SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB


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

                  For the fiscal year ended December 31, 2002.
                         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.)

                             1175 Walt Whitman Road
                               Melville, NY 11747
                         (Address of corporate offices)

        Registrant's telephone number, including area code: 631-424-5500

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

                      Title of Each Class Name of Exchange

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


     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-KSB or any  amendment to
this Form 10-KSB. [X]

     Synergy  Brands  Inc.  revenues  for  its  most  recent  fiscal  year  were
$31,540,675

     On March 31,  2003,  the  aggregate  market  value of the  voting  stock of
Synergy Brands Inc.,  held by  non-affiliates  of the  Registrant  (based on the
closing  price as  reported  on the  NASDAQ  for March 31,  2003)  approximately
$2,447,500.  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 31, 2003 was 1,479,059.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Proxy  Statement for  Registrant's  2002 Annual  Meeting of
Stockholders  currently  scheduled  to be held  June  2003 are  incorporated  by
reference in Part III (for other  documents  incorporated  by reference refer to
Exhibit Index at page 36)

                                     PART I

     Other  than  historical  and  factual  statements,  the  matters  and items
discussed  in this report on Form 10-KSB 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  "Management's  Discussion  and  Analysis of
Financial Condition and Results of Operations - Forward-Looking  Information and
Cautionary Statements."

<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS

     A. OVERVIEW

     Synergy  Brands,  Inc.  (SYBR or the Company) is a holding  Company,  which
operates  through  three  unique  business  segments  that all utilize  business
logistics.  The businesses  include PHS Group (also known as  Dealbynet),  Grand
Reserve Corporation (GRC), and Proset Hair Systems (Proset).

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

     GRC manages  multiple  Internet  domains that market directly to the retail
consumer  via  electronic   commerce.   GRC  owns  multiple  domains   including
Cigargold.com,  Netcigar.com and  BeautyBuys.com.  GRC focuses on a mix of Brand
name premium cigar items and cigar related  accessories and markets them through
multiple cigar domains  including  CigarGold.com  and  NetCigar.com.  Beautybuys
markets Beauty related products to the customer on the Internet through multiple
domains including store.perx.com.

     Proset  distributes  Salon  Hair care  products  to chain  drug  stores and
supermarkets in the Northeastern part of the United States.  Proset uses just in
time technology and continuous replenishment programs to stock, track and market
defined planograms within the store's beauty aisles. Planograms can range from 4
feet to 16 feet depending on the demographics of the store.

     The Company  also owns 20% of the  outstanding  common  stock in  Interline
Travel and Tours,  Inc. (ITT). The Company believes that its capital  investment
in this unique travel Company may provide for the future  capital  appreciation.
Synergy  Brands does not manage ITT and relies on its  management for day-to day
operations.  ITT provides cruise and resort hotel packages through a proprietary
reservation  system to solely  airline  employees  and  their  retirees.  ITT is
believed  to be the  largest  Company  in this  sector of the  travel  industry.
Information on ITT can be found at www.perx.com, and www.store.perx.com.

     SYBR has also  established  strategic  alliances  with media and technology
partners in a way that helps minimize cash outlay by offering equity in SYBR for
media and technology credits. With such transactions not only does SYBR conserve
its cash assets but also it gains the interest of important media  partners.  As
of this date,  the Company has  advertising  and trade  credits from the Premier
Radio Network and Icon International.

     THE  COMPANY'S  CORPORATE  OFFICE  IS  LOCATED  AT 1175 WALT  WHITMAN  ROAD
MELVILLE NEW YORK 11747, AND ITS TELEPHONE NUMBER IS (631) 424-5500. THE COMPANY
MAINTAINS  A  CORPORATE  WEBSITE  AT  WWW.SYNERGYBRANDS.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  10QSB and
year end 10-KSB reports and interim Form 8K reports. The general public may read
and copy any  materials  the  Company  has filed  with the SEC at the SEC Public
Reference  Room at 450 Fifth Street NW,  Washington  DC. The general  public may
obtain  information on the operation of the Public Reference Room by calling the
SEC at  1-800-SEC-0330.  The SEC also  maintains an Internet  site that contains
reports,  proxy and  information  statements,  and other  information  regarding
issuers that file  electronically  with the SEC which website can be accessed at
www.sec.gov.

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<PAGE>

     B. INTERNET & LOGISTICS

     1. GROCERY AND HEALTH & BEAUTY AID (HBA) LOGISTICS

     PHS Group is the grocery  logistics  business used for the purchase of name
brands  grocery  and Health and Beauty  Aids (HBA)  products  and their  further
resale  to  traditional   customers   utilizing  the  logistics  and  networking
advantages  of  electronic  commerce and just in time  distribution.  PHS's core
sales base remain the distribution of nationally  branded  consumer  products in
the grocery and health and beauty (HBA) sectors.  Distribution  of such products
is directed to major retailers and wholesalers from major U.S.  consumer product
manufactures. PHS has positioned itself a distributor for major manufacturers as
opposed to a full line wholesaler.  A full line wholesale has the responsibility
of servicing the entire need of a retail operation, whereby a distributor caters
to specific merchandising categories. As a result, PHS is able to plan the needs
of its customers  directly from the source of supply and in turn increase  sales
to its customers  through this unique  focus.  PHS  concentrates  on the fastest
moving  promotional  items  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 300 customers in the northeastern  quadrant of the
United  States.  PHS maintains  leased  trucks in addition to consigning  common
carriers for overflow  sales.

     2. BUSINESS TO CONSUMER OPERATIONS

     GRC manages  multiple  Internet  domains that market directly to the retail
consumer  via  electronic   commerce.   GRC  owns  multiple  domains   including
Netcigar.com  and  BeautyBuys.com.  GRC  focuses on a mix of Brand name  premium
cigar items and cigar  related  accessories  and markets them  through  multiple
cigar domains  including  CigarGold.com  and  NetCigar.com.  Beautybuys  markets
Beauty related  products on the Internet  through multiple domains to the retail
customer.

     a. BEAUTYBUYS

     In  the  first  quarter  of  1999,  the  Company  established  through  its
subsidiary  BeautyBuys.Com  Inc. an e-commerce website  (www.BeautyBuys.com)  to
offer  direct to the  consumer via  internet  sales on a  non-exclusive  basis a
popular  selection of nationally  branded beauty care products,  including salon
hair and skin care items, designer fragrances and cosmetics, and consumer health
and beauty care products,  most being  previously sold by the Company as part of
its more  traditional  distribution  business.  BeautyBuys.com  Inc. has further
expanded its internet operations into B2B sales of most products offered through
its retail  internet sales as well as adapting much of the Company's  historical
wholesale  product  trade outside the health and beauty care industry to the B2B
platform.  Advertising on radio, television and on-line channels was an integral
part of the overall  traffic-building  plan for BeautyBuys.com.  To further this
area of expanded awareness of the BeautyBuys.com presence in the marketplace the
Company has established for  BeautyBuys.com a strategic alliance with a material
advertising source in Sinclair Broadcasting, Group Inc.(Sinclair) (NASDAQ:SBGI).

     BeautyBuys.com's (BB) 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.   BeautyBuys.com  strives  through
internal development efforts to create and enhance the specialized,  proprietary
software that is unique to its Business.

     BeautyBuys.com 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,  management can determine the quantity of product
stored by item,  cost by item,  aging and other  characteristics  necessary  for
expeditious fulfillment and distribution.

     BeautyBuys.com  has  implemented  a broad array of services and systems for
site management,  searching,  customer interaction,  transaction  processing and
fulfillment.  BeautyBuys.com 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.

                                       3

<PAGE>

     BeautyBuys'  website can be shopped 24 hours a day,  seven days a week from
anywhere  that a  consumer  has  Internet  access.  BeautyBuys  offers  a  large
selection of products and in addition provides various levels of product content
that includes a wealth of  health-related  information,  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.

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

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

     BeautyBuys  has  programs  that  allow it to provide  samples  of  products
designed as personal  gifts.  BeautyBuys also plans to use sampling to work with
manufacturers to introduce new products.

     Management believes that the following are principal competitive factors in
the market place wherein it operates, all of which are acknowledged to exist and
are  focused  upon in  BeautyBuys'  operations:  brand  recognition,  selection,
convenience,  price,  website  performance and accessibility,  customer service,
quality of information services, reliability and speed of order shipment.

     b.NETCIGAR.COM and CIGARGOLD.COM

     In July 1999, the Company launched through its subsidiary NetCigar.com Inc.
a web  site  (www.netcigar.com)  for sale of  premium  cigar  products.  Through
NetCigar.com  Inc.  the  Company  offers  information  and sales on a variety of
cigars and cigar related products and content,  including cigar news and events,
editorials, and an array of cigars and cigar products of both proprietary labels
and other  popular  brands.  The Company also markets  humidors,  and sells golf
oriented  gifts and  apparatus.  The  Company  has a long  term  lease in Miami,
Florida  for  storage  of its  entire  inventory  in a custom  designed  humidor
warehouse.  NetCigar'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 NetCigar's  web site design is  proprietary  and NetCigar has had the
site designed and has developed the site to accommodate  specific  marketing and
record keeping  requirements to enhance their customer service. In October 2000,
NetCigar entered an arrangement through SYBR for media coverage through Premiere
Radio  Networks  Inc.  ("Premiere").  Premiere  syndicates  more  than 60  radio
programs  to more than 7800 radio  affiliations  and  reaches  over 180  million
listeners  weekly.  Specifically,  Premiere  exchanged $1 million of radio media
credits for stock in SYBR and cash.

     Netcigar.com, Inc., utilizes a computerized database management system that
collects,  integrates  and  allows  analysis  of data  concerning  sales,  order
processing, procurement, shipping, receiving, inventory and financial reporting.
At any given time,  Company  executives  can  determine  the quantity of product
stored by item,  cost by item,  aging and other  characteristics  necessary  for
expeditious  fulfillment  and  distribution.  A network  system of the Company's
office and warehousing facilities allows for online assessment and transactional
reporting capabilities.  It is the Company's policy that all consumer orders are
shipped  from  the  Company's  warehouse  within  3  days  of  order  placement.
Netcigar.com maintains an inventory on approximately 75% of its product mix; the
other 25% is purchased on a just-in-time  basis. The  distribution  facility has
sufficient  space to handle  the  Company's  anticipated  growth in this area of
product  sales.  After an order is shipped,  customers  can view  order-tracking
information through a customized profile for each customer.

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

                                       4

<PAGE>

     NetCigar  competes with many and varied  sources for cigar products in a $1
billion market both large and highly fragmented.  No single traditional retailer
competes  against the Company in all of its product  lines and there is an array
of recently developed e-commerce cigar sites. The largest competitor,  JR Cigars
has  developed  an  e-commerce  web site for its product  sales as an adjunct to
their traditional brick and mortar retail stores and catalogue sales.

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

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

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

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

     4. Drug stores and mass market retailers  representing less than 10% of the
     market.

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

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

     3. PROSET HAIR SYSTEMS.

     The Company  services on a direct store basis through its subsidiary  Grand
Reserve  Corporation  (GRC)  and  affiliated  parties  several  drug  store  and
supermarket  chains in the  Northeast  United  States and numerous  other retail
outlets  for the sale of hair and skin care  products  available  to the Company
through contacts made in the industry.  Similar products are also made available
to be sold direct to the consumer via internet sales though BeautyBuys.  In this
product area,  Company  affiliated sources stock the designated store shelves on
the design of the Plan-O-Gram  developed by Company  affiliates which service is
offered at no additional charge, which aspect of sales helps maintain the client
as long as awareness is maintained of and remedies for  deficiencies are made in
product  shelf  storage  as it occurs.  This  aspect of the  Company's  business
presently  accounts for about 1% of sales.  A Plan-O-Gram  is a  compilation  of
store shelves that display products within a retailer's store aisles that Proset
manages and replenishes on a direct store delivery basis.

     Proset  distributes  Salon  Hair care  products  to chain  drug  stores and
supermarkets  in  the  Northeastern  part  of the  United  States.  Proset  uses
optimized   inventory   levels  for  just  in  time  technology  and  continuous
replenishment  programs to stock, track and market defined planograms within the
store's beauty aisles.  Planograms can range from 4 feet to 16 feet depending on
the demographics of the store.

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<PAGE>

     C. 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.  Such
differences however do not act as a material hindrance to operations.  Access to
product  remains  important  but  the  Company  is  confident  of the  continued
availability of product from  manufactures,  wholesalers,  and distributors with
whom the Company  has  successfully  acquainted  itself or  developed  in house.
Source of  supplies  should  be  stable.  Most of the  Company's  suppliers  are
regulated under fair trade and pricing regulations.  As a result the Company can
remain  competitive  as long as it purchases  products at prescribed  volume and
credit limitation set by the suppliers. During the years ended December 31, 2002
and 2001, the Company purchased over 77% and 85%, 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. The Company maintained over a
ten year  relationship  with this vendor and believes that the relationship with
this vendor is satisfactory.

     D. MAJOR CUSTOMERS.

     During the years ended  December  31, 2002 and 2001,  sales to one customer
accounted for 11% and 22% of the Company's total sales, respectively. This major
customer relates to the grocery logistics business.

     E. INFORMATION SYSTEMS

     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. Internet sites presently available regarding Company
business and product sales are:

                                 BeautyBuys.com
                                  NetCigar.com
                                SynergyBrands.Com
                                  DealbyNet.com
                         Store.Perx.com (managed by GRC)
                            Perx.com (managed by ITT)
                   Visionet2.com (managed by Fleming NYSE:FLM)
                                    SYBR.com
                                  CIGARGOLD.com
                                  Goldcigar.com

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<PAGE>

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

     F. SEASONALITY

     Sales by PHS Group and  Proset  usually  peak at the end of the 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  quarterly  end and as a result  reduced  products
costs may  increase  sales.  In  particular,  the second and first  quarters are
usually better operating quarters.  Sales of beauty care products and fragrances
increase over traditional gift giving holidays such as Christmas,  Mother's Day,
Father's Day, and Valentine's Day.

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

     G. SHIPPING AND HANDLING

     Products  sold on a Business  to  Business  (B2B)  basis by the Company are
shipped  in bulk from  inventory  maintained  by the  Company  at its  warehouse
facilities by common carriers. All B2C orders are consolidated in Company leased
fulfillment  facilities then packed and shipped to the customer usually within 3
to 7 days mainly by UPS.  Approximately 75% of product inventory is in warehouse
stock and 25% is  purchased by the Company on an as needed "just in time" basis.
The Company  does not own its trucks and is  dependent  on common  carriers  and
truck leases.  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  are  prevented  from or  delayed  in
utilizing  transportation  lanes,  the Company will likely 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 can not be passed to the customers on all occasions.

     The Company  purchases name brand grocery products and HBA products for its
business to be sold by PHS to B2B customers  bulk.  The Company does not foresee
difficulty in arranging additional trucking if it increases its business volume.
The Company has arranged for warehousing when and where necessary, on a contract
basis and has  thereby  eliminated  the  existence  of and need for  centralized
warehousing. Proset purchases salon hair products in bulk and redistributes them
through a central warehouse to drug stores using UPS on Common Carriers.

     H. TRADEMARKS, LICENSES AND PATENTS

     The Company has obtained rights to various  copyrights,  trademarks,  trade
names,  and domain  names in its internet  business.  The Company has obtained a
wholesale drug 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" 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,  Gold
Cigar,  Proset,  and Cigar Kingdom.  Others are owned directly by the Company or
where  applicable  and  appropriate  by  BeautyBuys.com  Inc.  Since most of the
Company's  business relies on the distribution of nationally  branded  products,
proprietary trademarks are not material to the Company's business operations.

     I. EMPLOYEES

     The Company and its  subsidiaries  in the  aggregate as of the date of this
report employ and contract  approximately  30 full time persons all of whom work
in executive,  administrative sales, marketing, data processing,  and accounting
or clerical activities and certain work as Company employees that integrate with
the various warehouses where Company products are stored. The Company leases and
staffs  its  warehouses  in New York (PHS  Group),  New  Jersey,  (Proset),  and
Florida,  (Netcigar,  CigarGold,  and  BeautyBuys)  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 except for supervisory personnel hired by
the  Company.  The  Company  relies  on a stable  working  environment  with its
contract warehousing and trucking.

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<PAGE>

     J. GOVERNMENT REGULATION

     1. TOBACCO INDUSTRY REGULATION AND TOBACCO INDUSTRY LITIGATION

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

     The Food and Drug  Administration  (the "FDA") has determined that nicotine
is a drug and 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.  Cigars were not specifically included
in the FDA's regulations.  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 became  effective  on  February  28, 1997 and it is possible
that in the future similar regulations will be applied to cigar sales as well.

     The U. S.  Department of Health and Human  Services ( the "HHS")  Inspector
General issued a report in February 1999, urging the Federal Trade Commission to
require cigars to carry warning  labels similar to those  contained on cigarette
packages.  This report marked the first time that cigars had  specifically  been
identified for increased  regulatory  oversight by a federal  health agency.  In
2002 new federally  mandated  health  warnings  went into effect on cigars.  The
enforcement follows a report by the National Cancer Institute which detailed the
health risks of cigar smoking. Cigar companies are now required to display these
warnings  clearly and permanently on packages,  in print ads, on audio and video
ads, on point of purchase displays and on the Internet.

     While the cigar  industry  historically  has not been  subject  to  federal
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 HHS report  indicates that federal  regulatory  effort directed toward cigar
manufacturers  and  distributors  may be increasingly  likely.  The costs to the
Company of increased government regulations could have a material adverse effect
on the Company's business and results of operations.

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

     Consideration  at both the  federal  and state level also has been given to
consequences  of tobacco on others  that are not  presently  smoking  (so-called
"second-hand"  smoke).  There can be no assurance that  regulations  relating to
second-hand  smoke  will not be  adopted  or that such  regulations  or  related
litigation would not have a material adverse effect on the Company's  results of
operations or financial condition.

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

     Historically,  the  cigar  industry  has  experienced  less  health-related
litigation than the cigarette and smokeless tobacco industries have experienced.

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

                                       8

<PAGE>

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

     The tobacco  industry has  negotiated  settlements  totaling more than $240
billion with the States seeking  reimbursement  for expenditures by state-funded
medical programs for treatment of tobacco related illnesses.

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

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

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

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

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

     2. OTHER GOVERNMENT REGULATION.

     The United  States Food and Drug  Administration  through the United States
Food,  Drug and Cosmetic Act and the Fair  Packaging  and Labeling Act and other
various  rules and  regulations  regulate,  among other  things,  the purity and
packaging  of HBA  products and  fragrances  and  cosmetic  products and various
aspects of the  manufacture  and  packaging of other  grocery  items sold by the
Company.  Similar  statutes are in effect in various states.  Manufacturers  and
distributors  of such  products  are also  subject  to the  jurisdiction  of the
Federal Trade Commission with respect to such matters as advertising content and
other  trade  practices.   To  the  Company's  knowledge,  it  only  deals  with
manufacturers  and  manufactured  products in a manner which  complies with such
regulations   and  who   periodically   submit  their  products  to  independent
laboratories for testing. However, the failure by the Company's manufacturers or
suppliers  to comply with  applicable  government  regulations  could  result in
product recalls 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.

     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.  For  further  discussion  of other  present  and  potential
government  regulation  of the  Internet see "Forward  Looking  Information  and
Cautionary Statements No.32 Government Regulation of the Internet may impede the
Company's growth or add to its operating costs" infra.

                                       9

<PAGE>

ITEM 2: DESCRIPTION OF PROPERTY

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

     The Company  maintains  satellite  offices in New York,  Pennsylvania,  New
Jersey, Ontario, Maine, and Florida.

     Warehousing   facilities   for   BeautyBuys  are  located  in  New  Jersey.
Warehousing  facilities  for  Netcigar  are  located  in  Florida.  The  Company
maintains  regular  warehousing   arrangements  on  a  contract  basis  for  PHS
throughout the northeastern quadrant of the United States.

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 2002 no matters were submitted for shareholder
approval except for the shareholder approval of the 1 for 4 reverse split of the
Company's  common  stock  approved  by  written  consent  of a  majority  of the
shareholders  of the Company on December 10, 2002 followed by distribution of an
Information  Statement  to all  other  shareholders  in form as  filed  with the
Securities and Exchange Commission.

                                     PART II

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

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

COMMON STOCK

Quarter Ended               High             Low
-------------             -------         -------
March 31, 2001             10.60            9.40
June 30, 2001               7.80            7.00
September 30, 2001          7.80            4.56
December 31, 2001           5.80            4.20
March 31, 2002              5.60            3.80
June 30, 2002               4.00            3.20
September 30, 2002          3.80            3.00
December 31, 2002           3.80            2.52

     The stock  prices  listed  above have been  adjusted to reflect the 1 for 4
reverse split of the Company's stock  effectuated in February 2003. On March 31,
2003, 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.

     By letter  dated  November  20,  2002 the  Company  was  notified  that its
securities  were subject to delisting  based upon the Company's  failure to meet
NASDAQ's minimum  shareholders' equity requirements and the Company's failure to
meet the minimum $1 bid price.  The Company  requested an appeal hearing,  which
stayed the delisting.

                                       10

<PAGE>

     An oral  hearing  before  the  NASDAQ  Listing  Qualifications  Panel  (the
"Panel") was held January 9, 2003, wherein the Company presented a proposed Plan
of  Compliance.  By written  decision  dated  February  7, 2003 the  Company was
informed by NASDAQ that the Panel was of the opinion that the Company  presented
a  definitive  plan  that  will  enable  it  to  evidence  compliance  with  all
requirements  for  continued  listing  on the NASDAQ  Small Cap Market  within a
reasonable period of time and to sustain  compliance with those requirement over
the long term.

     Accordingly,  the Panel determined to continue the listing of the Company's
securities on the NASDAQ Small Cap Market  provided  certain  further  deadlines
through March 31, 2003 for  evidencing  compliance on these  outstanding  issues
were met. The Panel  reserved the right to modify or  terminate  this  exception
upon a review of the  Company's  reported  financial  results.  In the event the
Company  failed  to comply  with any terms of this  exception  the  Company  was
informed that its securities would be delisted from The NASDAQ Stock Market.

     Subsequently the bid price for the Company's stock has increased to a level
above $1.00 bid as a result of a 1 for 4 reversed  stock split in February 2003.
The  Company's  stockholders'  equity of $2,082,537 as of December 31, 2002 does
not meet the minimum NASDAQ listing standard of $2,500,000  although the Company
does believe a sufficient  increase  will be  reflected in the  Company's  first
quarter  2003 10QSB  filing to have the Company  comply with the NASDAQ  minimum
stockholders equity standard.  The Company therefore  requested  reconsideration
from the Panel of their decision regarding the deadlines given for compliance by
the  Company.  By  reply  letter  dated  March  10,  2003,  the  NASDAQ  Listing
Qualifications  acknowledged that the $1.00 bid price pre-condition to continued
listing  had been  satisfied  but  that  the  Company's  request  for  extension
regarding  compliance with the stockholders' equity standard was "premature" and
the deadline of March 31, 2003 remains but there is  recognition  in such NASDAQ
reply of the Company's belief that compliance will be indicated in the Company's
first quarter 2003  reporting  and it is the Company's  belief that if necessary
the Company will be granted a reasonable extension of the applicable deadline if
the Company can exhibit,  as they are confident that they can, the likelihood of
the first  quarter  2003  financial  figures for the Company  disclosing  a then
stockholders' equity level above the $2,500,000 threshold required for continued
NASDAQ listing.

     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 2002.  These
issuances  were made either under  exemption  from  registration  allowed  under
Section 4 (2) or Regulation D of the Securities Act of 1933 as amended.

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

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

     Synergy  Brands,  Inc.  (SYBR or the Company) is a holding  company,  which
operates  through  three  unique  business  segments  that all utilize  business
logistics.  The businesses  include PHS Group (also known as  Dealbynet),  Grand
Reserve Corporation (GRC), and Proset Hair Systems (Proset).

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

     GRC manages  multiple  Internet  domains that market directly to the retail
consumer  via  electronic   commerce.   GRC  owns  multiple  domains   including
Cigargold.com,  Netcigar.com and  BeautyBuys.com.  GRC focuses on a mix of Brand
name premium cigar items and cigar related  accessories and markets them through
multiple cigar domains  including  CigarGold.com  and  NetCigar.com.  Beautybuys
markets Beauty related products to the customer on the Internet through multiple
domains including store.perx.com.

                                       11

<PAGE>

     Proset  distributes  Salon  Hair care  products  to chain  drug  stores and
supermarkets in the Northeastern part of the United States.  Proset uses just in
time technology and continuous replenishment programs to stock, track and market
defined planograms within the store's beauty aisles. Planograms can range from 4
feet to 16 feet depending on the demographics of the store.

     The Company  also owns 20% of the  outstanding  common  stock of  Interline
Travel and Tours,  Inc. (ITT). The Company believes that its capital  investment
in this unique travel Company may provide for the future  capital  appreciation.
Synergy Brands does not manage ITT and relies on such  company's  management for
day-to day operations.  ITT provides cruise and resort hotel packages  through a
proprietary  reservation  system to solely airline employees and their retirees.
ITT is believed to be the largest Company in this sector of the travel industry.
Information on ITT can be found at www.perx.com, and www.store.perx.com.

           RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002
                AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2001.

The Company's revenues were comprised of the following:

                                    Year ended           Year ended
                                    12/31/2002           12/31/2001

PHS Group(BtoB)                    $27,745,818          $20,036,232
Proset (Salon Products)              2,537,216            2,144,905
GRC(BtoC)                            1,257,641            2,166,791
Total revenues                     $31,540,675          $24,347,928

     Revenues  increased by 29.5% to $31.5  million for the year ended  December
31,  2002 as compared  to the year ended  December  31,  2001.  The  increase is
attributable to increases in the Company's  Business-to-Business  (BtoB) grocery
logistics  business (PHS Group).  B2B sales  increased by 38.5% to $27.7 million
representing  88% of total revenues for 2002. The Company  attributes its growth
in this sector to strong customer acquisition, a streamlined product acquisition
system, manufacturer and advertising rebates, and additional sales staff.

     Proset sales increased 18.3% from $2.1 million to $2.5 million from 2001 to
2002. The increase is attributable to two factors.  As a result of the Company's
new line of credit with the Company's primary lender,  International  Investment
Group, Proset has been able to obtain financing on inventory and sales orders as
well as accounts receivable.  As a result of the line of credit with IIG, Proset
has  increased its ability to purchase  products in bulk,  which has resulted in
lower costs of products to the Company;  therefore  resulting in increased sales
growth.  Also, Proset has been able to develop a wholesale  customer base due to
lower product costs. Such wholesale sales yield a lower margin, but higher sales
volume.

     BtoC Sales  (BeautyBuys and NetCigar)  decreased by 41.9% from $2.2 million
to $1.3 million.  Most of the decline is  attributable  to Beautybuys.  As sales
decreased in this sector, the Company  consolidated its B2C operation in Florida
and eliminated all indirect  costs to its  BeautyBuys  business.  As a result of
cost  containment,  the BtoC  drop in sales  had  little  overall  affect on the
Company's operations.

     Gross profit increased by 26.5% to $1.7 million for the year ended December
31, 2002 as compared to the year ended  December 31, 2001.  This  improvement is
attributable to stronger  promotional rebates and forward buying  opportunities.
The Company has also diversified its sources of supply so that its cost of sales
may be more competitive for the consumer products that it sells.


                              Gross Profit Analysis
<TABLE>
<CAPTION>
<S>                  <C>           <C>           <C>            <C>            <C>           <C>

                    Gross Profit  Gross Profit   Gross Profit  Gross Profit   Gross Profit   Gross Profit
                     12/31/2002    12/31/2001     12/31/2002   Contribution    12/31/2001    Contribution

PHS Group (BtoB)        3.9%         2.9%         $1,083,090       63.8%       $576,818        43.0%

Proset Salon
Products               12.4%         8.3%           $315,290       18.6%       $179,755        13.4%

GRC (BtoC)             23.8%        27.0%           $299,917       17.6%       $585,675        43.6%

Total Gross Profit                                $1,698,297                  $1,342,248

</TABLE>

                                       12

<PAGE>

     Gross  profit  includes  freight  and  warehousing  expenses.  Freight  and
warehousing  expenses  totaled  $600,994 which  represents 1.9% of the Company's
sales. While sales increased by 29.5% in FY2002, freight expenses decreased from
$657,793 to $600,994 in FY2002.  Higher sales and better logistics  enabled this
improvement. Margin increases for PHS result from higher promotional rebates and
lower freight costs as compared to the prior year. Furthermore, the gross profit
from PHS would have been  enhanced  by  $706,831 in FY2002.  PHS  undertook  the
business  development of three key customers.  By allowing for enhanced  pricing
discounts as well as bearing all  logistical  costs,  PHS incurred an additional
expense beyond its normal operating  costs.  The Company's  overall gross profit
was positively  impacted by higher  promotional  rebates earned from vendors and
lower freight costs. Overall margin contribution results from higher promotional
rebates and lower freight costs.

     Operating  expenses  decreased  18% to  $4.6  million  for the  year  ended
December  31, 2002 from $5.6 million for the year ended  December 31, 2001.  The
decrease of $1 million is primarily the result of a decrease in advertising  and
promotional  expenses  during the year ended  December 31, 2002. The decrease in
advertising  expenses is  attributable  to  reduction in the  Company's  planned
expenditures for on-line advertising. A large portion of the Company's operating
expenses were  stock-based.  As the Company  developed its  technology,  most of
advertising,  merchandising  and  professional  fees  were  paid for in stock or
barter.  A total of $303,145 of expenses  were paid for in common  stock  during
FY2002. The Company continues to contain its costs commensurate with its revenue
growth.  General and administrative  expenses are centralized by the Company and
service all sectors.

     Other  income and expenses  increased  from expense of $26,000 for the year
ended  December 31, 2001 to income of $398,000  for the year ended  December 31,
2002. Included in other income and expenses for the year ended December 31, 2002
are a $593,000 gain on the settlement of a liability due to a vendor; a $215,000
gain on the dissolution of a majority owned  subsidiary;  a $113,000 loss on the
forgiveness of a note  receivable  from a shareholder;  $71,000 in net losses on
the sales of  marketable  securities;  a $58,000  loss on the sale of  preferred
stock of an  invested;  $27,000 in interest  income and $211,000 in interest and
financing  expenses.  Included  in other  income and  expense for the year ended
December 31, 2001 are a $487,000 gain on the  settlement of a liability due to a
vendor; $440,000 of common stock and warrants issued to satisfy a guarantee on a
line of credit;  $128,000  in  interest  income and  $155,000  in  interest  and
financing expenses.

     The  Company  realized  a net loss of $2.5  million as  compared  to a $4.3
million loss in 2001, a 42% improvement.  As stated in the analysis above,  many
of the operating  expenses  that have been incurred  related to the prior's year
development  of the  Company's  internet  sites.  In  additon  depreciation  and
amortization  represented  33% of the  over  all  loss of the  Company  totaling
$839,935.  Furthermore,  stock based compensation and business development costs
totaled approximately $1.6 million for FY2002. The Company does not believe that
it will continue to incur these costs in FY2003 and beyond under normal business
conditions.  The  Company  adopted  FASB  142,  which  would  materially  reduce
depreciation and  amortization in the coming years.  There are no plans to incur
or invest in untested business development ventures and stock based compensation
is also expected to materially be reduced.

                        LIQUIDITY AND CAPITAL RESOURCES

     The  Company  did not  require  any  equity  financing  in  fiscal  2002 as
projected in its guidance for Fiscal Year (FY) 2002. The Company  entered into a
financing agreement with The International  Investment Group Trade Opportunities
Fund (IIG). IIG finances two of the Company's major subsidiaries,  PHS Group and
Grand Reserve Corporation (GRC). IIG provides account receivable,  inventory and
order  financing  for  PHS  Group  and  Grand  Reserve  Corporation.  All of the
Company's  businesses  rely on the  marketing  and  merchandising  of nationally
branded  products  together with  manufacturers  that already spend  billions of
dollars to build  their  brands.  The  manufacturers  of grocery  products  have
encouraged PHS to use its platform to reduce product  distribution costs through
logistics.  The Company's  believes that its working  capital metrics are stable
and rely on  continuous  sales flow. By  maintaining a revolving  line of credit
from IIG that provides the Company with advance rates of 80% against receivables
and 50% against  inventory  and orders,  the Company  believes  that  sufficient
working capital is available to increase  Company sales to about $40 million per
year. This prediction is a forward looking  statement  subject to  uncertainties
but the Company believes such outcome is attainable

                                       13

<PAGE>

     The Company's  predominant need for liquidity is its requirement to finance
its Receivables and Inventory requirements. In order to finance its requirements
the Company relies on Asset based lending,  trade  financing as well as its cash
flow. The Company's major lender IIG provides receivable and inventory financing
to its Grocery,  HBA,  Salon,  and Cigar  businesses.  In addition,  most of the
Company's major vendors provide trade credit for purchases ranging from 10 to 30
days. One vendor to the Company represents over 70% of the Company's  purchases.
Loss of this  vendor  would  have a  material  adverse  effect on the  Company's
operations.

     The Company  entered into a revolving loan and security  agreement with the
International  Investment Group Trade  Opportunities Fund NV (IIG) for financing
its PHS Group and Gran Reserve Corporation operations.  The line of credit under
the loan allows  borrowing up to $3.5 million for accounts  receivable,  orders,
and  inventory.  The  term of the  agreement  is for one  year  and  allows  for
automatic  renewals.  Outstanding  borrowings are collateralized by a continuing
security interest in all of the Company's  accounts  receivable,  chattel paper,
and inventory,  orders in transit equipment,  instruments,  investment property,
documents and general intangibles.

     The Company turns its inventory every 15 days, its  receivables  average 15
days of  collections  and its  account  payables  average 23 days.  The  Company
believes that it has sufficient  liquidity to maintain these  operating  metrics
and believes that it exceeds industry standards in all 3 working capital areas.

     On September 30, 2002, the Company  exchanged in full, its outstanding note
payable and accrued interest of $656,773  through a revision  agreement with one
of its  major  shareholders,  Sinclair  Broadcast  Group  ("Sinclair")  for  the
termination  of $794,990 of its  outstanding  unused  advertising  credits  with
Sinclair.  In addition,  the Company  issued  18,750  shares of stock and 31,250
warrants  exercisable at $1.25 to Sinclair in conjunction with this transaction.
The  Company  recorded a non-cash  charge to  earnings  of  $290,218 as the fair
market value of the consideration given exceeded the unused advertising credits.

     The Company submitted its operating projections and Balance Sheet estimates
to the NASDAQ  qualification  panel from December 31, 2002 through September 30,
2003. In its  submission,  the Company  anticipated  revenues of $41 million and
EBITDA of $320,000 (estimated at $.20 per share) for fiscal 2003. The submission
was provided to NASDAQ for  informational  purposes only.  There is no assurance
that the  forecasts  will be met and they are subject to a multitude of business
factors that may or may not occur. In addition, the Company provided NASDAQ with
quarterly  Balance  sheets  extended to September 30, 2003.  The purpose for the
submission is to show how the Company  anticipates being able to qualify for the
NASDAQ Small-cap Stockholders Equity requirement,  which has been raised to $2.5
million. The NASDAQ panel has responded to the Company's submission and provided
the Company with an extension. Under the panel's response, the minimum bid price
of $1 must be  achieved  by February  18th,  2003 and the minimum  stockholders'
equity  must be in  compliance  by March  31,  2003.  The  minimum  bid has been
achieved  as of the  date  of  this  report.  In  accordance  to  the  Company's
submission  to NASDAQ,  an additional $1 million of equity needs to be raised by
March 31,  2003 to bring the  Company in  compliance  with the NASDAQ  continued
listing stockholders equity standard. In January 2003, the Board of Directors of
the  Company  approved  a  private   placement  of  securities   ("2003  Private
Placement")  in which 100,000 units were offered,  with each unit  consisting of
one share of  unregistered  Series A Class B Preferred  Stock and four shares of
unregistered restricted common stock, at a purchase price of $10.00 per unit. In
February 2003, the Company sold 60,000 units and received  aggregate proceeds of
$600,000 as a result of the 2003 Private Placement.

                                       14

<PAGE>

     Management believes that cost containment, improved financial and operating
controls,  and a focused sales and  marketing  effort  should  provide  positive
results from  operations  and cash flows in the near term.  Achievement of these
goals,  however,  will be dependent  upon the Company's  attainment of increased
revenues,  improved operating costs and trade support levels that are consistent
with  management's  plans.  Such  operating   performance  will  be  subject  to
financial,  economic and other factors  beyond its control,  and there can be no
assurance that the Company's goals will be achieved.

     The following table presents the Company's  expected cash  requirements for
contractual obligations outstanding as of December 31, 2002.


                                           Payments Due By Period

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

Line-Of-Credit             $1,754,119                                $1,754,119

Notes Payable                           $60,000                         $60,000

Operating Leases             $189,031  $273,679  $198,052   $52,014    $712,776

Total Contractual
  Cash Obligations         $1,943,150  $333,679  $198,052   $52,014  $2,526,895

                                       15

<PAGE>

CRITICAL ACCOUNTING POLICIES.

     The  discussion  and analysis of the  Company's  financial  conditions  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  is  not  required.  Accounts
receivable  are due within 30 days and are stated at amounts due from  customers
net of an allowance for doubtful accounts.  Accounts outstanding longer than the
contractual  payment  terms  are  considered  past  due.  Estimates  are used in
determining  the  allowance  for  doubtful   accounts  based  on  the  Company's
historical  collections   experience,   current  trends,  credit  policy  and  a
percentage of its accounts  receivable by aging category.  In determining  these
percentages,  the Company looks at historical write-offs of its receivables. The
Company also looks at the credit quality of its customer base as well as changes
in its credit  policies.  The  Company  continuously  monitors  collections  and
payments from its  customers.  The Company writes off accounts  receivable  when
they  become   uncollectible,   and  payments   subsequently  received  on  such
receivables are credited to the allowance for doubtful accounts.

VALUATION OF DEFERRED TAX ASSETS.

     Deferred tax assets and liabilities represent temporary differences between
the basis of assets and  liabilities  for financial  reporting  purposes and tax
purposes.  Deferred tax assets are primarily  comprised of reserves,  which have
been deducted for financial statement  purposes,  but have not been deducted for
income tax purposes as well as net operating  loss carry  forwards.  The Company
annually reviews the deferred tax asset accounts to determine if is appears more
likely than not that the deferred tax assets will be fully realized. At December
31, 2002, 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.  The Company  conducted a valuation of its  intangible  assets during the
current year and  determined  that the fair value exceeded the carrying value of
its  intangible  assets  Management   considered   various  factors,   including
appraisals,  in determining  that a revision to the estimated useful life of the
Company's  customer  lists  should be made.  Based  upon this  analysis,  it was
determined that the estimated useful life should be extended prospectively, by a
term of six years than the original useful life of five years. This modification
decreased  amortization expense by approximately  $129,000 during the year ended
December 31, 2002.


                                       16

<PAGE>

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

     In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No.  4,  44,  and  64,  Amendment  of  FASB  Statement  No.  13,  and  Technical
Corrections."  SFAS No. 145  eliminates the current  requirement  that gains and
losses on debt  extinguishment  must be classified as extraordinary items in the
income  statement.  Instead,  such  gains  and  losses  will  be  classified  as
extraordinary  items only if they are deemed to be unusual  and  infrequent,  in
accordance  with  the  current   criteria  for   extraordinary   classification.
Additionally,  any gain or loss on extinguishment of debt that was classified as
an extraordinary item in prior periods presented that does not meet the criteria
in APB  Opinion  No. 30 for  classification  as an  extraordinary  item shall be
reclassified.  In addition,  SFAS No. 145 eliminates an  inconsistency  in lease
accounting  by requiring  that  modifications  of capital  leases that result in
reclassification   as  operating   leases  be  accounted  for  consistent   with
sale-leaseback accounting rules. SFAS No. 145 also contains other no substantive
corrections to authoritative accounting literature.  The changes related to debt
extinguishment  will be effective for fiscal years beginning after May 15, 2002,
and the changes related to lease  accounting will be effective for  transactions
occurring  after May 15,  2002.  The  Company  has  elected  to early  adopt the
provisions of SFAS No. 145. In  connection  with the adoption of SFAS No. 145, a
$486,788 gain recognized by the Company as a result of the  nonperformance  by a
vendor that was previously reported as an extraordinary item in the consolidated
statement  of  operations  for the  year  ended  December  31,  2001,  has  been
reclassified  to other income  (expense) as it did not meet the  definition  for
classification as extraordinary.  In addition,  the Company has reclassified the
forgiveness of a  shareholder's  note receivable of $113,129 to the Company from
extraordinary items to other income (expense) during the year ended December 31,
2002 as it did not meet the definition for classification as extraordinary.

     In June  2002,  the  FASB  issued  SFAS  No.  146,  "Accounting  for  Costs
Associated with Exit or Disposal  Activities,"  which  addresses  accounting for
restructuring  and similar costs.  SFAS No. 146 supersedes  previous  accounting
guidance,  principally  Emerging Issues Task Force ("EITF") Issue No. 94-3. SFAS
No.  146  requires  that the  liability  for  costs  associated  with an exit or
disposal  activity be recognized when the liability is incurred.  Under EITF No.
94-3,  a liability  for an exit cost was  recognized  at the date of a Company's
commitment  to an exit plan.  SFAS No. 146 also  establishes  that the liability
should  initially  be  measured  and  recorded  at fair  value.  SFAS No. 146 is
effective for disposal activities initiated after December 31, 2002. The Company
is currently evaluating the impact of the adoption of SFAS No. 146.


                                       17

<PAGE>


     In November  2002,  the FASB issued  FASB  Interpretation  No. 45 ("FIN No.
45"),  "Guarantor's  Accounting  and  Disclosure  Requirements  for  Guarantees,
Including  Indirect  Guarantees of  Indebtedness of Others." FIN No. 45 requires
that upon issuance of a guarantee,  a guarantor  must  recognize a liability for
the fair  value of an  obligation  assumed  under a  guarantee.  FIN No. 45 also
requires  additional  disclosures  by a  guarantor  in its  interim  and  annual
financial  statements about the obligations  associated with guarantees  issued.
The recognition provisions of FIN No. 45 are effective for any guarantees issued
or modified after December 31, 2002. The disclosure  requirements  are effective
for financial  statements of interim or annual periods ending after December 15,
2002. The adoption of the disclosure  requirements  of FIN No. 45 did not have a
material  impact on the Company's  financial  position or results of operations.
The Company is currently evaluating the effects of the recognition  provision of
FIN No. 45, but does not expect the  adoption  to have a material  impact on the
Company's financial position or results of operations.

     In January 2003, the FASB issued FASB  Interpretation No. 46 ("FIN No. 46")
"Consolidation of Variable Interest  Entities." In general,  a variable interest
entity is a corporation,  partnership,  trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity  investors  that do not  provide  sufficient  financial
resources for the entity to support its activities.  A variable  interest entity
often holds financial  assets,  including  loans or receivables,  real estate or
other property.  A variable interest entity may be essentially passive or it may
engage  in  activities  on behalf  of  another  Company.  Until  now,  a Company
generally has included another entity in its consolidated  financial  statements
only if it controlled the entity through  voting  interests.  FIN No. 46 changes
that by requiring a variable  interest entity to be consolidated by a Company if
that  Company is subject  to a  majority  of the risk of loss from the  variable
interest  entity's  activities or entitled to receive a majority of the entity's
residual  returns  or  both.  FIN  No.  46's  consolidation  requirements  apply
immediately to variable  interest entities created or acquired after January 31,
2003. The consolidation requirements apply to older entities in the first fiscal
year or interim period beginning after June 15, 2003.  Certain of the disclosure
requirements  apply in all financial  statements  issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company has
adopted FIN No. 46 effective  January 31, 2003.  The Company does not anticipate
that the  adoption  of FIN No. 46 will have a material  impact on the  Company's
consolidated financial condition or results of operations taken as a whole.

SEASONALITY

     Sales by PHS Group and  Proset  usually  peak at the end of the 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  quarterly  end and as a result  reduced  products
costs may  increase  sales.  In  particular,  the second and first  quarters are
usually better operating quarters.  Sales of beauty care products and fragrances
increase over traditional gift giving holidays such as Christmas,  Mother's Day,
Father's Day, and Valentine's Day.

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

INFLATION

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

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

                                       18

<PAGE>

FORWARD LOOKING INFORMATION AND CAUTIONARY STATEMENTS

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

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

         The Company's ability to attract and retain customers;

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

         The  Company's  future  operating  results and the future  value of its
         common stock;

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

         Potential government regulation; and

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

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

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

     In addition to the other  information  in this Form 10-KSB,  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-KSB 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.

     The  Company  has a long  history of  operating  losses.  To date,  a large
portion of the Company's  expenses have been financed  through  capital  raising
activities.  Although the Company has narrowed its losses, it still continues to
report  operating  deficits  as  opposed  to  profits.  A large  portion  of the
Company's historical losses are a direct result of fees and expenses paid for in
stock  and/or  barter.  At this  time  the  Comapny  has no plans  for  material
issuances  of stock or  barter  transactions  and  believes  that its  operating
businesses are sustainable through current operating cash flow. However,  due to
a pattern of historical losses,  there is no assurance that further capital will
not be needed for operating purposes.

     2. INTERNET

     The internet  environment  is relatively  new to business and is subject to
inherent risks as in any new developing  business  including rapidly  developing
technology  with which to attempt to keep pace and level of acceptance and level
of consumer knowledge regarding its use.

                                       19

<PAGE>

     3. 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.

     4. 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 not
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 claim from its
own funds. Any such payment could have a material adverse impact on the Company.

     5. RELIANCE ON COMMON CARRIERS.

     The  Company  does  not  utilize  its own  trucks  in its  business  and is
dependent, for shipping of product purchases, 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, the Company will likely
incur higher freight costs due to the limited  availability of trucks during any
such period that transportation lanes are restricted.

     6. 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.

     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.

                                       20

<PAGE>

     8. POSSIBLE LOSS OF NASDAQ SMALL CAP LISTING.

     Synergy's  qualification  for trading on the NASDAQ Small Cap system has in
the recent past been  questioned,  the focus being on the market  quotes for the
Company's  stock, the current bid price having for a time been reduced below the
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  that
stockholders'  equity has fallen below minimum NASDAQ continued listing standard
of $2,500,000.  NASDAQ has adopted,  and the  Commission  has approved,  certain
changes to its maintenance  requirements  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  has been below $1.00 in the past and the
Common  Stock has remained on the NASDAQ  Small Cap System  because  Synergy has
complied with alternative criteria which are now eliminated under the new rules.
If the bid price dips below $1.00 per share, and is not brought above such level
for a sustained  period of time or the Company  fails to maintain  stockholders'
equity at a level of at least $2,500,000 the Common Stock could be delisted from
the NASDAQ  Small Cap System and  thereafter  trading  would be  reported in the
NASDAQ's OTC Bulletin Board or in the "pink sheets." (see Item 5-"Market For The
Registrant's Common Stock and Related  Stockholder  Matters" supra for a more in
depth discussion of the Company's  current NASDAQ listing status)In the event of
delisting  from the NASDAQ  Small Cap  System,  the Common  Stock  would  become
subject  to  the  rules  adopted  by  the  Commission  regulating  broker-dealer
practices in connection  with  transactions  in "penny  stocks." The  disclosure
rules applicable to penny stocks require a broker-dealer, prior to a transaction
in a penny stock not otherwise  exempt from the rules, to deliver a standardized
list disclosure  document  prepared by the Commission that provides  information
about penny stocks and the nature and level of risks in the penny stock  market.
In addition, the broker-dealer must identify its role, if any, as a market maker
in the particular  stock,  provide  information with respect to market prices of
the Common Stock and the amount of compensation that the broker-dealer will earn
in the proposed  transaction.  The broker-dealer  must also provide the customer
with certain other  information  and must make a special  written  determination
that the penny stock is a suitable  investment for the purchaser and receive the
purchaser's  written  agreement to the transaction.  Further,  the rules require
that following the proposed  transaction the broker-dealer  provide the customer
with monthly account  statements  containing market information about the prices
of the securities. 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   may  be  unwilling  to  engage  in
transactions  in  the  Company's  securities  because  of the  added  disclosure
requirements,  thereby  making it more  difficult  for  purchasers of the Common
Stock to dispose of their shares.  The Company's  common stock has  historically
remained at NASDAQ  trading  levels above $1 except for limited  periods of time
and the Company is confident of achieving a level of Stockholders'  equity above
$2,500,000 by the end of the first quarter 2003.  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.

     9. RISKS OF BUSINESS DEVELOPMENT.

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

                                       21

<PAGE>

     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  develop  and  implement  an
appropriate  marketing  strategy  for  each  of its  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  presently being taken to meet and enhance the
Company's  operating and financial  requirements  should 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.

     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.  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).

                                       22

<PAGE>

     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 foreseeable future.

     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.

     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. THE COMPANY  DEPENDS ON CONTINUED USE OF THE INTERNET AND GROWTH OF THE
         ONLINE PRODUCT PURCHASE MARKET.

     The Company's  future revenues and profits,  if any,  substantially  depend
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 only recently. As a result,
acceptance  and use may not  continue  to develop  at  historical  rates,  and a
sufficiently  broad base of  consumers  may not adopt,  and continue to use, the
Internet and other online services as a medium of commerce.

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

     16. IF THE  COMPANY  DOES NOT  RESPOND  TO RAPID  TECHNOLOGY  CHANGES,  ITS
         SERVICES  COULD BECOME  OBSOLETE  AND ITS  BUSINESS  WOULD BE SERIOUSLY
         HARMED.

     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.

                                       23

<PAGE>

     17. POTENTIAL FUTURE SALES OF COMPANY STOCK.

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

     18. 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  increase  its  number of  customers.  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
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 its business.

     19. BECAUSE  THE  COMPANY'S  INDUSTRY  IS  HIGHLY  COMPETITIVE  AND HAS LOW
         BARRIERS TO ENTRY, THE COMPANY MAY NOT BE ABLE TO EFFECTIVELY COMPETE.

     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.

     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.


                                       24

<PAGE>

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

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

     21. 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.

     22.  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.

     23. 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. 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.

                                       25

<PAGE>

     25. A SYSTEM FAILURE COULD CAUSE DELAYS OR  INTERRUPTIONS OF SERVICE TO THE
         COMPANY'S CUSTOMERS.

     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.

     26. THE  FUNCTIONING  OF THE  COMPANY'S  SYSTEMS  OR THE  SYSTEMS  OF THIRD
         PARTIES ON WHICH IT RELIES COULD BE  DISRUPTED  BY FACTORS  OUTSIDE THE
         COMPANY'S CONTROL.

     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.

     27. 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.

     28. THE COMPANY'S  SUCCESS DEPENDS ON THE CONTINUED  GROWTH OF THE INTERNET
         AND ONLINE COMMERCE.

     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,  these  market  participants  must  accept  and  use  novel  ways of
conducting business and exchanging information.

                                       26

<PAGE>

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

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

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

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

         - alternative-purchasing solutions may be implemented;

         - buyers may dislike the  reduction  in the human  contact  inherent in
         traditional purchasing methods;

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

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

         - new and burdensome governmental regulations may be imposed.

     29. THE  COMPANY'S  SUCCESS  DEPENDS ON THE  CONTINUED  RELIABILITY  OF THE
         INTERNET.

     The Internet  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.  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 a viable commercial  marketplace,  the Company will have to adapt its
business model to the new environment,  which would materially  adversely affect
its results of operations and financial condition.

                                       27

<PAGE>

     30.  GOVERNMENT  REGULATION OF THE INTERNET MAY IMPEDE THE COMPANY'S GROWTH
          OR ADD TO ITS OPERATING COSTS.

     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,  such as end-users  of the  Company's  customers'  auction  sites.  The
Company  has adopted and is further  refining  its  policies  and  practices  to
qualify  for one or more of these safe  harbors,  but there can be no  assurance
that its efforts will be successful since the Digital  Millennium  Copyright Act
has not been fully interpreted by the courts and its interpretation is therefore
uncertain.

     In the area of user privacy,  several states have proposed legislation that
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  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 its 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.

     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.  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 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. As an Internet Company,  it is
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.

                                       28

<PAGE>

     The Company is not aware of any recent related legislation not specifically
mentioned herein 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.

     31. NEW 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),  prohibits the imposition of taxes on
electronic  commerce  by United  States  federal and state  taxing  authorities.
However,  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. 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.

     32. 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.

     33. 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.

                                       29

<PAGE>

     34. 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:

         - 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.

ITEM 7.  FINANCIAL STATEMENTS

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

                                                              Page
                                                              ----

Report of Independent
Certified Public Accountants:                                     F-2

Consolidated Balance Sheet as of December 31, 2002          F-3 - F-4

Consolidated Statements of Operations for the
Years Ended December 31, 2002 and 2001                            F-5

Consolidated Statement of
Changes in Stockholders' Equity for the
Years Ended December 31, 2002 and 2001                      F-6 - F-7

Consolidated Statements of
Cash Flows for the Years Ended December 31, 2002 and 2001   F-8 - F-9

Notes to Consolidated Financial Statements                  F-10-F-37


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

     BDO  Seidman  LLP was  previously  the  principal  accountants  for Synergy
Brands, Inc. ("the Registrant"). On January 22, 2002, that firm's appointment as
principal  accountants  was  terminated by the Registrant and Grant Thornton LLP
was engaged as principal  accountants.  The decision to change  accountants  was
approved by the Board of Directors of the Registrant.

     In  connection  with the audits of the two fiscal years ended  December 31,
2000, and the subsequent  interim period through January 22, 2002, there were no
disagreements  with BDO Seidman LLP or Belew  Averitt  LLP,  whose  practice was
combined  with BDO  Seidman  LLP,  on any  matter of  accounting  principles  or
practices,  financial  statement  disclosure,  or auditing  scope or procedures,
which disagreements if not resolved to their satisfaction would have caused them
to make reference in connection  with their opinion to the subject matter of the
disagreement.

     During the two years ended  December  31, 2000 and the  subsequent  interim
period  preceding  the  termination  of BDO Seidman LLP on January 22, 2002,  no
reportable  events  occurred in  connection  with the  relationship  between BDO
Seidman LLP, Belew Averitt LLP and the Registrant.

                                       30

<PAGE>

                                    PART III

     The  information  required  by items 9-12 are  omitted  pursuant to general
instruction  G(3) to Form 10K. The Company has included this  information in its
proxy  statement to be mailed and filed with the  Commission  on or before April
30,  2003.  The annual  meeting  is  scheduled  to be in June  2003.  Such Proxy
Statement  expected  to be  filed  with the  Commission  by  April  30,  2003 is
incorporated herein by reference.

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

1. (a) Exhibits:

   See Index to Exhibits

2. Reports on Form 8-K

     A Form 8-K  report  was  filed  November  25,  2002  wherein   the  Company
     disclosed its having received a NASDAQ  delisting  notice and the Company's
     intention to appeal with a subsequent  8K/A  amendment  thereto being filed
     January  8, 2003  which  further  elucidated  on the  Company's  efforts to
     address  the NASDAQ  listing  issue and  including  therewith  a  pro-forma
     balance  sheet  with  pertinent  information  included  therein  addressing
     relevant  NASDAQ  concerns.  Such was the only 8K report  filed  during the
     fourth quarter of 2002.

3. Financial Statement Schedules
             None

ITEM 14.  CONTROLS AND PROCEDURES

     As certified  herein by the  Company's  Chief  Executive  Officer and Chief
Financial Officer, they have within 90 days of the date of this report evaluated
the  disclosure  controls and  procedures  of the Company and believe same to be
adequate to ensure that material information relating to the Company,  including
its consolidated subsidiaries,  is made known to the Company sufficient to allow
evaluation  by  the  Company  of  accuracy  in  their   recording,   processing,
summarizing and reporting  financial and other Company information and data, and
there do not appear to be any  deficiencies  in the design or  operation of such
internal  controls  which would  adversely and  materially  affect the Company's
ability to discover, evaluate and report such information.

     The Company is evaluating  and is hopeful at  completing  the adoption of a
revised Audit Committee Charter providing  expanded  authority of such committee
and the independent nature and identify of its director participants as required
by the recent enactment of the  Sarbanes-Oxley Act at 2002. The Company believes
that at least one  director  participant  therein will be qualified as an "audit
committee financial expert" as defined in such Act.

                                       31

<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 31, 2003

     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

Signed: March 31, 2003

                               by /s/ Mitchell Gerstein
                               ----------------------------------
                                      Mitchell Gerstein, Director
                                      Chief Financial Officer
Signed: March 31, 2003

                                       33

<PAGE>

                                 Certifications

I, Mair Faibish, certify that:

1. I have reviewed this annual report on Form 10-KSB 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-14 and 15d-14) for the registrant and we have:

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

(b) evaluated the  effectiveness  of the  registrant's  disclosure  controls and
procedures  as of a date  within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

(c) presented in this annual report our conclusions  about the  effectiveness of
the  disclosure  controls  and  procedures  based  on our  evaluation  as of the
Evaluation Date;

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

(a) all significant deficiencies in the design or operation of internal controls
which  could  adversely  affect the  registrant's  ability  to record,  process,
summarize and report  financial data and have  identified  for the  registrant's
auditors any material weaknesses in internal controls; and

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

6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant  changes in internal controls or in
other factors that could  significantly  affect internal controls  subsequent to
the date of our most recent  evaluation,  including any corrective  actions with
regard to significant deficiencies and material weaknesses.

Date: March 31, 2003

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

                                       34

<PAGE>

I, Mitchell Gerstein, certify that:

1. I have reviewed this annual report on Form 10-KSB 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-14 and 15d-14) for the registrant and we have:

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

(b) evaluated the  effectiveness  of the  registrant's  disclosure  controls and
procedures  as of a date  within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

(c) presented in this annual report our conclusions  about the  effectiveness of
the  disclosure  controls  and  procedures  based  on our  evaluation  as of the
Evaluation Date;

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

(a) all significant deficiencies in the design or operation of internal controls
which  could  adversely  affect the  registrant's  ability  to record,  process,
summarize and report  financial data and have  identified  for the  registrant's
auditors any material weaknesses in internal controls; and

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

6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant  changes in internal controls or in
other factors that could  significantly  affect internal controls  subsequent to
the date of our most recent  evaluation,  including any corrective  actions with
regard to significant deficiencies and material weaknesses.

Date: March 31, 2003

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

                                       35

<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
    Synergy Brands, Inc.

We have audited the accompanying  consolidated  balance sheet of Synergy Brands,
Inc. and  Subsidiaries  (the "Company") as of December 31, 2002, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the two years in the period ended  December  31,  2002.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the consolidated  financial position of Synergy Brands,
Inc. and Subsidiaries as of December 31, 2002, and the  consolidated  results of
their operations and their  consolidated cash flows for each of the two years in
the period ended  December 31, 2002, in conformity  with  accounting  principles
generally accepted in the United States of America.


GRANT THORNTON LLP


New York, New York
February 14, 2003

                                      F-2

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                           CONSOLIDATED BALANCE SHEET

                                December 31, 2002

                                     ASSETS

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

CURRENT ASSETS
    Cash and cash equivalents                                                     $   174,724
    Marketable securities                                                               2,395
    Accounts receivable, less allowance for doubtful accounts of $162,571           1,870,098
    Inventory                                                                       1,074,908
    Related party note receivable                                                      44,750
    Prepaid assets                                                                    331,049
                                                                                  -----------

              Total current assets                                                  3,497,924

PROPERTY AND EQUIPMENT, NET                                                           473,855

OTHER ASSETS                                                                          118,381

NOTES RECEIVABLE                                                                      110,400

WEB SITE DEVELOPMENT COSTS, net of accumulated
    amortization of $614,277                                                          315,202

INTANGIBLE ASSETS, net of accumulated amortization of $1,588,382                    1,355,907
                                                                                  -----------
                                                                                   $5,871,669
                                                                                  ===========

</TABLE>

         The accompanying notes are an integral part of this statement.

                                       F-3

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                           CONSOLIDATED BALANCE SHEET

                                December 31, 2002

                      LIABILITIES AND STOCKHOLDERS' EQUITY


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

CURRENT LIABILITIES
    Line of credit                                                               $   1,754,119
    Accounts payable                                                                 1,561,024
    Related party note payable                                                          65,035
    Accrued expenses                                                                    66,204
                                                                                  ------------
                    Total current liabilities                                        3,446,382

NOTES PAYABLE                                                                           60,000

OTHER LIABILITIES                                                                      282,750

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
    Class A preferred stock - $.001 par value; 100,000 shares authorized
        and outstanding; liquidation preference of $10.50 per share                        100
    Class B preferred stock - $.001 par value; 10,000,000 shares authorized,
        and no shares outstanding                                                            -
    Common stock - $.001 par value; 49,900,000 shares authorized;
        1,368,121 shares issued                                                          1,368
    Additional paid-in capital                                                      35,210,686
    Deficit                                                                        (33,096,104)
    Accumulated other comprehensive income (loss)                                          (74)
    Stockholders' notes receivable                                                      (5,000)
                                                                                  ------------
                                                                                     2,110,976

Less treasury stock, at cost, 7,500 shares                                             (28,439)
                                                                                  -------------
                                                                                     2,082,537
                                                                                  ------------
                                                                                 $   5,871,669
                                                                                  ============

</TABLE>

         The accompanying notes are an integral part of this statement.

                                      F-4

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                             Year ended December 31,


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

                                                                         2002                     2001
                                                                      -----------             -----------

Net sales                                                             $31,540,675             $24,347,928
                                                                      -----------             -----------
Cost of sales
    Cost of product                                                    29,241,384              22,347,887
    Shipping and handling costs                                           600,994                 657,793
                                                                      -----------             -----------
                                                                       29,842,378              23,005,680
                                                                      -----------             -----------
              Gross profit                                              1,698,297               1,342,248
Operating expenses
    Advertising and promotional                                           469,965               1,501,267
    General and administrative                                          3,196,270               3,089,033
    Depreciation and amortization                                         893,935               1,004,553
                                                                      -----------             -----------
                                                                        4,560,170               5,594,853
                                                                      -----------             -----------
              Operating loss                                           (2,861,873)             (4,252,605)
Other income (expense)
    Interest income                                                        26,695                 128,189
    Other income (expenses)                                               514,860                  23,804
    Equity in earnings of investee                                         67,717                   1,583
    Interest and financing expenses                                      (211,279)               (154,745)
    Dividends on preferred stock of subsidiary                            -                       (24,500)
                                                                      -----------             -----------
                                                                          397,993                 (25,669)
                                                                      -----------             -----------
              Loss before income taxes                                 (2,463,880)             (4,278,274)
Income tax expense                                                         22,687                  21,865
                                                                      -----------             -----------
              NET LOSS                                              $  (2,486,567)           $ (4,300,139)
                                                                      ===========             ===========
Basic and diluted net loss per common share:                               $(1.91)               $  (4.15)
                                                                      ===========             ===========
Weighted-average shares used in the computation of loss per
    common share:
       Basic and diluted                                                1,302,042               1,035,795
                                                                      ===========             ===========

</TABLE>

        The accompanying notes are an integral part of these statements.

                                      F-5

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

                     Years ended December 31, 2002 and 2001

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

                                                                                                                       Accumulated
                                                     Class A                                Additional                    other
                                                 preferred stock          Common stock       paid-in                  comprehensive
                                               Shares       Amount      Shares    Amount     capital     Deficit     income (loss)
                                              --------------------     -----------------   -----------  -----------  --------------
Balance at January 1, 2001                    100,000        $100      881,371     $882    $32,278,353  $(26,309,398)

Issuance of common stock
   pursuant to a private offering                                      200,000      200        999,800
Costs incurred in conjunction with
   private offering of common
   stock                                                                                     (132,200)
Common stock issued in
    connection with compensation
    plan                                                                81,250       81        893,369
Issuance of common stock and
   warrants to guarantee a line of
   credit                                                               50,000       50        439,950
Issuance of warrants as payment
   for services                                                                                191,050
Exercise of warrants                                                    25,000       25        124,975
Purchase of treasury stock
Advertising credits utilized
Provision for advertising receivable
Change in unrealized gain on
    marketable securities                                                                                                    1,685

Net loss                                                                                                  (4,300,139)

Comprehensive loss
                                              -------        -----     ---------  -----    -----------    ------------      -------
Balance at December 31, 2001
    (carried forward)                         100,000         100      1,237,621  1,238     34,795,297    (30,609,537)       1,685

</TABLE>

                                      F-6

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

      CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (continued)

                     Years ended December 31, 2002 and 2001

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

                                                                                  Stockholders'
                                                                                   advertising
                                                                                     and
                                                                Stockholders'       in-kind       Total
                                                 Treasury           notes           services    stockholders       Comprehensive
                                                  stock          receivable        receivable      equity              loss
                                               -----------       -----------      ------------  ------------       -------------

Balance at January 1, 2001                     $(167,500)        $(115,629)       $(1,407,435)  $4,279,373

Issuance of common stock
   pursuant to a private offering                                                                1,000,000
Costs incurred in conjunction with
   private offering of common stock                                                              (132,200)
Common stock issued in
    connection with compensation
    plan                                                                                           893,450
Issuance of common stock and
   warrants to guarantee a line of
   credit                                                                                          440,000
Issuance of warrants as payment
   for services                                                                                    191,050
Exercise of warrants                                                                               125,000
Purchase of treasury stock                       (83,635)                                         (83,635)
Advertising credits utilized                                                          112,445      112,445
Provision for advertising receivable                                                  500,000      500,000
Change in unrealized gain on
    marketable securities                                                                            1,685            $    1,685
Net loss                                                                                        (4,300,139)           (4,300,139)
                                                 --------       -----------        ----------   -----------         -------------
Comprehensive loss                                                                                                   $(4,298,454)
                                                                                                                    =============

Balance at December 31, 2001
    (carried forward)                           (251,135)       (115,629)            (794,990)   3,027,029

</TABLE>

                                      F-6

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

      CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (continued)

                     Years ended December 31, 2002 and 2001

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

                                                                                                                       Accumulated
                                                Class A                                    Additional                     other
                                            preferred stock          Common stock           paid-in                   comprehensive
                                           Shares      Amount      Shares      Amount       capital       Deficit     income (loss)
                                           -------    -------     ---------    -------    ------------ ------------   -------------
Balance at December 31, 2001               100,000      $100      1,237,621     $1,238    $34,795,297  $(30,609,537)      $ 1,685
    (brought forward)

Common stock  and options issued
   in connection with compensation
   Plan                                                              85,500         85       301,360
Intrinsic value of stock options
   issued in connection with
   compensation plan                                                                          49,825
Issuance of restricted stock                                          1,250          1         4,199
Purchase of treasury stock
Sale of treasury stock                                                                       (24,451)
Retirement of treasury stock                                                                (167,500)
Extinguishment of notes receivable                                   25,000         25        99,975
Extinguishment of advertising and
   in-kind services receivable from
   stockholder                                                       18,750         19       151,981
Change in unrealized gain on
    marketable securities                                                                                                  (1,583)
Cumulative translation adjustments                                                                                           (176)
Net loss                                                                                                 (2,486,567)

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

Balance at December 31, 2002               100,000      $100      1,368,121     $1,368    $35,210,686   $(33,096,104)       $ (74)
                                           =======      ====      =========     ======    ===========   =============      =======

</TABLE>

                                      F-7

<PAGE>

                   Synergy Brands, Inc. and Subsidiaries

      CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (continued)

                     Years ended December 31, 2002 and 2001



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

                                                                                    Stockholders'
                                                                                    advertising
                                                                                        and
                                                                    Stockholders'    in-kind          Total
                                                    Treasury          notes           services      stockholders    Comprehensive
                                                     stock          receivable       receivable       equity             loss
                                                    ----------      ------------     ----------      ----------      ------------
Balance at December 31, 2001                        $(251,135)      $(115,629)     $(794,990)       $3,027,029
    (brought forward)

Common stock  and options issued
   in connection with compensation
   Plan                                                               (2,500)                          298,945
Intrinsic value of stock options
   issued in connection with
   compensation plan                                                                                    49,825
Issuance of restricted stock                                                                             4,200
Purchase of treasury stock                            (75,752)                                         (75,752)
Sale of treasury stock                                130,948                                          106,497
Retirement of treasury stock                          167,500                                                -
Extinguishment of notes receivable                                   113,129                           213,129
Extinguishment of advertising and
   in-kind services receivable from
   stockholder                                                                       794,990           946,990
Change in unrealized gain on
    marketable securities                                                                               (1,583)      $    (1,583)
Cumulative translation adjustments                                                                        (176)             (176)
Net loss                                                                                            (2,486,567)

                                                    ---------      -----------      --------     -------------       ------------
Comprehensive loss                                                                                                   $(2,488,326)
                                                                                                                     ============

Balance at December 31, 2002                        $(28,439)       $ (5,000)         $              2,082,537
                                                    =========      ==========       =========      ===========


</TABLE>

         The accompanying notes are an integral part of this statement.

                                      F-7

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                             Year ended December 31,


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

                                                                                        2002               2001
                                                                                  -------------      --------------
Cash flows from operating activities
    Net loss                                                                      $ (2,486,567)      $  (4,300,139)
    Adjustments to reconcile net loss to net cash
       (used in) provided by operating activities
         Depreciation and amortization                                                 893,935           1,004,553
         Provision for doubtful accounts                                               112,351              25,000
         Provision for advertising receivable                                                -             500,000
         Utilization of advertising credits                                                  -             112,445
         Loss (gain) on sale of marketable securities                                   71,237              (7,300)
         Loss on sale of preferred stock of investee                                    57,600                   -
         Equity in earnings of investee                                                (67,717)              1,583
         Loss on forgiveness of stockholder's note receivable                          213,129                   -
         Loss on forgiveness of advertising receivable from a stockholder              290,217                   -
         Gain on dissolution of subsidiary                                            (215,250)                  -
         Gain on settlement of liabilities due to vendors                             (592,689)           (486,788)
         Dividends on preferred stock of subsidiary                                      6,125              24,500
         Intrinsic value of stock options granted to employees                          49,825                   -
         Operating expenses paid with common stock and warrants                        303,145             493,350
         Common stock and warrants issued to guarantee line of credit                        -             440,000
         Changes in operating assets and liabilities
             Net (increase) decrease in
                Accounts receivable                                                 (1,440,824)            343,528
                Inventory                                                              265,263            (152,388)
                Prepaid expenses, related party note receivable and other assets        26,050              69,503
             Net increase (decrease) in
                Accounts payable, related party note payable, accrued
                    expenses and other current liabilities                            (605,182)            319,937
                Other liabilities                                                      282,750             592,689
                                                                                  -------------      --------------
                      Net cash  used in operating activities                        (2,836,602)         (1,019,527)
                                                                                  -------------      --------------
Cash flows from investing activities
    Purchase of marketable securities                                                 (979,379)         (4,221,152)
    Proceeds from sale of marketable securities                                      2,635,571           2,498,730
    Purchase of property and equipment                                                 (14,342)           (118,038)
    Payment of collateral security deposit                                                   -            (300,000)
    Refund of collateral security deposit                                              658,542
    Purchase of Web site                                                                     -             (32,166)
    Investment in equity affiliate                                                           -            (290,880)
    Proceeds from sale of preferred stock of investee                                  230,400                    -
    Purchase of customer lists                                                        (250,000)                   -
    Issuance of notes receivable                                                      (110,400)                   -
                                                                                  -------------      --------------
                      Net cash provided by (used in) investing activities            2,170,392          (2,463,506)
                                                                                  -------------      --------------

</TABLE>

                                      F-8

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

                             Year ended December 31,


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

                                                                               2002                2001
                                                                         -------------    --------------
Cash flows from financing activities
    Borrowings under line of credit                                       $10,486,724     $  9,782,032
    Repayments under line of credit                                        (9,130,942)     (10,047,694)
    Proceeds from the issuance of notes payable                               722,778                -
    Repayments of notes payable                                              (662,778)               -
    Due from broker                                                        (1,216,733)       1,216,733
    Proceeds from issuance of common stock                                          -        1,000,000
    Costs incurred in conjunction with private placement                            -        (132,200)
    Proceeds from the exercise of stock purchase warrants                           -         125,000
    Proceeds from the sale of treasury stock                                  106,497               -
    Purchase of treasury stock                                                (75,752)        (83,635)
                                                                         -------------    --------------
                      Net cash provided by financing activities               229,794       1,860,236
                                                                         -------------    --------------
  Foreign currency translation                                                   (176)              -
                                                                         -------------    --------------
                      NET  DECREASE IN CASH                                  (436,592)     (1,622,797)

Cash and cash equivalents, beginning of year                                  611,316       2,234,113
                                                                         -------------    --------------
Cash and cash equivalents, end of year                                    $   174,724     $   611,316
                                                                         =============    ==============

Supplemental disclosures of cash flow information:
    Cash paid during the year for
       Interest                                                           $   164,000     $   108,000
                                                                         =============    ==============
       Income taxes paid                                                  $    23,000     $    22,000
                                                                         =============    ==============
Supplemental disclosures of noncash operating, investing
    and financing activities:
      Expenses paid through the issuance of common stock                  $         -     $   591,150
                                                                         =============    ==============
      Unrealized gains on marketable securities                           $       102     $     1,685
                                                                         =============    ==============
      Common stock issued for notes receivable                            $     2,500     $         -
                                                                         =============    ==============

</TABLE>

        The accompanying notes are an integral part of these statements.

                                      F-9

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2002 and 2001


NOTE A - DESCRIPTION OF THE BUSINESS, LIQUIDITY AND CAPITAL RESOURCES

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

     At December 31, 2002, the Company had cash, cash equivalents and marketable
     securities of  approximately  $177,000,  working  capital of  approximately
     $52,000  and an  accumulated  deficit  of  approximately  $33,096,000.  The
     Company incurred a loss of approximately  $2,487,000  during the year ended
     December 31, 2002.

     As  discussed  in Note J, the  Company  maintains  a line of  credit  which
     provides the Company with financing based upon eligible accounts receivable
     and inventory, as defined.

     In January 2003,  the Board of Directors of the Company  approved a private
     placement of securities  ("2003 Private  Placement") in which 100,000 units
     were offered, with each unit consisting of one share of unregistered Series
     A Class B Preferred Stock and four shares of unregistered restricted common
     stock,  at a  purchase  price of $10.00 per unit.  In  February  2003,  the
     Company sold 60,000 units and received  aggregate proceeds of $600,000 as a
     result of the 2003 Private Placement.

     On February 5, 2003, the Company received $500,000 pursuant to the issuance
     of two secured  promissory notes.  Borrowings under the notes bear interest
     at a rate of 12%. The Company is not required to repay any principal  until
     the maturity date of the notes,  February 4, 2005. 25,000 restricted shares
     of the Company's common stock were also issued as part of the financing.

     Management believes that cost containment, improved financial and operating
     controls,  and a focused sales and marketing effort should provide positive
     results from  operations  and cash flows in the near term.  Achievement  of
     these goals,  however,  will be dependent upon the Company's  attainment of
     increased revenues,  improved operating costs and trade support levels that
     are consistent with management's plans. Such operating  performance will be
     subject to financial,  economic and other factors  beyond its control,  and
     there can be no assurance that the Company's goals will be achieved.

                                      F-10

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2002 and 2001

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

     1. Principles of Consolidation

     The accompanying  consolidated financial statements include the accounts of
     Synergy,  its wholly-owned  subsidiaries and its majority-owned  subsidiary
     (collectively, the "Company"). During the year ended December 31, 2002, the
     Company  dissolved  its   majority-owned   subsidiary  (see  Note  K).  All
     significant  intercompany accounts and transactions have been eliminated in
     consolidation.  The equity method of accounting is used for  investments in
     50% or less owned  companies  over  which the  Company  has the  ability to
     exercise significant influence.

     2. Cash and Cash Equivalents

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

     3. Marketable Securities

     The Company determines the appropriate  classification of securities at the
     time of purchase and reassesses the  appropriateness  of the classification
     at each reporting  date. At December 31, 2002,  all  marketable  securities
     held by the Company have been  classified as  available-for-sale  and, as a
     result,  are  stated  at  fair  value.   Unrealized  gains  and  losses  on
     available-for-sale  securities  are  recorded  as a separate  component  of
     stockholders' equity.  Realized gains and losses on the sale of securities,
     as  determined  on a specific  identification  basis,  are  included in the
     consolidated statements of operations.

     4. Accounts Receivable

     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  is not
     required.  Accounts  receivable  are due  within 30 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

                                      F-11

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2002 and 2001

NOTE B (continued)

     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.

         Accounts  receivable,  net  consist  of  the  following  components  at
         December 31, 2002:

              Accounts receivable - business to business       $2,021,518
              Accounts receivable - business to consumer           11,151
                                                               ----------
                       Total                                    2,032,669

              Less allowance for doubtful accounts               (162,571)
                                                               ----------
                                                               $1,870,098
                                                               ==========

         Changes in the  Company's  allowance for doubtful  accounts  during the
         year ended December 31, 2002 are as follows:

              Beginning balance                                $  50,220
              Provision for doubtful accounts                    112,351
                                                               ---------
              Ending balance                                    $162,571
                                                               =========

     5. Business and Credit Concentrations

     Financial   instruments   that   potentially   subject   the   Company   to
     concentrations  of  credit  risk  consist  principally  of  cash  and  cash
     equivalents,  marketable  securities 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,  2002  totaled  approximately   $72,000.
     Marketable  securities are potentially  subject to  concentration of credit
     risk,  but such risk is  limited  due to such  amounts  being  invested  in
     investment grade securities.

                                      F-12

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2002 and 2001

NOTE B (continued)

     During the years ended  December  31, 2002 and 2001,  sales to one customer
     accounted for 11% and 22% of the Company's total sales,  respectively.  One
     customer  accounted  for 38% of accounts  receivable  at December 31, 2002.
     These concentrations relate to the Company's B2B segment. (See Note S.)

     During the years ended  December 31, 2002 and 2001,  the Company  purchased
     over 77% and 85%,  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.

     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 assets'
     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. Web Site Development Costs

     In March 2000,  the Emerging  Issues Task Force  ("EITF") of the  Financial
     Accounting  Standards  Board  reached a consensus  on EITF Issue No.  00-2,
     "Accounting  for Web  Site  Development  Costs."  This  consensus  provides
     guidance  on what types of costs  incurred  to develop a Web site should be
     capitalized  or expensed.  The Company  adopted this consensus in the third
     quarter of 2000. The Company's Web sites were ready for application  during
     the year ended  December 31, 2001,  and the Company began to amortize these
     costs using the straight-line method over the estimated useful lives of the
     Web sites, not to exceed three years.

                                      F-13

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2002 and 2001


NOTE B (continued)

     9. Intangible Assets

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

     Prior to the adoption of Statement of Financial  Accounting  Standards  No.
142 ("SFAS No. 142"),  "Goodwill and Other Intangible  Assets," these intangible
assets were  amortized  over their  estimated  useful  life of five years.  As a
result of the adoption of SFAS No. 142, intangible assets with indefinite useful
lives will no longer be amortized but instead will be reviewed for impairment at
least  annually and more often when  impairment  indicators  are  present.  As a
result,  the Company's  trade names will no longer be  amortized.  The Company's
customer  lists  have  finite  lives.  Management  considered  various  factors,
including  appraisals,  in determining  that a revision to the estimated  useful
life of the Company's customer lists should be made. Based upon the analysis, it
was determined that the estimated useful life should be extended  prospectively,
by a term of six  years  from  the  original  useful  life of five  years.  This
modification decreased amortization expense by approximately $129,000 during the
year ended December 31, 2002. As a result, the remaining carrying amount will be
amortized prospectively over the remaining useful life.

         At December 31, 2002, intangible assets are comprised of the following:

                       Amortized intangible assets
                           Customer lists                   $ 2,755,126
                           Less accumulated amortization     (1,488,419)
                                                            ------------
                                                              1,266,707
                       Unamortized intangible assets
                           Trade names                           89,200
                                                            ------------
                                                             $1,355,907
                                                            ============

                                      F-14

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2002 and 2001

NOTE B (continued)

     The following table provides a reconciliation  of the reported net loss and
     net loss per share for the years ended  December  31, 2002 and December 31,
     2001, adjusted as though SFAS No. 142 had been effective for all periods:


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

                                                                     2002        2001

      Reported net loss                                          $(2,486,567) $(4,300,139)
      Add back discontinued amortization expense                        -           32,490
                                                                 ------------ ------------
             Adjusted net loss                                   $(2,486,567) $(4,267,649)
                                                                 ============ ============
      Reported basic and diluted net loss per common share
                                                                 $     (1.91) $     (4.15)
      Effect of discontinued amortization expense
          Adjusted basis and diluted net loss per common share          -              .03
                                                                 ------------  -----------
                                                                 $     (1.91)       $(4.12)
                                                                 ============  ===========

</TABLE>

         For the year ended December 31, 2002, aggregate amortization expense on
         these finite-lived  intangible assets was $580,515. The following table
         presents  expected  amortization  expense  for the  Company's  customer
         lists:

                            Year ending December 31,
                                2003                   $   162,398
                                2004                       162,398
                                2005                       162,398
                                2006                       162,398
                                2007                       162,398
                                Thereafter                 454,717
                                                        ----------
                                                        $1,266,707
                                                        ==========

     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.

                                      F-15

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2002 and 2001

NOTE B (continued)

     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,  third-party  reimbursement  and other  allowances.  Cost of
     sales consists primarily of costs of products sold to customers,  including
     outbound and inbound shipping costs.

     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  carryforwards 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. Stock Split

     On  September  30, 2002,  the  Company's  Board of  Directors  authorized a
     1-for-4  reverse split of its common stock.  Share and per share amounts in
     the accompanying  consolidated financial statements have been retroactively
     adjusted for the reverse split.

     15. Basic and Diluted Loss Per Share

     Basic and diluted loss per share is  calculated by dividing the net loss by
     the  weighted-average  number  of common  shares  outstanding  during  each
     period.  Incremental  shares from assumed  exercises  of stock  options and
     warrants of 586,759 and 422,059 for the years ended  December  31, 2002 and
     2001, respectively, have been excluded from the calculation of diluted loss
     per share since their effect would be antidilutive.

                                      F-16

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2002 and 2001

NOTE B (continued)

     16. Stock-Based Compensation Plans

     At December 31, 2002, the Company has two stock-based employee compensation
     plans,  which are described more fully in Note M. The Company  accounts for
     stock-based  compensation  using the  intrinsic  value method in accordance
     with  Accounting  Principles  Board Opinion No. 25,  "Accounting  for Stock
     Issued to Employees,"  and related  Interpretations  ("APB No. 25") and has
     adopted the  disclosure  provisions of SFAS No. 148. Under APB No. 25, when
     the exercise  price of the  Company's  employee  stock  options  equals the
     market price of the underlying  stock on the date of grant, no compensation
     expense  is  recognized.  Accordingly,  no  compensation  expense  has been
     recognized in the  consolidated  financial  statements  in connection  with
     employee stock option grants.

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

                                                      Year ended December 31,
                                                         2002          2001

            Net loss, as reported                    $(2,486,567)  $(4,300,139)
            Add:  Total stock-based employee
              compensation expense included
              in reported net loss                        49,825             -
            Deduct:  Total stock-based employee
              compensation expense determined
              under fair value-based method for all
              awards                                    (601,250)            -

            Pro forma net loss                       $(3,037,992)  $(4,300,139)

            Loss per share
               Basic and diluted - as reported       $  (1.91)          $(4.15)
               Basic and diluted - pro forma         $  (2.33)          $(4.15)

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

                                      F-17

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2002 and 2001


NOTE B (continued)

     The  Black-Scholes   option  valuation  model  was  developed  for  use  in
     estimating  the  fair  value  of  traded  options,  which  have no  vesting
     restrictions  and are fully  transferable.  In addition,  option  valuation
     models  require the input of highly  subjective  assumptions  including the
     expected  stock price  volatility.  Because the  Company's  employee  stock
     options have characteristics  significantly  different from those of traded
     options  and  because  changes  in the  subjective  input  assumptions  can
     materially  affect the fair value estimate,  in management's  opinion,  the
     existing models do not necessarily provide a reliable single measure of the
     fair value of its employee stock options.

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

                                                              2002

                    Dividend yield                             0%
                    Expected volatility                      114%
                    Risk-free rate of return                 4.0%
                    Expected life                         3 years
                    Weighted-average option fair value      $2.79

         No stock options were granted during the year ended December 31, 2001.

     17. Segment Information

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

                                      F-18

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2002 and 2001

NOTE B (continued)

     18. Recent  Pronouncements  of the  Financial  Accounting  Standards  Board
     ("FASB")

     In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
     No. 4, 44, and 64,  Amendment  of FASB  Statement  No.  13,  and  Technical
     Corrections."  SFAS No. 145 eliminates the current  requirement  that gains
     and losses on debt extinguishment must be classified as extraordinary items
     in the income statement.  Instead, such gains and losses will be classified
     as  extraordinary  items  only  if  they  are  deemed  to  be  unusual  and
     infrequent,  in  accordance  with the current  criteria  for  extraordinary
     classification.  Additionally,  any gain or loss on  extinguishment of debt
     that was  classified as an  extraordinary  item in prior periods  presented
     that does not meet the criteria in APB Opinion No. 30 for classification as
     an  extraordinary  item shall be  reclassified.  In addition,  SFAS No. 145
     eliminates  an   inconsistency   in  lease  accounting  by  requiring  that
     modifications  of  capital  leases  that  result  in   reclassification  as
     operating leases be accounted for consistent with sale-leaseback accounting
     rules.  SFAS No. 145 also  contains  other  nonsubstantive  corrections  to
     authoritative   accounting   literature.   The  changes   related  to  debt
     extinguishment  will be effective for fiscal years  beginning after May 15,
     2002,  and the changes  related to lease  accounting  will be effective for
     transactions occurring after May 15, 2002. The Company has elected to early
     adopt the  provisions of SFAS No. 145. In  connection  with the adoption of
     SFAS No. 145, a $486,788 gain  recognized by the Company as a result of the
     nonperformance by a vendor that was previously reported as an extraordinary
     item  in the  consolidated  statement  of  operations  for the  year  ended
     December 31, 2001, has been  reclassified  to other income  (expense) as it
     did not  meet  the  definition  for  classification  as  extraordinary.  In
     addition,  the Company has  reclassified the forgiveness of a shareholder's
     note  receivable  of $113,129 to the Company  from  extraordinary  items to
     other income  (expense)  during the year ended  December 31, 2002 as it did
     not meet the definition for classification as extraordinary.

                                      F-19

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2002 and 2001

NOTE B (continued)

     In June  2002,  the  FASB  issued  SFAS  No.  146,  "Accounting  for  Costs
     Associated with Exit or Disposal  Activities,"  which addresses  accounting
     for  restructuring  and similar  costs.  SFAS No. 146  supersedes  previous
     accounting guidance,  principally Emerging Issues Task Force ("EITF") Issue
     No. 94-3.  SFAS No. 146 requires that the  liability  for costs  associated
     with an exit or  disposal  activity be  recognized  when the  liability  is
     incurred.  Under EITF No. 94-3, a liability for an exit cost was recognized
     at the date of a company's  commitment  to an exit plan.  SFAS No. 146 also
     establishes that the liability should initially be measured and recorded at
     fair value.  SFAS No. 146 is effective  for disposal  activities  initiated
     after December 31, 2002. The Company is currently evaluating the impact the
     adoption of SFAS No. 146.

     In November  2002,  the FASB issued  FASB  Interpretation  No. 45 ("FIN No.
     45"),  "Guarantor's  Accounting and Disclosure Requirements for Guarantees,
     Including  Indirect  Guarantees  of  Indebtedness  of  Others."  FIN No. 45
     requires that upon issuance of a guarantee,  a guarantor  must  recognize a
     liability  for the fair value of an  obligation  assumed under a guarantee.
     FIN No. 45 also  requires  additional  disclosures  by a  guarantor  in its
     interim and annual financial  statements  about the obligations  associated
     with  guarantees  issued.  The  recognition  provisions  of FIN No.  45 are
     effective for any  guarantees  issued or modified  after December 31, 2002.
     The  disclosure  requirements  are effective  for  financial  statements of
     interim or annual periods ending after

                                      F-20

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2002 and 2001

NOTE B (continued)

     December 15, 2002. The adoption of the disclosure  requirements  of FIN No.
     45 did not have a material  impact on the Company's  financial  position or
     results of operations.  The Company is currently  evaluating the effects of
     the  recognition  provision of FIN No. 45, but does not expect the adoption
     to have a material impact on the Company's financial position or results of
     operations.

     In January 2003, the FASB issued FASB  Interpretation No. 46 ("FIN No. 46")
     "Consolidation  of Variable  Interest  Entities."  In  general,  a variable
     interest  entity is a corporation,  partnership,  trust, or any other legal
     structure  used for business  purposes that either (a) does not have equity
     investors  with  voting  rights  or (b) has  equity  investors  that do not
     provide  sufficient  financial  resources  for the  entity to  support  its
     activities.  A variable  interest  entity  often  holds  financial  assets,
     including loans or receivables,  real estate or other property.  A variable
     interest  entity may be essentially  passive or it may engage in activities
     on behalf of another company.  Until now, a company  generally has included
     another  entity  in  its  consolidated  financial  statements  only  if  it
     controlled the entity through voting interests.  FIN No. 46 changes that by
     requiring a variable  interest  entity to be  consolidated  by a company if
     that company is subject to a majority of the risk of loss from the variable
     interest  entity's  activities  or  entitled  to receive a majority  of the
     entity's residual returns or both. FIN No. 46's consolidation  requirements
     apply  immediately to variable  interest entities created or acquired after
     January 31, 2003. The consolidation requirements apply to older entities in
     the first  fiscal year or interim  period  beginning  after June 15,  2003.
     Certain of the disclosure  requirements  apply in all financial  statements
     issued after  January 31, 2003,  regardless  of when the variable  interest
     entity was  established.  The  Company  has  adopted  FIN No. 46  effective
     January 31, 2003. The Company does not anticipate  that the adoption of FIN
     No. 46 will have a material impact on the Company's  consolidated financial
     condition or results of operations taken as a whole.

     19. Use of Estimates

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

     20. Reclassifications

     Certain prior year amounts have been  reclassified  to conform with current
     year presentation.

                                      F-21

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2002 and 2001

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 - COLLATERAL SECURITY DEPOSIT

     At December  31,  2001,  the Company  had a security  deposit  with a major
     supplier aggregating approximately $658,542, which served as collateral for
     credit  purchases  made by the Company from the  supplier.  During the year
     ended  December 31,  2002,  this deposit was refunded to the Company by the
     supplier.

NOTE E - MARKETABLE SECURITIES

     The cost, gross unrealized  gains,  gross unrealized losses and fair market
     value for marketable securities by major security type at December 31, 2002
     are as follows:

                                                   Gross       Gross        Fair
                                                  unrealized  unrealized  market
                                          Cost     gains       losses      value

       Available-for-sale securities
            Equity securities           $2,293     $102         $ -       $2,395

     Proceeds from the sale of  available-for-sale  securities and the resulting
     net realized gains included in the  determination of net loss for the years
     ended December 31, 2002 and 2001 are as follows:

                                                 2002              2001
      Available-for-sale securities
        Proceeds                            $2,635,571       $2,498,730
        Gross realized gains                    66,414           76,475
        Gross realized losses                 (137,651)         (69,175)

                                      F-22

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2002 and 2001

NOTE F - INVENTORY

     Inventory as of December 31, 2002 consisted of the following:

       Grocery, health and beauty products   $   739,145
       Tobacco finished goods                    335,763
                                             -----------
                                              $1,074,908
                                             ===========

NOTE G - PROPERTY AND EQUIPMENT

     Property and equipment as of December 31, 2002 consisted of the following:

       Office equipment                                    $ 176,348
       Furniture and fixtures                                231,265
       Leasehold improvements                                411,298
                                                         -----------
                                                             818,911

       Less accumulated depreciation and amortization      (345,056)
                                                         -----------
                                                           $ 473,855
                                                         ===========

     Depreciation  and  amortization  expense on property and  equipment for the
     years ended  December  31,  2002 and 2001 was  approximately  $118,336  and
     $161,244, respectively.


NOTE H - OTHER ASSETS

     Other assets consist of the following at December 31, 2002:

       Investment                                       $  72,180
       Deferred financing costs, net                       27,500
       Other                                               18,701
                                                       -----------
                                                         $118,381
                                                       ===========

     In December  2001, the Company made an investment in  approximately  20% of
     the  outstanding  common stock of an investee.  The Company also  purchased
     288,000 shares of nonvoting redeemable preferred stock of the investee. The
     aggregate cost of the investment was $290,880. The Company

                                      F-23

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2002 and 2001

NOTE H (continued)

     accounts for this investment under the equity method. During the year ended
     December  31,  2002,  the  Company  sold the  288,000  shares of  nonvoting
     redeemable preferred stock for aggregate proceeds of $230,400.  The Company
     recorded a loss of  $57,600 in  conjunction  with this  sale.  The  Company
     recorded  equity in the net  earnings  of  investee  of $67,717  and $1,583
     during  the  years  ended   December   31,  2002  and  December  31,  2001,
     respectively.

     Summarized  financial  information of this investee as of December 31, 2002
     and for the years ended December 31, 2002 and 2001 is as follows:

                Financial position:                    2002
                                                     ----------
                Current assets                       $1,545,000
                 Property and equipment                 207,000
                 Other assets                           345,000
                                                     ----------
                Total assets                         $2,097,000
                                                     ==========
                Current liabilities                 $   737,000
                Long-term debt                          524,000
                Other long-term liabilities               3,000
                                                     ----------
                Total liabilities                    $1,264,000
                                                     ==========

                Results of operations:                   2002         2001

                Revenues                            $ 8,167,000     $ 520,000
                Operating expenses                   (7,637,000)     (522,000)
                Other income                             44,000         8,000
                                                    ------------   -----------
                Income before income taxes              574,000         6,000
                Income tax expense                     (210,000)          -
                                                    ------------   -----------
                Net income                         $    364,000     $   6,000
                                                    ============   ===========

                                      F-24

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2002 and 2001

NOTE I - NOTES RECEIVABLE

     In 2002, the Company  provided  $110,400 in financing to a customer engaged
     in  establishing  a  distribution  channel  for the  Company's  products in
     Canada. The promissory note, which is unsecured, bears interest at 12%. The
     principal  balance is due on  December  31,  2004.  Sales to this  customer
     aggregated  $986,000 in 2002 and  accounts  receivable  from this  customer
     aggregates $777,000 at December 31, 2002.


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

     In  2002,  the  Company  entered  into  two  revolving  loan  and  security
     agreements with the same financial institution (the "Lender"). The lines of
     credit (the "2002  Lines") under the loans allow for the borrowing of up to
     $3.5  million  based on the sum of 80% of the net face  amount of  eligible
     accounts receivable, as defined, plus the lesser of (1) $750,000 or the (2)
     eligible inventory and eligible goods in transit,  as defined.  The Company
     had approximately  $117,000  available for advances under the agreements at
     December 31, 2002. The terms of the agreements are for one year and provide
     for automatic  renewals unless written consent by either the Company or the
     Lender is provided within 60 days of the renewal date.  Interest accrues on
     outstanding  borrowings at the greater of (i) 8% per annum in excess of the
     prime rate or (ii) 17% per annum.  The minimum  interest to be paid for any
     year  under the line of credit is  $320,000.  At  December  31,  2002,  the
     interest rate on outstanding borrowings was 17%. Outstanding borrowings are
     collateralized  by a continuing  security  interest in all of the Company's
     accounts  receivable,  chattel paper,  inventory,  equipment,  instruments,
     investment property,  documents and general intangibles.  112,500 shares of
     the  Company's  common  stock have also been pledged as  collateral  on the
     outstanding borrowings.

     Prior to the establishment of the 2002 Line, the Company had entered into a
     line of credit agreement with another  financial  institution in April 2000
     (the  "2000  Line"),   which  was   terminated  by  the  Company  with  the
     establishment  of the 2002 Line.  Under the terms of 2000 Line, the Company
     had the option to borrow against eligible  receivables,  on a full recourse
     basis.  The  Company had the ability to obtain  advances  against  eligible
     receivables up to 90% of the face amount of the eligible  receivables.  The
     agreement  required a 0.25% fee on accounts  receivable  invoices which are
     borrowed against and a per annum rate equal to the prime rate plus 2%.

                                      F-25

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2002 and 2001

NOTE J (continued)

     On April 9, 2002,  the Company  and a lender  executed a  promissory  note,
     which provides for borrowing of $543,000, bears interest at the rate of 12%
     per annum and is due on April 9, 2003. No amounts were  outstanding on this
     loan as of  December  31,  2002.  As partial  security  for this note,  the
     Company  pledged as collateral  its  investment in the common and preferred
     stock of an investee (see Note H).

     During the year  ended  December  31,  2002,  the  Company  entered  into a
     promissory  note with a lender that  provides  for  borrowings  of $60,000,
     bears interest at a rate of 9% per annum and is due on December 31, 2004.

     As of December  31, 2001,  the Company had  outstanding  borrowings  from a
     stockholder  totaling  $555,763.  This money was borrowed  under  unsecured
     promissory notes bearing interest at 7.5%. These notes were due on December
     31, 2002. On September 30, 2002,  the Company and the  stockholder  entered
     into an agreement  whereby  repayment of the borrowings was forgiven by the
     lender. (See Note L.)

NOTE K - MINORITY INTEREST

     Premium Cigar Wrappers,  Inc. ("PCW") was incorporated in October 1997 with
     7,750 shares of authorized  $.001 par value common stock for the purpose of
     producing premium cigar wrappers in the Dominican  Republic.  PCW had 1,000
     shares of common  stock  outstanding,  which were issued at par value.  The
     Company  owned 66% of the  common  stock and an outside  investor  owns the
     minority  interest.  In addition,  PCW had 2,250 shares of authorized $.001
     par value  preferred stock issued and outstanding at December 31, 1998. PCW
     issued  1,750  shares of  preferred  stock at  inception  to two  unrelated
     individuals  at $60 per  share,  and 500  shares to the  Company  for a 22%
     minority  interest in the  preferred  stock.  The holders of PCW  preferred
     stock were entitled to receive cumulative  dividends at the rate of $14 per
     share  before any  dividends on the common  stock are paid.  The  Company's
     portion of the  dividends  have been  eliminated in  consolidation.  In the
     event of  dissolution  of PCW,  the  holders  of the  preferred  shares are
     entitled to receive $60 per share together with all accumulated  dividends,
     before any  amounts  can be  distributed  to the common  stockholders.  The
     shares were convertible only at the option of PCW at $120 per share.

                                      F-26

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2002 and 2001

NOTE K (continued)

     In May 2002, the shareholders of PCW authorized a dissolution of PCW as PCW
     had  discontinued  its operations  during the year ended December 31, 2000.
     Upon  the   dissolution  of  PCW,  there  were  no  assets   available  for
     distribution.  As a result, the Company recorded a gain of $215,250,  which
     is included as a component  of other income  (expense) in the  accompanying
     consolidated statement of operations,  or $.17 per share on the dissolution
     of PCW,  related to  cumulative  dividends  payable of $110,250 and capital
     contributed by the minority shareholders of $105,000.


NOTE L - STOCKHOLDERS' EQUITY

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

     During the years ended December 31, 2002 and 2001, the Company  repurchased
     21,329 and  15,806  shares of  treasury  stock for an  aggregate  amount of
     $75,752 and $83,635,  respectively.  The Company sold 29,635  shares of its
     treasury  stock  during the year ended  December 31,  2002,  for  aggregate
     proceeds of $130,998.

     In January  2002,  the Company  issued  25,000  shares of common  stock and
     forgave $113,129 in shareholder indebtedness to the Company in exchange for
     the  cancellation  of 61,222  outstanding  cashless  warrants.  A charge to
     operations of $213,129 was recorded in connection with this transaction.

     In November  1999,  Synergy  entered into a stock  purchase  agreement with
     Sinclair Broadcasting Group ("SBG") whereby SBG purchased 110,000 shares of
     Synergy's  restricted  $.001 par value  common  stock for  $4,400,000.  The
     purchase  price  consisted of $1,400,000 in cash, a credit for a minimum of
     $2,000,000 of radio advertising and a credit for a minimum of $1,000,000 of
     certain in-kind services, as defined.

     In November 1999,  Beautybuys.com ("BB"), a wholly-owned  subsidiary of the
     Company,  entered into a stock  purchase  agreement  with SBG,  whereby SBG
     purchased  900,000 shares of $.001 par value Class B common stock in BB for
     $765,000 cash. The Class B common shares constitute 50% of the voting power
     of the common stock issued and outstanding.  At December 31, 2000,  Synergy
     owned 9,000,000 shares of Class A common stock and SBG owned 900,000 shares
     of Class B common stock of BB.

                                      F-27

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2002 and 2001

NOTE L (continued)

     Simultaneously  with the purchase of the Class B shares, BB and SBG entered
     into a Class A Common Stock Option Agreement providing for a grant by BB to
     SBG of the right to purchase  8,100,000 shares of its Class A common stock.
     In consideration for the grant, SBG agreed to provide  $50,000,000 of radio
     and/or television  advertising and promotional  support,  as defined, to be
     used from November 1999 through December 31, 2004.

     In December 2000, Synergy, BB and SBG entered into a modification agreement
     by which SBG  transferred to Synergy  900,000 shares of BB's Class B common
     stock, $7,000,000 of transferable advertising credits Web site developments
     costs previously  provided in exchange for Synergy issuing 25,000 shares of
     common  stock to SBG and  options to acquire  25,000  additional  shares of
     Synergy   common  stock.   Simultaneously,   Synergy  sold  the  $7,000,000
     advertising  credits  to a third  party  for  $2,660,000  in cash and trade
     credits.  Synergy paid a broker $375,000 in cash and the remaining  balance
     with stock valued at $591,150 on January 2, 2001

     At December 31, 2001, Synergy also had issued  outstanding  warrants to SBG
     to purchase 25,000 shares of common stock at $14.00 per share. The warrants
     become  exercisable  when the shares are  registered and expire in December
     2010.

     On September 30, 2002, the Company  exchanged in full its outstanding  note
     payable and accrued interest of $656,773 through a revision  agreement with
     SBG for the termination of $794,990 of its outstanding  unused  advertising
     credits with SBG. In addition,  the Company  issued  75,000 shares of stock
     and 31,250  warrants  exercisable at $5.00 to SBG in conjunction  with this
     transaction.  The Company  recorded a charge to earnings of $290,218 as the
     fair  market  value  of  the   consideration   given  exceeded  the  unused
     advertising credits.

     In October 2001, warrants to purchase 25,000 shares of the Company's common
     stock were exercised with aggregate proceeds to the Company of $125,000.

                                      F-28

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2002 and 2001


NOTE L (continued)

     In September 2001, the Company raised  $1,000,000 in a private  offering by
     issuing  200,000  restricted  shares of its common  stock and  warrants  to
     purchase  50,000  shares of common  stock at $5.00 per share.  The  Company
     incurred  $132,000 in offering  expenses  in  conjunction  with the private
     placement.  The Company also issued  warrants to purchase  75,000 shares of
     common  stock  at  $5.00  to  investment  bankers  related  to the  private
     offering.  All of the  warrants  issued  in  conjunction  with the  private
     offering expire in September 2006.

     In July 2001,  the Company  issued 50,000 shares of its stock and five-year
     warrants to purchase  25,000 shares of common stock at an exercise price of
     $10.00 per share in  connection  with a guarantee  of a line of credit by a
     subsidiary of the Company.  The Company  recorded a charge to operations of
     $440,000 in connection with this transaction (see Note R).

     On January 2, 2001, Synergy issued 25,000 restricted shares of common stock
     for services and warrants to purchase  10,000  restricted  shares of common
     stock at $50.00 per share. The warrants  expired,  unexercised,  on July 1,
     2002. The fair value of the  restricted  stock and warrants of $320,800 was
     recorded  as a  charge  to  operations  in  the  accompanying  consolidated
     statement of operations.

     The following is a summary of transactions  involving  warrants to purchase
     common stock for the years ended December 31, 2002 and 2001.

                                                                     Weighted-
                                                 Number               average
                                                of shares         exercise price
                                                ----------        -------------
         Outstanding at January 1, 2001           47,500               $ 23.42
             Granted                             258,750                  9.52
             Exercised                           (25,000)                (5.00)
             Cancelled/forfeited                  -                     (37.00)
                                                ----------        -------------
         Outstanding at December 31, 2001        281,250                 12.27
             Granted                              31,250                  5.00
             Cancelled/forfeited                 (85,000)               (19.41)
                                                ----------        -------------
         Outstanding at December 31, 2002        227,500              $   8.60
                                                ==========        =============

                                      F-29

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2002 and 2001

NOTE L (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            2002            life (years)      price               2002            price
           -----------------        --------------     -------------    ----------       -------------      ---------
           $5.00                      173,750               3.84        $  5.00             173,750          $  5.00
           $10.00 - $12.00             31,250               2.97          10.40              31,250            10.40
           30.00 - 40.00               22,500               2.50          33.89              22,500            33.89

                                      227,500               3.58        $  8.60             227,500          $  8.60
                                     =============      ===========    ===========        ===========        =======

</TABLE>

NOTE M - STOCK OPTION PLANS

     In 1994, Synergy adopted the 1994 Services and Consulting Compensation Plan
     (the "Plan"). Under the Plan, as amended,  8,400,000 shares of common stock
     have been reserved for issuance.  The Plan  terminates  with respect to the
     granting of common  stock and options in 2004.  Since the  inception of the
     Plan,  Synergy  has issued  1,391,800  shares for  payment of  services  to
     employees and  professional  service  providers  such as legal,  marketing,
     promotional and investment  consultants.  Common stock issued in connection
     with the Plan was valued at the fair value of the common  stock at the date
     of issuance or at an amount equal to the service provider's invoice amount.
     During the years  ended  December  31, 2002 and 2001,  the  Company  issued
     85,500  and 2,500  shares of its  common  stock,  respectively,  to various
     service  providers  and has  recorded a charge to earnings of $298,945  and
     $11,800,  respectively,  pursuant to the provisions of the Plan.  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.  During the year ended December 31, 2002, the Company recorded a
     charge to operations of $49,825,  which  represented the intrinsic value of
     stock options granted to employees and directors in January 2002.

                                      F-30

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2002 and 2001

NOTE M (continued)

     The following is a summary of such stock option  transactions for the years
     ended  December  31,  2002 and 2001 in  accordance  with the Plan and other
     restricted stock option agreements:

                                                                 Weighted-
                                             Number               average
                                            of shares          exercise price
                                           ----------           -------------
       Outstanding at January 1, 2001        223,781               $ 33.92
           Forfeited                         (82,972)               (37.00)
                                           ----------           -------------
       Outstanding at December 31, 2001      140,809                 32.12
           Granted                           231,625                  3.76
           Cancelled/forfeited               (13,175)               (34.66)
                                           ----------           -------------
       Outstanding at December 31, 2002      359,259               $ 13.75
                                           ==========           =============

       Available for grant
           December 31, 2002               7,582,291
                                           =========
           December 31, 2001               7,911,241
                                           =========

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


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

                                                 Options outstanding                       Options exercisable
                                   --------------------------------------------        --------------------------
                                                      Weighted-
                                      Number           average        Weighted-           Number         Weighted-
                                   outstanding at     remaining        average        exercisable at      average
             Ranges of             December 31,      contractual      exercise         December 31,      exercise
            exercise prices            2002          life (years)       price              2002            price
           -------------------     -------------     ------------     ----------       ---------------    -------
           $ 1.00 - $ 3.80           231,125             2.02          $  3.76                -           $   -
             8.00 -  20.00            51,604             1.25            14.67           51,604            14.67
            25.00 -  35.60            36,280             1.69            27.36           36,280            27.36
            40.00 -  50.00             8,500             1.99            42.94            8,500            42.94
            60.00 -  70.00            31,750             1.62            61.57           31,750            61.57
                                    ------------      -----------      ---------        --------          ------
                                     359,259             1.84           $13.75          128,134           $31.76
                                    ============      ===========      =========        ========          ======

</TABLE>

                                      F-31

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2002 and 2001

NOTE M (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
     94,000 shares available for grant at December 31, 2002.

NOTE N - TRANSACTIONS WITH RELATED PARTIES

     The Company pays consulting fees to two entities,  one of which is owned by
     the Company's  Chairman and Chief Executive  Officer and the other is owned
     by the Company's  President and Chief  Operating  Officer.  Consulting fees
     paid  during  the  years  ended  December  31,  2002  and  2001  aggregated
     approximately $134,000 and $172,000, respectively.

     At December 31, 2002, there is an amount receivable from the entity that is
     owned by the Company's  Chairman and Chief  Executive  Officer  aggregating
     $44,750.  There is also an amount  payable to the  Company's  Chairman  and
     Chief  Executive  Officer  for  short-term  advances  made  to the  Company
     aggregating $65,035.

NOTE O - OTHER INCOME (EXPENSE)

     Other income (expense) is comprised of the following:

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

                                                                                  2002     2001
                                                                              ---------- ---------
        Gain on settlements of liabilities due to vendors (Note R 6)            $592,689  $486,788
         Gain on dissolution of subsidiary (Note-K)                              215,250         -
         Loss on forgiveness of notes receivable from a shareholder (Note L)    (113,129)        -
         Gain (loss) on sales of marketable securities (Note E)                  (71,237)    7,300
        Loss on sale of preferred stock of an investee (Note H)                  (57,600)        -
        Common stock and warrants issued to
             satisfy guarantee on a line of credit (Note R 5)                         -  (440,000)
        Other                                                                   (51,113)  (30,284)
                                                                             ---------- ---------
                                                                               $514,860  $ 23,804
                                                                             ========== =========

</TABLE>

                                      F-32

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2002 and 2001

NOTE P - INCOME TAXES

     At December 31, 2002, the Company had a net operating loss  carryforward of
     approximately  $22,744,000,  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,  2002  were
     approximately as follows:

          Net operating loss carryover              $ 9,433,000
          Deferred compensation                         171,000
          Allowance for doubtful accounts                55,000
          Inventory                                     126,000
          Capital losses                                 54,000
          Other                                         (20,000)
          Valuation allowance                        (9,819,000)
                                                   ------------
                                                    $         -
                                                   ============

     Taxes for the years  ended  December  31,  2002 and 2001  consisted  of the
     following:

                                                          2002          2001
                                                        -------      -------
          State and local income tax expense            $22,687      $21,865
                                                        =======      =======

     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, 2002 and 2001 are as follows:

                                                                  2002    2001
                                                                ------    -----
          Federal income tax expense at statutory rate          (34)%     (34)%

          Increase (decrease) resulting from
              Increase in valuation allowance                    34         34
              State and local income taxes, net of Federal
                  benefit                                        .9         .5
                                                                ------    -----
                                                                 .9%        .5%
                                                                ======    =====

                                      F-33

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2002 and 2001

NOTE Q - RETIREMENT PLAN

     On January 1, 2002, the Company established the Synergy Brands, Inc. 401(k)
     Profit  Sharing Plan  (the "Plan")  covering  employees 21 years of age and
     older who have  completed six months of continuous  service.  The Plan is a
     defined   contribution   plan  which   provides  for   voluntary   employee
     contributions and discretionary  employer  contributions.  Employees become
     fully vested in employer  contributions  after three years.  The  Company's
     discretionary  matching and  profit-sharing  contributions to the Plan were
     $18,846 for the year ended December 31, 2002.


NOTE R - COMMITMENTS AND CONTINGENCIES

     1. Lease Commitments

     The  Company  leases  office and  warehouse  space under  operating  leases
     expiring at various  dates  through June 2008.  The Company is also leasing
     vehicles  under  operating  leases  expiring in 2004.  Future minimum lease
     payments under noncancelable  operating leases as of December 31, 2002 were
     as follows:

                         Year ending December 31,
                                2003                      $190,000
                                2004                       157,000
                                2005                       116,000
                                2006                        97,000
                                2007                       101,000
                                Thereafter                  52,000
                                                          --------
                                                          $713,000
                                                          ========

     Rent expense under  operating  leases for the years ended December 31, 2002
     and 2001 was approximately $288,000 and $252,000, respectively.

     2. Service Agreement

     BB's  inventory is  maintained in a public  warehouse in South Kearny,  New
     Jersey. The Company is required to make rental payments based on 4% of BB's
     sales of  inventory  stored in the  warehouse.  The  agreement  expires  in
     October 2018 and may be  cancelled  by either  party with a 90-day  written
     notice under  certain  circumstances,  as defined.  Rent expense  under the
     service  agreement  for the  years  ended  December  31,  2002 and 2001 was
     approximately $108,000 and $175,000, respectively.

                                      F-34

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2002 and 2001

NOTE R (continued)

     3. Distribution Agreements

     A wholly-owned  subsidiary of the Company, New Era Foods, Inc., maintains a
     25-year exclusive  worldwide  distribution  agreement  expiring in December
     2022 with a Dominican Republic corporation for the sale and distribution of
     premium handmade cigars manufactured in the Dominican Republic. There is an
     option to extend the term of the distribution agreement up to an additional
     25 years.

     4. 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.

     5. Guarantee

     In March 1998, the Company guaranteed a $1,000,000  line-of-credit facility
     to a Dominican cigar  manufacturer,  which was owned by a PCW  stockholder.
     The purpose of the  line-of-credit  was to provide  financing  to the cigar
     manufacturer  to which PCW will supply cigar  wrappers.  In July 2001,  the
     Company  issued  200,000  shares  of its stock and  five-year  warrants  to
     purchase  100,000  shares of common stock at an exercise price of $2.50 per
     share to satisfy  the  guarantee  and  receive  brand  names as part of the
     agreement.  The fair value of the  warrants of $186,000  was  recorded as a
     charge  to  operations  in  the  accompanying   consolidated  statement  of
     operations during the year ended December 31, 2001.

     6. Other Liabilities

     Since 1999, the Company has disputed  services  performed by a vendor.  The
     vendor has not sought  payment since  December  2000. In December 2002, the
     Company  and the  vendor  executed  a  settlement  and  release  agreement.
     Pursuant to the terms of the settlement and release agreement,  the Company
     was  relieved  of its  obligation  to pay  for  the  services  that  it had
     disputed.  The  Company  recorded  a gain of  $592,689  as a result  of the
     release by the vendor.

     The Company has also disputed the services  performed by two other vendors.
     The Company and one of the vendors  entered into a  settlement  and release
     agreement in which the Company, upon

                                      F-35

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2002 and 2001

NOTE R (continued)

     payment of $13,000 to the vendor,  will be released of its liability to pay
     for the remainder of the services  that it had  disputed.  The Company will
     record a gain of  $155,750  as a result of this  release  during  the first
     quarter of 2003. The Company is pursuing a release and settlement  with the
     other  vendor.  Management  does not  believe  that it will have to use any
     working capital to resolve this matter.


NOTE S - SEGMENT AND GEOGRAPHICAL INFORMATION

     The Company  offers a broad range of Internet  access  services and related
     products to  businesses  and  consumers  throughout  the United  States and
     Canada.  Management  evaluates the various segments of the Company based on
     the types of products being distributed which were, as of December 31, 2002
     and 2001, as shown below:


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

                                          Salon
                                        products        B2B              B2C        Total
                                       ----------   -----------     ------------ ------------
   Year ended December 31, 2002
     Revenue                           $2,537,216   $27,745,818     $ 1,257,641  $31,540,675
     Net loss                            (833,712)     (293,088)     (1,359,767)  (2,486,567)
     Depreciation and amortization        468,842       272,667         152,456      893,935
     Interest income                            -        $3,024          23,671       26,695
     Other income (expense)                (6,407)      (18,056)        539,323      514,860
     Equity in earnings of investee             -             -          67,717       67,717
     Interest and financing expenses       60,336        94,582          56,361      211,279
     Identifiable assets                2,193,471     2,477,292       1,200,906    5,871,669
     Additions to long-lived assets             -         2,150         262,192      264,342
     Investment in affiliate                    -             -          72,180       72,180

   Year ended December 31, 2001
     Revenue                           $2,144,905   $20,036,232     $ 2,166,791  $24,347,928
     Net loss                            (847,351)     (864,732)     (2,588,056)  (4,300,139)
     Depreciation and amortization        526,068       272,559         205,926    1,004,553
     Interest income                            -             -         128,189      128,189
     Other income (expense)                (2,990)      (14,729)         41,523       23,804
     Equity in earnings of investee             -             -           1,583        1,583
     Interest and financing expenses       33,119        65,088          56,538      154,745
     Identifiable assets                2,437,719     2,344,607       3,615,804    8,398,130
     Additions to long-lived assets             -         1,793         148,411      150,204
     Investment in affiliate                    -             -         292,463      292,463

</TABLE>

                                      F-36

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2002 and 2001

NOTE S (continued)

     All of the  Company's  identifiable  assets and results of  operations  are
     located in the United States and Canada. Geographic data, as of and for the
     years ended December 31, 2002 and 2001, is as follows:

                                                2002               2001
                                              ------------   --------------
                 Revenue
                      United States            $30,555,151      $24,347,928
                      Canada                       985,524            -
                                              ------------   --------------
                                               $31,540,675      $24,347,928
                                              ============   ==============
                 Accounts receivable
                      United States           $  1,256,041    $     591,845
                      Canada                       776,628             -
                                              ------------   --------------
                                              $  2,032,669    $     591,845
                                              ============   ==============
                 Identifiable assets
                      United States           $  5,824,230     $  8,398,130
                      Canada                        47,439             -
                                              ------------   --------------
                                              $  5,871,669     $  8,398,130
                                              ============   ==============

NOTE T - FOURTH QUARTER ADJUSTMENTS

     During the year ended  December 31, 2001,  the Company made fourth  quarter
     adjustments  to record the estimated  fair value of warrants  issued during
     the year of $377,000 and to record an  allowance of $500,000 in  connection
     with advertising credits.


NOTE U - POSSIBLE LOSS OF NASDAQ LISTING

     NASDAQ has  notified the Company that it had  questions  concerning,  among
     other  things,  the  Company's   ability to maintain  the  minimum  listing
     requirements for continued  NASDAQ listing.  The Company may not be able to
     satisfy the minimum listing requirements. As a result, the Company's common
     stock may be removed from the NASDAQ  SmallCap Market and will trade on the
     OTC Bulletin Board ("OTCBB").


                                      F-37

<PAGE>

                                  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 defining  rights of security  holders (3)               EX-3.1

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

21               Listing of Company Subsidiaries                                   EX-21

99               Listing of Company Intellectual Properties                        EX-99

99.1             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-99.1

99.2             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-99.2


</TABLE>

(1)      Only a copy of the amendment to the Certificate of Incorporation  filed
         February  11,  2003  and  the  Certificate  of  Designation   regarding
         Preferred  Stock  filed  3/13/03  are  included  in the  Exhibits.  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 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

(3)      Description   of  rights  of  Preferred   Stock  are  included  in  the
         Certificate of  Designation  filed 3/13/03  included  herein in Exhibit
         3.1, and  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  inclusion  thereof as an exhibit to the
         Company's   10KSB   report  filed  March  2002  which   documents   are
         incorporated by reference herein. Also included as an exhibit hereto is
         the Option  Agreement  dated  September 30, 2002 entered by the Company
         with  Sinclair  Broadcasting  Group  Inc.  as  part  consideration  for
         modification of all earlier agreements between said parties,  including
         extinguishment  of Debt which  Option  Agreement  along with all equity
         holdings in the Company held by Sinclair  Broadcasting was subsequently
         purchased by and assigned to the largest  shareholder of the Company to
         which assignment the Company consented.

(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.

                                       36