FACILITY

The Company has a $7,500,000 line of credit available for advances to finance
working capital and the issuance of letters of credit. Advances under the line
of credit are based on a borrowing formula equal to 80% of eligible domestic
accounts receivable plus the smaller of 70% of domestically-owned eligible
inventory or a seasonal inventory cap. Borrowings on inventory are capped based
upon the Company's seasonal requirements and are limited to $5 million for the
period April 1 through November 1 and $3 million for the period November 2
through March 31. Advances under the line of credit are further reduced by the
aggregate amount of outstanding letters of credit which may not exceed $2.5
million. Interest accrues on such advances at LIBOR plus 1.85% (the rate at July
31,1999 was 7.0437%) and is payable monthly. The loan agreement expires in
November 2000. At July 31, 1999, the Company had borrowed $1,938,448 under the
line of credit and had $1,196,695 in letters of credit outstanding. The line of
credit is secured by the cash and cash equivalents, accounts receivable and
inventories of the Company. During the years ended July 31, 1999 and 1998, the
Company incurred and paid approximately $28,645 and $92,000 of interest expense
on the line of credit, respectively.

The line of credit agreement contains various business and financial covenants,
including, among other things, a minimum tangible net worth of $9,500,000 and a
funds flow coverage in excess of 1.50. The Company was in violation of these two
covenants at July 31, 1999. The bank has granted the Company a waiver of these
two covenants for the periods ending July 31, 1999 and October 31, 1999. The
Company believes that it will be in compliance with these two covenants
subsequent to October 31, 1999.

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

<TABLE>
<CAPTION>
                                                                  JULY 31, 1999       JULY 31, 1998
                                                                -----------------    -----------------
<S>                                                             <C>                  <C>
Borrowings under revolving line of credit at year end           $       1,938,448    $              -
Weighted average interest rate                                              7.81%                 8.5%
Maximum month-end balance during period                         $       1,938,448    $       1,462,225
Average balance during the period                               $         761,957    $       1,239,151

</TABLE>

5.          LETTERS OF CREDIT

The Company has available an irrevocable letter of credit of $935,000 with a
bank, to be used for payments of principal portions of Virginia Revenue Bonds in
the event the Company defaults on payment. The letter is collateralized by a
first deed of trust and security interest in the Company's land, building and
equipment. The letter of credit expires in 2006. The letter of credit agreement
has a debt to worth and a debt coverage requirement as well as a limitation on
dividends paid and on borrowings. The letter of credit agreement contains
various business and financial covenants, including, among other things, a
minimum debt coverage of 1.50 to 1.00. The Company was in violation of this
covenant at July 31, 1999. The bank has granted the Company a waiver of this
covenant for the year ended July 31, 1999. The Company believes that it will be
in compliance with this covenant subsequent to July 31, 1999.

In addition, the Company has available another irrevocable letter of credit of
$580,000 with a bank, to be used for payment of principal portions of Virginia
Revenue Bonds in the event the Company defaults on payment. The letter is
collateralized by a first deed of trust in the Company's commercial property as
well as a lien on certain assets of the Company. This letter of credit expires
in 2002.

                                      F-11
<PAGE>

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

6.          LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                              JULY 31,
                                                                                --------------------------------------
                                                                                      1999                 1998
                                                                                -----------------    -----------------
<S>                                                                             <C>                  <C>
Mecklenberg County, Virginia Variable Rate Demand Revenue
  Bonds issued on June 1, 1996; collateralized by an irrevocable
  Letter of credit (see Note 5); payable in varying annual amounts;
  To be redeemed in whole by June 1, 2006; interest at variable
  Market tax exempt rates (3.30% at July 31, 1999).                             $        790,000     $        860,000

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 (3.30% at July 31, 1999).                                                 390,000              495,000
                                                                                -----------------    -----------------
                                                                                       1,180,000            1,355,000
Less current maturities                                                                 (205,000)            (175,000)
                                                                                -----------------    -----------------
Long-term portion                                                               $        975,000     $      1,180,000
                                                                                =================    =================

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

                                                                                      AMOUNT
                                                                                -----------------
Fiscal years ending July 31,
2000                                                                            $        205,000
2001                                                                                     210,000
2002                                                                                     215,000
2003                                                                                      90,000
2004                                                                                      40,000
Thereafter                                                                               420,000
                                                                                -----------------
                             Total                                              $      1,180,000
                                                                                =================
</TABLE>

                                      F-12
<PAGE>

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

7.          SUBORDINATED DEBT

Subordinated debt consists of the following:

<TABLE>
<CAPTION>
                                                                                              JULY 31,
                                                                                --------------------------------------
                                                                                      1999                 1998
                                                                                -----------------    -----------------
<S>                                                                             <C>                  <C>
Mecklenberg County, Virginia Industrial Development Authority
  Note; collateralized by second deed of trust on land, building and
  Equipment; payable in monthly installments of $4,644, including
  Interest of 7%, with a final payment of $239,193 due in
  June, 2001.                                                                   $        304,872     $        340,589

Lake Country Development Corporation Note; collateralized by
  Second deed of trust on land, building and equipment; payable
  in monthly installments of $5,480, including interest of 5.25%
  Beginning on April 1, 1997 and payable in full on June 1, 2001.                        119,654              174,468
                                                                                -----------------    -----------------
                                                                                         424,526              515,057
Less current maturities                                                                  (96,444)             (90,941)
                                                                                -----------------    -----------------
Long-term portion                                                               $        328,082     $        424,116
                                                                                =================    =================

The scheduled maturities of subordinated debt are as follows:
                                                                                     AMOUNT
                                                                                -----------------
Fiscal years ending July 31,
2000                                                                            $         96,444
2001                                                                                     328,082
                                                                                -----------------
                             Total                                              $        424,526
                                                                                =================
</TABLE>

8.          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. The Company has reserved
350,000 shares of common stock for issuance under the Plan.

                                      F-13
<PAGE>

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

The following summary represents the activity under the Plan:

<TABLE>
<CAPTION>
                                                                YEARS ENDED JULY 31,
                                          -----------------------------------------------------------------
                                                       1999                             1998
                                          -------------------------------  --------------------------------
                                                              AVERAGE                          AVERAGE
                                                             EXERCISE                          EXERCISE
                                             SHARES            PRICE           SHARES           PRICE
                                          --------------   --------------  ---------------  ---------------
<S>                                             <C>            <C>
Under option, beginning of year                 143,750        $5.95               -             -
Granted                                          10,000        $5.95              143,750       $5.95
Exercised                                        -                                 -
Cancelled                                        -                                 -
                                          --------------                   ---------------
Under option, end of year                       153,750        $5.95              143,750       $5.95
                                          ==============                   ===============
Exercisable at end of year                       47,917         -                  -             -
                                          ==============                   ===============

</TABLE>

The options under the Plan expire at various dates through June 19, 2008.

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 "Minimum Value" method to measure the
compensation cost of stock options granted in 1998 with the following
assumptions: Risk-free interest rate of 5.11% a dividend payout rate of zero and
an expected option life of ten years, respectively.

Using these assumptions, the fair value of stock options granted is $2.57
commencing March 31, 1998. 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
option, the existing models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.

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

                                      F-14
<PAGE>

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

<TABLE>
<CAPTION>
                                                                       YEARS ENDED JULY 31,
                                                    -----------------------------------------------------------------
                                                                 1999                             1998
                                                    -------------------------------  --------------------------------
                                                         AS               PRO              AS              PRO
                                                      REPORTED           FORMA          REPORTED          FORMA
                                                    --------------   --------------  ---------------  ---------------
<S>                                                 <C>              <C>             <C>              <C>
Net (loss) income                                   $  (1,262,897)   $  (1,345,484)  $      701,189   $      673,660
Basic and diluted (loss) earnings per share         $       (0.34)   $       (0.36)  $         0.28   $         0.27

</TABLE>

9.          INCOME TAXES

The provision for income taxes in the statement of operations for the years
ended July 31, 1999 and 1998 is as follows:

<TABLE>
<CAPTION>
                                                                            JULY 31,
                                                              --------------------------------------
                                                                    1999                 1998
                                                              -----------------    -----------------
    <S>                                                       <C>                  <C>
    Current tax provision (benefit):
        Federal                                               $       (151,800)    $         73,100
        State                                                          (33,200)              16,100
        IRS Examination                                                214,400                    -
                                                              -----------------    -----------------
                                       Total current                    30,200               89,200

    Deferred tax                                                      (349,900)             227,200
                                                              -----------------    -----------------
                Total taxes on income                         $       (319,700)    $        316,400
                                                              =================    =================
</TABLE>

         During the current year, the IRS examined the tax returns for Sherwood
Brands, Inc. and Sherwood Brands Overseas, Inc. for tax years ended July 31,
1995 to July 31,1997. As a result of the tax examination, the IRS contends that
the Company's borrowing agreement contained an indirect guarantee by Overseas of
the borrowings of the parent and therefore the parent must include as income the
earnings of Overseas. The IRS assessed taxes due of $214,400. The Company does
not agree with the IRS position and is currently considering what actions it
will take in the future to argue the case.

                                      F-15
<PAGE>

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

The following summary reconciles taxes at the federal statutory rate with actual
taxes:

<TABLE>
<CAPTION>
                                                                                      JULY 31,
                                                                      --------------------------------------
                                                                            1999                  1998
                                                                      -----------------    -----------------
<S>                                                                   <C>                  <C>
Income taxes at the statutory rate                                    $       (538,000)    $        346,000
Increase (decrease) in taxes resulting from:
   Effect of untaxed income from foreign subsidiary                             40,000              (94,000)
   IRS Examination                                                             214,400                    -
   State and local taxes, net of federal income tax benefit                    (79,000)              66,000
   Other                                                                        42,900               (1,600)
                                                                      -----------------    -----------------
            Total (benefit) provision for taxes                       $       (319,700)    $        316,400
                                                                      =================    =================

</TABLE>

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

The principal items giving rise to the Company's net deferred tax assets and
liabilities are as follows:

<TABLE>
<CAPTION>
                                                                                    JULY 31,
                                                                      --------------------------------------
                                                                          1999                   1998
                                                                      --------------       -----------------
<S>                                                                   <C>                  <C>
Deferred tax assets
   Net operating loss carryforwards                                   $     244,500        $          -
   Purchase price allocation of fixed assets                                284,600                  22,400
   Officers salary payable                                                    9,000                   -
   Allowance for doubtful accounts                                           45,200                  14,000
   Inventory obsolescence reserve                                           103,300                  14,000
   Other                                                                     17,600                   -
   Bonus accrual                                                              -                      17,900
   Unrealized loss on foreign exchange contracts                              4,000                   1,200
                                                                      --------------       -----------------
           Total deferred tax assets                                        708,200                  69,500
                                                                      --------------       -----------------
Deferred tax liabilities
    Accumulated depreciation                                               (241,800)               (115,100)
    Purchase price allocation of inventory                                 (201,900)                  -
    Accounts receivable service costs                                       (79,700)               (119,500)
                                                                      --------------       -----------------
           Total deferred tax liabilities                                  (523,400)               (234,600)
                                                                      --------------       -----------------
Net deferred tax asset (liability)                                    $     184,800        $       (165,100)
                                                                      ==============       =================
Net current deferred tax asset                                        $     141,800        $         29,700
                                                                      ==============       =================
Net long-term deferred tax asset (liability)                          $      43,000        $       (194,800)
                                                                      ==============       =================

</TABLE>

                                      F-16
<PAGE>

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

At July 31, 1999 the Company has net operating loss carryforwards for federal
income tax purposes of approximately $700,000 which are available to offset
future taxable income. The net operating loss carryforwards expire in 2019.

10.         COMMITMENTS

The Company leases office space in Maryland, and office, warehouse and
manufacturing facilities in Rhode Island. Rental expense under these leases
aggregated approximately $309,611 and $41,692 for the years ended July 31, 1999
and 1998 respectively. The lease for office space in Rockville, MD is subject to
annual increases based upon both certain allocated operating costs and increases
in the Consumer Price Index. Future minimum rental commitments under operating
leases as of July 31, 1999 are summarized in the following table:

               YEARS ENDED JULY 31,                                       AMOUNT
               --------------------                                       ------
                     2000                                             $   99,492
                     2001                                                102,477
                     2002                                                105,553
                     2003                                                108,718
                     2004                                                111,970
                     Thereafter                                          505,430
                                                                      ----------
                     Total                                            $1,033,640
                                                                      ==========

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

The Company has entered into employment agreements with the Chief Executive
Officer, Executive Vice President Finance and Secretary and the Executive Vice
President - Marketing and Product Development and Treasurer. The agreements
expire on July 31, 2001. The agreements provide for annual base salaries of
$225,000, $135,000 and $194,000, respectively. The base salary shall be
increased each year by at least 5% and may be reviewed for merit increases by
the Compensation Committee of the Board of Directors. In addition, such
employment agreements entitle the executives to a portion of a bonus pool as
determined by the Board of Directors equal to the sum of (i) the first $150,000
in excess of $1 million of Company pre tax net income (this item (i) is
applicable solely for fiscal 1998) and (ii) 15% of Company pre tax net income in
excess of certain incremental earnings targets. If any of these executives is
terminated without cause or upon a change in control of the Company, each is
entitled to continue to receive his or her annual base salary for a period of
three years, any accrued incentive compensation through the date of termination
and certain other benefits. Each of the above listed executives is prohibited
from competing with the Company for the duration of his or her respective
employment agreement, and if terminated or upon voluntary resignation, for one
year thereafter.

The Company is currently finalizing negotiations on an employment agreement with
a new salesperson that will include a base annual salary of $115,000 plus
performance-based commissions and non-compete language.

11.         EMPLOYEE BENEFIT PLANS

Effective January 1, 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.

                                      F-17
<PAGE>
                     SHERWOOD BRANDS, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)

Effective August 1, 1997, the Company amended its Money Purchase Pension Plan to
a 401(k) and Profit Sharing Plan ("401(k) Plan"). 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. Contributions to the 401 (k) Profit Sharing Plan
amounted to $30,787 for the year ended July 31, 1998. There were no
contributions in 1999.

12.         SUPPLEMENTAL CASH FLOWS DISCLOSURE

Cash paid for interest amounted to $153,832 and $222,947 for the years ended
July 31, 1999 and 1998, respectively.

Cash paid for income taxes amounted to $328,015 and $214,757 for the years ended
July 31, 1999 and 1998, respectively.

13.         CONCENTRATION OF CREDIT RISK AND EXPORT SALES

The Company currently purchases most of its contract manufactured products from
third-party sources located in Argentina, Austria, Belgium and Holland. The
Company has a variety of customers, including mass merchandisers, drug stores
and grocery stores throughout the United States and abroad. For the year ended
July 31, 1999 a single customer accounted for approximately 12% of the Company's
net sales. For the year ended July 31, 1998 a different customer accounted for
approximately 9% of the Company's total sales.

Export sales for the years ended July 31, 1999 and 1998, were approximately
$1,120,000 and $1,647,000 respectively. The majority of export sales are made to
Canada.

14.         PRE-PRODUCTION COSTS

During the years ended July 31, 1999 and 1998, The Company incurred certain
costs relating to the development of its production facilities for its
Demitasse(R) and candy product lines in Chase City, VA. Pre-production costs for
the years ended July 31, 1999 and 1998 were $213,112 and $115,095, respectively.
These costs consist of parts and supplies, assembly salaries, sub-contract
labor, and direct labor.

15.         ADVERTISING COSTS

Advertising costs, included in selling, general and administrative expenses, are
expensed as incurred and were $698,498 and $697,734 for the years ended July 31,
1999 and 1998, respectively.

16.         FOURTH QUARTER ADJUSTMENT

During the fourth quarter of 1999, the Company recorded an adjustment to
increase its inventory reserve against inventory purchased from Rosen by
$180,000.

                                      F-18
<PAGE>

                                   SCHEDULE II

                        VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                        BALANCE BEGINNING    CHARGED TO COSTS                        BALANCE AT END
             DESCRIPTION                    OF PERIOD          AND EXPENSES         DEDUCTION          OF PERIOD
----------------------------------      -----------------   -----------------   ----------------   ----------------
<S>                                     <C>                 <C>                 <C>                <C>
Year ended July 31, 1998
   Allowance for doubtful accounts      $         23,400    $         83,100    $        (66,500)  $         40,000

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

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

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

</TABLE>

                                      F-19
<PAGE>

                                  EXHIBIT INDEX

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

 21.1                   Subsidiaries of the Registrant

 27.1                   Financial Data Schedule