SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

                  For the fiscal year ended December 31, 2006.
                         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
$71,759,908.

<PAGE>

     On March 30,  2007,  the  aggregate  market  value of the  voting  stock of
Synergy Brands Inc., held by  non-affiliates of the Registrant was approximately
$6,800,000.  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, 2007 was 7,908,292.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Proxy  Statement for  Registrant's  2006 Annual  Meeting of
Stockholders  currently  scheduled  to be held  June  2007 are  incorporated  by
reference in Part III (for other  documents  incorporated  by reference refer to
Exhibit Index at page and); also committee charters are included verbatim on the
Company's   website  at  www.sybr.com   and  such   information  and  historical
organization  documentation on the Company are incorporated by referenced to the
source thereof, as more particularly set forth in such listing of Exhibits).

                                     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
principally operates through a wholly owned subsidiary,  PHS Group Inc. ("PHS"),
in the  wholesale  distribution  of  Groceries  and  Health and Beauty Aid (HBA)
products but operates as well through its wholly owned subsidiary,  Gran Reserve
corporation,  the  business of  wholesale  and on-line  distribution  of premium
cigars and accessories, and through such subsidiary,  trading as Beautybuys.com,
salon  products  and  luxury  goods.  It  principally  focuses  on the  sale  of
nationally  known  brand  name  consumer  products  manufactured  by major  U.S.
manufacturers  and has also entered the grocery private label market in FY 2006.
The consumer  products are  concentrated  within the Grocery and Health & Beauty
Aids (HBA) industries. The Company uses logistics based programs to optimize its
distribution costs on both wholesale and retail levels.

     The Company  also owns 20% 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  should
provide for material future capital appreciation. Synergy Brands does not manage
PERX's day-to-day operations.

     For further  information  please visit the Company's  corporate  website at
www.sybr.com.

                                      -1-

<PAGE>

     PHS GROUP (GROCERY & HBA OPERATIONS).

     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 97% of the overall Company sales and 88% 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  as the direct supply source and in turn
increase  sales to its  customers  at  optimized  pricing  through  this  unique
strategy.  PHS concentrates on what it perceives to be faster 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 this sector was Proset Hair
Systems  (Proset).  Proset  discontinued its operations in the 4th quarter of FY
2006.

     In the third quarter of 2006 PHS entered the private  label grocery  market
specializing  in the  distribution of baking mixes and spices to national chains
on a proprietary basis. PHS hopes to develop private label programs for national
accounts  by  creating  proprietary  baking mix  products  and spice  planograms
specifically designed for retail need.

     GRAN RESERVE CORPORATION (PREMIUM CIGAR OPERATIONS)

     The Company's  premium cigar  operations  are conducted  through its wholly
owned  subsidiary  Gran Reserve  Corporation  (GRC).  GRC operates the following
businesses (under the business names stated)

         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.  Information on the Company's
website is not deemed to be incorporated by reference into this report except as
otherwise specifically listed within this report.

                                       2

<PAGE>

     B. PHS GROUP (Grocery & HBA Operations)

     PHS Group heading the principal business of the Company representing 97% of
total  revenues,  is 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 other  international  markets.  Reference is made to the  financial
statements,  schedules, and notes to financials wherein more specific disclosure
is  presented  regarding  amounts of  revenues  derived  from  foreign  sales as
compared  to  domestic.Distribution  of  such  products  is  directed  to  major
retailers  and  wholesalers  from  major  U.S.  and  Canadian  consumer  product
manufacturers and  distributors.  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 what it perceives to be 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 1000 outlets in the northeastern  quadrant of the
United States and Canada.  PHS utilizes  leased trucks in addition to consigning
common carriers for overflow sales.

     In the third quarter of 2006 PHS entered the private  label grocery  market
specializing  in the  distribution of baking mixes and spices to national chains
on a proprietary basis. PHS hopes to develop private label programs for national
accounts  by  creating  proprietary  baking mix  products  and spice  planograms
specifically designed for retail need.

     C. GRAN RESERVE CORPORATION (Cigar Sector).

     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, initial winner of the NBC show The Apprentice. Mr. Rancic serves on
the Board of Directors of Synergy Brands.  CAW sells, its cigars,  in large part
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.  Its  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>

     The Company  through its websites also 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 cigar 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.

     CG  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. The system
is designed such that 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  95% of
its  product  mix;  the  other 5% 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 CG web site,  they provide CG with  information  about
their buying preferences and habits. CG then can use this information to develop
personalized  communications and deliver useful information,  special offers and
new product announcements to its customers. In addition, CG uses e-mail to alert
customers to important developments and merchandising initiatives.

                                       4

<PAGE>

     CG 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  CG.   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 FY 2007 the Company desires to and will likely  continue  implementation
of plans to expand on its online  partnerships for all its product offerings and
expand CAW retail store operations.

     The second business area of this segment within the Company's B2C sector is
sale directly to the consumer of salon products  on-line through  Beautybuys.com
and other on-line partnership affiliations.  This latter online unit operates at
www.BeautyBuys.com.  BeautyBuys.com  sells salon hair  products  directly to the
retail consumer.

                                      -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, 2006, sales to three customers accounted
for 21%,  16% and 12% of the  Company's  total  sales and in 2005 sales to three
customers  accounted for 12%, 11% and 10% of total sales.  These major customers
relate to the grocery logistics business within the Company's PHS Group (grocery
and HBA operation) 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
which charters and policies should also be accessible by link from the Company's
website at www.sybr.com.  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 its 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.

     The  Company's  proprietary  internet  technology  and  that  independently
developed  as  utilized by the Company  does focus on and gives  protection  for
customers and supplier privacy concerns.

                                        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  presently  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.

     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 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 direct customer 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  95% of direct
customer  product  inventory  is in  warehouse  stock and 5% 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, Cigars Around The World and Cigar Kingdom. PHS
is the dominant 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 has been an
increased  pressure  on  Congress  to enact  legislation  that  would ease State
efforts in the collection of taxation on cigarette  sales.  Although cigar sales
are not currently  included in the recent  regulatory  initiatives  there may be
future action against cigar companies  which could have material  adverse effect
on the Company's  business.  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,  as of  January  2007,  twenty-two  states  have  legislation
mandating,  in varying  degrees,  the  prohibition  of smoking in certain public
places.  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). A 2006 U.S. Surgeon General Report ("The Report") detailed
the adverse  physical  impacts of second-hand  smoke;  thereby  invalidating the
contention that smoking in public is a "victimless crime." The Report has been a
propelling factor in the expansion of anti-smoking legislation.

     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.  At the end of 2006,  the
Alcohol and Tobacco Tax and Trade  Bureau and the  Department  of Treasury  have
proposed  rule  changes  to the  classifications  and  labeling  of  cigars  and
cigarettes   in  an  effort   to  reduce   possible   revenue   losses   due  to
misclassification.  The rule  changes  attempt  to  clarify  the  classification
criteria.  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.
Current  legislation before Congress,  the Permanent Internet Tax Freedom Act of
2007, proposes to permanently extend the moratorium on discriminatory  taxes for
Internet purchases.  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 TO EXTEND CREDIT TO ITS CUSTOMERS.

     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, 2006,  the Company had  long-term  indebtedness  of $2.0
million.  Although the Company made debt principal  reduction  payments over the
last three 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  historical  losses,  its evolving business model, and
the  unpredictability  of  its  industries,  the  Company  may  not be  able  to
accurately  forecast its rate of continued 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 which reduces the gross profit and may increase inventory risk.

     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 system is presently and
has in the past been  questioned,  the focus being on the market  quotes for the
Company's  stock, the current bid price presently being and having for a time in
the past been reduced below the  applicable  minimum  NASDAQ  standard of $1 and
having 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 applicable 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 and revised NASDAQ 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 System and
thereafter  trading would likely be reported in the NASDAQ's OTC Bulletin  Board
or in the "pink  sheets." The Company is presently  under warning from NASDAQ to
better conform by evidencing and maintaining a bid price at or better than $1 or
chance being delisted. (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.
The  Company  is  hopeful  of  experiencing  an  increase  in its bid  price  in
conformity with applicable  NASDAQ listing standards within the time limitations
instructed  by NASDAQ  administration.  The  Company  has also  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.

     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>

     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 notes that there is
currently Congressional  legislation pending, the Permanent Internet Tax Freedom
Act of 2007,  which is intended to amend the  Internet  Tax Freedom Act of 1998,
thereby placing a permanent  moratorium on multiple and discriminatory  taxes on
electronic commerce and Internet access taxes. Said amendment is currently being
considered  by the  Committee on the  Judiciary  and the  Committee on Commerce,
Science,  and  Transportation in the U.S. House of  Representatives  and Senate,
respectively.  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 increase  enforcement  of the federal  Jenkins Act,  which  requires
persons  whom  engage  in the  sale  of  cigarettes  and  smokeless  tobacco  in
interstate  commerce  to  report  said sale to the  buyer's  state  tobacco  tax
administrator.  A 2003 U.S.  Government  Accounting  Office  report found that a
significant number of Internet cigarette vendors fail to comply with the Jenkins
Act.  Although the Jenkins Act and  subsequent  bills have sought the  increased
collection of state  cigarette  taxes,  cigars  remain  outside the scope of the
regulation.  However, the Company cannot predict the ultimate content, timing or
effect of any additional  regulation of tobacco products by any federal,  state,
or local  or  regulatory  body,  and  there  can be no  assurance  that any such
legislation  or  regulation  would  not  have  material  adverse  effect  on the
Company's business. 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>

     28. INTERNATIONAL BUSINESS RISKS.

     The Company deals with Companies not located in the United States. Although
almost all business activity is conducted in United States Dollars,  The Company
may be subject to currency risks. The Company has significant assets outside the
United States and therefore may be subject to  international  risks that are not
under the jurisdiction of U.S. Laws. In 2006 the Company had  transactions  with
Companies located in Canada,  China,  Dominican  Republic,  Colombia,  Italy and
Israel.

     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 2006 no matters were submitted for shareholder
approval.

                                       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, 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
March 31, 2006              1.97            1.22       1.38
June 30, 2006               1.45            1.00       1.12
September 30, 2006          1.17             .93       1.04
December 31, 2006           1.35             .81        .93

     On March 30,  2007,  the Company had  approximately  3200  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.  There are no
unexercised stock options outstanding.

     The Company is under present warning from NASDAQ  administration to achieve
and maintain a bid price for its Common Stock above $1 or chance being  delisted
(see further  explanations  at Risk Factor 7 "Possible  Loss of NASDAQ Small Cap
Listing," supra).

     The  Company  has  authorized  stock  of  15,000,000  shares  divided  into
14,000,000  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.

                                       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 2006.  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


                             YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
<S>                                                 <C>             <C>           <C>         <C>          <C>

                                                      2006           2005          2004         2003       2002
CONSOLIDATED STATEMENT OF OPERATIONS:
NET SALES                                          $71,759,908    $63,350,182   $52,781,221  $36,869,471 $29,003,459

COST OF SALES
COST OF PRODUCT                                    $65,631,282    $58,403,752   $48,701,653  $33,707,053 $27,181,698
SHIPPING AND HANDLING COSTS                         $1,169,381       $940,316      $770,723     $697,524    $438,754
                                                   $66,800,663    $59,344,068   $49,472,376  $34,404,577 $27,620,452

GROSS PROFIT                                        $4,959,245     $4,006,114    $3,308,845   $2,464,894  $1,383,007

OPERATION EXPENSES
ADVERTISING AND PROMOTIONAL                           $234,582        $62,255      $150,181      $91,634    $464,638
GENERAL AND ADMINISTRATIVE                          $4,052,762     $3,701,271    $3,322,686   $2,554,979  $2,588,520
DEPRECIATION AND AMORTIZATION                         $245,085       $314,545      $448,570     $479,500    $425,093
                                                    $4,532,429     $4,078,071    $3,921,437   $3,126,113  $3,478,251

OPERATING PROFIT(LOSS)                                $426,816       -$71,957     -$612,592    -$661,219 -$2,095,244

OTHER INCOME(EXPENSE)
INTEREST INCOME                                       $147,533       $102,644        $4,610      $13,913     $26,695
OTHER INCOME(EXPENSE)                                 -$22,039       -$20,469       $33,795     $300,420    $521,267
EQUITY IN EARNINGS OF INVESTEE                        $227,054        $56,311      $172,224      $92,424     $67,717
INTEREST AND FINANCING EXPENSES                    -$2,050,856    -$1,513,406   -$1,320,608    -$490,146   -$150,943
                                                   -$1,698,308    -$1,374,920   -$1,109,979     -$83,389    $464,736

LOSS BEFORE INCOME TAXES                           -$1,271,492    -$1,446,877   -$1,722,571    -$744,608 -$1,630,508

INCOME TAX EXPENSE                                     $43,976        $82,325       $34,604      $30,457     $22,347

LOSS FROM CONTINUING OPERATIONS                    -$1,315,468    -$1,529,202   -$1,757,175    -$775,065 -$1,652,855

LOSS FROM DISCONTINUED OPERATIONS                  -$1,358,478    -$1,029,043     -$219,204    -$499,957   -$833,372

INCOME TAX EXPENSE                                        $986         $2,533                     $2,201        $340

LOSS FROM DISCONTINUED OPERATIONS                  -$1,359,464    -$1,031,576     -$219,204    -$502,158   -$833,712

NET LOSS                                           -$2,674,932    -$2,560,778   -$1,976,379  -$1,277,223 -$2,486,567

DIVIDEND-PREFERRED STOCK                              $356,500       $317,333      $156,375      $78,000

NET LOSS ATTRIBUTABLE
TO COMMON STOCKHOLDERS                             -$3,031,432    -$2,878,111   -$2,132,754  -$1,355,223 -$2,486,567

BASIC AND DILUTED NET LOSS PER COMMON
SHARE FROM CONTINUING OPERATIONS:                       -$0.33         -$0.48        -$0.87       -$0.52      -$1.27

BASIC AND DILUTED NET LOSS PER COMMON
SHARE FROM DISCONTINUED OPERATIONS:                     -$0.27         -$0.27        -$0.10       -$0.30      -$0.64

BAISIC AND DILUTED NET LOSS PER COMMON SHARE            -$0.60         -$0.75        -$0.97       -$0.82      -$1.91

WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING                                   5,080,323      3,820,061     2,209,371    1,652,019   1,302,042


CONSOLIDATED BALANCE SHEET DATA:
WORKING CAPITAL                                     $9,285,585     $4,967,712    $4,058,275   $2,245,956  $1,488,699
TOTAL ASSETS                                       $20,867,796    $17,352,638   $16,706,423  $10,992,645  $5,871,669
LONG TERM OBLIGATIONS                               $7,797,566     $2,668,691    $1,196,241     $788,162    $342,750
TOTAL SHAREHOLDERS' EQUITY                          $5,660,250     $6,932,701    $6,573,057   $2,943,832  $2,082,537

</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
principally  operates through a wholly owned subsidiary,  PHS Group Inc. ("PHS")
in the wholesale distribution of nationally known brands and proprietary private
label  Groceries  and Health and Beauty Aid (HBA)  products as well as wholesale
luxury goods. It principally  focuses on the sale of nationally known brand name
consumer  products  manufactured  by  major  U.S.  manufacturers  and has  begun
focusing on the  grocery  private  label  market in FY 2006.  The  Company  uses
logistics  based  distribution  programs to optimize its costs on both wholesale
and retail levels.

     The Company also owns a wholly owned  subsidiary  Gran Reserve  Corporation
that principally  operates in the wholesale,  retail and online sales of Premium
hand made cigars and accessories.

     The Company  also owns 20% 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  should
provide for material future capital appreciation. Synergy Brands does not manage
PERX's day-to-day operations.

     For further  information  please visit the Company's  corporate  website at
www.sybr.com.

     PHS GROUP (GROCERY & HBA OPERATIONS)

     PHS Group distributes Grocery and HBA products to retailers and wholesalers
predominately  located in the  Northeastern  United  States.  PHS is the largest
business segment of the Company's business operations, representing about 97% of
the overall Company sales and 88% 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 better plan for the needs of its  specific  customers  and at the
same time  benefit  the  manufacturer  as the direct  supply  source and in turn
increase  sales to its  customers  at  optimized  pricing  through  this  unique
strategy.  PHS concentrates on what it perceives to be faster 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 sector wherein
PHS  participates  was  previously  Proset  Hair  Systems  (Proset)  but  Proset
discontinued  its operations in the 4th quarter of FY 2006 as further  discussed
infra.

     In the third quarter of 2006 PHS entered the private  label grocery  market
specializing  in the  distribution of baking mixes and spices to national chains
on a proprietary basis. PHS hopes to develop private label programs for national
accounts by creating  proprietary  baking mix  products  and spice  plan-o-grams
specifically  designed for particular  retail needs. PHS further hopes to expand
its grocery  distribution  business by  complementing  the  distribution  of its
promotional  grocery and HBA items with higher margin secondary items that would
blend a higher margin into PHS operations.

     GRAN RESERVE CORPORATION (PREMIUM CIGAR OPERATIONS)

     The Company's  premium cigar  operations  are conducted  through its wholly
owned  subsidiary  Gran Reserve  Corporation  (GRC).  GRC operates the following
businesses (under the business names stated)

         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 opened a
         retail store and lounge in Miami Lakes,  Florida selling premium cigars
         and  accessories in March 2006 as well as  established  and furthered a
         web site related to its operations, www.cigarsaroundtheworld.com.

         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.

                                       29

<PAGE>

     CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2006
         AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2005.

SUMMARY OF OPERATING SEGMENTS AND SUMMARY CONSOLIDATED RESULTS OF OPERATIONS


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

                                         OPERATING                       OPERATING AND
                                         SEGMENTS                      CORPORATE SEGMENTS

Y/E 12/31/2006
Revenue                                 $71,759,908       13.27%            $ 71,759,908      13.27%
Gross Profit                              4,959,245       23.79%               4,959,245      23.79%
SG&A                                      2,896,658       -5.48%               4,287,344      13.92%
Operating Profit                          1,894,202      145.30%                 426,816     693.15%
Net Profit (loss) from
 continuing operations attributable
  to common shareholders                    468,424      184.05%              (1,671,968)     -9.45%
Per share continuing operations                0.09                                (0.33)
Net loss from discontinued
 operations                                                                   (1,359,464)     31.79%
Per share discontinued operations                                                  (0.27)
Net loss attributable
 to shareholders                                                              (3,031,432)      5.33%
Net loss per common share                                                          (0.60)
Interest and financing expense            1,403,739        8.20%               2,050,856      35.50%

   Y/E 12/31/2005
Revenue                                 $63,350,182                         $ 63,350,182
Gross Profit                              4,006,114                            4,006,114
SG&A                                      3,064,639                            3,763,526
Operating Profit (loss)                     772,194                              (71,957)
Net Profit (loss) from
 continuing operations attributable
  to common shareholders                   (557,289)                          (1,846,535)
Per share continuing operations               (0.14)                               (0.48)
Net loss from discontinued
 operations                                                                   (1,031,576)
Per share discontinued operations                                                  (0.27)
Net loss attributable
 to shareholders                                                              (2,878,111)
Net loss per common share                                                          (0.75)
Interest and financing expense            1,297,348                            1,513,406

</TABLE>

     SYNERGY BRANDS

     Synergy Brands is a holding  Company that operates  through its two current
segments as previously  referred to and described herein.  Synergy  discontinued
its Proset segment in the fourth quarter of 2006. In order to better  understand
the results of operations, each present segment is analyzed respectively and the
discontinued  operations  summarized with the financial details thereof included
as are relevant to discussion of past performance.

     Overall  revenues  increased  by 13% to  $71,759,908  for  the  year  ended
December 31, 2006, as compared to  $63,350,182  for the year ended  December 31,
2005.  The largest  percentage  increase  was in the  Company's  grocery and HBA
operations  conducted  through  its  wholly  owned  subsidiary  PHS  Group.  The
Company's grocery operation continued to develop additional vendor relationships
in the grocery and HBA  businesses  as well as developed a Private Label grocery
business offered to U.S. and Canadian customers.

     Overall  gross  profit  increased by 24% to  $4,959,245  for the year ended
December  31, 2006 as compared to  $4,006,114  for the year ended  December  31,
2005.  During the latest annual period the Company  invested in its direct store
delivery (DSD)  operation as well as private label grocery  distribution,  which
have contributed to higher gross margins as compared to the prior fiscal year.

     Overall Selling General and Administrative  expenses (SGA) increased by 14%
while revenues increased by 13% for the year ended December 31, 2006 as compared
to the year ended December 31, 2005. The largest subsidiary of the Company,  PHS
Group,  decreased  its SGA  expenses  by 3% to  $2,161,320  for the  year  ended
December  31, 2006 as compared to  $2,211,290  for the year ended  December  31,
2005.  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  rose,  sales  commissions  and certain
operating expenses resulting from sales increased commensurately.

                                       30

<PAGE>

     The overall net loss attributable to Common Stockholders of the Company was
$3,031,432  for the year ended  December  31,  2006 as compared to a net loss of
$2,878,111  for the year ended December 31, 2005.  Interest and financing  costs
represents  approximately 68% of the total loss. The reasons for the increase in
net loss the Company attributes in significant part to a charge of $1.35 million
incurred by the Company in connection with discontinuing Proset's operations and
$655,020 in non-cash  charges.  Corporate  expenses  such as legal,  accounting,
corporate employees and regulatory costs as well as depreciation costs primarily
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  is and will  likely
continue  to be  required to comply  with those and  additional  governance  and
financial  regulations that will likely result in additional corporate expenses.
Corporate  expenses for the year ended  December  31, 2006  totaled  $1,390,686,
which include legal, accounting, corporate employees, and regulatory expenses as
compared  to  $698,887  for the year ended  December  31,  2005.  The  operating
segments of PHS Group and Gran Reserve  Corporation are further  analyzed herein
as relate to the operating  performance  of the Company as well there  following
herein a discussion relating to discontinuing Proset operations.

                                       31

<PAGE>

     Below is a summary of the results of operation by segment:

     PHS Group: (Grocery and HBA operations)

     Synergy's  Grocery  and HBA  business  improved  its  operation  through an
expansion of its DSD and private label  wholesale and  distribution  operations.
Sales improved by 14% to $69.8 million and operating  profit increased by 83% to
$2.2 million. PHS represented 97% of the Company's overall revenues and provides
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  DSD
operations,  expand its private label programs,  and increase its  international
sales which are  anticipated  to help  continue  its  direction  toward  greater
profitability.

     GRAN RESERVE CORPORATION (Cigar operations)

     Gran  Reserve  segment  operations  headed by GRC consist of  subcategories
www.CigarGold.com,  www.CigarsAroundtheWorld.com,  www.BeautyBuys.com,  and  the
retail store  operation in Miami  Lakes,  Florida as well as online  partnership
programs such as www.Overstock.com  and www.Google.com.  The principal operation
has been relocated in March 2006 to a 6,000 square foot facility in Miami Lakes,
Florida,  which  handles  order  flow  for  the  operation  as  well  as  retail
operations.  Sales for this segment  during this period  increased by 1% to $1.9
million  while  operating  loss was  reduced by 29% to  $303,418.  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 2007.  The  combination  of online sales as well as retail store
sales is expected to be the focus for growth in FY 2007.  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 be shifting  the Cigar  business  to be a complete  destination
business as opposed to a leisurely  activity which GRC has commenced  focus upon
through its retail store operations.

     Corporate Expenses:

     The  Company's  allocation  to  corporate  expenses  increased  by  99%  to
$1,390,686. Corporate expenses represent 32% of overall operating expense of the
Company. The Company relates the increase in expenses to higher legal, corporate
employees, regulatory and accounting expenses as well as management  allocations
to corporate costs.  Operating expenses for all operations  including  corporate
expenses totaled $4.3 million in FY 2006.

     Below is a detailed review of the Company's performance.

     In order to better understand the Company's financial historical status and
performance  a  discussion  of  the  Company's  segments  and  their  respective
financial results follow;

     PHS GROUP (Grocery and HBA operations)

     PHS Group distributes Grocery and HBA products to retailers and wholesalers
predominately  located in the Northeastern United States , as well as in Canada.
PHS constitutes the largest segment of the Company's operations from a financial
prospective,  representing  about 97% of the overall  Company sales.  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,  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  which in turn is designed to increase  sales to its  customers
through  this unique  focus.  PHS  concentrates  on what it  perceives to be the
fastest moving consumer product items and uses promotional savings to streamline
and reduce  their sale  prices.  PHS  focuses on  approximately  1,000  products
manufactured  by the top Grocery and HBA Companies in the United States and as a
result the Company believes that they have a competitive advantage in comparison
to the traditional  wholesaler,  which may concentrate on over 10,000  different
items.

                                       32

<PAGE>

PHS SEGMENT INFORMATION OF OPERATING BUSINESSES

                                                  PHS Group          CHANGE
Year ended December 31, 2006
Revenue                                            69,840,886        13.65%
Gross Profit                                        4,370,869        27.66%
SG&A                                                2,161,320        -2.66%
Operating Profit (loss)                             2,197,620        83.16%
Net Profit (loss)                                     779,634       797.45%
Interest and financing expenses                     1,403,739         8.20%

Year ended December 31, 2005
Revenue                                            61,450,467
Gross Profit                                        3,423,960
SG&A                                                2,211,290
Operating Profit (loss)                             1,199,866
Net loss                                             (111,784)
Interest and financing expenses                     1,297,348

     PHS increased its revenues by 14% to $69.8 million for year ended  December
31, 2006 as compared to $61.4 million for the year ended  December 31, 2005. The
increase in PHS business is  attributable  by the Company to the  utilization of
additional  vendors,  development of a private label grocery program designed to
sell proprietary products, more specifically in the baking mix and spice market,
to national  chains located in the United States and Canada,  and organic growth
in sales to its customers in the Northeastern  Section of the United States. PHS
increased its gross profit by increasing Direct Store Delivery sales, developing
a private  label  market to national  chains as well as focusing on  promotional
merchandise  offered  by  its  vendors.  The  overall  gross  profit  percentage
increased to 6.3% in 2006 compared to 5.6% at December 31,2005. In 2006, several
PHS vendors created special packaging with promotional  pricing that enabled PHS
to widen its profit  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 2006 as opposed to marketing those products for normal  replenishment.
The Company believes that 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 manufacturers'  allowances will likely have a material adverse effect
on the Company's operating results. Net profit for this segment was $779,634 for
the year ended  December 31, 2006 as compared to a loss of $111,784 for the year
ended December 31, 2005.

                                       33

<PAGE>

     GRAN RESERVE SEGMENT INFORMATION OF OPERATING BUSINESSES

                                              GRC            CHANGE
Year ended December 31, 2006
Revenue                                       1,919,022         1.02%
Gross Profit                                    588,376         1.07%
SG&A                                            735,338       -13.83%
Operating Profit(loss)                         (303,418)      -29.05%
Net Profit(loss)                               (311,210)      -30.14%
Year ended December 31, 2005
Revenue                                       1,899,715
Gross Profit                                    582,154
SG&A                                            853,349
Operating Profit(loss)                         (427,672)
Net Profit(loss)                               (445,505)

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

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

         o CigarGol.com  markets premium cigars through the Internet directly to
         the consumer. (www.cigargold.com)

         o GRC opened its first retail  store in Miami Lakes,  Florida in March,
         2006.  The store is expected to be an  extension  to the CAW  operation
         with the store 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  direct to  consumers  websites  are also  expected 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 and designed so that all the Cigars can be
viewed in a total store experience. In addition, the store houses a Cigar Lounge
with presently Free satellite TV and Free Wireless  Internet designed to enhance
the customer's  Cigar smoking and shopping  experience.  CAW expects to use this
facility for Radio remotes for special events,  seminars on upcoming news in the
Cigar world, and other organized events for its members benefits.

     CAW features 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 also offers 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 an  optimally  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.

                                       34

<PAGE>

     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  the  Company  believes  that  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
and the perceived results thereof,  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 Lakes; and the Miami New Times.

     Revenues in the Company's  B2C  operation  for the year ended  December 31,
2006 were  $1,919,022 as compared to $1,899,715  for the year ended December 31,
2005. CAW on a current  operating  basis  represented  approximately  56% of B2C
revenues  for the year ended  December  31,  2006.  Gross  profit for year ended
December  31, 2006 was  $588,376  as  compared  to  $582,154  for the year ended
December  31,  2005.  The  table  above  provides  comparative  details  for the
Company's B2C operation.

     CAW is operating  profitably,  but the logistical needed for support of the
Miami Lakes, Florida operations is consuming much of the segment's resources and
thereby  slowing 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.

     DISCONTINUED OPERATIONS

     The Company  discontinued  Proset's operation in the fourth quarter of 2006
and such  discontinuance  is reflected in the financial  statements  hereinafter
provided.  The prior  Proset  segment of the  Company's  business has never been
considered  a  significant  component  thereof.  After  review  of the  relevant
components  required for measuring  the  importance  of and  particulars  of the
Proset segment, the Company determined that the lessened value to the Company of
Proset's  revenues  (because of the cost factor) did not warrant  continuing its
operations  because such revenues had not become sufficient to sustain the costs
of its operations.  Proset has not been able to acquire and sell salon hair care
products at costs  needed to market  those  products  profitably.  In  addition,
Proset's inventory could not be replenished at appropriate levels to accommodate
customers'  needs as determined by the Company.  Proset has continued to operate
at  a  loss  and  management   believed  that  there  is  little  likelihood  of
establishing  a plan  to  bring  such  segment  profitable.  Management  further
believes that the expansion of its profitable  grocery  operations  will provide
for  vertical  growth that may require  additional  capital that would be better
invested in PHS operations rather then Proset operations.

     The table  below  summarizes  the  financial  operations  of Proset for the
period being discussed.

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

                                                 Year ended Dec.31, 2006    Year ended Dec. 31, 2005
         Net Sales                                         $1,222,834                    $786,908

         Cost of sales
         Cost of product                                    1,260,694                     867,036
         Shipping and handling costs                          144,772                      98,607
                                                            ----------                   --------
                                                            1,405,466                     965,643

          Gross Profit                                      (182,632)                    (178,735)

         Operating expenses:
          Advertising and promotion                             1,046                         900
          General and administrative                          594,008                     291,134
          Depreciation and amortization                       157,650                     183,420
          Asset impairment charge                             359,353                     293,586
                                                            ----------                   --------
                                                            1,112,057                     769,040

          Operating profit (loss)                         (1,294,689)                   (947,775)

         Other Income (expenses):
          Other income (expenses)                             (1,024)                     (1,035)
          Interest and financing expenses                    (62,765)                    (80,233)
                                                            ----------                   --------
                                                             (63,789)                    (81,268)
         Net loss before income taxes                     (1,358,478)                 (1,029,043)
                                                            ----------                   --------
         Income tax expense                                       986                       2,533
                                                            ----------                   --------
         Net loss from discontinued operations          $ (1,359,464)                $ (1,031,576)
                                                            ----------                   --------
</TABLE>
                                       35
<PAGE>

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

SUMMARY OF OPERATING SEGMENTS AND SUMMARY CONSOLIDATED RESULTS OF OPERATIONS


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

                                              OPERATING                     OPERATING AND
                                              SEGMENTS                    CORPORATE SEGMENTS

Y/E 12/31/2005
Revenue                                      $63,350,182       20.02%       $ 63,350,182      20.02%
Gross Profit                                   4,006,114       21.07%          4,006,114      21.07%
SG&A                                           3,064,639        9.09%          3,763,526       8.37%
Operating Profit (loss)                          772,194      122.08%            (71,957)    -88.25%
Net Profit (loss) from
 continuing operations attributable
  to common shareholders                        (557,289)     -31.44%         (1,846,535)     -3.50%
Per share continuing operations                    (0.14)                          (0.48)
Net loss from discontinued
 operations                                                                   (1,031,576)    370.60%
Per share discontinued operations                                                  (0.27)
Net loss attributable
 to shareholders                                                              (2,878,111)     34.95%
Net loss per common share                                                          (0.75)
Interest and financing expense                 1,297,348        7.12%          1,513,406      14.60%

   Y/E 12/31/2004
Revenue                                      $52,781,221                    $ 52,781,221
Gross Profit                                   3,308,845                       3,308,845
SG&A                                           2,809,340                       3,472,867
Operating Profit (loss)                          347,703                        (612,592)
Net Profit (loss) from
 continuing operations attributable
  to common shareholders                        (812,821)                     (1,913,550)
Per share continuing operations                    (0.37)                          (0.87)
Net loss from discontinued
 operations                                                                     (219,204)
Per share discontinued operations                                                  (0.10)
Net loss attributable
 to shareholders                                                              (2,132,754)
Net loss per common share                                                          (0.97)
Interest and financing expense                 1,211,107                       1,320,608

</TABLE>

     SYNERGY BRANDS

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

     Overall  revenues  increased  by 20% to  $63,350,182  for  the  year  ended
December 31, 2005, as compared to  $52,781,221  for the year ended  December 31,
2004. The largest percentage increase was in the Company's B2B (PHS) operations.
The  Company's  grocery  operation  within  this  segment  continued  to develop
additional  vendor  relationships  in the grocery and HBA  businesses as well as
expanding its sales in Canada.

     Overall  gross  profit  increased by 21% to  $4,006,114  for the year ended
December  31, 2005 as compared to  $3,308,845  for the year ended  December  31,
2004. The Company  invested in its direct store delivery (DSD) operation  during
this period which have  contributed  to higher  margins as compared to the prior
fiscal year.

     Overall Selling General and  Administrative  expenses (SGA) increased by 8%
while revenues increased by 20% 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 then existing 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
attributed  to 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 have
risen sales commissions and certain operating expenses resulting from sales have
increased commensurately.

                                       36

<PAGE>

     The overall net loss attributable to Common Stockholders 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
represented 53% of the total loss. The Company believes that 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 in significant part 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 is and will
likely  continue  to 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.

     Below is a summary of the results of operations by segment:

     PHS Group: (Grocery and HBA Operations))

     Synergy's  Grocery and HBA  operation  (through PHS) improved its operation
through an  expansion  of its Metro NY wholesale  operation.  Sales  improved as
between the referenced  periods by 21% to $61.4 million and operating profit for
this  segment  increased  by 29% to $1.2  million.  PHS  represented  97% of the
Company's  overall revenues and provides most of the cash flow for the Company's
other segments as well as to cover corporate regulatory  expenses.  PHS plans to
continue  attempting  to  build  its  Metro  NY,  operations  and  increase  its
international sales to Canada and the Caribbean.

     Gran Reserve Corporation (Cigar Operations)

     Gran  Reserve  operations  of the Company as are the focus of this  segment
consist of www.CigarGold.com, www.CigarsAroundtheWorld.com,  www.BeautyBuys.com;
retail store operation in Miami Lakes,  Florida and online partnership  programs
such as www.Overstock.com  and www.Google.com.  The principal operation has been
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 as between the
referenced  periods  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 planned its retail  outlets to act as its
hubs for  expansion in FY 2006 and beyond.  The  combination  of online sales as
well as retail store sales,  as expected was a good part of 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 have contributed to a likely shift in the
Cigar  business  to a complete  destination  business  as opposed to a leisurely
activity.

     Corporate Expenses:

     The Company's  allocation to corporate expenses increased during the period
by 5% to  $698,887.  Corporate  expenses  represented  19% of overall  operating
expense  of  the  Company.  Operating  expenses  for  all  operations  including
corporate expenses totaled $4 million in FY 2005.

     Below is a more detailed review of the Company's performance.

     In order to better  understand  the  Company's  results a discussion of the
Company's  segments and their respective  results during the represented  period
follow;

     PHS Group (Grocery and HBA Operations)

     The Company's  grocery and HBA sector for the period consists mainly of one
operating business, PHS Group. PHS Group distributes Grocery and HBA products to
retailers  and  wholesalers  predominately  located in the  Northeastern  United
States as well as in Canada.  PHS is the largest  subsidiary  of the Company and
represents on average about 97% of the overall  Company sales.  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,  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 which in turn  appears to 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.

                                       37

<PAGE>

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  by the Company 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 of its business  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% for the referenced  period . 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 to 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 manufacturers'  allowances will likely have a material adverse effect
on the  Company's  operating  results.  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.

                                       38

<PAGE>

GRAN RESERVE SEGMENT INFORMATION OF OPERATING BUSINESSES

                                         GRC            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  direct to consumers  activities  are  conducted  through its
wholly  owned  subsidiary  Gran  Reserve  Corporation  (GRC).  GRC  operates the
following businesses

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

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

         o GRC opened its first retail  store in Miami Lakes,  Florida in March,
         2006.  The store as designed is expected to be an  extension to the CAW
         operation with the store 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  direct to  consumers  websites  are also  expected 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 as was contemplated in 2005.

     CAW features 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 also offers premium brands of upscale  accessories.  All
the  products  in the store are  available  nationally  on the  Store's  website
www.CigarsAroundTheWorld.com.

     Revenues in the Company's direct to consumers  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  represented  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  needed for the
Miami Lakes,  Florida operation is consuming much of the segment's resources and
thereby  restricting it from show of 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
future critical mass.

                                       39

<PAGE>

     DISCONTINUED OPERATIONS

     The Company  discontinued  Proset's operation in the fourth quarter of 2006
and such  discontinuance  is reflected in the financial  statements  hereinafter
provided.  The prior  Proset  segment of the  Company's  business has never been
considered  a  significant  component  thereof.  After  review  of the  relevant
components  required for measuring  the  importance  of and  particulars  of the
Proset segment, the Company determined that the lessened value of the Company of
Proset's  revenues  did not  warrant  continuing  its  operations  because  such
revenues  (because of the cost factor) had not become  sufficient to sustain the
costs of its operations. Proset has not been able to acquire and sell salon hair
care products at costs needed to market those products profitably.  In addition,
Proset's inventory could not be replenished at appropriate levels to accommodate
customers'  needs as determined by the Company.  Proset has continued to operate
at  a  loss  and  management   believed  that  there  is  little  likelihood  of
establishing  a plan  to  bring  such  segment  profitable.  Management  further
believes that the expansion of its profitable  grocery  operations  will provide
for  vertical  growth that may require  additional  capital that would be better
invested in PHS operations rather then Proset operations.

     The table below  summarizes the historical  financial  operations of Proset
for the period being discussed.

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


                                            Year ended Dec. 31, 2005   Year ended Dec. 31, 2004
         Net Sales                                          $ 786,908                $3,923,823

         Cost of sales
         Cost of product                                      867,036                 3,206,187
         Shipping and handling costs                           98,607                   129,482
                                                            ----------                 --------
                                                              965,643                 3,335,669

          Gross Profit                                       (178,735)                  588,154

         Operating expenses:
           Advertising and promotion                              900                         -
           General and administrative                         291,134                   282,747
           Depreciation and amortization                      183,420                   210,920
           Asset impairment charge                            293,586                         -
                                                            ----------                 --------
                                                              769,040                   493,667

          Operating profit (loss)                           (947,775)                    94,487

         Other Income (expenses):
           Other income (expenses)                            (1,035)                  (80,778)
           Interest and financing expenses                   (80,233)                 (232,913)
                                                            ----------                 --------
                                                             (81,268)                 (313,691)
         Net loss before income taxes                     (1,029,043)                 (219,204)
                                                            ----------                 --------
         Income tax expense                                     2,533                        -
                                                            ----------                 --------
         Net loss from discontinued operations          $ (1,031,576)                $(219,204)
                                                            ----------                 --------

</TABLE>

                                       40

<PAGE>

                         LIQUIDITY AND CAPITAL RESOURCES


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

Year ended                                                      2006           2005

Working Capital                                               $ 9,285,585     $ 4,967,712
Assets                                                         20,867,796      17,352,638
Liabilities                                                    15,207,546      10,419,937
Equity                                                          5,660,250       6,932,701
Line of Credit Facility                                         5,836,928       4,033,242
Receivable turnover (days)                                             57              44
Inventory Turnover (days)                                               7               7
Net cash used in operating activies                            (4,324,635)     (4,064,235)
Net cash provided by (used in ) investing activites               420,590        (791,007)
Net cash provided by financing activites                        4,293,432       4,160,250

</TABLE>

     The Company's  working capital increased by $4.3 million in FY 2006 to $9.3
million due to a combination of several factors including  amortization of debt,
refinancing of short term debt to long term debts and operating profits from PHS
Group.  Receivables  including  trade and other  receivables  increased  by $4.4
million  due to revenue  increases  and vendor  rebates.  The  Company  plans to
further  improve its working  capital  through  conversion of short-term debt to
long-term debt, increasing its operating profit, reducing its financing expenses
and the utilization of equity financing.

     The  Company  needed  $4.3  million to support  cash  needed for  operating
activities.  The  predominant  need for cash  involved  the increase of accounts
receivable by $4.3 million.  The Company supported this need through an increase
of its utilization of lines of credit,  additional  equity and debt instruments.
In addition,  improved  operating  performance  by PHS Group  contributed to the
operating needs of the Company. The Company financed its operating activities by
issuing $1.75  million in 10% notes in the first  quarter of 2006,  and utilized
its asset based financing facilities and trade financing for $1.8 million in the
fourth quarter of 2006.

                                       41

<PAGE>

     Liquidity  for the  Company  predominately  involves  the  need to  finance
accounts receivables,  inventory, interest and operating expenses. The cash flow
realized  from the  Company's  gross  profit  has been  sufficient  to cover the
Company's  operating  expenses.  However,  the Company relies on debt and equity
financing in order to support the interest  that it pays in support of financing
its  receivables  and  inventory.  The  Company  has  not  been  able to date to
completely  support its financing costs solely from operations and has relied on
equity and debt  financing to bridge the gap.  The Company  generated a net loss
attributable  to  Common  Shareholders  of  approximately  $3,031,000  in  2006.
Financing costs totaled  $2,050,856 and non-cash  charges totaled  approximately
$600,000  for the  period.  Reductions  in  financing  expenses  through  equity
conversions and debt repayments  through operating or capital  transactions have
been and should continue to be beneficial to the Company's performance.

     The capital  resources that were available to the Company consisted of $7.0
million in lines of Credit,  $3.7 million in short term notes,  $3.65 million of
non-redeemable  preferred and $2.0 million in long-term notes as of December 31,
2006.  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 debit
with lower rates.  Towards such goal,  in the first  quarter of 2007 the Company
refinanced  it's $6 million  dollar senior line of credit with a $6.5 million 10
year term facility and reduced its interest rate to 11.25%.  However there is no
assurance  that the  Company  will be able to  achieve  its  stated  objectives.
Achieving  these  goals and  objectives  is believed  material to the  Company's
success.

     The  Company's  liquidity  relies in  material  part on the  turnover of it
inventory  and  accounts  receivable.  The  Company has for the last fiscal year
turned its  receivables  on average every 57 days and the Company has turned its
overall  inventory on average  approximately  every 7 days. The Company believes
that its collection  procedures  and  procurement  policies are consistent  with
industry standards. However, nearly 60% 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
to optimize its profit potential. The Company's sales are reliant in significant
part on  extending  credit  that  ranges  from 30 to 60 days.  As a result,  the
Company must have financing  facilities  that will continue to allow the Company
to procure  inventory and extend accounts  receivable  credits.  The Company has
strict credit policies and reviews;  however credit extensions may pose material
financial  risks to the Company.  In addition the Company  relies on performance
incentives  from its  manufacturers  that are based  upon  sales.  Provided  the
Company maintains its performance  standards with the Manufacturers with whom it
contracts for  procurement  of goods its  estimates of  incentives  that are due
should remain accurate.  However,  if the respective  manufactures  change their
policies or the Company does not meet the  manufacturers  standards,  incentives
may be reduced.

                                       42

<PAGE>

     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 likely  continue to be subject to  financial,  economic  and other  factors
likely  to be  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 and continues to be 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:

12/31/07          12/31/08          12/31/09         12/31/10          Total
$227,000          $102,000          $74,000          $53,000           $456,000

     Variable  interest rate on notes of $570,000 was 11.25%.  Variable interest
rate on note of $500,000 was 7.75%.

     The following  table presents the Company  expected cash  requirements  for
contractual obligations outstanding at December 31, 2006.

                                      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                      $5,836,928                                                            $5,836,928

Notes Payable                       $4,227,000       $1,386,000        $857,000                           $6,470,000

Operating Leases                     $429,746        $835,737          $642,152         $103,714          $2,011,349

Total Contractual
 Cash Obligations                    $10,493,674     $2,221,737        $1,499,152       $103,714         $14,318,277

</TABLE>

                                       43

<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 - 90 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, 2006, 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.

                                       44

<PAGE>

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

     In November 2004, the Financial  Accounting Standards Board ("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's  adoption  of  SFAS  No.151  did not  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's
adoption  of SFAS  No.153  did  not  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. " ("SFAS 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  the  net  income  of the  period  of the  change  the
cumulative  effect of  change to the new  accounting  principle.  The  Company's
adoption  of SFAS  No.  154 did not  have a  material  impact  on the  Company's
financial position or result of operations.

     In February 2006, FASB issued SFAS No. 155,  Accounting for Certain Hybrid
Financial  Instruments-an Amendment of FASB No. 133 and 140. The purpose of SFAS
statement No. 155 is to simplify the  accounting  for certain  hybrid  financial
instruments by permitting  fair value  re-measurement  for any hybrid  financial
instrument  that contains an embedded  derivative  that otherwise  would require
bifurcation.  SFAS No. 155 also eliminates the restriction on passive derivative
instruments that a qualifying  special-purpose  entity may hold. SFAS No. 155 is
effective for all financial  instruments  acquired or issued after the beginning
of any entity's first fiscal year beginning after September 15, 2006. We believe
that the  adoption of this  standard on January 1, 2007 will not have a material
effect on our consolidated financial statements.

                                       45

<PAGE>

     In September 2006, the FASB issued No. 157, "Fair Value Measurements." SFAS
No. 157 defines fair value, establishes a framework for measuring fair value and
requires  enhanced  disclosures  about  fair  value  measurements.  SFAS No. 157
requires  companies  to disclose the fair value of their  financial  instruments
according to a fair value  hierarchy as defined in the  standard.  Additionally,
companies  are  required  to provide  enhanced  disclosure  regarding  financial
instruments in one of the categories  (level 3), including a  reconciliation  of
the beginning and ending  balances  separately for each major category of assets
and liabilities.  SFAS No. 157 is effective for financial  statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal  years.  We  believe  that the  adoption  of SFAS No. 157 will not have a
material impact on our consolidated financial statements.

     In July 2006,  the FASB  issued FASB  Interpretation  48,  "Accounting  for
Uncertainty  in Income Taxes ("FIN 48").  FIN 48 clarifies  the  accounting  for
uncertainty in income taxes recognized in an enterprise's  financial  statements
in  accordance   with  SFAS  No.  109,   "Accounting  for  Income  Taxes."  This
interpretation  prescribes a recognition threshold and measurement attribute for
the financial  statement  recognition and measurement of a tax position taken or
expected  to be  taken  in a tax  return.  FIN  48  also  provides  guidance  on
derecognizing,  classification  interest and  penalties,  accounting  in interim
periods,  disclosure and transition. We believe that the adoption of FIN 48 will
not have a material impact of our  consolidated  financial  statements.  For our
Company, this interpretation will be effective beginning January 1, 2007.

     The SEC issued Staff Accounting Bulletin No. 108 ("108") in September 2006.
SAB  108  expresses  the  views  of the  SEC  staff  regarding  the  process  of
quantifying  the materiality of financial  misstatements.  SAB 108 requires both
the balance sheet and income  statement  approaches be used when quantifying the
materiality of misstatement  amounts. In addition,  SAB 108 contains guidance on
correcting errors under the dual approach and provides  transition  guidance for
correcting  errors  existing  in  prior  years.  SAB  108 was  effective  in the
Company's  fourth  quarter  of  2006.  The  adoption  of SAB 108 did not  have a
material impact on the Company's consolidated financial statements.

     SEASONALITY

     Sales by PHS Group  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, the 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.

     ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The  Company  does rely  partly  not to any  material  extent  on  variable
interest  rate  debt  instruments  representing  less  than 10% in amount of all
working capital financing,  and the Company does not therefore consider there to
be any overall  material market risk  potentially  derived from the existence of
such loan terms (See MD&A supra for further details regarding  existing variable
interest rate  instruments).  The Company does not believe that it has any other
potential market risk sensitive financial instruments.

                                       46

<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

Report of Independent Registered Public Accounting Firm                                            F-2
Consolidated Balance Sheets as of December 31, 2006 and 2005                                     F-3-F-4
Consolidated Statements of Operations for the Years Ended
    December 31, 2006, 2005 and 2004                                                               F-5
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Loss for the
    Years Ended December 31, 2006, 2005 and 2004                                                 F-6-F-9
Consolidated Statements of Cash Flows for the Years Ended
    December 31, 2006, 2005 and 2004                                                             F-10-F-11
Notes to Consolidated Financial Statements                                                       F-12-F-39

</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 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.

                                       47

<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 2007.  Such Proxy
Statement is expected to be filed with the  Commission  by April 30, 2007 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.

                                       48

<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

EX-14.1          Audit Committee Charter (5)                                       EX-14.1

EX-14.2          Nominating Committee Charter (5)                                  EX-14.2

EX-14.3          Whistleblower Policy (5)                                          EX-14.3

EX-14.4          Nominating Committee Charter (5)                                  EX-14.4

21               Listing of Company Subsidiaries                                   EX-21

23.1             Consent of Holtz Rubenstein Reminick LLP                          EX-23.1


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

                                       49

<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.  In January  2007 the  Company
         entered into a Securities Purchase Agreement with Lloyd Miller, III and
         affiliated  entity  thereof  under which  terms the  Company  obligated
         itself to a borrowing  of $6.5  million  and agreed to issue  1,075,000
         shares of its Common Stock,  which financial  arrangement was disclosed
         in an 8K filing made by the Company on January 22, 2007 and such filing
         is incorporated by reference  hereafter for further  description of the
         subject  transactions.  Information  and particulars on other 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   approximately   $2,225,000  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

(5)      These charters and policies are available in full text on the Company's
         website  and such  information  is  incorporated  herein  by  reference
         therefrom.

(c) Financial Statement Schedules
             None

                                       50

<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: March 30, 2007

     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: March 30, 2007

                               by /s/ Mitchell Gerstein
                               ----------------------------------
                                      Mitchell Gerstein
                                      Chief Financial Officer
Dated: March 30, 2007
                               by /s/ Joel Sebastian
                               -----------------------------------
                                      Joel Sebastian, Director

Dated: March 30, 2007

                               by /s/ Lloyd Miller
                               -----------------------------------
                                      Lloyd Miller, Director
Dated: March 30, 2007


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


Dated: March 30, 2007

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

Dated: March 30, 2007

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

                                       51

<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 occurred  during the  registrant's  most
recent fiscal quarter (the registrant's  fourth fiscal quarter 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 of internal  control over  financial  reporting,  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  control 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 control over
financial reporting.



Date: March 30, 2007

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

                                       52

<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 occurred  during the  registrant's  most
recent fiscal quarter (the registrant's  fourth fiscal quarter 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 of internal  control over  financial  reporting,  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  control 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 control over
financial reporting.


Date: March 30, 2007

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

                                       53

<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, 2006 and 2005 and the related  consolidated  statements
of operations,  stockholders'  equity and comprehensive loss, and cash flows for
each  of  the  three  years  in  the  period  ended  December  31,  2006.  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, 2006 and 2005 and the results of its  operations and its cash
flows for each of the three  years in the  period  ended  December  31,  2006 in
conformity with accounting principles generally accepted in the United States of
America.

As  discussed  in  Note B to  the  financial  statements,  the  Company  adopted
Financial  Accounting  Standard No.  123(R),  "Share-Based  Payment",  effective
January 1, 2006.


HOLTZ RUBENSTEIN REMINICK LLP

Melville, New York
March 9, 2007

                                      F-2

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                           CONSOLIDATED BALANCE SHEETS

                           December 31, 2006 and 2005


                                     ASSETS

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

CURRENT ASSETS                                                                        2006            2005
                                                                                ----------       ---------
    Cash and cash equivalents                                                   $  644,870       $ 255,483
    Accounts receivable trade, less allowance for doubtful accounts of
    $127,481 and $127,481                                                       11,165,980       7,478,139
    Other receivables                                                            2,453,705       1,730,806
    Notes receivable - current                                                     344,699         287,967
    Inventory                                                                    1,289,221       1,181,223
    Prepaid assets and other current assets                                        669,908         392,789
    Assets of discontinued operations                                              127,182       1,392,551
                                                                                ----------       ---------
              Total Current Assets                                              16,695,565      12,718,958

PROPERTY AND EQUIPMENT, NET                                                        252,950         276,844

OTHER ASSETS                                                                       909,454         802,887

NOTES RECEIVABLE                                                                 2,207,233       2,691,439

INTANGIBLE ASSETS, net of accumulated amortization of
$389,226 and $329,310                                                              288,297         348,213

GOODWILL                                                                           514,297         514,297
                                                                                ----------       ---------
TOTAL ASSETS                                                                  $ 20,867,796    $ 17,352,638
                                                                                ==========       =========

</TABLE>

        The accompanying notes are an integral part of these statements.

                                      F-3

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                     CONSOLIDATED BALANCE SHEETS (Continued)

                           December 31, 2006 and 2005

                      LIABILITIES AND STOCKHOLDERS' EQUITY

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

CURRENT LIABILITIES                                                                                 2006                 2005
                                                                                                -----------          -----------
     Lines of credit                                                                            $         -          $ 4,033,242
    Notes payable - current                                                                       4,196,757            1,326,000
    Accounts payable                                                                              2,170,408            1,640,448
    Related party note payable                                                                       23,706               61,882
    Accrued expenses                                                                                151,037               36,855
     Deferred income                                                                                755,503              127,000
     Liabilities of Discontinued operations                                                         112,569              525,819
                                                                                                -----------          -----------
                    Total Current Liabilities                                                     7,409,980            7,751,246

NOTES PAYABLE, net of discount of $313,749 and 46,309, respectively                               1,960,638            2,668,691

LINES OF CREDIT                                                                                   5,836,928                    -

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
    Class A preferred stock - $.001 par value; 100,000 shares authorized;
        93,213 and 100,000 shares issued and outstanding;
         liquidation preference of $10.50 per share                                                      93                  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;
        285,000 and 330,000 shares issued and outstanding; liquidation preference of
         $10.00 per share                                                                               285                  330
    Class B Series B Preferred stock-$.001 par value, 250,000 shares authorized;
        80,000 shares issued and outstanding; liquidation preference of
        $10.00 per share                                                                                 80                   80
    Common stock - $.001 par value; 14,000,000 shares authorized;
         6,484,275 and 4,457,530 shares issued                                                        6,484                4,458
    Additional paid-in capital                                                                   47,252,064           45,918,817
    Deficit                                                                                     (41,585,416)         (38,910,484)
     Unearned Compensation                                                                                -              (67,260)
    Accumulated other comprehensive loss                                                             (8,340)              (8,340)
                                                                                                -----------          -----------
                                                                                                  5,665,250            6,937,701

    Less treasury stock, at cost, 1,000 shares                                                       (5,000)              (5,000)
                                                                                                -----------          -----------
       Total Stockholders' Equity                                                                 5,660,250             6,932,701
                                                                                                -----------          -----------
        TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                              $20,867,796           $17,352,638
                                                                                                ===========          ===========

</TABLE>

        The accompanying notes are an integral part of these statements.

                                      F-4

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                            Years ended December 31,

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

                                                                                2006               2005          2004
                                                                            -----------         -----------  ------------
Net sales                                                                   $71,759,908         $63,350,182  $ 52,781,221
                                                                            -----------         -----------  ------------
Cost of sales
    Cost of product                                                          65,631,282          58,403,752    48,701,653
    Shipping and handling costs                                               1,169,381             940,316       770,723
                                                                            -----------         -----------  ------------
                                                                             66,800,663          59,344,068    49,472,376
                                                                            -----------         -----------  ------------
Gross profit                                                                  4,959,245           4,006,114     3,308,845
Operating expenses
    Advertising and promotional                                                 234,582              62,255       150,181
    General and administrative                                                4,052,762           3,701,271     3,322,686
    Depreciation and amortization                                               245,085             314,545       448,570
                                                                            -----------         -----------  ------------
                                                                              4,532,429           4,078,071     3,921,437
                                                                            -----------         -----------  ------------
Operating Profit (loss)                                                         426,816             (71,957)     (612,592)
Other income (expense)
    Interest income                                                             147,533             102,644         4,610
    Other income (expense)                                                      (22,039)            (20,469)       33,795
    Equity in earnings of investee                                              227,054              56,311       172,224
    Interest and financing expenses                                          (2,050,856)         (1,513,406)   (1,320,608)
                                                                            -----------         -----------  ------------
                                                                             (1,698,308)         (1,374,920)   (1,109,979)
                                                                            -----------         -----------  ------------
Loss from continuing operations before income taxes                          (1,271,492)         (1,446,877)   (1,722,571)
Income tax expense                                                               43,976              82,325        34,604
                                                                            -----------         -----------  ------------
Loss from continuing operations                                              (1,315,468)         (1,529,202)   (1,757,175)
                                                                            -----------         -----------  ------------
Discontinued operations
Loss from operations of discontinued component                               (1,358,478)         (1,029,043)     (219,204)

Income tax expense                                                                  986               2,533             -
                                                                            -----------         -----------  ------------

Loss from discontinued operations                                            (1,359,464)         (1,031,576)     (219,204)
                                                                            -----------         -----------  ------------
Net Loss                                                                     (2,674,932)         (2,560,778)   (1,976,379)
Dividend - Preferred Stock                                                     (356,500)           (317,333)     (156,375)
                                                                            -----------         -----------  ------------
Net loss attributable to common stockholders                               $ (3,031,432)       $ (2,878,111) $ (2,132,754)
                                                                            ===========         ===========  ============
Basic and diluted net loss per common share from continuing
operations:                                                                    $ (0.33)            $ (0.48)      $ (0.87)
Basic and diluted net loss per common share from discontinued
operations:                                                                    $ (0.27)            $ (0.27)      $(0.10)
                                                                            -----------         -----------  ------------
                                                                               $ (0.60)            $ (0.75)       $(0.97)
                                                                            -----------         -----------  ------------
Weighted average shares used in the compution of loss per common
shares:
Basic and diluted                                                             5,080,323           3,820,061      2,209,371
                                                                            ===========         ===========  ============

</TABLE>

        The accompanying notes are an integral part of these statements.

                                      F-5

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                      AND
                               COMPREHENSIVE LOSS

                  Years ended December 31, 2006, 2005 and 2004


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

                                       Class A          Class B-Series A       Class B-Section B                        Additional
                                   Preferred Stock      Preferred Stock         Preferred Stock        Comonn Stock       Paid-in
                                   Shares    Amount     Shares     Amount       Shares    Amount      Shares    Amount    Capital
                                  -------    ------     -------   --------      -------  --------   ---------  ------- ------------
Balance at January 1, 2004        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                                                                                   100,000      100      470,685
Net proceeds from issuance of
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-6

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                      AND
                               COMPREHENSIVE LOSS

                  Years ended December 31, 2006, 2005 and 2004
                                    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, 2004                  $(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-6

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)

                  Years ended December 31, 2006, 2005 and 2004

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

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

Amortization of unearned
 compensation
Common stock issued                                                                                  454,300     454        537,619
Redemption of
  preferred stock for shares
  of common stock                 (7,000)     (7)      (45,000)    (45)                              785,925     786           (734)
Issuance of common stock for
  note conversion                                                                                    635,610     635        600,565
Issuance of common stock for
     Services                                                                                        150,910     151        190,297
Preferred stock dividend                                                                                                   (356,500)
Issuance of stock warrants                                                                                                  362,000

Net loss
                                  -------    ------     -------   --------      -------  --------   ---------  -------  -----------
Balance at December 31, 2006       93,000      93       285,000    $285         80,000      $80      6,484,275   $6,484  $47,252,064
                                  =======    ======     =======   ========      =======  ========   =========  ======== ===========

</TABLE>

                                      F-7

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)

                  Years ended December 31, 2006, 2005 and 2004

                                    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                                                                                            67,260
Common stock issued
Redemption of
  preferred stock for shares
  of common stock
Issuance of common stock for
  note conversion
Issuance of common stock for
     Services
Preferred stock dividend
Issuance of stock warrants

Net loss                                     (2,674,932)
                                           -------------      --------------     ----------   -----------    ------------
Balance at December 31, 2006               $(41,585,416)         $(8,340)         $(5,000)
                                           =============      ===============    ==========   ===========    ============

</TABLE>


                                      F-7

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)

                  Years ended December 31, 2006, 2005 and 2004


Balance at January 1, 2004                               $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
                                                           =========

                                                                   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-8
<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)

                  Years ended December 31, 2006, 2005 and 2004


                                                             Comprehensive
                                                                  Loss

Amortization of unearned compensation              67,260
Common stock issued                               538,073
Redemption of
  preferred stock for
  shares of common stock                                -
Issuance of common stock for note
   conversions                                    601,200
Issuance of common stock for services             190,448
Preferred stock dividend                         (356,500)
Issuance of stock warrants                        362,000

Net loss                                      (2,674,932)    (2,674,932)
                                              ------------   ------------
Comprehensive loss                                          $(2,674,932)
                                                            =============
Balance at December 31, 2006                  $  5,660,250
                                              ============

         The accompanying notes are an integral part of these statement

                                      F-9

<PAGE>

                                        Synergy Brands, Inc. and Subsidiaries

                                        CONSOLIDATED STATEMENTS OF CASH FLOWS

                                               Years ended December 31,

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

                                                                                  2006                2005               2004
                                                                             -------------       --------------      -------------
Cash flows from operating activities
    Net loss                                                                 $ (2,674,932)        $ (2,560,778)      $ (1,976,379)
    Adjustments to reconcile net loss to net cash
       used in operating activities
          Loss on sale of accounts receivable                                           -                    -             79,134
         Depreciation and amortization                                            245,085              314,545            448,570
         Amortization of financing cost                                            38,059               63,283             90,746
         Loss on sale of marketable securities                                          -                    -             15,793
         Equity in earnings of investee                                          (227,054)             (56,311)          (172,224)
         Non-cash compensation                                                          -                    -             30,750
         Operating expenses paid with common stock and warrants
                                                                                  180,549              104,025            154,620
         Changes in operating assets and liabilities
                 (Increase) decrease in
                Accounts receivable and other receivables                      (4,410,740)          (1,173,399)        (7,126,272)
                Inventory                                                        (107,998)             (27,055)           474,877
                Prepaid expenses, related party note receivable and
                other assets                                                       71,278              177,396            (66,011)
                 Increase (decrease) in
                Accounts payable, related party note payable,
                accrued expenses and other current liabilities                    661,647           (1,189,575)          (143,425)
                Deferred Income and other liabilities                             727,821                     -                 -
            Net assets of discontinued operations                               1,171,650              283,634           1,229,419
                                                                             -------------       --------------      -------------
                      Net cash (used in) operating activities                  (4,324,635)          (4,064,235)        (6,960,402)
                                                                             -------------       --------------      -------------
Cash flows from investing activities
    Payment of security deposit                                                         -              (17,172)           (35,848)
    Purchase of marketable securities                                                   -                    -           (168,377)
    Proceeds from sale of marketable securities                                         -                    -            194,515
    Purchase of property and equipment                                            (35,684)             (72,329)          (112,058)
    Refund of collateral security deposit                                               -                    -            500,000
    Payments received on notes receivable                                         453,469              284,894            433,033
    Issuance of notes receivable                                                  (25,995)          (1,015,200)                 -
     Investee dividend received                                                    28,800               28,800                  -
                                                                             -------------       --------------      -------------
                       Net cash provided by (used in) investing activities        420,590             (791,007)           811,265
                                                                             -------------       --------------      -------------

</TABLE>

                                      F-10

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

                            Years ended December 31,


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

                                                                          2006                   2005               2004
                                                                        ------------        ------------         ------------
Cash flows from financing activities
    Borrowings under line of credit                                      33,593,364          37,488,600           35,608,070
    Repayments under line of credit                                     (31,458,478)        (37,428,968)         (31,804,326)
    Increase in deferred financing cost                                     (67,750)            (57,070)                   -
    Proceeds from the issuance of notes payable                           6,391,319           3,339,564            1,990,000
    Repayments of notes payable                                          (3,777,165)           (240,000)            (100,000)
    Proceeds from issuance of common stock                                  288,173             285,926              462,732
    Net proceeds from the issuance of common and Preferred stock
    in a private placement                                                        -             770,000            1,460,000
    Proceeds from the exercise of stock purchase options                          -                 -                102,250
     Payment of dividends                                                  (356,500)          (317,333)             (156,375)
    Net assets of discontinued operations                                  (319,531)           319,531            (1,219,814)
                                                                        ------------        ------------         ------------
               Net cash provided by financing activities                  4,293,432          4,160,250             6,342,537
                                                                        ------------        ------------         ------------
  Foreign currency translation                                                    -                  -                (2,463)
                                                                        ------------        ------------         ------------
 Net Increase (Decrease) In Cash                                            389,387           (694,992)              190,937
                                                                        ------------        ------------         ------------
Cash and cash equivalents, beginning of year                                255,483            950,475               759,538
                                                                        ------------        ------------         ------------
Cash and cash equivalents, end of year                                    $ 644,870          $ 255,483             $ 950,475
                                                                        ------------        ------------         ------------
Supplemental disclosures of cash flow information:
    Cash paid during the year for
       Interest                                                          $1,219,870          $ 928,597           $ 1,084,238
                                                                        ============        ============         ============
       Income taxes paid                                                 $   44,962          $  84,858           $    34,604
                                                                        ============        ============         ============
Supplemental disclosures of non-cash, investing
    and financing activities:
      Common stock issued for acquisition                                $        -          $        -           $   244,068
                                                                        ============        ============         ============
      Common stock issued for note conversions                           $  661,200          $ 1,764,354          $ 2,734,646
                                                                        ============        ============         ============

</TABLE>

         The accompanying notes are an integral part of these statements

                                      F-11

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  Years ended December 31, 2006, 2005 and 2004

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 an initial maturity of
three months or less to be cash equivalents.

                                      F-12

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2006, 2005 and 2004

3. 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.

4.       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 - 90 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  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.

                                      F-13

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2006, 2005 and 2004

NOTE B (continued)

Accounts  receivable trade, net consist of the following  components at December
31, 2006 and 2005:

                                                      2006              2005
                                                  -----------       ----------
    Accounts receivable - business to business    $11,154,841       $7,484,084
    Accounts receivable - business to consumer        138,620          121,536
                                                  -----------       ----------
             Total                                $11,293,461       $7,605,620

    Less allowance for doubtful accounts             (127,481)        (127,481)
                                                  -----------       ----------
                                                  $11,165,980       $7,478,139
                                                  ===========       ==========

Changes in the Company's  allowance for doubtful accounts during the years ended
December 31, 2006 and 2005 are as follows:

                                                        2006           2005
    Beginning balance                                 $ 127,481      $127,481
    Provision for (reduction in) doubtful account             -             -
                                                      ----------     --------
    Ending balance                                    $ 127,481      $127,481
                                                      ===========    ========


5. 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, 2006 totaled approximately $600,000.
There are no  balances in excess of  Federally  insured  limits at December  31,
2005.

During the year ended December 31, 2006, sales to three customers  accounted for
21%, 16% and 12% of total sales,  respectively.  Three  customers  accounted for
27%,  23% and 10%,  respectively  of accounts  receivable  at December 31, 2006.
These concentrations relate to the Company's PHS Group segment.

During the year ended December 31, 2005, sales to three customers  accounted for
12%, 11% and 10% of total sales and in 2004,  sales to two  customers  accounted
for 21% and 18% 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 years ended December 31, 2006,  2005 and 2004, the Company  purchased
approximately  40%,  40 % and  53%,  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-14

<PAGE>


                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2006, 2005 and 2004


NOTE B (continued)

6. 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.

7. 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.

8. Vendor Allowances

The Company  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, 2006 and
2005, the Company recognized  approximately $ 2,272,273 and $2,196,955 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
$2,453,705 and $1,730,806 at December 31, 2006 and 2005.

                                      F-15

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2006, 2005 and 2004

NOTE B (continued)

9. Intangible Assets and Goodwill

Intangible  assets include the "Gran  Reserve"  trade names and customer  lists,
acquired in November 1999 and certain  customer lists,  the rights to the use of
the trade name.

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.

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 being  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 2006,  2005,  and 2004 the
amortization expense recorded for each of the years was $59,916.

At December 31, 2006 and 2005, intangible assets are comprised of the following:

       Amortized intangible assets                 2006               2005
                                              ----------        ----------
           Customer lists                     $ 677,523          $ 677,523
           Less accumulated amortization       (389,226)          (329,310)
                                              ----------        ----------
           Total                               $288,297           $348,213
                                              ==========        ==========

Amortization expense for the Company over the next four years is estimated to be
approximately $60,000 per year. Amortization expense for 2012 is estimated to be
$50,000.

                                      F-16

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2006, 2005 and 2004

NOTE B (continued)

10. 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.

11. 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.

Payments  received  from  customers  prior to  shipment  of goods is recorded as
deferred revenue.At December 31, 2006 approximately $600,000 was received by the
Company for goods to be shipped in January  2007.  In  addition,  the Company at
December 31, 2006 and 2005 has recorded deferred revenue of $127,000 in relation
to the ITT warrants (see Note H).

12. Advertising

The Company expenses advertising and promotional costs as incurred.

13. 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.

14. 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-17

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2006, 2005 and 2004

NOTE B (continued)

exercises of stock options,  warrant and convertible debt and equity  securities
of 995,749,  1,317,702 and 951,468 for the years ended  December 31, 2006,  2005
and 2004, respectively,  have been excluded from the calculation of diluted loss
per share since their effect would be antidilutive.

15. Stock-Based Compensation Plans

At December  31, 2006,  the Company has two  stock-based  employee  compensation
plans,  which are described  more fully in Note K. The Company had accounted 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 had adopted the  disclosure  provisions of SFAS No. 148.  Effective
January 1, 2006, the  provisions of SFAS No. 123(R) were  implemented to account
for  stock-base  compensation.  Under APB No. 25, when the exercise price of the
Company's  employee or director  stock  options  equaled the market price of the
underlying stock on the date of grant, no compensation expense was 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>

                                                                                     Year ended December 31,
                                                                                   2005                 2004

       Net loss, as reported                                                    $ (2,560,778)     $(1,976,379)
       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)
                                                                                ==============   =============
       Loss per share attributable to common shareholders
           Basic and diluted - as reported from continuing operations               $ ( 0.48)        $  (0.87)
                                                                                ==============   =============
           Basic and diluted - as reported from discontinued operations             $ ( 0.27)        $  (0.10)
                                                                                ==============   =============
           Basic and diluted - pro forma from continuing operations                 $  (0.49)        $  (0.87)
                                                                                ==============   =============
           Basic and diluted - pro forma from discontinued operations               $  (0.27)        $  (0.10)
                                                                                ==============   =============

</TABLE>

                                      F-18

<PAGE>


                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2006, 2005 and 2004

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 were
cancelled in January 2006. There were no stock options granted in 2006 and 2004.

16. 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.  Proset segment of business has been  eliminated  from the
segment reporting (see Note S).

                                      F-19

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2006, 2005 and 2004

NOTE B (CONTINUED)

17. Recent Accounting Pronouncements

In November  2004, the Financial  Accounting  Standards  Board  ("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's  adoption  of  SFAS  No.151  did not  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's  adoption of SFAS
No.153 did not 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."
("SFAS 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's adoption of SFAS 154 did
not have a material  impact on the  Company's  financial  position or results of
operations.

                                      F-20

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2006, 2005 and 2004

NOTE B (CONTINUED)

In  February  2006,  FASB issued SFAS No.  155,  Accounting  for Certain  Hybrid
Financial  Instruments  - An  Amendment  of FASB No. 133 and 140. The purpose of
SFAS  statement  No.  155 is to  simplify  the  accounting  for  certain  hybrid
financial  instruments by permitting  fair value  re-measurement  for any hybrid
financial  instrument that contains an embedded  derivative that otherwise would
require  bifurcation.  SFAS No. 155 also  eliminates the  restriction on passive
derivative  instruments that a qualifying  special-purpose entity may hold. SFAS
No. 155 is effective for all financial  instruments acquired or issued after the
beginning of any entity's first fiscal year beginning  after September 15, 2006.
We believe that the adoption of this standard on January 1, 2007 will not have a
material effect on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
No. 157 defines fair value, establishes a framework for measuring fair value and
requires  enhanced  disclosures  about  fair  value  measurements.  SFAS No. 157
requires  companies  to disclose the fair value of their  financial  instruments
according to a fair value  hierarchy as defined in the  standard.  Additionally,
companies  are  required  to provide  enhanced  disclosure  regarding  financial
instruments in one of the categories  (level 3), including a  reconciliation  of
the beginning and ending  balances  separately for each major category of assets
and liabilities.  SFAS No. 157 is effective for financial  statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal  years.  We  believe  that the  adoption  of SFAS No. 157 will not have a
material impact on our consolidated financial statements.

In  July  2006,  the  FASB  issued  FASB   Interpretation  48,  "Accounting  for
Uncertainty  in Income Taxes ("FIN 48").  FIN 48 clarifies  the  accounting  for
uncertainty in income taxes recognized in an enterprise's  financial  statements
in  accordance   with  SFAS  No.  109,   "Accounting  for  Income  Taxes."  This
interpretation  prescribes a recognition threshold and measurement attribute for
the financial  statement  recognition and measurement of a tax position taken or
expected  to be  taken in a tax  return.  FIN 48 also  provides  a  guidance  on
derecognition,  classification  interest and  penalties,  accounting  in interim
periods,  disclosure and transition. We believe that the adoption of FIN 48 will
not have a material impact on our  consolidated  financial  statements.  For our
Company, this interpretation will be effective beginning January 1, 2007.

The SEC issued Staff Accounting  Bulletin No. 108 ("SAB 108") in September 2006.
SAB  108  expresses  the  views  of the  SEC  staff  regarding  the  process  of
quantifying  the materiality of financial  misstatements.  SAB 108 requires both
the balance sheet and income  statement  approaches be used when quantifying the
materiality of misstatement  amounts. In addition,  SAB 108 contains guidance on
correcting errors under the dual approach and provides  transition  guidance for
correcting  errors  existing  in  prior  years.  SAB  108 was  effective  in the
Company's  fourth  quarter of 2006. The adoption SAB 108 did not have a material
impact on the Company's consolidated financial statements.

18. Reclassifications

Certain  2004 and 2005  balances  have been  reclassified  to conform  with 2006
classifications, including presenting the operations of the Pro-Set segment (see
Note S).

                                      F-21

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2006, 2005 and 2004

NOTE C - 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 D - MARKETABLE SECURITIES

At December 31, 2006 and 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.

                                                                        2004
      Available-for-sale securities                                 ---------
        Proceeds                                                     $194,515
        Gross realized gains                                           19,973
        Gross realized losses                                         (35,766

                                      F-22

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2006, 2005 and 2004

NOTE E - INVENTORY

     Inventory as of December 31, 2006 and 2005 consisted of the following:
                                                     2006              2005
                                                    ---------         --------
       Grocery, health and beauty products           $802,090         $739,769
       Tobacco finished goods                         487,131          441,454
                                                    ----------        --------
                                                   $1,289,221       $1,181,223
                                                   ===========      ==========

The allowance for slow moving and obsolete  inventory  approximated  $35,000 and
$35,000 at December 31, 2006 and 2005, respectively.

NOTE F - PROPERTY AND EQUIPMENT

Property  and  equipment  as of  December  31,  2006 and 2005  consisted  of the
following:

                                                        2006             2005
                                                      ---------       ---------
       Office equipment                               $205,742        $205,742
       Furniture and fixtures                           84,196          84,196
       Leasehold improvements                          422,538         386,854
                                                      ---------       ---------
                                                       712,476         676,792

       Less accumulated depreciation and amortization (459,526)       (399,948)
                                                      ---------       ---------
                                                      $252,950        $276,844
                                                      =========       =========

Depreciation  and  amortization  expense on property and equipment for the years
ended December 31, 2006, 2005 and 2004 was  approximately  $60,000,  $62,000 and
$76,000, respectively.

                                      F-23

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2006, 2005 and 2004

NOTE G - OTHER ASSETS

Other assets consist of the following at December 31, 2006 and 2005:


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

                                                                                      2006             2005
                                                                                  ---------          ---------
       Investment (a)                                                              $562,593          $364,340
       Investment in warrants (b)                                                   127,000           127,000
       CAW purchase agreement; net of accumulated amortization of $145,827
       and $87,495                                                                   29,173            87,505
       Deferred financing net of accumulated
          amortization of $204,660 and $103,555
       Other                                                                        121,591           154,945
                                                                                     69,097            69,097
                                                                                  ---------          ---------
                                                                                   $ 909,454         $ 802,887
                                                                                  =========          =========

</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, 2006, the Companies  investment in ITT is approximately 20%
     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 $227,054, $56,311 and $172,224 during the years ended December 31, 2006,
     2005 and 2004, respectively. At December 31, 2006, the investment in ITT is
     $562,593 as included in "Other Assets" on the accompanying balance sheet.

(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 I). In relation to the ITT  warrants,  Company
     has recorded deferred income of $127,000.

                                      F-24

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2006, 2005 and 2004


NOTE G (continued)

Summarized  audited  financial  information  of this investee as of December 31,
2006, 2005, and 2004 and for the years then ended is as follows:

      Financial position:                         2006              2005
                                               ------------     ------------
      Current assets                           $5,334,000        $4,229,000
       Property and equipment                     666,000           735,000
       Other assets                             5,728,000         4,720,000
                                               ------------     ------------
      Total assets                            $11,728,000        $9,684,000
                                               ------------     ------------
      Current liabilities                      $4,977,000        $3,823,000
      Long-term debt                            4,289,000         4,983,000
                                               ------------     ------------
      Total liabilities                        $9,266,000        $8,806,000
                                               ------------     ------------

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

      Results of operations:                     2006              2005               2004
                                               ------------     ------------       ------------
      Revenues                                $32,464,000       $14,715,000        $10,883,000
      Total expenses                          (30,993,000)      (14,528,000)        (9,934,000)
      Other income                                322,000           325,000            111,000
                                               ------------     ------------       ------------
      Income before income taxes                1,793,000           512,000          1,069,000
      Income tax expense                         (632,000)         (211,000)          (359,000)
                                               ------------     ------------       ------------
      Net income                             $  1,161,000       $   301,000        $   701,000
                                               ------------     ------------       ------------

</TABLE>

                                      F-25

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2006, 2005 and 2004

NOTE H - NOTES RECEIVABLE

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 principal and interest at
4% for seven years,  beginning in January 2005. As a condition for the sale, the
Company issued  150,000 shares of common stock to the note holder.  The value of
the shares  ($200,000)  was  treated as a  reduction  of sales  price.  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.  in  2004.  The  balance  of the Note
Receivable at December 31, 2006 was $1,635,340.

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  /Director 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 I). In relation
to the ITT  warrants,  Company has  recorded  deferred  income of  $127,000.  On
September 29, 2006,  $142,857 was paid by ITT to reduce the loan balance.  As of
December  31, 2006 the  outstanding  loan balance was  $857,143.  As part of the
Company's  agreement,  the  Company  paid  $142,857  on the  note  payable.  The
outstanding  balance of the note  payable at  December  31,  2006 was  $857,143.

NOTE I - 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 July  2006,  allow for the  borrowing  of up to
$6,000,000  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.  $5,836,928 was outstanding
under the  agreements at December 31, 2006. As amended,  the agreement  extended
through  December  31,  2007.  The Company is seeking to  refinance  its secured
financing needs through other asset based Lenders (see Note T). 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, 2006,  the interest rate on
outstanding borrowings was 13.25%.  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,  202,120 shares of the Company's  common
stock remain as collateral on the outstanding borrowings. The agreements provide
for minimum annual interest charges.  In 2006, the lender converted  $331,200 of
outstanding  debt into 289,080 shares of common stock (see note J). In 2005, the
lender  converted  $1,003,000 of outstanding  debt into 427,532 shares of common
stock (see Note J).

                                      F-26

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2006, 2005 and 2004

NOTE I (continued)

On March 1, 2004,  the Company  received  $490,000  pursuant to the  issuance of
three secured promissory notes from certain shareholders of ITT, a 20% investee.
Borrowings  under the  notes  bear  interest  at a rate of 12%.  The notes  were
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  G).  Amortization  expense
recorded in 2006, 2005 and 2004 was approximately  $6,259,  $37,500, and $31,000
respectively. At December 31, 2006 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 $1.75 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. In March 2005, the Company converted  $525,000 of this outstanding
debt into 150,000 shares of common stock. In 2006 the Company converted $150,000
of this  outstanding  debt into 159,574  shares of common stock.  The conversion
price was reduced from $1.75 to $0.94.  The Company repaid $175,000 of this debt
at December  31,  2006.  At  December  31,  2006,  the  outstanding  balance was
$150,000.

On January 25, 2005, the Company  completed a second financing with Laurus.  The
financing  consisted of a $500,000 secured  convertible  debenture that converts
into common stock under certain  conditions  at $1.75 per share as amended,  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 and  $150,000  during
2006. In July 2006, the Company  converted $50,000 of this outstanding debt into
50,000 shares of common stock.  The  conversion  price was reduced from $1.75 to
$1.00. In December 2006, the Company  converted $40,000 of this outstanding debt
into 43,478 shares of common stock.  The conversion price was reduced from $1.75
to $ 0.92. 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, 2006 the  outstanding  balance
was $176,666.

                                      F-27

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2006, 2005 and 2004

NOTE I (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 (7.75% at
December  31,  2006).  This note was extended and the Company is not required to
repay any principal  until the maturity date of the note,  September 1, 2007. As
security for the note, a pledge agreement was entered by certain Shareholders of
ITT.  Borrowings at December 31, 2006 were  $500,000.

On April 6, 2005,  the Company  received  $500,000  pursuant to the  issuance of
three secured promissory notes from certain shareholders of ITT, a 20% 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 G).  Amortization  expense  recorded  in 2006  and  2005 was  approximately
$27,000 and $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 20%  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 G). Amortization expense recorded in 2006 and 2005 was approximately $4,800
and $3,200.

On June 21, 2005,  the Company  completed a third  financing  with  Laurus.  The
financing  consisted of a $500,000 secured  convertible  debenture that converts
into common stock under certain  conditions  at $1.75 per share as amended,  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 and  $150,000  during
2006. In July 2006, the Company  converted $50,000 of this outstanding debt into
50,000 shares of common stock.  The  conversion  price was reduced from $1.75 to
$1.00. In December 2006, the Company  converted $40,000 of this outstanding debt
into 43,478 shares of common stock.  The conversion price was reduced from $1.75
to $0.92. 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, 2006 the outstanding balance was $243,333.

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 and director.  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 H).

On March 14, 2006 the Company  closed a $1.75 million  junior secured three year
loan with an Laurus bearing a fixed interest rate of 10%.  Payments will be made
at a rate of $32,000 per month starting October 1, 2006. The lender was issued a
warrant  to acquire  270,000  shares of the  Company's  common  stock  valued at
$362,000. The relative fair value of the warrant of $362,000 is being charged to
operations as additional  interest over the term of the loan. The Company repaid
$96,000 of this debt at December 31, 2006. At December 31, 2006 the  outstanding
balance was $1,654,000.

In the fourth quarter of 2006, the Company secured  $1,800,000 from shareholders
of short term  financing  that matures in the first quarter of 2007. The advance
may be extended by mutual consent.

Principal repayments of notes payable at December 31, 2006 are as follows:

Year Ending December 31,
                  2007            $  4,227,000
                  2008            $    500,000
                  2009            $    886,000
                  2010            $    857,000
                                 -------------
                                  $  6,470,000
         Discounts                $   (312,000)
                                  ------------
         Total                    $  6,158,000
                                  ============
                                      F-28
<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2006, 2005 and 2004

NOTE J - 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. In November 2006,  6,787 Class A preferred stock was redeemed into 75,009
common shares.

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 March 2006 and 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 2006 and July 2005, in
compliance  with the  subscription  agreements  dated July 2, 2003. No more than
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.  The  Company  issued  112,500  shares  to  Class  B  Series  A  Preferred
shareholders  in November 2006 in  compliance  with the  subscription  agreement
dated  November 1, 2004.  In November  2006,  45,000 Class B, Series A Preferred
stock was redeemed into 473,416 shares of common stock.

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 2006,  Laurus Master Funds converted  $330,000 of debt into 346,530 of shares
of common stock and in 2005, Laurus Master Funds converted $525,000 of debt into
150,000  shares of common stock.  Also in 2006, the Company  converted  $331,200
outstanding  debt of IIG into 289,080  shares of common  stock and in 2005,  the
Company  converted  $1,003,000  outstanding  debt of IIG into 427,532  shares of
common stock. In 2005,  certain  shareholders of ITT converted  $236,354 of debt
into 94,452 shares of common stock (see Note I).

For the years ended  December 31, 2006 and 2005,  the Company issued 150,910 and
98,964 shares of common stock as  compensation  for past and future  service and
recorded a charge to  operations  of $180,549 and  $104,025.  For the year ended
December  31,  2006  the  Company  issued  499,300  shares  of  common  stock in
connection  with  the  sale  of  securities  and  the  satisfaction  of  certain
obligations  which included  130,000 shares to satisfy certain  liabilities (See
Note H).

                                      F-29

<PAGE>

Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2006, 2005 and 2004

NOTE J (continued)

Effective  January 2006, the Company cancelled options to acquire 300,000 shares
of  common  stock  held by  employees.  There  are no  option  outstanding  with
employees at December 31, 2006.

For the years ended December 31, 2004 the Company received  proceeds of $102,250
from the exercise of stock options to purchase  110,000  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, 2006, 2005 and 2004.


                                                                  Weighted-
                                                      Number       average
                                                     of shares  exercise price
                                                    ----------  --------------
         Outstanding at January 1,, 2004              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
             Granted                                  270,000             -
             Cancelled/Forfeited                      (82,500)        (6.52)
                                                    ----------    ------------
         Outstanding at December 31, 2006             467,916         $1.47
                                                    ==========    ============

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


<TABLE>
<CAPTION>
             <S>                      <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            2006            life (years)      price               2006            price
            ----------------       ---------------    --------------   ------------    ----------------    -----------
             $0.00-$0.99              270,000               4.25         $0.0010             270,000          $0.0010
             $1.00-$4.00              166,666               5.16         $  3.20             166,666           $ 3.20
            $5.00-$12.00               31,250               5.16            5.50              31,250             5.50
                                   ---------------    --------------   ------------    ----------------    -----------
                                      467,916               4.85         $  1.47             467,916           $ 1.47
                                   ===============    ==============   ============    ================    ===========

</TABLE>

                                      F-30

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2006, 2005 and 2004

NOTE K - 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  1,430,907  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, 2006,
2005 and 2004,  the  Company  issued  150,910,  98,964 and 42,195  shares of its
common  stock,  respectively,  to various  service  providers and has recorded a
charge to earnings of $180,549,  $104,025 and $150,621.  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, 2006 and 2005.

The following is a summary of such stock option transactions for the years ended
December  31,  2006,  2005 and  2004 in  accordance  with  the  Plan  and  other
restricted stock option agreements:

                                                              Weighted-
                                              Number           average
                                              of shares     exercise price
                                             -----------   ------------------
       Outstanding at January 1, 2004         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
           Cancelled/Forfeited                (300,000)         (2.07)
                                             -----------   ------------------
       Outstanding at December 31, 2006             -            -
                                             ===========   ==================

       Shares available for grant

         December 31, 2006                   7,270,913
                                             =========
         December 31, 2005                   7,120,003
                                             =========
         December 31, 2004                   7,218,967
                                             =========

                                      F-31

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2006, 2005 and 2004

NOTE K (continued)

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, 2006 and 2005.

NOTE L - TRANSACTIONS WITH RELATED PARTIES

At December 31, 2006 and 2005,  $23,706 and $61,882 is payable to the  Company's
Chairman  and  Chief  Executive  Officer  for  short-term  advances  made to the
Company.

Two of the  Company's  directors  were  members of the board of  directors  of a
significant  customer of the Company.  These individuals  terminated their board
membership in the customer in 2006.

                                      F-32

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2006, 2005 and 2004

NOTE M - OTHER INCOME (EXPENSE)

     Other income (expense) is comprised of the following:

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

                                                                      2006           2005             2004
                                                                     ---------    ----------       ----------
         Gain (loss) on sales of marketable securities (Note D)            -              -          (15,793)
        Other                                                        (22,039)       (20,469)          49,588
                                                                     ---------    ----------       ----------
                                                                    $(22,039)      $(20,469)        $ 33,795
                                                                     =========    ==========       ==========

</TABLE>

NOTE N - INCOME TAXES

At December  31, 2006,  the Company had a net  operating  loss carry  forward of
approximately  $34,200,000 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, 2006 were approximately as follows:

          Net operating loss carry forwards         $ 11,628,000
          Fixed assets and intangibles                   484,000
          Allowance for doubtful accounts                166,000
          Inventory                                      126,000
          Capital losses                                  56,000
          Other                                         (200,000)
          Valuation allowance                        (12,260,000)
                                                   ---------------
                                                    $         -
                                                   ===============

The valuation allowance increased by approximately $ 583,000 in 2006.

Income  taxes  expense  for the years ended  December  31,  2006,  2005 and 2004
including  amounts  attributable to discontinued  operations  consisted,  of the
following:

                             2006          2005           2004
                             --------      --------     ----------
          State and local    $44,962       $84,858       $ 34,604
                             ========      ========     ==========

                                      F-33

<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2006, 2005 and 2004

NOTE N (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, 2006, 2005 and 2004 are as follows:


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

                                                                  2006          2005      2004
                                                                 -------        -----    ------
          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 O - QUARTERLY FINANCIAL RESULTS (UNAUDITED)

Quarterly  financial  results for the years ended December 31, 2006 and 2005 are
as follows:

                                                              THREE MONTHS ENDED

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

                                                            3/31/2006        6/30/2006      9/30/2006    12/31/2006      TOTAL
    SALES                                                $ 14,878,155     $ 15,679,679    $18,607,807   $22,594,267   $ 71,759,908
    GROSS PROFIT                                         $  1,074,371     $  1,148,123    $ 1,288,286   $ 1,448,465   $ 4,959,245
    NET INCOME (LOSS) FROM CONTINUING OPERATIONS         $  (375,272)     $   (260,145)   $  (247,924)  $  (432,127)  $(1,315,468)
    NET INCOME (LOSS) FROM DISCONTINUED OPERATING        $    (3,414)     $    (55,519)   $  (108,306)  $(1,192,225)  $(1,359,464)
                                                         -------------    -------------   ------------  -----------   -------------
    NET LOSS                                             $  (378,686)     $  (315,664)    $  (356,230)  $(1,624,352)   $(2,674,932)
    BASIC AND DILUTED NET LOSS PER COMMON SHARE FROM
    CONTINUING OPERATING:                                $     (0.10)     $     (0.07)    $     (0.06)  $     (0.10)   $     (0.33)

    BASIC AND DILUTED NET LOSS PER COMMON SHARE FROM
    DISCONTINUED OPERATIONS:                              $        -      $     (0.02)    $     (0.02)  $     (0.23)   $     (0.27)
                                                         -------------    -------------   ------------  -----------   -------------
    TOTAL                                                 $    (0.10)     $     (0.09)    $     (0.08)  $     (0.33)   $     (0.60)

    DIVIDEND PREFERED STOCK                               $   90,250      $    90,250     $    85,750   $    90,250    $   356,500

</TABLE>

                                                              THREE MONTHS ENDED

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

                                                            3/31/2005        6/30/2005      9/30/2005    12/31/2005      TOTAL
    SALES                                                 $ 14,757,963    $ 15,339,974    $ 16,864,434   $16,387,811   $ 63,350,182
    GROSS PROFIT                                          $    803,000    $  1,154,480    $ 1,167,950    $   880,684   $  4,006,114
    NET INCOME (LOSS) FROM CONTINUING OPERATIONS          $   (493,472)   $    (99,331)   $  (176,660)   $ (759,739)   $ (1,529,202)
    NET INCOME (LOSS) FROM DISCONTINUED OPERATING         $   (124,425)   $   (107,289)   $  (141,029)   $ (658,833)   $ (1,031,576)
                                                         -------------    -------------   ------------  -----------   -------------
    NET LOSS                                              $   (617,897)   $   (206,620)   $  (317,689)   $1,418,572)   $ (2,560,778)
    BASIC AND DILUTED NET LOSS PER COMMON SHARE FROM
    CONTINUING OPERATING:                                 $      (0.17)   $   (0.05)      $   (0.06)     $   (0.20)    $   (0.48)
    BASIC AND DILUTED NET LOSS PER COMMON SHARE FROM
    DISCONTINUED OPERATIONS:                              $      (0.04)   $   (0.03)      $   (0.03)     $   (0.17)    $   (0.27)
    TOTAL                                                 $      (0.21)   $   (0.08)      $   (0.09)     $   (0.37)    $   (0.75)
    DIVIDEND - PREFERED STOCK                             $     74,250    $  74,250       $  78,583      $  90,250     $  317,333

</TABLE>


                                      F-34

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2006, 2005 and 2004

NOTE P - 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 2006, 2005 and 2004 the Company
match was $28,627, $20,812 and $17,275.

NOTE Q - 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, 2006 were as follows:

       Year ending December 31,
              2007                                $429,747
              2008                                $422,420
              2009                                $413,317
              2010                                $408,390
              2011                                $233,762
              thereafter                          $103,71

Rent expense under operating  leases for the years ended December 31, 2006, 2005
and 2004 was approximately $382,000, $375,000 and $190,000 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.

                                      F-35

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2006, 2005 and 2004

NOTE R- 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, 2006, 2005 and 2004,
as shown below the segment information does not include the discontinued segment
of Proset:

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


                                               PHS Group         GRC            Corporate                Total
                                             ------------     ------------      ------------          -----------
   Year ended December 31, 2006
     Revenue                                  $69,840,886       $1,919,022                -           $71,759,908
     Net profit (loss) attributable to            779,634         (311,210)       (2,140,392)          (1,671,968)
     common stockholder
     Depreciation and amortization                 11,929          156,456            76,700              245,085
     Interest income                                    -                -           147,533              147,533
     Other income (expense)                       (14,247)          (7,792)                -              (22,039)
     Equity in earnings of investee                     -                -           227,054              227,054
     Interest and financing expenses            1,403,739                -           647,117            2,050,856
     Identifiable assets                       15,609,833        1,594,373         3,536,408           20,740,614
     Additions to long-lived assets                35,684                -                 -               35,684
     Investment in affiliate                            -                -           562,593              562,593

                                               PHS Group         GRC            Corporate                Total
                                             ------------     ------------      ------------          -----------
   Year ended December 31, 2005
     Revenue                                  $61,450,467      $1,899,715                -            $63,350,182
     Net loss attributable to common             (111,784)      (445,505)       (1,289,246)            (1,846,535)
     stockholder
     Depreciation and amortization                 12,804        156,477           145,264                314,545
     Interest income                                    -              -           102,644                102,644
     Other income (expense)                        (3,581)       (16,888)            -                    (20,469)
     Equity in earnings of investee                     -              -            56,311                 56,311
     Interest and financing expenses            1,297,348              -           216,058              1,513,406
     Identifiable assets                       10,056,544      1,715,940         4,187,603             15,960,087
     Additions to long-lived assets                10,735         61,594                 -                 72,329
     Investment in affiliate                            -              -           364,340                364,340

                                               PHS Group         GRC            Corporate                Total
                                             ------------     ------------      ------------          -----------
   Year ended December 31, 2004
     Revenue                                  $50,728,560    $2,052,661               -               $52,781,221
     Net loss attributable to common
     Stockholder                              $   (167,951)    (644,870)        (1,100,729)            (1,913,550)
     Depreciation and amortization                  6,501        145,301           296,768                448,570
     Interest income                                4,344              -               266                  4,610
     Other income (expense)                        71,586        (21,139)          (16,652)                33,795
     Equity in earnings of investee                     -              -           172,224                172,224
     Interest and financing expenses            1,168,607         42,500           109,501              1,320,608
     Identifiable assets                        9,160,367      1,837,998         3,590,427             14,588,792
     Additions to long-lived assets                85,980        175,000            29,078                290,058
     Investment in affiliate                            -              -           336,828                336,828


</TABLE>

                                      F-36

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2006, 2005 and 2004

NOTE R (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, 2006, 2005 and 2004, is as follows:


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

                                                  2006               2005                 2004
                                                --------------    --------------       -------------
Revenue
     United States                               $ 49,041,460       $ 31,103,702        $ 26,850,659
     Canada                                        22,718,448         32,246,480          25,930,562
                                                --------------    --------------       -------------
                                                  $71,759,908       $ 63,350,182        $ 52,781,221
                                                ==============    ==============       =============

</TABLE>

Accounts receivable
     United States                                 $6,005,782       $    795,738
     Canada                                         5,160,198          6,682,401
                                                --------------    --------------
                                                  $11,165,980       $  7,478,139
                                                ==============    ==============
Identifiable assets of continuing operations
     United States                                $20,740,614        $15,960,087
     Canada                                             -                  -
                                                --------------    --------------
                                                  $20,740,614       $ 15,960,087
                                                ==============    ==============

                                      F-37

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2006, 2005 and 2004

NOTE S - Discontinued Operations

In December  2006,  the Company  instituted  a plan to  discontinue  the Pro-Set
segment.  Accordingly,  the operating results of Pro-set segment for each of the
three years ended  December 31, 2006 has been  presented as "(Loss)  income from
discontinued operations,  net of income taxes". Net assets and liabilities to be
disposed of or liquidated,  at their book value, have been separately classified
in the accompanying balance sheets at December 31, 2006 and December 31, 2005.

The Company recorded impairment loss of (i) 293,586, for the year ended December
31, 2005 and (ii) an  additional  impairment  loss of  $359,353  during the year
ended  December 31, 2006, in connection  with the  write-down of the assets that
were to be disposed of.  During the year ended  December  31, 2006,  the Company
recorded a loss of $58,305 in  connection  with the  write-down of fixed assets.
Also  in  2006,  $485,000  was  recorded  as  additional  reserves  of  accounts
receivables,  other receivables,  and inventory.  Due to operating losses, there
was no income tax benefit from the write-down and disposal of these assets.

Summarized  financial   information  of  the  Pro-Set  segment  as  discontinued
operations for each of the three years ended as follows:


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

                                            Year ended         Year ended          Year ended
                                           -------------     ---------------   ----------------
                                           Dec.31, 2006       Dec. 31, 2005       Dec. 31, 2004
                                           -------------     ---------------   ----------------
Net Sales                                  $ 1,222,834          $ 786,908           $3,923,823

Cost of sales
Cost of product                              1,260,694            867,036           3,206,187
Shipping and handling costs                    144,772             98,607             129,482
                                           -------------     ---------------   ----------------
                                             1,405,466            965,643           3,335,669

 Gross Profit                                 (182,632)         (178,735)             588,154

Operating expenses:
  Advertising and promotion                      1,046                900                   -
  General and administrative                   594,008            291,134             282,747
  Depreciation and amortization                157,650            183,420             210,920
  Asset impairment charge                      359,353            293,586                   -
                                           -------------     ---------------   ----------------
                                             1,112,057            769,040             493,667

 Operating profit (loss)                    (1,294,689)          (947,775)             94,487

Other Income (expenses):
  Other income (expenses)                       (1,024)            (1,035)            (80,778)
  Interest and financing expenses              (62,765)           (80,233)           (232,913)
                                           -------------     ---------------   ----------------
                                               (63,789)           (81,268)           (313,691)

Net loss before income taxes                (1,358,478)        (1,029,043)           (219,204)

Income tax expense                                 986              2,533                   -
                                           -------------     ---------------   ----------------
Net loss from discontinued operations     $ (1,359,464)      $ (1,031,576)         $  (219,204)
                                           =============     ===============   ================

</TABLE>

                                      F-38

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                  Years ended December 31, 2006, 2005 and 2004

NOTE S (continued)

                                                 Dec.31, 2006     Dec. 31, 2005
                                                 --------------  --------------
ASSETS:
CURRET ASSETS:
CASH AND CASH EQUIVALENTS                           $  1,782          $   8,071
ACCOUNTS RECEIVABLE TRADE                             44,632             16,185
OTHER RECEIVABLES                                     28,563            117,563
INVENTORY                                             52,205            728,092

PREPAID ASSETS AND OTHER CURRENT ASSETS                    -              5,637

PROPERTY AND EQUIPMENT, NET                                -             79,170

INTANGIBLE ASSETS,NET OF ACCUMULATED
AMORITIZATION OF $ 2,627,469 AND $ 2,189,639               -            437,833
                                                 --------------  --------------
TOTAL ASSETS                                       $ 127,182         $1,392,551
                                                 --------------  --------------

LIABILITIES:

NOTES PAYABLE                                        $     -          $ 319,531
ACCOUNTS PAYABLE                                     112,569            206,288
                                                 --------------  --------------
TOTAL  LIABILITIES                                 $ 112,569          $ 525,819
                                                 ==============  ==============

NOTE T - SUBSEQUENT EVENTS

Effective January 19, 2007, Synergy Brands Inc. completed a $6.5 million secured
financing with Lloyd I. Miller,  a major  shareholder  and a director of Synergy
Brands for its main operating  subsidiary PHS Group Inc. The financing consisted
of $6.5 million in secured term notes to be amortized over a 5 year period, with
a balloon  payment of  $3,250,000 in January 2012 at an interest rate of 11.25%,
that may be reduced  to 11% under  certain  conditions.  The  agreement  further
involved a securities  purchase  agreement that added 1,075,000 common shares of
Synergy  Brands to Lloyd Miller and retired all warrants  beneficially  owned by
Mr. Miller.


                                      F-39