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, 2007.
                         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/Capital Market System
                            and Boston Stock Exchange


     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. []

     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___

     Indicate by check mark whether the registrant is and is reporting utilizing
the scaled  disclosure  standards of Regulation SK allowed to Smaller  Reporting
Company. YES_X__NO___

     Synergy  Brands  Inc.  revenues  for  its  most  recent  fiscal  year  were
$89,540,501.

<PAGE>

     On March 28,  2008,  the  aggregate  market  value of the  voting  stock of
Synergy Brands Inc., held by  non-affiliates of the Registrant was approximately
$6,900,000.  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 28, 2008 was 11,698,010.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Proxy  Statement for  Registrant's  2007 Annual  Meeting of
Stockholders  currently  scheduled  to be held  June  2008 are  incorporated  by
reference in Part III (for other  documents  incorporated  by reference refer to
Exhibit Index and Item 5 - Market for the Registrant's  Common Stock and Related
Shareholder  Matters);  also  committee  charters are  included  verbatim on the
Company's website at www.sybr.com.

                                     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  and  in  the  manufacturing  and   retail/wholesale   distribution  of
proprietary  baking mix  products  and spices and  presently  operates  as well,
through its wholly owned subsidiary,  Gran Reserve Corporation,  the business of
wholesale  and on-line  distribution  of premium  cigars and  accessories  which
business segment the Company expects and has contracted in principal to transfer
to a  non-affiliated  investor  familiar  with the business  operations  of such
segment (see Item 9B "Other  Information"  infra),  and through such subsidiary,
trading as  Beautybuys.com,  the Company also markets 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 and proprietary baking mix and spice
market in 2007. The consumer products significantly marketed and distributed 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 and markets most of its tobacco and salon  products
through internet presentation and processing.

     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,  including  proprietary
baking mix  products  and spices,  to retailers  and  wholesalers  predominately
located in the Northeastern  United States. PHS is the largest subsidiary of the
Company and largest operating segment of the Company , representing about 98% of
the overall Company sales and 95% 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,Duracell  batteries, among
many  others,  and  uses  promotions,  logistics  and  distribution  savings  to
streamline  and reduce its sale prices and  increase  gross  profit  thereby.  A
second business  segment within this sector was Proset Hair Systems (Proset) but
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 continue to develop private label programs
for  national  accounts by creating  proprietary  baking mix  products and spice
planograms  specifically designed for retail need. Through acquisition of baking
mix  manufacturing  operations  in Monroe,  Michigan,  the Company by way of its
subsidiary,  Quality  Food Brands  Inc.,  manufactures  baking mix  products for
further sale under proprietary  labeling programs for other customers of PHS and
markets such products  wholesale and retail through PHS Group Inc. In the latter
half of 2007 the Company also  established  in China  independent  manufacturing
operations  in a  co-packing  arrangement  for  proprietary  spices and in North
Dakota for proprietary potato products,  pasta salads and dried beans which have
added to its product  distribution  menu. Income from sales of these proprietary
products is anticipated to add  considerably  to the gross sales of the Company.
The Company  utilized the proprietary  product line as a co-packing  opportunity
offered to PHS  customers.  The largest  sector of this  recently  acquired  and
developed  proprietary  product  production  line is the  Company's  baking  mix
product operation centered in Monroe, Michigan.

                                        2

<PAGE>

     GRAN RESERVE CORPORATION (PREMIUM CIGAR OPERATIONS)

     The Company's premium cigar operations are presently  conducted through its
wholly  owned  subsidiary  Gran  Reserve  Corporation  (GRC).  The  Company  has
authorized  the  sale of the  Company's  cigar  operations,  which  transfer  is
probable in 2008.  Although no formal  commitments  have yet been  finalized,  a
contract  in  principal  has  been  reached  with  a  group  of  management  and
supervisory personnel associated with the GRC cigar operations but who otherwise
have no official capacity with Synergy Brands Inc. or its subsidiaries.  If such
should  transpire  cigar  regulation  will no longer have any material impact on
Company operations. Information is hereby presented on such operating segment as
an ongoing venture as well as its historical  contribution  to Company  business
opportunities  but its  significance  to the Company and the Company's  focus on
such segment have  diminished and this and the  increasing  cost and exposure of
the applicable  regulatory framework under which the cigar business is operating
have provided  impetus for the Company to enter an arrangement  for the transfer
of such segment. 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  required of 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.

                                       3

<PAGE>

     B. PHS GROUP (Grocery & HBA Operations)

     PHS Group heading the principal business of the Company representing 98% of
total revenues, is involved in the purchase of name brand grocery and Health and
Beauty Aids (HBA)  products  and  proprietary  brands of limited  baking mix and
potato products, and spices which are manufactured through other subsidiaries of
the  Company and the  further  resale to  traditional  customers  utilizing  the
logistics and  networking  advantages  of  electronic  commerce and just in time
distribution.  PHS's core sales base  remains  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.  Sales of Company  manufactured  proprietary food
products has begun in 2007 and is expected to grow into a significant  operating
element  of PHS  Group  as a  co-packer  for  other  customers  of the  Company.
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  and  separation
between brand name and proprietary products.  Product sales to Canada constitute
what the Company  believes to be the only material  foreign  sales.  The Company
also sells to Israel,  Colombia,  and the  Dominican  Republic but such sales in
total  constitute only  approximately 2% of overall Company sales. All sales are
done in U.S.  Dollars.  Distribution of brand name products is directed to major
retailers  and  wholesalers  from  major  U.S.  and  Canadian  consumer  product
manufacturers  and  distributors.  Proprietary  products  are  manufactured  for
distribution  through  PHS  by  other  subsidiaries  of  the  Company.  PHS  has
positioned  itself as a distributor for  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  in brand name product
distribution 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 on an as needed basis with
no formal long term lease 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  acquisition  and further  distribution of baking mixes and
spices and in the fourth quarter of 2007 that of potato  products,  pasta salads
and dried beans,  to national  chains on a proprietary  basis.  PHS continues to
develop  these  private  label  programs as co-packer  for national  accounts by
creating proprietary product planograms  specifically  designed for retail need.
On May 18, 2007 PHS through a  controlling  subsidiary  acquired the assets of a
baking mix  manufacturing  facility that was formerly  operated under the entity
Loretta Baking Mix Products (LBMP) for a combined cost of $10.4 million.

     The factors  that were  involved in the  Company's  decision to acquire the
manufacturing facility consisted of many business factors including:

     (1) PHS has secured and established  business with several  national chains
that have been  generating  substantial  orders for PHS of products  produced by
LBMP and there for was no  available  replacement  capability  perceived  by the
Company for this  business.  Although PHS did not own the private  label brands,
the factory had the artwork, the packaging,  the recipes,  inventory assets, the
configurations,   governmental  approvals,   logistics,  line  design  and  many
strategic  capabilities  that  allowed  PHS  to  have  a  turnkey  solution  and
uninterrupted   business.   Restaurant  Artwork,   packaging  and  recipes  were
formulated and are owned by PHS customers for whom PHS acts as a co-packer.

     (2) Baking mix  facilities  have to be American  Baking  Association  (ABA)
approved.  The ABA approval  process and subsequent FDA approval are tedious and
time consuming.  The LBMP plant was already  certified for all regulatory baking
mix needs and has certifications and quality control at the optimum levels. This
facility was already  co-packing  for PHS and the customers  were satisfied with
the quality of the product.

                                       4

<PAGE>

     (3) PHS has started to develop  proprietary  brands  under the County Fare,
Country Value and Rich and Moist Labels.  PHS has started the process of seeking
customers that may not have their own private label brands, but are only selling
baking mix national  brands such as Duncan Hines.  PHS has positioned the brands
that it has developed as value brands that could provide  higher  margins to the
retailer then national  brands,  but do not have the costs of development that a
private label brand might otherwise  have. The Company  believes that its market
capitalization  suffers  because  there  is no  proprietary  brand  that it owns
whereas  presently the Company  merely  distributes.  The Company  believes that
building   brand  value  could  enhance   shareholder   value.   Gaining  direct
manufacturing  capabilities with no delays or financial  hardship is believed to
be a valuable resource.

     (4) PHS started to develop a broker network,  distributed  presentations to
several  national  chains,  and hired sales  support for  co-packing  expansion.
Interruption  of this  progress  would have  reduced  PHS future  profits.  This
facility  enabled  operations to likely continue more  seamlessly.  Furthermore,
controlling the facility will likely enable PHS to expand,  bring new lines into
activation, run more shifts and PHS strong credit should allow it to close deals
with customers that were tenuous about the co-packing relationship as opposed to
full PHS production and manufacturing control.

     (5) PHS plans on expanding the business in the existing facility. Since all
process  approvals that have been granted are for the use of this facility,  any
expansion would likely be modular and cost effective.  The facility  already has
the regulatory  certifications to operate a baking mix  manufacturing  plant and
would therefore ease the process of future expansion.  The anticipated expansion
is being  ascertained for existing PHS customers that PHS has been servicing for
12 months and expansion opportunities that PHS has been developing internally.

     (6) The  information  systems  needed to  support  this  operation  already
existed  within  the  manufacturing  process.  The IT  requirements  as  well as
logistical  requirements  were  already  in  place  to  support  PHS  customers.
Customers  have their own product mix that is customized to the line. A customer
programs the manufacturing line. This integrated process is an important part of
the manufacturing  process,  job order costing,  quality control and motion time
study that determines capacity.

     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  sites.  GRC also  manages the  internet  sales of
Beautybuys.com  which are less than 5% of overall  online sales.  GRC operations
account for less than 2% of the Company's present consolidated revenues, and the
diminished capacity of the cigar operations in the overall business plan for the
Company and cost saving opportunity for the Company if GRC operated  independent
of the Company,  as well as  regulatory  burdens  perceived as increasing in the
future for the Company if its present cigar operations are retained, the Company
has  sought and been able to locate a suitor for this  business  segment  and is
pursuing  such  opportunity  and  agreement  in  principal  has been reached for
transfer of such segment to a non-affiliated  but familiar  acquiree  candidate.
Provided such transaction prevails,  the information included herewith regarding
cigar  operations  shall be  considered  in material  part to be  historical  in
nature.  There  have  been none and the  Company  does not  intend to  guarantee
continued effective  performance of this operating segment. GRC cigar operations
include two businesses.  This segment includes Cigars Around the World (CAW) and
CigarGold.  Through CAW the 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 and his business was
acquired by the Company with  continued  support  from Mr.  Rancic.  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 present 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.

                                       5

<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.

    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.

     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 exclusively through
Internet admissibility directly to the retail consumer.

     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 manufacturers,  wholesalers,  and distributors with
whom the Company  has  successfully  acquainted  itself or  developed  in house.
Source of  products  the  Company  believes  should  stay  stable.  Sources  and
availability of raw materials may pose certain concerns,  including pricing, but
most  ingredients  in the  Company's  baking mix  operations,  as the  Company's
principal  proprietary  grocery product,  principally  flour,  sugar, and edible
oils, are readily  available in house and from numerous outside sources.  Prices
for our raw  materials  are  dependent  on a number  of  factors  including  the
weather,  crop  production,  transportation  and  processing  costs,  government
regulation  and  policies,  worldwide  market  supply of, and demand  for,  such
commodities and alternative demand for raw materials,  such as the recent demand
for corn for use in the  production  of ethanol.  Although the Company  believes
that it has a capable  purchasing  function to obtain and allow for  competitive
pricing,   the  inherent   volatility  of  commodity  prices   occasionally  and
potentially  exposes the Company to fluctuating  costs.  The Company attempts to
recover the majority of its commodity cost increases by operating  efficiencies.
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. The Company believes it competes in its supply chain operation on the
basis of  product  pricing,  quality  and  assortment,  scheduling  capabilities
regarding  and  reliability  of  deliveries,  the range and  quality of services
provided,  technological  capabilities and location and logistics of distributor
facilities and  arrangements.  In the Company's  proprietary  baking mix product
sector,  competition is based upon primarily product quality,  pricing, customer
service,  and development of brand  recognition and loyalty through  promotional
activities  and  information  dissemination  techniques.  The Company  acts as a
co-packer  in the  proprietary  product  area and emphasis is placed on customer
preferences  and success  dependent in great part on being able to recognize and
service such preferences. Competition here is significantly related to existence
of similar brand name products, and development of proprietary brand recognition
in such market is accomplished  through  offering and  maintenance  primarily of
competitive pricing and product quality.

                                       6

<PAGE>

     E. MAJOR CUSTOMERS.

     During the year ended December 31, 2007,  sales to two customers  accounted
for  13%,  and 10% of the  Company's  total  sales  and in 2006  sales  to three
customers  accounted for 21%, 16% and 12% of total sales.  During such periods 1
supplier  of  product  for the  Company  further  retail/wholesale  distribution
contributed 59% of such supply.  These major  customers and suppliers  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:

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

     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 accessed 24 hours a day,  seven days a week
from anywhere that a visitor thereto has Internet  access.  The Company offers a
large  selection of products  for sale on its relevant  websites 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 in internet sales 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  stores  provide
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.

                                       7

<PAGE>
     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.

    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 usually peak at the end of a calendar quarter,  when the
Company's  suppliers  offer  promotions  which lower  prices  and, in turn,  the
Company is able to lower its prices and increase sales volume. Suppliers tend to
promote at quarter end and as a result reduced product costs may increase sales.
Sales of beauty care  products and  fragrances  increase over  traditional  gift
giving holidays.

     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.

     Consumer  propensity for baking products (and similarly for the ingredients
therefor) is stronger in the Spring and Fall.

     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
PHS utilizes leased trucks on an as needed basis with no formal long term lease.
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.

     Proprietary  Banking  Mix  business  operations  are  centered  in  Monroe,
Michigan where the Company maintains manufacturing and warehousing facilities on
a long term lease basis considered of sufficient  capacity to fulfill  projected
needs. Use of Company owned facilities for both manufacture and storage saves on
cost.

     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.   The  baking  mix  proprietary   co-packing   operation
manufactures products under proprietary tradenames including,  Country Value and
County  Fare,  Rich n Moist,  and Rich n Fluffy,  and in the  spice  manufacture
sector under Palm Spices and Gourmet Select.

     J. EMPLOYEES

     The  Company  and its  subsidiaries  taken  together 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.
Administration  and  operation of the baking mix  manufacture  and  distribution
operation centered in Monroe,  Michigan employs an additional five (5) full time
personnel.  Additional  part-time  labor  personnel are employed on an as needed
basis.
                                       8
<PAGE>

     The  Company  leases and staffs its  warehouses  in New York , New Jersey ,
Pennsylvania  and Florida  (GRC),  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.  The Company also leases and staffs facilities  approximating  110,000
square  feet  utilized  in   administering   the  Baking  Mix   manufacture  and
distributions  operations.

     K. GOVERNMENT REGULATION

     1. TOBACCO INDUSTRY REGULATION AND TOBACCO INDUSTRY LITIGATION

     There is and has been various tobacco industry regulation at federal, state
and local Levels from which the cigar industry to date only been affected mainly
only tangentially.  There appears a recent trend toward increasing regulation of
the tobacco industry,  and the increase in popularity of cigars could lead to an
increase in  regulation  of cigars.  Because in part of the changing  regulatory
framework  within which the Company's cigar  marketing  business  operates,  the
Company has considered and has entered in principal an agreement to transfer out
its  cigar  operations  business  and  assets  to  a  group  of  management  and
supervisory personnel associated with the GRC cigar operations but who otherwise
have no official capacity with Synergy Brands Inc. or its subsidiaries.  If such
should  transpire  cigar  regulation  will no longer have any material impact on
Company  operations.  The Company has in the past  reported  existence  of cigar
regulation  in  greater  depth  and  reference  is  made  thereto  for  expanded
disclosure. The changing regulatory environment relevant to cigar production and
marketing is emphasized in this report and historical  reference is made to past
disclosure on past tobacco  regulation  having present and/or  potential  future
application to the cigar industry

     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>

     States have legislation  mandating,  in varying degrees, the prohibition of
smoking in 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 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 and
is one of multiple business reasons  underlying the Company's  expected transfer
out of its cigar business.

     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.

     While the cigar industry has not been subject to health-related  litigation
to date  similar to the various  cases  brought  against  and  settled  with the
cigarette industry, 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  State
Children's  Health Insurance  Program ("SCHIP") is a jointly financed program by
the Federal and State governments  designed at providing health insurance to the
children of families from modest incomes.  In 2007,  Congress passed legislation
expanding the SCHIP program.  Funding for the SCHIP expansion was to be financed
through an increase in the federal excise tax on tobacco  products,  whereby the
cigar industry would bear the greatest increase of roughly 6,000%. On October 3,
2007,  President  Bush  vetoed  the bill.  Congress'  attempt  to  override  the
President's  veto by the  two-thirds  majority  failed,  however  the  House  of
Representatives  passed a similar bill, H.R. 3963, which was subsequently passed
by the Senate on November 1, 2007. On December 12, 2007,  President  Bush vetoed
the  second  bill as well on the  grounds  that it was  essentially  similar  to
earlier  legislation.  Thereafter  President Bush signed  legislation  extending
SCHIP to cover  current  enrollment  levels  through  March 2009.  Congress  may
attempt similar legislative efforts to expand SCHIP which would have significant
financial impacts on the cigar industry. If such legislation is passed, with the
increase  of the  excise  tax on  tobacco  products,  cigar  prices  would  rise
dramatically.  This may potentially lead to decreased  consumption of cigars and
subsequent  decline in revenues from cigar sales.  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.  There are  increased  State
efforts to change the classifications of cigars to increase tax revenues. 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.  Specifically, and as an example of use of revised classification,  in
January  2008  New  York   Governor   Eliot   Spitzer   proposed   changing  the
classification  of little cigars to  cigarettes,  thereby  increasing the tax on
said goods.  Increased taxation either directly or through  reclassifications of
tobacco  products  could  have an adverse  effect on sales as cigar  consumption
generally  declines.  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.

                                       10

<PAGE>
     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.

     As a provider of directly manufactured food items, the Company's operations
are subject to stringent quality, labeling and traceability standards, including
the Federal Food and Drug Act of 1906 and  Bioterrorism  Act of 2002,  and rules
and  regulations  governing trade  practices,  including  advertising.  Our food
production  operations  and our delivery  fleet are subject to various  federal,
state and local  environmental  laws and  workplace  regulations,  including the
federal  Occupational  Safety  and Health Act of 1970,  the  federal  Fair Labor
Standards  Act of 1938,  the federal  Clean Air Act of 1990,  the federal  Clean
Water Act of 1972 and the Comprehensive Environmental Response, Compensation and
Liability Act, or CERCLA.  Future  compliance  with or violation of such laws or
regulations,   and  future  regulation  by  various  federal,  state  and  local
government entities and agencies,  which could become more stringent, may have a
material adverse effect on our financial condition and results of operations. We
could also be subject to litigation arising out of such governmental regulations
that could have a material adverse effect on our financial condition and results
of operations.  We believe that our current legal and  environmental  compliance
programs  adequately  address  such  concerns  and  that  we are in  substantial
compliance  with such  applicable  laws and  regulations.  From time to time the
Company receives notices of violation relating to regulatory matters.  When such
notices are received, the Company works with the appropriate authorities to seek
a  resolution  to the  violations,  which may  include,  adjustment  to  company
operations or  protocols,  site  remediation,  or the  acquisition  or repair of
related  equipment and other facility  improvements,  if necessary.  The Company
believes  its  manufacturing   and  warehousing   facilities  to  be  regulatory
compliant.

     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.
On October 31, 2007,  the Internet  Tax Freedom Act  Amendments  Act of 2007 was
enacted  into law thereby  amending  the  Internet Tax Freedom Act to extend the
moratorium until November 1, 2014.
                                       11
<PAGE>

     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.

     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 and/or to 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;

         Concentration of 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;

         Company proprietary and other distributed product brand recognition;

         Protection of Company's intellectual property and trade secrets;

         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;

         Production and Inventory concerns;

         Potential government regulation;

         Interruption of production facilities operations;

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

         Risk associated with cost increases in materials,  ingredients, energy,
         and employee wages and benefits;

         Ability to obtain and maintain  adequate terms with vendors and service
         providers;

         Risks associated with product price increases,  including the risk that
         such actions will not effectively  offset  inflationary costs pressures
         and may adversely impact sales of products;

         The  effectiveness of efforts to hedge exposure to price increases with
         respect to various ingredients and energy;

         Ability  to  attract,   motivate   and/or  retain  key  executives  and
         employees;

         Successful implementation of information technology improvements;

         The  continuing  effect of  changes  in  consumers'  eating  habits and
         dietary guidelines

                                       12

<PAGE>

     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.

         o The  availability  of  capital  on  acceptable  terms in light of the
         various factors discussed herein,;

         o The  availability  and cost of raw materials,  packaging,  fuels, and
         utilities,  and the  ability to recover  these  costs in the pricing of
         products, improved efficiencies and other strategies;

         o Actions of competitors,  including  pricing  policies and promotional
         spending;

         o The effectiveness of advertising and marketing spending;

         o The  effectiveness  and adequacy of information  and data  processing
         systems;

         o Changes in general economic and business conditions;

         o Any  inability  to protect  and  maintain  the value of  intellectual
         property;

         o Changes in consumer tastes or eating habits;

         o Costs associated with environmental compliance and remediation;

         o Actions of governmental entities, including regulatory requirements;

         o Acceptance  of new product  offerings by consumers and our ability to
         expand existing brands;

         o  Expenditures  necessary  to carry out  cost-saving  initiatives  and
         savings derived from these initiatives;

         o Changes in our business strategies;

         o Business  disruption  from terrorist  acts, our nation's  response to
         such acts and acts of war;

         o Changes in general economic or business conditions  nationally and in
         the Company's primary markets;

         o The availability of capital upon terms acceptable to the Company;

         o The availability and pricing or raw materials;

         o The level of demand for the Company's products;

         o The  outcome  of legal  proceedings  to which the  Company  is or may
         become a party;

         o The actions of  competitors  within the industry  wherein the Company
         operates;

         o The success of business strategies implemented by the Company to meet
         future challenges;

         o The costs to upgrade and enhance existing facilities;

         o The costs to acquire (or lease)  fit-out new  facilities and relocate
         thereto;

                                       13

<PAGE>

         o The costs and  availability  of capital to fund  improvements  or new
         facilities;

         o The retention of key employees;

         o The  ability to develop and market in a timely and  efficient  manner
         new products which are accepted by consumers; and

         o Other factors.

     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.  If any of the  Company's  assumptions  prove  incorrect or should
unanticipated  circumstances  arise, its actual results could differ  materially
from those anticipated by such forward-looking statements. The differences could
be caused by a number of factors or combination of factors,  including,  but not
limited to, those stated  herein.  Readers are strongly  encouraged  to consider
these factors when evaluating any such forward-looking statements.

     These statements speak only as of the date of this report,  and the Company
disclaims any  intention or  obligation to update or revise any  forward-looking
statements  to  reflect  new  information,  future  events  or  developments  or
otherwise,   except  as  required  by  law.  All  subsequent  written  and  oral
forward-looking statements attributable to the Company and persons acting on its
behalf are qualified in their entirety by the cautionary statements contained in
this section and elsewhere in this report.

     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.  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. The Company
has made  strides in the last  several  years to become less  reliant on capital
raising  efforts,  substituting  debt  financing at  advantageous  interest rate
levels,  thereby  utilizing to a much greater extent working  capital  generated
from increasingly positive business operations.

                                       14

<PAGE>

     As of  December  31,  2007,  the  Company  had  long-term  indebtedness  of
approximately  $12,000,000.  Although the Company made debt principal  reduction
payments over the last several 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;

                                       15

<PAGE>

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

     - disruptions in service by shipping carriers;

     - the extent to which the Company offers 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,  as  well  as raw  materials  used  in
     preparatory  product  manufacture,  all of which are used in the  Company's
     operating facilities.

     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.

                                       16

<PAGE>

     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.

                                       17

<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.

     The  principal raw  materials  used in the  Company's  baking mix and other
lesser directly  manufactured  food items  operations,  including flour,  sugar,
spices and edible oils,  and the paper,  films and plastics  used to package its
products, are subject to substantial price fluctuations,  and some raw materials
are at historically high prices.  The prices for raw materials are influenced by
a number of factors, including the weather, crop production,  transportation and
processing costs,  government  regulation and policies,  worldwide market supply
and demand an alternative  demand for raw  materials,  such as the recent demand
for  corn  for  use  in  the  production  of  ethanol.   Commodity  prices  have
historically  been  volatile and may continue to be  volatile.  Any  substantial
increase  in the prices of raw  materials  may  adversely  affect the  Company's
financial condition, results of operations and cash flows.

     The Company relies on utilities to operate its business;  its manufacturing
plants and other facilities use natural gas, propane and electricity to operate.
In addition, its distribution operations use gasoline and diesel fuel to deliver
its products. For these reasons,  substantial future increases in prices for, or
shortages of, these fuels or electricity  could  adversely  affect the Company's
financial condition, results of operations and cash flows.

     6. FURTHER  CONSOLIDATION  IN THE RETAIL FOOD INDUSTRY MAY ADVERSELY IMPACT
PROFITABILITY

     As  supermarket  chains  and  grocery  product  manufacturers  continue  to
consolidate and as mass merchants gain scale, the Company's larger customers may
seek  more  favorable  terms  for  their  purchase  of the  Company's  products,
including  increased  spending on  promotional  programs,  and  availability  of
product for  distribution  may lessen if the Company  has not  established  good
business relationships with all participants in the consolidated ventures.

     7. 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.

                                       18

<PAGE>

     8. POSSIBLE LOSS OF NASDAQ CAPITAL MARKET 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  Capital
Market 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  and has in the recent
past been  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  Capital  Market  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  and maintaining
its bid  price  in  conformity  with  applicable  NASDAQ  listing  standards  as
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.

                                       19

<PAGE>

     9. 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 through use of the Internet. 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 from product sales over
the  Internet  as well as use of the  Internet  to  arrange  products  sales  in
generaldepend  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.

                                       20

<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 could  adversely affect its results
of operations and financial condition.

     10. 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  in the  operating
segments of the Company highly dependent on Internet sales.

                                       21

<PAGE>

     11.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).

     12. 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 near future but the Company does have outstanding
preferred stock upon which dividends are paid currently.

     13. 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.

                                       22

<PAGE>

     14. 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.

     15. 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 current  revised Rule 144 a person
(or persons whose shares are  aggregated)  who has satisfied a six month holding
period may if they are an affiliate,  under certain circumstances and processes,
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 and
non-affiliates  have no such  limitations,  but under both scenarios the Company
must be current in their reporting. Rule 144 also permits, the sale of shares by
a person who is not an affiliate of the Company and who has satisfied a one year
holding period without any limitations. The majority of holders of the shares of
the outstanding common stock of the Company deemed "restricted  securities" have
already satisfied at least their six month 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.

     16. 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.

     17.  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  and its various
tradenames  and  trademarks.  In  the  baking  mix  operations,  as an  example,
proprietary  manufacturing is accomplished for products under the Country Value,
County Fare, Rich n Fluffy and Rich n Moist tradename  brands;  and in the spice
manufacturing  sector recognized  tradenames are Palm Spices and Gourmet Select.
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 and gain acceptance of products under other
more highly recognized tradenames and trademarks.

     18. 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.

                                       23

<PAGE>

     19.  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.

     20. 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.

                                       24

<PAGE>

     21. 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.

     22. 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.

     23.  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.

                                       25

<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.

                                       26

<PAGE>

     24. 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.

                                       27

<PAGE>

     25. 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.

 26. 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.

                                       28

<PAGE>

     27. 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 and  co-packing
and labeling on  proprietary  products.  We do not have  long-term  contracts or
arrangements  with  most  of  our  vendors  to  guarantee  the  availability  of
merchandise and channeling of product distribution, particular payment terms, or
the extension of credit limits.  If the Company's  current  vendors were to stop
selling  merchandise  to us or assisting in product  distribution  channeling on
acceptable terms, the Company may not be able to acquire  merchandise or channel
product from other vendors and customer sources in a timely and efficient manner
and on acceptable terms.

     28. CHANGE IN TOP CUSTOMERS/SUPPLIERS SELLING/BUYING PATTERNS MAY ADVERSELY
AFFECT THE COMPANY'S SALES AND PROFITS

     The  Company's top 2 customers  represent 23% of its 2007 total sales,  and
top 3 customers  49% of its 2006 total sales.  The Company's  largest  supplier,
Proctor and Gamble,  represents 59% of its product distribution  availability in
2007 and 2006. If any of the top customers change their buying patterns with the
Company  and/or top suppliers  limit  product  supply,  the Company's  sales and
profits could be adversely affected.

     29. LOSS OF FACILITIES COULD ADVERSELY  AFFECT THE COMPANY'S  FINANCIAL AND
OPERATIONAL RESULTS

     The  Company  has one  principal  production  facility  for its  baking mix
operations,  which  facility  is a four  story  manufacturing  plant in  Monroe,
Michigan  where the  Company's  signature  baking mix products  are  exclusively
manufactured.  The loss of such production  facility could have material adverse
impact  on  the  Company's  operations,   financial  condition  and  results  of
operations.

     30. TERMS OF INDEBTEDNESS IMPOSE SIGNIFICANT RESTRICTIONS ON OUR BUSINESS

     The  Company's  Credit  and  Debt  Instruments  Agreements,  ("Agreements")
contain  various  covenants  that limit the  Company's  ability to,  among other
things, incur or become liable for additional indebtedness;  create or suffer to
exist  certain   liens;   enter  into  business   combinations   or  asset  sale
transactions;  make restricted  payments,  including  dividends over a specified
amount; and make investments.

     These  restrictions  could  limit the  Company's  ability to obtain  future
financing,  sell  assets,  make  acquisitions  or needed  capital  expenditures,
withstand a future  downturn in its business or the economy in general,  conduct
operations or otherwise take advantage of business opportunities that may arise.

     31.  THREATS OR POTENTIAL  THREATS TO SECURITY OR FOOD SAFETY MAY ADVERSELY
AFFECT OUR BUSINESS

     Wartime  activities,  threats or acts of terror,  data  theft,  information
espionage,  or other  criminal  activity  directed  at the grocery or drug store
industry,  the transportation  industry, or computer or communications  systems,
including  security  measures  implemented in recognition of actual or potential
threats,   could  increase  security  costs,   adversely  affect  the  Company's
operations,  or impact consumer behavior and spending and customer orders. Other
events  that  give  rise  to  actual  or  potential  food  contamination,   drug
contamination,  or  food-borne  illness  could  have an  adverse  effect  on the
Company's operating results.

     32. 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;

                                       29

<PAGE>

         - 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.

                                       30

<PAGE>

     33. 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 and may be subject to international  risks that
are  not  under  the  jurisdiction  of  U.S.  Laws.  In  2007  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, and 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.

     The Company also leases space for manufacturing  and warehousing  regarding
its baking mix operation in Michigan (USA) of approximately 110,000 square feet.

     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 2007 no matters were submitted for shareholder
approval.

                                       31

<PAGE>

                                     PART II

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

     The Company's common stock trades on NASDAQ Capital Market under the Symbol
"SYBR",  and on the Boston Stock Exchange  under the Symbol "SYB".  The high and
low sales prices in the NASDAQ Capital 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, 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
March 31, 2007              1.07             .66        .83
June 30, 2007               1.07             .72        .84
September 30, 2007          1.34             .80       1.04
December 31, 2007           1.29             .80        .89

     On March 28,  2008,  the Company had  approximately  3000  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 presently and in the past has been under 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 8 "Possible
Loss of NASDAQ Capital  Market  Listing,"  supra;  reference is also made to the
report of the Company on Form 8K regarding the present  NASDAQ  warning filed by
the  Company  on  January  28,  2008  which  report  is  incorporated  herein by
reference).

     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.  The Company has had
approved by its Board of  Directors  and  Shareholders  an increase in its total
authorized stock (without further change in designation  beyond common stock and
without any amendment in the amount  authorized in each present  designation) to
26 million shares which increase, although authorized, has not as of the date of
this report been effectuated.

     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.

                                       32

<PAGE>

     ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATION
                                    OVERVIEW

     Synergy Brands Inc. is a holding company that principally  operates through
a wholly owned subsidiary,  PHS Group Inc. ("PHS") in the wholesale distribution
of  nationally  known  brands,  proprietary  private  label  groceries,  general
merchandise, and Health and Beauty Aid (HBA) products. 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 manufacturing and distribution
of certain grocery  private label products  including  baking mixes,  spices and
packaged meals. Information can be found at www.phsgroup.com.

     The Company  also owns a small wholly owned  subsidiary  representing  less
then  2% of  the  Company's  revenues,  Gran  Reserve  Corporation  (GRC),  that
principally  operates in the wholesale,  retail and online sales of Premium hand
made cigars and accessories The Company has authorized the sale of GRC and plans
to focus on its expanding grocery  operations.  Further information can be found
at  www.cigargold.com.  The  Company  also owns 20% of a travel  company  called
Interline Vacations (PERX). Information can be found at www.perx.com.

     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  in the United States.  PHS is the largest business segment of the
Company's  business  operations,  representing  about 98% of the overall Company
sales and 95% 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 benefits 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,
Duracell,  Folgers,  Crest, 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.

     In the third quarter of 2006,  PHS entered the private label grocery market
specializing in the  distribution of baking mixes and spices to grocery and drug
chains as well as wholesalers and distributors 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.

     On May 18,  2007,  PHS  acquired  the assets of a baking mix  manufacturing
facility  through a wholly owned subsidiary that was known as Loretta Baking Mix
Products (LBMP) for a combined cost of $10.4 million.

     Factors that were involved in PHS and Synergy  decision to acquire LBMP
manufacturing facility consisted of the following:

     o PHS has secured and  established  business with several  national  chains
     that have been generating  substantial  orders for PHS of products produced
     by LBMP and there was no immediate replacement  capability perceived by the
     Company  for this  business.  Although  PHS did not own the  private  label
     brands, the factory had the artwork, the packaging, the recipes, (inventory
     assets) the configurations,  governmental approvals, logistics, line design
     and many strategic capabilities that allowed PHS to have a turnkey solution
     and  uninterrupted  business.  The  artwork,  packaging  and  recipes  were
     formulated and are owned by PHS customers.

                                       33

<PAGE>

     o Baking  mix  facilities  have to be  American  Baking  Association  (ABA)
     approved.  The ABA approval process and subsequent FDA approval are tedious
     and time consuming. The LBMP plant was already certified for all regulatory
     baking mix needs and has  certifications and quality control at the optimum
     levels. This facility was already co-packing for PHS and the customers were
     satisfied with the quality of the product.

     o PHS has  started to develop  proprietary  brands  under the County  Fare,
     Country  Value and Rich and Moist  Labels.  PHS has  started the process of
     seeking customers that may not have their own private label brands, but are
     only  selling  baking mix  national  brands such as Duncan  Hines.  PHS has
     positioned  the brands  that it has  developed  as value  brands that could
     provide  higher  margins to the retailer then national  brands,  but do not
     have the costs of  development  that a private label brand might  otherwise
     have.  Synergy  Brands  believes  that its  market  capitalization  suffers
     because  there is no  proprietary  brand that  Synergy  Brands owns whereas
     presently the Company merely  distributes.  Synergy  believes that building
     brand value may enhance  shareholder  value.  Gaining direct  manufacturing
     capabilities  with no  delays  or  financial  hardship  is  believed  to be
     valuable.

     o PHS started to develop a broker  network,  distributed  presentations  to
     several national chains, and hired sales support for co-packing  expansion.
     Interruption of this progress would have reduced PHS future  profits.  This
     facility   enabled   operations  to  likely   continue   more   flawlessly.
     Furthermore,  controlling  the facility will likely  enables PHS to expand,
     bring new lines into  activation,  run more  shifts  and PHS strong  credit
     should allow it to close deals with  customers  that were tenuous about the
     co-packing relationship as opposed to full PHS production and manufacturing
     control.

     o PHS plans to expand the  business  in the  existing  facility.  Since all
     process  approvals that have been granted are for the use of this facility,
     any  expansion  would  likely be modular and cost  effective.  The facility
     already  has  the  regulatory   certifications  to  operate  a  baking  mix
     manufacturing  plant  and  would  therefore  ease  the  process  of  future
     expansion.  The anticipated expansion is being ascertained for existing PHS
     customers  that  PHS  has  been  servicing  for  12  months  and  expansion
     opportunities that PHS has been developing internally.

     o The information  systems needed to support this operation already existed
     within the manufacturing process. The IT requirements as well as logistical
     requirements were already in place to support PHS customers. Customers have
     their  own  product  mix that is  customized  to the line.  The  customer's
     formula  programs the  manufacturing  line. This  integrated  process is an
     important part of the  manufacturing  process,  job order costing,  quality
     control and motion time study that determines capacity.

     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).  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.  CigarGold.com  sells
premium  cigars  through  the  Internet  directly  to the  consumer  and through
partnership online affiliations. GRC, under the tradename BeautyBuys.com,  sells
salon hair care  products  directly to the consumer via the Internet and through
partnership online affiliations.

                                       34

<PAGE>

     CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2007
                AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2006.

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

                                                             OPERATING                        OPERATING AND
                                                              SEGMENTS                        CORPORATE SEGMENTS

Y/E 12/31/2007
Revenue                                                      $89,540,501      24.78%           $ 89,540,501         24.78%
Gross Profit                                                   8,833,419      78.12%              8,833,419         78.12%
SG&A                                                           4,327,546      49.40%              5,858,185         36.64%
Operating Profit                                               3,293,750      73.89%              1,755,019        311.19%
Net Profit (loss) from continuing operations
  attributable to common shareholders                          1,740,677     271.60%               (315,309)       -81.14%
Per share continuing operations                                     0.19                              (0.04)
Net loss from discontinued
 operations                                                                                        (114,997)       -91.54%
Per share discontinued operations                                                                     (0.01)
Net profit (loss) attributable
 to common shareholders                                                                            (430,306)       -85.81%
Net profit (loss) per common share                                                                    (0.05)
Interest and financing expense                                 1,546,969      10.20%              2,184,141          6.50%

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

</TABLE>

     Synergy Brands

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

     Revenues  increased by 25% to  $89,540,501  for the year ended December 31,
2007,  as compared to  $71,759,908  for the year ended  December 31,  2006.  The
increase in sales was predominately  from the sale of PHS private label products
and an increase in the Company's PHS wholesale distribution operations.

     The  Company  has been able to  diversify  its  product  selection  in both
national  brand and  private  label to achieve  better  operating  margins.  The
Company was able to grow revenue by 25% and gross  profit  increased by 78%. The
Company  attained an operating  profit of $1,755,019 for the year ended December
31, 2007 as compared to a $426,816  operating profit for the year ended December
31, 2006.

     Selling  General and  Administrative  expenses  (SGA)  increased  by 37% to
$5,858,185  for the year ended  December 31, 2007 as compared to $4,287,344  for
the year ended  December  31, 2006.  The  increase in SG&A by 37% resulted  from
increases in certain variable costs that correlate to increases in revenue. SG&A
expense for PHS Group increased by 68% to $3,623,994 for the year ended December
31, 2007 as compared to  $2,161,320  for the year ended  December 31, 2006.  PHS
incurs  variable  expenses  in  connection  with  selling  costs  such as  sales
commission,  drivers,  warehousing and  administrative  personnel as well as its
promotional  expenses. As revenues rise, sales commissions and certain operating
expenses  resulting from sales increase  commensurately.  Overall SGA costs were
6.5% in 2007 as compared to 6% of Revenues in 2006 while gross profit  increased
materially for the same period.

     The net  loss  attributable  to  Common  Stockholders  of the  Company  was
$430,306  for  the  year  ended  December  31,  2007  as  compared  to a loss of
$3,031,432  for the year ended  December  31,  2006.  Synergy  Brands  earned an
operating  profit of  $3,293,750  from as  compared  to an  operating  profit of
$1,894,202 for the same period last year.  Corporate expenses for the year ended
December 31, 2007 totaled $1,530,639, which include legal, accounting, corporate
employees,  and regulatory expenses as compared to $1,390,686 for the year ended
December 31, 2006.  Management believes that its corporate expenses may increase
because of  additional  regulatory  requirements  that have been  enacted by the
Securities and Exchange Commission (SEC). The Company will be required to comply
with additional  governance and financial regulations that will likely result in
additional corporate expenses.

                                       35

<PAGE>

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

     PHS Group: (Grocery and HBA operations)

     Synergy's  Grocery  and  HBA  business  known  as PHS  Group  improved  its
operation  through the expansion of its direct store  delivery (DSD) and private
label wholesale and distribution operations. Sales for this segment for the year
improved  by 26% to $87.9  million and  operating  profit  increased  by 100% to
$4,391,213.  PHS represented 98% of the Company's  overall revenues and provides
most of the cash flow for corporate regulatory  expenses.  PHS plans to continue
attempting to build its DSD operations,  expand its private label programs,  and
increase its national sales.

     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
was  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  for the year  ended  December  31,  2007
decreased  by 16% while  operating  loss  increased by 262% to  $1,097,463.  The
Company has authorized the sale of GRC in FY 2008.

     Corporate Expenses:

     The  Company's  allocation  to  corporate  expenses  increased  by  10%  to
$1,530,639  for the year ended  December 31, 2007 as compared to $1,390,686  for
the year ended December 31, 2006.  Corporate  expenses  represent 26% of overall
operating  expense  of  the  Company.  Operating  expenses  for  all  operations
including  corporate  expenses  totaled $5.9 million for the year ended December
31, 2007.  Corporate expenses reflected the charges needed to operate the public
corporation,  Synergy Brands Inc. These included all the regulatory costs, board
fees,  governance fees, legal and accounting expenses and employees that oversee
the operations of the Company's assets.

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

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

     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 98% 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.

                                       36

<PAGE>

PHS SEGMENT INFORMATION OF OPERATING BUSINESSES

                                             PHS Group             CHANGE
YEAR ENDED DECEMBER 31, 2007
Revenue                                         87,933,523        25.91%
Gross Profit                                     8,368,974        91.47%
SG&A                                             3,623,994        67.68%
Operating Profit                                 4,391,213        99.82%
Net Profit                                       2,838,318       264.06%
Interest and financing expenses                  1,546,969        10.20%

YEAR ENDED DECEMBER 31, 2006
Revenue                                         69,840,886
Gross Profit                                     4,370,869
SG&A                                             2,161,320
Operating Profit                                 2,197,620
Net Profit                                         779,634
Interest and financing expenses                  1,403,739

     PHS  increased  its  revenues  by 26% to $87.9  million  for the year ended
December 31, 2007 as compared to $69.8  million for the year ended  December 31,
2006.  The  increase  in PHS  business is  attributable  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 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 from 6.3%
to 9.5%.  PHS has been  able to  maintain  its  sales and  customer  base  while
increasing  gross profit by 91%.  This has been  achieved  through its wholesale
operations  by  generating  incremental  retail sales as opposed to lower margin
wholesale  revenues.  Additionally,  PHS  has  taken  advantage  of  promotional
rebates,  which  further  enables its cost of foods to be reduced.  PHS plans to
continue this approach,  but it does rely on manufacturer  promotions to achieve
its targeted results.  Any material changes in manufacturer  promotional  rebate
policies  may have an  adverse  effect on PHS's  cost of goods.  Continuing  the
development  of private label grocery  products  produced for the benefit of PHS
customers is another objective  currently being developed and executed by PHS as
well as designing brand labels  controlled by PHS. Net profit was $2,838,318 for
the year ended  December  31, 2007 as  compared to a profit of $779,639  for the
year ended  December 31, 2006.  The increased net profit  resulted from a higher
gross profit  realized by PHS through the sale of higher  margin items and items
with increased promotional allowances.

                                       37

<PAGE>

GRAN RESERVE SEGMENT

                                        GRC              CHANGE
YEAR ENDED DECEMBER 31, 2007
Revenue                                $1,606,978      -16.26%
Gross Profit                              464,445      -21.06%
SG&A                                      703,552       -4.32%
Operating loss                         (1,097,463)     261.70%
Net loss                               (1,097,641)     252.70%

YEAR ENDED DECEMBER 31, 2006
Revenue                                 1,919,022
Gross Profit                              588,376
SG&A                                      735,338
Operating loss                           (303,418)
Net loss                                 (311,210)

     Revenues in the  Company's  cigar  operation  decreased by 16% for the year
ended  December  31,2007 to $1,606,978  as compared to  $1,919,022  for the year
ended  December  31,  2006.  CAW  on  a  current   operating  basis   represents
approximately  45% of cigar revenues for the year ended December 31, 2007. Gross
profit for the year ended  December  31,  2007  decreased  by 21% to $464,445 as
compared to $588,376 for the year ended December 31, 2006. Gran Reserve recorded
an impairment loss of $742,678 for the year ended December 31, 2007.

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  was  little  likelihood  of
establishing a plan to make 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 periods being discussed.

                                                 Year Ended      Year Ended
                                            December 31, 2007  December 31, 2006
                                            ----------------- ------------------
Net Sales                                       $9,856           $1,222,834

Cost of sales
Cost of product                                 55,133            1,260,694
Shipping and handling costs                     13,616              144,772
                                            ----------------- ------------------
                                                68,749            1,405,466

Gross Profit (loss)                            -58,893             -182,632

Operating expenses:
  Advertising and promotion                          -                1,046
  General and administrative                    56,104              594,008
  Depreciation and amortization                      -              157,650
  Asset impairment charge                            -              359,353
                                            ----------------- ------------------
                                                56,104            1,112,057

  Operating loss                              -114,997           -1,294,689

Other Income (expenses):
  Other income (expenses)                            -               -1,024
  Interest and financing expenses                    -              -62,765
                                            ----------------- ------------------
                                                     -              -63,789

Net loss before income taxes                  -114,997           -1,358,478

Income tax expense                                                      986
                                            ----------------- ------------------
Net loss from discontinued operations        ($114,997)         ($1,359,464)
                                            ================= ==================

                                       38

<PAGE>

                         LIQUIDITY AND CAPITAL RESOURCES

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


Year ended                                                         2007             2006

Working Capital                                                   $ 6,262,577      $ 9,285,585
Assets                                                             31,440,090       20,867,796
Liabilities                                                        22,419,884       15,207,546
Equity                                                              9,020,206        5,660,250
Line of Credit Facility                                                     -        5,836,928
Receivable turnover (days)                                                 17               57
Inventory Turnover (days)                                                  15                7
Net cash provided by (used in) operating activies                     349,736       (4,324,635)
Net cash provided by investing activites                             (203,784)         420,590
Net cash (used in) provided by financing activites                   (289,070)       4,293,432

</TABLE>

     The Company's  working capital decreased by $3.0 million in FY 2007 to $6.3
million due to a combination of several factors  including  amortization of debt
and  the  purchase  of  the  baking  mix  plant.   Liquidity   for  the  Company
predominately involves the need to finance accounts receivables,  inventory, and
fixed costs.  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
historically 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.  However,  in FY 2007,  the Company has been able to support its  operation
from its operating  profit.  The Company  improved its cash flow from  operating
activities by $4.7 million.  The Company  generated a net loss  attributable  to
Common  Shareholders of  approximately  $430,000 for the year ended December 31,
2007.   Financing  costs  totaled   $2,184,141  and  non-cash   charges  totaled
approximately  $1,664,000 for the year. Reductions in certain 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.  Although the Company was able to fund its operations from internal
cash flow, it still requires  inventory and  receivable  financing for growth as
well as cash flow to support debt amortization.

     The capital resources that were available to the Company as of December 31,
2007 consisted of $12.0 million in long-term  notes,  $4.2 million in short term
notes,  and $3.65  million of  non-redeemable  preferred  stock.  The  Company's
objectives  are to  reduce  its debt  through  the  cash  flow  from  operation,
dispositions  of assets,  as well as refinancing  its current  obligations  with
lower rates.  In 2007, the Company  refinanced its $6 million dollar senior line
of credit with a $8.0 million 10 year term facility and  materially  reduced its
interest rate to 11.75%.  Management would also consider  conversions of debt to
equity depending on market conditions.

     The  Company's  liquidity  relies in  material  part on the  turnover of it
inventory and accounts receivable.  The Company turns its receivables on average
every 17 days and the  Company  has  turned  its  overall  inventory  on average
approximately every 15 days. The Company believes that its collection procedures
and procurement policies are consistent with industry standards. However, 24% 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.  The
Company's sales are reliant in significant  part on extending credit that ranges
from 10 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 manufacturers
change their policies or the Company does not meet the manufacturer's standards,
incentives  may be reduced  and may cause a material  financial  problem for the
company.

                                       39

<PAGE>

     Management believes that continued cost containment, improved financial and
operating controls, long term 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.  However,  achievement of these goals 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 may 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:

12/31/08      12/31/09   12/31/10  12/31/11  12/31/12         Total
$1,157,000   $879,000   $756,000   $621,000  $19,000        $3,432,000

CRITICAL ACCOUNTING POLICIES.

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

ACCOUNTS RECEIVABLE/ALLOWANCE FOR DOUBTFUL ACCOUNTS.

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

                                       40

<PAGE>

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
quarterly  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, 2007, 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.

RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARD BOARD ("FASB").

     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.  The
adoption of this  standard on January 1, 2007 did not have a material  effect on
our consolidated financial statements.

     In July 2006,  the FASB  issued FASB  Interpretation  48,  "Accounting  for
Uncertainty  in Income  Taxes " ("FIN 48") and in May,  2007,  issued FASB Staff
Position FIN 48-1.  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.  The  adoption  of FIN 48 did  not  have a  material  impact  on our
consolidated  financial  statements.  For our Company,  this  interpretation was
effective beginning January 1, 2007.

     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.

                                       41

<PAGE>

     In February  2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial  Liabilities  including an amendment of SFAS 115"
(SFAS No.  159).  The new  statement  allows  entities to choose,  at  specified
election dates,  to measure  eligible  financial  assets and liabilities at fair
value that are not otherwise required to be measured at fair value. If a company
elects the fair value option for an eligible  item,  changes in that item's fair
value in subsequent  reporting  periods must be recognized in current  earnings.
SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We
are currently  evaluating the potential  impact of SFAS No. 159 on our financial
position and results of operations.

     In  December  2007,  the FASB  issued  Statements  No.  141 (R),  "Business
Combinations",  and No. 160, "Noncontrolling Interests in Consolidated Financial
Statements." Effective for fiscal years beginning after December 15, 2008, these
statements   revise  and  converge   internally   the  accounting  for  business
combinations  and the  reporting of  noncontrolling  interests  in  consolidated
financial statements. The adoption of these statements is not expected to have a
material impact on the Company's 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. Sales of HBA products increase over traditional gift giving holidays such
as Christmas,  Mother's Day,  Father's Day, and  Valentine's  Day.  Baking goods
increase in beginning of spring and fall.

     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.  However,  inflation increases prices which
maybe a natural hedge to an increase in interest, commodity prices such as corn,
wheat and sugar in the Company's consumer business.  This may cause a decline in
sales that would result in a reduced operating profit.

                                       42

<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, 2007 and 2006                                   F-3- F-4
Consolidated Statements of Operations for the Years Ended
    December 31, 2007 and 2006                                                                 F-5
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Loss for the
    Years Ended December 31, 2007 and 2006                                                     F-6 - F-7
Consolidated Statements of Cash Flows for the Years Ended
    December 31, 2007 and 2006                                                                 F8-F9
Notes to Consolidated Financial Statements                                                     F-10 - F-32

</TABLE>


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

                                      NONE

ITEM 9A. CONTROLS AND PROCEDURES

     Under the Supervision of the Company's  Chief  Executive  Officer and Chief
Financial  Officer,  the  Company has as of December  31,  2007,  the end of the
period covered by this Annual Report on Form 10K evaluated the  effectiveness of
the design and operation of the  disclosure  controls and procedures (as defined
in Rule 13a-15(e)under the Exchange Act) of the Company and concluded as of such
valuation date same to be effective to ensure that material information relating
to the  Company,  including  its  consolidated  subsidiaries  and required to be
disclosed in reports the Company  files or submits  under the  Exchange  Act, 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.

     Management's Annual Report on Internal Control Over Financial Reporting

     The  financial  statements,  financial  analyses and all other  information
included  in this  Annual  Report on Form 10-K were  prepared  by the  Company's
management,  which is responsible  for  establishing  and  maintaining  adequate
internal control over financial reporting.

                                       43

<PAGE>

     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.

     The  Company's  internal  control over  financial  reporting is designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted  accounting  principles.  The Company's internal control
over financial reporting includes those policies and procedures that:

     i.  Pertain to the  maintenance  of records  that,  in  reasonable  detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the Company;

     ii.  Provide  reasonable  assurances  that  transactions  are  recorded  as
necessary to permit  preparation  of financial  statements  in  accordance  with
generally accepted accounting principles,  and that receipts and expenditures of
the Company are being made only in accordance with  authorizations of management
and directors of the Company; and

     iii. Provide reasonable  assurance regarding prevention or timely detection
of unauthorized  acquisition and use or disposition of the Company's assets that
could have a material effect on the financial statements.

     There  are  inherent  limitations  in the  effectiveness  of  any  internal
control,  including  the  possibility  of human error and the  circumvention  or
overriding  of  controls.  Accordingly,  even  effective  internal  controls can
provide  only  reasonable   assurances  with  respect  to  financial   statement
preparation.  Further,  because of changes in conditions,  the  effectiveness of
internal controls may vary over time.

     Management  assessed the design and effectiveness of the Company's internal
control  over  financial  reporting  as of  December  31,  2007.  In making this
assessment,  management  used  the  criteria  set  forth  by  the  Committee  of
Sponsoring    Organizations    of   the   Treadway    Commission   in   Internal
Control-Integrated  Framework.  Based  on  management's  assessment  using  this
framework,  it believes  that, as of December 31, 2007,  the Company's  internal
control over financial reporting is effective.

                                       44

<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.

     This annual report does not include an attestation  report of the Company's
registered  public  accounting  firm regarding  internal  control over financial
reporting.  Management's  report was not subject to attestation by the Company's
registered  public accounting firm pursuant to temporary rules of the Securities
and Exchange  Commission  that permit the Company to provide  only  management's
report in this annual report.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

     During the fiscal quarter ended December 31, 2007, there has been no change
in the Company's  internal control over financial  reporting (as defined in Rule
13a-15(f) under the Exchange Act) that has materially affected, or is reasonably
likely to materially  affect,  the  Company's  internal  control over  financial
reporting.

ITEM 9B OTHER INFORMATION.

In the latter half of 2007 the Company began  manufacture and  distribution of a
broad  line of  spice  products  under  proprietary  labels  under a  co-packing
arrangement.  The Company leases  facilities for such  production and storage in
Qingdao,  China located in the Shandong  province.  Such facility is utilized to
consolidate the commodity  requirements of the production  cycle,  which include
raw materials, packaging and distribution, under high quality controls. Customer
orders are filled and shipped  directly from the facility.  The Company has also
expanded  its  Syosset,  New York and  Monroe,  Michigan  facilities  as further
storage and distribution  centers for such products.  The Company in latter half
of 2007 has also  entered into a  co-packing  arrangement  in North Dakota (USA)
with an experienced  operator for the production for distribution by the Company
of boxed pasta  dinners,  potato  products  and dried  beans  under  proprietary
labeling.  These  additional  proprietary  products  are  expected to add to the
revenue level of the PHS operating segment of the Company.

     The  Company  has  located  an  opportunity  to sell its cigar  operations,
presently  conducted under the GRC business segment,  and its Board of Directors
have authorized a proposed  contract for such transaction under which certain of
the management  contingent of the Company's Miami Lakes,  Florida cigar emporium
and its cigar  warehousing  facilities have in principal  agreed to purchase the
GRC  segment for a total  purchase  price of  $400,000,  $350,000 of which would
involve Seller financing. The assets of the GRC cigar operations being purchased
consist of approximately  $400,000 in product  inventory and $75,000 in Accounts
Receivable.  Accounts Payable are approximately  $150,000 resulting in net value
(without  considering  goodwill) of  approximately  $350,000.  The GRC operating
segment is working at a significant loss to the consolidated financial status of
the Company and  Management  of the Company  believes such segment has become an
insignificant,  non-strategic  asset,  rendering far less than the 10% benchmark
for  'significance'  regarding assets and revenues of the segment as compared to
the total for the  Company.  The Company also  believes the Tobacco  industry is
more likely in the future to increase  including  the cigar trade as an integral
part thereof for regulatory purposes,  and that the cigar industry is entering a
phase of uncertain  taxation and moratoriums.  The Company would rather transfer
the GRC segment as an operating  unit so as preserve  its business  cohesion and
historic values, and to allow the opportunity for effective continuance,  and in
recognition of the likelihood  that  liquidation  value would be materially less
than value to be derived from an organized sale. The transfer agreement is still
being considered by all relevant parties.

                                       45

<PAGE>

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, 2007. The annual  meeting is scheduled to be in June 2008.  Such Proxy
Statement is expected to be filed with the  Commission  by April 30, 2008 and is
incorporated herein by reference. The Company has established and adopted a Code
of Ethics outlining and providing  guidelines for executive and employer conduct
regarding  the  disclosure,  promotion  and  handling  of Company  business  and
business relationships and a policy for comment and complaint on compliance with
applicable  conduct  codes  ("whistleblower  policy")  and the  Company has also
established a Nominating  Committee of certain of its Directors to assist in the
election and  succession  of members of the  Company's  Board of Directors and a
Compensation Committee to assist in establishing executive compensation.  Copies
of the Company's Code of Ethics,  whistleblower policy, Nominating Committee and
Compensation  Committee  Charters may be found  disclosed in the aforesaid Proxy
Statement to be confirmed at the relevant  shareholders  meeting and included by
reference thereto on the Company's Internet home page website.

                                       46

<PAGE>

ITEM 15. EXHIBITS, and FINANCIAL STATEMENT SCHEDULES

     (a) financial statements-see Item 8

     (b) Exhibits:

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

3.2              By-Laws (2)                                                        --

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

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

14               Code of Ethics                                                    EX-14

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 Independent Registered Public Accounting Firm          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

                                       47

<PAGE>

(3)  Description  of rights of  Preferred  Stock are  included  in the  Restated
Certificate of Incorporation filed November 10, 2003 and Clarification Amendment
to the Certificate of Incorporation filed March , 2004 and in the Certificate of
Designation  filed 3/13/03 all  incorporated  by reference  herein (See footnote
(1)), and in the  Certificate  of  Designation  regarding  Preferred  Stock,  as
amended,  and included as exhibit to the Form 10K/A of the Company  filed 9/3/98
as well as the amendment to the certificate of incorporation  filed in July 2000
and included as an exhibit to the Form 10KSB/A of the Company filed 8/9/01 which
latter  documents  are  incorporated  by reference  herein.  Description  of the
Company's Common Stock is incorporated by reference to the description contained
in the Company's  Registration  Statement on Form 8-A (File No.  0-19409)  filed
with the  Commission  pursuant to Section  12(b) of the Exchange Act on July 16,
1991, including any amendments or reports filed for the purpose of updating such
description. A facsimile of outstanding warrants is included by reference to the
similar  exhibit in the Company's Form 10-K/A for the fiscal year ended December
31,  2004.  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 and in April 2007 such same parties entered
into an amendment to such financial  arrangement  the designed  purpose being to
arrange  an  increase  in the  amount  of such  borrowing  to $8  million,  such
extension not having any equity  component,  which financial  arrangements  were
disclosed  in an 8K filing  made by the Company on January 22, 2007 and again on
April 5, 2007 and such  filings are  incorporated  by  reference  hereafter  for
further description of the subject transactions.  Effective May 18, 2007 Quality
Food Brands Inc. a controlled  subsidiary of the Company  purchased a baking mix
operation in Michigan out of foreclosure and financed such  acquisition from the
foreclosing lender,  Laurus Master Funds Ltd. through issuance by said purchaser
of  a 9%  secured  term  note  in  the  principal  amount  of  $4,750,000  which
transaction  was made the subject of an 8K filing made by the Company on May 23,
2007 which filing is also  incorporated  herein be  reference.  One half of such
latter financing was satisfied by and assigned to an affiliated  entity of Lloyd
Miller III in August 2007.  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
$1,270,000 debt remaining as currently owed to Laurus Master Fund, Ltd.  arising
from  Secured  Convertible  Term Note dated March 13, 2006 and $250,000 in total
long term debt to one  non-affiliated  party by  Secured  Promissory  Note 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

                                       48

<PAGE>

                                   SIGNATURES


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

                               Synergy Brands Inc.



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

Dated: March 28, 2008

     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 28, 2008

                               by /s/ Mitchell Gerstein
                               ----------------------------------
                                      Mitchell Gerstein
                                      Chief Financial Officer
Dated: March 28, 2008
                               by /s/ Joel Sebastian
                               -----------------------------------
                                      Joel Sebastian, Director

Dated: March 28, 2008

                               by /s/ Lloyd Miller
                               -----------------------------------
                                      Lloyd Miller, Director
Dated: March 28, 2008


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


Dated: March 28, 2008

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

Dated: March 28, 2008

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

                                       49

<PAGE>

                                 Certification

I, Mair Faibish, certify that:

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

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

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

4.  The  registrant's  other  certifying  officer  and  I  are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal  control over financial
reporting  (as defined in Exchange Act Rules  13a-15(f) and  15d-15(f))  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) designed  such internal  control over  financial  reporting,  or caused such
internal control over financial  reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles;

(c) 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

(d)  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 28, 2008

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

                                       50

<PAGE>


                                  Certification

I, Mitchell Gerstein, certify that:

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

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

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

4.  The  registrant's  other  certifying  officer  and  I  are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-15 (e) and 15d-15(e)) and internal control over financial
reporting  (as defined in Exchange Act Rules  13a-15(f) and  15d-15(f))  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) designed  such internal  control over  financial  reporting,  or caused such
internal control over financial  reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles;

(c) 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

(d)  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 28, 2008

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

                                       51

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Synergy Brands, Inc.

We have audited the accompanying  consolidated balance sheets of Synergy Brands,
Inc., as of December 31, 2007 and 2006 and the related  consolidated  statements
of operations, stockholders' equity and cash flows for the two years then ended.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements  are free of material  misstatement.  The Company is not  required to
have,  nor were we engaged to perform,  an audit of its  internal  control  over
financial reporting.  Our audit included  consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
option on the  effectiveness  of the Company's  internal  control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes
examining,  on a test basis,  evidence  supporting the amounts and disclosure in
the  financial   statements,   assessing  the  accounting  principles  used  and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  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, 2007 and 2006 and the results of its  operations and its cash
flows for the two years  then ended in  conformity  with  accounting  principles
generally accepted in the United States of America.

/s/ HOLTZ RUBENSTEIN REMINICK LLP


Melville, New York
March 26, 2008

                                       F2

<PAGE>

                           CONSOLIDATED BALANCE SHEETS

                           December 31, 2007 and 2006


                                     ASSETS

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


CURRENT ASSETS                                                                                  2007                         2006
                                                                                          -----------                  ----------
    Cash and cash equivalents                                                             $  501,752                   $  644,870
    Accounts receivable trade, less allowance for doubtful accounts of
    $127,481 and $127,481                                                                  4,000,805                   11,165,980
    Other receivables                                                                      5,038,607                    2,453,705
    Notes receivable - current                                                               356,909                      344,699
    Inventory                                                                              3,525,635                    1,289,221
    Prepaid assets and other current assets                                                3,231,673                      669,908
    Assets of discontinued operations                                                        -                            127,182
                                                                                          -----------                  ----------
              Total Current Assets                                                        16,655,381                   16,695,565

PROPERTY AND EQUIPMENT, NET                                                               10,180,261                      252,950

OTHER ASSETS                                                                               2,999,188                      909,454

NOTES RECEIVABLE                                                                           1,605,260                    2,207,233

INTANGIBLE ASSETS, net of accumulated amortization of
$449,142 and $389,226.                                                                             -                      288,297

GOODWILL                                                                                           -                      514,297
                                                                                          -----------                  ----------
TOTAL ASSETS                                                                            $ 31,440,090                 $ 20,867,796
                                                                                          ===========                  ==========

</TABLE>

        The accompanying notes are an integral part of these statements.

                                       F3

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                     CONSOLIDATED BALANCE SHEETS (Continued)

                           December 31, 2007 and 2006

                      LIABILITIES AND STOCKHOLDERS' EQUITY

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


CURRENT LIABILITIES                                                                                        2007      2006
                                                                                                     ----------    ----------
    Notes payable - current                                                                          $4,199,348    $4,196,757
    Accounts payable                                                                                  5,720,504     2,194,114
    Accrued expenses                                                                                     35,176       151,037
     Deferred income                                                                                    437,776       755,503
     Liabilities of Discontinued operations                                                                   -       112,569
                                                                                                     ----------    ----------

     Total Current Liabilities                                                                       10,392,804     7,409,980

NOTES PAYABLE, net of discount of $ 587,105 and $313,749, respectively                               12,027,080     1,960,638

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 93,213 shares issued and outstanding;
         liquidation preference of $10.50 per share                                                          93           93
    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 285,000 shares issued and outstanding; liquidation preference of
      $10.00 per share                                                                                      285          285
    Class B Series B Preferred stock-$.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;
         11,328,764 and 6,484,275 shares issued                                                          11,329        6,484
    Additional paid-in capital                                                                       50,712,481   47,252,064
    Deficit                                                                                         (41,690,722) (41,585,416)
    Accumulated other comprehensive loss                                                                 (8,340)      (8,340)
                                                                                                     ----------    ----------
                                                                                                      9,025,206    5,665,250

    Less treasury stock, at cost, 1,000 shares                                                           (5,000)      (5,000)
                                                                                                     ----------    ----------
       Total Stockholders' Equity                                                                     9,020,206    5,660,250
                                                                                                     ----------    ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                          $31,440,090  $20,867,796
                                                                                                     ==========    ==========

</TABLE>

        The accompanying notes are an integral part of these statements.


                                       F4

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                            Years ended December 31,

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

                                                                                2007                  2006
                                                                            -----------         ------------

Net sales                                                                   $89,540,501         $71,759,908
Cost of sales
    Cost of product                                                          79,468,861          65,631,282
    Shipping and handling costs                                               1,238,221           1,169,381
                                                                            -----------         ------------
                                                                             80,707,082          66,800,663
                                                                            -----------         ------------
Gross profit                                                                  8,833,419           4,959,245
Operating expenses
    Advertising and promotional                                                 201,562             234,582
    General and administrative                                                5,656,623           4,052,762
    Depreciation and amortization                                               477,537             245,085
    Asset impairment charge                                                     742,678                  -
                                                                            -----------         ------------
                                                                              7,078,400           4,532,429
                                                                            -----------         ------------
Operating Profit                                                              1,755,019             426,816
Other income (expense)
    Interest income                                                             150,305             147,533
    Other income (expense)                                                         (851)            (22,039)
    Equity in earnings of investee                                              342,683             227,054
    Interest and financing expenses                                          (2,184,141)         (2,050,856)
                                                                            -----------         ------------
                                                                             (1,692,004)         (1,698,308)
                                                                            -----------         ------------
Profit (loss) from continuing operations before income taxes                     63,015          (1,271,492)
Income tax expense                                                               53,324              43,976
                                                                            -----------         ------------
Profit (loss) from continuing operations                                          9,691          (1,315,468)
                                                                            -----------         ------------
Discontinued operations
Loss from operations of discontinued component                                 (114,997)         (1,358,478)

Income tax expense                                                               -                      986
                                                                            -----------         ------------
Loss from discontinued operations                                              (114,997)         (1,359,464)
                                                                            -----------         ------------
Net loss                                                                       (105,306)         (2,674,932)

Dividend - Preferred Stock                                                     (325,000)           (356,500)
                                                                            -----------         ------------
Net loss attributable to common stockholders                                  $(430,306)       $ (3,031,432)
                                                                            ===========        ============
Basic and diluted net loss per common share from continuing operations:       $   (0.04)            $ (0.33)
Basic and diluted net loss per common share from discontinued operations:     $   (0.01)            $ (0.27)
                                                                            -----------         ------------
Basic and diluted net loss per share:                                         $   (0.05)            $ (0.60)
                                                                            ===========         ============
Weighted average shares used in the compution of loss per common
shares:
Basic and diluted                                                             8,973,842           5,080,323
                                                                            ===========         ============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       F5

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                      AND
                               COMPREHENSIVE LOSS

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


                                       Class A          Class B - Series A     Class B - Series B
                                   Preferred stock        Preferred stock       Preferred stock               Common stock
                                Shares      Amount      Shares       Amount    Shares        Amount         Shares     Amount
                              --------    --------     ---------    --------  -------       -------        ---------   -------
Balance at January 1, 2006     100,000     $100         330,000      $330     80,000        $80            4,457,530   $4,458
Amortization of unearned
compensation
Common stock issued                                                                                          454,300      454
Redemption of
  preferred stock for shares
  of common stock               (7,000)      (7)        (45,000)      (45)                                   785,925      786
Issuance of common stock for
  note conversion                                                                                            635,610       635
Issuance of common stock for
     Services                                                                                                150,910       151
Preferred stock dividend
Issuance of stock warrants

Net loss
                              --------    --------     ---------    --------  -------       -------        ---------   -------
Balance at December 31, 2006     93,000      93         285,000        285    80,000         80             6,484,275    6,484


Common stock issued                                                                                         1,819,664    1,820
Issuance of common stock for
  note conversion                                                                                             917,039      917
Issuance of common stock for
     Services                                                                                                 801,647      802
Preferred stock dividend
Issuance of common stock for
      warrant conversion                                                                                      231,139      231
Issuance of common stock
      for loan  inducement                                                                                  1,075,000    1,075

Net loss
                              --------    --------     ---------    --------  -------       -------        ---------   -------
Balance at December 31,2007     93,000      $93         285,000     $285      80,000       $80              11,328,764 $11,329
                              --------    --------     ---------    --------  -------       -------        ---------   -------

</TABLE>

                     Years ended December 31, 2007 and 2006


                                       F6

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                      AND
                               COMPREHENSIVE LOSS
                                  (continued)

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

                                                                                   Accumulated
                                       Additional                                 other
                                       paid in                                     Comprehensive        Treasury          Unearned
                                       capital              Deficit              income (loss)         stock          Compensation
                                      -------------        -------------          -------------      -------------   --------------
         Balance at January 1, 2006    $ 45,918,817        ($38,910,484)           $ (8,340)            $ (5,000)        $ (67,260)

Amortization of unearned
compensation                                                                                                                 67,260
Common stock issued                     537,619
Redemption of
  preferred stock for shares
  of common stock                          (734)
Issuance of common stock for
  note conversion                       600,565
Issuance of common stock for
     Services                           190,297
Preferred stock dividend               (356,500)
Issuance of stock warrants              362,000

Net loss                                                     (2,674,932)
                                      -------------        -------------          -------------      -------------   --------------
Balance at December 31, 2006           47,252,064           (41,585,416)             (8,340)                                (5,000)



Common stock issued                     1,386,040
Issuance of common stock for
  note conversion                         513,497
Issuance of common stock for
     Services                             773,351
Preferred stock dividend                 (325,000)
Issuance of common stock for              135,354
      warrant conversion
Issuance of common stock
      for loan inducement                 977,175

Net loss                                                       (105,306)
                                      -------------        -------------          -------------      -------------   --------------
Balance at December 31, 2007          $50,712,481          $(41,690,722)            $(8,340)            $(5,000)
                                      -------------        -------------          -------------      -------------   --------------


</TABLE>

                                       F6
                                  (continued)



<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)

                     Years ended December 31, 2007 and 2006

Balance at January 1, 2006                                  $6,932,701

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)
                                                            -----------
Balance at December 31, 2006                                 5,660,250



Common stock issued                                          1,387,860
Issuance of common stock for note
   conversions                                                 514,414
Issuance of common stock for services                          774,153
Preferred stock dividend                                      (325,000)
Issuance of common stock for warrant conversion                135,585
Issuance of common stock
      for loan inducement                                      978,250

Net Loss                                                     (105,306)
                                                           -----------
Balance at December 31, 2007                                $9,020,206
                                                           ===========

        The accompanying notes are an integral part of these statements

                                       F7

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                            Years ended December 31,

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

                                                                                2007                2006
                                                                              ------------        -------------
Cash flows from operating activities
    Net loss                                                                 $   (105,306)        $ (2,674,932)
    Adjustments to reconcile net loss to net cash
       provided by (used in) operating activities
         Depreciation and amortization                                            477,537              245,085
         Amortization of financing cost                                           152,199               38,059
         Asset impairment charge                                                  742,678                    -
         Equity in earnings of investee                                          (342,683)            (227,054)
         Operating expenses paid with common stock and warrants
                                                                                  439,667              180,549
         Changes in operating assets and liabilities
                 (Increase) decrease in
                Accounts receivable and other receivables                      (1,738,530)          (4,410,740)
                Inventory                                                      (1,447,034)            (107,998)
                Prepaid expenses, related party note receivable and
                other assets                                                   (1,654,346)              71,278
                 Increase (decrease) in
                Accounts payable, related party note payable,
                accrued expenses and other current liabilities                  4,130,938              661,647
                Deferred income and other liabilities                            (285,977)             727,821
            Net assets of discontinued operations                                 (19,407)           1,171,650
                                                                              ------------        -------------

                 Net cash provided by (used in) operating activities              349,736           (4,324,635)
                                                                              ------------        -------------
    Cash flows from investing activities
    Payment of security deposit                                                   (15,604)                   -
    Purchase of property and equipment                                           (756,743)             (35,684)
    Payments received on notes receivable                                         623,713              453,469
    Issuance of notes receivable                                                  (33,950)             (25,995)
     Investee dividend received                                                    28,800               28,800
     Investment in investee                                                       (50,000)                   -
                                                                              ------------        -------------
                  Net cash (used in) provided by investing activities            (203,784)             420,590
                                                                              ------------        -------------

</TABLE>


                                       F8
<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

                            Years ended December 31,


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

                                                                            2007               2006
                                                                        -----------         ------------
Cash flows from financing activities
    Borrowings under line of credit                                        375,751           33,593,364
    Repayments under line of credit                                     (6,025,679)         (31,458,478)
    Increase in deferred financing cost                                          -              (67,750)
    Proceeds from the issuance of notes payable                         10,455,000            6,391,319
    Repayments of notes payable                                         (4,800,464)          (3,777,165)
    Proceeds from issuance of common stock                                  31,322              288,173
     Payment of dividends                                                 (325,000)            (356,500)
    Net assets of discontinued  operations                                        -            (319,531)
                                                                        -----------         ------------
             Net cash (used in) provided by financing activities          (289,070)            4,293,432
                                                                        -----------         ------------

 Net (Decrease) Increase In Cash                                          (143,118)              389,387
                                                                        -----------         ------------
Cash and cash equivalents, beginning of year                                644,870              255,483
                                                                        -----------         ------------
Cash and cash equivalents, end of year                                     $501,752            $ 644,870
                                                                        ===========         ============
Supplemental disclosures of cash flow information:
    Cash paid during the year for
       Interest                                                          $1,378,582           $1,219,870
                                                                        ===========         ============
       Income taxes paid                                                $   53,324            $   44,962
                                                                        ===========         ============
Supplemental disclosures of non-cash, investing
    and financing activities:
      Common stock issued for note conversions                         $   709,998          $    661,200
                                                                        ===========         ============
      Common stock issued for financing cost                           $   978,250          $          -
                                                                        ===========         ============

</TABLE>

In May 2007, the Company  acquired  property and equipment  valued at $9,559,000
and  inventory  valued at $841,000.  Consideration  consisted of the issuance of
$4,750,000 note and the offset of accounts receivable of $6,318,000 and accounts
payable of $668,000.

        The accompanying notes are an integral part of these statements.

                                       F9

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     Years ended December 31, 2007 and 2006

NOTE A - DESCRIPTION OF THE BUSINESS

Synergy Brands Inc. is a holding  company that  principally  operates  through a
wholly owned subsidiary, PHS Group Inc. ("PHS") in the wholesale distribution of
nationally  known  brands,   proprietary   private  label   groceries,   general
merchandise, and Health and Beauty Aid (HBA) products. 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 manufacturing and distribution
of certain grocery  private label products  including  baking mixes,  spices and
packaged  meals.   The  Company  also  owns  a  small  wholly  owned  subsidiary
representing less then 2% of the Company's  revenues,  Gran Reserve  Corporation
(GRC),  that principally  operates in the wholesale,  retail and online sales of
Premium hand made cigars and accessories.  The Company also owns 20% of a travel
company call Interline  vacations (PERX).  Synergy was incorporated on September
26, 1988 in the State of Delware.

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 and its wholly-owned  subsidiaries  (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.

                                      F10

<PAGE>


                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                     Years ended December 31, 2007 and 2006

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.

                                      F11

<PAGE>


                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Years ended December 31, 2007 and 2006 NOTE B (continued)

Accounts  receivable trade, net consist of the following  components at December
31, 2007and 2006:

                                                         2007             2006
                                                    -----------     ------------
    Accounts receivable - PHS Group                 $4,057,363       $11,154,841
    Accounts receivable - Cigars                        70,923           138,620
                                                    -----------     ------------
             Total                                   4,128,286        11,293,461

    Less allowance for doubtful accounts              (127,481)        (127,481)
                                                    -----------     ------------
                                                     $4,000,805      $11,165,980
                                                    ===========    ============

Changes in the Company's  allowance for doubtful accounts during the years ended
December 31, 2007 and 2006 are as follows:

                                                         2007             2006
    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, 2007 and 2006 totaled  approximately
$340,000 and $600,000, respectively.

During the year ended  December 31, 2007,  sales to two customers  accounted for
13% and 10% of total sales,  respectively.  Two customers  accounted for 19% and
13%,   respectively  of  accounts   receivable  at  December  31,  2007.   These
concentrations relate to the Company's PHS Group segment.

During the year ended December 31, 2006, sales to three customers  accounted for
21%, 16% and 12% of total sales.  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 years  ended  December  31,  2007 and 2006,  the  Company  purchased
approximately 59% and 40%,  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.

                                      F12

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                     Years ended December 31, 2007 and 2006

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, 2007 and
2006, the Company recognized  approximately  $7,760,940 and $2,272,273 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
$5,038,607 and $2,453,705 at December 31, 2007 and 2006.

                                      F13

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                     Years ended December 31, 2007 and 2006

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. In 2007 and 2006, the amortization  expense recorded for each of
the years was $59,916.

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.  In the fourth quarter of 2007,
in connection with a contemplated disposal of the net assets of GRC, the Company
identified  impairment losses for both intangible assets and goodwill based upon
estimated future cash flows. These losses,  approximately $228,000 and $514,000,
respectively,  are  reflected  in the  accompanying  consolidated  statement  of
operations as an "Asset Impairment Charge".

At December 31, 2007 and 2006, intangible assets are comprised of the following:

    Amortized intangible assets                         2007               2006
      Customer lists                                 $677,523          $ 677,523
      Less accumulated amortization and impairment   (677,523)         (389,226)
                                                     ---------         ---------
                           Total                     $      -           $288,297
                                                     ==========        =========

                                      F14

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                     Years ended December 31, 2007 and 2006

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 (see Note B No 9).

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 are  recorded as
deferred revenue. At December 31, 2007, $342,526 was received by the Company for
goods to be  shipped in January  2008 and at  December  31,  2006  $628,503  was
received by the Company for goods to be shipped in January 2007. In addition, at
December 31, 2007 and  December  31, 2006 the balance for  deferred  revenue was
$95,250 and $127,000 (see Note F).

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 Net 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  year.
Incremental shares from assumed

                                      F15

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                     Years ended December 31, 2007 and 2006

NOTE B (continued)

exercises of stock options,  warrant and convertible debt and equity  securities
of  1,036,844  and  995,749  for the  year  ended  December  31,  2007  and 2006
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, 2007,  the Company has two  stock-based  employee  compensation
plans,  which are described more fully in Note K. 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.  These
options were cancelled in January 2006.  There were no stock options  granted in
2007 and 2006.

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 P).

17.  Comprehensive  income (loss)

Other comprehensive income refers to revenues,  expenses,  gains and losses that
under generally accepted  accounting  principles in the United States of America
are  included in  comprehensive  income but are exluded from net income as these
amounts  are  recorded  directly  as  an  adjustment  to  stockholders'  equity.
Comprehensive  income (loss) was equivalent to net income (loss) for all periods
presented.

                                      F16

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                     Years ended December 31, 2007 and 2006

NOTE B (CONTINUED)

18. Recent Accounting Pronouncements

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  adotion  of SFAS No.  157 will not have a
material impact on our consolidated financial statements.

In February  2007,  the FASB issued  SFAS No.  159,  "The Fair Value  Option for
Financial Assets and Financial  Liabilities  including an amendment of SFAS 115"
(SFAS No.  159).  The new  statement  allows  entities to choose,  at  specified
election dates,  to measure  eligible  financial  assets and liabilities at fair
value that are not otherwise required to be measured at fair value. If a company
elects the fair value option for an eligible  item,  changes in that item's fair
value in subsequent  reporting  periods must be recognized in current  earnings.
SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We
are currently  evaluating the potential  impact of SFAS No. 159 on our financial
position and results of operations.

In  December   2007,  the  FASB  issued   Statements  No.  141  (R),   "Business
Combinations",  and No. 160, "Noncontrolling Interests in Consolidated Financial
Statements." Effective for fiscal years beginning after December 15, 2008, these
statements   revise  and  converge   internally   the  accounting  for  business
combinations  and the  reporting of  noncontrolling  interests  in  consolidated
financial statements. The adoption of these statements is not expected to have a
material impact on the Company's financial statements.

                                      F17

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                     Years ended December 31, 2007 and 2006

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 - INVENTORY

Inventory as of December 31, 2007 and 2006 consisted of the following:

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

                                                                                 2007           2006
Grocery, general merchandise and health and beauty products                    $2,664,633   $ 802,090
Premium Cigar finished goods                                                      416,556     487,131
Raw materials                                                                     444,446           -
                                                                               ----------  ----------
                                                                               $3,525,635  $1,289,221
                                                                               ==========  ==========

</TABLE>

The allowance for slow moving and obsolete  inventory  approximated  $35,000 and
$35,000 at December 31, 2007 and 2006, respectively.

NOTE E - PROPERTY AND EQUIPMENT

Property  and  equipment  as of  December  31,  2007 and 2006  consisted  of the
following:

                                                         2007            2006
  Machine and euipment                                $891,965         $205,742
  Furniture and fixtures                                92,899           84,196
  Leasehold improvements                            10,043,370          422,538
                                                   ------------        ---------
                                                    11,028,234          712,476

  Less accumulated depreciation and amortization      (847,973)        (459,526)
                                                   ------------        ---------
                                                   $10,180,261          $252,950
                                                   ============        =========


Depreciation  and  amortization  expense on property and equipment for the years
ended  December  31,  2007 and  2006 was  approximately  $389,000  and  $60,000,
respectively.

                                      F18

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                     Years ended December 31, 2007 and 2006


NOTE F - OTHER ASSETS

Other assets consist of the following at December 31, 2007 and 2006:

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


                                                                                                 2007              2006
Investment (a)                                                                                 $939,177         $562,593
Investment in warrants (b)                                                                      114,300          127,000
CAW purchase agreement; net of accumulated amortization of $175,000 and $145,827
Deferred financing net of accumulated                                                               -             29,173
amortization of $514,643 and $204,660 (c)                                                       984,856          121,591
Prepaid costs and security deposit net of accumulated amortization of $17,846 (d)                876,154             -
Other                                                                                            84,701           69,097
                                                                                             ----------       ----------
                                                                                            $ 2,999,188        $ 909,454
                                                                                           ============       ==========

</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, 2007 and 2006, the Company's 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
$342,683  and  $227,054  during  the years  ended  December  31,  2007 and 2006,
respectively.   The  Company's  investment  in  ITT  serves  as  collateral  for
outstanding  notes  payable with  aggregate  outstanding  balance  approximately
$1,385,000 at December 31, 2007.

Summarized  audited  financial  information  of this investee as of December 31,
2007 and 2006 and for the years then ended is as follows:


      Financial position:                  2007              2006
                                           -----------      ------------
      Current assets                        $6,697,000        $5,334,000
       Property and equipment                  502,000           666,000
       Other assets                          5,548,000         5,728,000
                                           -----------      ------------
      Total assets                         $12,747,000       $11,728,000
                                           ===========      ============
      Current liabilities                   $5,845,000        $5,127,000
      Long-term debt                         2,768,000         4,139,000
                                           -----------      ------------
      Total liabilities                     $8,613,000        $9,266,000
                                           ===========     =============

      Results of operations:               2007              2006
                                           -----------      ------------
      Revenues                             $36,356,000       $32,464,000
      Total expenses                       (34,340,000)      (30,993,000)
      Other income                             421,000           322,000
                                           -----------      ------------
      Income before income taxes             2,437,000         1,793,000
      Income tax expense                      (764,000)         (632,000)
                                           -----------      ------------
      Net income                            $1,673,000      $  1,161,000
                                           ===========      ============

(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) of the
deferred income. In relation to the ITT warrants,  Company has recorded deferred
income of  $127,000  in 2006.  In 2007 the  Company  recognized  $31,750  of the
deferred income.

(c)  Valuation  of  stock in  connection  with  secured  2007  debt  and  equity
financing (see Note I).

(d) Valuation of stock in connection of LBMP asset acquisition (see Note G).

                                      F19
<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                     Years ended December 31, 2007 and 2006

NOTE G - ASSET ACQUISITION

On May 18, 2007,  Quality Food Brands ("QFB") a wholly owned a subsidiary of PHS
Group.,  leased a baking mix facility,  and acquired associated assets through a
foreclosure  sale contracted by a secured lender (the  "Seller").  The aggregate
purchase  price  approximated  $10,400,000.  The Lender  financed  the  purchase
through the issuance by QFB of a 9% secured term note in the principal amount of
$4,750,000  that  matures on May 18,  2012,  with  principal  payment  beginning
December 1, 2007.  In  addition,  net  accounts  receivable  due from the seller
approximating $6,300,000 and accounts payable due to the seller were offset as a
component  of the  purchase  price.  Further,  the lender  received a warrant to
acquire up to 30% of QFB's common stock.

The  allocation  of the assets  acquired  (see table  below)  provide QFB with a
facility to produce baking mix products to supply existing customers of PHS.

      Inventory                               $   841,000
      Property, equipment and leasehold       $ 9,559,000
                                             ------------
      Total                                   $10,400,000
                                             ============

                                      F20

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                     Years ended December 31, 2007 and 2006

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. The balance of
the Note Receivable at December 31, 2007 was $1,335,641.

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. In 2007, the
Company  received  payments  from  ITT  of  $285,714.  As of  December  31,  the
outstanding loan balance was $571,429.  As part of the Company's agreement,  the
Company paid $285,714 in 2007 on the note payable.  The  outstanding  balance of
the notes payable at December 31, 2007 was $571,429.

In 2007, the Company  exercised  warrants to acquire 10,000 additional shares of
ITT at a cost of  $50,000.  In  addition,  the  Company  recognized  $31,750  of
deferred income in 2007 in connection with the  amortization of deferred revenue
attributable to the warrants received.

NOTE I - NOTES PAYABLE

The Company  financed a series of secured notes with IIG (lender) since 2002. At
December 31, 2006 the outstanding balance was $5,836,928.  The Company's largest
shareholder has refinanced these notes during 2007.

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, 2008. The maturity has been extended to
December 31, 2008. At December 31, 2007 the outstanding balance was $250,000.


                                      F21

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                     Years ended December 31, 2007 and 2006

NOTE I (continued)

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 has been repaid as of December 31, 2007.

On January 25, 2005, the Company  completed a second financing with Laurus.  The
financing  consisted of a $500,000 secured  convertible  debenture that has been
repaid as of December 31, 2007.

In January 2005, the Company  entered into a promissory note with major regional
bank for  $1,000,000,  which was  increased to  $1,500,000  in  September  2007.
Borrowing  under the note bears  interest at prime (6.75% at December 31, 2007).
This note was extended  and the Company is not  required to repay any  principal
until the maturity  date of the note,  June 1, 2008. As security for the note, a
pledge  agreement  was entered by a certain  Shareholder  of ITT.  Borrowings at
December 31, 2007 were $377,850.  The Company has a $1,000,000 standby letter of
credit expiring June 1, 2008 with this Lender.

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. The maturity has been extended to April 5, 2008.

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. The maturity date has been extended to April 5, 2008.

On June 21, 2005,  the Company  completed a third  financing  with  Laurus.  The
financing  consisted of a $500,000 secured  convertible  debenture that has been
repaid as of December 31, 2007.

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). The
balance at December 31, 2007 was $571,429.

On March 14, 2006,  the Company closed a $1.75 million junior secured three year
loan with Laurus bearing a fixed  interest rate of 10%.  Payments are being made
at a rate of $32,000  per month since  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 in 2006 and  $384,000  in 2007.  At  December  31, 2007 the
outstanding balance, net of discount was $1,124,155.

                                      F22

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                     Years ended December 31, 2007 and 2006

NOTE I (continued)

In the fourth quarter of 2006, the Company secured  $1,800,000 from shareholders
of short term  financing that matured in the first quarter of 2007, and was paid
in April 2007. In July 2007, the Company secured $1,500,000 from shareholders of
short term financing bearing interest at 8% that matures in the third quarter of
2008. The balance of the notes at December 31, 2007 net of discount approximated
$1,605,000.

On April  15,  2007,  Synergy  Brands  Inc.  completed  a $8.0  million  secured
financing  with a major  shareholder  and a  director,  for its  main  operating
subsidiary  PHS Group  Inc.  The  financing  consisted  of long term notes to be
amortized  over a 5 year period with a balloon  payment of $4,000,000 in January
2012 at an interest rate of 11.75%.  This financing retired all of the Company's
debt with IIG. The agreement  further  involved a security  purchase  agreement,
under which there was issued 1,075,000 common shares of Synergy Brands issued to
this shareholder as a financing cost and all warrants beneficially owned by this
shareholder  were retired.  The Company repaid $643,361 of this debt at December
31, 2007.  At December  31,  2007,  the  outstanding  balance was  approximately
$7,356,639.

The Company financed an asset acquisition  through the issuance by QFB of two 9%
secured loans aggregating $4,750,000 that mature on May 18, 2012, with principle
payments  beginning  December 1, 2007. In addition,  the Company  issued 480,000
shares  valued at  $393,600.  The  relative  fare value of these shares is being
charged to operations as  additional  interest over the term of the loan.  Total
repayments  in 2007 were  $15,000.  The  balance  of the  notes net of  discount
approximated $4,341,400 at December 31, 2007.

Principal repayments of notes payable at December 31, 2007 are as follows:

Year Ending December 31,
                  2008            $    4,282,000
                  2009                 1,939,000
                  2010                 1,198,000
                  2011                 1,794,000
                  2012                 7,601,000
                                  ---------------
                                      16,814,000
Discounts                               (585,572)
                                  ---------------
         Total                    $   16,226,428
                                  ===============

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  right of
$10.50 per share  before  common  stock and  redemption  at option of Company at
$10.50 per share.  In November  2006,  6,787 shares of the  outstanding  Class A
preferred stock were exchanged 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 2007 and March 2006 in compliance with
the subscription  agreements dated February 26, 2003 and 50,000 common shares to
Class B Series A Preferred Shareholder in July 2007 and July 2006, 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.  Synergy
Brands, Inc. and Subsidiaries

                                      F23
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                     Years ended December 31, 2007 and 2006
                               NOTE J (continued)

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.

For the year ended December 31, 2007 and 2006, the Company issued  4,842,489 and
2,026,745  shares of common  stock in  connection  with  financing,  the sale of
securities,  conversions  of debt  to  equity,  services,  other  expenses,  and
dividends in connection  with Class B Preferred  Stock valued at $3,460,419  and
$1,333,247. Detail of the issuances are listed in the consolidated statements of
changes in stockholders' equity in page F-6.

Effective  January 2006, the Company cancelled options to acquire 300,000 shares
of common  stock  held by  employees.  There  are no  options  outstanding  with
employees at December 31, 2007 and 2006.

The following is a summary of transactions involving warrants to purchase common
stock for the years ended December 31, 2007and 2006.


                                                                   Weighted-
                                               Number               average
                                              of shares          exercise price


         Outstanding at January 1, 2006        280,416        $    4.38
             Granted                           270,000           0.0010
             Cancelled/Forfeited               (82,500)           (6.52)
                                              -----------    -------------

         Outstanding at December 31, 2006      467,916          $  1.47

             Granted                                 -                -
             Exercised                        (249,822)         (0.0010)
             Cancelled/Forfeited               (31,250)         $ (5.50)

                                              -----------    -------------
         Outstanding at December 31, 2007      186,844          $  2.85
                                              ===========    =============

                                      F24

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                     Years ended December 31, 2007 and 2006

NOTE J (continued)

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            2007            life (years)      price               2007            price
            ------------------     ----------------   ---------------  -----------       --------------     -----------
             $0.00-$0.99               20,178              4.25           $0.0010             20,178          $0.0010
             $1.00-$4.00              166,666               5.16           $3.20             166,666            $3.20
                                      ----------        ---------       --------         -------------        ----------
                                      186,844               4.70           $2.85             186,844            $2.85
                                    ============         =======        ========         =============       ===========

</TABLE>

NOTE K - STOCK COMPENSATION PLANS

In 1994, Synergy adopted the 1994 Services and Consulting Compensation Plan (the
"Plan"). Under the Plan, as amended,  8,500,000 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  2,632,374  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.  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, 2007 and 2006. In the first quarter
of 2008, the Company approved the issuance of 678,500 shares under the plan.

The following is a summary of such stock option transactions for the years ended
December  31,  2007 and 2006 in  accordance  with the Plan and other  restricted
stock option agreements:

                                                                     Weighted-
                                                   Number            average
                                                 of shares        exercise price
                                                ------------    ----------------
       Outstanding at January 1, 2006             300,000            $    2.07
           Cancelled/Forfeited                   (300,000)               (2.07)
                                                ------------    ----------------
       Outstanding at December 31, 2006
           Granted                                     -                     -
           Cancelled/Forfeited                         -                     -
                                                ------------    ----------------
       Outstanding at December 31, 2007
                                                       -                     -
                                                ------------    ----------------
       Shares available for grant

       December 31, 2007                     8,472,380
                                            ===========
       December 31, 2006                     7,270,913
                                            ===========

                                      F25

<PAGE>

                     Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                     Years ended December 31, 2007 and 2006

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, 2007 and 2006.

NOTE L - TRANSACTIONS WITH RELATED PARTIES

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.

NOTE M - INCOME TAXES

At December  31, 2007,  the Company had a net  operating  loss carry  forward of
approximately  $34,500,000 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, 2007 and 2006 were approximately as follows:


                                                    2007                 2006
          Net operating loss carry forwards    $ 11,739,000        $ 11,628,000
          Allowance for doubtful accounts            171,000            166,000
          Inventory                                  141,000            126,000
          Capital losses                              56,000             56,000
          Other                                     (316,000)          (200,000)
          Fixed Assets and Intangibles               736,000            484,000
          Valuation allowance                    (12,527,000)       (12,260,000)
                                                ------------      -------------
                                                $      -           $       -
                                                ------------      -------------

The valuation allowance increased by approximately $ 267,000 in 2007.

                                      F26

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                     Years ended December 31, 2007 and 2006

NOTE M (continued)

Income taxes  expense for the years ended  December 31, 2007 and 2006  including
amounts  attributable to discontinued  operations  consisted,  of the following:

                                                   2007                2006

          State and local                        $53,324            $44,962

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, 2007 and 2006 are as follows:

                                                               2007         2006

          Federal income tax expense at statutory rate        (34)%        (34)%

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


                                      F27

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                     Years ended December 31, 2007 and 2006

NOTE N - 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 2007 and 2006 the Company match
was $38,958 and $28,627.

NOTE O - COMMITMENTS AND CONTINGENCIES

1. Lease Commitments

The  Company  and its  subsidiaries  lease  office  and  warehouse  space  under
operating  leases  expiring at various dates through March 2027.  The Company is
also leasing  vehicles  under  operating  leases.  Future minimum lease payments
under noncancelable operating leases as of December 31, 2007 were as follows:

                         Year ending December 31,
                                2008             $ 934,339
                                2009               945,289
                                2010               958,878
                                2011               796,728
                                2012               628,878
                                thereafter       7,309,158
                                               $11,573,270

Rent expense under  operating  leases for the years ended  December 31, 2007 and
2006 was approximately $653,000 and $382,000, respectively.

2. Litigation

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

3. NASDAQ Listing

On January 29, 2008,  the Company  announced  that it had  received  notice from
NASDAQ Stock Market dated January 25, 2008, that for 30 consecutive days the bid
price of the  Registrant's  common stock had closed below the minimum  $1.00 per
share  requirement for listing.  The Registrant has been provided until July 23,
2008 to regain compliance.

                                       F28

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                     Years ended December 31, 2007 and 2006

NOTE P - 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, 2007 and 2006,  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, 2007
  Revenue                                              $87,933,523       $1,606,978                -       $89,540,501
  Income (loss) from continuing operations
     attributable to common stockholder                  2,838,318       (1,097,641)       (2,055,986)        (315,309)
  Depreciation and amortization                            353,767          115,678             8,092          477,537
  Asset impairment charge                                        -          742,678                 -          742,678
  Interest income                                                -                -           150,305          150,305
  Other income (expense)                                      (673)            (178)                -             (851)
  Equity in earnings of investee                                 -                -           342,683          342,683
  Interest and financing expenses                        1,546,969                -           637,172        2,184,141
  Identifiable assets                                   26,607,086          591,878         4,241,126       31,440,090
  Additions to long-lived assets                        10,312,869            2,889                 -       10,315,758
  Investment in affiliate                                        -                -           939,177          939,177

                                                        PHS Group         GRC            Corporate            Total
                                                       ------------    -------------    -----------       -----------
Year ended December 31, 2006
  Revenue                                              $69,840,886       $1,919,022                -       $71,759,908
  Income (loss) from continuing operations
    attributable to common stockholder                     779,634         (311,210)       (2,140,392)      (1,671,968)
  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 - continuing operations           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

</TABLE>

The Company's  premium cigar  operations  are  presently  conducted  through its
wholly owned subsidiary Gran Reserve Corp.  (GRC). In the first quarter of 2008,
management authorized the sale of the Company's cigar operations, which transfer
is probable in 2008.  Although no formal commitments have yet been finalized,  a
contract  in  principal  has  been  reached  with  a  group  of  management  and
supervisory  personnel  associated with GRC cigar operations,  but who otherwise
have no official capacity with Synergy Brands Inc. or its subsidiaries.


                                      F29

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                     Years ended December 31, 2007 and 2006

NOTE P (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, 2007 and 2006, is as follows:


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

                                                           2007               2006
                                                          -------------     --------------
Revenue
     United States                                         $67,169,090       $ 49,041,460
     Canada                                                 22,371,411         22,718,448
                                                          -------------     --------------
                                                           $89,540,501        $71,759,908
                                                          =============     ==============
Accounts receivable
     United States                                           3,410,535         $6,005,782
     Canada                                                    590,270          5,160,198
                                                          -------------     --------------
                                                            $4,000,805        $11,165,980
                                                          =============     ==============

Identifiable assets of continuing operations
     United States                                         $31,440,090        $20,740,614
     Canada                                                      -                  -
                                                          -------------     --------------
                                                           $31,440,090        $20,740,614
                                                          -------------     --------------

</TABLE>

NOTE Q - 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, 2007 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, 2007 and December 31, 2006.

The  Company  recorded  impairment  loss of (i)  $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.

                                      F30

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                     Years ended December 31, 2007 and 2006

NOTE Q (continued)

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

                                                Year ended         Year ended
                                               Dec.31, 2007       Dec.31, 2006
                                               -------------    --------------
Net Sales                                           $9,856        $ 1,222,834

Cost of sales
Cost of product                                     55,133          1,260,694
Shipping and handling costs                         13,616            144,772
                                               -------------    --------------
                                                    68,749          1,405,466

 Gross Profit (loss)                               (58,893)          (182,632)

Operating expenses:

  Advertising and promotion                              -              1,046
  General and administrative                        56,104            594,008
  Depreciation and amortization                          -            157,650
  Asset impairment charge                                -            359,353
                                               -------------    --------------
                                                         -          1,112,057

 Operating loss                                   (114,997)        (1,294,689)

Other Income (expenses):
  Other income (expenses)                                -             (1,024)
  Interest and financing expenses                        -            (62,765)
                                               -------------    --------------
                                                         -            (63,789)

Net (loss) before income taxes                       (114,997)     (1,358,478)
                                               -------------    --------------
Income tax expense                                          -            986
                                               -------------    --------------
Net (loss) from discontinued operations            $ (114,997)  $ (1,359,464)
                                               -------------    --------------

                                      F31

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                  CONSOLIDATED FINANCIAL STATEMENTS (continued)

                     Years ended December 31, 2007 and 2006

NOTE Q (continued)

                                                 Dec.31, 2007       Dec.31, 2006
ASSETS:
CURRET ASSETS:

CASH AND CASH EQUIVALENTS                      $      -                $  1,782
ACCOUNTS RECEIVABLE TRADE                             -                  44,632
OTHER RECEIVABLES                                     -                  28,563
INVENTORY                                             -                  52,205
PREPAID ASSETS AND OTHER CURRENT ASSETS               -                       -

PROPERTY AND EQUIPMENT, NET                           -                       -

INTANGIBLE ASSETS,NET OF ACCUMULATED

AMORITIZATION OF $ 2,627,469                          -                       -
                                                 ---------          -----------
TOTAL ASSETS                                          -              $ 127,182
                                                 =========          ===========

LIABILITIES:



NOTES PAYABLE                                        -                       -
ACCOUNTS PAYABLE                                     -                  112,569
                                                 ---------          -----------
TOTAL  LIABILITIES                             $     -                $ 112,569
                                                 =========          ===========

                                      F32