<PAGE>

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

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


                                  FORM 10-K/A

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

                    For the fiscal year ended July 31, 2001

                        Commission File Number: 1-14091

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

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

<TABLE>
<S>                                            <C>
                North Carolina                              56-1349259
(State or Other Jurisdiction of Incorporation) (IRS Employer Identification Number)
</TABLE>

<TABLE>
              <S>                                      <C>
                   1803 Research Blvd., Suite 201
                        Rockville, Maryland              20850
              (Address of Principal Executive Offices) (Zip Code)
</TABLE>

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

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

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

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


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


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

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

                      DOCUMENTS INCORPORATED BY REFERENCE


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


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

<PAGE>

                             SHERWOOD BRANDS, INC.


                                  FORM 10-K/A

                               TABLE OF CONTENTS

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

                                      PART I


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


 ITEM 2.  PROPERTIES.....................................................   7


 ITEM 3.  LEGAL PROCEEDINGS..............................................   7


 ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............   7


                                      PART II


 ITEM 5.  MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
            STOCKHOLDER MATTERS..........................................   8


 ITEM 6.  SELECTED FINANCIAL DATA........................................   9


 ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATIONS........................................  10


 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....  15


 ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................  16


 ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
            AND FINANCIAL DISCLOSURE.....................................  16


                                     PART III


 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY................  17


 ITEM 11. EXECUTIVE COMPENSATION.........................................  19


 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT...................................................  22


                                      PART IV


 ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
            FORM 8-K.....................................................  23


 SIGNATURES..............................................................  25
</TABLE>

<PAGE>

                                    PART I.

Item 1.  Description of Business

General

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

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

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

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

Market Overview

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

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

                                      1

<PAGE>

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

Products

  Internationally Manufactured Candy, Cookies and Chocolates

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

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

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

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

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

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

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

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

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


   ZED GUM:  On July 9, 2001 the Company entered into its first agreement to be
the exclusive distributor of a non-company brand name product in the United
States. The agreement is for an indefinite term and terminates only upon a
material breach by either party or upon the mutual consent of both parties.
This agreement allows the Company the opportunity to position itself strongly
in the kids novelty and everyday gum market. The strength of this relationship
is to develop products specifically for the United States including development
of products designed and trademarked by the Company under the ZED name. The
product line meets the Company's requirements for high quality, exceptional
package design and value. Since the Company began marketing the product to its
customers in 2001, orders for the product have steadily increased.


                                      2

<PAGE>

  Domestically Manufactured Candies and Biscuits

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

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

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

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

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

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

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

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

  Assembled Holiday Gift Items and Gift Baskets

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

Suppliers


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



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


                                      3

<PAGE>




   Under the terms of the Company's agreement with the manufacturer of ZED gum,
there is no minimum purchase requirement during the first year. Upon the first
anniversary of the date of the agreement, the minimum purchase requirement will
be 1,000,000 Euros.



   The Company's supplier agreements require the supplier to maintain product
liability insurance with the Company as an additional named insured and are
generally terminable on short notice. The loss of any one supplier would not
have a material adverse effect on the Company's business.



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

Customers


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


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

   The Company also sells its products to numerous gourmet distributors
throughout the United States. These distributors in turn sell 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, Puerto
Rico and Canada. For the year ended July 31, 2001, net sales of the Company's
products in the Canadian market accounted for approximately $407,000, or 0.7%
of the Company's total net sales and in July 31, 2000 and 1999 they were
$588,000, or 1.4%, and $1,120,000, or 4.4%, respectively.


   The Company engages independent food and candy brokers in various regions
throughout the United States for marketing to retail customers. These brokers
account for a majority of the Company's sales. Food and candy

                                      4

<PAGE>

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

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

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

Manufacturing and Assembly Facilities

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

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

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

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

Marketing, Sales and Advertising

   The Company believes that product recognition by retail and wholesale
customers, consumers and food brokers is an important factor in the marketing
of its products. Accordingly, the Company promotes its products

                                      5

<PAGE>

and brand names through the use of attractive promotional materials, including
full-color product brochures and newspaper inserts, advertising in trade
magazines targeted to the mass merchandisers, vending industry, gourmet trade
and gift basket markets, and participation in trade shows. For the year ended
July 31, 2001, the Company spent approximately $980,000 on advertising and
product promotion and as of July 31, 2000 and 1999 the company spent
approximately $716,000 and $698,000, respectively.

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

Competition

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

Trademarks


   The Company holds United States trademark registrations for the "ELANA,"
"RUGER", "TONGUE TATTOO", "STRIP-O-POP", "SMILE POPS" and "demitasse" names,
and has filed trademark registrations for certain other names, including
"COWS," and uses other names for which it has not applied for registration. The
Company believes that its rights to these names are a significant part of the
Company's business and that its ability to create demand for its products is
dependent to a large extent on its ability to exploit these trademarks. The
Company's failure to protect its trademarks and other intellectual property
rights could negatively impact the value of its brand names. The Company is not
aware of any infringement claims or other challenges to the Company's rights to
use these marks. The Company is applying for the international registration of
all its trademarks.


Government Regulation

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

   Nevertheless, there can be no assurance that the Company will continue to be
in compliance with current laws and regulations or that the Company will be
able to comply with any future laws and regulations and

                                      6

<PAGE>

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. These insurance amounts may not be sufficient to cover
potential claims and adequate levels of coverage may not be available in the
future at a reasonable cost. In the event of a partially or completely
uninsured successful claim against the Company, the Company's financial
condition and reputation would be materially affected.


Employees

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

Item 2.  Description of Properties

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

<TABLE>
<CAPTION>
                           Approximates
                        ------------------
                        Square    Annual      Expiration
Address                  Feet      Rent        of Lease             Business Use
-------                 ------- ---------- ---------------- ----------------------------
<S>                     <C>     <C>        <C>              <C>
Leased Properties:
1803 Research Boulevard   5,500 $  125,000 January 31, 2009 Executive and General Office
Rockville, MD 20850
1005 Main Street....... 131,000 $  206,000     October 2004 Manufacturing Plant and
Pawtucket, RI 02860                                         General Office
280 Rand Street........ 397,000 $  396,000     October 2004 Assembly facility, Storage
Central Falls, RI 02863                                     And Distribution facilities
27 Healy Street........ 430,000 $   25,000        June 2020 Assembly facility, Storage
New Bedford, MA 02745             (Yr 1-2)                  And Distribution
                                $   41,667
                                 (Yr 3-20)
Owned Properties:
807 South Main Street..  70,000                             Manufacturing Plant
Chase City, VA 23924
350 Sherwood Drive.....  73,000                             Manufacturing Plant
Keysville, VA 23947
</TABLE>

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

Item 3.  Legal Proceedings

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

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

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

                                      7

<PAGE>

                                    PART II

Item 5.  Market Prices and Dividends

Market Price

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

<TABLE>
<CAPTION>
                  Price Period                     High   Low
                  ------------                     ----- -----
                  <S>                              <C>   <C>
                  Fiscal Year Ended July 31, 2000:
                     First Quarter................ $3.63 $1.75
                     Second Quarter............... $3.50 $1.38
                     Third Quarter................ $3.25 $1.38
                     Fourth Quarter............... $2.25 $1.25
                  Fiscal Year Ended July 31, 2001:
                     First Quarter................ $2.50 $1.50
                     Second Quarter............... $3.25 $1.63
                     Third Quarter................ $3.26 $2.42
                     Fourth Quarter............... $4.95 $3.00
</TABLE>

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

Dividend Policy

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

                                      8

<PAGE>

Item 6.  Selected Financial Data

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

<TABLE>
<CAPTION>
For years ended July 31,                2001         2000       1999 (*)       1998         1997
------------------------            -----------  -----------  -----------  -----------  -----------
<S>                                 <C>          <C>          <C>          <C>          <C>
Net sales.......................... $58,316,716  $42,104,645  $25,299,806  $18,084,174  $17,487,462
Cost of sales......................  41,796,184   32,183,885   19,218,718   12,230,757   12,570,606
                                    ===========  ===========  ===========  ===========  ===========
Gross profit.......................  16,520,532    9,920,760    6,081,088    5,853,417    4,916,856
Selling, general and administrative
  expenses.........................   8,006,416    6,675,177    4,922,082    3,139,475    2,744,116
Salaries and related expenses......   4,806,061    3,285,850    2,450,096    1,515,803    1,180,522
Pre-production costs...............          --           --      213,112      155,095      769,585
                                    ===========  ===========  ===========  ===========  ===========
Total operating expenses...........  12,812,477    9,961,027    7,585,290    4,810,373    4,694,223
                                    ===========  ===========  ===========  ===========  ===========
Income/(Loss) from operations......   3,708,055      (40,267)  (1,504,202)   1,043,044      222,633
                                    ===========  ===========  ===========  ===========  ===========
Other income (expense)
   Interest income.................      11,182       36,016       83,258       88,870       26,073
   Interest expense................    (539,971)    (434,978)    (153,832)    (222,947)    (273,511)
   Insurance claim, net............          --           --           --      102,223      364,028
   Other income (expense)..........     132,209      693,413       (7,821)       9,747       51,263
                                    ===========  ===========  ===========  ===========  ===========
Total other income (expense).......    (396,580)     294,451      (78,395)     (25,455)     103,747
                                    ===========  ===========  ===========  ===========  ===========
Income/(Loss) before provision
  (benefit) for taxes on income....   3,311,475      254,184   (1,582,597)   1,017,589      326,380
                                    ===========  ===========  ===========  ===========  ===========
Provision (Benefit) for taxes on
  income...........................   1,093,100       98,100     (319,700)     316,400       23,100
                                    ===========  ===========  ===========  ===========  ===========
Net income (loss).................. $ 2,218,375  $   156,084  $(1,262,897) $   701,189  $   303,280
                                    ===========  ===========  ===========  ===========  ===========
   Net Income (loss) per share
   --basic......................... $      0.60  $      0.04  $     (0.34) $      0.28  $      0.14
   --diluted.......................        0.56         0.04        (0.34)        0.28         0.14
                                    ===========  ===========  ===========  ===========  ===========
Weighted average common shares
    outstanding
    --basic........................   3,700,000    3,700,000    3,700,000    2,515,205    2,150,000
   --diluted.......................   3,954,428    3,700,000    3,700,000    2,515,205    2,150,000

For the years ended July 31,            2001         2000         1999         1998         1997
----------------------------        -----------  -----------  -----------  -----------  -----------
Balance Sheet Data:
   Working Capital................. $ 7,485,168  $ 6,020,265  $ 6,992,533  $ 9,244,219  $ 2,219,735
   Total Assets....................  22,804,112   20,618,891   16,575,370   15,066,358    8,963,360
   Total Long Term Debt............   1,221,162    1,755,170    1,604,526    1,870,057    2,101,242
   Total Liabilities...............  11,575,121   11,590,004    7,702,567    4,925,419    7,270,887
   Stockholders' Equity............  11,228,991    9,028,887    8,872,803   10,140,939    1,692,473
</TABLE>
--------
(*) In September 1998, the assets of E. Rosen were acquired.

                                      9

<PAGE>

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

IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

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


Overview



   The Company is engaged in the manufacture, marketing and distribution of a
diverse line of brand name candies, cookies, chocolates and gifts. During the
past three fiscal years, the Company has experienced continued revenue growth.
This growth is a direct result of the Company's introduction of gift items,
gift baskets and new candy products. The new gift products enabled the Company
to expand its customer base to include mass-merchandisers.


Results From Operations

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


   Net Sales:  Net sales for the year ended July 31, 2001 and 2000 were
$58,316,716 and $42,104,645 respectively, an increase of 38.3%. Higher sales of
gift baskets accounted for 8% of the increase in net sales. The remaining 30.3%
increase resulted from sales of new products, including Kastins candies, jelly
beans and new gift items.



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



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



   Salaries and related expenses increased to $4,806,061 from $3,285,850 or 8%
as a percent of sales. Of this increase, approximately $1,100,000 was due to
new management employees at both the Maryland and Rhode Island operations as
well as cost of living raises for existing management . In addition, the
Company recognized additional expense of $500,000 during fiscal 2001 for a
company wide performance based bonus program which was payable at the end of
the fiscal year based on earnings performance criteria which were achieved.


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

                                      10

<PAGE>

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

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


   Interest Expense:  Interest expenses increased to $539,971 from $434,978 due
to working capital needs to purchase inventory and raw materials to support the
increased volume of sales during the peak seasonal needs. The Company's average
borrowings increased from $4,500,000 in fiscal 2000 to $5,500,000 in fiscal
2001.


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

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

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

  Fiscal Year Ended July 31, 2000 Compared to Fiscal Year Ended July 31, 1999


   Net Sales:  Net sales for the year ended July 31, 2000 and 1999 were
$42,104,645 and $25,299,806, respectively, an increase of $16,804,839 or 66%.
Of this increase, 60% was the result of increased sales of gift sets and gift
baskets. Hard candy sales accounted for 4% of the increase while soft candy
sales accounted for 2% of the increase. International sales declined by 48%
from $1,119,548 to $587,620 due to a temporary shift in management's focus on
the introduction of new products.



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


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

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


   Salaries and related expenses for the year ended July 31, 2000 increased to
$3,285,850 from $2,450,096 for the prior year period, due to increases in
management salaries and cost of living raises, or as a percentage of sales
declined to 8% from 10% in the respective period. As a result, operating
expenses for the year ended July 31,


                                      11

<PAGE>

2000 increased to $9,961,027 from $7,585,290 for the prior year period, but
declined as a percentage of sales to 24% from 30% in the respective periods.
The Company believes that it has put into place the infrastructure including
new management in the areas of marketing, sales and operations to support newly
expanded and growing product lines and customer base.

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

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


   Other Income (Expense):  Other income was $693,413 compared to expense of
$7,821 for the prior year period. The change was primarily due to the receipt
of a legal settlement of $350,000 during the current year, receipt of a $75,000
insurance claim, $108,000 gain on foreign exchange contracts, $42,000 gain on
sales of machinery, receipt of property insurance claims on products damages of
$60,000 and $75,000 of collections on amounts previously written off.


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

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

Financial Condition

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

  Assets

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

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


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


  Liabilities

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

                                      12

<PAGE>

  Capital Structure

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

Liquidity and Capital Resources

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

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


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


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

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

                                      13

<PAGE>

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

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

Cash Flows:


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



   Net cash used by operating activities in the year ended July 31, 2000 was
$986,660 compared to $2,441,231 in the prior year period. The decrease in cash
used by operations was a result of improved profits, increased accounts
receivables collections, and increased payables due to higher sales volume as
discussed above. The Company's inventory increased due to greater components of
approximately $1,800,000, higher finished goods of approximately $1,600,000 and
greater packaging materials of approximately $600,000.


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

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


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


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

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

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






   The Company anticipates that its material capital expenditures for the next
12 months will consist of expansion and improvements to the Company's
manufacturing facilities of approximately $1,300,000. In addition, the Company
will continue to explore opportunities to expand the Company's business,
including possible acquisitions, although the Company has no current agreements
or commitments and is not currently engaged in any material negotiations with
respect to specific acquisitions. The Company believes that cash provided from
operations and borrowings will be sufficient to fund these expenditures.


                                      14

<PAGE>

Item 7a.  Quantitative and Qualitative Disclosures About Market Risks

Accounting Policies and Market Risks Associated with Derivative Instruments

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

  Foreign Exchange Contracts

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

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

Seasonality


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


Inflation

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

New Accounting Pronouncements

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

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

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

                                      15

<PAGE>

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

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

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

Item 8.  Financial Statements


   The following consolidated financial statements of the Company and
Subsidiaries and the report of independent certified public accountants thereon
are set forth on pages 27 through 43 hereof.


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

   None.

                                      16

<PAGE>

                                   PART III.

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

Directors and Executive Officers

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

<TABLE>
<CAPTION>
  Name                    Age Position
  ----                    --- --------
  <S>                     <C> <C>
  Uziel Frydman.......... 65  Chairman, President and Chief Executive Officer
  Anat Schwartz.......... 41  Executive Vice President--Finance and Secretary
  Amir Frydman........... 39  Director, Treasurer and Executive Vice
                                President--Marketing and Product Development
  Douglas A. Cummins..... 59  Director
  Jean E. Clary.......... 58  Director
  Jason Adelman.......... 32  Director
  Eric A. Richman(1)..... 51  Vice President--Operations
  Paul J. Splitek(1)..... 52  Vice President--Sales
  Christopher J. Willi(1) 41  Chief Financial Officer
  Arthur Wlodarski(1).... 45  Vice President--Purchasing
</TABLE>
--------
(1) Messrs. Richman, Woldarski, Willi and Splitek are key employees, but not
    executive officers of the Company.

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

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

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

                                      17

<PAGE>

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


   Jean E. Clary has been a director of the Company since May 1998. Ms. Clary
has been the Chief Executive Officer and President of Century 21--Clary and
Associates, Inc. since January 1973. From 1996 to 2000, Ms. Clary was a member
of the Board of Directors of Virginia Power, a wholly-owned subsidiary of
Dominion Resources Inc., a public company traded on the New York Stock Exchange.


   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 1997 to 1999, Mr. Richman served as Director of
Manufacturing of E. Rosen, and prior to that, from 1996 to 1997, Plant Manager
of E. Rosen. From 1992 to 1996, he was Plant Manger of Richardson Brands
Company; from 1989 to 1992, Plant Manager of Conusa Corporation; and from 1973
to 1989, Plant Manager of Planters Lifesavers Company. Mr. Richman has
extensive experience in manufacturing, management, quality control and labor
relations.


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


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



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


                                      18

<PAGE>

  Compliance with Section 16(A) of the Securities Exchange Act of 1934

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

Item 11.  Executive Compensation


                            EXECUTIVE COMPENSATION



Compensation Committee



   The compensation committee, composed of Messrs. Uziel Frydman, Amir Frydman
and Jason Adelman, is responsible for making recommendations to the board of
directors regarding compensation arrangements for senior management, adoption
of any compensation plans in which management is eligible to participate and
grants of stock options or other benefits under the plans. The compensation
committee met twice during the fiscal year ended July 31, 2001.



Summary Compensation Table



   The following table presents information concerning compensation for our
chief executive officer and our other executive officers and key employees
whose total salary and bonus in our fiscal year ended July 31, 2001 exceeded
$100,000 for services in all capacities during the fiscal years indicated.



                          SUMMARY COMPENSATION TABLE



<TABLE>
<CAPTION>
                                                                    Long Term
                                               Annual Compensation Compensation
                                               ------------------- ------------
                                                                    Securities
                                        Fiscal                      Underlying
   Name and Principal Position           Year   Salary    Bonus     Options(#)
   ---------------------------          ------ --------  --------  ------------
   <S>                                  <C>    <C>       <C>       <C>
   Uziel Frydman,......................  2001  $421,807  $114,090    152,984
    Chairman of the Board, President     2000  $314,500  $     --     15,000
    and Chief Executive Officer          1999  $225,000  $     --         --

   Amir Frydman,.......................  2001  $363,691  $ 98,371    131,906
    Executive Vice President--Marketing  2000  $271,171  $     --     30,000
    and Treasurer                        1999  $194,000  $     --         --

   Anat Schwartz,......................  2001  $253,079  $ 68,453     91,788
    Executive Vice President--Finance    2000  $188,865  $     --     30,000
    and Secretary                        1999  $135,000  $     --         --

   Eric Richman,.......................  2001  $105,000  $  9,848     15,000
    Vice President--Operations(3)        2000  $105,000  $     --     10,000
                                         1999  $ 85,000  $     --         --

   Paul Splitek,.......................  2001  $150,000  $ 16,881     15,000
    Vice President--Sales(3)             2000  $125,000  $     --     10,000
                                         1999  $105,764  $     --         --

   Christopher J. Willi,...............  2001  $ 37,500  $     --     15,000
    Chief Financial Officer(1)(3)        2000  $     --  $     --         --
                                         1999  $     --  $     --         --

   Art Woldarski,......................  2001  $185,000  $     --     10,000
    Vice President--Purchasing(2)(3)     2000  $ 58,350  $     --         --
                                         1999  $     --  $     --         --
</TABLE>


                                      19

<PAGE>

--------

(1) Mr. Willi joined Sherwood Brands in May 2001.


(2)  Mr. Woldarski joined Sherwood Brands in April 2000.


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



Employment Agreements



   We have entered into employment agreements with Uziel Frydman, Chairman of
the Board, President and Chief Executive Officer, Anat Schwartz, Vice
President--Finance and Secretary, and Amir Frydman, Treasurer and Vice
President--Marketing and Product Development. The terms of these agreements are
for three years commencing on May 12, 1998. The agreements provide annual base
salaries of $315,000, $189,000 and $271,000 for Uziel Frydman, Anat Schwartz
and Amir Frydman, respectively, and are subject to annual increases. In
addition, the employment agreements entitle the executives to a portion of a
bonus pool as determined by the board of directors equal to 15% of our pre-tax
net income in excess of certain incremental earnings targets. The base salary
is subject to annual increases of the greater of the percentage increase in
sales for the last year or 5% and may be reviewed for merit increases by the
compensation committee. If either Uziel Frydman, Amir Frydman or Anat Schwartz
is terminated without cause or upon a change in control of Sherwood Brands,
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 us for the duration of his or her respective
employment agreement, and if terminated or upon voluntary resignation, for one
year thereafter.



   Effective as of August 1, 2001, the employment agreements for Uziel Frydman
and Amir Frydman were extended for an additional three year term (until July
31, 2004) and the employment agreement for Anat Schwartz was extended for an
additional six month term (until January 1, 2002) on substantially the same
terms and conditions as in effect under their respective employment agreements
during the previous fiscal year. The annual base salaries payable to Uziel
Frydman, Amir Frydman and Anat Schwartz pursuant to the amended agreements were
increased to $451,333, $389,149 and $270,795, respectively, effective August 1,
2001, and are subject to annual increases. Under the amendments to the
employment agreements, each of Uziel Frydman, Amir Frydman and Anat Schwartz
are entitled to participate in our 1998 Executive Compensation Incentive Plan.
A description of our 1998 Executive Compensation Incentive Plan is set forth
below. For fiscal years beginning on or after August 1, 2001, the bonus pool
will be increased proportionately to the extent that earnings before interest,
taxes, depreciation and amortization (EBITDA) in any year exceeds EBITDA for
the fiscal year ended July 31, 2001.





Summary of 1998 Executive Incentive Compensation Plan, as Amended





   The 1998 Plan is intended to qualify under Rule 16b-3 under the Exchange Act
and is administered by the board of directors. The board of directors, within
the limitations of the 1998 Plan, determines the persons to whom options will
be granted, the number of shares to be covered by each option, whether the
options granted are intended to be ISOs, the duration and rate of exercise of
each option, the option purchase price per share and the manner of exercise,
and the time, manner and form of payment upon exercise of an option.





   ISOs granted under the 1998 Plan may not be granted at a price less than the
fair market value of the Class A Common Stock on the date of grant, or 110% of
fair market value in the case of persons holding 10% or more of our voting
stock. The aggregate fair market value of shares for which ISOs granted to any
employee are exercisable for the first time by such employee during any
calendar year (under all of our stock option plans and any related corporation)
may not exceed $100,000. Non-qualified options granted under the 1998 Plan may
not be granted at a price less than the fair market value of the Class A Common
Stock on the date of grant. Options granted under the 1998 Plan will expire not
more than ten years from the date of grant (five years in the case of ISOs
granted to persons holding 10% or more of our voting stock). All options
granted under the 1998 Plan are not transferable during an optionee's lifetime
but are transferable at death by will or by the laws of descent and
distribution. In general, upon termination of employment of an optionee, all
options granted to such person which are not exercisable on the date of
termination immediately terminate, and any options that are exercisable
terminate 90 days following termination of employment.




                                      20

<PAGE>




Compensation Committee Interlocks and Insider Participation



   The members of the compensation committee during fiscal 2001 were Messrs.
Uziel Frydman, Amir Frydman and Jason Adelman. Messrs. Uziel Frydman and Amir
Frydman currently serve as executive officers.



Option/SAR Grant Table



   The following table sets forth information concerning grants of stock
options made during the fiscal year ended July 31, 2001 to each of our
executive officers and key employees named in the Summary Compensation Table.
No stock appreciation rights were granted during the fiscal year ended July 31,
2001.



<TABLE>
<CAPTION>

                                                                  Potential Realizable
                                  Individual Grants                 Value At Assumed
                     --------------------------------------------   Annual Rates Of
                      Number of   % of Total                          Stock Price
                     Securities    Options                          Appreciation For
                     Underlying   Granted to  Exercise               Option Term(1)
                       Options   Employees in  Price   Expiration --------------------
Name                 Granted (#) Fiscal Year   ($/Sh)     Date     5% ($)     10% ($)
----                 ----------- ------------ -------- ----------  -------    -------
<S>                  <C>         <C>          <C>      <C>         <C>        <C>
Uziel Frydman.......   152,984      26.38      1.625    8/4/2010   156,343    396,203
Amir Frydman........   131,906      22.75      1.625    8/4/2010   134,802    341,614
Anat Schwartz.......    91,788      15.83      1.625    8/4/2010    93,803    237,715
Eric Richman(2).....    15,000       2.59      1.625    8/4/2010    15,329     38,847
Paul Splitek(2).....    15,000       2.59      1.625    8/4/2010    15,329     38,847
Christopher Willi(2)    15,000       2.59      3.100   4/30/2011    29,244     74,109
Art Woldarski(2)....    10,000       1.72      1.625    8/4/2010    10,220     25,898
</TABLE>

--------

(1) These amounts are based on assumed appreciation rates of 5% and 10% set by
    the Securities and Exchange Commission rules and are not intended to
    forecast possible future appreciation, if any, of our stock price.


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



Aggregated Option Exercises in 2001 and Year End Option Values



   The following table sets forth information with respect to (i) the number of
unexercised options held by the executive officers as of July 31, 2001 and (ii)
the value as of July 31, 2001 of unexercised in-the-money options. No options
were exercised by any of the executive officers in fiscal 2001.



<TABLE>
<CAPTION>
                       Number of Securities      Value of Unexercised
                      Underlying Unexercised    In-the-Money Options at
                     Options at July 31, 2001      July 31, 2001(1)
                     ------------------------- -------------------------
                     Exercisable Unexercisable Exercisable Unexercisable
                     ----------- ------------- ----------- -------------
       <S>           <C>         <C>           <C>         <C>
       Uziel Frydman   202,984         0        $445,531        $0
       Amir Frydman.   196,906         0        $408,039        $0
       Anat Schwartz   156,788         0        $296,712        $0
</TABLE>

--------

(1) Based on a per share price of $4.40, the closing price of the common stock
    as reported on the American Stock Exchange on July 31, 2001, minus the
    exercise price of the option, multiplied by the number of shares underlying
    the option.






Item 12.  Security Ownership of Certain Beneficial Owners and Management

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

                                      21

<PAGE>

                                   PART IV.


Item 14.  Exhibits, Lists And Reports On Form 8-K


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

                  Index to Consolidated Financial Statements


<TABLE>
<CAPTION>
                                                                                                   Page
                                                                                                 --------
<S>                                                                                              <C>
Report of Independent Auditors.................................................................. 26 to 27
Consolidated Balance Sheets at July 31, 2001 and 2000...........................................    28
Consolidated Statements of Operations for the years ended July 31, 2001, 2000 and 1999..........    29
Consolidated Statements of Shareholders' Equity for the years ended July 31, 2001, 2000 and 1999    30
Consolidated Statements of Cash Flows for the years ended July 31, 2001, 2000 and 1999..........    31
Summary of Accounting policies.................................................................. 32 to 34
Notes to Consolidated Financial Statements...................................................... 35 to 42
Schedule II--Valuation and Qualifying Accounts..................................................    26
</TABLE>


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

   (a)  Exhibits


<TABLE>
<CAPTION>
Number                                              Description
------                                              -----------
<C>    <S>

  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.*
</TABLE>


                                      22

<PAGE>


<TABLE>
<CAPTION>
Number                                              Description
------                                              -----------
<C>    <S>

 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  Employment Agreement between Registrant and Uziel Frydman, dated May 6, 1998.**

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

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

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

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

 21.1  Subsidiaries of the Registrant.****
</TABLE>



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

**  Incorporated herein by reference to Amendment No. 2 to the Company's
    Registration Statement on Form SB-2, dated as of May 4, 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-K, filed on October 29, 2001.


   (b)  Reports on Form 8-K

      None

                                      23

<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 on the date indicated.



Date: October 2, 2002


                                              SHERWOOD BRANDS, INC.

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

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




                                      24

<PAGE>


              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS'


                        ON FINANCIAL STATEMENT SCHEDULE



Sherwood Brands, Inc.



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



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



                                          BDO SEIDMAN, LLP



Washington, D.C.


October 5, 2001



SCHEDULE II



                       VALUATION AND QUALIFYING ACCOUNTS



<TABLE>
<CAPTION>
                                    Balance Beginning Charged To Costs            Balance At End
Description                             Of Period       And Expenses   Deduction    Of Period
-----------                         ----------------- ---------------- ---------  --------------
<S>                                 <C>               <C>              <C>        <C>
Year ended July 31, 1999
   Allowance for doubtful accounts.     $ 40,000          $ 33,570     $  (5,624)    $ 67,946
   Allowance for customer credits..     $386,092          $ 94,126     $(360,242)    $119,976
Reserve for slow moving inventory..     $ 40,000          $255,141     $      --     $295,141
Year ended July 31, 2000
   Allowance for doubtful accounts.     $ 67,946          $201,293     $(154,239)    $115,000
   Allowance for customer credits..     $119,976          $120,096     $      --     $240,072
Reserve for slow moving inventory..     $295,141          $ 19,918     $      --     $315,059
Year ended July 31, 2001
   Allowance for doubtful accounts.     $115,000          $272,290     $(198,690)    $188,600
   Allowance for customer credits..     $240,072          $     --     $(156,533)    $ 83,539
Reserve for slow moving inventory..     $315,059          $385,369     $      --     $700,428
</TABLE>


                                      25

<PAGE>


               INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT



To the Board of Directors and Stockholders


Sherwood Brands, Inc.



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



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



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



                                                    BDO SEIDMAN, LLP



Washington, D.C.


October 5, 2001


                                      26

<PAGE>

                    SHERWOOD BRANDS, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
For the years ended July 31,                                                 2001        2000
----------------------------                                             -----------  -----------
<S>                                                                      <C>          <C>
                                Assets
Current assets
   Cash and cash equivalents............................................ $   385,195  $   641,497
   Accounts receivable, less allowance of $189,000 and $115,000.........   1,977,093    2,094,694
   Inventory............................................................  14,709,515   12,683,575
   Income taxes receivable..............................................          --      407,237
   Other current assets.................................................     344,568      288,934
   Deferred taxes on income.............................................     425,000      196,000
                                                                         -----------  -----------
Total current assets....................................................  17,841,372   16,311,937
Net property and equipment..............................................   4,906,350    4,245,848
Other assets............................................................      56,391       61,106
                                                                         -----------  -----------
Total Assets............................................................ $22,804,112  $20,618,891
                                                                         ===========  ===========

                 Liabilities and Stockholders' Equity
Current liabilities
   Line of credit....................................................... $ 3,842,297  $ 4,119,000
   Current portion of long-term debt....................................     215,000      210,000
   Current portion of subordinated debt.................................          --      324,593
   Current portion of capital lease obligation..........................      31,245       31,245
   Accounts payable.....................................................   3,986,845    4,523,899
   Accrued expenses.....................................................   1,558,342    1,032,935
   Income taxes payable.................................................     722,474       50,000
                                                                         -----------  -----------
Total current liabilities...............................................  10,356,203   10,291,672
Long-term debt..........................................................     550,000      765,000
Capital lease obligation................................................     424,917      424,332
Deferred taxes on income................................................     244,000      109,000
                                                                         -----------  -----------
Total Liabilities.......................................................  11,575,121   11,590,004
                                                                         ===========  ===========

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

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

                                      27

<PAGE>

                     SHERWOOD BRANDS, INC AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                               For years ended July 31,
                                        -------------------------------------
                                            2001         2000         1999
                                        -----------  -----------  -----------
 <S>                                    <C>          <C>          <C>
 Net sales............................. $58,316,716  $42,104,645  $25,299,806
 Cost of sales.........................  41,796,184   32,183,885   19,218,718
                                        -----------  -----------  -----------
 Gross profit..........................  16,520,532    9,920,760    6,081,088
 Selling, general and administrative
   expenses............................   8,006,416    6,675,177    4,922,082
 Salaries and related expenses.........   4,806,061    3,285,850    2,450,096
 Pre-production costs..................          --           --      213,112
                                        -----------  -----------  -----------
 Total operating expenses..............  12,812,477    9,961,027    7,585,290
                                        -----------  -----------  -----------
 Income/(Loss) from operations.........   3,708,055      (40,267)  (1,504,202)
                                        -----------  -----------  -----------
 Other income (expense)................
    Interest income....................      11,182       36,016       83,258
    Interest expense...................    (539,971)    (434,978)    (153,832)
    Other income (expense).............     132,209      693,413       (7,821)
                                        -----------  -----------  -----------
 Total other income (expense)..........    (396,580)     294,451      (78,395)
                                        -----------  -----------  -----------
 Income/(Loss) before provision
   (benefit) for taxes on income.......   3,311,475      254,184   (1,582,597)
                                        -----------  -----------  -----------
 Provision (Benefit) for taxes on
   income..............................   1,093,100       98,100     (319,700)
                                        -----------  -----------  -----------
 Net income (loss)..................... $ 2,218,375  $   156,084  $(1,262,897)
                                        ===========  ===========  ===========
 Net Income (loss) per share
    --basic............................ $      0.60  $      0.04  $     (0.34)
    --diluted..........................        0.56         0.04        (0.34)
                                        ===========  ===========  ===========
 Weighted average common shares
   outstanding
    --basic............................   3,700,000    3,700,000    3,700,000
    --diluted..........................   3,954,428    3,700,000    3,700,000
</TABLE>


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

                                      28

<PAGE>

                    SHERWOOD BRANDS, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                     Common Stock
                          -----------------------------------                           Accumulated
                               Class A           Class B      Additional                   Other
                          ----------------- -----------------  Paid-In      Retained   Comprehensive
                           Shares   Amount   Shares   Amount   Capital      Earnings   Income (Loss)    Total
                          --------- ------- --------- ------- ----------  -----------  ------------- -----------
<S>                       <C>       <C>     <C>       <C>     <C>         <C>          <C>           <C>
Balance, at July 31, 1998 2,700,000 $27,000 1,000,000 $10,000 $7,978,777  $ 2,125,162    $     --    $10,140,939
Net loss.................        --      --        --      --         --   (1,262,897)         --     (1,262,897)
Offering costs...........        --      --        --      --     (5,239)          --          --         (5,239)
                          --------- ------- --------- ------- ----------  -----------    --------    -----------
Balance, at July 31, 1999 2,700,000  27,000 1,000,000  10,000  7,973,538      862,265          --      8,872,803
Net income...............        --      --        --      --         --      156,084          --        156,084
                          --------- ------- --------- ------- ----------  -----------    --------    -----------
Balance, at July 31, 2000 2,700,000  27,000 1,000,000  10,000  7,973,538    1,018,349          --      9,028,887
Foreign Currency (Loss)..        --      --        --      --         --           --     (18,270)            --
Net income...............        --      --        --      --         --    2,218,375          --             --
Comprehensive Income.....        --      --        --      --         --           --          --      2,200,105
                          --------- ------- --------- ------- ----------  -----------    --------    -----------
Balance, at July 31, 2001 2,700,000 $27,000 1,000,000 $10,000 $7,973,538  $ 3,236,724    $(18,270)   $11,228,992
                          ========= ======= ========= ======= ==========  ===========    ========    ===========
</TABLE>



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

                                      29

<PAGE>

                    SHERWOOD BRANDS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                           For the years ended July 31,
                                                      -------------------------------------
                                                          2001         2000         1999
                                                      -----------  -----------  -----------
<S>                                                   <C>          <C>          <C>
Cash flows from operating activities
   Net income (loss)................................. $ 2,218,375  $   156,084  $(1,262,897)
   Adjustments to reconcile net income (loss) to net
   Cash provided by/(used in) operating activities:
       Depreciation expense..........................     403,756      226,871      188,795
       Deferred income taxes.........................     (94,000)      48,100     (349,900)
       (Gain)/loss on foreign currency exchange......      (2,519)      (5,574)       5,870
       Provision for Inventory allowance.............     385,369       19,918      255,141
       Provision for doubtful accounts...............     272,290      201,293       33,570
       (Increase) decrease in assets
       Accounts receivable...........................    (154,689)     632,887     (895,321)
       Inventory.....................................  (2,411,309)  (4,133,913)    (766,428)
       Income taxes receivable.......................     407,237       78,072     (435,609)
       Other current assets..........................     (55,634)     369,430     (530,547)
       Other assets..................................       4,715      (32,642)      22,934
       Increase (decrease) in liabilities
          Accounts payable...........................    (537,054)   1,666,290      579,800
          Accrued expenses...........................     509,656      (49,076)     660,222
          Income taxes payable.......................     672,474     (164,400)      53,139
                                                      -----------  -----------  -----------
Net cash provided by/(used in) operating activities..   1,618,667     (986,660)  (2,441,231)
                                                      -----------  -----------  -----------
Cash flows from investing activities
   Inventory purchased from Rosen....................          --           --   (4,000,000)
   Capital expenditures..............................  (1,064,258)    (905,254)    (656,445)
                                                      -----------  -----------  -----------
Net cash used in investing activities................  (1,064,258)    (905,254)  (4,656,445)
                                                      -----------  -----------  -----------
Cash flows from financing activities
   Net borrowings on line of credit..................    (276,703)   2,180,552    1,938,448
   Payments on debt..................................    (534,008)    (304,932)    (265,531)
   Offering costs....................................          --           --       (5,239)
                                                      -----------  -----------  -----------
Net cash (used in)/provided by financing activities..    (810,711)   1,875,620    1,667,678
                                                      -----------  -----------  -----------
Net (decrease) in cash and cash equivalents..........    (256,302)     (16,294)  (5,429,998)
                                                      -----------  -----------  -----------
Cash and cash equivalents, at beginning of period....     641,497      657,791    6,087,789
                                                      -----------  -----------  -----------
Cash and cash equivalents, at end of period.......... $   385,195  $   641,497  $   657,791
                                                      ===========  ===========  ===========
Interest Paid........................................ $   539,971  $   434,978  $   153,832
Income Taxes Paid.................................... $   443,440  $   395,900  $   328,015
</TABLE>

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

                                      30

<PAGE>

                    SHERWOOD BRANDS, INC. AND SUBSIDIARIES

                  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation, Organization and Description of Business

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

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

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

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

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

Cash Equivalents

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

Inventory

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

Property and Equipment

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


Asset Impairment



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


                                      31

<PAGE>

                    SHERWOOD BRANDS, INC. AND SUBSIDIARIES

            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)

Revenue Recognition


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



   In September 2000, the Emerging Issues Task Force issued EITF 00-10,
Accounting for Shipping and Handling Fees and Costs (EITF 00-10). EITF 00-10
requires that shipping and handling fees billed to customers be classified as
revenue and shipping and handling costs be either classified as cost of sales
or disclosed in the notes to the financial statements. The Company includes
shipping and handling fees billed to customers in net sales. Shipping and
handling costs associated with inbound freight are included in cost of sales.
Shipping and handling costs associated with outbound freight are included in
selling, general and administrative expenses and totaled approximately
$3,437,000, $3,137,000 and $1,611,000 in 2001, 2000 and 1999, respectively.


Income Taxes

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

Use of Estimates

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

Financial Instruments

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

Derivative Financial Instruments

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

                                      32

<PAGE>


                    SHERWOOD BRANDS, INC. AND SUBSIDIARIES



            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)

Comprehensive Income

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

Earnings Per Share

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

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

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

Recent Accounting Pronouncements

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

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

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

                                      33

<PAGE>

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

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


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



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



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


                                      34

<PAGE>

                    SHERWOOD BRANDS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  FOREIGN EXCHANGE CONTRACTS

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

2.  INVENTORY

   Inventories consist of the following:


<TABLE>
<CAPTION>
                                              For years ended July 31,
                                              ------------------------
                                                  2001         2000
                                              -----------  -----------
         <S>                                  <C>          <C>
         Raw materials and ingredients....... $ 1,195,859  $   546,006
         Components used in assembly.........   1,564,878    2,389,504
         Packaging materials.................   2,474,046    1,715,479
         Work-in-process.....................   1,408,316      874,220
         Finished product....................   8,766,844    7,473,425
                                              -----------  -----------
                                               15,409,943   12,998,634
         Less reserve for inventory allowance    (700,428)    (315,059)
                                              -----------  -----------
            Total............................ $14,709,515  $12,683,575
                                              ===========  ===========
</TABLE>


3.  PROPERTY, PLANT AND EQUIPMENT

   Property, plant and equipment consist of the following:

<TABLE>
<CAPTION>
                                            For years ended July 31,
                                            -----------------------
                                                2001        2000
                                            -----------  ----------
           <S>                              <C>          <C>
           Land............................ $    85,282  $   85,282
           Buildings and improvements......   1,879,153   1,782,918
           Machinery and equipment.........   3,753,331   2,857,792
           Furniture and computer equipment     192,002     123,267
           Transportation equipment........      83,914      80,165
                                            -----------  ----------
                                              5,993,682   4,929,424
              Accumulated depreciation.....  (1,087,332)   (683,576)
                                            -----------  ----------
              Total........................ $ 4,906,350  $4,245,848
                                            ===========  ==========
</TABLE>

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

4.  CREDIT FACILITY

   In May 2001, the Company entered into a new agreement with First Union
National Bank. The new credit facility is a $20.0 million line of credit to
provide additional working capital to support the Company's additional sales.
The line of credit is available for advances to finance working capital and the
issuance of letters of credit. Advances under the line of credit are based on a
borrowing formula equal to 85% of eligible domestic accounts receivable plus
60% of eligible finished goods and 30% of eligible components inventory.
Borrowings on inventory are capped based upon the Company's seasonal
requirements and are limited to $9 million. The line of credit is secured by
the cash and cash equivalents, accounts receivable and inventories of Sherwood
Brands, Inc. and its wholly-owned subsidiaries. The line of credit agreement
contains various business and financial

                                      35

<PAGE>

                    SHERWOOD BRANDS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


covenants, including, among other things, a minimum tangible net worth, debt
service coverage and capital expenditure limits. The company was in violation
of the capital expenditure limits at July 31, 2001, but has received a waiver
from the bank. For the year interest accrued on such advances at LIBOR plus
2.35% (the rate at July 31, 2001 was 6.09%) and is payable monthly. The loan
agreement expires in June 2004. At July 31, 2001 and 2000, the Company had
borrowed $3,842,297 and $4,119,000, respectively under the line of credit and
had $0 and $1,667,678, respectively, in letters of credit outstanding. During
the years ended July 31, 2001, 2000 and 1999, the Company incurred and paid
approximately $475,827, $363,255 and $92,000 of interest expense on the line of
credit, respectively.


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

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

5.  LETTERS OF CREDIT

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

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

6.  LONG-TERM DEBT

   Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                         For years ended July 31,
                                                                                         -----------------------
                                                                                            2001         2000
                                                                                          ---------   ---------
<S>                                                                                      <C>          <C>
Mecklenberg County, Virginia Variable Rate Demand Revenue Bonds issued on June 1,
  1996; collateralized by an irrevocable Letter of credit (see Note 5); payable in
  varying annual amounts; To be redeemed in whole by June 1, 2011; interest at
  variable Market tax exempt rates (4.40% at July 31, 2001)............................. $ 635,000    $ 715,000
Mecklenberg County, Virginia Revenue Bond issued on May 15, 1997; collateralized
  by an irrevocable letter of credit (see Note 5); payable in varying annual amounts; to
  be redeemed In whole by May 15, 2002; interest at variable market tax Exempt rates
  (4.40% at July 31, 2001)..............................................................   130,000      260,000
                                                                                          ---------   ---------
                                                                                           765,000      975,000
Less current maturities.................................................................  (215,000)    (210,000)
                                                                                          ---------   ---------
Long-term portion....................................................................... $ 550,000    $ 765,000
                                                                                          =========   =========
</TABLE>

                                      36

<PAGE>

                    SHERWOOD BRANDS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

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

7.  SUBORDINATED DEBT

   Subordinated debt consists of the following:

<TABLE>
<CAPTION>
                                                                                           For years ended July 31,
                                                                                           -----------------------
                                                                                           2001         2000
                                                                                             -----     ---------
<S>                                                                                        <C>       <C>
Mecklenberg County, Virginia Industrial Development Authority Note; collateralized by
  second deed of trust on land, building and Equipment; payable in monthly installments of
  $4,644, including Interest of 7%, with a final payment of $239,193 due in June, 2001....    --     $ 266,134
Lake Country Development Corporation Note; collateralized by Second deed of trust on
  land, building and equipment; payable in monthly installments of $5,480, including
  interest of 5.25% Beginning on April 1, 1997 and payable in full on June 1, 2001........    --        58,459
                                                                                             -----     ---------
                                                                                              --       324,593
Less current maturities...................................................................    --      (324,593)
                                                                                             -----     ---------
Long-term portion......................................................................... $  --     $      --
                                                                                             =====     =========
</TABLE>

   On June 2001 the subordinated notes was paid in full.

8.  CAPITAL LEASE OBLIGATION

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

   Future minimum payments under the capital lease are as follows:

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

                                      37

<PAGE>

                    SHERWOOD BRANDS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


9.  STOCK TRANSACTIONS

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

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


<TABLE>
<CAPTION>
                                                       Weighted average
                                             Number   Exercise price per
                                            of Shares       Share
                                            --------- ------------------
       <S>                                  <C>       <C>
       Options outstanding at July 31, 1998  143,750        $5.95
       Granted.............................   10,000        $5.95
       Cancelled...........................       --        $  --
       Options outstanding at July 31, 1999  153,750        $5.95
       Granted.............................  146,500        $3.00
       Cancelled...........................  (10,000)       $5.95
       Options outstanding at July 31, 2000  290,250        $4.46
       Granted.............................  624,918        $1.67
       Cancelled...........................       --        $  --
       Options outstanding at July 31, 2001  915,168        $2.56
       Options exercisable at July 31, 1999   47,917        $5.95
       Options exercisable at July 31, 2000   95,833        $5.95
       Options exercisable at July 31, 2001  657,951        $2.68
</TABLE>


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


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


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


   The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123"), but it continues to measure compensation cost for
the stock options using the intrinsic value method prescribed by APB Opinion
No. 25. As allowable under SFAS 123, the Company used the Black-Sholes method
to measure the compensation cost of stock options granted in 2001, 2000 and
1999 with the following assumptions: Risk-free interest rate of 6.00%, 6.00%
and 5.11%, a dividend payout rate of zero, and an expected option life of ten
years, respectively. The volatility is 75%. Using these assumptions, the fair
value of stock options granted during fiscal 2001, 2000 and 1999 was $2.56,
$2.71 and $2.57, respectively.



                                      38

<PAGE>

                    SHERWOOD BRANDS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

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


<TABLE>
<CAPTION>
                                               For years ended July 31,
                                           --------------------------------
                                              2001      2000        1999
                                           ---------- --------  -----------
   <S>                                     <C>        <C>       <C>
   Net Income/(loss)
      As Reported......................... $2,218,375 $156,084  $(1,262,897)
      Pro Forma...........................  1,711,375  (12,609)  (1,345,484)
   Basic Income/(loss) per Common Share:
      As Reported......................... $     0.60 $   0.04  $     (0.34)
      Pro Forma...........................       0.46    (.003)       (0.36)
   Diluted income/(loss) per Common Share:
      As reported......................... $     0.56 $   0.04  $     (0.34)
      Pro Forma...........................       0.43   (0.003)       (0.36)
</TABLE>


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

11.  INCOME TAXES

   The provisions for income taxes was as follows:

<TABLE>
<CAPTION>
                                             For the years ended July 31,
                                            -----------------------------
                                               2001      2000      1999
                                            ----------  ------- ---------
     <S>                                    <C>         <C>     <C>
     Current tax provisions (benefit):
            Federal........................ $  956,400  $39,000 $(151,800)
            State..........................    230,700   11,000   (32,400)
            IRS Examination................         --       --   214,400
                                            ----------  ------- ---------
        Current provision for income taxes.  1,187,100   50,000    30,200
                                            ----------  ------- ---------
     Deferred Tax..........................    (94,000)  48,100  (349,900)
                                            ----------  ------- ---------
     Total provision on income taxes....... $1,093,100  $98,100 $(319,700)
                                            ==========  ======= =========
</TABLE>

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

                                      39

<PAGE>

                    SHERWOOD BRANDS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

<TABLE>
<CAPTION>
                                                         For the years ended July 31,
                                                         ---------------------------
                                                            2001           2000
                                                          ---------      ---------
 <S>                                                      <C>            <C>
 Deferred tax assets
    Purchase price allocation of fixed assets............ $ 167,000      $ 223,000
    Officers salary payable..............................    21,000         13,000
    Allowance for doubtful accounts and customer credits.   100,000        118,000
    Inventory obsolescence reserve.......................   257,000        110,000
    Other................................................    47,000         36,000
                                                          ---------      ---------
        Total deferred tax assets........................   592,000        500,000
                                                          ---------      ---------
 Deferred tax liabilities
    Accumulated depreciation.............................  (411,000)      (332,000)
    Purchase price allocation of inventory...............        --        (41,000)
    Accounts receivable service costs....................        --        (40,000)
    Settlement receivable................................        --             --
                                                          ---------      ---------
        Total deferred tax liabilities...................  (411,000)      (413,000)
                                                          ---------      ---------
 Net deferred tax asset (liability)...................... $ 181,000      $  87,000
                                                          =========      =========
 Net current deferred tax asset.......................... $ 425,000      $ 196,000
                                                          =========      =========
 Net long-term deferred tax asset (liabilities).......... $(244,000)     $(109,000)
                                                          =========      =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                               For the years ended July 31,
                                                              ------------------------------
                                                                 2001       2000      1999
                                                              ----------  -------  ---------
<S>                                                           <C>         <C>      <C>
Income taxes at statutory rate
Increase (decrease) in taxes resulting from:................. $1,125,900  $86,400  $(538,000)
   Effect of untaxed income from foreign subsidiary..........    (22,500)  (4,200)    40,000
   IRS Examination...........................................         --       --    214,400
   State and local taxes, net of federal income tax benefits.    120,500       --         --
   State, net operating losses and credits used..............   (136,700)  11,000    (79,000)
   Other.....................................................      5,900    4,900     42,900
                                                              ----------  -------  ---------
       Total provision (benefit for taxes)................... $1,093,100  $98,100  $(319,700)
                                                              ==========  =======  =========
</TABLE>

12.  COMMITMENTS AND CONTINGENCIES

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

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

                                      40

<PAGE>

                    SHERWOOD BRANDS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

<TABLE>
<CAPTION>
                                               Amount
                                             ----------
                        <S>                  <C>
                        Years Ended July 31,
                           2002............. $  704,119
                           2003.............    711,126
                           2004.............    212,850
                           2005.............    115,916
                           2006.............    115,916
                           Thereafter.......    361,296
                                             ----------
                               Total........ $2,221,223
                                             ==========
</TABLE>

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

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

13.  EMPLOYEE BENEFIT PLANS

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

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

14.  SUPPLEMENTAL CASH FLOWS DISCLOSURE

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

15.  CONCENTRATION OF CREDIT RISK AND EXPORT SALES


   The Company has a variety of customers, including mass merchandisers, drug
stores and grocery stores throughout the United States and abroad. For the year
ended July 31, 2001 two customers accounted for approximately 27% and 14% of
the Company's net sales. For the year ended July 31, 2000 one of these customer
accounted for approximately 15% of the Company's total net sales. The Company
had sales to customers in Canada which represent 0.7%, 1.4% and 4.4% of net
sales in fiscal 2001, 2000 and 1999, respectively.


16.  PRE-PRODUCTION COSTS


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


17.  ADVERTISING COSTS

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

                                      41

<PAGE>

                    SHERWOOD BRANDS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


18.  ACCRUED EXPENSES

   Accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                               July 31,
                                          -------------------
                                            2001      2000
                                          --------- ---------
                  <S>                     <C>       <C>
                  Payroll................   311,744   330,160
                  Payroll benefits.......   201,071   176,722
                  Bonuses................   500,000        --
                  Professional fees......    75,000    68,250
                  Commissions............    42,500    99,392
                  Inventory costs........   162,084   139,985
                  Personal property taxes   136,107   122,884
                  Water and sewer........    41,481    54,937
                  Other..................    88,355    40,605
                                          --------- ---------
                     Total............... 1,558,342 1,032,935
                                          ========= =========
</TABLE>

19.  QUARTERLY DATA

   Summary quarterly results were as follows:

<TABLE>
<CAPTION>
                                                      Quarter
                                  ----------------------------------------------
Year 2001                            First      Second       Third      Fourth
---------                         ----------- ----------- ----------- ----------
<S>                               <C>         <C>         <C>         <C>
Net Sales........................ $19,733,398 $20,823,008 $14,010,737 $3,749,573
Gross Profit.....................   6,201,022   6,380,230   3,007,557    931,723
Net Income (loss)................   1,486,118     938,497     296,563   (502,803)
Basic earnings (loss) per share.. $      0.40 $      0.25 $      0.08 $    (0.13)
Diluted earnings (loss) per share $      0.39 $      0.24 $      0.08 $    (0.15)
</TABLE>
<TABLE>
<CAPTION>
                                                       Quarter
                                  ------------------------------------------------
Year 2000                            First       Second       Third       Fourth
---------                         ----------- -----------  -----------  ----------
<S>                               <C>         <C>          <C>          <C>
Net Sales........................ $12,865,846 $10,161,858  $14,365,353  $4,711,588
Gross Profit.....................   3,969,429   2,819,716    2,415,515     716,100
Net Income (loss)................   1,206,989    (127,705)    (186,517)   (736,683)
Basic earnings (loss) per share.. $      0.33 $     (0.03) $     (0.05) $    (0.21)
Diluted earnings (loss) per share $      0.33 $     (0.03) $     (0.05) $    (0.21)
</TABLE>


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


                                      42

<PAGE>

                                 Exhibit Index


<TABLE>
<CAPTION>
Exhibit No.  Description
-----------  -----------
<C>         <S>

   10.20      Loan and Security Agreement between the Registrant and First Union National Bank, dated
              June 12, 2001.
</TABLE>