SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K/A

                  Annual report pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                  For the fiscal year ended December 31, 2005.
                         Commission file number 0-19409

                               SYNERGY BRANDS INC.

             (Exact name of registrant as specified in its charter)

                    DELAWARE                  22-2993066
          (State of incorporation) (I.R.S. Employer Identification No.)

                               223 Underhill Blvd.
                                Syosset, NY 11791
                         (Address of corporate offices)

        Registrant's telephone number, including area code: 516-714-8200

             Securities registered pursuant to Section 12(b) of the
                                      Act:

                      Title of Each Class Name of Exchange

              Common Stock, $.001 par value NASDAQ/Small-Cap System
                            and Boston Stock Exchange

     The  purpose  for this  amendment  is to include  corrected  Certifications
required by Exchange Act Rule  13a-14(a);  no other  changes have been made from
the original filing.

     Indicate by check mark if the registrant is a well-known  seasoned  issuer,
as defined in Rule 405 of the Securities Act. YES __ NO_X____

     Indicate by check mark if the  registrant  is not  required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. YES___NO__X____

     Note-Checking  the box will not  relieve  any  registrant  required to file
reports  pursuant  to  Section  13 or  15(d)  of the  Exchange  Act  from  their
obligations under those Sections.

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes_X_ NO__

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2). Yes__NO_X_

     Indicate  by check mark  whether  the  registrant  is a shell  company  (as
defined in Rule 12b-2 of the Exchange Act). YES________NO X___

     Synergy  Brands  Inc.  revenues  for  its  most  recent  fiscal  year  were
$64,137,090.

<PAGE>

     On March 30,  2006,  the  aggregate  market  value of the  voting  stock of
Synergy Brands Inc., held by  non-affiliates of the Registrant was approximately
$5,637,000.  This  determination  of  affiliate  status  is  not  necessarily  a
conclusive determination for other purposes. The number of outstanding shares of
the Registrant's Common Stock as of March 30, 2006 was 4,613,190.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Proxy  Statement for  Registrant's  2005 Annual  Meeting of
Stockholders  currently  scheduled  to be held  June  2006 are  incorporated  by
reference in Part III (for other  documents  incorporated  by reference refer to
Exhibit Index at page 44 and 45)

                                     PART I

     Other  than  historical  and  factual  statements,  the  matters  and items
discussed  in this  report on Form  10-K are  forward-looking  information  that
involve  risks and  uncertainties.  The  Company's  actual  results  may  differ
materially from the results discussed in the forward-looking statements. Factors
that could contribute to such  differences are discussed in the  forward-looking
statements  and  are  summarized  in  Item  1A  "Risk  Factors   Forward-Looking
Information and Cautionary Statements."

     ITEM 1. DESCRIPTION OF BUSINESS

     A. OVERVIEW

     Synergy  Brands  Inc.  (SYBR or the  Company)  is a  holding  company  that
operates in the  wholesale  distribution  of Groceries and Health and Beauty Aid
(HBA) products as well as wholesale and on-line  distribution of premium cigars,
salon  products  and  luxury  goods.  It  principally  focuses  on the  sale  of
nationally  known  brand  name  consumer  products  manufactured  by major  U.S.
manufacturers.  The consumer  products are  concentrated  within the Grocery and
Health & Beauty Aids (HBA) industries as well as the premium cigar business. The
Company uses logistics web based programs to optimize its distribution  costs on
both  wholesale  and retail  levels.  The  Company  distributes  and sells these
products through wholly owned subsidiaries in three distinct manners, wholesale,
on-line and retail.

     The Company  also owns 22% of the  outstanding  common  stock of  Interline
Travel and Tours,  Inc. (aka:  PERX.com).  PERX provides cruise and resort hotel
packages through a proprietary reservation system to airline employees and their
retirees.  PERX is  believed  to be the  largest  Company in this  sector of the
travel industry.  Information on PERX can be found at www.perx.com.  The Company
believes that its capital investment in this unique travel company could provide
for material future capital appreciation.  Synergy Brands does not manage PERX's
day-to-day operations.

     For further information please visit our corporate website at www.sybr.com.

                                      -1-

<PAGE>

     BUSINESS-TO-BUSINESS  (B2B): THE COMPANY OPERATES TWO BUSINESSES WITHIN THE
B2B SECTOR. B2B IS DEFINED AS SALES TO NON-RETAIL CUSTOMERS.

     PHS Group distributes Grocery and HBA products to retailers and wholesalers
predominately  located in the  Northeastern  United  States.  PHS is the largest
subsidiary of the Company and largest business segment of the Company's business
operations, representing about 96% of the overall Company sales and 89% of gross
profit.  PHS's core sales base remains the  distribution  of nationally  branded
consumer  products in the grocery and health and beauty (HBA)  sectors.  PHS has
positioned itself as a distributor for major  manufacturers as opposed to a full
line wholesaler.  A full line wholesaler has the responsibility of servicing the
entire needs of a retail  operation,  whereas a  distributor  caters to specific
merchandising  categories.  As a  result,  PHS is able to plan the  needs of its
customers and benefit the manufacturer directly from the source of supply and in
turn  increase  sales  to  its  customers  through  this  unique  strategy.  PHS
concentrates  on the fastest  moving  promotional  items such as: Tide,  Bounty,
Nyquil, Pantene, Clorox bleach, Scott tissues, Marcal tissues among many others,
and uses promotions, logistics and distribution savings to streamline and reduce
its sale prices and increase gross profit thereby.  The second business  segment
within  the  Company's  B2B  sector  is Proset  Hair  Systems  (Proset).  Proset
distributes  salon hair care  products  and  luxury  goods to  wholesalers,  and
distributors in the Northeastern part of the United States.

     BUSINESS TO CONSUMER (B2C): THE COMPANY  OPERATES THREE  BUSINESSES  WITHIN
THE B2C SECTOR. B2C IS DEFINED AS SALES TO RETAIL CUSTOMERS.

     The  Company's  B2C  activities  are  conducted  through  its wholly  owned
subsidiary Gran Reserve Corporation (GRC). GRC operates the following businesses

         o Cigars  Around the World (CAW) sells premium  cigars to  restaurants,
         hotels,   casinos,   country  clubs  and  many  other  leisure  related
         destinations.  This company was acquired in June, 2003. CAW also opened
         a retail  store and  lounge in Miami  Lakes,  Florida  selling  premium
         cigars and accessories in March 2006.

         o CigarGold.com  sells premium cigars through the Internet  directly to
         the consumer and through partnership online affiliations.

         o  BeautyBuys.com  sells  salon  hair  care  products  directly  to the
         consumer via the internet and through partnership online affiliations.

     THE  COMPANY'S  CORPORATE  OFFICES  ARE  LOCATED  AT 223  UNDERHILL  BLVD.,
SYOSSET,  NY 11791,  AND ITS  TELEPHONE  NUMBER  IS  516-714-8200.  THE  COMPANY
MAINTAINS  A  CORPORATE  WEBSITE AT  WWW.SYBR.COM.  The  Company is a  reporting
Company as defined in Regulation 12B of the Securities  Exchange Act of 1934 and
files  electronically with the SEC the Company's quarterly 10Q and Year-end 10-K
reports and interim  Form 8K reports.  The general  public may read and copy any
materials the Company has filed with the SEC at the SEC Public Reference Room at
450 Fifth Street NW, Washington DC. The general public may obtain information on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC also  maintains  an  Internet  site  that  contains  reports,  proxy and
information  statements,  and  other  information  regarding  issuers  that file
electronically with the SEC which website can be accessed at www.sec.gov.  Filed
reports by the  Company may be viewed at the SEC Edgar  filing  website to which
the Company's homepage website is directly linked.

                                       2

<PAGE>

     B. BUSINESS TO BUSINESS OPERATIONS (B2B)

     The Company's B2B operations  consist of two operating  business segments ,
PHS Group and Proset Hair Systems.

     PHS Group is the grocery  logistics  business  involved in the  purchase of
name brands  grocery and Health and Beauty Aids (HBA) products and their further
resale  to  traditional   customers   utilizing  the  logistics  and  networking
advantages  of  electronic  commerce and just in time  distribution.  PHS's core
sales base consists of the distribution of nationally  branded consumer products
in the  grocery  and HBA sectors and  wholesale  distribution  of grocery  items
predominantly  in  the  United  States,  Canada  and  Dominican  Republic  (DR).
Distribution  of such products is directed to major  retailers  and  wholesalers
from major U.S. consumer product manufacturers, Canadian and DR Wholesalers. PHS
has positioned  itself as a distributor for major  manufacturers as opposed to a
full line wholesaler. A full line wholesaler has the responsibility of servicing
the entire need of a retail operation,  whereas a distributor caters to specific
merchandising  categories.  As a  result,  PHS is able to plan the  needs of its
customers  directly from the source of supply and in turn increase  sales to its
customers  through this unique focus.  PHS  concentrates  on the fastest  moving
promotional items and uses logistics and distribution  savings to streamline and
reduce its sale prices.

     PHS  conducts  its  business  through  its sales  offices in New York.  The
Company  maintains its  information  system and  warehousing  operations in Long
Island, NY. PHS services over 500 customers in the northeastern  quadrant of the
United States and Canada.  PHS utilizes  leased trucks in addition to consigning
common carriers for overflow sales.

     The second business  segment within the Company's B2B sector is Proset Hair
systems (Proset).  Proset  distributes Salon hair care products and luxury goods
(such as bags, wallets, brief cases etc.) predominantly to wholesalers retailers
and distributors in the United States.  Proset focuses on the sale of brand name
products.  Proset  purchases  these goods in large  quantities  and thereby at a
volume  discount  and  in  turn  sells  in  bulk  to  regional  wholesalers  and
distributors.  Proset also sells directly to the consumer salon products on-line
through Beautybuys.com and on-line partnership affiliations.  This latter online
unit operates at  www.BeautyBuys.com.  BeautyBuys.com  sells salon hair products
directly to the retail consumer.

     C. BUSINESS TO CONSUMER OPERATIONS (B2C)

     CIGAR OPERATIONS.

     GRC   owns   multiple    internet    domains    including    Cigargold.com,
cigarsaroundtheworld.com and affiliations. GRC focuses on sale of a mix of brand
name and private label premium  cigar items and cigar  related  accessories  and
markets  them  through  these  sties.  GRC also  manages the  internet  sales of
Beautybuys.com which are less than 5% of overall online sales.

     GRC Cigar operations  include two businesses.  This segment includes Cigars
Around the World (CAW) and CigarGold. Cigars Around the World (CAW) was acquired
in June of 2003.  That  Company  sells  premium  cigars to Hotels,  Restaurants,
Casinos,  PGA Clubs and other leisure related  destinations.  CAW was founded by
Bill Rancic,  winner of the NBC show The  Apprentice.  Mr.  Rancic serves on the
Board of Directors of Synergy Brands.  CAW sells its cigars in customized retail
displayed  humidors  that it  provides  to its  customers.  CAW also has its own
retail  website that operates under the name  www.CigarsAroundTheWorld.com.  The
displays  range from  counter top  humidors to Walled  Display  units.  CAW also
organizes events such as cigar dinners and  merchandising  opportunities  within
its  destinations.  CigarGold  (CG) is the Company's  main cigar online unit. CG
sells premium cigars online to retail customers throughout the United States. It
has a  selection  of over 1000  products,  which  include  brand-name  hand made
premium cigars and cigar  accessories  as well as private label and  proprietary
products. CigarGold operates under the domain name: www.CigarGold.com.

                                      -3-

<PAGE>


     In 1999, the Company launched through its GRC subsidiary  NetCigar.com Inc.
("NetCigar") a web site created for sale of premium cigar products.  The Company
developed  another  domain name in  CigarGold.com  (CGC) and the  operations  of
NetCigar are now processed under that name.  Through  CigarGold.com  the Company
offers  information on a variety of cigars and cigar related products as well as
content, including cigar news and events and editorials, and sale of an array of
cigars and cigar products of both  proprietary  labels and other popular brands.
The Company also markets humidors,  and sells golf oriented gifts and apparatus.
The Company has a  long-term  lease in Miami,  Florida for storage of its entire
inventory in a custom  designed  humidor  warehouse.  CigarGold's  web site adds
convenience  to  customer  and  potential  customer  shopping  by being open and
available  24 hours a day,  seven days a week for access  from  anywhere  that a
consumer has internet  access.  A significant  portion of  CigarGold's  web site
design is proprietary  and CigarGold has had the site designed and has developed
the site to accommodate  specific  marketing and record keeping  requirements to
enhance their customer service.

     CGC  utilizes a  computerized  database  management  system that  collects,
integrates  and allows  analysis of data  concerning  sales,  order  processing,
procurement,  shipping,  receiving,  inventory and financial  reporting.  At any
given time,  Company  executives can determine the quantity of product stored by
item, cost by item,  aging and other  characteristics  necessary for expeditious
fulfillment  and  distribution.  A network  system of the  Company's  office and
warehousing facilities allows for online assessment and transactional  reporting
capabilities.  It is the Company's  policy that all consumer  orders are shipped
from the Company's warehouse within 3 days of order placement.  GRC maintains an
inventory on approximately 90% of its product mix; the other 10% is purchased on
a just-in-time  basis. The distribution  facility has sufficient space to handle
the Company's  anticipated  growth in this area of product sales. After an order
is shipped,  customers can view order tracking  information through a customized
profile for each customer.

     As customers use the CGC web site, they provide CGC with information  about
their buying  preferences and habits.  NetCigar then can use this information to
develop  personalized  communications  and deliver useful  information,  special
offers and new product  announcements  to its customers.  In addition,  CGC uses
e-mail  to  alert  customers  to  important   developments   and   merchandising
initiatives.

                                       4

<PAGE>

     CGC competes with many and varied sources for cigar products in a small but
affluent market which is highly fragmented and which has to date a small on-line
presence.  No single  traditional  retailer to the Company's  knowledge competes
against  the  Company  in all of its  product  lines  and  there  is an array of
developed  e-commerce  cigar  sites.  The  largest  competitor,  JR  Cigars  has
developed an  e-commerce  web site for its product  sales as an adjunct to their
traditional brick and mortar retail stores and catalogue sales.

     Traditional  pre-internet  cigar sales appear to have  evolved  through the
following four categories of retailing, which together remain the main source of
cigar marketing:

     1. Mom and Pop brick and mortar tobacco shops that  typically  average 2500
     square feet and generate  average annual volume of  approximately  $250,000
     per store.

     2. Chain and franchise  brick and mortar  tobacco shops that average 12,000
     to 15,000  square  feet and  generate  approximately  $1,000,000  in annual
     volume per store.

     3. Catalog and mail order  vendors  that do monthly  mailings to as many as
     500,000 customers (in some instances as few as 25,000 customers),  which is
     the portion of the market that the Company  believes  should be the easiest
     to convert to ecommerce purchases, and

     4. Drug stores and mass market retailers  representing a small share of the
     market.

     The  Company   believes  that  the  following  are  principal   competitive
advantages   present  in  its   operations  and  product   presentation:   brand
recognition,   selection,   convenience,   price,   web  site   performance  and
accessibility, customer service, quality of information provided and reliability
and  speed of order  shipment,  acute  knowledge  of cigar  brands,  quality  of
products,  stable source of supply,  editorial contribution regarding cigar news
and one on one  online  customer  interaction.  Greater  than  fifty  percent of
NetCigar customers are repeat customers on a daily basis.

     Many of the Company's off-line and online competitors have longer operating
histories,  larger customer bases,  greater brand  recognition and significantly
greater  financial,   marketing  and  other  resources  than  CGC.   Traditional
store-based retailers also enable customers to see and feel products in a manner
that is not possible over the Internet.  Traditional  store-based  retailers can
also sell  products  to address  immediate  needs,  which the  Company and other
online sites may not be able to do.

     In June 2003 the  Company  acquired  the  ownership  interest in The Ranley
Group Inc. an Illinois  corporation  doing  business as Cigars  Around the World
("CAW") a Chicago based Midwest  premium  cigar  distributor.  CAW sells premium
cigars to various leisure related destinations in customized retail displays and
maintains its own internet sales based website.

     In FY 2006 the Company desires to and will likely implement plans to expand
on its online  partnerships for all its product  offerings and expand CAW retail
store operations.

                                      -5-

<PAGE>

     D. COMPETITION

     The  Company is smaller in  comparison  to many of its  competitors  in the
marketing of grocery and health and beauty care  products and cigars.  Access to
product  remains  important  but  the  Company  is  confident  of the  continued
availability of product from  manufactures,  wholesalers,  and distributors with
whom the Company  has  successfully  acquainted  itself or  developed  in house.
Source  of  supplies  the  Company  believes  should  stay  stable.  Most of the
Company's suppliers are regulated under fair trade and pricing regulations. As a
result the Company can remain  competitive  as long as it purchases  products at
prescribed volume and credit limitation set by the suppliers.

     E. MAJOR CUSTOMERS.

     During the year ended December 31, 2005,  sales to two customers  accounted
for 12% and 10% of the Company's  total sales and in 2004 sales to two customers
accounted for 21% and 18% of total sales.  These major  customers  relate to the
grocery logistics business within the Company's B2B sector.

     F. INFORMATION SYSTEMS AND WEBSITE TECHNOLOGY FOR INTERNET SALES.

     The various web sites established for sale of the Company's products are of
multi-tier  construction to allow for ease of administration and record keeping.
Behind the screen  not  visible to the  consumer  when  visiting  the  Company's
various  product  category  websites are internet based marketing and accounting
information  programs  to allow  the  Company  to review  interest  shown in its
websites and account for sales made there from.  The Company also  maintains its
own websites  regarding  information  on the Company as a public  entity and its
various business  interests.  The Company's home page website is linked directly
to the SEC Edgar based listing of all Company SEC filings where further  Company
information  disclosure as required by the SEC is contained  including reference
to and listing of various Company  committee  charters and disclosure  policies.
Internet sites presently  available regarding Company business and product sales
are:

                                 BeautyBuys.com
                                SynergyBrands.Com
                                  DealbyNet.com
                 Perx.com (managed by Interline Travel & Tours)
                                    SYBR.com
                                  CIGARGOLD.com
                            CigarsAroundtheWorld.com

                                        6

<PAGE>

     The  Company's  website  design work is  proprietary.  It was  developed to
accommodate  the  specific  marketing  and record  keeping  requirements  of the
Company.  State-of-the-art  technology  is  utilized  in site  design,  tracking
systems,  hosting and affiliated programs.  The Company strives through internal
development efforts to create and enhance the specialized,  proprietary software
that The Company believes is unique to its Business.

     The Company  utilizes a computerized web based database  management  system
that collects,  integrates and allows analysis of data concerning  sales,  order
processing,   shipping,  purchasers,   receiving,   inventories,  and  financial
reporting.  At any given time, the database  management  systems utilized by the
Company are designed to allow  management  to determine  the quantity of product
stored by item,  cost by item,  aging and other  characteristics  necessary  for
expeditious fulfillment and distribution.

     The Company has  implemented a broad array of services and systems for site
management,   searching,   customer  interaction,   transaction  processing  and
fulfillment.  The Company uses a set of software applications for: accepting and
validating  customer  orders;  organizing,  placing,  and  managing  orders with
vendors and fulfillment partners; receiving product and assigning it to customer
orders; and managing shipment of products to customers based on various ordering
criteria.

     The  Company's  websites  can be shopped 24 hours a day,  seven days a week
from anywhere that a consumer has Internet  access.  The Company  offers a large
selection  of  products  and in  addition  provides  various  levels of selected
product  content,  buying guides and other tools designed to help consumers make
educated purchasing decisions. Additionally,  shopping list and e-mail reminders
are  designed  to make it easier  for  customers  to  regularly  purchase  their
preferred products.

     The Company's marketing efforts are aimed at flexibility of presentation to
attract new and repeat customers and give ease of access to product availability
and  information.  The Company's  online store  provides  flexibility  to change
featured products or promotions without having to alter the physical layout of a
store.  The  Company  is also able to  dynamically  adjust  its  product  mix in
response  to changing  customer  demand,  new  seasons or  holidays  and special
promotions.

     The Company has the ability to offer products to individual customers based
on their brand  preferences.  The Company also  cross-sells  its  departments to
promote impulse buying by customers.

                                        7

<PAGE>

     The Company also  maintains a Virtual  Private  Network  (VPN) and intranet
system.  This network allows for real time sales and order processing  across to
Company's  regional offices and warehouses.  The network has been customized for
logistics,   warehousing   accounting,   management   information  systems,  and
distribution.

     G. SEASONALITY

     Sales  by PHS  Group  and  Proset  usually  peak at the  end of a  calendar
quarter,  when the Company's  suppliers offer promotions which lower prices and,
in turn,  the  Company is able to lower its prices and  increase  sales  volume.
Suppliers tend to promote at quarter end and as a result  reduced  product costs
may increase sales.  Sales of salon care products increase over traditional gift
giving holidays such as Christmas,  Mother's Day,  Father's Day, and Valentine's
Day.

     Cigar product sales also increase during holiday periods and summer months,
as well as around  special  sporting  events.  In particular  sales are stronger
before Father's Day, the summer golf season and the Christmas holiday season.

     H. SHIPPING AND HANDLING

     Products  sold on a Business  to  Business  (B2B)  basis by the Company are
shipped  in bulk from  inventory  maintained  by the  Company  at its  warehouse
facilities by leased trucks and common carriers. All B2C orders are consolidated
in  Company  leased  fulfillment  facilities;  then  packed  and  shipped to the
customer  usually  within 3 to 7 days  mainly by UPS.  Approximately  90% of B2C
product  inventory is in warehouse  stock and 10% is purchased by the Company on
an as needed "just in time" basis.  The Company is dependent on common  carriers
and truck  leases but also has  acquired a fleet of trucks  leased and  operated
directly  by the  Company.  Although  the  Company  can call upon any of several
hundred  common  carriers  to  distribute  its  products,  from time to time the
trucking  industry  is subject to strikes or work  stoppages  which could have a
material  adverse  effect on the Company's  operations if  alternative  modes of
shipping are not then available.  Additionally, the trucking industry is subject
to various natural disasters which can close  transportation  lanes in any given
region of the country. To the extent common carriers utilized by the Company are
prevented  from or delayed in utilizing  transportation  lanes,  the Company may
incur higher freight costs due to the limited  availability of trucks during any
such period that  transportation  lanes are  restricted.  Trucking  expenses are
regulated by the cost of fuel and destination lanes.  Increasing fuel prices can
cause an increase in shipping  rates.  The Company  attempts to pass along these
charges through a fuel surcharge.  This charge cannot be passed to the customers
on all occasions.

     I. TRADEMARKS, LICENSES AND PATENTS

     The Company has obtained rights to various  trademarks and tradenames,  and
domain  names in its  internet  business.  The Company has  obtained a wholesale
controlled  substance  license through the Drug  Enforcement  Agency (DEA).  The
Company has  domestic  rights to the "Suarez  Gran  Reserva",  "Breton  Legend",
"Breton Vintage",  "Anduleros",  "Don  Otilio","Alminante"  "Nativo" "Ditka" and
various other trade names in marketing of premium handmade cigars.  GR also owns
and  utilizes in its cigar  distribution  business  the  following  trade names:
CigarGold,  Netcigar,  GoldCigar,  and Cigar  Kingdom.  Proset is the  principal
tradename  utilized by the Company in its other business  sectors.  PHS also has
exclusive  distributorship  rights in the Dominican  Republic for "Fitti" diaper
brand.

     J. EMPLOYEES

     The Company and its  subsidiaries  in the  aggregate as of the date of this
report  employ and contract  approximately  40 full time and part time non Union
employees all of whom work in executive, administrative,  sales, marketing, data
processing,  accounting  or  clerical  activities  and  certain  work as Company
employees that integrate with the various  warehouses where Company products are
stored and as drivers and delivery personnel in the Company leased trucks.

     The  Company  leases and staffs its  warehouses  in New York , New Jersey ,
Pennsylvania  and Florida (GRC),  and a sales office in Illinois,  from where it
facilitates  storage,  sorting,  packing and  shipping  of products  sold on its
websites.  Otherwise  warehousing  is  contracted  on an as  needed  arrangement
staffed through the warehousing entity contracted with exception for supervisory
personnel  hired  by  the  Company.  The  Company  relies  on a  stable  working
environment with its contract warehousing and trucking.

                                       8

<PAGE>

     K. GOVERNMENT REGULATION

     1. TOBACCO INDUSTRY REGULATION AND TOBACCO INDUSTRY LITIGATION

     The tobacco  industry is subject to regulation at federal,  state and local
levels.  Federal law has required  states,  in order to receive full funding for
federal substance abuse block grants and other federal assistance , to establish
a minimum  age of 18 years for the sale of tobacco  products,  together  with an
appropriate   enforcement   program.  The  recent  trend  is  toward  increasing
regulation  of the tobacco  industry,  and the increase in  popularity of cigars
could lead to an increase in regulation of cigars.

     The Food and Drug  Administration  (the "FDA") has determined that nicotine
is a drug  and  has  asserted  that  it has  jurisdiction  over  cigarettes  and
smokeless  tobacco  products,  as   nicotine-delivering   medical  devices,  and
therefore,   promulgated   regulations   restricting   and  limiting  the  sale,
distribution and advertising of cigarette and smokeless  tobacco  products.  FDA
jurisdiction is also the subject of current federal  legislation  which will, if
and when enacted,  codify much of the past  regulatory  scheme  established  for
tobacco products and as agreed in settlement agreements reached with the tobacco
industry to avoid the myriad of lawsuits  filed.  In the Fall of 2004,  the U.S.
Senate  considered  legislation  that would grant the FDA  authority to regulate
tobacco products. Among other things, the legislation called for the prohibition
of free samples and self-service displays. The proposed legislation also limited
certain  advertising  and labeling to a text only format and called for a ban on
the sale or  distribution  of  non-tobacco  items that bear tobacco brand names,
such as hats and t-shirts,  and would have  restricted  sponsorship of events to
corporate  name only.  In  addition,  the FDA was to be empowered to adopt rules
regarding the  manufacture,  ingredient  content,  and  pre-approval  of tobacco
products.  The proposed  legislation  passed the US Senate, but failed to garner
sufficient support in the House of Representatives and was not enacted into law.
There remains  uncertainty  as to whether the U.S.  Congress can gain passage of
legislation  in the future to permit  the FDA to  regulate  tobacco as  outlined
above or to permit the FDA to regulate tobacco in a different  manner.  In 2004,
Congress  passed  legislation  to eliminate the federal price support system for
tobacco  farmers and, in its place,  provided an estimated US $10.1  billion buy
out of  tobacco  farmers  over the next 10 years.  The buy out will be funded by
quarterly  assessments on tobacco  manufacturers.  Even within this  legislation
however cigar  products are not included but there is no assurance that they may
not be included in these or similar  regulations in the future.  There is also a
regulatory  move toward taxing  internet  tobacco sales,  which may also include
cigar sales in the future but is presently  concentrated on cigarette marketing.
Legislation is also pending to curtail  internet  tobacco product sales in their
entirety. Recently the US Bureau of Alcohol Tobacco Firearms and Explosives, the
major credit card companies and State  attorneys  general  reached  agreement to
disallow use of credit cards for cigarette  purchases  over the internet  across
State  lines  and to take  action  against  Internet  Sellers  that  authorities
identify as violating State and Federal laws  regulating  cigarette  sales.  New
York was the first State to ban Internet cigarette sales totally. Further States
may likely  follow  suit.  Those bans are based both on tax  evasion  issues and
underage  purchasing  concerns.  Such treatment of tobacco product tax issues is
not a new phenomena however but a revisiting of and more active promotion of the
federal  Jenkins Act which  originated in 1949 to address  interstate tax issues
regarding  tobacco  sales  through  use of United  States  mail.  Cigars are not
specifically  included in the FDA's  regulations.  Present  tobacco  regulations
which do appear  applicable to cigars in addition to focusing on cigarettes  are
the  prohibition  on retailers  from selling  cigarettes,  cigarette  tobacco or
smokeless  tobacco to persons  under the age of 18 and  requiring  retailers  to
check the  photographic  identification  of every person under the age of 27 who
requests  purchases  of tobacco  products,  and  requirement  that cigars  carry
warning  labels  similar to those  contained on cigarette  packages  which Cigar
companies are now required to display  clearly and  permanently on packages,  in
print ads,  on audio and video ads,  on point of  purchase  displays  and on the
Internet.

                                       9

<PAGE>

     In addition, the majority of states restrict or prohibit smoking in certain
public  places and  restrict  the sale of  tobacco  products  to  minors.  Local
legislative  and  regulatory  bodies  have also  increasingly  moved to  curtail
smoking by  prohibiting  smoking in certain  buildings  or areas or by requiring
designated "smoking" areas.  Numerous proposals also have been considered at the
state and local level  restricting  smoking in certain public areas,  regulating
point of sale placement and promotion and requiring warning labels.

     Consideration  at both the  federal  and state level also has been given to
consequences  of tobacco on others  that are not  presently  smoking  (so-called
"second-hand"  smoke).

     While the cigar  industry  historically  has not been subject to government
regulatory efforts,  focus has increased on possible need to increase regulation
in this area and there can be no assurance that there will not be an increase in
federal  regulation in the future against cigar  manufacturers  or distributors.
The costs to the  Company  of  increased  government  regulations  could  have a
material adverse effect on the Company's business and results of operations.

     Increased  cigar  consumption  and the  publicity  that such  increase  has
received  may  increase  the  risk of  additional  regulation.  There  can be no
assurance  as to the  ultimate  content,  timing,  or effect  of any  additional
regulation of tobacco products by any federal,  state, local or regulatory body,
and there can be no assurance that any such  legislation or regulation would not
have a material adverse effect on the Company's business.

     Litigation  against the cigarette industry has historically been brought by
individual  cigarette  smokers.  The United States  Supreme Court has ruled that
federal legislation relating to cigarette labeling  requirements preempts claims
based on  failure  to warn  consumers  about the  health  hazards  of  cigarette
smoking,   but  does   not   preempt   claims   based   on   express   warranty,
misrepresentation, fraud, or conspiracy.

                                       10

<PAGE>

     Current tobacco litigation  generally falls within one of three categories:
class  actions,  individual  actions or actions  brought  by  individual  States
generally to recover  Medicaid costs allegedly  attributable to  tobacco-related
illnesses.  Related  litigation  complaints  allege a broad  range  of  injuries
resulting from the use of tobacco products or exposure to tobacco smoke and seek
various remedies,  including  compensatory and, in some cases,  punitive damages
together with certain  types of equitable  relief such as the  establishment  of
medical  monitoring funds and restitution.  The major tobacco  companies are and
have been vigorously  pursuing defense to and otherwise the termination of these
actions.

     The tobacco  industry has  negotiated  settlements  totaling more than $240
billion with the States seeking  reimbursement  for expenditures by state-funded
medical  programs for  treatment of tobacco  related  illnesses  and in addition
within such settlements have agreed to end all outdoor  advertising and severely
restrict  other  traditional  marketing  practices  such  as a ban on  promoting
tobacco  products  in media  events and  productions,  to prohibit on brand name
tobacco  sponsorship  of team sports and sport  facilities and further agreed to
fund  a  national  research  foundation  as  well  as to  prohibit  advertising,
promotions  and  marketing  that  target  youth;  and to give  access by tobacco
companies  to the  public of  related  litigation  documentation;  and  strictly
curtails traditional lobbying activities on behalf of the tobacco industry.

     The federal government has sued the tobacco industry seeking  reimbursement
for  billions  of  dollars   spent  by   government   held   programs  to  treat
smoking-related  illnesses.  This type litigation  could have a material adverse
affect on the profitability of tobacco and tobacco related products.

     While the cigar  industry  has not been  subject to similar  health-related
litigation to date, there can be no assurance that there will not be an increase
in  health-related  litigation  in the future  against  cigar  manufacturers  or
distributors.  The costs to the Company and/or other suppliers of cigar products
marketed by the Company of defending  prolonged  litigation  and  settlement  or
successful  prosecution of any  health-related  litigation could have a material
adverse effect on the Company's business and results of operations.

     Cigars long have been subject to federal, state and local excise taxes, and
such taxes  frequently have been increased or proposed to be increased,  in some
cases significantly, to fund various legislative initiatives. The federal excise
tax rate on large cigars  (weighing more than three pounds per thousand  cigars)
is a material component of the manufacturer's selling price.


     The Company believes that the enactment of  significantly  increased excise
taxes could have a material  adverse effect on the business of the Company.  The
Company is unable to predict the  likelihood  of the passage or the enactment of
future increases in tobacco excise taxes as they relate to cigars.

     Tobacco  products  also are subject to certain  state and local  taxes.  An
example is the passage of the  Proposition 10 referendum in  California,  an act
used to  fund  early  childhood  development  programs,  children's  health  and
development  concerns  at the state  level.  The  majority  of states now impose
excise taxes on cigars. In certain of the states without tobacco taxes proposals
are pending to add such  taxes.  State cigar  excise  taxes are not  necessarily
subject to caps  similar  to the  federal  excise  tax.  From time to time,  the
imposition of state and local taxes has had some impact on sales regionally. The
enactment of new state  excise  taxes and the increase in existing  state excise
taxes  are  likely  to have  an  adverse  effect  on  regional  sales  as  cigar
consumption generally declines.

     2. OTHER GOVERNMENT REGULATION.

     The United  States Food and Drug  Administration  through the United States
Food,  Drug and Cosmetic Act and the Fair  Packaging  and Labeling Act and other
various  rules and  regulations  regulate,  among other  things,  the purity and
packaging  of HBA  products and  fragrances  and  cosmetic  products and various
aspects of the  manufacture  and  packaging of other  grocery  items sold by the
Company.  Similar  statutes are in effect in various states.  Manufacturers  and
distributors  of such  products  are also  subject  to the  jurisdiction  of the
Federal Trade Commission with respect to such matters as advertising content and
other  trade  practices.   To  the  Company's  knowledge,  it  only  deals  with
manufacturers  and  manufactured  products in a manner which  complies with such
regulations   and  who   periodically   submit  their  products  to  independent
laboratories for testing.  However, the failure by the Company's manufacturer or
supplier contacts to comply with applicable government  regulations could result
in product recalls or lack of product  availability  that could adversely affect
the  Company's  relationships  with its  customers.  In addition,  the extent of
potentially  adverse  government  regulations  which  might  arise  from  future
legislation or administrative action cannot be predicted.

                                       11

<PAGE>

     The  Company  is not aware of  government  regulation  directly  related to
internet  sales  different  from that  applicable to  traditional  marketing but
immense interest has been indicated on policing the internet focusing on contact
and access but the  nature of the  products  marketed  by the  Company  over the
internet does not appear to involve any of such concerns beyond product labeling
and advertising  content which would apply regardless of the medium in which the
products are sold except for developing limitations on internet sales of tobacco
products as  aforementioned  herein.  The Company is subject to the same foreign
and  domestic  laws  as  other  companies  conducting  business  on and  off the
Internet.  Today,  there are still  relatively  few laws  specifically  directed
towards online services.  However,  due to the increasing  popularity and use of
the Internet and online  services,  many laws relating to the Internet are being
debated at various  levels of  government  and it is possible that such laws and
regulations will be adopted.  These laws and regulations focus on issues such as
user privacy,  freedom or  expression,  pricing,  fraud,  content and quality of
products and services, taxation, advertising,  intellectual property rights, and
information security. It is not clear how existing laws governing issues such as
property ownership, copyrights and other intellectual property issues, taxation,
libel  and  defamation,   obscenity,   and  personal  privacy  apply  to  online
businesses.  The vast majority of these laws were adopted prior to the advent of
the Internet and related  technologies  and, as a result,  do not contemplate or
address the unique issues of the Internet and related  technologies.  Those laws
that do reference the Internet such as the U.S. Digital Millennium Copyright Act
have  begun  to  be  interpreted  by  the  courts  and   implemented  but  their
applicability and scope remain somewhat  uncertain.  The application of indirect
taxes (such as sales and use tax,  value added tax, or VAT,  goods and  services
tax,  business tax, and gross  receipt tax) to e-commerce  business such as that
operated by the Company is a complex and evolving issue. Many of the fundamental
statutes and  regulations  that impose these taxes were  established  before the
growth  of the  Internet  and  e-commerce.  In many  cases,  it is not clear how
existing  statutes  apply to the  Internet  or  e-commerce.  In  addition,  some
jurisdictions have implemented or may implement laws specifically addressing the
Internet or some aspect of  e-commerce.  The  application  of existing,  new, or
future  laws  could have  adverse  effects on the  Company's  business.  Several
proposals  have been made at the U.S.  state and local  level that would  impose
additional taxes on the sale of goods and services  through the Internet.  These
proposals, if adopted, could substantially impair the growth of e-commerce,  and
could diminish the Company's  opportunity to derive  financial  benefit from its
business  activities.  In December 2004,  the U.S.  Federal  Government  enacted
legislation  extending  the  moratorium  on states and other  local  authorities
imposing access or  discriminatory  taxes on the Internet through November 2007.
This moratorium does not prohibit  federal,  state,  or local  authorities  from
collecting  taxes on the Company's  income or from collecting taxes that are due
under existing tax rules. In conjunction with the Streamlined Sales Tax Project,
the U.S.  Congress  continues to consider  overriding the Supreme  Court's Quill
decision,  which  limited the ability of state  governments  to require  sellers
outside of their own state to collect and remit  sales taxes on goods  purchased
by in-state  residents.  An  overturning  of the Quill  decision  could harm the
Company's  business.  For further  discussion  of other  present  and  potential
government  regulation  of the  Internet see "Forward  Looking  Information  and
Cautionary Statements No.22 Government Regulation of the Internet and E-Commerce
is evolving and unfavorable changes could harm the Company's business" infra.


                                       12
<PAGE>

     ITEM 1A: RISK FACTORS.

             FORWARD LOOKING INFORMATION AND CAUTIONARY STATEMENTS

     Other than the factual matters set forth herein,  the matters and items set
forth in this  report are  forward-looking  statements  that  involve  risks and
uncertainties.  The  Company's  actual  results may differ  materially  from the
results discussed in the forward-looking statements.  These statements relate to
future events or the Company's future financial performance and include, but are
not limited to, statements concerning:

         The  anticipated  benefits  and risks of the  Company's  key  strategic
         partnerships, business relationships and acquisitions;

         The Company's ability to attract and retain customers;

         The  anticipated  benefits  and  risks  associated  with the  Company's
         business  strategy,  including those relating to its  distribution  and
         fulfillment  strategy  and its current  and future  product and service
         offerings;

         The Company's future operating  results,  its need for and availability
         of  financing to sustain its  operations  and expand  thereon;  and the
         future value of its common stock;

         The anticipated  size or and trends in the market segments in which the
         Company competes and the anticipated competition in those markets;

         Potential government regulation; and

         The Company's  future capital  requirements  and its ability to satisfy
         its capital needs.

     Furthermore,  in some cases, you can identify forward-looking statements by
terminology such as may, will, could, should, expect, plan, intend,  anticipate,
believe, estimate, predict, potential or continue, the negative of such terms or
other  comparable  terminology.  These statements are only  predictions.  Actual
events  or  results  may  differ  materially.  Factors  that  could  cause  such
differences  include,  but are not limited to, those identified herein and other
risks included from time to time in the Company's other  Securities and Exchange
Commission  ("SEC")  reports and press  releases,  copies of which are available
from the Company upon request.

     Although  the  Company  believes  that the  expectations  reflected  in the
forward-looking  statements are reasonable,  it cannot guarantee future results,
levels of activity,  performance or achievements  and continued  availability of
logistics  and  financial  support  therefore.  Moreover the Company  assumes no
responsibility  for  the  accuracy  and  completeness  of  the   forward-looking
statements  to conform such  statements  to actual  results or to changes in its
expectations.

     In addition to the other  information in this Form 10-K, the following risk
factors  should be  carefully  considered  in  evaluating  the Company  business
because these factors may have a significant  impact on the Company's  business,
operating  results  and  financial  condition.  As a result of the risk  factors
discussed  below and elsewhere in this Form 10-K and the risks  discussed in the
Company's other SEC filings,  actual results could differ  materially from those
projected in any forward-looking statements.

     1. THE COMPANY HAS INCURRED  OPERATING  LOSSES,  HAS MATERIAL DEBT, AND HAS
BEEN AND IS RELIANT UPON FINANCING.

     The  Company  has a long  history of  operating  losses.  To date,  a large
portion of the Company's  expenses have been financed  through  capital  raising
activities.  Although the Company has narrowed its losses, it still continues to
report  operating  deficits  as  opposed  to  profits.  A large  portion  of the
Company's  historical losses are a direct result of fees and expenses associated
with stock and/or other working  capital  financing.  The Company  believes that
Financing costs must be reduced in order to improve operating  results.  Failure
to reduce financing costs will likely inhibit the Company's growth.  There is no
assurance that further financing will not be needed for operating purposes,  and
where needed there can be no assurances of continued  availability  of financing
at affordable levels of expense.

                                       13

<PAGE>

     THE COMPANY HAS SIGNIFICANT INDEBTEDNESS

     As of December 31, 2005,  the Company had  long-term  indebtedness  of $2.7
million.  Although the Company made debt principal  reduction  payments over the
last two years, it may incur substantial  additional debt in the future,  and in
any event a significant portion of the Company's future cash flow from operating
activities  is likely to remain  dedicated  to the payment of  interest  and the
repayment of principal on its  indebtedness.  The Company's  indebtedness  could
limit its ability to obtain  additional  financing for working capital,  capital
expenditures,  debt service requirements,  acquisitions or other purposes in the
future,  as needed;  to plan for, or react to,  changes in technology and in its
business  and  competition;  and to react in the event of an economic  downturn.
There is no  guarantee  that the Company  will be able to meet its debt  service
obligations. If the Company is unable to generate sufficient cash flow or obtain
funds for  required  payments,  or it we fail to comply  with  covenants  in its
indebtedness,  the Company will be in default. In addition,  the Company may not
be able to refinance its indebtedness on terms acceptable to the Company,  or at
all.

     Due to the  Company's  limited  operating  history,  its evolving  business
model, and the  unpredictability of its industries,  the Company may not be able
to  accurately  forecast its rate of growth.  The Company  bases its current and
future expense levels and its investment  plans on estimates of future net sales
and rate of growth.  Its expenses and  investments  are to a large extent fixed,
and the Company may not be able to adjust its spending quickly enough if its net
sales fall short of its expectations.

     The Company's  revenue and operating profit growth depends on the continued
growth of demand for the products offered by the Company or its sellers, and its
business is affected by general economic and business conditions  throughout the
world. A softening of demand,  whether caused by changes in consumer preferences
or a weakening of the U.S. or global economies,  may result in decreased revenue
or growth.  Terrorist attacks and armed hostilities create economic and consumer
uncertainty that could adversely affect its revenue or growth. Such events could
create  delays  in,  and  increase  the cost of,  product  shipments,  which may
decrease  demand.  Revenue  growth may not be sustainable  and its  company-wide
percentage growth rate may decrease in the future.

     The Company's net sales and operating  results will also fluctuate for many
other reasons, including:

     - its ability to expand its network of  purchasers  and  suppliers,  and to
     enter into,  maintain,  renew,  and amend on favorable terms its commercial
     agreements and strategic alliances;

     - its ability to acquire merchandise, manage inventory, and fulfill orders;

     - the  introduction  by the  Company's  current  or future  competitors  of
     websites, products, services, price decreases, or improvements;

     - changes in usage of the  Internet and  e-commerce,  including in non-U.S.
     markets;

     - timing,  effectiveness,  and costs of upgrades  and  developments  in the
     Company's systems and infrastructure;

     - the effects of  commercial  agreements  and  strategic  alliances and the
     Company's  ability to successfully  implement the underlying  relationships
     and integrate them into its business;

     - the effects of  acquisitions,  and other  business  combinations  and the
     Company's ability to successfully integrate them into its business;

     - the success of the Company's geographic and product line expansions;

     - technical difficulties, system downtime, or interruptions;

     - Variations in the mix of products and services the Company sells;

     - Variations in the Company's level of merchandise and vendor returns;

     - disruptions in service by shipping carriers;

     - the extent to which the Company offers free shipping, continues to reduce
     product prices worldwide, and provides additional benefits to its customers
     which reduce its gross or operating profits;

     - the extent the Company  invests in technology  and content,  fulfillment,
     marketing and other expense categories;

     - the extent to which the Company provides for and pays taxes; and

     - an  increase  in the prices of fuel and  gasoline,  which are used in the
     transportation  of packages,  as well as an increase in the prices of other
     energy products,  primarily  natural gas and  electricity,  and commodities
     like paper and  packing  supplies,  all of which are used in the  Company's
     operating facilities.

                                       14

<PAGE>

     2. DEPENDENCE ON PUBLIC TRENDS.

     The  Company's  business  is subject to the  effects of  changing  customer
preferences  and the  economy,  both of which are  difficult to predict and over
which the Company has no control.  A change in either consumer  preferences or a
down-turn in the economy may affect the Company's business prospects.

     3. POTENTIAL PRODUCT LIABILITY.

     As a participant in the  distribution  chain between the  manufacturer  and
consumer,  the  Company  would  likely be named as a  defendant  in any  product
liability  action  brought by a consumer.  To date, no claims have been asserted
against the Company for product liability;  there can be no assurance,  however,
that such claims will not arise in the future. Currently, the Company does carry
product liability  insurance.  In the event that any products liability claim is
not fully funded by insurance,  and if the Company is unable to recover  damages
from the  manufacturer  or supplier of the product that caused such injury,  the
Company  may be  required  to pay some or all of such claims from its own funds.
Any such payment could have a material adverse impact on the Company.

     4. RELIANCE ON COMMON CARRIERS.

     Although  the  Company  has in the last few years  leased a fleet of trucks
operated by the Company to make deliveries,  the Company is still dependent, for
shipping of product  purchased,  on common  carriers in the  trucking  industry.
Although the Company uses several hundred common carriers, the trucking industry
is subject to  strikes  from time to time,  which  could have  material  adverse
effect on the Company's operations if alternative modes of shipping are not then
available.  Additionally the trucking industry is susceptible to various natural
disasters  which  can  close  transportation  lanes in any  given  region of the
country.  To the  extent  common  carriers  are  prevented  from or  delayed  in
utilizing  local   transportation  lanes  or  otherwise  trucking  services  are
curtailed  because of any other case,  the  Company  will  likely  incur  higher
freight costs due to the limited  availability  of trucks during any such period
that transportation lanes are restricted.

     5. COMPETITION.

     The Company is subject to  competition  in all of its various  product sale
businesses.  While  these  industries  may be  highly  fragmented,  with  no one
distributor  dominating  the  industry,  the  Company is subject to  competitive
pressures from other distributors based on price and service and product quality
and origin.

     The food industry is sensitive to a number of economic  conditions such as:
(i) food price  deflation  or  inflation,  (ii)  softness in local and  national
economies,  (iii)  increases  in  commodity  prices,  (iv) the  availability  of
favorable  credit and trade terms,  and (v) other economic  conditions  that may
affect consumer buying habits. Any one or more of these economic  conditions can
affect the demand for products PHS distributes to its customers.

     The industries in which PHS competes in are extremely competitive. Both the
wholesale  grocery operation and supply chain services to businesses are subject
to competitive practices that may affect: (i) the prices at which PHS is able to
sell products to its service area,  (ii) sales volume,  (iii) the ability of our
traditional food distribution customers to sell products PHS supplies, which may
affect  future  orders,  and (iv)  ability to attract and retain  customers.  In
addition,  the nature and extent of  consolidation  in the food and  traditional
food distribution industries could affect the competitive position. PHS competes
with larger  distributors  and retailers  that have greater  resources  then the
Company.

     The U.S.  market for  e-commerce  services is  extremely  competitive.  The
Company  expects  competition to intensify as current  competitors  expand their
product offerings and enter the e-commerce market, and new competitors enter the
market.

                                       15

<PAGE>


     The principal  competitive  factors are the quality and breadth of services
provided,  potential for successful  transaction activity and price.  E-commerce
markets are  characterized  by rapidly  changing  technologies  and frequent new
product and service  introductions.  The Company may fail to update or introduce
new market  pricing  formats,  selling  techniques  and/or other  mechanics  and
administrative  tools and formats for  internet  sales  consistent  with current
technology  on a timely basis or at all. If its fails to  introduce  new service
offerings or to improve its existing  service  offerings in response to industry
developments,  or if its  prices are not  competitive,  the  Company  could lose
customers, which could lead to a loss of revenues.

     Because  there  are  relatively  low  barriers  to entry in the  e-commerce
market, competition from other established and emerging companies may develop in
the future.  Many of the Company's  competitors  may also have  well-established
relationships with the Company's existing and prospective  customers.  Increased
competition is likely to result in fee reductions, reduced margins, longer sales
cycles for the  Company's  services and a decrease or loss of its market  share,
any of which could harm its business, operating results or financial condition.

     Many of the Company's  competitors have, and new potential  competitors may
have,  more  experience  developing  Internet-based  software  applications  and
integrated purchasing solutions, larger technical staffs, larger customer bases,
more established  distribution  channels,  greater brand recognition and greater
financial,  marketing  and other  resources  than the Company  has. In addition,
competitors  may be able to develop  products and services  that are superior to
those of the Company or that achieve greater customer  acceptance.  There can be
no assurance that the e-commerce solutions offered by the Company's  competitors
now or in the future will not be  perceived  as superior to those of the Company
by either businesses or consumers.

     6. LITIGATION

     The Company is subject to legal  proceedings  and claims which arise in the
ordinary  course of its business.  In the opinion of  management,  the amount of
ultimate  liability with respect to these actions  should not materially  affect
the financial position,  results of operations or cash flows of the Company, but
there can be no assurance as to this.

     7. POSSIBLE LOSS OF NASDAQ SMALL CAP LISTING.

     Synergy's  qualification  for trading on the NASDAQ Small Cap system has in
the past been questioned, the focus being on the market quotes for the Company's
stock,  the current bid price having for a time in the past been  reduced  below
the  minimum  NASDAQ  standard  of $1 and  had  been  below  such  level  for an
appreciable  period of time,  as well as the Company also being  notified in the
past that stockholders' equity had fallen below minimum NASDAQ continued listing
standard of $2,500,000. NASDAQ has established, and the Commission has approved,
certain  maintenance  requirements  to which the  Company  must adhere to remain
listed,  including the requirement that a stock listed in such market have a bid
price  greater  than  or  equal  to  $1.00  and  the  listed  Company   maintain
stockholders  equity  above  $2,500,000.  The bid price per share for the Common
Stock of  Synergy  had been  below  $1.00 in the past and the  Common  Stock has
remained  on the NASDAQ  Small Cap System  because  Synergy  had  complied  with
alternative  criteria which are now eliminated  under the new rules.  If the bid
price dips  below  $1.00 per share,  and is not  brought  above such level for a
sustained period of time or the Company fails to maintain  stockholders'  equity
at a level of at least  $2,500,000  the Common Stock could be delisted  from the
NASDAQ Small Cap System and  thereafter  trading would likely be reported in the
NASDAQ's OTC Bulletin Board or in the "pink sheets." (see Item 5-"Market For The
Registrant's Common Stock and Related  Stockholder  Matters" supra for a more in
depth discussion of the Company's  current NASDAQ listing status)In the event of
delisting  from the NASDAQ  Small Cap  System,  the Common  Stock  would  become
subject  to  the  rules  adopted  by  the  Commission  regulating  broker-dealer
practices in connection with transactions in "penny stocks",  including what the
Company  believes to be stringent  disclosure  rules very  different from NASDAQ
trading practice procedures.  These disclosure  requirements may have the effect
of reducing the level of trading  activity in the  secondary  market for a stock
that  becomes  subject to the penny  stock  rules.  If the Common  Stock  became
subject to the penny stock  rules,  many  broker-dealers  might be  unwilling to
engage  in  transactions  in the  Company's  securities  because  of  the  added
disclosure requirements,  thereby making it more difficult for purchasers of the
Common  Stock to  dispose  of their  shares.  The  Company's  common  stock  has
historically  remained  at NASDAQ  trading  levels  above $1 except for  limited
periods of time and the Company has achieved and is confident of  maintaining  a
level of Stockholders'  equity above $2,500,000.  Historical  stability combined
with the Company's  increasing  business  share in the market and its continuing
establishment as a viable force in the industries  wherein it participates gives
the Company  confidence that its  susceptibility to market  deficiencies is in a
much  lessened  state then in years past and that it can continue to achieve and
maintain NASDAQ listing compliance, but of this there can be no assurance.

                                       16

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     8. RISKS OF BUSINESS DEVELOPMENT-INTERNET MARKETING -THE COMPANY DEPENDS ON
CONTINUED USE OF THE INTERNET AND GROWTH OF THE ONLINE PRODUCT PURCHASE MARKET.

     Because still the lines of product and product distribution established for
the Company regarding its e-commerce  marketing are relatively new and different
from its historical  non-internet product distribution  business,  the Company's
operations in these areas should continue to be considered subject to all of the
risks  inherent  in a new  business  enterprise,  including  the  absence  of an
appreciable  operating  history and the expense of new product  development  and
uncertainties  on demand and  logistics  of delivery and other  satisfaction  of
customer demands.  Various problems,  expenses,  complications and delays may be
encountered in connection with the development of the Company's new products and
methods of product  distribution.  These expenses must either be paid out of the
proceeds of future  equity  offerings or out of  generated  revenues and Company
profits  and will likely be a drain on Company  capital if revenues  and revenue
collection do not keep pace with Company expenses.  There can be no assurance as
to the continued availability of funds from revenues or from any other sources.

     The Company's future potential revenues and profits substantially depend to
a great  extent upon the  widespread  acceptance  and use of the  internet as an
effective  medium  of  business  and   communication  by  the  Company's  target
customers. Rapid growth in the use of and interest in the Internet has occurred.
As a result,  acceptance and use continue to develop,  and a sufficiently  broad
base of  consumers  have  adopted,  and  continue to use, the Internet and other
online  services  as a medium  of  commerce  but there  can be no  assurance  of
continued use at the levels  anticipated  by the Company to sustain its internet
business segments.

     In  addition,  the  Internet  may not be  accepted  as a  viable  long-term
commercial marketplace for a number of reasons, including potentially inadequate
development of the necessary network  infrastructure  or delayed  development of
enabling  technologies and performance  improvements,  ease of use restrictions,
and/or  potential  customer  continued  preferences for more traditional see and
touch  purchasing.  The Company's success will depend, in large part, upon third
parties  maintaining the Internet  infrastructure  to provide a reliable network
backbone  with the speed,  data  capacity,  security and hardware and  education
regarding and ease of use thereof as necessary for reliable  Internet access and
services  and  hopeful  continued  shifting  of  potential   customers  shopping
preferences to the internet.

     As the  Internet  and online  commerce  industry  evolve,  the Company must
license  leading  technologies  useful in its  business,  enhance  its  existing
services,  develop new services  and  technology  that address the  increasingly
sophisticated  and varied  needs of its  prospective  customers  and  respond to
technological  advances  and  emerging  industry  standards  and  practices on a
cost-effective  and timely  basis.  The Company may not be able to  successfully
implement new  technologies or adapt its proprietary  technology and transaction
processing systems to customer  requirements or emerging industry standards.  If
the Company is unable to do so, it could  adversely  impact its ability to build
on its varied businesses and attract and retain customers.

     The Company's future revenues and profits depend to a large extent upon the
widespread  acceptance  and use of the Internet  and other online  services as a
medium for  commerce by  merchants  and  consumers.  The use of the Internet and
e-commerce  may not continue to develop at past rates and a  sufficiently  broad
base of business and  individual  customers may not adopt or continue to use the
Internet as a medium of commerce.  The market for the sale of goods and services
over the Internet is a relatively  new and  emerging  market.  Demand and market
acceptance for recently  introduced  services and products over the Internet are
subject to a high level of  uncertainty.  Growth in the Company's  customer base
depends  on  obtaining  businesses  and  consumers  who have  historically  used
traditional  means  of  commerce  to  purchase  goods.  For  the  Company  to be
successful,  the Company believes that these market participants must accept and
use the novel ways of  conducting  business  and  exchanging  information  as is
provided by the internet.

                                       17

<PAGE>

     E-commerce  may not  prove to be a viable  medium  for  purchasing  for the
following reasons, any of which could seriously harm the Company's business:

         - the  necessary  infrastructure  for Internet  communications  may not
         develop adequately;

         - the  Company's  potential  customers,  buyers and  suppliers may have
         security and confidentiality concerns;

         -  complementary  products,  such as high-speed  modems and  high-speed
         communication lines, may not be developed or be adequately available;

         - alternative-purchasing solutions may be implemented;

         - buyers may dislike  the  reduction  in the human  contact and product
         review  attendant to internet  sales,  different  from that inherent in
         traditional purchasing methods;

         - use of the  Internet  and other  online  services may not continue to
         increase or may increase more slowly than expected;

         - the development or adoption of new technology standards and protocols
         may be delayed or may not occur; and

         - new and burdensome governmental regulations may be imposed.

     The Internet is still  relatively new and rapidly  changing  technology and
continues to experience  significant growth in the number of users, frequency of
use  and   bandwidth   requirements.   There  can  be  no  assurance   that  the
infrastructure of the Internet and other online services will be able to support
the  demands  placed  upon them and/or that the Company may be able to keep pace
therewith.  Furthermore,  the Internet has  experienced a variety of outages and
other delays as a result of damage to portions of its infrastructure,  and could
face such  outages and delays in the  future.  These  outages  and delays  could
adversely  affect the level of Internet  usage and also the level of traffic and
the  processing  of  transactions.  In  addition,  the  Internet or other online
services could lose their viability due to delays in the development or adoption
of new standards and protocols  required to handle  increased levels of Internet
or other online service activity, or due to increased  governmental  regulation.
Changes in or insufficient availability of telecommunications  services or other
Internet service providers to support the Internet or other online services also
could result in slower response times and adversely affect usage of the Internet
and other online services generally and the Company's service in particular.  If
use of the Internet and other online services does not continue to grow or grows
more slowly than  expected,  if the  infrastructure  of the  Internet  and other
online  services does not  effectively  support growth that may occur, or if the
Internet  and  other  online  services  do not  become  or  sustain  as a viable
commercial marketplace, the Company will have to adapt its business model to any
resulting new environment,  which would materially  adversely affect its results
of operations and financial condition.

     9. RAPIDLY CHANGING MARKET MAY IMPACT OPERATIONS.

     The market for the  Company's  products is rapidly  changing  with evolving
industry standards and frequent new product introductions.  The Company's future
success will depend in part upon its  continued  ability to enhance its existing
products and to introduce  new products and features to meet  changing  customer
requirements and emerging  industry  standards and to continue to have access to
such products from their sources on a pricing schedule  conducive to the Company
operating at a profit. The Company will have to continuously develop, change and
implement  as and where  necessary  an  appropriate  marketing  strategy for its
various  products.  There can be no assurance that the Company will successfully
complete the  development  of future  products or that the Company's  current or
future products will achieve market  acceptance levels and be made available for
sale by the  Company  conducive  to the  Company's  fiscal  needs.  Any delay or
failure  of these  products  to  achieve  market  acceptance  or limits on their
availability  for sale by the  Company  would  adversely  affect  the  Company's
business.  In  addition,  there  can  be  no  assurance  that  the  products  or
technologies  developed  by others  will not render the  Company's  products  or
technologies non-competitive or obsolete.

     Management  believes  actions taken and  presently  being taken to meet and
enhance the Company's  operating and  financial  requirements  should assure and
provide the opportunity for the Company to continue as a going concern. However,
Management  cannot  predict the outcome of future  operations and no adjustments
have been made to offset the outcome of this uncertainty.

                                       18

<PAGE>

     10.EXTENSIVE  AND INCREASING  REGULATION OF TOBACCO PRODUCTS AND LITIGATION
MAY IMPACT CIGAR INDUSTRY.

     The tobacco industry in general has been subject to extensive regulation at
the federal,  state and local levels. Recent trends have increased regulation of
the  tobacco  industry.  Although  regulation  initially  focused  on  cigarette
manufacturers,  it has begun to have a broader impact on the industry as a whole
and may focus more directly on cigars in the future.  The increase in popularity
of cigars may likely lead to an increase in regulation  of cigars.  A variety of
bills  relating to tobacco  issues have been  introduced  in the U.S.  Congress,
including  bills that would (i) prohibit the  advertising  and  promotion of all
tobacco products or restrict or eliminate the  deductibility of such advertising
expense,  (ii) increase  labeling  requirements on tobacco  products to include,
among others things, addiction warnings and lists of additives and toxins, (iii)
shift  control of tobacco  products and  advertisements  from the Federal  Trade
Commission  (the "FTC") to the Food and Drug  Administration  (the "FDA"),  (iv)
increase  tobacco  excise  taxes and (v) require  tobacco  companies  to pay for
health care costs incurred by the federal  government in connection with tobacco
related  diseases.  There has also been recent  cooperation  between federal and
State  authorities to curtail  internet sales of tobacco products because of tax
issues  as  well  as  underage  purchase  questions.  Future  enactment  of such
proposals  or  similar  bills  may have an  adverse  effect  on the  results  of
operations or financial condition of the Company.  Although,  except for warning
labeling and smoke free facilities,  current  legislation and regulation focuses
on  cigarette  smoking  and  sales,  there is no  assurance  that  the  scope of
legislation will not be expanded in the future to encompass cigars as well.

     A majority of states restrict or prohibit  smoking in certain public places
and  restrict  the sale of tobacco  products to minors.  Local  legislative  and
regulatory bodies also have increasingly moved to curtail smoking by prohibiting
smoking in certain buildings or areas or by designating  "smoking" areas.  These
restrictions  generally do not distinguish between cigarettes and cigars.  These
restrictions  and future  restrictions  of a similar nature have and likely will
continue to have an adverse effect on the Company's sales or operations  because
of resulting  difficulty  placed upon advertising and sale of tobacco  products,
such as  restrictions  and in many cases  prohibition  of  counter  access to or
display of  premium  handmade  cigars,  and/or  decisions  by  retailers  not to
advertise for sale and in many cases to sell tobacco  products because of public
pressure to stop the selling of tobacco products.  Numerous  proposals also have
been and are being  considered  at the state and local  levels,  in  addition to
federal  regulations,  to restrict  smoking in certain public areas,  regulating
point of sale placement and promotions of tobacco products and requiring warning
labels.

     Increased  cigar  consumption  and the publicity such increase has received
may increase the risk of additional  regulation.  The Company cannot predict the
ultimate  content,  timing or effect of any  additional  regulation  of  tobacco
products by any federal,  state,  local or regulatory  body, and there can be no
assurance  that any such  legislation  or  regulation  would not have a material
adverse effect on the Company's business.

     In addition  numerous tobacco  litigation has been commenced and may in the
future  be  instituted,  all  of  which  may  adversely  affect(albeit  focusing
primarily  on cigarette  smoking)  cigar  consumption  and sale and may pressure
applicable  government entities to institute further and stricter legislation to
restrict and possibly prohibit cigar sale and consumption,  any and all of which
may have an adverse  affect on Company  business (see  "Government  Regulation -
Tobacco Industry Regulation and Tobacco Industry Litigation" supra).

     11. NO DIVIDENDS LIKELY.

     No dividends  have been paid on the Common Stock since  inception,  nor, by
reason  of  its  current   financial  status  and  its  contemplated   financial
requirements,  does Synergy  contemplate or anticipate paying any dividends upon
its Common Stock in the foreseeable future but the Company does have outstanding
preferred stock upon which dividends are paid current.

     12. POTENTIAL LIABILITY FOR CONTENT ON THE COMPANY'S WEB SITE.

     Because the Company posts product  information and other content on its Web
sites, the Company faces potential liability for negligence,  copyright, patent,
trademark,  defamation,  indecency  and other  claims  based on the  nature  and
content of the materials that the Company posts.  Such claims have been brought,
and sometimes successfully pressed, against other Internet content distributors.
In  addition,  the Company  could be exposed to  liability  with  respect to the
unauthorized  duplication  of  content  or  unauthorized  use of other  parties'
proprietary technology or infiltration into the Company's system by unauthorized
personnel.  The Company is not aware of any present  claim of such nature or any
current  basis  therefore  but  because of the nature of the  product  marketing
techniques utilized by the Company with application of the internet,  likelihood
of claims of such nature arising in the future cannot be predicted.

                                       19

<PAGE>

     13. THE COMPANY'S NET SALES WOULD BE HARMED IF IT  EXPERIENCES  SIGNIFICANT
CREDIT CARD FRAUD.

     A failure to adequately  control  fraudulent credit card transactions would
harm the Company's net sales and results of operations because it does not carry
insurance  against such risk.  Under current credit card practices,  the Company
may be held liable for  fraudulent  credit card  transactions  where it does not
obtain a cardholder's signature, a frequent practice in internet sales.

     14. POTENTIAL FUTURE SALES OF COMPANY STOCK.

     The majority of the shares of common stock of the Company  outstanding  are
"restricted  securities" as that term is defined in Rule 144  promulgated  under
the Securities Act of 1933. In general under Rule 144 a person (or persons whose
shares are  aggregated)  who has satisfied a one year holding  period may, under
certain  circumstances,  sell within any three  month  period a number of shares
which does not exceed the greater of 1% of the then outstanding shares of common
stock or the average  weekly trading volume during the four calendar weeks prior
to such sale. Rule 144 also permits,  under certain  circumstances,  the sale of
shares by a person who is not an affiliate of the Company and who has  satisfied
a two year holding  period  without,  any quantity  limitation.  The majority of
holders of the shares of the  outstanding  common  stock of the  Company  deemed
"restricted  securities" have already  satisfied at least their one year holding
period  or will do so with the  next  fiscal  year,  and  such  stock is  either
presently  or within the next fiscal year will become  eligible  for sale in the
public market (subject to volume  limitations of Rule 144 when applicable).  The
Company is unable to predict  the effect  that sales of its common  stock  under
Rule 144, or  otherwise,  may have on the then  prevailing  market  price of the
common stock.  However,  the Company believes that the sales of such stock under
Rule 144 may have a depressive effect upon the market.

     15. THE COMPANY MAY NOT BE ABLE TO CONTINUE ATTRACTING NEW CUSTOMERS.

     The success of the  Company's  business  model depends in large part on its
continued  ability to maintain and re sell to current  customers and to increase
its number of customers in the future.  The market for its  businesses  may grow
more slowly than anticipated  because of or become  saturated with  competitors,
many of which may offer  lower  prices or broader  distribution.  The Company is
also highly  dependant  on internet  sales which  require  interest of potential
suppliers in the internet mode of product  purchasing.  Some potential suppliers
may not want to join the Company's networks because they are concerned about the
possibility  of their  products  being listed  together with their  competitors'
products  thus  limiting  availability  of  product  mix made  available  by the
Company.  If the Company cannot  continue to bring new customers to its internet
sites or maintain its existing  customer base or attract listing of a mixture of
product, the Company may be unable to offer the benefits of the network model at
levels sufficient to attract and retain customers and sustain that aspect of its
business.

     16.  THE  COMPANY'S  BUSINESS  MAY  SUFFER  IF IT IS NOT  ABLE  TO  PROTECT
IMPORTANT INTELLECTUAL PROPERTY.

     The Company's ability to compete effectively against other companies in its
industry  will  depend,  in part,  on its  ability  to protect  its  proprietary
technology and systems designs  relating to its  technologies.  The Company does
not know  whether  it has been or will be  completely  successful  in doing  so.
Further,  its competitors may independently  develop or patent technologies that
are  substantially  equivalent  or  superior  to those of the  Company  so as to
effectively compete.

     17. THE  COMPANY  MAY NOT BE ABLE TO MAINTAIN  THE  CONFIDENTIALITY  OF ITS
PROPRIETARY KNOWLEDGE.

     The Company relies, in part, on contractual provisions to protect its trade
secrets and proprietary  knowledge.  These  agreements may be breached,  and the
Company may not have  adequate  remedies for any breach.  Its trade  secrets may
also  be  known  without  breach  of  such  agreements  or may be  independently
discovered by competitors.  Its inability to maintain the proprietary  nature of
its  technology  could harm its business,  results of  operations  and financial
condition by adversely affecting its ability to compete.

                                       20

<PAGE>

     18.  OTHERS  MAY  ASSERT  THAT THE  COMPANY'S  TECHNOLOGY  INFRINGES  THEIR
INTELLECTUAL PROPERTY RIGHTS.

     The Company  believes that its technology does not infringe the proprietary
rights of others.  However,  the  e-commerce  industry is  characterized  by the
existence of a large number of patents and  trademarks  and frequent  claims and
litigation  based on allegations of patent  infringement  and violation of other
intellectual  property rights. As the e-commerce market and the functionality of
products in the industry  continues to grow and  overlap,  the Company  believes
that the possibility of an intellectual property claim against it will increase.
For example,  the Company may  inadvertently  infringe an intellectual  property
right  of  which  it is  unaware,  or  there  may  be  applications  to  protect
intellectual  property rights now pending of which it is unaware which it may be
infringing  when they are  issued in the  future,  or the  Company's  service or
systems may incorporate  and/or utilize third party  technologies  that infringe
the intellectual  property rights of others. The Company has been and expects to
continue to be subject to alleged infringement claims. The defense of any claims
of  infringement  made  against  the  Company by third  parties,  whether or not
meritorious,  could  involve  significant  legal costs and require the Company's
management to divert time and attention from its business operations.  Either of
these consequences of an infringement claim could have a material adverse effect
on the Company's  operating results. If the Company is unsuccessful in defending
any  claims of  infringement,  it may be forced  to  obtain  licenses  or to pay
royalties  to  continue  to use its  technology.  The Company may not be able to
obtain any necessary licenses on commercially reasonable terms or at all. If the
Company fails to obtain necessary licenses or other rights, or if these licenses
are costly,  its operating results may suffer either from reductions in revenues
through the Company's inability to serve customers or from increases in costs to
license third-party technologies.

     19. THE  COMPANY'S  BUSINESS MAY BE  ADVERSELY  AFFECTED IF IT IS UNABLE TO
CONTINUE TO LICENSE SOFTWARE THAT IS NECESSARY FOR ITS SERVICE OFFERING.

     Through  distributors,  the  Company  licenses  a variety  of  commercially
available Internet  technologies,  which are used in its services and systems to
perform key functions. As a result, the Company is to a certain extent dependent
upon continuing to maintain these  technologies.  There can be no assurance that
the Company would be able to replace the  functionality  provided by much of its
purchased Internet technologies on commercially  reasonable terms or at all. The
absence of or any  significant  delay in the  replacement of that  functionality
could  have a  material  adverse  effect on the  Company's  business,  financial
condition and results of operations.

                                       21

<PAGE>

     20. THE COMPANY'S SYSTEMS INFRASTRUCTURE MAY NOT KEEP PACE WITH THE DEMANDS
OF ITS CUSTOMERS.

     Interruptions  of  service as a result of a high  volume of traffic  and/or
transactions could diminish the attractiveness of the Company's services and its
ability to attract  and retain  customers.  There can be no  assurance  that the
Company will be able to accurately  project the rate or timing of increases,  if
any,  in the use of its  service,  or that it will be able to expand and upgrade
its systems and infrastructure to accommodate such increases in a timely manner.
The Company  currently  maintains  systems in the U.S.  Any failure to expand or
upgrade  its  systems  could have a material  adverse  effect on its  results of
operations and financial condition by reducing or interrupting  revenue flow and
by limiting its ability to attract new  customers.  Any such failure  could also
have a material  adverse  effect on the business of its  customers,  which could
damage the  Company's  reputation  and expose it to a risk of loss or litigation
and potential liability.

     Service  offerings  involving  complex  technology  often contain errors or
performance  problems.  Many  serious  defects are  frequently  found during the
period  immediately  following  introduction and initial  implementation  of new
services or enhancements to existing services.  Although the Company attempts to
resolve all errors that it believes would be considered serious by its customers
before  implementation,  its systems are not  error-free.  Errors or performance
problems could result in lost revenues or  cancellation  of customer  agreements
and may expose the Company to litigation and potential  liability.  In the past,
the Company has  discovered  errors in  software  used in the Company  after its
incorporation  into Company  sites.  The Company  cannot assure that  undetected
errors or  performance  problems in its existing or future  services will not be
discovered  or that known errors  considered  minor by it will not be considered
serious by its  customers.  The Company has  experienced  periodic  minor system
interruptions, which may continue to occur from time to time.

     The Company's success depends on the efficient and uninterrupted  operation
of  its  computer  and  communications   hardware  systems.  These  systems  are
vulnerable to damage or interruption from natural disasters,  fires, power loss,
telecommunication failures,  break-ins,  sabotage, computer viruses, intentional
acts of vandalism and similar events.  Despite any precautions the Company takes
or plans to take,  the occurrence of a natural  disaster or other  unanticipated
problems  could result in  interruptions  in its services.  In addition,  if any
hosting  service fails to provide the data  communications  capacity the Company
requires,  as a result of human  error,  natural  disaster or other  operational
disruption,  interruptions in the Company's services could result. Any damage to
or failure of its systems could result in reductions in, or terminations of, its
services, which could have a material adverse effect on its business, results of
operations and financial condition.

     21. THE COMPANY MAY ACQUIRE OTHER BUSINESSES OR  TECHNOLOGIES,  WHICH COULD
RESULT  IN  DILUTION  TO  ITS   STOCKHOLDERS,   OR  OPERATIONAL  OR  INTEGRATION
DIFFICULTIES WHICH COULD IMPAIR ITS FINANCIAL PERFORMANCE.

     If appropriate  opportunities  present themselves,  the Company may acquire
complementary or strategic businesses,  technologies,  services or products that
it believes will be useful in the growth of its  business.  The Company does not
currently  have  any   commitments  or  agreements   with  respect  to  any  new
acquisitions.  They may not be able to identify, negotiate or finance any future
acquisition  successfully.  Even if the  Company  does  succeed in  acquiring  a
business, technology, service or product, the process of integration may produce
unforeseen  operating  difficulties and expenditures and may require significant
attention from the Company's  management  that would  otherwise be available for
the ongoing  development of its business.  Moreover the anticipated  benefits of
any  acquisition  may not be realized or may depend on the continued  service of
acquired  personnel  who could  choose to leave.  If the  Company  makes  future
acquisitions, it may issue shares of stock that dilute other stockholders, incur
debt,  assume contingent  liabilities or create  additional  expenses related to
amortizing  intangible assets, any of which might harm its financial results and
cause its stock price to decline.  Any  financing  that it might need for future
acquisitions  may only be available to it on terms that restrict its business or
that impose on it costs that reduce its revenue.

     22.  GOVERNMENT  REGULATION OF THE INTERNET AND  E-COMMERCE IS EVOLVING AND
UNFAVORABLE CHANGES COULD HARM THE COMPANY'S BUSINESS

     The Company is subject to general business regulations and laws, as well as
regulations and laws  specifically  governing the Internet and e-commerce.  Such
existing and future laws and  regulations  may impede the growth of the Internet
or other online services.  These  regulations and laws may cover taxation,  user
privacy, data protection, pricing, content, copyrights, distribution, electronic
contracts and other communications, consumer protection, the provision of online
payment services, broadband residential Internet access, and the characteristics
and  quality  of  products  and  services.  It is not  clear how  existing  laws
governing issues such as property  ownership,  sales and other taxes, libel, and
personal privacy apply to the Internet and e-commerce. Unfavorable resolution of
these issues may harm the Company's business.

                                       22

<PAGE>

     Like many Internet-based businesses, the Company operates in an environment
of tremendous  uncertainty as to potential government  regulation.  The Internet
has rapidly emerged as a commerce medium, and governmental agencies have not yet
been able to adapt all existing  regulations to the Internet  environment.  Laws
and  regulations  have  been  introduced  or are under  consideration  and court
decisions  have been or may be reached in the U.S. and other  countries in which
the Company does  business  that affect the  Internet or other online  services,
covering  issues such as pricing,  user privacy,  freedom of expression,  access
charges, content and quality of products and services, advertising, intellectual
property  rights and  information  security.  In addition,  it is uncertain  how
existing laws governing issues such as taxation, property ownership,  copyrights
and other intellectual  property issues,  libel,  obscenity and personal privacy
will be applied to the  Internet.  The majority of these laws were adopted prior
to the introduction of the Internet and, as a result,  do not address the unique
issues of the Internet.  Recent laws that contemplate the Internet,  such as the
Digital  Millennium  Copyright  Act  in  the  U.S.,  have  not  yet  been  fully
interpreted by the courts and their  applicability is therefore  uncertain.  The
Digital Millennium Copyright Act provides certain "safe harbors" that limits the
risk of  copyright  infringement  liability  for service  providers  such as the
Company  with  respect  to  infringing  activities  engaged  in by  users of the
service.

     In the area of user privacy,  several states have  legislation  and/or have
proposed  legislation  that  limits  or would  limit the uses of  personal  user
information  gathered  online or require  online  services to establish  privacy
policies.  The Federal Trade Commission also has become increasingly involved in
this area.  The Company does not sell  personal user  information  regarding its
customers.  The Company  does use  aggregated  data for analysis  regarding  the
Company  network,  and does use personal user  information in the performance of
its  services  for its  customers.  Since the Company  does not control what its
customers do with the personal user  information  they collect,  there can be no
assurance that its customers' sites will be considered compliant.

     As online  commerce  evolves,  the Company  expects that federal,  state or
foreign  agencies will  continue to adopt  regulations  covering  issues such as
pricing, content, user privacy, and quality of products and services. Any future
regulation may have a negative  impact on the Company's  business by restricting
its methods of operation or imposing  additional  costs.  Although many of these
regulations may not apply to its business directly, the Company anticipates that
laws  regulating  the   solicitation,   collection  or  processing  of  personal
information could indirectly affect its business.

     Internet  regulation  which has met with the most successful  challenges is
that which touches upon Free Speech.  Title V of the  Telecommunications  Act of
1996,  known as the  Communications  Decency Act of 1996,  prohibits the knowing
transmission  of any  comment,  request,  suggestion,  proposal,  image or other
communication  that is obscene or pornographic to any recipient under the age of
18. The  prohibitions  scope and the liability  associated  with a violation are
currently  unsettled.   In  addition,   although  substantial  portions  of  the
Communications  Decency Act of 1996 have been held to be  unconstitutional,  the
Company  cannot be certain  that  similar  legislation  will not be enacted  and
upheld in the future.  Subsequent attempts at such legislation such as the Child
Online  Protection  Act  passed in 1998  have met with  similar  and  successful
constitutional  attack.  It is  possible  that  such  legislation  could  expose
companies involved in online commerce to liability, which could limit the growth
of online commerce  generally.  Legislation like the Communications  Decency Act
and Child Online  Protection  Act could reduce the growth in Internet  usage and
decrease its acceptance as a communications and commerce medium.

     The worldwide  availability of Internet web sites often results in sales of
goods to buyers outside the  jurisdiction  in which the Company or its customers
are  located,  and  foreign  jurisdictions  may claim  that the  Company  or its
customers are required to comply with their laws. Foreign regulation of internet
use has not met with the success of  constitutional  and other judicial scrutiny
that US  regulation  has been  limited  by. As an Internet  Company,  it is also
unclear which  jurisdictions  may find that the Company is  conducting  business
therein.  Its failure to qualify to do business in a jurisdiction  that requires
it to do so could  subject the Company to fines or penalties and could result in
its inability to enforce contracts in that jurisdiction.

     The Company is not aware of any recent related  legislation other than that
specifically  referenced herein which may affect the manner in which the Company
utilizes the internet in its business but there can be no assurance  that future
government  regulation  will  not  be  enacted  further  restricting  use of the
internet that might adversely affect the Company's business.

                                       23

<PAGE>

     23. TAXES MAY BE IMPOSED ON INTERNET COMMERCE.

     In the U.S.,  the Company does not collect  sales or other similar taxes on
goods sold through the Company's internet websites. The Internet Tax Freedom Act
of 1998,  (extended  through  November 2003 and internet access tax prohibitions
though  November 1, 2007),  prohibits the  imposition  of new or  discriminatory
taxes  on  electronic  commerce  by  United  States  federal  and  State  taxing
authorities  except for taxes  caused by nexus of the Seller of the goods in the
State.  Sales to  customers  in such States may be taxable,  but to date no such
taxes have ever been  collected by the Company.  The Company is not aware of any
further  extensions of this  legislation  but  understands  that more  permanent
application  of the  aforesaid  Internet  Tax  Freedom  Act is  currently  being
discussed in the federal  legislature and further extension has been recommended
by the Advisory Commission on Electronic Commerce  established by US Congress to
further  review  application  of the statute.  Currently,  decisions of the U.S.
Supreme Court  restrict the imposition of obligations to collect state and local
sales and use taxes with  respect to sales made over the  Internet.  However,  a
number of States, as well as the U.S.  Congress,  have been considering  various
initiatives that could limit or supersede the Supreme Court's position regarding
sales and use taxes on Internet sales. If any of these initiatives addressed the
Supreme  Court's  constitutional  concerns  and  resulted  in a reversal  of its
current position,  the Company could be required to collect sales and use taxes.
The  imposition  by State and local  governments  of various taxes upon Internet
commerce could create administrative  burdens for the Company and could decrease
its future  sales.  The status of the  prohibition  is uncertain and States have
attempted to impose sales and use tax, often successfully  mainly based upon the
nexus of the  retailer  with the State  imposing  the tax on  customers  in that
State.  A number of  proposals  have been made at the State and local level that
would  impose  additional  taxes on the sale of goods and  services  through the
Internet.   Such  proposals,  if  adopted  and  not  in  conflict  with  federal
prohibitions,  could substantially impair the growth of electronic commerce, and
could adversely  affect the Company's  opportunity to derive  financial  benefit
from such activities.  There has been recent activity in attempts to enforce the
federal Jenkins Act which historically  allowed State taxation of sales of goods
made  through use of the United  States mails and is  currently  being  reviewed
toward  possibly  allowing  the States to tax  internet  sales.  . In  addition,
non-U.S.  countries  may seek to impose  service tax (such as  value-added  tax)
collection  obligations  on  companies  that  engage in or  facilitate  Internet
commerce.  A successful  assertion by one or more states or any foreign  country
that the Company  should collect sales or other taxes on the sale of merchandise
could impair its revenues and its ability to acquire and retain customers.

     24. THERE MAY BE SIGNIFICANT  SECURITY RISKS AND PRIVACY CONCERNS  RELATING
TO ONLINE COMMERCE.

     A significant  barrier to online commerce and  communications is the secure
transmission of confidential  information over public networks.  A compromise or
breach of the  technology  used to protect the  Company's  customers'  and their
end-users'  transaction data could result from, among other things,  advances in
computer  capabilities,  new discoveries in the field of cryptography,  or other
events or developments. Any such compromise could have a material adverse effect
on the  Company's  reputation  and,  therefore,  on  its  business,  results  of
operations  and  financial  condition.  Furthermore,  a  party  who is  able  to
circumvent  the Company's  security  measures could  misappropriate  proprietary
information  or  cause  interruptions  in its  operations.  The  Company  may be
required to expend  significant  capital and other  resources to protect against
security  breaches or to alleviate  problems  caused by such breaches.  Concerns
over the  security of  transactions  conducted  on the Internet and other online
services  and the privacy of users may also  inhibit the growth of the  Internet
and  other  online  services  generally,  especially  as a means  of  conducting
commercial  transactions.  The Company currently has practices and procedures in
place to protect the  confidentiality  of its  customers'  and their  end-users'
information.  However,  its security  procedures to protect  against the risk of
inadvertent  disclosure  or  intentional  breaches  of  security  might  fail to
adequately  protect  information that it's obligated to keep  confidential.  The
Company may not be successful in adopting more effective systems for maintaining
confidential  information,  and its  exposure to the risk of  disclosure  of the
confidential  information  of others  may grow with  increases  in the amount of
information it possesses.  To the extent that the Company activities involve the
storage  and  transmission  of  proprietary  information,  such as  credit  card
numbers,  security  breaches could damage its reputation and expose it to a risk
of loss or litigation and possible  liability.  The Company's insurance policies
may not be adequate to reimburse it for losses caused by security breaches.

                                       24

<PAGE>

     25. IF THE COMPANY'S  FULFILLMENT CENTERS ARE NOT EFFECTIVELY  OPERATED THE
COMPANY'S BUSINESS MAY BE ADVERSELY AFFECTED.

     If the Company does not successfully  operate its fulfillment  centers such
could  significantly  limit the Company's  ability to meet  customer's  demands,
which would  likely  result in  diminished  revenues,  adversely  affecting  the
Company's  business.  Because it is difficult  to predict  sales  increases  the
Company  may not manage  its  facilities  in an optimal  way which may result in
excess inventory,  warehousing,  fulfillment and distribution capacity having an
adverse impact on working capital of the Company,  or the lack of sufficiency in
such areas causing delays in fulfillment of customer orders adversely  affecting
customer confidence and loyalty.

     26. OUR VENDOR RELATIONSHIPS SUBJECT US TO A NUMBER OF RISKS

     Although we continue to increase the number of vendors that supply products
to us and only two vendors  account for 10% or more of our inventory  purchases,
we have significant  vendors that are important to our sourcing.  We do not have
long-term  contracts or  arrangements  with most of our vendors to guarantee the
availability  of  merchandise,  particular  payment  terms,  or the extension of
credit limits. If our current vendors were to stop selling  merchandise to us on
acceptable terms, we may not be able to acquire merchandise from other suppliers
in a timely and efficient manner and on acceptable terms.

     27. THE COMPANY'S STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE.

     The stock market, and in particular the market for Internet-related stocks,
has, from time to time, experienced extreme price and volume fluctuations.  Many
factors may cause the market  price for the  Company's  common stock to decline,
perhaps substantially, including:

         - actual or anticipated variations in the Company's quarterly operating
         results and expected future results;

         - changes in, or failure to meet,  financial  estimates  by  securities
         analysts;

         - unscheduled system downtime;

         - additions or departures of key personnel;

         -  announcements  of  technological  innovations or new services by the
         Company or its competitors;

         - initiation of or developments in litigation affecting the Company;

         - conditions or trends in the Internet and online commerce industries;

         - changes in the market valuations of other Internet,  online commerce,
         or technology companies;

         - developments in regulation;

         -  announcements  by the  Company  or its  competitors  of  significant
         acquisitions,  strategic  partnerships,  joint ventures, new product of
         capital commitments;

         - unanticipated economic or political events;

         - sales of the Company's  common stock or other  securities in the open
         market; and

         - other  events or  factors,  including  those  described  in the "Risk
         Factors", section and others that may be beyond the Company's control.

         - failure to meet its development plans;

         - the demand for its common stock;

         - downward  revision in  securities  analyst's  estimates or changes in
         general market conditions;

         -   technological   innovations   by   competitors   or  in   competing
         technologies; and

         - investor perception of the Company's industry or its prospects.

     The Company's  stock pricing has fluctuated  significantly  in the past and
there is no assurance such trend may not continue in the future.

                                       25

<PAGE>

     ITEM 2: DESCRIPTION OF PROPERTY

     The Company's corporate offices and administrative headquarters are located
in Syosset, New York.

     The Company  maintains  satellite and  representative  offices in New York,
Pennsylvania, New Jersey, Illinois, Florida.

     Warehousing  facilities  utilized by the Company are located in New Jersey,
New York and Florida.  The Grocery  inventory is warehoused  in New York,  Salon
products are warehoused in New Jersey, and cigars are warehoused in Florida. The
facilities  operate under contractual  warehousing  agreements except in Florida
and New York which  facilities  are leased.  The Company  also uses  warehousing
facilities on a spot contract basis as needed.

     ITEM 3: LEGAL PROCEEDINGS

     The Company is a party to a number of legal  proceedings in connection with
claims made for goods sold and various  other  aspects of its  business,  all of
which are  considered  routine  litigation  incidental  to the  business  of the
Company. The Company is not aware of any other litigation pending which might be
considered material and not in the ordinary course of business.

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

     During the fourth quarter of 2005 no matters were submitted for shareholder
approval. However, on September 7, 2005 a majority of the Company's shareholders
by  written  consent  approved  that an  amendment  be  filed  to the  Company's
Certificate  of  Incorporation  to increase  the amount of stock the Company has
authorization   to  issue  which  filing  of  the  approved   amendment   awaits
distribution of the information Statement the Company presently has on file with
the  Commission to be distributed  to its  shareholders  not having voted on the
matter.

                                       26

<PAGE>

                                     PART II

     ITEM 5. MARKET FOR THE  REGISTRANT'S  COMMON STOCK AND RELATED  STOCKHOLDER
MATTERS

     The  Company's  common  stock  trades on NASDAQ  Small Cap Market under the
Symbol "SYBR", and on the Boston Stock Exchange under the Symbol "SYB". The high
and low sales  prices in the NASDAQ  Small Cap Market for the  Company's  Common
Stock,  as reported by the NASDAQ for each of the quarters of the  Company's two
most recent fiscal years are as follows:

COMMON STOCK

Quarter Ended               High             Low       Close
-------------             -------         -------      ------
March 31, 2004              5.69            3.75       3.96
June 30, 2004               4.72            2.75       2.89
September 30, 2004          3.22            2.13       2.30
December 31, 2004           7.25            1.66       3.38
March 31, 2005              3.71            2.08       2.39
June 30, 2005               2.95            1.62       2.10
September 30, 2005          2.85            1.85       2.07
December 31, 2005           2.66            1.68       1.85

     On March 30,  2006,  the Company had  approximately  3100  shareholders  of
record.

     The Company has never paid any  dividends  on its Common Stock and does not
presently  intend to pay any  dividends on the Common  Stock in the  foreseeable
future. The Company does pay a dividend on its preferred stock.

     The Company has authorized stock of 6,000,000 shares divided into 5,000,000
Common  Stock $.001 par value,  100,000  shares of Class A  Preferred  Stock par
value $.001 and 900,000  shares of Class B Preferred  Stock,  500,000  shares of
which are  designated  Series A Class B  Preferred.  The  Company  is  currently
processing  an  increase  in such  authorized  stock  to 15  million  shares  by
amendment to its Certificate of Incorporation  which the Company  anticipates to
be effective in April 2006.

                                       27

<PAGE>

     Refer to the Company's  Consolidated  Statement of Changes in Stockholders'
Equity in the Company's audited financial statements included in this report for
information  on issuances of equity  securities  during fiscal year 2005.  These
issuances  were made either under  exemption  from  registration  allowed  under
Section 4 (2) or Regulation D of the Securities Act of 1933 as amended.

     ITEM 6. SELECTED FINANCIAL DATA

     The  following  selected  financial  data is  derived  from  the  Company's
financial  statements.  This  data  should  be read in  conjunction  with Item 7
Management's  Discussion  and  Analysis  of  Financial  Condition  and  Plan  of
Operations.


                               SYNERGY BRANDS INC
                             SELECTED FINANCIAL DATA
                                   12/31/2005

                                                         YEAR ENDED DECEMBER 31,

<TABLE>
<CAPTION>
<S>                                           <C>            <C>          <C>        <C>          <C>

                                                  2005        2004         2003         2002         2001
CONSOLIDATED STATEMENT OF OPERATIONS:
NET SALES                                    $64,137,090    $56,705,044 $40,540,577 $31,540,675 $24,347,928

COST OF SALES
COST OF PRODUCT                              $59,270,788    $51,907,840 $36,837,796 $29,241,384 $22,347,887
SHIPPING AND HANDLING COSTS                   $1,038,923       $900,205    $893,582   $600,994     $657,793
                                             $60,309,711    $52,808,045 $37,731,378 $29,842,378 $23,005,680

GROSS PROFIT                                  $3,827,379     $3,896,999  $2,809,199 $1,698,297   $1,342,248

OPERATION EXPENSES
ADVERTISING AND PROMOTIONAL                      $63,155       $150,181     $91,634   $469,965   $1,501,267
GENERAL AND ADMINISTRATIVE                    $3,992,405     $3,605,433  $2,984,663 $3,196,270   $3,072,900
DEPRECIATION AND AMORTIZATION                   $497,965       $659,490    $692,698   $893,935   $1,004,553
ASSET IMPAIRMENT CHARGE                         $293,586
DEVELOPMENT COSTS                                                                                   $16,133
                                              $4,847,111     $4,415,104  $3,768,995 $4,560,170   $5,594,853

OPERATING LOSS                               -$1,019,732      -$518,105   -$959,796 -$2,861,873 -$4,252,605

OTHER INCOME(EXPENSE)
INTEREST INCOME                                 $102,644         $4,610     $13,913    $26,695     $128,189
OTHER INCOME(EXPENSE)                           -$21,504       -$46,983    $298,932   $514,860      $23,804
EQUITY IN EARNINGS OF INVESTEE                   $56,311       $172,224     $92,424    $67,717       $1,583
INTEREST AND FINANCING EXPENSES              -$1,593,639    -$1,553,521   -$690,038  -$211,279    -$154,745
DIVIDENDS ON PREFERRED STOCK OF SUBSIDARY                                                          -$24,500
                                             -$1,456,188    -$1,423,670   -$284,769   $397,993     -$25,669

LOSS BEFORE INCOME TAXES                     -$2,475,920    -$1,941,775 -$1,244,565 -$2,463,880 -$4,278,274

INCOME TAX EXPENSE                               $84,858        $34,604     $32,658    $22,687      $21,865

NET LOSS BEFORE DISCONTIUED OPERATIONS       -$2,560,778    -$1,976,379 -$1,277,223 -$2,486,567 -$4,300,139

DIVIDEND-PREFERRED STOCK                        $317,333       $156,375     $78,000

NET LOSS ATTRIBUTABLE
TO COMMON STOCKHOLDERS                       -$2,878,111    -$2,132,754 -$1,355,223 -$2,486,567 -$4,300,139

BASIC AND DILUTED NET LOSS
PER COMMON SHARE:                                 -$0.75         -$0.97      -$0.82     -$1.91       -$4.15

WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING                             3,820,061      2,209,371   1,652,019  1,302,042    1,035,795


CONSOLIDATED BALANCE SHEET DATA:
WORKING CAPITAL                               $4,450,709     $3,064,266  $1,041,027    $51,542     $744,710
TOTAL ASSETS                                 $17,352,638    $16,706,423 $10,992,645 $5,871,669   $8,398,310
LONG TERM OBLIGATIONS                         $2,668,691     $1,196,241    $788,162   $342,750     $801,814
TOTAL SHAREHOLDERS' EQUITY                    $6,932,701     $6,573,057  $2,943,832 $2,082,537   $3,027,029

</TABLE>


                                       28

<PAGE>

     ITEM 7.  MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF FINANCIAL  CONDITION AND
PLAN OFOPERATIONS

         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATION
                                    OVERVIEW

     Synergy  Brands,  Inc.  (SYBR or the  Company)  is a holding  company  that
operates in the  wholesale  and online  distribution  of Groceries  and Health &
Beauty Aid (HBA) as well as wholesale, retail and online distribution of premium
cigars  and  salon  &  luxury  products  through  three  business  segments.  It
principally  focuses on the sale of nationally  known brand name grocery and HBA
consumer  products  manufactured by major U.S.  manufacturers.  The company uses
supply based logistics to optimize its distribution  costs on both wholesale and
retail channels.

     The Company  also owns 22% of the  outstanding  common  stock of  Interline
Travel and Tours,  Inc.  (AKA:  PERX).  PERX  provides  cruise and resort  hotel
packages through a proprietary reservation system to airline employees and their
retirees.  PERX is  believed  to be the  largest  Company in this  sector of the
travel industry.  Information on PERX can be found at www.perx.com.  The Company
believes that its capital investment in this unique travel Company could provide
for material future capital appreciation.  Synergy Brands does not manage PERX's
day-to  day  operations.  Perx  pre-tax  profit  for the  fiscal  year  2005 was
$512,000.  SYBR's share under the equity  method  amounted to $56,311 for fiscal
year  2005  after  income  taxes.  SYBR and PERX  have  been  exploring  several
opportunities to optimize the shareholder  value of both Companies.  SYBR made a
$1 million  investment in a private  placement in the fourth  quarter of FY 2005
for the purpose of expanding PERX operations through acquisitions.

     Business-to-Business  (B2B): The Company  operates two businesses  segments
within the B2B sector. B2B is defined as sales to non-retail customers.

     PHS Group  ("PHS")  distributes  Grocery and HBA products to retailers  and
wholesalers  predominately located in the Northeastern United States and Canada.
PHS is the largest  subsidiary  of the Company and  represents  about 96% of the
overall Company sales. PHS's core sales base continues to be the distribution of
nationally  branded consumer products in the grocery and (HBA) sectors.  PHS has
positioned itself as a distributor for major  manufacturers as opposed to a full
line wholesaler.  A full line wholesaler has the responsibility of servicing the
entire needs of a retail  operation,  whereby a  distributor  caters to specific
merchandising  categories.  As a  result,  PHS is able to plan the  needs of its
customers  directly from the source of supply and in turn increase  sales to its
customers  through this unique focus.  PHS  concentrates  on the fastest  moving
promotional items such as: Tide, Bounty, Nyquil,  Pantene,  Clorox bleach, Scott
tissues,  Marcal tissues among many others,  and uses logistics and distribution
savings to streamline and reduce its sale prices.  The second  business  segment
within the Company's B2B sector is Proset.  Proset imports and distributes Salon
Hair care  products and luxury goods to  wholesalers  and  distributors,  in the
Northeastern part of the United States.

     Business to Consumer (B2C): The Company  operates three  businesses  within
the B2C segment. B2C is defined as sales to retail customers.

     The  Company's  B2C  activities  are  conducted  through  its wholly  owned
subsidiary Gran Reserve Corporation (GRC). GRC operates the following businesses

     o Cigars  Around the World sells  premium  cigars to  restaurants,  hotels,
     casinos,  country clubs and many other leisure  related  destinations.  The
     company   was   acquired   in  June  2003.   (www.cigarsaroundtheworld.com)
                                                  ------------------------------

     o CigarGold.com  sells premium cigars through the Internet  directly to the
     consumer. (www.cigargold.com)
               -------------------

     o GRC opened its first retail store in Miami,  Florida in March,  2006. The
     store is  expected to be an  extension  to CAW  operation  and the store is
     called "Cigars Around the World."

     o  BeautyBuys.com  sells salon hair care products  directly to the consumer
     via the Internet. (www.beautybuys.com)
                       --------------------

     o The  Company's  B2C  websites  also expects to generate  revenue  through
     affiliates   and   partnership   agreements   such  as   www.overstock.com,
                                                              ------------------
     www.google.com .
     --------------

                                       29

<PAGE>

     CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2005
                AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2004.


<TABLE>
<CAPTION>
<S>                                       <C>             <C>            <C>               <C>

                                           OPERATING                      OPERATING AND
                                           SEGMENTS                   CORPORATE SEGMENTS

Y/E 12/31/2005
Revenue                                   $64,137,090       13.11%        $64,137,090      13.11%
Gross Profit                                3,827,379       -1.79%          3,827,379      -1.79%
SG&A                                        3,356,673        8.56%          4,055,560       7.99%
Operating Profit (loss)                      (175,581)    -139.71%         (1,019,732)    -96.82%
Net loss attributable to
 common stockholders                       (1,588,865)     -53.96%         (2,878,111)    -34.95%
Net loss per common  share                      (0.42)                          (0.75)
Interest and financing expenses             1,377,581       -4.60%          1,593,639       2.58%
   Y/E 12/31/2004
Revenue                                   $56,705,044                     $56,705,044
Gross Profit                                3,896,999                       3,896,999
SG&A                                        3,092,087                       3,755,614
Operating Profit (loss)                       442,190                        (518,105)
Net loss attributable to
 common stockholders                       (1,032,025)                     (2,132,754)
Net loss per common  share                      (0.47)                          (0.97)
Interest and financing expenses             1,444,020                       1,553,521

</TABLE>

     Synergy Brands

     Synergy  Brands is a holding  Company that  operates  through  wholly owned
segments.  In order to fully understand the results of operations,  each segment
is analyzed respectively.

     Revenues  increased by 13% to  $64,137,090  for the year ended December 31,
2005,  as compared to  $56,705,044  for the year ended  December 31,  2004.  The
largest percentage  increase was in the Company's B2B operations.  The Company's
grocery operation  continued to develop  additional vendor  relationships in the
grocery and HBA businesses as well as materially expanded its sales in Canada.

     Gross profit  remained flat at $3,827,379  for the year ended  December 31,
2005 as compared to  $3,896,999  for the year ended  December 31,  2004.  Proset
increased its reserves to $190,000 in FY 2005, and took an impairment  charge to
its  intangible  assets in the amount of  $293,586.  The salon  business did not
secure  sufficient  product flow to service Proset's  customers during the year.
Gross profit would have increased by 3% without the additional reserves.

     Selling  General and  Administrative  expenses (SGA)  increased by 8% while
revenues  increased  by 13% for the year ended  December 31, 2005 as compared to
the year ended  December 31, 2004.  The Company  streamlined  its  operations by
centralizing  all  administrative  functions at its corporate  offices,  reduced
staff in its Proset operation  through  outsourcing,  and increased its focus on
wholesale  distribution as opposed to retail store sales. The largest subsidiary
of the Company,  PHS Group,  increased its SGA expenses by 18% to $2,211,290 for
the year ended  December 31, 2005 as compared to  $1,870,312  for the year ended
December  31,  2004.  The  increase  in SGA for PHS  group  was  caused by a 21%
increase in revenues.  PHS incurs  variable  expenses in connection with selling
costs  such  as  sales  commission,   drivers,  warehousing  and  administrative
personnel  as  well  as  its  promotional   expenses.  As  revenues  rise  sales
commissions  and  certain  operating  expenses  resulting  from  sales  increase
commensurately.

     The  net  loss  attributable  to  Common  Stockholder  of the  Company  was
$2,878,111  for the year ended  December  31,  2005 as compared to a net loss of
$2,132,754  for the year ended December 31, 2004.  Interest and financing  costs
represents  55% of the total  loss.  The  reasons  for the  increase in net loss
relate  to  one-time  non-cash  charges.   Corporate  expenses  such  as  legal,
accounting,  and regulatory  costs as well as  depreciation  costs represent the
difference  between the Company's  consolidated  results and operating  results.
Management  believes  that its  corporate  expenses  may increase as a result of
additional regulatory  requirements that have been enacted by the Securities and
Exchange  Commission  (SEC).  The  Company  will  be  required  to  comply  with
additional  governance  and  financial  regulations  that will likely  result in
additional  corporate  expenses.  Corporate expenses for the year ended December
31, 2005 totaled  $698,887,  which  include  legal,  accounting  and  regulatory
expenses as compared to $663,527 for the year ended December 31, 2004.

                                       30

<PAGE>

     BELOW IS A SUMMARY OF THE RESULTS OF OPERATION BY SEGMENT:

     PHS Group: (B2B Operations)

     Synergy's Grocery operation  improved its operation through an expansion of
its Metro NY wholesale  operation.  Sales  improved by 21% to $61.4  million and
operating  profit  increased by 29% to $1.2 million.  PHS represented 96% of the
Company's  overall  revenues  and  provides  the most of the  cash  flow for the
Company's other segments as well as corporate regulatory expenses.  PHS plans to
continue  attempting  to  build  its  Metro  NY,  operations  and  increase  its
international sales to Canada and the Caribbean.

     B2C operations. (Gran Reserve Corporation supra GRC)

     B2C operations consist of www.CigarGold.com,  www.CigarsAroundtheWorld.com,
www.BeautyBuys.com;  retail  store  operation  in Miami and  online  partnership
programs  such  as  www.Overstock.com  and  www.Google.com.  The  operation  has
relocated to a 6,000 square foot facility in Miami Lakes Florida,  which handles
order flow for the operation as well as retail operations.  Sales deceased by 7%
to $1.9 million while  operating  loss was reduced by 27% to $427,672.  Revenues
were reduced due in material part to Hurricane Wilma, which disrupted operations
in the fourth quarter of 2005. Retail store operations  commenced in December of
2005 with a grand  opening,  which  occurred on March 4, 2006. GRC plans to have
its retail outlets act as its hubs for expansion in FY 2006. The  combination of
online  sales as well as  retail  store  sales is  expected  to be the focus for
growth in FY 2006.  The retail  store is an expansion  of Bill  Rancic's  Cigars
Around the World (CAW) concept of providing the ultimate  destination to a cigar
aficionado.  The Company has been disappointed by GRC's growth and believes that
rapidly  changing  antismoking  legislation may shift the Cigar business to be a
complete destination business as opposed to a leisurely activity.

     Proset operations

     Proset had a disappointing  year in FY 2005.  Proset  developed  additional
sources  for its goods  predominately  in Europe,  but access to goods have been
limited in FY 2005.  However,  in the first quarter of 2006, the Company secured
direct  contacts  in Europe  for  Luxury  Goods  and  secured  Costco  and other
customers for the  distribution of these goods.  These goods include some of the
most respected producers for Bags, wallets,  briefcases,  and eyewear in Europe.
Management expects that Proset-operating results should significantly improve in
FY 2006.  Furthermore,  Proset-operating  structure has been integrated into PHS
Group, thus allowing for logistics to be integrated into PHS operations.  Proset
is expected to have a record first quarter in FY 2006.  The flow of luxury goods
has materialized in the first quarter and Costco has already  received  numerous
deliveries.

     Corporate Expenses:

     The  Company's  allocation  to corporate  expenses  was  increased by 5% to
$698,887.  Corporate  expenses represent 17% of overall operating expense of the
Company.  Operating  expenses for all operations  including  corporate  expenses
totaled $4 million in FY 2005.

                                       31

<PAGE>

     BELOW IS A DETAILED REVIEW OF THE COMPANY'S PERFORMANCE.

     IN ORDER TO FULLY  UNDERSTAND  THE  COMPANY'S  RESULTS A DISCUSSION  OF THE
COMPANY'S SEGMENTS AND THEIR RESPECTIVE RESULTS FOLLOW;

     B2B OPERATIONS

     The Company's B2B operations consist of two operating businesses, PHS Group
and Proset.  PHS Group  distributes  Grocery and HBA products to  retailers  and
wholesalers  predominately located in the Northeastern United States and Canada.
PHS is the largest  subsidiary  of the Company and  represents  about 96% of the
overall  company  sales.  PHS's  core  sales base  remain  the  distribution  of
nationally  branded consumer products in the grocery and health and beauty (HBA)
sectors.  PHS has positioned itself as a distributor for major  manufacturers as
opposed to a full line wholesaler. A full line wholesaler has the responsibility
of servicing  the entire  needs of a retail  operation,  where as a  distributor
caters to specific  merchandising  categories.  As a result, PHS is able to plan
the needs of its  customers  directly  from the  source  of  supply  and in turn
increase sales to its customers  through this unique focus.  PHS concentrates on
the fastest moving promotional items and uses logistics and distribution savings
to streamline and reduce its sale prices. The second business segment within the
company's  B2B  sector is Proset  Hair  Systems  (Proset).  Proset  imports  and
distributes  salon  hair care  products  and  luxury  goods to  wholesalers  and
distributors, in the northeastern part of the United States.

PHS SEGMENT INFORMATION OF OPERATING BUSINESSES

                                                    PHS Group          CHANGE
Year ended December 31, 2005
Revenue                                              61,450,467        21.14%
Gross Profit                                          3,423,960        22.03%
SG&A                                                  2,211,290        18.23%
Operating Profit (loss)                               1,199,866        29.17%
Net loss                                               (111,784)      -33.44%
Interest and financing expenses                       1,297,348        11.02%

Year ended December 31, 2004
Revenue                                              50,728,560
Gross Profit                                          2,805,747
SG&A                                                  1,870,312
Operating Profit (loss)                                 928,934
Net loss                                               (167,951)
Interest and financing expenses                       1,168,607

     PHS increased its revenues by 21% to $61.4 million for year ended  December
31, 2005 as compared to $50.7 million for the year ended  December 31, 2004. The
increase in PHS  business  is  attributable  to the  utilization  of  additional
vendors,  development  of a wholesale  operation  and  expansion of the Canadian
distribution  business in Ontario,  Canada  increase of its  Domestic  Wholesale
business and  expansion  into the  Dominican  Republic.  PHS increased its gross
profit  by  increasing  Direct  Store  Delivery  sales  as well as  focusing  on
promotional  merchandise  offered  by its  vendors.  The  overall  gross  profit
percentage  remained  consistent at 5.6%. In 2005,  several PHS vendors  created
special packaging with promotional pricing that enabled PHS to widen its margin.
As an example,  special packaging was created for Folgers,  Marcal paper,  Crest
displays as well as Gain  Detergent  among others,  with unique  retail  display
features,  that PHS has been able to strongly  promote during FY 2005 as opposed
to marketing those products for normal replenishment. Promotional displays allow
PHS to sell  better  mixes  of  product  as  well  as  introduce  new  items  in
combination  with regularly  stocked items. As long as the Company  maintains or
expands its vendor  relationships,  management  believes that it can continue to
improve its operating results.  However, the Company is dependant on promotional
allowances and any material changes to manufacture's  allowance will likely have
a  material  adverse  effect to the  Company's  operating  result.  Net loss was
$111,784 for the year ended  December 31, 2005 as compared to a loss of $167,951
for the year ended December 31, 2004.

                                       32

<PAGE>

PROSET SEGMENT INFORMATION OF OPERATING BUSINESSES

                                                Salon
           Year ended December 31, 2005         products           CHANGE
Revenue                                          786,908          -79.95%
Gross Profit                                    (178,735)        -130.39%
SG&A                                             292,034            3.28%
Operatimg Profit(loss)                          (947,775)       -1103.07%
Net loss                                      (1,031,576)        -370.60%
Interest and financing expenses                   80,233          -65.55%
Year ended December 31, 2004
Revenue                                        3,923,823
Gross Profit                                     588,154
SG&A                                             282,747
Operatimg Profit(loss)                            94,487
Net Profit(loss)                                (219,204)
Interest and financing expenses                  232,913

     Proset  revenues  decreased by 80% for the year ended  December 31, 2005 as
compared to the year ended December 31, 2004.  Proset reserved  $190,000 against
its inventory and took a $293,586  impairment  charge to its customer list in FY
2005. During FY 2005 Proset failed to secure product through its normal channels
and as a result Proset was not able to service its  customers.  However,  Proset
was able to secure reliable  channels of distributors  and procurement to luxury
goods in the end of FY 2005.  Proset has started to explore the  importation  of
luxury  products  from Europe in the middle of FY 2006.  It has  secured  supply
specifically  designated  for Costco's  use.  Proset  believes that the Designer
Luxury goods, which include handbags, wallets, briefcases,  Eyewear among others
is a fast growing category that Mass Merchandisers can benefit from. Proset will
comply with all requests made by its vendors for the effective  distribution  of
these  goods and is bound by  restriction  in the event that it does not comply.
SG&A  increased  by 3% to  $292,034  for the year  ended  December  31,  2005 as
compared to $282,747 for the year ended  December 31, 2004.  Management has been
disappointed  with  Proset's  operation  for the year ended  December  31, 2005.
Proset's  backlog  of orders  has not  materialized,  and as a result  operating
results were below expectations.  Proset's management believes that the delay in
order flow should be corrected,  but there is no assurance that it will. Results
of operations would have been improved if Proset's business  expectations  would
have materialized.  Proset represented about 1.2% of the Company's sales for the
year, but it represented 36% of the overall net loss of the Company. Over 63% of
the charges related to Proset loss were non-cash charges.

                                       33

<PAGE>

B2C SEGMENT INFORMATION OF OPERATING BUSINESSES

                                                   B2C            CHANGE
Year ended December 31, 2005
Revenue                                           1,899,715        -7.45%
Gross Profit                                        582,154        15.71%
SG&A                                                853,349        -9.12%
Operating Profit(loss)                             (427,672)      -26.42%
Net loss                                           (445,505)      -30.92%
Interest and financing expenses                        -         -100.00%
Year ended December 31, 2004
Revenue                                           2,052,661
Gross Profit                                        503,098
SG&A                                                939,028
Operating Profit(loss)                             (581,231)
Net Profit(loss)                                   (644,870)
Interest and financing expenses                      42,500

     The  Company's  B2C  activities  are  conducted  through  its wholly  owned
subsidiary Gran Reserve Corporation (GRC). GRC operates the following businesses

     o Cigars  Around the World sells  premium  cigars to  restaurants,  hotels,
     casinos,  country clubs and many other leisure  related  destinations.  The
     company was acquired in June 2003. (www.cigarsaroundtheworld.com)

     o CigarGold.com  sells premium cigars through the Internet  directly to the
     consumer. (www.cigargold.com)

     o GRC opened its first retail store in Miami,  Florida in March,  2006. The
     store is  expected to be an  extension  to CAW  operation  and the store is
     called Cigars Around the World.

     o  BeautyBuys.com  sells salon hair care products  directly to the consumer
     via the Internet. (www.beautybuys.com)

     o The  Company's  B2C  websites  also expects to generate  revenue  through
     affiliates   and   partnership   agreements   such  as   www.overstock.com,
     www.google.com and paid links.

     Cigars Around the World (CAW), a wholly owned subsidiary of Synergy Brands,
Inc. (NASDAQ: SYBR), officially opened its first retail outlet and cigar club in
Miami Lakes Florida, on March 4, 2006. The 6,000 square-foot  facility,  located
at 15804 57th Ave, in Miami Lakes  features  more than 1,000 unique  cigars that
include  brand name,  hand made premium  cigars as well as Gran  Reserve  Corp's
(GRC) proprietary  brands as well as Cigar  Accessories.  The entire facility is
temperature  and humidity  controlled so all the Cigars can be viewed in a total
store  experience.  In  addition,  the  store  houses a Cigar  Lounge  with Free
satellite TV and Free Wireless  Internet which will enhance the customer's Cigar
smoking  and  shopping  experience.  CAW expects to use its  facility  for Radio
remotes for special  events,  seminars on upcoming news in the Cigar world,  and
other organized events for its members.

                                       34

<PAGE>

     CAW features the top selling Cigar brands which include Macanudo, Partagas,
Montecristo,  Cohiba, Arturo Fuentes-Opus X, Hemingway,  Padron, Punch, Romeo y'
Julietta,  Suarez Gran Reserve,  Davidoff,  Ashton, Mike Ditka and Breton labels
among others.  The store will also offer premium brands of upscale  accessories.
All the products in the store are available  nationally  on the Store's  website
www.CigarsAroundTheWorld.com.

     Bill  Rancic,  founder  of CAW at  www.CigarsAroundTheWorld.com  and Donald
Trump's first  "Apprentice" on the popular NBC-TV  program,  was on hand for the
store's grand opening. One of the attractions of the new store is the membership
program which enables club members to rent a climate  controlled  locker to keep
their  personal  cache  in  a  perfectly  controlled  temperature  and  humidity
environment.  Management  believes that the club has the potential to provide an
additional  revenue  stream to the strong  sales we continue to see in the cigar
division.

     Upcoming  events include plans for a Father's Day celebration in the lounge
of Cigars Around the World similar to the grand  opening.  Fathers will be given
the special  treatment  they deserve as well as  exceptional  discounts on their
favorite  cigars.  CAW plans NFL  weekends as the football  season  starts and a
Super Bowl event next year. Based upon this model, CAW is exploring other retail
opportunities to expand this concept.

     The store's  grand  opening  celebration  received  coverage by local media
including WSVN-TV, FOX; WPLG-TV, ABC; WAXY-AM, 790 The Ticket; the Miami Herald;
the Miami Laker; and the Miami New Times.

     Revenues in the Company's  B2C  operation  for the year ended  December 31,
2005 were  $1,899,715 as compared to $2,052,661  for the year ended December 31,
2004.  CAW on a current  operating  basis  represents  approximately  59% of B2C
revenues  for the year ended  December  31,  2005.  Gross  profit for year ended
December  31, 2005 was  $582,154  as  compared  to  $503,098  for the year ended
December  31,  2004.  The  table  above  provides  comparative  details  for the
Company's B2C operation.

     CAW is operating  profitably,  but the logistical support in Miami, Florida
is  consuming  the  segment's  resources  and thereby not  allowing it to show a
profit at those sales  levels.  The On-line  segment has over 20,000  customers,
generates an average order of $100, with over a 50% repeat rate and generates at
a 99%  fulfillment  rate.  The Company  believes  that  building its B2C segment
brands along with  popularity  of Bill  Rancic,  the winner of the ABC show "The
Apprentice" should bring the segment effective critical mass.

                                       35

<PAGE>


CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2004
                AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2003.

                                       OPERATING                OPERATING AND
                                       SEGMENTS              CORPORATE SEGMENTS

<TABLE>
<CAPTION>
<S>                                    <C>            <C>          <C>            <C>

Y/E 12/31/2004
Revenue                               56,705,044      39.87%      56,705,044       39.87%
Gross Profit                           3,896,999      38.72%       3,896,999       38.72%
SG&A                                   3,092,087      17.04%       3,755,614       22.08%
Operating Profit (loss)                  442,190     202.03%        (518,105)      46.02%
Net loss attributable to
   common stockholder                 (1,032,025)    -26.22%      (2,132,754)     -57.37%
Net loss per common  share                 (0.47)                      (0.97)
Interest and financing expenses        1,444,020     109.50%       1,553,521      125.14%
   Y/E 12/31/2003
Revenue                               40,540,577                  40,540,777
Gross Profit                           2,809,199                   2,809,199
SG&A                                   2,641,864                   3,076,297
Operating Profit (loss)                 (433,395)                   (959,796)
Net loss attributable to
common stockholder                      (817,658)                 (1,355,223)
Net loss per common  share                 (0.49)                      (0.82)
Interest and financing expenses          689,286                     690,038

</TABLE>

     Revenues  increased by 40% to  $56,705,044  for the year ended December 31,
2004,  as compared to  $40,540,577  for the year ended  December 31,  2003.  The
largest percentage  increase was in the Company's B2B operations.  The Company's
grocery operation  continued to develop  additional vendor  relationships in the
grocery and HBA businesses as well as materially expanded its sales in Canada.

     Gross profit increased by 39% to $3,896,999 for the year ended December 31,
2004 as  compared  to  $2,809,199  for the year ended  December  31,  2003.  The
increase in gross profit was in direct relationship to increased sales.

     Selling  General and  Administrative  expenses (SGA) increased by 22% while
revenues  increased  by 40% for the year ended  December 31, 2004 as compared to
the year ended  December 31, 2003.  The Company  streamlined  its  operations by
centralizing  all  administrative  functions at its corporate  offices,  reduced
staff in its Proset operation through outsourcing, and increasing sales focus on
wholesale  distribution as opposed to retail store sales. The largest subsidiary
of the Company,  PHS Group,  increased its SGA expenses by 41% to $1,870,312 for
the year ended  December 31, 2004 as compared to  $1,323,887  for the year ended
December  31,  2003.  The  increase  in SGA for PHS  group  was  caused by a 46%
increase in revenues.  PHS incurs  variable  expenses in connection with selling
costs  such  as  sales  commission,   drivers,  warehousing  and  administrative
personnel  as  well  as  its  promotional   expenses.  As  revenues  rise  sales
commissions  and  certain  operating  expenses  resulting  from  sales  increase
commensurately.

                                       36

<PAGE>

     The net loss for the Company was $2,132,754 for the year ended December 31,
2004 as compared to a net loss of  $1,355,223  for the year ended  December  31,
2003.  In the first  quarter of 2003,  the  Company  realized a one time gain of
$282,750 in connection with the extinguishment of online advertising payables in
2003.  The  Company  also had the  benefit  of an  allowance  paid in the second
quarter  of 2003  totaling  $415,000  that  will  be paid  over  the  course  of
subsequent period. Other material factors that affected the Company's costs were
increased financing costs resulting from increased borrowings.  The increase was
attributable to the development of the Company's  wholesaling  operation as well
as materially  higher  financing  costs.  Interest and financing costs jumped by
125% to $1,553,521 for the year ended December 31, 2004. Corporate expenses such
as  legal,  accounting,  and  regulatory  costs  as well as  depreciation  costs
represent  the  difference  between  the  Company's   consolidated  results  and
operating results.  Management believes that its corporate expenses may increase
as a result of additional regulatory  requirements that have been enacted by the
Securities and Exchange Commission (SEC). The Company will be required to comply
with additional  governance and financial regulations that will likely result in
additional  corporate  expenses.  Corporate expenses for the year ended December
31, 2004 totaled  $663,527,  which  include  legal,  accounting  and  regulatory
expenses as compared to $434,443 for the year ended December 31, 2003.

     Management  believes  that  financing  costs were  increased as a result of
revenue  growth.  As a result,  the Company was  required to utilize its line of
credit to support account receivable and inventory growth.  Although the working
capital needed to support  revenue  growth is directly  related to the growth in
accounts  receivable and inventory,  the Company has invested in capital assets,
such as warehousing and trucks to support the growth of the business.

     In order to fully  understand  the  Company's  results a discussion  of the
Company's segments and their respective results follow;

     B2B OPERATIONS

     The Company's B2B operations consist of two operating businesses, PHS Group
and Proset Hair  Systems.  PHS Group  distributes  Grocery  and HBA  products to
retailers  and  wholesalers  predominately  located in the  Northeastern  United
States and Canada.  PHS is the largest  subsidiary of the Company and represents
about 89% of the  overall  company  sales.  PHS's  core  sales  base  remain the
distribution of nationally  branded consumer  products in the grocery and health
and beauty (HBA) sectors.  PHS has positioned  itself as a distributor for major
manufacturers as opposed to a full line  wholesaler.  A full line wholesaler has
the responsibility of servicing the entire needs of a retail operation, where as
a distributor caters to specific merchandising  categories.  As a result, PHS is
able to plan the needs of its  customers  directly from the source of supply and
in  turn  increase  sales  to its  customers  through  this  unique  focus.  PHS
concentrates  on the fastest  moving  promotional  items and uses  logistics and
distribution  savings  to  streamline  and reduce  its sale  prices.  The second
business  segment  within  the  company's  B2B  sector  is Proset  Hair  Systems
(Proset).   Proset   distributes   Salon  Hair  care  products  to  wholesalers,
distributors, chain drug stores and supermarkets in the Northeastern part of the
United States.

                                       37

<PAGE>

                                             PHS Group          CHANGE
Year ended December 31, 2004
Revenue                                       50,728,560       46.02%
Gross Profit                                   2,805,747       45.57%
SG&A                                           1,870,312       41.27%
Operating Profit (loss)                          928,934      180.88%
Net loss                                        (167,951)    -110.30%
Interest and financing expenses                1,168,607      159.76%

Year ended December 31, 2003
Revenue                                       34,740,999
Gross Profit                                   1,927,416
SG&A                                           1,323,887
Net loss                                         (79,864)
Interest and financing expenses                  449,876

     PHS  increased  its  revenues  by  46.0% to $50.7  million  for year  ended
December 31, 2004 as compared to $34.7  million for the year ended  December 31,
2003.  The  increase  in PHS  business is  attributable  to the  utilization  of
additional  vendors,  development of a wholesale  operation and expansion of the
Canadian  distribution  business in Ontario,  Canada.  PHS  increased  its gross
profit  by  increasing  Direct  Store  Delivery  sales  as well as  focusing  on
promotional  merchandise  offered  by its  vendors.  The  overall  gross  profit
percentage  remained  consistent at 5.5%. In 2004,  several PHS vendors  created
special packaging with promotional pricing that enabled PHS to widen its margin.
As an example,  special packaging was created for Nyquil,  Marcal paper,  Clorox
displays as well as Herbal  Essence  shampoos  among others,  with unique retail
display  features,  that PHS has been able to strongly promote during FY 2004 as
opposed  to  marketing  those  products  for normal  replenishment.  Promotional
displays  allow PHS to sell  better  mixes of product as well as  introduce  new
items in  combination  with  regularly  stocked  items.  As long as the  Company
maintains or expands its vendor  relationships,  management believes that it can
continue to improve its operating results.

                                       38

<PAGE>

PROSET SEGMENT INFORMATION OF OPERATING BUSINESSES

                                                    Salon
               Year ended December 31, 2004       products             CHANGE
Revenue                                          3,923,823            6.88%
Gross Profit                                       588,154           70.82%
SG&A                                               282,747          -34.20%
Operatimg Profit(loss)                              94,487          131.65%
Net loss                                          (219,204)          56.35%
Interest and financing expenses                    232,913           16.52%
Year ended December 31, 2003
Revenue                                          3,671,106
Gross Profit                                       344,305
SG&A                                               429,684
Operatimg Profit(loss)                            (298,577)
Net Profit(loss)                                  (502,158)
Interest and financing expenses                    199,892

     Proset  revenues  increased by 6.9% for the year ended December 31, 2004 as
compared  to the year ended  December  31,  2003.  Proset has  transitioned  its
business model from retail services to wholesale distribution.  Gross profit has
increased by 71% to $588,154 for the year ended December 31, 2004 as compared to
$344,305 for the year ended  December 31, 2003. At the same time SG&A dropped by
34% to  $282,747  for  year  ended  December  31,  2004.  As a  result  of  this
transition,  the  Company's  customer  base  has  expanded  to  include  smaller
distributors  that purchase salon products in higher  quantities,  which in turn
optimizes  the gross  profit.  However,  distributor  sales  require less labor,
warehousing and distribution  costs,  but rely on optimal market  conditions and
product  availability.   The  salon  business  is  highly  fragmented  and  very
competitive.  Proset  must  maintain  strong  vendor  relations,  which  include
distributors  and  resellers  in order to keep a supply  chain for its  customer
base.  Financing costs are also an important  factor in the operation of Proset.
Financing  costs  increased by 17% to $232,913.  Wholesalers are provided better
credit terms then retailers since they need to maintain greater inventories.  In
order to improve the profitability of Proset, management believes that financing
costs need to reduced.

                                       39

<PAGE>

B2C SEGMENT INFORMATION OF OPERATING BUSINESSES

                                                 B2C             CHANGE
Year ended December 31, 2004
Revenue                                         2,052,661       -3.56%
Gross Profit                                      503,098       -6.40%
SG&A                                              939,028        5.71%
Operatimg Profit(loss)                           (581,231)      24.85%
Net loss                                         (644,870)    -173.67%
Interest and financing expenses                    42,500        7.55%
Year ended December 31, 2003
Revenue                                         2,128,472
Gross Profit                                      537,478
SG&A                                              888,293
Operatimg Profit(loss)                           (465,535)
Net Profit(loss)                                 (235,636)
Interest and financing expenses                    39,518

     The Company's B2C segment includes three  businesses,  which include Cigars
Around the World,  CigarGold and  BeautyBuys.  Cigars Around the World (CAW) was
acquired  in June of 2003.  CAW sells  premium  cigars to  Hotels,  Restaurants,
Casinos, PGA Clubs and other leisure related destinations.  CAW sells its cigars
in through  customized  retail displayed  humidors.  CAW also has its own retail
website that operates under the name www.CigarsAroundTheWorld.com.  The displays
range from counter top humidors to Walled Display  units.  CigarGold (CG) is the
Company's cigar online unit. CG sells premium cigars online to retail  customers
throughout  the United States.  It has a selection of over 1000 products,  which
include  brand-name  hand made premium cigars and cigar  accessories.  CigarGold
operates  under  the  domain  names:  www.CigarGold.com,  www.NetCigar.com,  and
www.GoldCigar.com.   The   online   unit   also   operates   www.BeautyBuys.com.
BeautyBuys.com sells salon hair products to the retail consumer.  Previously the
operation also sold fragrances and cosmetics to retail customers.  However,  the
Company  decided in 2003 to limit its  selection  to salon  hair care  products,
since those items are already  carried and stocked  within its  wholesale  salon
operation, Proset Hair Systems.

     Revenues in the Company's  B2C  operation  for the year ended  December 31,
2004 were  $2,052,661 as compared to $2,128,472  for the year ended December 31,
2003. CAW on a current  operating  basis  represented  approximately  64% of B2C
revenues  for the year ended  December  31,  2004.  Gross  profit for year ended
December  31, 2004 was  $503,098  as  compared  to  $537,478  for the year ended
December  31,  2003.  The  table  above  provides  comparative  details  for the
Company's B2C operation.

                                       40

<PAGE>

                         LIQUIDITY AND CAPITAL RESOURCES

Year end                                      2005           2004

Working Capital                             $ 4,450,709     $ 3,064,266
Assets                                       17,352,638      16,706,423
Liabilities                                  10,419,937      10,133,366
Equity                                        6,932,701       6,573,057
Line of Credit Facility                       4,033,242       4,976,610
Receivable turnover (days)                           43              49
Inventory Turnover (days)                            12              12
Net cash used in operating activies           4,051,495       6,983,055
Net cash (used in) provided by
    investing activities                       (791,007)        811,265
Net cash provided by financing activites      4,160,250       6,342,537

     The Company reduced its cash requirements from operating  activities by 42%
from $7 million to $4.1 million from 2004 to 2005. The reason was a net decrease
of  $5.6  million  in  the  net  increase  of  accounts  receivables  and  other
receivables from $6.5 million to $900,000.

     Liquidity  for the  Company  predominately  involves  the  need to  finance
accounts  receivables,  inventory,  financing costs and operating expenses.  The
cash flow realized from the Company's  gross profit was not  sufficient to cover
the  Company's  operating  expenses.   The  Company  generated  a  net  loss  of
approximately $2.6 million. Financing costs totaled $1.6 million and represented
the largest cost center for the Company.  Reductions in financing expenses would
be beneficial to the Company's  performance.  This  reduction  could be achieved
through equity-based transactions, refinancing at lower rates and a reduction of
the  Company's  inventory  and accounts  receivables.  Management  believes that
equity based  transactions  and  refinancing  should be the  objectives  for the
Company.  A reduction  in  receivables  and  inventory  may cause a reduction in
revenue, which would reduce operating margins.

     Although the Company  improved its cash flow from  operating  activities by
$2.9 million,  it needed to secure funds from financing  activities to cover its
operating needs.  The Company financed its operating  activities by issuing $3.7
million in notes and $770,000 in Preferred Stock.

     The Company's  working capital improved by $1.4 million to $4.5 million due
to a $900,000  reduction  in the  Company's  line of credit  and a $1.6  million
reduction in accounts payable.  Receivables increased by $900,000 due to revenue
increases and vendor rebates.

     Notes receivable  increased by $800,000  predominately due to the Company's
investment  in PERX.  Notes  payable  had a  corresponding  increase  due to the
proceeds derived in a loan from a major shareholder.

     The  Company  raised  $2.8  million  is  equity  predominately  due to note
conversions under existing  agreements.  The Company acquired sufficient capital
to cover its  operating  expenses  and had unused  availability  of $1.2 million
under  its  line  of  credit.  The  Company  believes  that  it  has  sufficient
availability under its line of credit and an ability to raise sufficient capital
to cover its operating  losses.  However,  the Company believes that it needs to
generate an operating profit and not rely on external  financing whether debt or
equity.

                                       41

<PAGE>

     The capital  resources  available to the Company consist of $6.3 million in
lines of Credit,  $2.7  million in  long-term  notes and $4 million in Preferred
Stock.  The  Company's  objective is to reduce its notes through the issuance of
equity and cash flow as well as refinancing its current  obligations  with lower
rates.  However there is no assurance  that the Company would be able to achieve
its objectives.

     The Company's liquidity relies on the turnover of it inventory and accounts
receivables. The Company reduced its receivable turnover from 49 days to 43 days
and its inventory  turnover  remained flat at 12 days. The Company believes that
its collection  procedures and procurement policies are consistent with industry
standards.  However,  nearly  70% of  the  Company's  assets  consist  of  trade
receivables and inventory. The Company must maintain a strict policy on insuring
collections of receivables and adequate procurement based upon customer demands.

     Management believes that continued cost containment, improved financial and
operating  controls,  debt reduction,  and a focused sales and marketing  effort
should  provide  sufficient  cash flow from  operations in the near term and the
Company is working toward  reliance on such financial  sources and attributes to
cover its cash flow requirements but achievement of these goals,  however,  will
likely  continue to be  dependent  upon the  Company's  attainment  of increased
revenues,  improved  operating costs,  reduced  financing cost and trade support
levels that are consistent with management's  plans. Such operating  performance
will be subject to financial, economic and other factors beyond its control, and
there can be no assurance  that the  Company's  goals will be  achieved.  In the
interim while such goals are being pursued achievement of positive cash flow has
been reliant on equity and debt financing,  including the Company's  exchange of
notes payable for common shares and its issuance of further common and preferred
stock in private  placements  and the  Company is hopeful  that the market  will
continue to recognize the Company's  stature so that such financing  method will
continue to be available in the future because, at least in the near future, the
Company is likely to continue to use such  financing  opportunities  to maintain
adequate cash flow.

     Expected  interest  payments on notes payable for the period ended December
31, are as follows:

12/31/06   12/31/07   12/31/08   12/31/09   12/31/10   Total
$373,000   $206,000  $108,000    $80,000    $60,000   $827,000

     Variable interest rate on notes of $1,275,000 was 10.25%. Variable interest
rate on note of $995,531 was 7.25%.

     The following  table presents the Company  expected cash  requirements  for
contractual obligations outstanding at December 31, 2005.

                                         Payments Due By Period

<TABLE>
<CAPTION>
<S>                         <C>             <C>        <C>            <C>        <C>


Contractual Obligations     Less Than       1-3         4-5          After 5
                             1 Year        Years       Years          Years         Total

Line-Of-Credit              $4,033,242                                            $4,033,242

Notes Payable               $1,645,531   $1,715,000   $1,000,000                  $4,360,531

Operating Leases            $  435,161   $  842,177   $  811,539     $337,476     $2,426,353

Total Contractual
  Cash Obligations          $6,113,934   $2,557,177   $1,811,539     $337,476    $10,820,126

</TABLE>

                                       42

<PAGE>

     CRITICAL ACCOUNTING POLICIES.

     The  discussion  and  analysis of the  Company's  financial  condition  and
results of operations are based upon its financial  statements,  which have been
prepared in accordance  with  generally  accepted  accounting  principles in the
United States. The preparation of financial  statements  requires  management to
make estimates and disclosures on the date of the financial statements. On an on
going basis,  management evaluates its estimates.  Management uses authoritative
pronouncements,  historical  experience  and other  assumptions as the basis for
making judgments.  Actual results could differ from those estimates.  Management
believes  that  the  following  critical  accounting  policies  affect  its more
significant  judgments  and  estimates  in  the  preparation  of  the  Company's
financial statements.

     ACCOUNTS RECEIVABLE/ALLOWANCE FOR DOUBTFUL ACCOUNTS.

     The Company's  accounts  receivable are due from businesses  engaged in the
distribution  of grocery,  health and beauty  products as well as from consumers
who purchase  health and beauty  products and premium  handmade  cigars from the
Company's  Web sites.  Credit is extended  based on  evaluation  of a customers'
financial  condition  and,  generally,  collateral  may  be  required.  Accounts
receivable  are due  within  10 - 60 days and are  stated  at  amounts  due from
customers net of an allowance for doubtful accounts. Accounts outstanding longer
than the contractual  payment terms are considered past due.  Estimates are used
in  determining  the  allowance  for doubtful  accounts  based on the  Company's
historical  collections   experience,   current  trends,  credit  policy  and  a
percentage of its accounts  receivable by aging category.  In determining  these
percentages,  the Company looks at historical write-offs of its receivables. The
Company also looks at the credit quality of its customer base as well as changes
in its credit  policies.  The  Company  continuously  monitors  collections  and
payments from its  customers.  The Company writes off accounts  receivable  when
they  become   uncollectible,   and  payments   subsequently  received  on  such
receivables are credited to the allowance for doubtful accounts.

     VALUATION OF DEFERRED TAX ASSETS.

     Deferred tax assets and liabilities represent temporary differences between
the basis of assets and  liabilities  for financial  reporting  purposes and tax
purposes.  Deferred tax assets are primarily  comprised of reserves,  which have
been deducted for financial statement  purposes,  but have not been deducted for
income tax purposes as well as net operating  loss carry  forwards.  The Company
annually reviews the deferred tax asset accounts to determine if is appears more
likely than not that the deferred tax assets will be fully realized. At December
31, 2005, the Company has established a full valuation allowance.

     VALUATION OF LONG-LIVED ASSETS.

     The  Company  reviews  its  long-lived  assets  periodically  to  determine
potential impairment by comparing the carrying value of the assets with expected
net cash flows  expected  to be  provided  by the  operating  activities  of the
business or related  products.  Should the sum of the  expected  future net cash
flows be less than the carrying value,  the Company would  determine  whether an
impairment  loss should be recognized.  An impairment  loss would be measured by
comparing  the amount by which the carrying  value exceeds the fair value of the
Asset.  Long-lived  assets and  intangible  assets are reviewed  for  impairment
whenever events or changes in circumstances  indicate the carrying value may not
be  recoverable.  Impairment is measured by comparing the carrying  value of the
long-lived  assets to the estimated  undiscounted  future cash flows expected to
result  from use of the assets  and their  ultimate  disposition.  To the extent
impairment has occurred,  the carrying amount of the asset would be written down
to an amount to reflect the fair value of the asset.

                                       43

<PAGE>

     RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD ("FASB")

     In  December  2004,  the FASB  issued  SFAS  No.  123(R),  "Accounting  for
Stock-Based  Compensation"  ("SFAS No.  123(R)").  SFAS No.  123(R)  establishes
standards for the accounting for  transactions in which an entity  exchanges its
equity  instruments for goods or services.  This statement  focuses primarily on
accounting  for  transactions  in which an entity obtains  employee  services in
share-based payment  transactions.  SFAS No. 123(R) requires that the fair value
of such  equity  instruments  be  recognized  as an  expense  in the  historical
financial  statements as services are performed.  Prior to SFAS No. 123(R), only
certain pro forma  disclosures  of fair value were  required.  The provisions of
this statement are effective as of the beginning of the first interim  reporting
period for fiscal years beginning  after June 15, 2005. The Company  adoption of
SFAS  No.123(R)  will have an impact on the  Company's  financial  position  and
results of  operations  similar to the pro forma  disclosure  in NOte 17B to the
Financial Statements.

     In  November  2004,  the FASB  issued  Statement  of  Financial  Accounting
Standards  (SFAS) No. 151 "Inventory  Costs." This statement  amends  Accounting
Research  Bulletin No. 43,  Chapter 4,  "Inventory  Pricing" and removes the "so
abnormal"  criterion  that  under  certain  circumstances  could have led to the
capitalization of these items. SFAS No. 151 requires that idle facility expense,
excess  spoilage,   double  freight  and  re-handling  costs  be  recognized  as
current-period  charges  regardless  of whether  they meet the  criterion of "so
abnormal." SFAS 151 also requires that allocation of fixed  production  overhead
expenses  to the costs of  conversion  be based on the  normal  capacity  of the
production  facilities.  The provisions of this statement shall be effective for
all fiscal years  beginning  after June 15, 2005.  The Company  adoption of SFAS
No.151 has not had a material  impact on the  Company's  financial  position  or
results of operations.

     On  December  16,  2004,  the  FASB  issued  SFAS  No.  153,  "Exchange  of
Non-monetary  Assets",  an  amendment of  Accounting  Principles  Board  ("APB")
Opinion No. 29,  which  differed  from the  International  Accounting  Standards
Board's  ("IASB")  method of  accounting  for  exchanges  of similar  productive
assets.  Statement No. 153 replaces the exception from fair value measurement in
APB No. 29, with a general  exception from fair value  measurement for exchanges
of non-monetary assets that do not have commercial  substance.  The statement is
to be applied  prospectively  and is effective for non-monetary  asset exchanges
occurring in fiscal periods  beginning after June 15, 2005. The Company adoption
of SFAS No.153 has not had a material impact on the Company's financial position
or result of operations.

     In May 2005,  the FASB issued  Statement No. 154,  "Accounting  Changes and
Error Corrections a replacement of APB Opinion No. 20 and FASB Statement No. 3."
("FAS 154"). This Statement requires  retrospective  application to prior period
financial  statements of a voluntary change in accounting principle unless it is
impracticable  and is effective for fiscal years  beginning  after  December 15,
2005. Previously, most voluntary changes in accounting principle were recognized
by including in net income of the period of the change the cummulative effect of
changing  to the new  accounting  principle.  The  Company  will comply with the
provisions of FAS 154 although the impact of such  adoption is not  determinable
at this time.

     SEASONALITY

     Sales by PHS  Group  and  Proset  usually  peak at the end of the  calendar
quarter,  when the Company's  suppliers offer promotions which lower prices and,
in turn,  the  Company is able to lower its prices and  increase  sales  volume.
Suppliers tend to promote at quarter end and as a result reduced  products costs
may increase sales. In particular,  first and second quarters are usually better
operating  quarters.  Sales of beauty care products and fragrances increase over
traditional gift giving holidays such as Christmas,  Mother's Day, Father's Day,
and Valentine's Day.

     Cigar product sales also increase  during holiday periods and summer months
as well as around special sporting events.

     INFLATION

     The Company believes that inflation, under certain circumstances,  could be
beneficial  to the  Company's  major  business,  PHS  Group.  When  inflationary
pressures  drive product costs up, the Company's  customers  sometimes  purchase
greater  quantities of product to expand their  inventories  to protect  against
further pricing  increases.  This enables the Company to sell greater quantities
of products that are sensitive to inflationary pressures.

     However,  inflationary  pressures frequently increase interest rates. Since
the Company is  dependent  on  financing,  any  increase in interest  rates will
increase the Company's credit costs, thereby reducing its profits.

                                       44

<PAGE>

     ITEM 8. FINANCIAL STATEMENTS

     The  following  financial  statements  of the Company are contained in this
Report on the pages indicated:

                          INDEX TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
<S>                                                                                               <C>

                                                                                                     Page


Reports of Independent Registered Public Accounting Firms                                         F-2 - F-3
Consolidated Balance Sheets as of December 31, 2005 and 2004                                      F-4 - F-5
Consolidated Statements of Operations for the Years Ended
    December 31, 2005, 2004 and 2003                                                              F-6
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Loss for the
    Years Ended December 31, 2005, 2004 and 2003                                                  F-7 - F-10
Consolidated Statements of Cash Flows for the Years Ended
    December 31, 2005, 2004 and 2003                                                              F-11 - F-12
Notes to Consolidated Financial Statements                                                        F-13 - F-38

</TABLE>

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

                                      NONE


ITEM 9A.  CONTROLS AND PROCEDURES

     As certified  herein by the  Company's  Chief  Executive  Officer and Chief
Financial  Officer,  they  have  as of the  date of this  report  evaluated  the
disclosure  controls  and  procedures  of the  Company  and  believe  same to be
effective to ensure that material information relating to the Company, including
its consolidated subsidiaries,  is made known to the Company sufficient to allow
evaluation  by  the  Company  of  accuracy  in  their   recording,   processing,
summarizing and reporting  financial and other Company information and data, and
there do not appear to be any  deficiencies  in the design or  operation of such
internal  controls  which would  adversely and  materially  affect the Company's
ability to discover, evaluate and report such information.

     The Company  has  adopted an Audit  Committee  Charter  providing  expanded
authority  of such  committee  and the  independent  nature and  identity of its
director  participants as required by the recent enactment of the Sarbanes-Oxley
Act. The Company believes that at least one director participant therein will be
qualified as an "audit committee financial expert" as defined in such Act.

     There have been no significant changes in the Registrants internal controls
or in other factors that could significantly affect these controls subsequent to
the date of the evaluation thereof, including any corrective actions with regard
to significant deficiencies and material weaknesses.

     The Company's  disclosure  controls and  procedures are designed to provide
reasonable  assurance that  information  required to be disclosed in its reports
filed under the Exchange Act,  such as this Form 10-K,  is recorded,  processed,
summarized and reported  within the time periods  specified in the SEC rules and
forms.  The Company's  disclosure  controls and  procedures are also designed to
ensure that such  information is accumulated  and  communicated to management to
allow timely decisions  regarding  required  disclosure.  The Company's internal
controls are designed to provide reasonable  assurance regarding the reliability
of financial  reporting  and the  preparation  of its  financial  statements  in
conformity with GAAP.

                                       45

<PAGE>

     The Company's management, including its principal executive officer and the
principal  financial  officer,  does not expect  that the  Company's  disclosure
controls and  procedures  and its internal  control  processes  will prevent all
error  and all  fraud.  A  control  system,  no matter  how well  conceived  and
operated,  can  provide  only  reasonable,  not  absolute,  assurance  that  the
objectives  of the  control  system  are met.  Further,  the design of a control
system  must  reflect  the fact that  there are  resource  constraints,  and the
benefits of controls must be considered relative to their costs.  Because of the
inherent  limitations  in all control  systems,  no  evaluation  of controls can
provide  absolute  assurance that all control issues and instances of fraud,  if
any, within the Company have been detected.  These inherent  limitations include
the  realities  that  judgments  in  decision-making  can be  faulty,  and  that
breakdowns can occur because of simple error or mistake. Additionally,  controls
can be circumvented by the individual acts of some persons,  by collusion of two
or more people,  or by  management  override of the  control.  The design of any
system of  controls  also is based in part upon  certain  assumptions  about the
likelihood of future events,  and there can be no assurance that any design will
succeed in achieving  its stated goals under all  potential  future  conditions.
Over time,  controls may become inadequate because of changes in conditions,  or
the degree of  compliance  with the  policies  or  procedures  may  deteriorate.
Because  of  the  inherent  limitations  in  a  cost-effective  control  system,
misstatements  due to error or fraud  may  occur  and may not be  detected.  The
Company  monitors its disclosure  controls and procedures and internal  controls
and makes  modifications  as necessary;  the Company's  intent in this regard is
that the disclosure  controls and  procedures and the internal  controls will be
maintained  as dynamic  systems that change  (including  with  improvements  and
corrections) as conditions warrant.

     PART III

     The  information  required by items  10-14 are omitted  pursuant to general
instruction  G(3) to Form 10K including  executive  compensation and auditor fee
information . The Company has included this  information in its proxy  statement
expected to be mailed to shareholders and filed with the Commission on or before
April 30, 2006. The annual  meeting is scheduled to be in June 2006.  Such Proxy
Statement is expected to be filed with the  Commission  by April 30, 2006 and is
incorporated herein by reference. The Company has established and adopted a Code
of Ethics outlining and providing  guidelines for executive and employer conduct
regarding  the  disclosure,  promotion  and  handling  of Company  business  and
business relationships and a policy for comment and complaint on compliance with
applicable  conduct  codes  ("whistleblower  policy")  and the  Company has also
established a Nominating  Committee of certain of its Directors to assist in the
election and  succession  of members of the  Company's  Board of Directors and a
Compensation Committee to assist in establishing executive compensation.  Copies
of the Company's Code of Ethics,  whistleblower policy, Nominating Committee and
Compensation  Committee  Charters may be found  disclosed in the aforesaid Proxy
Statement to be confirmed at the relevant  shareholders  meeting and included by
reference thereto on the Company's Internet home page website.

                                       46

<PAGE>

     ITEM 15. EXHIBITS, and FINANCIAL STATEMENT SCHEDULES

     (a) financial statements-see Item 8

     (b) Exhibits:

                                    EXHIBIT INDEX
<TABLE>
<CAPTION>
<S>              <C>                                                             <C>
Exhibit No.      Description                                                        Page
-----------      -----------                                                        ----
3.1              Certificate of Incorporation and amendments thereto (1)              --

3.2              By-Laws (2)                                                          --

4                Preferred Stock, Common Stock, and Options and
                 Warrants and other Instruments defining  rights of security
                 holders, including indentures (3)                                   EX-4

10               Synergy Brands Inc. 1994 Services and Consulting  Compensation
                 Plan, as amended (4)

14               Code of Ethics                                                     EX-14

21               Listing of Company Subsidiaries                                    EX-21

23.1             Consent of Holtz Rubenstein Reminick LLP                           EX-23.1

23.2             Consent of Grant Thornton LLP                                      EX-23.2

32.1             Certification  Pursuant to 18 U.S.C.  Section  1350. As Adopted
                 Pursuant  to  Section  906 of the  Sarbanes-Oxley  Act of 2002,
                 signed by the Chief Executive Officer.                             EX-32.1

32.2             Certification  Pursuant to 18 U.S.C.  Section  1350. As Adopted
                 Pursuant  to  Section  906 of the  Sarbanes-Oxley  Act of 2002,
                 signed by the Chief Financial Officer.                             EX-32.2

99               Listing of Company Intellectual Properties                         EX-99

</TABLE>

(1)      A copy of the  Amendment  to the  Certificate  of  Incorporation  dated
         September 14, 2004 and  Certificates  of Correction  (3) filed February
         25, 2005 are included as exhibits by  incorporation by reference to the
         10K/A report filed for the Company for the year ended 12/31/04.  A copy
         of the Restated  Certificate of  Incorporation  filed November 10, 2003
         and the  clarification  amendment to the  Certificate of  Incorporation
         filed March 2004 are  incorporated  by reference to the 10KSB filed for
         the Company for the year ended 12/31/03.  The amendments to Certificate
         of  Incorporation  filed 7/29/96 and filed 6/24/98 and  Certificate  of
         Designation  regarding Preferred Stock filed 6/24/98,  are incorporated
         by  reference  to the  exhibits  filed to the Form 10K/A of the Company
         filed 9/3/98.  The amendment to the Certificate of Incorporation  filed
         July 2000 is  incorporated  by reference  to the exhibits  filed to the
         form  10KSB/A  of  the  Company  filed  8/9/01.  The  amendment  to the
         Certificate of  Incorporation  filed April 1, 2001 is  incorporated  by
         reference to the exhibits filed to the Form 10-KSB of the Company filed
         March 2002.  The amendment to the  Certificate of  Incorporation  filed
         February  11,  2003  and  the  Certificate  of  Designation   regarding
         Preferred  Stock filed March 13, 2003 are  incorporated by reference to
         the 10KSB  filed  for the  Company  for the year  ended  12/31/02.  The
         original  Certificate of Incorporation and other amendments thereto are
         incorporated  by reference to the  exhibits  filed to the  registration
         statement of the Company on Form S-1 (File No.  33-83226)  filed by the
         Company with the Commission on August 24, 1994.

(2)      The  amendment  to the  By-Laws  approved  by the  Company's  Board  of
         Directors  on  March 7,  1997  are  incorporated  by  reference  to the
         exhibits  filed to the Form  10K/A of the  Company  filed  9/3/98.  The
         original By-Laws are incorporated by reference to the exhibits filed to
         the  registration  statement  of the  Company  on Form  S-1  (File  No.
         33-83226) filed by the Company with the Commission on August 24, 1994

                                       47

<PAGE>

(3)      Description  of rights of Preferred  Stock are included in the Restated
         Certificate of Incorporation  filed November 10, 2003 and Clarification
         Amendment to the Certificate of Incorporation filed March , 2004 and in
         the  Certificate  of  Designation  filed  3/13/03 all  incorporated  by
         reference  herein  (See  footnote  (1)),  and  in  the  Certificate  of
         Designation  regarding  Preferred  Stock,  as amended,  and included as
         exhibit to the Form 10K/A of the  Company  filed  9/3/98 as well as the
         amendment to the  certificate of  incorporation  filed in July 2000 and
         included as an exhibit to the Form 10KSB/A of the Company  filed 8/9/01
         which  latter   documents  are   incorporated   by  reference   herein.
         Description of the Company's  Common Stock is incorporated by reference
         to the description contained in the Company's Registration Statement on
         Form 8-A (File No.  0-19409)  filed  with the  Commission  pursuant  to
         Section  12(b) of the  Exchange  Act on July 16,  1991,  including  any
         amendments   or  reports   filed  for  the  purpose  of  updating  such
         description.  A  facsimile  of  outstanding  warrants  is  included  by
         reference to the similar  exhibit in the Company's  Form 10-K/A for the
         fiscal year ended  December 31, 2004.  Information  and  particulars on
         long term debt  instruments  outstanding  shall be  supplied  if and as
         requested by the  Commission as allowed by applicable  regulation as on
         none of such debt  instruments  on an  individual  basis does the total
         amount of securities  authorized thereunder exceed 10% of the Company's
         total assets.  Such  instruments  include  $2,925,000 debt remaining as
         currently  owed to  Laurus  Master  Fund,  Ltd.  arising  from  Secured
         Convertible Term Notes dated April 2, 2004,  January 25, 2005, June 21,
         2005 and March 13,  2006 and  $490,000 in total long term debt to three
         non-affiliated parties by Secured Promissory Notes dated March 1, 2004.

(4)      Incorporated by reference to the Registration  Statement of the Company
         on Form S-8 (File No. 333-92243) filed with the Commission on 12/17/99,
         as amended

(c) Financial Statement Schedules
             None

                                       48

<PAGE>

                                   SIGNATURES


     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                               Synergy Brands Inc.



                               by /s/ Mair Faibish
                               --------------------------------
                                      Mair Faibish
                                      Chairman of the Board

Dated: April 12, 2006

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.

                               by /s/ Mair Faibish
                               ----------------------------------
                                      Mair Faibish
                                      Chairman of the Board

Dated: April 12, 2006

                               by /s/ Mitchell Gerstein
                               ----------------------------------
                                      Mitchell Gerstein
                                      Chief Financial Officer
Dated: April 12, 2006
                               by /s/ Joel Sebastian
                               -----------------------------------
                                      Joel Sebastian, Director

Dated: April 12, 2006

                               by /s/ Lloyd Miller
                               -----------------------------------
                                      Lloyd Miller, Director
Dated: April 12, 2006


                               by /s/ William Rancic
                               -----------------------------------
                                      William Rancic, Director


Dated: April 12, 2006

                               by /s/ Frank A. Bellis Jr.
                               -----------------------------------
                                      Frank A. Bellis, Director

Dated: April 12, 2006

                               by /s/ Randall J. Perry
                               -----------------------------------
                                      Randall J. Perry, Director

                                       49

<PAGE>


                                 Certification

I, Mair Faibish, certify that:

1. I have reviewed this annual report on Form 10-K of Synergy Brands, Inc.;

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

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

4.  The  registrant's  other  certifying  officer  and  I  are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

(a) designed such  disclosure  controls and procedures or caused such disclosure
controls and  procedures  to be designed  under our  supervision  to ensure that
material  information  relating to the  registrant,  including its  consolidated
subsidiaries, is made known to us by others within those entities,  particularly
during the period in which this annual report is being prepared;

(b) evaluated the  effectiveness  of the  registrant's  disclosure  controls and
procedures and presented in this report our conclusions  about the effectiveness
of the disclosure controls and procedures as of the end of the period covered by
this report based on such evaluation; and

(c)  disclosed in this annual  report any changes in the  registrant's  internal
control over  financial  reporting  that occured  during the  registrant's  most
recent fiscal quarter (the  registrant's  fourth fiscal quarer in the case of an
annual  report)  that  has  materially  affected,  or is  reasonably  likely  to
materially affect, the registrant's  internal control over financial  reporting;
and;

5. The registrant's other certifying officer and I have disclosed,  based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's board of directors

(a) all significant  deficiencies and material  weaknesses we find in the design
or operation of internal controls over financial  reporting which are reasonably
likely  to  adversely  affect  the  registrant's  ability  to  record,  process,
summarize and report financial information; and

(b) any fraud,  whether  or not  material,  that  involves  management  or other
employees who have a significant role in the registrant's internal controls over
financial reporting; and



Date: April 12, 2006

/s/ Mair Faibish
----------------
Mair Faibish
Chief Executive Officer

                                       50

<PAGE>


                                  Certification

I, Mitchell Gerstein, certify that:

1. I have reviewed this annual report on Form 10-K of Synergy Brands, Inc.;

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

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

4.  The  registrant's  other  certifying  officer  and  I  are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-15 (e) and 15d-15(e)) for the registrant and we have:

(a) designed such  disclosure  controls and procedures or caused such disclosure
controls and  procedures  to be designed  under our  supervision  to ensure that
material  information  relating to the  registrant,  including its  consolidated
subsidiaries, is made known to us by others within those entities,  particularly
during the period in which this annual report is being prepared;

(b) evaluated the  effectiveness  of the  registrant's  disclosure  controls and
procedures and presented in this report our conclusions  about the effectiveness
of the disclosure controls and procedures as of the end of the period covered by
this report based on such evaluation; and

(c)  disclosed in this annual  report any changes in the  registrant's  internal
control over  financial  reporting  that occured  during the  registrant's  most
recent fiscal quarter (the  registrant's  fourth fiscal quarer in the case of an
annual  report)  that  has  materially  affected,  or is  reasonably  likely  to
materially affect, the registrant's  internal control over financial  reporting;
and;

5. The registrant's other certifying officer and I have disclosed,  based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's board of directors

(a) all significant  deficiencies and material  weaknesses we find in the design
or operation of internal controls over financial  reporting which are reasonably
likely  to  adversely  affect  the  registrant's  ability  to  record,  process,
summarize and report financial information ; and

(b) any fraud,  whether  or not  material,  that  involves  management  or other
employees who have a significant role in the registrant's internal controls over
financial reporting; and


Date: April 12, 2006

/s/ Mitchell Gerstein
---------------------
Mitchell Gerstein
Chief Financial Officer

                                       51

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Synergy Brands, Inc.

We have audited the accompanying  consolidated balance sheets of Synergy Brands,
Inc., as of December 31, 2005 and 2004 and the related  consolidated  statements
of operations,  stockholders'  equity and comprehensive  loss and cash flows for
the two years  then  ended.  These  consolidated  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted  our audits in  accordance  with  standards  of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audit  to  obtain  reasonable  assurance  about  whether  the
consolidated  financial statements are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the  consolidated  financial  statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall consolidated  financial statement
presentation.  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 Synergy Brands, Inc.
as of December 31, 2005 and 2004 and the results of its  operations and its cash
flows for the two years  then ended in  conformity  with  accounting  principles
generally accepted in the United States of America.

HOLTZ RUBENSTEIN REMINICK LLP

Melville, New York
March 10, 2006  (except for Note T, as to which the date is March 14, 2006)

                                      F-2

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors
Synergy Brands, Inc.

We have audited the accompanying consolidated statements of operations,  changes
in  stockholders'  equity  and  comprehensive  loss,  and cash  flows of Synergy
Brands,  Inc. and  Subsidiaries  (the "Company") for the year ended December 31,
2003.  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 audit.

We  conducted  our audit in  accordance  with  standards  of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements  are free of material  misstatement.  The Company is not  required to
have,  nor were we  engaged to perform  an audit of its  internal  control  over
financial reporting.  Our audit included  consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   assessing  the  accounting  principles  used  and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated  results of operations and consolidated
cash flows of Synergy Brands,  Inc. and Subsidiaries for the year ended December
31, 2003, in conformity with  accounting  principles  generally  accepted in the
United States of America.


/S/GRANT THORNTON LLP

March 5, 2004
New York, New York

                                      F-3

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                           CONSOLIDATED BALANCE SHEETS

                           December 31, 2005 and 2004


                                     ASSETS


<TABLE>
<CAPTION>
<S>                                                                             <C>                 <C>

CURRENT ASSETS                                                                       2005               2004
                                                                                -------------       ------------
    Cash and cash equivalents                                                     $ 263,554          $ 945,806
    Accounts receivable trade, less allowance for doubtful accounts of
    $ 127,481 and $127,481                                                         7,494,324          7,476,444
    Other receivables                                                              1,848,369          1,015,287
    Notes receivable - current                                                       287,967            314,285
    Inventory                                                                      1,909,315          1,826,274
    Prepaid assets and other current assets                                          398,426            423,295
                                                                                -------------       ------------

              Total Current Assets                                                12,201,955         12,001,391

PROPERTY AND EQUIPMENT, NET                                                          356,014            366,510

OTHER ASSETS                                                                         802,887            632,466

NOTES RECEIVABLE                                                                   2,691,439          1,889,815

INTANGIBLE ASSETS, net of accumulated amortization of
$2,518,946 and $2,003,048                                                            786,046          1,301,944

GOODWILL                                                                             514,297            514,297
                                                                                -------------       ------------
TOTAL ASSETS                                                                    $ 17,352,638       $ 16,706,423
                                                                                =============       ============

</TABLE>

        The accompanying notes are an integral part of these statements.

                                      F-4


<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                     CONSOLIDATED BALANCE SHEETS (Continued)

                           December 31, 2005 and 2004

                      LIABILITIES AND STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
<S>                                                                                             <C>           <C>

CURRENT LIABILITIES                                                                                    2005         2004
                                                                                                -----------   -----------
     Lines of credit                                                                            $ 4,033,242   $ 4,976,610
    Notes payable - current                                                                       1,645,531       384,021
    Accounts payable                                                                              1,846,736     3,482,456
    Related party note payable                                                                       61,882        56,972
    Accrued expenses                                                                                 36,855        37,066
     Deferred income                                                                                127,000             -
                                                                                                -----------   -----------
                    Total Current Liabilities                                                     7,751,246     8,937,125

NOTES PAYABLE                                                                                     2,668,691     1,196,241
                                                                                                -----------   -----------
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
    Class A preferred stock - $.001 par value; 100,000 shares authorized
        and outstanding; liquidation preference of $10.50 per share                                     100           100
    Class B preferred stock - $.001 par value; 150,000 shares authorized, none issued                     -             -
     Class B Series A Preferred stock-$.001 par value; 500,000 shares authorized;
        330,000 shares issued and outstanding; liquidation preference of
        $10.00 per share                                                                                330           330
    Class B Series B Preferred stock-$.001 par value, 250,000 shares authorized;
        80,000 and 0 shares issued and outstanding; liquidation preference of
        $10.00 per share                                                                                 80             -
    Common stock - $.001 par value; 5,000,000 shares authorized;
         4,457,530 and 3,263,992 shares issued                                                        4,458         3,264
    Additional paid-in capital                                                                   45,918,817    43,134,165
    Deficit                                                                                     (38,910,484)  (36,349,706)
     Unearned Compensation                                                                          (67,260)     (201,756)
    Accumulated other comprehensive loss                                                             (8,340)       (8,340)
                                                                                                -----------   -----------
                                                                                                  6,937,701     6,578,057

    Less treasury stock, at cost, 1,000 shares                                                       (5,000)       (5,000)
                                                                                                -----------   -----------
    Total Stockholders' Equity                                                                    6,932,701     6,573,057
                                                                                                -----------   -----------
    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                $  17,352,638  $ 16,706,423
                                                                                                ===========   ===========

</TABLE>

        The accompanying notes are an integral part of these statements.

                                      F-5

<PAGE>

                                           Synergy Brands, Inc. and Subsidiaries

                                           CONSOLIDATED STATEMENTS OF OPERATIONS

                                                 Years ended December 31,

<TABLE>
<CAPTION>
<S>                                                            <C>                 <C>                    <C>

                                                                   2005                  2004                  2003
                                                              -----------         -------------            -----------
Net sales                                                     $64,137,090          $ 56,705,044            $40,540,577
                                                              -----------         -------------            -----------
Cost of sales
    Cost of product                                            59,270,788            51,907,840             36,837,796
    Shipping and handling costs                                 1,038,923               900,205                893,582
                                                              -----------         -------------            -----------
                                                               60,309,711            52,808,045             37,731,378
                                                              -----------         -------------            -----------
Gross profit                                                    3,827,379             3,896,999              2,809,199
Operating expenses
    Advertising and promotional                                    63,155               150,181                 91,634
    General and administrative                                  3,992,405             3,605,433              2,984,663
    Depreciation and amortization                                 497,965               659,490                692,698
    Asset impairment charge                                       293,586                     -                      -
                                                              -----------         -------------            -----------
                                                                4,847,111             4,415,104              3,768,995
                                                              -----------         -------------            -----------
Operating loss                                                 (1,019,732)             (518,105)              (959,796)
Other income (expense)
    Interest income                                               102,644                 4,610                 13,913
    Other income (expense)                                        (21,504)              (46,983)               298,932
    Equity in earnings of investee                                 56,311               172,224                 92,424
    Interest and financing expenses                            (1,593,639)           (1,553,521)              (690,038)
                                                              -----------         -------------            -----------
                                                               (1,456,188)           (1,423,670)              (284,769)
                                                              -----------         -------------            -----------
Loss before income taxes                                       (2,475,920)           (1,941,775)            (1,244,565)

Income tax expense                                                 84,858                34,604                 32,658
                                                              -----------         -------------            -----------
Net loss                                                       (2,560,778)           (1,976,379)            (1,277,223)

Dividend-Preferred Stock                                         (317,333)             (156,375)               (78,000)
                                                              -----------         -------------            -----------
Net loss attributable to common stockholders                 $ (2,878,111)         $ (2,132,754)         $  (1,355,223)
                                                              ===========         =============            ===========
Basic and diluted net loss per common share:                      $ (0.75)              $(0.97)                $(0.82)
                                                              ===========         =============            ===========
Weighted-average shares used in the computation of
loss per common share:

       Basic and diluted                                        3,820,061              2,209,371              1,652,019
                                                              ===========         =============            ===========

</TABLE>

         The accompanying notes are an integral part of these statement


                                       F-6

<PAGE>

                     Synergy Brands, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
                  Years ended December 31, 2005, 2004 and 2003

<TABLE>
<CAPTION>
<S>                                    <C>                  <C>              <C>                 <C>                 <C>


                                            Class A       Class B-Series A   Class B- Series B                        Additional
                                        Preferred Stock    Preferred Stock     Preferred Stock    Common Stock        Paid-in
                                      Shares   Amount    Shares    Amount     Shares    Amount  Shares    Amount       Capital

Balance at January 1, 2003           100,000  $100         -        -           -         -     1,368,121  $1,368   $35,210,686

Common sock and options issued
 In connection with compensation
    plan                                                                                           93,438      93       212,133
Common stock issued                                                                                30,000      30        47,170
Net proceeds from issuance of
   common stock in
Connection with private placement                       160,000    160                            160,000     160     1,509,680
Issuance of common stock in
     satisfaction of note payable                                                                  15,300      15        39,985
 Issuance of restricted stock in
      Connection with notes payable                                                                42,500      43        97,957
Issuance of common stock for service                                                              185,000     185       493,315
Issuance of common stock in
connection with CAW acquisition                                                                    25,000      25        99,975
Purchase of Treasury stock
Sale of treasury stock
Preferred stock dividend                                                                                                115,103
Consulting expense                                                                                                      (78,000)
Change in unrealized gain on
      Marketable securities
Cumulative translation adjustments
Net loss
Comprehensive loss
                                     --------  ----     -------    -----      -----     ----   ----------   ------  -----------
Balance at December 31, 2003         100,000   $100     160,000    $160         -         -     1,919,359   $1,919  $37,748,004
                                     --------  ----     -------    -----      -----     ----   ----------   ------  -----------

Amortization of unearned compensation
Common stock returned and retired                                                                 (61,500)     (61)          61
Common stock issued
Net proceeds from issuance of                                                                     100,000      100      470,685
Issuance of common stock in
     common stock in
Connection with private placement                       170,000     170                           255,000      255    1,454,575
Issuance of common stock for note
      conversion                                                                                  688,338      688    2,733,957
Exercise of stock options                                                                         110,000      110      102,140
Issuance of common stock for services                                                              58,195       58      190,563
Issuance of common stock in
       connection with CAW acquisitions                                                           175,000      175      524,825
Issuance of common stock along                                                                     19,600       20       74,980
       with debt
Option Expense                                                                                                           30,750
Preferred stock dividend                                                                                               (156,375)
Consulting expense                                                                                                      (40,000)
Change in unrealized gain on
       Marketable securities
Cumulative translation adjustments

Net loss
Comprehensive loss
                                     --------  ----     -------    -----      -----     ----   ----------   ------  -----------
Balance at December 31, 2004         100,000   $100     330,000    $330         -         -     3,263,992   $3,264  $43,134,165
                                     --------  ----     -------    -----      -----     ----   ----------   ------  -----------

</TABLE>

                                       F-7

<PAGE>

                     Synergy Brands, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
                  Years ended December 31, 2005, 2004 and 2003
                                   Continued

<TABLE>
<CAPTION>
<S>                                        <C>               <C>           <C>            <C>           <C>

                                                            Accumulated
                                                                Other                                   Stockholders
                                                            Comprehensive    Treasury      Unearned        Notes
                                          Deficit           Income (loss)     Stock       Compensation   Receivable

Balance at January 1, 2003              $(33,096,104)         $(74)         $(28,439)            -        $(5,000)

Common sock and options issued
    In connection with compensation
    plan                                                                                                    5,000
Common stock issued
Net proceeds from issuance of
   common stock in
Connection with private placement
Issuance of common stock in
     satisfaction of note payable
Issuance of restricted stock in
      Connection with notes payable
Issuance of common stock for service                                                        (493,500)
Issuance of common stock in
connection with CAW acquisition
Purchase of Treasury stock                                                   (122,779)
Sale of treasury stock                                                        146,218
Preferred stock dividend
Consulting expense
Change in unrealized gain on                                                                  67,248
      Marketable securities                                   4,003
Cumulative translation adjustments                           (5,701)
Net loss                                  (1,277,223)
Comprehensive loss
                                       --------------      ---------        ----------     ----------      ------
Balance at December 31, 2003            $(34,373,327)       $(1,772)          $(5,000)      $(426,252)          -
                                       --------------      ---------        ----------     ----------      ------


Amortization of unearned compensation                                                         224,496

Common stock returned and retired
Common stock issued
Net proceeds from issuance of
Issuance of common stock in
     common stock in
Connection with private placement
Issuance of common stock for note
      conversion
Exercise of stock options
Issuance of common stock for services
Issuance of common stock in
       connection with CAW acquisitions
Issuance of common stock along
       with debt
Option Expense
Preferred stock dividend
Consulting expense
Change in unrealized gain on
       Marketable securities                                 (4,105)
Cumulative translation adjustments                           (2,463)

Net loss                                 (1,976,379)
Comprehensive loss
                                       --------------      ---------        ----------     ----------      ------
Balance at December 31, 2004           $(36,349,706)        $(8,340)         $(5,000)      $(201,756)         -

</TABLE>

                                      F-7

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)

                  Years ended December 31, 2005, 2004 and 2003

<TABLE>
<CAPTION>
<S>                                       <C>                   <C>                  <C>                <C>            <C>

                                               Class A          Class B-Series A     Class B- Series B                 Additional
                                          Preferred Stock        Preferred Stock      Preferred Stock   Common Stock     Paid-in
                                         Shares     Amount      Shares   Amount     Shares     Amount  Shares  Amount    Capital

Amortization of unearned compensation
Common stock issued                                                                                    220,000   220       330,705
Net proceeds from issuance of
     common stock in connection
     with private placement                                                          80,000     80     202,500   203       798,608
Issuance of common stock for
     note conversion                                                                                   672,074   673      1,750,746
Issuance of common stock for
     services                                                                                           98,964    98        203,926
Preferred stock dividend                                                                                                   (317,333)
Issuance of stock warrants                                                                                                   18,000

Net loss
                                       ---------     -----   --------   -----      --------   ----   --------  ------   -----------
Balance at December 31, 2005           100,000       $100     330,000    $330        80,000    $80   4,457,530 $4,458    45,918,817
                                       ---------     -----   --------   -----      --------   ----   --------  ------   -----------

</TABLE>


                                      F-8

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)

                  Years ended December 31, 2005, 2004 and 2003
                                   continued

<TABLE>
<CAPTION>
<S>                                         <C>            <C>                 <C>          <C>            <C>

                                                           Accumulated
                                                              Other                                        Stockholders
                                                          Comprehensive        Treasury      Unearned         Notes
                                           Deficit        Income (loss)         Stock       Compensation    Receivable

Amortization of unearned compensation                                                          134,496
Common stock issued
Net proceeds from issuance of
     common stock in connection
     with private placement
Issuance of common stock for
     note conversion
Issuance of common stock for
     services
Preferred stock dividend
Issuance of stock warrants

Net loss                                (2,560,778)
                                      -------------        ---------        ----------      -----------      ----------
Balance at December 31, 2005          ($38,910,484)         $(8,340)         $ (5,000)       $ (67,260)          -
                                      -------------        ---------        ----------      -----------      ----------

</TABLE>

                                      F-8

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)

                  Years ended December 31, 2005, 2004 and 2003



<TABLE>
<CAPTION>
<S>                                                        <C>               <C>


                                                             Total
                                                          stockholder's     Comprehensive
                                                             equity              loss
                                                          --------------    -------------
Balance at January 1, 2003                                $ 2,082,537

Common stock and options issued
      in connection with compensation  plan                   217,226
Common stock issued                                            47,200
Net proceeds from issuance of common stock in
      Connection with private placement                     1,510,000
Issuance of common stock in satisfaction of note payable       40,000
Issuance of restricted stock in
      Connection with notes payable                            98,000
Issuance of common stock for services
Issuance of common stock in connection with CAW
acquisition                                                   100,000
Purchase of treasury stock                                   (122,779)
Sale of treasury stock                                        261,321
Preferred Stock Dividend                                      (78,000)
Consulting expense                                             67,248
Change in unrealized gain on
      Marketable securities                                     4,003           4,003
Cumulative translation adjustments                             (5,701)         (5,701)
Net loss                                                   (1,277,223)     (1,277,223)
                                                          --------------    -------------

Comprehensive loss                                                        ($1,278,921)
                                                                            =============
Balance at December 31, 2003                               $2,943,832
                                                          ==============


Amortization of unearned compensation                         224,496
Common stock returned and retired                                  -
Common stock issued                                          470,785
Net proceeds from issuance of
      common stock in
      connection with private placement                    1,455,000
Issuance of common stock for note                          2,734,645
      conversions
Exercise of stock options                                    102,250
Issuance of common stock for services                        190,621
Issuance of common stock in
   connection with CAW acquisitions                          525,000
Issuance of common stock along
       with debt                                              75,000
Option Expense                                                30,750
Preferred stock dividend                                    (156,375)
Consulting expense                                           (40,000)
Change in unrealized gain on
      Marketable securities                                   (4,105)     $    (4,105)
Cumulative translation adjustments                            (2,463)          (2,463)
Net loss                                                  (1,976,379)      (1,976,379)
                                                          --------------    -------------
Comprehensive loss                                                        ($1,982,947)
                                                                            =============
Balance at December 31, 2004                              $6,573,057
                                                          ==============

</TABLE>

                                      F-9

<PAGE>


                      Synergy Brands, Inc. and Subsidiaries

     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)

                  Years ended December 31, 2005, 2004 and 2003

                                                            Comprehensive
                                                                loss
                                                            -------------

Amortization of unearned compensation            134,496
Common stock issued                              330,925
Net proceeds from issuance of
      common stock in
      connection with private placement          798,891
Issuance of common stock for note
      conversions                              1,751,419
Issuance of common stock for services            204,024
Preferred stock dividend                        (317,333)
Issuance of stock  warrants                       18,000

Net loss                                      (2,560,778)   (2,560,778)
                                              -----------  ------------
Comprehensive loss                                         $(2,560,778)
                                                           ============
Balance at December 31, 2005                 $6,932,701
                                             ==========

        The accompanying notes are an integral part of these statements.

                                      F-10

<PAGE>

                                           Synergy Brands, Inc. and Subsidiaries

                                           CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                 Years ended December 31,

<TABLE>
<CAPTION>
<S>                                                                          <C>                   <C>               <C>


                                                                                  2005              2004                  2003
                                                                             ------------         ------------      -------------

Cash flows from operating activities
    Net loss                                                                 $ (2,560,778)        $ (1,976,379)      $ (1,277,223)
    Adjustments to reconcile net loss to net cash
       used in operating activities
          Loss on sale of accounts receivable                                           -               79,134                  -
         Depreciation and amortization                                            497,965              659,490            625,450
         Asset impairment charge                                                  293,586                    -                  -
         (Recovery of)/Provision for doubtful accounts                                  -                    -            (35,090)
         Amortization of financing cost                                            63,283               90,746             82,142
         Loss (gain) on sale of marketable securities                                   -               15,793            (10,828)
         Equity in earnings of investee                                           (56,311)            (172,224)           (92,424)
         Gain on settlement of liabilities due to vendors                               -                    -           (282,750)
         Non-cash compensation                                                          -               30,750             67,248
         Operating expenses paid with common stock and warrants
                                                                                  104,025              154,620            100,725
         Changes in operating assets and liabilities
             Net (increase) decrease in
                Accounts receivable and other receivables                        (850,962)          (6,466,339)        (2,095,518)
                Inventory                                                         (83,041)             337,842         (1,089,208)
                Prepaid expenses, related party note receivable and
                other assets                                                      171,759              (66,011)          (122,354)
             Net increase (decrease) in
                Accounts payable, related party note payable,
                accrued expenses and other current liabilities                 (1,631,021)             329,523          1,231,455
                                                                             ------------         ------------      -------------
                      Net cash used in operating activities                    (4,051,495)          (6,983,055)        (2,898,375)
                                                                             ============         ============      =============
Cash flows from investing activities
    Payment of security deposit                                                   (17,172)             (35,848)                 -
    Purchase of business, net of cash acquired                                          -                    -           (414,000)
    Purchase of marketable securities                                                   -             (168,377)          (488,868)
    Proceeds from sale of marketable securities                                         -              194,515            460,060
    Purchase of property and equipment                                            (72,329)            (112,058)           (28,638)
    Payment of collateral security deposit                                              -                    -           (500,000)
    Refund of collateral security deposit                                               -              500,000                  -
    Payments received on notes receivable                                         284,894              433,033              2,267
    Issuance of notes receivable                                               (1,015,200)                   -           (329,000)
     Investee dividend received                                                    28,800                     -                  -
                                                                             ------------         ------------      -------------
               Net cash (used in) provided by investing activities               (791,007)             811,265         (1,298,179)
                                                                             ------------         ------------      -------------

</TABLE>


                                      F-11

<PAGE>


                      Synergy Brands, Inc. and Subsidiaries

                CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

                            Years ended December 31,

<TABLE>
<CAPTION>
<S>                                                                        <C>              <C>                  <C>

                                                                               2005                 2004               2003
                                                                           ------------      ------------        -------------
Cash flows from financing activities
    Borrowings under line of credit                                         37,488,600         35,608,070        $19,432,524
    Repayments under line of credit                                        (37,428,968)       (33,024,140)       (17,172,964)
    Increase in deferred financing cost                                        (57,070)                 -            (18,750)
    Proceeds from the issuance of notes payable                              3,659,095          1,990,000            850,000
    Repayments of notes payable                                               (240,000)          (100,000)           (20,000)
    Proceeds from issuance of common stock                                     285,926            462,732             47,200
    Net proceeds from the issuance of common and preferred stock in
    a private placement                                                        770,000          1,460,000          1,510,000
    Proceeds from the exercise of stock purchase options                             -            102,250            111,500
    Proceeds from the sale of treasury stock                                         -                  -            261,321
    Proceeds from stock subscription                                                 -                  -              5,000
    Purchase of treasury stock                                                       -                  -           (122,779)
     Payment of dividends                                                     (317,333)          (156,375)           (78,000)
                                                                           ------------      ------------        -------------
                      Net cash provided by financing activities               4,160,250          6,342,537         4,805,052
                                                                           ------------      ------------        -------------
  Foreign currency translation                                                       -             (2,463)            (5,700)
                                                                           ------------      ------------        -------------
Net (Decrease) Increase  In Cash                                               (682,252)            168,284           602,798
                                                                           ------------      ------------        -------------
Cash and cash equivalents, beginning of year                                    945,806            777,522           174,724
                                                                           ------------      ------------        -------------
Cash and cash equivalents, end of year                                        $ 263,554          $ 945,806      $    777,522
                                                                           ============      ============        =============
Supplemental disclosures of cash flow information:
    Cash paid during the year for
       Interest                                                               $ 972,830        $ 1,317,151      $    590,126
                                                                           ============      ============        =============
       Income taxes paid                                                      $  84,858        $    34,604      $     32,658
                                                                           ============      ============        =============
Supplemental disclosures of non-cash, investing
    and financing activities:
      Common stock issued for acquisition                                     $       -        $   244,068      $    100,000
                                                                           ============      ============        =============
      Unrealized gains on marketable securities                               $       -        $         -     $      4,105
                                                                           ============      ============        =============
      Common stock issued in satisfaction of note payable                     $       -        $         -     $     40,000
                                                                           ============      ============        =============
      Common stock issued in connection with consulting agreement
      and services                                                            $       -        $         -     $    493,500
                                                                           ============      ============        =============
      Common stock issued for note conversions                                $1,764,354       $ 2,734,646     $          -
                                                                           ============      ============        =============

</TABLE>


         The accompanying notes are an integral part of these statements.

                                      F-12

<PAGE>


                      Synergy Brands, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  Years ended December 31, 2005, 2004 and 2003

NOTE A - DESCRIPTION OF THE BUSINESS

Synergy  Brands,  Inc.  and its  subsidiaries  (collectively,  "Synergy"  or the
'Company") is engaged in the  distribution  of a variety of products,  including
health and beauty  aids and  premium  handmade  cigars,  directly  to  consumers
(business to consumer)  and to businesses  (business to business).  In addition,
the  Company   develops   and  operates   Internet   platform   operations   and
Internet-based   businesses  designed  to  sell  these  products.   Synergy  was
incorporated on September 26, 1988 in the state of Delaware.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant  accounting  policies applied in the preparation of
the accompanying consolidated financial statements is as follows:

1. Principles of Consolidation

The  accompanying  consolidated  financial  statements  include the  accounts of
Synergy,   its   wholly-owned   subsidiaries   and   majority-owned   subsidiary
(collectively,   the  "Company").  All  significant  intercompany  accounts  and
transactions  have  been  eliminated  in  consolidation.  The  equity  method of
accounting is used for investments in 50% or less owned companies over which the
Company has the ability to exercise significant influence.

2. Cash and Cash Equivalents

The Company  considers all highly  liquid  investments  with a maturity,  at the
purchase date, of three months or less to be cash equivalents.

                                      F-13

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2005, 2004 and 2003


3. Marketable Securities

The Company determines the appropriate  classification of securities at the time
of purchase and reassesses the  appropriateness  of the  classification  at each
reporting  date.  All  marketable  securities  held  by the  Company  have  been
classified  as  available-for-sale  and, as a result,  are stated at fair value.
Unrealized gains and losses on  available-for-sale  securities are recorded as a
separate  component of  stockholders'  equity.  Realized gains and losses on the
sale of  securities,  as  determined  on a specific  identification  basis,  are
included in the consolidated statements of operations.  At December 31, 2005 and
2004, the Company had no marketable securities.

4. Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting  principles  requires management of the Company to make estimates and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements and the reported amounts of revenues and expense during the reporting
period.  The  most  significant   estimates  relate  to  reserves  for  accounts
receivable,  inventories,  and deferred tax assets,  and valuation of long-lived
assets. Actual results could differ from those estimates.

5. Accounts Receivable Trade

The Company's  accounts  receivable trade are due from businesses engaged in the
distribution  of grocery,  health and beauty  products as well as from consumers
who purchase  health and beauty  products  and premium  handmade  cigars  either
direct or from the Company's Web sites.  Credit is extended  based on evaluation
of a customers' financial condition and, generally,  collateral is not required.
Accounts  receivable  are due  within  10 - 60 days and are  stated  at  amounts
generally due from customers net of an allowance for doubtful accounts. Accounts
outstanding  longer than the contractual  payment terms are considered past due.
Estimates are used in determining  the allowance for doubtful  accounts based on
the Company's historical collections  experience,  current trends, credit policy
and a percentage of its accounts  receivable by aging  category.  In determining
these percentages, the Company looks at historical write-offs of itsreceivables.
The Company  also looks at the credit  quality of its  customer  base as well as
changes in its credit policies.  The Company  continuously  monitors collections
and payments from its customers. The Company writes off accounts receivable when
they  become   uncollectible,   and  payments   subsequently  received  on  such
receivables are credited to the allowance for doubtful accounts.

                                      F-14

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2005, 2004 and 2003

NOTE B (continued)

Accounts  receivable trade, net consist of the following  components at December
31, 2005 and 2004:

                                                       2005           2004
                                                   ----------    -----------
    Accounts receivable - business to business     $7,500,269    $7,467,321
    Accounts receivable - business to consumer        121,536       136,604
                                                   ----------    -----------
            Total                                  $7,621,805     7,603,925

    Less allowance for doubtful accounts             (127,481)     (127,481)
                                                   ----------     ----------
                                                   $7,494,324     $7,476,444
                                                   ==========     ==========

Changes in the Company's  allowance for doubtful accounts during the years ended
December 31, 2005 and 2004 are as follows:


                                                         2005         2004
                                                      ---------     --------
     Beginning balance                                $ 127,481     $127,481
     Provision for (reduction in) doubtful account          -           -
                                                      ---------     --------
     Ending balance                                   $ 127,481     $127,481
                                                      =========     ========

6. Business and Credit Concentrations

Financial  instruments that potentially subject the Company to concentrations of
credit risk  consist  principally  of cash and cash  equivalents,  and  accounts
receivable.  The Company  places its cash and cash  equivalents  with  financial
institutions it believes to be of high credit  quality.  Cash balances in excess
of Federally insured limits at December 31, 2004 totaled $756,150.

During the year ended  December 31, 2005,  sales to two customers  accounted for
12% and 10% of total sales, respectively. Four customers accounted for 22%, 20%,
15% and 12%,  respectively  of accounts  receivable at December 31, 2005.  These
concentrations relate to the Company's PHS Group segment.

During the year ended  December 31, 2004,  sales to two customers  accounted for
21% and 18% of total sales,  and in 2003 sales to two customers each,  accounted
for 11% of total sales, respectively. Four customers accounted for 26%, 26%, 22%
and 11%,  respectively  of accounts  receivable  at  December  31,  2004.  These
concentrations relate to the Company's PHS Group segment.

During the years ended December 31, 2005,  2004 and 2003, the Company  purchased
approximately  40 %,  53%  and  71%,  respectively,  of its  products  from  one
supplier.  If the Company were unable to maintain  this  relationship,  it might
have a material impact on future operations.

                                      F-15

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2005, 2004 and 2003


NOTE B (continued)

7. Inventory

Inventory  is  stated  at the  lower of cost or  market.  The  Company  uses the
first-in, first-out ("FIFO") cost method of valuing its inventory.

8. Property and Equipment

Property  and  equipment  are  stated  at cost.  Depreciation  of  property  and
equipment is computed using the straight-line  method over the asset's estimated
useful lives, ranging from 3 to 10 years.  Leasehold  improvements are amortized
over the shorter of their estimated useful lives or the lease term.

Maintenance  and  repairs of a routine  nature  are  charged  to  operations  as
incurred.  Betterments and major renewals that  substantially  extend the useful
life of an  existing  asset are  capitalized  and  depreciated  over the asset's
estimated useful life.

9. Web Site Development Costs

Capitalized  website cost are amortized using the straight-line  method over the
estimated useful lives of the Web sites, not to exceed three years.

10. Vendor Allowances

In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on
the  application  of EITF No.  02-16  "Accounting  by a Customer"  (including  a
reseller)  for Certain  Consideration  Received  from a Vendor.  EITF No.  02-16
addresses  how  a  reseller  of  vendor   products   should   account  for  cash
consideration  recorded  from a vendor.  The Company  adopted EITF No. 02-16 and
recognizes vendor allowances, at the date goods are purchased and recorded under
fixed and determined  arrangements.  The Company receives allowances and credits
from suppliers for volume  incentives,  promotional  allowances and, to a lesser
extent,  new product  introductions  which are  typically  based on  contractual
arrangements  covering  a  period  of one year or less.  Volume  incentives  and
promotional  allowances  earned based on  quantities  purchased  and new product
allowances are recognized as a reduction to the cost of purchased  inventory and
recognized when the related inventory is sold.  Promotional  allowances that are
based on the  sell-through  of products are recognized as a reduction of cost of
sales when the products are sold for which the promotional allowances are given.
For the  years  ended  December  31,  2005  and  2004,  the  Company  recognized
approximately  $  2,196,955  and  $913,000  in vendor  allowances  arising  from
arrangements  with a major  supplier  that met the  criteria for being fixed and
determinable.   Vendor   allowances  from   manufacturers,   included  in  other
receivables in the accompanying consolidated balance sheet aggregated $1,730,806
and $1,015,287 at December 31, 2005 and 2004.

                                      F-16

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2005, 2004 and 2003

NOTE B (continued)

11. Intangible Assets and Goodwill

Intangible  assets  include of the "Proset" and "Gran  Reserve"  trade names and
customer lists acquired in November 1999 and certain  customer lists, the rights
to the use of the trade name "Fineperfume.com" and the ownership of the internet
domain  www.fineperfume.com  acquired for aggregate consideration of $250,000 in
February 2002. The Company  re-evaluates  the carrying value of these intangible
assets when factors  indicating  impairment are present,  using an  undiscounted
operating cash flow assumption.

On June 1, 2003,  the Company  acquired the common stock of Ranley  Group,  Inc.
(d.b.a. Cigars Around the World ("CAW") of Chicago, Illinois). Intangible assets
acquired, which consist primarily of customer lists, are being amortized over an
eleven (11) year estimated  useful life from the date of acquisition.  (see Note
C)

Goodwill is the excess of cost of an acquired  entity over the amounts  assigned
to assets and liabilities assumed in business combination.  Effective January 1,
2002, with the adoption of SFAS No.142 "Goodwill and other  Intangible  Assets",
that have an indefinite life are not amortized.

Prior to the adoption of Statement of  Financial  Accounting  Standards  No. 142
("SFAS No.  142"),  "Goodwill and Other  Intangible  Assets,"  these  intangible
assets other than Goodwill were  amortized over their  estimated  useful life of
five  years.  As a result of the  adoption  of SFAS No. 142 in 2002,  intangible
assets with  indefinite  useful lives are no longer be amortized but instead are
being  reviewed for impairment  when  impairment  indicators  are present.  As a
result,  the Company's  trade names will no longer be  amortized.  The Company's
customer  lists  have  finite  lives.  Management  considered  various  factors,
including  appraisals,  in determining  that a revision to the estimated  useful
life of the Company's customer lists should be made. Based upon the analysis, it
was  determined  in 2003 that the  estimated  useful  life  should  be  extended
prospectively,  by a term of six years  from the  original  useful  life of five
years.   As  a  result,   the  remaining   carrying  amount  will  be  amortized
prospectively  over the  remaining  useful  life.  In 2005,  2004,  and 2003 the
amortization  expense  recorded  for  the  years  were  $222,312,  $222,312  and
$192,354. During the fourth quarter of fiscal 2005, the Company determined that,
based on estimated future cash flows, the carrying amount of the Proset customer
list exceeded its fair value by $293,586;  accordingly,  an  impairment  loss of
that amount was recognized.

At December 31, 2005 and 2004, intangible assets are comprised of the following:

     Amortized intangible assets                    2005               2004
                                              -------------     --------------
     Customer lists                           $ 3,214,592        $ 3,214,592
     Less accumulated amortization             (2,225,360)        (2,003,048)
     Less impairment writedown                 (  293,586)                 -
                                              -------------     --------------
                                                  695,646          1,211,544
     Unamortized intangible assets
     Trade names                                   90,400             90,400
                                               ------------      -------------
     Total                                       $786,046        $ 1,301,944
                                               ============      =============

Amortization expense for the Company over the next four years is estimated to be
approximately  $160,000 per year.  Amortization expense for 2010 is estimated to
be $50,000.

                                      F-17

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2005, 2004 and 2003

NOTE B (continued)

12. Long-lived Assets

Long-lived  assets and intangible  assets are reviewed for  impairment  whenever
events or  changes  in  circumstances  indicate  the  carrying  value may not be
recoverable.  Impairment  is measured by  comparing  the  carrying  value of the
long-lived  assets to the estimated  undiscounted  future cash flows expected to
result  from use of the assets  and their  ultimate  disposition.  To the extent
impairment has occurred,  the carrying amount of the asset would be written down
to an amount to reflect the fair value of the asset.

13. Revenue Recognition

The Company  recognizes  revenue  upon  shipment of goods when title and risk of
loss passes to the customer.  Net sales include gross revenue from product sales
and related shipping fees, net of discounts and provision for sales returns, and
other allowances.  Cost of sales consists primarily of costs of products sold to
customers, including outbound and inbound shipping costs.

14. Advertising

The Company expenses advertising and promotional costs as incurred.  Advertising
and promotional  expenses were approximately $ 63,000, $ 150,000 and $91,000 for
the years ended December 31, 2005, 2004 and 2003.

15. Income Taxes

Deferred income taxes are recognized for temporary differences between financial
statement and income tax bases of assets and  liabilities and net operating loss
carry  forwards  for which  income tax  expenses or benefits  are expected to be
realized in future years.  A valuation  allowance is  established  if it is more
likely than not that all, or some  portion,  of deferred  tax assets will not be
realized.

16. Basic and Diluted Loss Per Share

Basic and diluted loss per share is  calculated  by dividing the net loss by the
weighted-average  number  of  common  shares  outstanding  during  each  period.
Incremental shares from assumed

                                      F-18

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2005, 2004 and 2003

NOTE B (continued)

exercises of stock options and warrants of 580,416,  681,650 and 596,650 for the
years ended December 31, 2005, 2004 and 2003,  respectively,  have been excluded
from the  calculation  of diluted  loss per share  since their  effect  would be
antidilutive.

17. Stock-Based Compensation Plans

At December  31, 2005,  the Company has two  stock-based  employee  compensation
plans,  which are  described  more  fully in Note L. The  Company  accounts  for
stock-based  compensation  to employees and directors  using the intrinsic value
method  in  accordance  with  Accounting   Principles   Board  Opinion  No.  25,
"Accounting  for Stock Issued to Employees," and related  Interpretations  ("APB
No. 25") and has adopted the  disclosure  provisions of SFAS No. 148.  Effective
January 1, 2006,  the  provisions  of SFAS No.  123(R)  will be  implemented  to
account for stock-base  compensation.  Under APB No. 25, when the exercise price
of the Company's  employee or director  stock options equals the market price of
the  underlying  stock  on  the  date  of  grant,  no  compensation  expense  is
recognized.

The  following  table  illustrates  the effect on net income (loss) and earnings
(loss) per share had the Company applied the fair value  recognition  provisions
of  Statement  of  Financial  Accounting  Standards  No. 123,   "Accounting  for
Stock-Based Compensation," to stock-based employee compensation.


<TABLE>
<CAPTION>
         <S>                                             <C>            <C>                      <C>

                                                                       Year ended December 31,
                                                              2005              2004               2003
                                                        --------------      -----------       ------------
                                                        $ (2,560,778)       $(1,976,379)      $(1,277,223)
     Net loss, as reported
     Add:  Total stock-based employee
       compensation expense included
       in reported net loss
     Deduct:  Total stock-based employee
       compensation expense determined
       under fair value-based method for all
       awards                                            $    (27,184)            _                     -
                                                        --------------      -----------       ------------
     Pro forma net loss                                  $ (2,587,962)       $(1,976,379)     $(1,277,223)
                                                        ==============      ===========       ============
     Loss per share attributable to common shareholders
       Basic and diluted - as reported                   $ ( 0.75)            $(0.97)          $(0.82)
                                                        ==============      ===========       ============
       Basic and diluted - pro forma                     $ ( 0.76)            $(0.97)          $(0.82)
                                                        ==============      ===========       ============

</TABLE>

                                      F-19

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2005, 2004 and 2003

NOTE B (continued)

Pro forma  compensation  expense may not be  indicative  of pro forma expense in
future years.  For purposes of  estimating  the fair value of each option on the
date of grant, the Company utilized the Black-Scholes option-pricing model.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options,  which have no vesting  restrictions and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective  assumptions  including the expected stock price volatility.  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.

The  weighted-average  option fair values and the  assumptions  used to estimate
these values are as follows:

                                                                 2005

     Dividend yield                                               0%
     Expected volatility                                         40%
     Risk-free rate of return                                   4.0%
     Expected life                                            1 year
     Weighted-average option fair value                        $2.07

On October 1, 2005  performance  stock  options to  purchase  300,000  shares of
common stock at $2.07 per share were granted to  employees.  These  options will
expire on October 1, 2006. The option is deemed to be vested and granted.  There
were no stock options granted in 2004 and 2003.

18. Segment Information

Segment  information is presented in accordance with SFAS No. 131,  "Disclosures
about Segments of an Enterprise and Related Information." This standard is based
on a management approach,  which requires  segmentation based upon the Company's
internal  organization that is used for making operating decisions and assessing
performance as the source of the Company's reportable  operating segments.  SFAS
No. 131 also requires disclosures about products and services,  geographic areas
and major customers.


                                      F-20
<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2005, 2004 and 2003

NOTE B (CONTINUED)

19. Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123(R),  "Accounting  for Stock-Based
Compensation" ("SFAS No. 123(R)"). SFAS No. 123(R) establishes standards for the
accounting for transactions in which an entity exchanges its equity  instruments
for goods or  services.  This  statement  focuses  primarily on  accounting  for
transactions in which an entity obtains employee services in share-based payment
transactions.  SFAS No.  123(R)  requires  that the  fair  value of such  equity
instruments be recognized as an expense in the historical  financial  statements
as services  are  performed.  Prior to SFAS No.  123(R),  only certain pro forma
disclosures  of fair value were  required.  The provisions of this statement are
effective as of the beginning of the first interim  reporting  period for fiscal
years beginning after June 15, 2005. The Company adoption of SFAS No.123(R) will
have an impact on the  Company's  financial  position and results of  operations
similar to the pro forma disclosure in note 17B to the financial statements.

In November 2004, the FASB issued  Statement of Financial  Accounting  Standards
(SFAS) No. 151 "Inventory  Costs." This  statement  amends  Accounting  Research
Bulletin No. 43,  Chapter 4,  "Inventory  Pricing" and removes the "so abnormal"
criterion that under certain  circumstances could have led to the capitalization
of these  items.  SFAS No.  151  requires  that idle  facility  expense,  excess
spoilage,  double freight and re-handling  costs be recognized as current-period
charges regardless of whether they meet the criterion of "so abnormal." SFAS 151
also requires that allocation of fixed production overhead expenses to the costs
of conversion be based on the normal capacity of the production facilities.  The
provisions of this statement  shall be effective for all fiscal years  beginning
after June 15, 2005. The Company adoption of SFAS No.151 is not expected to have
a material impact on the Company's financial position or results of operations.

On December 16, 2004,  the FASB issued SFAS No. 153,  "Exchange of  Non-monetary
Assets",  an amendment of Accounting  Principles  Board ("APB")  Opinion No. 29,
which differed from the  International  Accounting  Standards  Board's  ("IASB")
method of accounting for exchanges of similar productive  assets.  Statement No.
153 replaces the  exception  from fair value  measurement  in APB No. 29, with a
general  exception  from fair value  measurement  for exchanges of  non-monetary
assets that do not have  commercial  substance.  The  statement is to be applied
prospectively  and is effective for  non-monetary  asset exchanges  occurring in
fiscal  periods  beginning  after June 15,  2005.  The Company  adoption of SFAS
No.153 is not  expected  to have a material  impact on the  Company's  financial
position or result of operations.

In May 2005, the FASB issued  Statement No. 154,  "Accounting  Changes and Error
Corrections  - a  replacement  of APB Opinion No. 20 and FASB  Statement  No. 3.
"("FAS 154") This Statement requires  retrospective  application to prior period
financial  statements of a voluntary change in accounting principle unless it is
impracticable  and is effective for fiscal years  beginning  after  December 15,
2005. Previously, most voluntary changes in accounting principle were recognized
by including in net income of the period of the change the cumulative  effect of
changing  to the new  accounting  principle.  The  Company  will comply with the
provisions of FAS 154 although the impact of such  adoption is not  determinable
at this time.

20. Reclassifications

Certain   2004   balances   have  been   reclassified   to  conform   with  2005
classifications.

                                      F-21

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2005, 2004 and 2003

NOTE C - ACQUISTION

On June 1, 2003,  the Company  acquired  from Bill  Rancic("Seller")  the common
stock of the Ranley  Group,  Inc.,  (d.b.a.  Cigars  Around the World ("CAW") of
Chicago,  Illinois).  CAW is a leading  supplier of premium  hand made cigars to
some of the most prestigious hotels, restaurants,  casinos and gold clubs in the
United  States.  The initial  purchase  price for the common stock  acquired was
$425,000.  Additional  consideration  of up to $450,000,  to be paid through the
issuance of Class B, Series A Preferred stock,  cash or common stock, is payable
based upon the  achievement  of certain  targeted  operating  results of CAW. In
December 2003, 25,000 shares of common stock were issued valued at $100,000, the
quoted  market  price,  and recorded as  additional  Goodwill for the purpose of
satisfying the anticipated consideration due the Seller by March 31, 2004, based
upon the operating  results of CAW through  December 31, 2003. In February 2004,
the Company issued an additional 25,000 shares in anticipation of satisfying the
initial  annual EBTDA  requirements.  These shares were valued at $100,000,  the
quoted market  price,  and recorded as additional  Goodwill.  In June 2004,  the
Company issued an additional 150,000 shares, of which 88,235 shares were used in
anticipation of satisfying the CAW acquisition and 61,765 shares were issued for
future  services to be provided by the Seller.  These shares are not forfeitable
or recoverable by the Company in the event the Seller  terminates his consulting
position.  These  shares were valued at  $425,000,  and  recorded as  additional
Goodwill  of  $250,000,  and  prepaid  compensation  of  $175,000.  The  prepaid
compensation  will be charged to operations  over the  three-year  period of the
consulting arrangement.

The acquisition of CAW has been accounted for as a purchase pursuant to SFAS No.
121,  "Business  Combinations."  The operations of CAW have been included in the
Company's  statement of operations  since the  acquisition  date.  The following
table  summarizes  the assets and  liabilities  acquired from CAW based upon the
Company's  allocation of the  aggregate  purchase  price of $875,000,  including
contingent consideration.

Cash                             $    11,000
Accounts receivable                  374,000
Other Assets                           9,000
Customer List                        361,000
Goodwill                             514,000
Accounts Payable                    (331,000)
Other Current Liabilities            (35,000)
Other Long-Term Liabilities          (28,000)
                                 ------------
                                 $   875,000
                                 ============

The intangible assets acquired consist  principally of customer lists, which are
being  amortized  over a eleven  year  estimated  useful  life  from the date of
acquisition, and Goodwill. The primary reason for the acquisition of CAW and the
main factor  that  contributed  to a purchase  price in excess of the net assets
acquired is that CAW is expected to positively  impact the Company's  results of
operations,  in that  CAW is  expected  to have  limited  selling,  general  and
administrative  expenses,  as  such  business  is a  strategic  addition  to the
Company's  current  internet  operations.  CAW  distribution is being handled at
Synergy's current cigar distribution  facilities in Florida. The Company's cigar
operations  are conducted  through Gran Reserve  Corporation  ("GRC"),  which is
wholly owned by the Company.

                                      F-22

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                   Years ended December 31, 2005 2004 and 2003

NOTE D - FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying  amount of cash and cash  equivalents,  marketable  securities  and
accounts  receivable  and accounts  payable  approximates  fair value due to the
short-term  maturities of the  instruments.  The carrying  amounts of borrowings
under  the line of  credit  agreement  and notes  receivable  and notes  payable
approximate their fair values.

NOTE E - MARKETABLE SECURITIES

At December 31, 2005, the Company has no marketable securities. In the past, the
Company accounted for marketable securities as available-for-sale securities. In
accordance  with FASB 115,  these equity  securities  were accounted for at fair
market value and any  unrealized  gains  (losses) were treated as an increase or
decrease to equity.

Proceeds from the sale of  available-for-sale  securities  and the resulting net
realized  gains  included in the  determination  of net loss for the years ended
December 31, 2004 and 2003 are as follows:

                                                    2004            2003
                                                  ----------      ----------
      Available-for-sale securities
        Proceeds                                  $194,515        $460,060
        Gross realized gains                        19,973          27,713
        Gross realized losses                      (35,766)       (16,885)

                                      F-23

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2005, 2004 and 2003

NOTE F - INVENTORY

Inventory as of December 31, 2005 and 2004 consisted of the following:

                                                        2005              2004
                                                     -----------     -----------
       Grocery, health and beauty products           $1,467,861       $1,375,165
       Tobacco finished goods                           441,454          451,109
                                                     -----------     -----------
                                                     $1,909,315       $1,826,274
                                                     ===========     ===========

The allowance for slow moving and obsolete inventory  approximated  $225,000 and
$30,000 at December 31, 2005 and 2004, respectively.

NOTE G - PROPERTY AND EQUIPMENT

Property  and  equipment  as of  December  31,  2005 and 2004  consisted  of the
following:

                                                            2005        2004
                                                          ---------   --------
       Office                                             $210,885    $204,610
       equipment
       Furniture and fixtures                              234,196     231,265
       Leasehold improvements                              586,854     523,731
                                                          ---------   --------
                                                         1,031,935     959,606

       Less accumulated depreciation and amortization     (675,921)   (593,096)
                                                          ---------   --------
                                                          $356,014   $ 366,510
                                                          =========   ========

Depreciation  and  amortization  expense on property and equipment for the years
ended December 31, 2005, 2004 and 2003 was approximately  $83,000,  $125,000 and
$123,000, respectively.

                                      F-24

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2005, 2004 and 2003

NOTE H - OTHER ASSETS

Other assets consist of the following at December 31, 2005 and 2004:


<TABLE>
<CAPTION>
         <S>                                                                      <C>              <C>

                                                                                      2005             2004
                                                                                 -----------        ----------
       Investment (a)                                                              $364,340           $336,828
       Investment in warrants (b)                                                   127,000                  -
       CAW purchase agreement; net of accumulated amortization of $58,332 and
       $29,163                                                                       87,505            145,837
       Deferred financing net of accumulated
          amortization of $70,930 and $32,625
       Other                                                                        154,945            97,875
                                                                                     69,097            51,926
                                                                                 -----------        ----------
                                                                                   $ 802,887         $ 632,466
                                                                                 ===========        ==========

</TABLE>

(a) In December  2001,  the Company made an investment  in Interline  Travel and
Tour. Inc. ("ITT") for  approximately  20 % of the outstanding  common stock. At
December 31, 2005, the Companies  investment in ITT is approximately  22% of the
outstanding  common stock. ITT provides cruise and resort hotel packages through
a proprietary  reservation  system to airline employees and their retirees.  The
Company recorded equity in the net earnings of investee of $56,311, $172,224 and
$92,424 during the years ended December 31, 2005, 2004 and 2003, respectively.

(b) In October,  2005 SYBR.com  Inc., a wholly owned  subsidiary of the Company,
invested $1 million in a Private  Placement  of Senior  Subordinated  Debentures
issued by ITT. The  investment  consists of a five year 8% Note (ITT Note),  and
200,000  warrants  exercisable  into 200,000 common shares of ITT stock at $5.00
per share (ITT Warrants). The Company financed this investment with a $1 million
fully recourse note with a major Shareholder under the same terms and conditions
as the  ITT  Note  and  assigned  to  such  shareholder  the  ITT  Warrants.  As
consideration  for the  financing,  the Company has  retained  the benefit to be
derived from 100,000 of the warrants received from ITT (see Note J). In relation
to the ITT warrants, Company has recorded deferred income of $127,000.

                                      F-25

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2005, 2004 and 2003

NOTE H (continued)

Summarized  unaudited financial  information of this investee as of December 31,
2005, 2004, 2003 and for the years then ended is as follows:

      Financial position:                    2005              2004
                                         -----------      -----------
      Current assets                     $4,229,000        $2,020,000
       Property and equipment               735,000           290,000
       Other assets                       4,720,000           267,000
                                         -----------      -----------
      Total assets                       $9,684,000        $2,577,000
                                         ===========      ===========
      Current liabilities                $3,823,000        $1,322,000
      Long-term debt                      4,983,000                 -
      Other long-term liabilities                 -             4,000
                                         -----------      -----------
      Total liabilities                  $8,806,000        $1,326,000
                                         ===========      ===========

<TABLE>
<CAPTION>
      <S>                                  <C>             <C>               <C>

      Results of operations:                 2005              2004                2003
                                         -----------      -----------        ------------
      Revenues                          $14,715,000       $10,883,000        $ 9,602,000
      Total expenses                    (14,528,000)       (9,934,000)        (8,906,000)
      Other income                          325,000           111,000             54,000
                                         -----------      -----------        ------------
      Income before income taxes            512,000         1,069,000            750,000
      Income tax expense                   (211,000)         (359,000)          (268,000)
                                         -----------      -----------        ------------
      Net income                        $   301,000       $   701,000       $    482,000
                                         ===========      ===========        ============

</TABLE>

                                      F-26

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2005, 2004 and 2003

NOTE I - NOTES RECEIVABLE

Through  December  31,  2003,  the Company  provided  $429,600 in financing to a
significant  customer who is a distributor  of the Company's  products in Canada
and is expanding its distribution channel. The principle balance of $429,600 was
paid March 31, 2004.

In December  2004,  the Company sold accounts  receivable  attributable  to West
Coast Supplies,  Inc. for $2,200,000.  This promissory note, which is secured by
the accounts receivable,  requires monthly payments of principle and interest at
4% for seven years,  beginning in January 2005. As a condition for the sale, the
Company is obligated to issue West Coast 50,000  shares of common  stock,  which
will vest  through  April 1, 2006.  In the event the value of the shares is less
than  $200,000  at April 1,  2006,  the  Company  will be  obligated  to pay the
difference in cash or additional  shares. The value of the shares ($200,000) was
treated as a reduction of sales price.  The Company does not anticipate  selling
selected  products  to this  customer  base in the  future.  Sales  of  selected
products to this customer  base  approximated  $3,180,000  in 2004.  The Company
recorded a loss of $79,134  related to the sale of the  accounts  receivable  to
West Cost Supplies, Inc. The balance of the Note Receivable at December 31, 2005
was $1,923,306.

In October,  2005  SYBR.com  Inc.,  a wholly  owned  subsidiary  of the Company,
invested $1 million in a Private  Placement  of Senior  Subordinated  Debentures
issued by ITT. The  investment  consists of a five year 8% Note (ITT Note),  and
200,000  warrants  exercisable  into 200,000 common shares of ITT stock at $5.00
per share (ITT Warrants). The Company financed this investment with a $1 million
fully recourse note with a major Shareholder under the same terms and conditions
as the  ITT  Note  and  assigned  to  such  shareholder  the  ITT  Warrants.  As
consideration  for the  financing,  the Company has  retained  the benefit to be
derived from 100,000 of the warrants received from ITT (see Note J). In relation
to the ITT warrants, Company has recorded deferred income of $127,000.

NOTE J - LINE OF CREDIT AGREEMENT, NOTES PAYABLE AND NOTE PAYABLE TO STOCKHOLDER

In 2002, two of the Company's  subsidiaries  entered into two revolving loan and
security  agreements with the same financial  institution  (the  "Lender").  The
lines of credit,  as amended in December 2005,  allow for the borrowing of up to
$5,300,000  based on the sum of 85% of the net face amount of eligible  accounts
receivable,  as  defined,  plus the  lesser of (1)  $2,750,000  or (2)  eligible
inventory and eligible goods in transit, as defined.  As amended,  the agreement
extends  through  December  31, 2006.  The Company is seeking to  refinance  its
secured financing needs through other asset based Lenders. There is no assurance
that the Company  will be  successful  and it may need to continue to incur high
financing costs.  Interest  accrues on outstanding  borrowings at the greater of
(i) 5% per  annum in  excess  of the prime  rate or (ii)  10.5%  per  annum.  At
December  31, 2005,  the interest  rate on  outstanding  borrowings  was 12.25%.
Outstanding  borrowings are collateralized by a continuing  security interest in
all  of  the  subsidiaries'  accounts  receivable,   chattel  paper,  inventory,
equipment, instruments,  investment property, documents and general intangibles.
In  addition,  1,175,000  shares of the  Company's  common  stock have also been
pledged  as  collateral  on the  outstanding  borrowings.  In  2004  the  lender
converted  $1,621,000 of  outstanding  debt into 435,182  shares of common stock
(see Note K) and in 2005, the lender  converted  $1,003,000 of outstanding  debt
into 427,532 shares of common stock (see Note K).

                                      F-27

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2005, 2004 and 2003

NOTE J (continued)

On February 5, 2003, the Company received  $500,000  pursuant to the issuance of
two secured  promissory notes from certain  shareholders of ITT, a 22% investee.
Borrowings  under the notes bear  interest at a rate of 12%. The Company was not
required to repay any principal  until the maturity date of the notes,  February
4, 2006. 25,000 restricted shares of the Company's common stock were also issued
as part of the financing.  The relative estimated fair value of the common stock
that was issued of $56,000 was recorded as debt discount and was amortized  over
the life of the notes payable. As security for the notes, the Company pledged as
collateral its investment in the common stock of ITT. (See Note H). In 2004, the
Company  converted  $263,646 of the debt into 66,756 shares of common stock.  In
March 2005, the Company  converted the balance of this debt $236,354 into 94,542
shares of  common  stock.  Amortization  expense  recorded  in 2005 and 2004 was
approximately $2,333 and $28,000.

On July 1, 2003, the Company received $350,000 pursuant to the issuance of three
secured  promissory  notes from  certain  shareholders  of ITT, a 22%  investee.
Borrowings  under the notes bear  interest at a rate of 12%. The Company was not
required to repay any principal  until the maturity date of the notes,  June 30,
2005. In addition,  17,500  restricted shares of the Company's common stock were
also issued as part of the financing.  The relative  estimated fair value of the
common stock that was issued of $42,000 was recorded as debt discount and was to
be amortized over the life of the notes payable.  In 2004, the Company converted
all of this  outstanding  debt into 86,400  shares of common stock (see Note K).
Amortization  expense  recorded in 2004 and 2003 was  approximately  $31,000 and
$10,000.

On March 1, 2004,  the Company  received  $490,000  pursuant to the  issuance of
three secured promissory notes from certain shareholders of ITT, a 22% investee.
Borrowings under the notes bear interest at a rate of 12%. The note was extended
and the Company is not required to repay any  principal  until the maturity date
of the notes,  February 28, 2007. In addition,  19,600  restricted shares of the
Company's  common stock were also issued as part of the financing.  The relative
estimated fair value of the common stock that was issued of $75,000 was recorded
as debt discount and will be amortized  over the life of the notes  payable.  As
security for the notes,  the Company pledged as collateral its investment in the
common stock of ITT (see Note H). Amortization expense recorded in 2005 and 2004
was  approximately  $37,500 and $31,000.  At December  31, 2005 the  outstanding
balance was $490,000.

On April 2, 2004 the  Company  completed a financing  with Laurus  Master  Funds
("Laurus").  The  financing  consisted  of a $1.5  million  secured  convertible
debenture that converts into common stock under certain  conditions at $3.00 per
share as  amended,  and matures on April 2, 2007.  The  debenture  provides  for
monthly  payments of  $50,000,  plus  interest  commencing  October 1, 2004.  In
addition, Laurus was issued 100,000 warrants exercisable at $3.00 per share. The
debenture has a three-year term with a coupon rate of prime plus 3%. The Company
has filed an S-3 registration statement, which has been granted effectiveness to
register the common stock  underlying  the debenture and warrant.  In 2004,  the
Company  converted  $500,000 of this  outstanding  debt into  100,000  shares of
common stock.  The Company repaid  $100,000 of this debt in 2004. In March 2005,
the Company  converted  $525,000 of this outstanding debt into 150,000 shares of
common stock. At December 31, 2005, the outstanding balance was $375,000.

On January 25, 2005, the Company  completed a financing with Laurus Master Funds
("Laurus").  The financing consisted of a $500,000 secured convertible debenture
that converts into common stock under certain  conditions at $3.00 per share and
matures on January 25, 2008.  The financing  provides  Laurus with  registration
rights for common shares it is issued under conversion.  The debenture  provides
for monthly payments of $16,666.67 plus interest, commencing August 1, 2005. The
Company  repaid  $83,334 of this debt at December 31, 2005. In addition,  Laurus
was issued 33,333 warrants  exercisable at $3.50 per share.  The debenture has a
three-year  term with a coupon rate of prime plus 3%. The  conversion  prices on
the Laurus  debentures  were always above the current stock price at the closing
date. At December 31, 2005 the outstanding balance was $416,666.

                                      F-28

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2005, 2004 and 2003

NOTE J (continued)

In January 2005, the Company  entered into a promissory note with major regional
bank for $1,000,000.  Borrowing under the note bears interest at prime (7.25% at
December  31,  2005).  This note was extended and the Company is not required to
repay any principal  until the maturity date of the note,  September 1, 2006. As
security for the note, a pledge agreement was entered by certain Shareholders of
ITT. Borrowings at December 31, 2005 were $995,531.

On April 6, 2005,  the Company  received  $500,000  pursuant to the  issuance of
three secured promissory notes from certain shareholders of ITT, a 22% investee.
Borrowings  under the notes bear  interest  at a rate of 9%. The  Company is not
required to repay any principal  until the maturity date of the notes,  April 5,
2007. In addition,  25,000  restricted shares of the Company's common stock were
also issued as part of the financing.  The relative  estimated fair value of the
common stock that was issued of $54,000 was  recorded as debt  discount and will
be amortized over the life of the notes payable.  As security for the notes, the
Company  pledged as  collateral  its  investment in the common stock of ITT (see
Note H). Amortization expense recorded in 2005 was approximately $20,250.

On May 5, 2005, the Company  received  $100,000  pursuant to the issuance of one
secured  promissory  note from a certain  stockholder  of ITT,  a 22%  investee.
Borrowings  under the note bear  interest  at a rate of 9%.  The  Company is not
required to repay any  principal  until the  maturity  date of the note,  May 4,
2007. In addition,  5,000  restricted  shares of the Company's common stock were
also issued as part of the financing.  The relative  estimated fair value of the
common stock that was issued of $9,500 was recorded as debt discount and will be
amortized  over the life of the notes  payable.  As security for the notes,  the
Company  pledged as  collateral  its  investment in the common stock of ITT (See
Note H). Amortization expense recorded in 2005 was approximately $3,200.

On June 21, 2005,  the Company  completed a financing  with Laurus  Master Funds
("Laurus").  The financing consisted of a $500,000 secured convertible debenture
that converts into common stock under certain  conditions at $3.00 per share and
matures on June 21, 2008. The financing provides Laurus with registration rights
for common  shares it is issued under  conversion.  The  debenture  provides for
monthly payments of $16,666.67 plus interest,  commencing  December 1, 2005. The
Company repaid $16,667 of the debt at December 31, 2005. In addition, Laurus was
issued 33,333  warrants  exercisable at $ 3.50 per share.  The Company's  common
stock  quoted  market  price at the date of  closing  was $2.15 per  share.  The
debenture has a three-year term with a coupon rate of prime plus 3%. The Company
recorded  a charge of  $18,000  as  prepaid  expense  for the fair  value of the
warrants,  and this  amount  will be  amortized  over the life of the  note.  At
December 31, 2005 the outstanding balance was $483,333.

In October,  2005  SYBR.com  Inc.,  a wholly  owned  subsidiary  of the Company,
received $1 million,  pursuant to the issuance of one senior secured  promissory
note from a certain  stockholder.  Borrowings under the note bearing interest at
8%, and the note is due October 7, 2010.  The Company has secured this borrowing
with a $1 million wholly recourse note from ITT (see Note I).

Aggregate maturities of notes payable at December 31, 2005 are as follows:

Year Ending December 31,
         2006     $ 1,645,531
         2007     $ 1,568,691
         2008     $   100,000
         2009     $         -
         2010     $ 1,000,000
                 ------------
        Total     $ 4,314,222
                 ============

NOTE K - STOCKHOLDERS' EQUITY

The Company has 100,000  authorized and outstanding  shares of Class A preferred
stock with a par value of $.001;  13-to-1 voting  rights;  liquidation of $10.50
per share before common stock and  redemption at option of Company at $10.50 per
share.

                                      F-29

<PAGE>

                     Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2005, 2004 and 2003

NOTE K (continued)

In January  2003,  the Company  designated  100,000  shares of Class B Preferred
stock, par value $.001 per share to be designated as Class B, Series A Preferred
Stock and in June 2003, the Company  increased the authorized  Class B, Series A
preferred  stock to 500,000  shares.  The holders of Class B, Series A Preferred
Stock have no voting  rights  with  respect to general  corporate  matters.  The
holders of Class B, Series A Preferred  Stock are entitled to receive  dividends
at the annual rate of $.90 per share per annum.  The Company may, as its option,
at any time in whole, or from time to time in part, out of earned funds, capital
and surplus of the Corporation,  redeem the Class B, Series A Preferred Stock on
any date set by the Board of Directors,  at $10.00 per share plus, in each case,
an amount equal to all  dividends of Class B, Series A Preferred  Stock  accrued
and unpaid thereon, pro rata to the date of redemption.  If, however, as to each
share of Class B, Series A Preferred Stock  outstanding,  if not redeemed by the
Company  within 2 years of the  issuance of such  shares,  the  Company  will be
obligated  to issue to the then  holder of record of such  outstanding  Class B,
Series A Preferred  Stock,  half a share of the  Company's  unissued  restricted
Common  Stock per share of Class B, Series A Preferred  Stock for each year that
said share is not redeemed.  The Company  issued 30,000 common shares to Class B
Series  A  Preferred  shareholders  in  January  2005  in  compliance  with  the
subscription  agreements  dated  February 26, 2003 and 50,000  common  shares to
Class B Series A  Preferred  Shareholder  in July  2005 in  compliance  with the
subscription  agreements dated July 2, 2003. No more that 19.9% of the Company's
stock can be issued in connection with stock dividend payments against the Class
B, Series A Preferred Stock.

In November 2004, the Board of Directors  approved a Private  Placement in which
17  units  were  offered,   with  each  unit  consisting  of  10,000  shares  of
unregistered Class B, Series A Preferred Stock and 15,000 shares of unregistered
restricted  Common Stock at a purchase  price of $100,000 per unit.  In November
2004, the Company sold 17 units and received  aggregate  proceeds of $1,700,000.
Also in  November  2004,  the Company  exchanged  $245,000  compensation  due to
William Rancic for two units of Class B Series A Preferred stock at $100,000 per
unit.

In March 2005, the Company designated 250,000 shares of Class B Preferred Stock,
par value $.001 per share to be designated as Class B, Series B Preferred Stock.
On July 22,  2005,  the Company  completed  an  $800,000  private  placement  of
Preferred Stock and Common Stock consisting of 80,000 shares of Series B Class B
Preferred  Stock and 88,000  shares of restricted  Common Stock.  The holders of
Class B Series B Preferred  Stock have no voting  rights with respect to general
corporate matters.  The holders of Class B Series B Preferred Stock are entitled
to receive dividends at the annual rate of $.80 per share per annum. The Company
may, as its option,  at any time in whole,  or from time to time in part, out of
earned funds of the Corporation, redeem the Class B, Series B Preferred Stock on
any date set by the Board of Directors,  at $10.00 per share plus, in each case,
an amount equal to all  dividends of Class B, Series B Preferred  Stock  accrued
and unpaid thereon,  pro rata to the date of redemption.  If however, as to each
share of Class B, Series B Preferred Stock  outstanding,  if not redeemed by the
Company  within 2 years of the  issuance of such  shares,  the  Company  will be
obligated  to issue to the then  holder of record of such  outstanding  Class B,
Series B Preferred  Stock,  half a share of the  Company's  unissued  restricted
Common  Stock per share of Class B, Series B Preferred  Stock for each year that
said share is not redeemed within limits as provided under applicable law.

In 2005,  certain  shareholders  of ITT  converted  $236,354 of debt into 94,542
shares  of common  stock  and in 2004,  certain  shareholders  of ITT  converted
$613,646 of debt into 153,156  shares of common  stock.  In 2005,  Laurus Master
Funds  converted  $525,000 of debt into  150,000  shares of common  stock and in
2004,  Laurus  Master Funds  converted  $500,000 of debt into 100,000  shares of
common stock. Also, in 2005, the Company converted  $1,003,000  outstanding debt
of IIG into  427,532  shares of common  stock and in 2004 the Company  converted
$1,621,000 outstanding debt of IIG into 435,182 shares of common stock (see Note
J).

For the years ended  December 31, 2005 and 2004,  the Company  issued 98,964 and
58,195 shares of common stock as  compensation  for past and future  service and
recorded a charge to operations of $104,025 and $154,620.

                                      F-30

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2005, 2004 and 2003

NOTE K (continued)

For the years ended December 31, 2004 and 2003 , the Company  received  proceeds
of $102,250 and $111,500 from the exercise of stock options to purchase  110,000
and 62,500 shares of the Company's common stock. In connection with such options
of which 15,000 were modified, in 2004 the Company recorded compensation expense
and a credit to additional paid-in capital of $30,750.

The following is a summary of transactions involving warrants to purchase common
stock for the years ended December 31, 2005, 2004 and 2003.


                                                                  Weighted-
                                                  Number           average
                                                 of shares      exercise price
                                                -----------     --------------
         Outstanding at January 1, 2003           227,500           $  8.60
             Cancelled/Forfeited                  (17,500)           (35.00)
                                                -----------
         Outstanding at December 31, 2003         210,000           $  6.40
             Granted                              100,000              5.00
                                                -----------
         Outstanding at December 31, 2004         310,000           $   5.95
             Granted                               66,666               1.00
             Cancelled/Forfeited                  (96,250)              (6.75)
                                                -----------     --------------
         Outstanding at December 31, 2005         280,416           $   4.38
                                                ===========     ==============

The following table summarizes  information concerning currently outstanding and
exercisable stock purchase warrants:


<TABLE>
<CAPTION>
             <S>                     <C>         <C>                    <C>              <C>

                                                 Warrants outstanding                        Warrants exercisable
                                                         Weighted-
                                       Number             average       Weighted-            Number         Weighted-
                                    outstanding at       remaining       average         exercisable at      average
              Ranges of             December 31,        contractual     exercise          December 31,      exercise
             exercise prices            2005            life (years)      price               2005            price
           ------------------       ---------------    --------------   ----------        -------------     ---------
             $1.00-4.00               166,666               6.16          $3.20             166,666           $3.20
           $5.00-$12.00               113,750                .09           5.50             113,750            5.50
                                    ---------------    --------------   ----------        -------------     ---------
                                      280,416               3.50          $4.38             280,416           $4.38
                                    ===============    ==============   ==========        =============     =========

</TABLE>

                                      F-31

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2005, 2004 and 2003

NOTE L - STOCK COMPENSATION PLANS

In 1994, Synergy adopted the 1994 Services and Consulting Compensation Plan (the
"Plan"). Under the Plan, as amended,  8,400,000 shares of common stock have been
reserved  for  issuance.  The Plan  terminates  with  respect to the granting of
common stock and options in 2009.  Since the inception of the Plan,  Synergy has
issued  1,279,997  shares for payment of services to employees and  professional
service  providers  such  as  legal,   marketing,   promotional  and  investment
consultants.  Common stock issued in connection  with the Plan was valued at the
fair value of the common  stock at the date of issuance or at an amount equal to
the service provider's invoice amount. During the years ended December 31, 2005,
2004 and 2003, the Company issued 98,964, 42,195 and 65,938 shares of its common
stock,  respectively,  to various service providers and has recorded a charge to
earnings of $104,025,  $150,621 and $93,125. Under the Plan, Synergy has granted
options to selected employees and professional  service  providers.  The maximum
term of  options  granted  under the Plan is ten  years.  There  were no options
issued during the years ended December 31, 2005 and 2004.

The following is a summary of such stock option transactions for the years ended
December  31,  2005,  2004 and  2003 in  accordance  with  the  Plan  and  other
restricted stock option agreements:

                                                                   Weighted
                                                       Number       average
                                                      of shares    exercise
                                                                     price
                                                    -----------  ------------
       Outstanding at January 1, 2003                484,259       $  10.46
           Cancelled/Forfeited                       (25,109)         (9.08)
           Granted                                    85,000           3.53
           Exercised                                 (62,500)          1.84
                                                    -----------  ------------
       Outstanding at December 31, 2003              481,650       $  10.42
           Exercised                                (110,000)         (3.68)
                                                    -----------  ------------
       Outstanding at December 31, 2004              371,650       $  13.10
           Granted                                   300,000           2.07
           Cancelled/Forfeited                      (371,650)        (12.15)
                                                    -----------  ------------
       Outstanding at December 31, 2005               300,000      $    2.07
                                                    ===========  ============
       Shares available for grant

         December 31, 2005                         7,120,003
                                                   =========
         December 31, 2004                         7,218,967
                                                   =========
         December 31, 2003                         7,261,162
                                                   =========

                                      F-32

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2005, 2004 and 2003

NOTE L (continued)

The following table summarizes  information concerning currently outstanding and
exercisable stock options:


<TABLE>
<CAPTION>
                 <S>                <C>           <C>                 <C>             <C>
                                                 Options outstanding                       Options exercisable
                                                      Weighted-
                                      Number           average        Weighted-           Number         Weighted-
                                   outstanding at     remaining        average        exercisable at      average
             Ranges of             December 31,      contractual      exercise         December 31,      exercise
            exercise prices            2005          life (years)       price              2005            price

           $ 1.00 - $ 4.00           300,000             1.0             $2.07          300,000            $2.07

</TABLE>

The Company has also  reserved  100,000  shares for a stock option plan ("Option
Plan") for nonemployee,  independent directors, which entitles each nonemployee,
independent  director an option to purchase 10,000 shares of the Company's stock
immediately  upon election or  re-election  to the Board of  Directors.  Options
granted  under the Option Plan will be at the fair  market  value on the date of
grant, immediately exercisable, and have a term of ten years. The Company had no
options  outstanding and  exercisable  and 84,000 shares  available for grant at
December 31, 2005 and 2004.

NOTE M - TRANSACTIONS WITH RELATED PARTIES

The Company paid consulting  fees to two entities,  one of which is owned by the
Company's  Chairman  and Chief  Executive  Officer and the other is owned by the
Company's President and Chief Operating Officer. Consulting fees paid during the
years ended December 31, 2003 aggregated approximately $55,000.

At December 31, 2005 and 2004,  $61,882 and $56,972 is payable to the  Company's
Chairman  and  Chief  Executive  Officer  for  short-term  advances  made to the
Company.

                                      F-33

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2005, 2004 and 2003

NOTE N - OTHER INCOME (EXPENSE)

     Other income (expense) is comprised of the following:

<TABLE>
<CAPTION>
          <S>                                                               <C>        <C>              <C>

                                                                             2005           2004             2003
                                                                          -----------  ------------     ---------
        Gain on settlements of liabilities due to vendors                 $      -     $       -         $282,750
             (Note R-3)
         Gain (loss) on sales of marketable securities (Note E)                  -        (15,793)          10,828
        Other                                                              (21,504)        47,944            5,354
        Loss on sale of accounts receivable                                      -        (79,134)               -
                                                                          -----------  ------------     ---------
                                                                          $(21,504)     $ (46,983)        $298,932
                                                                          ==========   ============     ==========

</TABLE>

NOTE O - INCOME TAXES

At December  31, 2005,  the Company had a net  operating  loss carry  forward of
approximately  $33,700,000 which, if not utilized,  will begin expiring in 2011.
Utilization of these losses may be limited if the Company undergoes an ownership
change  pursuant to Internal  Revenue Code Section  382. The  components  of the
deferred tax asset at December 31, 2005 were approximately as follows:

          Net operating loss carry forwards           11,514,000
          Fixed assets and intangibles                   100,000
          Allowance for doubtful accounts                 43,000
          Inventory                                      109,000
          Capital losses                                  56,000
          Other                                         (145,000)
          Valuation allowance                        (11,677,000)
                                                    -------------

                                                     $          -

The valuation allowance increased by $715,000 in 2005.

Income  taxes  expense  for the years ended  December  31,  2005,  2004 and 2003
consisted of the following:

                                   2005          2004          2003
                                  ----------    ---------     ---------
          State and local          $84,858      $ 34,604        $32,658
                                  ==========    =========     =========

                                      F-34

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2005, 2004 and 2003

NOTE O (continued)

A reconciliation  of income tax expense  computed at the U.S. Federal  statutory
rate of 34% and the Company's  effective  tax rate for the years ended  December
31, 2005, 2004 and 2003 are as follows:


<TABLE>
<CAPTION>
          <S>                                                      <C>           <C>           <C>

                                                                 2005           2004           2003
                                                                 ---------     ---------      ------
          Federal income tax expense at statutory rate            (34)%         (34)%          (34)%

          Increase (decrease) resulting from
              Increase in valuation allowance                      34            34             34
              State and local income taxes, net of Federal
                  benefit                                          .9            .9             .9
                                                                 ---------     ---------      ------
                                                                   .9 %          .9 %           .9%
                                                                 =========     =========      ======

</TABLE>

NOTE P - QUARTERLY FINANCIAL RESULTS (UNAUDITED)

Quarterly  financial  results for the years ended December 31, 2005 and 2004 are
as follows:


<TABLE>
<CAPTION>
    <S>                                                 <C>                                <C>            <C>         <C>

                                                                 THREE MONTHS ENDED
                                                          3/31/2005        6/30/2005      9/30/2005    12/31/2005          TOTAL
SALES                                                   $14,934,354      $15,890,490    $17,122,629   $16,189,617   $ 64,137,090
GROSS PROFIT                                            $   805,200      $ 1,182,574     $1,169,966     $ 669,639    $ 3,827,379
NET INCOME(LOSS)  ATTRIBUTABLE TO COMMON STOCKHOLDER    $  (692,147)       $(280,870)     $(396,272)  $(1,508,822)   $(2,878,111)
BASIC AND DILUTED NET LOSS PER COMMON SHARE             $    (0.21)        $  (0.08)      $  (0.09)      $ (0.37)       $ (0.75)

                                                                      THREE MONTHS ENDED
                                                              3/31/2004        6/30/2004      9/30/2004    12/31/2004       TOTAL
SALES                                                   $13,307,183      $12,860,329    $13,759,995   $16,777,537     $56,705,044
GROSS PROFIT                                            $   817,524        $ 698,205     $1,299,230    $1,082,040     $ 3,896,999
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDER    $  (457,974)       $(700,008)    $(170,230)      $(804,542)   $(2,132,754)
BASIC AND DILUTED NET LOSS PER COMMON SHARE             $    (0.23)        $  (0.34)     $  (0.08)       $  (0.32)     $   (0.97)

</TABLE>

NOTE Q - RETIREMENT PLAN

On January 1, 2002, the Company established the Synergy Brands, Inc. 401(k) Plan
(the "Plan") covering employees 21 years of age and older who have completed six
months of continuous service. For the year ended 2005, 2004 and 2003 the Company
match was $23,587, $19,838 and $13,252.

                                      F-35

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2005, 2004 and 2003

NOTE R - COMMITMENTS AND CONTINGENCIES

1. Lease Commitments

The Company leases office and warehouse space under operating leases expiring at
various  dates  through June 2011.  The Company is also leasing  vehicles  under
operating leases.  Future minimum lease payments under  noncancelable  operating
leases as of December 31, 2005 were as follows:

                         Year ending December 31,
                                2006          $ 435,161
                                2007          $ 425,147
                                2008          $ 417,031
                                2009          $ 407,673
                                2010          $ 403,867
                                thereafter    $ 337,476
                                             ----------
                                             $2,426,355

Rent expense under operating  leases for the years ended December 31, 2005, 2004
and 2003 was approximately $375,000, $190,000 and $112,000 respectively.

2. Litigation

The Company is subject to legal  proceedings  and claims,  which  arise,  in the
ordinary  course of its business.  In the opinion of  management,  the amount of
ultimate  liability,  if any, with respect to these actions will not  materially
affect the Company's financial position, results of operations or cash flows.

3. Other Liabilities

During the first  quarter of 2003,  the Company  entered into a  settlement  and
release  agreement in which the Company paid $13,000 to a vendor and the Company
released of its  liability  to that  vendor.  The Company has recorded a gain of
$155,750 as a result of this release  during the first quarter of 2003. In March
2003,  the  Company  and  another  vendor  executed  a  settlement  and  release
agreement.  Pursuant to the terms of the settlement and release  agreement,  the
Company  was  relieved  of its  obligation  to pay for  the  services  that  was
disputed.  The Company recorded a gain of $127,000 as a result of the release by
this vendor.  These gains were recorded as a component of other income (expense)
in the consolidated statements of operations.

                                      F-36

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2005, 2004 and 2003

NOTE S- SEGMENT AND GEOGRAPHICAL INFORMATION

The  Company  offers a broad  range of  Internet  access  services  and  related
products to businesses  and consumers  throughout  the United States and Canada.
Management  evaluates the various  segments of the Company based on the types of
products being  distributed  which were, as of December 31, 2005, 2004 and 2003,
as shown below:


<TABLE>
<CAPTION>
<S>                                          <C>               <C>               <C>             <C>               <C>

                                              Proset            PHS Group          B2C           Corporate            Total
   Year ended December 31, 2005
     Revenue                                   $786,908        $61,450,467      $1,899,715               -        $64,137,090
     Net loss attributable to common         (1,031,576)          (111,784)       (445,505)      (1,289,246)        (2,878,111)
     stockholder
     Depreciation and amortization              183,420             12,804         156,477          145,264            497,965
     Asset impairment charge                    293,586                  -               -                -            293,586
     Interest income                                 -                   -               -          102,644            102,644
     Other income (expense)                     (1,035)             (3,581)        (16,888)              -            (21,504)
     Equity in earnings of investee                  -                   -               -           56,311             56,311
     Interest and financing expenses            80,233           1,297,348               -          216,058          1,593,639
     Identifiable assets                     1,392,551          10,056,544       1,715,940        4,187,603         17,352,638
     Additions to long-lived assets                  -              10,735          61,594                -             72,329
     Investment in affiliate                                                                        364,340            364,340


                                              Proset            PHS Group          B2C           Corporate            Total
   Year ended December 31, 2004
     Revenue                                 $3,923,823       $50,728,560       $2,052,661              -         $56,705,044
     Net loss attributable to common           (219,204)         (167,951)       (644,870)      (1,100,729)        (2,132,754)
     stockholder
     Depreciation and amortization              210,920             6,501         145,301          296,768            659,490
     Interest income                                  -             4,344               -              266              4,610
     Other income (expense)                     (80,778)           71,586        (21,139)          (16,652)           (46,983)
     Equity in earnings of investee                  -                 -               -           172,224            172,224
     Interest and financing expenses           232,913          1,168,607          42,500          109,501          1,553,521
     Identifiable assets                     2,117,631          9,160,367       1,837,998        3,590,427         16,706,423
     Additions to long-lived assets                  -             85,980         175,000           29,078            290,058
     Investment in affiliate                         -                  -               -          336,828            336,828


                                              Proset            PHS Group          B2C           Corporate            Total
   Year ended December 31, 2003
     Revenue                                 $3,671,106        $34,740,999      $2,128,472                -        $40,540,577
     Net loss attributable to common          (502,158)            (79,864)       (235,636)        (537,565)        (1,355,223)
     stockholder
     Depreciation and amortization             213,198             272,812         114,720           91,968            692,698
     Interest income                                 -              13,805               -              108             13,913
     Other income (expense)                     (1,488)             25,490         271,603            3,327            298,932
     Equity in earnings of investee                  -                   -               -           92,424             92,424
     Interest and financing expenses           199,892             449,876          39,518              752            690,038
     Identifiable assets                     2,874,102           6,236,552       1,253,920          628,071         10,992,645
     Additions to long-lived assets              2,220                 818         386,302                -            389,340
     Investment in affiliate                                                                        164,604            164,604

</TABLE>

                                      F-37

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2005, 2004 and 2003

NOTE S (continued)

All of the Company's  identifiable  assets and results of operations are located
in the United States and Canada.  Geographic data, as of and for the years ended
December 31, 2005, 2004 and 2003, is as follows:

                                      2005            2004               2003
                                   ------------   ------------     -------------
       Revenue
         United States             $31,890,610    $30,774,482        $34,076,666
         Canada                     32,246,480     25,930,562          6,463,911
                                   ------------   ------------     -------------
                                   $64,137,090    $56,705,044       $ 40,540,577
                                   ============   ============     =============

        Accounts receivable
          United States            $   939,404     $ 1,393,328
          Canada                     6,682,401        6,210,59
                                   ------------   ------------
                                   $ 7,621,805     $ 7,603,925
                                   ============   ============

        Identifiable assets
          United States            $17,352,638     $16,706,423
          Canada                             -               -
                                   ------------   ------------
                                   $17,352,638     $16,706,423
                                   ============   ============

NOTE T - SUBSEQUENT EVENTS

On March 14, 2006 the Company  closed a $1.75 million  junior  secured five year
loan with an existing lender bearing a fixed interest rate of 10%. Payments will
be made at a rate of $32,000 per month starting October 1, 2006.


                                      F-38