SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K/A

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

                  For the fiscal year ended December 31, 2004.
                         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: 1-800-373-7489 ext. 24

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

     Indicate by check mark whether the registrant is an accelerated filer
                                                         Yes__NO_X_

     Synergy  Brands  Inc.  revenues  for  its  most  recent  fiscal  year  were
$56,705,044.

<PAGE>

     On March 30,  2005,  the  aggregate  market  value of the  voting  stock of
Synergy Brands Inc., held by  non-affiliates of the Registrant was approximately
$5,013,000.  This  determination  of  affiliate  status  is  not  necessarily  a
conclusive determination for other purposes. The number of outstanding shares of
the Registrant's Common Stock as of March 30, 2005 was 3,298,026.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Proxy  Statement for  Registrant's  2004 Annual  Meeting of
Stockholders  currently  scheduled  to be held  June  2005 are  incorporated  by
reference in Part III (for other  documents  incorporated  by reference refer to
Exhibit Index at page 44 and 45)

                                     PART I

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

ITEM 1. DESCRIPTION OF BUSINESS

     A. OVERVIEW

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

     The Company  also owns 21.5% of the  outstanding  common stock of Interline
Travel and Tours,  Inc. (AKA:  PERX.com).  PERX provides cruise and resort hotel
packages through a proprietary reservation system to airline employees and their
retirees.  PERX is  believed  to be the  largest  Company in this  sector of the
travel industry.  Information on PERX can be found at www.perx.com.  The Company
believes that its capital investment in this unique travel company could provide
for material future capital appreciation.  Synergy Brands does not manage PERX's
day-to-day operations.

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

                                      -1-

<PAGE>

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

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

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

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

         o Cigars  Around the World is a recently  acquired  company  that sells
         premium cigars to restaurants,  hotels, casinos, country clubs and many
         other leisure related destinations.  This company was acquired in June,
         2003.

         o  CigarGold.com  and  NetCigar.com  sells premium  cigars  through the
         Internet directly to the consumer.

         o  BeautyBuys.com  sells  salon  hair  care  products  directly  to the
         consumer via the internet.

     THE  COMPANY'S  CORPORATE  OFFICES  ARE LOCATED AT 1175 WALT  WHITMAN  ROAD
MELVILLE NEW YORK 11747, AND ITS TELEPHONE NUMBER IS (800) 373-7489 ext.24.  THE
COMPANY  MAINTAINS  A  CORPORATE  WEBSITE  AT  WWW.SYBR.COM.  The  Company  is a
reporting Company as defined in Regulation 12B of the Securities Exchange Act of
1934 and  files  electronically  with the SEC the  Company's  quarterly  10Q and
Year-end 10-K reports and interim Form 8K reports.  The general  public may read
and copy any  materials  the  Company  has filed  with the SEC at the SEC Public
Reference  Room at 450 Fifth Street NW,  Washington  DC. The general  public may
obtain  information on the operation of the Public Reference Room by calling the
SEC at  1-800-SEC-0330.  The SEC also  maintains an Internet  site that contains
reports,  proxy and  information  statements,  and other  information  regarding
issuers that file  electronically  with the SEC which website can be accessed at
www.sec.gov.  Filed reports by the Company may be viewed at the SEC Edgar filing
website to which the Company's homepage website is directly linked.

                                       2

<PAGE>

     B. BUSINESS TO BUSINESS OPERATIONS (B2B)

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

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

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

     The second business  segment within the Company's B2B sector is Proset Hair
systems (Proset).  Proset distributes Salon hair care products  predominantly to
wholesalers  and  distributors  in the  Northeastern  part of the United States.
Proset  focuses  on the sale of brand  name  salon  hair care  products.  Proset
purchases  these goods in large  quantities and thereby at a volume discount and
in turn sells in bulk to  regional  wholesalers  and  distributors.  Proset also
sells directly to the consumer salon products  on-line  through  beautybuys.com.
The online unit operates at www.BeautyBuys.com.  BeautyBuys.com sells salon hair
products to the retail  consumer.  Previously the operation also sold fragrances
and cosmetics to retail customers. However, the Company decided in 2003 to limit
its selection to salon hair care products, since those items are already carried
and stocked within its wholesale salon operation, Proset Hair Systems.

     C. CIGAR OPERATIONS.

     GRC manages  multiple  Internet  domains that market directly to the retail
consumer  via  standard  and  electronic  commerce.  GRC owns  multiple  domains
including Cigargold.com. and Netcigar.com. GRC focuses on sale of a mix of Brand
name and private label premium  cigar items and cigar  related  accessories  and
markets  them  through  multiple  cigar  domains  including   CigarGold.com  and
NetCigar.com.

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

                                      -3-

<PAGE>

     (i) CIGARGOLD.COM

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

     CGC,  utilizes a  computerized  database  management  system that collects,
integrates  and allows  analysis of data  concerning  sales,  order  processing,
procurement,  shipping,  receiving,  inventory and financial  reporting.  At any
given time,  Company  executives can determine the quantity of product stored by
item, cost by item,  aging and other  characteristics  necessary for expeditious
fulfillment  and  distribution.  A network  system of the  Company's  office and
warehousing facilities allows for online assessment and transactional  reporting
capabilities.  It is the Company's  policy that all consumer  orders are shipped
from the  Company's  warehouse  within 3 days of order  placement.  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 CGC 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>

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

     Traditional pre-internet cigar sales 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 a small share of the
     market.

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

     Many of the Company's off-line and online competitors have longer operating
histories,  larger customer bases,  greater brand  recognition and significantly
greater financial, marketing and other resources than 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.

     In June 2003 the  Company  acquired  the  ownership  interest in The Ranley
Group Inc. an Illinois  corporation  doing  business as Cigars  Around the World
("CAW") a Chicago based Midwest  premium  cigar  distributor.  CAW sells premium
cigars to various leisure related destinations in customized retail displays and
maintains its own internet sales based website. The purchase price paid for such
subsidiary  was based on the EBTDA  (Earnings  Before  Taxes,  Depreciation  and
Amortization)of  CAW going forward over a three-year  period.

                                      -5-

<PAGE>

     D. COMPETITION

     The  Company is smaller in  comparison  to many of its  competitors  in the
marketing of grocery and health and beauty care  products and cigars.  Access to
product  remains  important  but  the  Company  is  confident  of the  continued
availability of product from  manufactures,  wholesalers,  and distributors with
whom the Company  has  successfully  acquainted  itself or  developed  in house.
Source of  supplies  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, 2004
and 2003, the Company  purchased  approximately  53% and 71% respectively of its
products  from one  supplier.  If the  Company  were  unable  to  maintain  this
relationship it might have a material impact on future  operations.  The Company
has maintained over a ten year  relationship  with this vendor and believes that
the relationship with this vendor is satisfactory.

     E. MAJOR CUSTOMERS.

     During the year ended December 31, 2004,  sales to two customers  accounted
for 21% and 18% of the Company's  total sales and in 2003 sales to two customers
accounted  for 11% each of total  sales.  These  major  customers  relate to the
grocery logistics business within the Company's B2B sector.

     F. INFORMATION SYSTEMS AND WEBSITE TECHNOLOGY FOR INTERNET SALES.

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

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

                                        6


<PAGE>

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

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

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

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

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

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

                                        7

<PAGE>

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

     G. SEASONALITY

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

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

     H. SHIPPING AND HANDLING

     Products  sold on a Business  to  Business  (B2B)  basis by the Company are
shipped  in bulk from  inventory  maintained  by the  Company  at its  warehouse
facilities by leased trucks and common carriers. All B2C orders are consolidated
in Company leased fulfillment facilities then packed and shipped to the customer
usually  within 3 to 7 days  mainly  by UPS.  Approximately  85% of B2C  product
inventory  is in  warehouse  stock and 15% is  purchased by the Company on an as
needed  "just in time" basis.  The Company is  dependent on common  carriers and
truck  leases but also in 2003  acquired a fleet of trucks  leased and  operated
directly  by the  Company.  Although  the  Company  can call upon any of several
hundred  common  carriers  to  distribute  its  products,  from time to time the
trucking  industry  is subject to strikes or work  stoppages  which could have a
material  adverse  effect on the Company's  operations if  alternative  modes of
shipping are not then available.  Additionally, the trucking industry is subject
to various natural disasters which can close  transportation  lanes in any given
region of the country. To the extent common carriers utilized by the Company are
prevented  from or delayed in utilizing  transportation  lanes,  the Company may
incur higher freight costs due to the limited  availability of trucks during any
such period that  transportation  lanes are  restricted.  Trucking  expenses are
regulated by the cost of fuel and destination lanes.  Increasing fuel prices can
cause an increase in shipping  rates.  The Company  attempts to pass along these
charges through a fuel surcharge. This charge can not be passed to the customers
on all occasions.

     I. TRADEMARKS, LICENSES AND PATENTS

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

     J. EMPLOYEES

     The Company and its  subsidiaries  in the  aggregate as of the date of this
report employ and contract  approximately  50 full time and part time  employees
all of whom work in executive, administrative sales, marketing, data processing,
accounting or clerical  activities  and certain work as Company  employees  that
integrate with the various  warehouses  where Company products are stored and as
drivers and delivery personnel in the Company leased trucks.

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

                                       8

<PAGE>

     K. GOVERNMENT REGULATION

     1. TOBACCO INDUSTRY REGULATION AND TOBACCO INDUSTRY LITIGATION

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

The Food and Drug  Administration  (the "FDA") has determined that nicotine is a
drug  and  that  it has  jurisdiction  over  cigarettes  and  smokeless  tobacco
products,  as  nicotine-delivering  medical devices, and therefore,  promulgated
regulations  restricting and limiting the sale,  distribution and advertising of
cigarette and smokeless tobacco  products.  FDA jurisdiction is also the subject
of current federal  legislation which will, if and when enacted,  codify much of
the past regulatory  scheme  established  for tobacco  products and as agreed in
settlement  agreements  reached with the tobacco industry to avoid the myriad of
lawsuits  filed.  Even within this  legislation  however cigar  products are not
included  but there is no  assurance  that they may not be  included in these or
similar regulations in the future. There is also a regulatory move toward taxing
internet tobacco sales,  which may also include cigar sales in the future but is
presently  concentrated on cigarette  marketing.  Legislation is also pending to
curtail internet tobacco product sales in their entirely. Recently the US Bureau
of Alcohol Tobacco Firearms and Explosives,  the major credit card companies and
State attorneys  general reached  agreement to dissallow use of credit cards for
cigarette  purchases  over the  internet  across  State lines and to take action
against  Internet  Sellers  that  authorities  identify as  violating  State and
Federal laws  regulating  cigarette  sales.  New York was the first State to ban
Internet  cigarette sales totally.  Further States may likely follow suit. Those
bans are based both on tax evasion issues and underage purchasing concerns. Such
treatment  of tobacco  product tax issues is not a new  phenomena  however but a
revisiting  of and more  active  promotion  of the  federal  Jenkins  Act  which
originated  in 1949 to address  interstate  tax issues  regarding  tobacco sales
through use of United States mail.  Cigars are not specifically  included in the
FDA's  regulations.  Present tobacco  regulations  which do appear applicable to
cigars in addition to focusing on cigarettes  are the  prohibition  on retailers
from selling cigarettes, cigarette tobacco or smokeless tobacco to persons under
the age of 18 and requiring  retailers to check the photographic  identification
of every person under the age of 27 who requests  purchases of tobacco products,
and  requirement  that cigars carry warning labels similar to those contained on
cigarette packages which Cigar companies are now required to display clearly and
permanently  on  packages,  in print ads,  on audio and video  ads,  on point of
purchase displays and on the Internet.

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

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

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

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

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

                                       9

<PAGE>

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

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

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

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

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

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

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

     2. OTHER GOVERNMENT REGULATION.

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

                                       10

<PAGE>

     The  Company  is not aware of  government  regulation  directly  related to
internet  sales  different  from that  applicable to  traditional  marketing but
immense interest has been indicated on policing the internet focusing on contact
and access but the  nature of the  products  marketed  by the  Company  over the
internet does not appear to involve any of such concerns beyond product labeling
and advertising  content which would apply regardless of the medium in which the
products are sold except for developing limitations on internet sales of tobacco
products as aforementioned  herein.  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.

ITEM 2: DESCRIPTION OF PROPERTY

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

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

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

ITEM 3: LEGAL PROCEEDINGS

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

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

     During the fourth quarter of 2004 no matters were submitted for shareholder
approval.  In September 2004 by written consent  shareholders holding a majority
of the votes  approved a reduction in the  authorized  stock of the Company from
60,000,000  shares  to  6,000,000  shares,  and  in  February  2005  by  similar
shareholder vote the authorized stock was retroactively  corrected to 15,000,000
shares as the  status  prior to the  aforesaid  reduction  to  6,000,000  shares
(further  explained  in Item 5 "Market  for the  Registrant's  Common  Stock and
Related Stockholder matters" infra.)

                                     PART II

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

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

COMMON STOCK

Quarter Ended               High             Low       Close
-------------             -------         -------      ------
March 31, 2003              3.05            2.47       2.47
June 30, 2003               3.44            2.45       2.67
September 30, 2003          4.49            2.99       3.61
December 31, 2003           4.20            3.40       3.90
March 31, 2004              5.69            3.75       3.96
June 30, 2004               4.72            2.75       2.89
September 30, 2004          3.22            2.13       2.30
December 31, 2004           7.25            1.66       3.35

     On March 30,  2005,  the Company had  approximately  3200  shareholders  of
record.

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

     Effective  February 2005 the Company has decreased its authorized  stock to
6,000,000  shares divided into 5,000,000  Common Stock $.001 par value,  100,000
shares of Class A Preferred  Stock par value $.001 and 900,000 shares of Class B
Preferred  Stock,  500,000  shares  of  which  are  designated  Series A Class B
Preferred.  Prior thereto the Company was authorized to issue 60,000,000  shares
but such figure was  retroactively  reduced to 15,000,000  shares to correct the
Company's  inadvertent lack of reduction of its authorized stock when it reverse
split its outstanding stock 1 for 4 in February 2003.

                                       11

<PAGE>

     Refer to the Company's  Consolidated  Statement of Changes in Stockholders'
Equity in the Company's audited financial statements included in this report for
information  on issuances of equity  securities  during fiscal year 2004.  These
issuances  were made either under  exemption  from  registration  allowed  under
Section 4 (2) or Regulation D of the Securities Act of 1933 as amended.

ITEM 6.  SELECTED FINANCIAL DATA

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


                               SYNERGY BRANDS INC
                             SELECTED FINANCIAL DATA
                                   12/31/2004

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

                                                                        YEAR ENDED
                                                                      DECEMBER 31,
                                                  2004             2003          2002            2001           2000
CONSOLIDATED STATEMENT OF OPERATIONS:
NET SALES                                      $56,705,044     $40,540,577    $31,540,675     $24,347,928    $20,665,018

COST OF SALES
COST OF PRODUCT                                $51,907,840     $36,837,796    $29,241,384     $22,347,887    $19,391,844
SHIPPING AND HANDLING COSTS                       $900,205        $893,582       $600,994        $657,793       $332,845
                                               $52,808,045     $37,731,378    $29,842,378     $23,005,680    $19,724,689

GROSS PROFIT                                    $3,896,999      $2,809,199     $1,698,297      $1,342,248       $940,329

OPERATION EXPENSES
ADVERTISING AND PROMOTIONAL                       $150,181         $91,634       $469,965      $1,501,267     $2,547,891
GENERAL AND ADMINISTRATIVE                      $3,605,433      $2,984,663     $3,196,270      $3,072,900     $4,419,753
DEPRECIATION AND AMORTIZATION                     $659,490        $692,698       $893,935      $1,004,553       $663,146
DEVELOPMENT COSTS                                                                                 $16,133       $632,696
                                                $4,415,104      $3,768,995     $4,560,170      $5,594,853     $8,263,486

OPERATING LOSS                                   -$518,105       -$959,796    -$2,861,873     -$4,252,605    -$7,323,157

OTHER INCOME(EXPENSE)
INTEREST INCOME                                     $4,610         $13,913        $26,695        $128,189        $66,183
OTHER INCOME(EXPENSE)                             -$46,983        $298,932       $514,860         $23,804       -$55,676
EQUITY IN EARNINGS OF INVESTEE                    $172,224         $92,424        $67,717          $1,583
INTEREST AND FINANCING EXPENSES                -$1,553,521       -$690,038      -$211,279       -$154,745      -$178,964
DIVIDENDS ON PREFERRED STOCK OF SUBSIDARY                                                        -$24,500       -$24,500
                                               -$1,423,670       -$284,769       $397,993        -$25,669      -$192,957

LOSS BEFORE INCOME TAXES                       -$1,941,775     -$1,244,565    -$2,463,880     -$4,278,274    -$7,516,114

MINORITY INTEREST IN LOSS                                                                                       $266,258

INCOME TAX EXPENSE                                 $34,604         $32,658        $22,687         $21,865        $21,433

NET LOSS BEFORE DISCONTINUED OPERATIONS        -$1,976,379     -$1,277,223    -$2,486,567     -$4,300,139    -$7,271,289

DISCONTINUED OPERATIONS
LOSS ON DISCONTINUED OPERATIONS OF PCW,
NET OF APPLICABLE BENEFIT OF $0                                                                                -$495,534

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

NET LOSS ATTRIBUTABLE
TO COMMON STOCKHOLDERS                         -$2,132,754     -$1,355,223    -$2,486,567     -$4,300,139    -$7,766,823

BASIC AND DILUTED NET LOSS
PER COMMON SHARE:                                   -$0.97          -$0.82         -$1.91          -$4.15         -$9.74

WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING                               2,209,371       1,652,019      1,302,042       1,035,795        797,193

CONSOLIDATED BALANCE SHEET DATA:
WORKING CAPITAL                                 $3,064,266      $1,041,027        $51,542        $744,710     $1,455,851
TOTAL ASSETS                                   $16,706,423     $10,992,645     $5,871,669      $8,398,310    $12,279,515
LONG TERM OBLIGATIONS                           $1,196,241        $788,162       $342,750        $801,814       $184,625
TOTAL SHAREHOLDERS' EQUITY                      $6,573,057      $2,943,832     $2,082,537      $3,027,029     $7,718,673

</TABLE>

                                       12

<PAGE>

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

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

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

     The Company  also owns 21.5% of the  outstanding  common stock of Interline
Travel and Tours,  Inc.  (AKA:  PERX).  PERX  provides  cruise and resort  hotel
packages through a proprietary reservation system to airline employees and their
retirees.  PERX is  believed  to be the  largest  Company in this  sector of the
travel industry.  Information on PERX can be found at www.perx.com.  The Company
believes that its capital investment in this unique travel Company could provide
for material future capital appreciation.  Synergy Brands does not manage PERX's
day-to day operations.  Perx pre-tax profit has grown at a compounded sequential
growth  rate of 36%  cumlative  since 2002 to  $1,069,000  in Fiscal  Year 2004.
SYBR's share under the equity  method  amounted to $172,224 for Fiscal Year 2004
after income taxes. SYBR and PERX have been exploring  several  opportunities to
optimize the shareholder value of both Companies.

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

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

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

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

         o Cigars  Around the World is a recently  acquired  company  that sells
         premium cigars to restaurants,  hotels, casinos, country clubs and many
         other leisure  related  destinations.  The company was acquired in June
         2003.

         o  CigarGold.com  and  Netcigar.com  sells premium  cigars  through the
         Internet directly to the consumer.

         o  BeautyBuys.com  sells  salon  hair  care  products  directly  to the
         consumer via the Internet.

                                       13

<PAGE>

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


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

                                                    OPERATING                  OPERATING AND
                                                    SEGMENTS                 CORPORATE SEGMENTS

Y/E 12/31/2004
Revenue                                          56,705,044       39.87%        56,705,044       39.87%
Gross Profit                                      3,896,999       38.72%         3,896,999       38.72%
SG&A                                              3,092,087       17.04%         3,755,614       22.08%
Operating Profit (loss)                             442,190      202.03%          (518,105)      46.02%
Net loss                                         (1,032,025)     -26.22%        (2,132,754)     -57.37%
Net loss per common  share                            (0.47)                         (0.97)
Depreciation and amortization                       362,722      -39.62%           659,490       -4.79%
Interest income                                      (4,344)     -68.53%            (4,610)     -66.87%
Interest and financing expenses                   1,444,020      109.50%         1,553,521      125.14%
                                                 -----------                    -----------
EBITDA                                              770,373       68.00%            75,647      456.23%
                                                 ===========                    ===========
EBITDA net income per share                           0.35                           0.03
   Y/E 12/31/2003
Revenue                                          40,540,577                     40,540,777
Gross Profit                                      2,809,199                      2,809,199
SG&A                                              2,641,864                      3,076,297
Operating Profit (loss)                            (433,395)                      (959,796)
Net loss                                           (817,658)                    (1,355,223)
Net loss per common  share                            (0.49)                         (0.82)
Depreciation and amortization                       600,730                        692,698
Interest income                                     (13,805)                       (13,913)
Interest and financing expenses                    689,286                        690,038
                                                 -----------                    -----------
EBITDA                                              458,553                         13,600
                                                 ===========                    ===========
EBITDA net income per share                            0.28                           0.01

</TABLE>

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

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

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

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

                                       14

<PAGE>

     Earnings before interest,  taxes,  depreciation  and amortization  (EBITDA)
improved to a profit of $75,647 for the year ended December 31, 2004 as compared
to a profit of $13,600 for the year ended December 31, 2003. The  improvement is
attributable to an increase in revenues.  However,  financing costs increased by
125% to $1,553,521. Management believes that financing costs were increased as a
result of revenue growth.  As a result,  the Company was required to utilize its
line of credit to support account receivable and inventory growth.  Although the
working  capital  needed to support  revenue  growth is directly  related to the
growth in accounts receivable and inventory, the Company has invested in capital
assets,  such as  warehousing  and trucks to support the growth of the business.
EBITDA from the Company's operating  businesses  increased by 68% to a profit of
$770,373  for the year  ended  December  31,  2004 as  compared  to a profit  of
$458,553 for the year ended December 31,2003.

     Earnings  before  interest,   depreciation,   amortization  (EBITDA)  is  a
financial  measurement used by distribution  related  companies that function in
the  wholesaling  of  manufactured  goods.  EBITDA is relevant to the  Company's
businesses due to the fact that traditional  valuations for measuring the values
of enterprises such as ours are usually based on EBITDA multiples. EBITDA is not
recognized  as a GAAP  measurement  of earnings and should not be relied upon as
such.

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

B2B OPERATIONS

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

                                       15

<PAGE>


PHS SEGMENT INFORMATION OF OPERATING BUSINESSES

                                               PHS Group          CHANGE
Year ended December 31, 2004
Revenue                                      50,728,560       46.02%
Gross Profit                                  2,805,747       45.57%
SG&A                                          1,870,312       41.27%
Operating Profit (loss)                         928,934      180.88%
Net loss                                       (167,951)    -110.30%
Depreciation and amortization                     6,501      -97.62%
Interest income                                  (4,344)     -68.53%
Interest and financing expenses               1,168,607      159.76%
EBITDA                                        1,002,813       59.42%

Year ended December 31, 2003
Revenue                                      34,740,999
Gross Profit                                  1,927,416
SG&A                                          1,323,887
Operating Profit (loss)                         330,717
Net loss                                        (79,864)
Depreciation and amortization                   272,812
Interest income                                 (13,805)
Interest and financing expenses                 449,876
EBITDA                                          629,019

     PHS  increased  its  revenues  by  46.0% to $50.7  million  for year  ended
December 31, 2004 as compared to $34.7  million for the year ended  December 31,
2003.  The  increase  in PHS  business is  attributable  to the  utilization  of
additional  vendors,  development of a wholesale  operation and expansion of the
Canadian  distribution  business in Ontario,  Canada.  PHS  increased  its gross
profit  by  increasing  Direct  Store  Delivery  sales  as well as  focusing  on
promotional  merchandise  offered  by its  vendors.  The  overall  gross  profit
percentage  remained  consistent at 5.5%. In 2003,  several PHS vendors  created
special packaging with promotional pricing that enabled PHS to widen its margin.
As an example,  special packaging was created for Nyquil,  Marcal paper,  Clorox
displays as well as Herbal  Essence  shampoos  among others,  with unique retail
display  features,  that PHS has been able to strongly promote during FY 2003 as
opposed  to  marketing  those  products  for normal  replenishment.  Promotional
displays  allow PHS to sell  better  mixes of product as well as  introduce  new
items  in  combination  with  regularly  stocked  items.   EBITDA  increased  to
$1,002,813  for the year ended December 31, 2004 as compared to $629,019 for the
year ended  December 31, 2003.  As long as the Company  maintains or expands its
vendor  relationships,  management  believes that it can continue to improve its
operating  results.  Management needs to also reduce its financing costs for PHS
as they represent 117% of EBITDA and the single highest of the Company's overall
expenditures.

                                       16

<PAGE>

PROSET SEGMENT INFORMATION OF OPERATING BUSINESSES

                                                    Salon
Year ended December 31, 2004                      products             CHANGE

Revenue                                           3,923,823            6.88%
Gross Profit                                        588,154           70.82%
SG&A                                                282,747          -34.20%
Operatimg Profit(loss)                               94,487          131.65%
Net loss                                           (219,204)          56.35%
Depreciation and amortization                       210,920           -1.07%
Interest and financing expenses                     232,913           16.52%
EBITDA                                              224,629          352.20%
Year ended December 31, 2003
Revenue                                           3,671,106
Gross Profit                                        344,305
SG&A                                                429,684
Operatimg Profit(loss)                             (298,577)
Net Profit(loss)                                   (502,158)
Depreciation and amortization                       213,198
Interest and financing expenses                     199,892
EBITDA                                              (89,068)

     Proset  revenues  increased by 6.9% for the year ended December 31, 2004 as
compared  to the year ended  December  31,  2003.  Proset has  transitioned  its
business model from retail services to wholesale distribution.  Gross profit has
increased by 71% to $588,154 for the year ended December 31, 2004 as compared to
$344,305 for the year ended  December 31, 2003. At the same time SG&A dropped by
34% to  $282,747  for  year  ended  December  31,  2004.  As a  result  of  this
transition,  the  Company's  customer  base  has  expanded  to  include  smaller
distributors  that purchase salon products in higher  quantities,  which in turn
optimizes  the gross  profit.  However,  distributor  sales  require less labor,
warehousing and distribution  costs,  but rely on optimal market  conditions and
product  availability.   The  salon  business  is  highly  fragmented  and  very
competitive.  Proset  must  maintain  strong  vendor  relations,  which  include
distributors  and  resellers  in order to keep a supply  chain for its  customer
base.  EBITDA  improved  from a loss of $89,068 for the year ended  December 31,
2003 to a profit  at  $224,629  for the  year  ended  December  31,  2004.  This
improvement  was caused by an increase in  revenues,  a reduction in labor cost,
warehousing  expenses and a reduction in freight  expenses.  Financing costs are
also an important  factor in the operation of Proset.  Financing costs increased
by 17% to $232,913.  Wholesalers are provided better credit terms then retailers
since  they  need to  maintain  greater  inventories.  In order to  improve  the
profitability  of  Proset,  management  believes  that  financing  costs need to
reduced.

                                       17

<PAGE>

B2C SEGMENT INFORMATION OF OPERATING BUSINESSES

                                             B2C            CHANGE
Year ended December 31, 2004
Revenue                                   2,052,661        -3.56%
Gross Profit                                503,098        -6.40%
SG&A                                        939,028         5.71%
Operatimg Profit(loss)                     (581,231)       24.85%
Net loss                                   (644,870)     -173.67%
Depreciation and amortization               145,301        26.66%
Interest and financing expenses              42,500         7.55%
EBITDA                                     (457,069)     -461.52%
Year ended December 31, 2003
Revenue                                    2,128,472
Gross Profit                                 537,478
SG&A                                         888,293
Operatimg Profit(loss)                      (465,535)
Net Profit(loss)                            (235,636)
Depreciation and amortization                114,720
Interest and financing expenses               39,518
EBITDA                                       (81,398)

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

     Revenues in the Company's  B2C  operation  for the year ended  December 31,
2004 were  $2,052,661 as compared to $2,128,472  for the year ended December 31,
2003.  CAW on a current  operating  basis  represents  approximately  64% of B2C
revenues  for the year ended  December  31,  2004.  Gross  profit for year ended
December  31, 2004 was  $503,098  as  compared  to  $537,478  for the year ended
December 31, 2003. EBITDA decreased by 462% for the same period. The table above
provides comparative details for the Company's B2C operation.

                                       18

<PAGE>

     CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2003
                AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2002.

SUMMARY OF OPERATING SEGMENTS AND SUMMARY CONSOLIDATED RESULTS OF OPERATIONS

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

                                                    OPERATING                OPERATING AND
                                                    SEGMENTS               CORPORATE SEGMENTS

Y/E 12/31/2003
Revenue                                         40,540,577       28.53%     40,540,577       28.53%
Gross Profit                                     2,809,199       65.41%      2,809,199       65.41%
SG&A                                             2,641,864       13.11%      3,076,297      -16.09%

Net loss                                          (817,658)      28.43%     (1,355,223)      48.64%
Net loss per common  share                           (0.49)      44.32%          (0.82)      59.52%
Depreciation and amortization                      600,730      -30.89%        692,698      -22.51%
Interest income                                    (13,805)     356.51%        (13,913)     -47.88%
Interest and financing expenses                    689,286      257.27%        690,038       226.60%
                                                ----------                   ----------
EBITDA                                             458,553      650.28%         13,600       100.96%
                                                ==========                   ==========
EBITDA net income per share                           0.28      533.70%            .01       100.92%
   Y/E 12/31/2002
Revenue                                         31,540,675                  31,540,675
Gross Profit                                     1,698,297                   1,698,297
SG&A                                             2,335,719                   3,666,235
Net loss                                        (1,142,511)                 (2,486,567)
Net loss per common  share                           (0.88)                      (1.91)
Depreciation and amortization                      869,273                      893,935
Interest income                                     (3,024)                    (26,695)
Interest and financing expenses                    192,931                      211,279
                                                ----------                   ----------
EBITDA                                             (83,331)                  (1,408,048)
                                                ==========                   ==========
EBITDA net income per share                          (0.06)                       (1.08)

</TABLE>

     Revenues  increased by 29% to  $40,540,577  for the year ended  December 31
2003 as compared  $31,540,675  for the year ended  December 31,  2002.  Revenues
increased across all of the Company's business segments.  The largest percentage
increase was in the Company's B2C operations. Revenues increased in this segment
as a result of the Company's  acquisition  of Cigars Around the World in June of
2003. The Company's  grocery  operation  continued to develop  additional vendor
relationships  in the grocery and HBA  businesses as well as expand its sales in
Canada.  Proset  increased  its  revenues  by  selling  its  products  to larger
distributors as well as retail customers.

     Gross profit  increased by 65% to $2.8 million in 2003 as compared to 2002.
The overall gross profit percentage increased to 6.9% to from 5.4%. The increase
in  gross  profit  is  attributable  to  better  operating  margins  in the  B2B
operations  realized through higher vendor  allowances as well as an increase of
Direct Store  Delivery  sales,  whose sales generate  higher gross margins.  The
acquisition  of CAW also helped  increase  gross profit.  The following  segment
analysis  will  further  define the  components,  which  caused the  increase in
operating gross profit.  In this period the Company utilized its own truck fleet
and developed a Direct Store Delivery (DSD) warehousing operation which cost the
Company $371,000 as compared to $209,000 in 2002.  Management believes that this
operation should increase the Company's sales and gross profit. In order for the
Company to achieve improved profitability it needs to reduce its financing costs
and increase revenues and operating margins.

                                       19

<PAGE>

     Selling General and Administrative  expenses (SGA) were reduced by 16% even
though  revenues  increased by 28.5% for the period  ended  December 31, 2003 as
compared to the prior annual period.  The Company  streamlined its operations by
centralizing  all  administrative  functions at its corporate  offices,  reduced
staff in its Proset operation through outsourcing, while also reducing the costs
involved in retail  sales.  The Company  reduced its  advertising  expenses on a
corporate level as well as reduced developmental expenses in its B2C businesses.
The largest  subsidiary of the Company,  PHS Group increased its SGA expenses by
33.2% to $1,323,877 in 2003 as compared to $993,664 in 2002. The increase in SGA
for PHS group was caused by a 25%  increase  in  revenues.  PHS incurs  variable
expenses in connection with selling costs as well as its  promotional  expenses.
As revenues rise, sales  commissions and certain  operating  expenses  resulting
from sales increase commensurately.

     The net loss of the  Company was  reduced by 49% to  $1,355,223  in 2003 as
compared to a net loss of $2,486,567 in 2002. The loss was reduced through sales
growth,  an increase in operating gross profit, a reduction of SG&A expenses and
a  significant  reduction  in  corporate  expenses.   However,  financing  costs
increased for the year as a result of the  Company's  growth.  Material  factors
that affected the Company's costs were increased financing costs and the control
of operating  margins.  The increase was  attributable to the development of the
Company's wholesaling operation.  Corporate expenses such as legal,  accounting,
and regulatory costs represent the difference between the Company's consolidated
results and operating results.  Management  believes that its corporate expenses
may increase as a result of additional  regulatory  requirements  that have been
enacted by the Securities  and Exchange  Commission  (SEC).  The Company will be
required to comply with  additional  governance and financial  regulations  that
will likely result in additional corporate expenses. Corporate expenses for 2003
totaled $434,433, which include legal, accounting and regulatory expenses.

                                       20

<PAGE>

     Earnings before  interest taxes,  depreciation  and  amortization  (EBITDA)
improved  from a loss of  $1,408,048  to a profit of $13,600  for the year ended
December  31,  2003 as  compared  to  December  31,  2002.  The  improvement  is
attributable  to an increase in revenues,  an increase in operating gross profit
and a reduction in SG&A.  However financing costs increased by 226% to $690,038.
Management  believes that financing  costs were increased as a result of revenue
growth.  As a result the Company  was  required to utilize its line of credit to
support account  receivable and inventory  growth.  Although the working capital
needed to support  revenue growth is directly  related to the growth in accounts
receivable and inventory,  the Company has invested in capital  assets,  such as
warehousing  and trucks to support the growth of the  business.  EBITDA from the
Company's operating businesses increased by 650% to $458,553 in 2003 as compared
to a loss of $83,331 in 2002.

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

B2B OPERATIONS

     The Company's B2B operations consist of two operating businesses, PHS Group
and Proset Hair  Systems.  PHS Group  distributes  Grocery  and HBA  products to
retailers  and  wholesalers  predominately  located in the  Northeastern  United
States and Canada.  PHS is the largest  subsidiary of the Company and represents
about 86% of the  overall  company  sales.  PHS's  core  sales  base  remain the
distribution of nationally  branded consumer  products in the grocery and health
and beauty (HBA) sectors.  PHS has positioned  itself as a distributor for major
manufacturers as opposed to a full line  wholesaler.  A full line wholesaler has
the responsibility of servicing the entire needs of a retail operation, where as
a distributor caters to specific merchandising  categories.  As a result, PHS is
able to plan the needs of its  customers  directly from the source of supply and
in  turn  increase  sales  to its  customers  through  this  unique  focus.  PHS
concentrates  on the fastest  moving  promotional  items and uses  logistics and
distribution  savings  to  streamline  and reduce  its sale  prices.  The second
business  segment  within  the  company's  B2B  sector  is Proset  Hair  Systems
(Proset).   Proset   distributes   Salon  Hair  care  products  to  wholesalers,
distributors, chain drug stores and supermarkets in the Northeastern part of the
United States.

PHS SEGMENT INFORMATION OF OPERATING BUSINESSES

                                                   B2B        CHANGE
Year ended December 31, 2003
Revenue                                       34,740,999       25.21%
Gross Profit                                   1,927,416       77.96%
SG&A                                           1,323,887       33.24%
Net loss                                         (79,864)      72.75%

Depreciation and amortization                    272,812        0.05%
Interest income                                  (13,805)     356.51%
Interest and financing expenses                  449,876      375.65%
EBITDA                                           629,019      784.24%

Year ended December 31, 2002
Revenue                                       27,745,818
Gross Profit                                   1,083,069
SG&A                                             993,644
Net loss                                        (293,088)

Depreciation and amortization                    272,667
Interest income                                   (3,024)
Interest and financing expenses                   94,582
EBITDA                                            71,137

                                       21

<PAGE>

     PHS  increased  its  revenues by 25.2% to $34.7  million for the year ended
December 31, 2003 as compared to the prior year. The increase in PHS business is
attributable  to  the  utilization  of  additional  vendors,  development  of  a
wholesale  operation  and  expansion  of the Canadian  distribution  business in
Ontario,  Canada.  The  Company  also  benefited  from  increases  in the vendor
allowances it receives from its vendors,  thereby  providing its customers  with
additional  discounts.  This also  resulted in  increased  sales.  Gross  profit
increased by 78% to $1.9 million in 2003 as compared to 2002.  PHS increased its
gross  profit  by  increasing  DSD  sales  as well as  focusing  on  promotional
merchandise  offered by its vendors. In 2003 several PHS vendors created special
packaging with promotional  pricing that enabled PHS to widen its margin.  As an
example, special packaging was created for Nyquil, Marcal paper, Clorox displays
as well as Herbal  essence  shampoos  among others,  with unique retail  display
features,  that PHS has been able to strongly  promote during FY 2003 as opposed
to marketing those products for normal replenishment. Promotional displays allow
PHS to sell  better  mixes  of  product  as  well  as  introduce  new  items  in
combination  with  regularly  stocked  items.  Vendor  allowances  as  a  result
increased  by 69% to $2.7  million in 2003 as compared to $1.6  million in 2002,
thus materially increasing PHS gross profit in 2003. EBITDA increased by 9 times
to  $629,019  in 2003 as  compared  to $71,137 in 2002.  As long as the  Company
maintains or expands its vendor  relationships,  management believes that it can
continue to improve its operating  results.  Management needs to also reduce its
financing  costs  for PHS as they  represent  71% of  EBITDA  and a  substantial
component of the Company's overall expenditures.


PROSET SEGMENT INFORMATION OF OPERATING BUSINESSES


                                                  Salon
                                                 products    CHANGE
Year ended December 31, 2003
Revenue                                        3,671,106      44.69%
Gross Profit                                     344,305      9.20%
SG&A                                             429,684     -29.91%
Net loss                                        (502,158)     39.77%

Depreciation and amortization                    213,198     -54.53%

Interest and financing expenses                  199,892     231.30%
EBITDA                                           (89,068)     70.75%

Year ended December 31, 2002
Revenue                                        2,537,216
Gross Profit                                     315,290
SG&A                                             613,077
Net loss                                        (833,712)

Depreciation and amortization                    468,842

Interest and financing expenses                   60,336
EBITDA                                          (304,534)

                                       22

<PAGE>

     Proset  increased  its  revenues by 44.7% in 2003 as compared to 2002.  The
growth  in  Proset  business  is   attributable   to  increased   wholesale  and
distribution  activity, as opposed to Direct Store Delivery (DSD) business. As a
result, the Company's customer base has expanded to include smaller distributors
that purchase  salon  products in higher  quantities,  which in turn reduces the
Company's  gross profit,  but increases  revenues.  However,  distributor  sales
require less labor,  warehousing  and  distribution  costs,  but rely on optimal
market  conditions  and  product  availability.  The  salon  business  is highly
fragmented and very  competitive.  Proset must maintain strong vendor relations,
which  include  manufacturers,  distributors  and  resellers  in order to keep a
supply chain for its customer base.  EBITDA  improved from a loss of $304,534 in
2002 to a loss of $89,068 in 2003. This improvement was caused by a reduction in
labor cost, warehousing expenses,  increased revenues and a reduction in freight
expenses.  Financing  costs are also an  important  factor in the  operation  of
Proset. As revenues increased financing costs increased by 231% to $199,892.  In
order to improve the profitability of Proset, management believes that financing
costs need to reduced.

B2C SEGMENT INFORMATION OF OPERATING BUSINESSES

                                                    B2C           CHANGE
Year ended December 31, 2003
Revenue                                           2,128,472       69.24%
Gross Profit                                        537,478       79.20%
SG&A                                                888,293       21.85%
Net loss                                          (235,636)    -1399.82%

Depreciation and amortization                      114,720       -10.21%
Interest and financing expenses                     39,518         3.96%
EBITDA                                             (81,398)      154.24%


Year ended December 31, 2002
Revenue                                          1,257,641
Gross Profit                                       299,938
SG&A                                               728,998
Net loss                                           (15,711)

Depreciation and amortization                      127,764
Interest and financing expenses                     38,013
EBITDA                                             150,066

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

     Revenues in the Company's B2C operation  increased by 69.2% to $2.1 million
from 2002 to 2003. The increase is predominately attributable to the acquisition
of CAW. The Company's  core  operation grew by 25% assuming CAW figures were not
included.  CAW on a current operating basis represents  approximately 60% of B2C
revenues.  Gross profit  improved by 79% in FY 2003 as compared to FY 2002.  The
increase in gross profit is attributable to higher revenues realized through the
acquisition of CAW in FY 2003. EBITDA improved by 154% for the same period.  The
table above provides comparative details for the Company's B2C operation.

                                       23

<PAGE>

                         LIQUIDITY AND CAPITAL RESOURCES

     The  Company's  predominant  need for  working  capital is to  finance  its
Receivables  and  Inventory  levels.  In order to finance its  requirements  the
Company has relied on secured debt  financings,  trade  financing,  equity based
financing as well as its cash flow from operations.  The Company's major lender,
International   Investment  Group  Trade  Opportunities  Fund  (IIG),   provides
receivable and inventory financing to its three operating segments. In addition,
most of the Company's major vendors  provide trade credit for purchases  ranging
from  COD to 30 days.  One  vendor  to the  Company  represents  over 53% of the
Company's purchases. Loss of this vendor would have a material adverse effect on
the Company's operations.

Liquidity and Capital Resources

Year ended                              2004          2003

Working Capital                      $3,064,266     $ 1,041,027       194.35%
Assets                             $ 16,706,423    $ 10,992,645        51.98%
Liabilities                        $ 10,133,366     $ 8,048,813        25.90%
Equity                               $6,573,057     $ 2,943,832       123.28%
Line of Credit Facility              $4,976,610     $ 4,013,680        23.99%
Receivable turnover (days)                   47              34
Inventory Turnover (days)                    12              20
Tangible Assets                    $ 14,890,182     $ 9,304,092        60.04%

     The  Company  has a  revolving  loan and  security  agreement  with IIG for
financing its operations. The line of credit under the loan allows borrowings up
to $8.5 million for accounts  receivable,  purchase orders,  and inventory based
upon a borrowing  base  formula.  The term of the  agreement is for one year and
allows for renewals.  As of December 31, 2004 the Company's  borrowing under its
agreement  were $4.9 million an increase of 24% as compared to 2003. In November
of 2003, PHS secured a $2 million stand by letter of credit (LC) for the purpose
of increasing its line of credit to $3.5 million with a major vendor. The LC was
secured by a $500,000 cash deposit as well as certain  reserves  modified  under
the loan and security  agreement  with IIG. The LC expired in May 2004, at which
time the cash deposit and reserves were released.  The increased  vendor line of
credit facility has enabled the Company to secure special  promotional  products
specifically designed for the cold and flu season, which increases the Company's
average purchases from approximately $40,000 per order to approximately $150,000
per order.  Management believes that its IIG facility has enabled the Company to
achieve  its recent  growth.  By  providing  financing  on all of the  Company's
tangible  assets,  the  Company  has  been  able to  expand  its  sales  through
receivable order and inventory  financing support.  In addition IIG provides the
Company with a financing option in Canada,  borrowing against anticipated vendor
allowances as well as securing  product through sales order  financing.  However
IIG's financing rate is 17% and as a result caused financing charges to increase
materially in 2004.  Management believes that to achieve profitable  operations,
financing  costs  must be  reduced.  By  improving  its  operating  results  and
especially EBITDA,  management expects to generate positive cash flow,  assuming
financing  costs can be reduced.  However,  there can be no  assurance  that the
Company will reduce its  financing  costs,  so that it can improve its operating
results.  Failure to reduce  financing costs will inhibit the Company's  growth.
Management  believes that its current capital  structure needs to be improved in
order to secure a profitable operation.

                                       24

<PAGE>

     As the Company's  operations  have grown the Company has been able to raise
additional  capital  predominately  through its shareholders  and  institutional
placements.  In 2003,  the Company  raised $1.6 million  through the issuance of
Series A Class B preferred  Stock and $850,000  through 12% notes secured by its
investment in ITT, a 21.5% investee.

     In December 2004, the Company sold accounts  receivable  attributable  to a
selected  customer  base  to West  Coast  Supplies  Inc.  for  $2,200,000.  This
promissory note, which is secured by the accounts  receivable,  requires monthly
payments of principle  and interest at 4% for seven years,  beginning in January
2005. As a condition for the sale,  the Company is obligated to issue West Coast
50,000  shares of common  stock,  which will vest through  April 1, 2006. In the
event  the  value of the  shares is less than  $200,000  at April 1,  2006,  the
Company will be obligated to pay the  difference in cash or  additional  shares.
The Company does not anticipate  selling selected products to this customer base
in the future.  Sales of selected  products to this customer  base  approximated
$3,180,000 in 2004.  Proset further intends to service the salon hair care needs
of BeautyBuys.com and PHS Retail based accounts.  The Company beleives that this
transaction  should  have a positive  effect on working  capital  for its Proset
operation  and should reduce the  dependence  of asset based  financing for this
operation.

     In November  2004, the Board of Directors  approved a Private  Placement in
which 17 units  were  offered,  with each unit  consisting  of 10,000  shares of
unregistered Class B, Series A preferred Stock and 15,000 shares of unregistered
restricted  Common Stock at a purchase  price of $100,000 per unit.  In November
2004, the Company sold 17 units and received aggregate proceeds of $1,700,000.

     On March 1, 2004, the Company received $490,000 pursuant to the issuance of
three  secured  promissory  notes  from  certain  shareholders  of ITT,  a 21.5%
investee. 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 28, 2006. In 2004,  certain  shareholders of ITT converted  $613,646 of
debt into 153,156 shares of common stock.  Also, in 2004, the Company  converted
$1,621,000 outstanding debt of IIG into 435,182 shares of common stock.

     On April 2, 2004,  the Company  completed a  financing  with Laurus  Master
Funds ("Laurus").  The financing consisted of a $1.5 million secured convertible
debenture that converts into common stock under certain  conditions at $5.00 per
share and matures on April 2, 2007. The debenture  provides for monthly payments
of $50,000, plus interest,  commencing October 1, 2004. In addition,  Laurus was
issued 100,000  warrants  exercisable at $5.00 per share.  The Company's  common
stock quoted market price at date of closing was $4.15 per share.  The debenture
has a  three-year  term with a coupon rate of prime (5.25% at December 31, 2004)
plus 3%. The Company  has filed an S-3  registration  statement,  which has been
granted  effectiveness to register the common stock underlying the debenture and
warrant.  In 2004, the Company converted  $500,000 of this outstanding debt into
100,000  shares of common  stock.  The Company  repaid  $100,000 of this debt in
2004. On January 25, 2005 the Company  completed a financing  with Laurus Master
Funds  ("Laurus").  The financing  consisted of a $500,000  secured  convertible
debenture that converts into common stock under certain  conditions at $3.50 per
share or matures January 25, 2008. The debenture  provides for monthly  payments
of $16,666.67 plus interest,  commencing August 1, 2005. In addition, Laurus was
issued 33,333  warrants  exercisable  at $3.50 per share.  The Company's  common
stock  quoted  market  price at the date of  closing  was $2.52 per  share.  The
debenture  has a  three-year  term with a coupon  rate of prime  plus 3%. As the
company grows it intends to raise  additional  capital to accommodate its growth
plans  however,  there  can  be no  assurance  that  additional  capital  can be
attained.

     Working capital at December 31, 2004 totaled  approximately  $3.1 million a
increase of 2.0 million from 2003. The Company's operations require financing of
inventory and receivables.  IIG provides the company's operating  subsidiaries a
facility  that  allows for  borrowings  of up to 85% against  eligible  accounts
receivables  and 50% against  eligible  inventory  and orders in transit.  It is
important to note that as the borrowings  increase from IIG,  commensurate  with
increased revenues and additional need for inventory, additional capital will be
needed to  support  the  borrowing  base with IIG.  Therefore  as the  financial
leverage of the company  increases,  additional capital is needed to support the
company's   growth.   The  Company  turns  its  overall   inventory  on  average
approximately  every 12 days, its receivables average 47 days of collections the
turn is computed on ending balances.

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

                                       25

<PAGE>

     The following table presents the Company's  expected cash  requirements for
Contractual obligations outstanding as of December 31, 2004.

                                           Payments Due By Period

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

Line-Of-Credit             $4,976,610                                 $4,976,610

Notes Payable              $  384,021  $1,196,241                     $1,580,262

Operating Leases           $   35,092  $1,054,110  $684,122 $521,430  $2,294,754

Total Contractual
  Cash Obligations         $5,395,723  $2,250,351  $684,122 $521,430  $8,851,626

CRITICAL ACCOUNTING POLICIES.

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

ACCOUNTS RECEIVABLE/ALLOWANCE FOR DOUBTFUL ACCOUNTS.

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

VALUATION OF DEFERRED TAX ASSETS.

     Deferred tax assets and liabilities represent temporary differences between
the basis of assets and  liabilities  for financial  reporting  purposes and tax
purposes.  Deferred tax assets are primarily  comprised of reserves,  which have
been deducted for financial statement  purposes,  but have not been deducted for
income tax purposes as well as net operating  loss carry  forwards.  The Company
annually reviews the deferred tax asset accounts to determine if is appears more
likely than not that the deferred tax assets will be fully realized. At December
31, 2004, the Company has established a full valuation allowance.

                                       26

<PAGE>

VALUATION OF LONG-LIVED ASSETS.

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

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

     In  December  2004,  the FASB  issued  SFAS  No.  123(R),  "Accounting  for
Stock-Based  Compensation"  ("SFAS No.  123(R)").  SFAS No.  123(R)  establishes
standards for the accounting for  transactions in which an entity  exchanges its
equity  instruments for goods or services.  This statement  focuses primarily on
accounting  for  transactions  in which an entity obtains  employee  services in
share-based payment  transactions.  SFAS No. 123(R) requires that the fair value
of such  equity  instruments  be  recognized  as an  expense  in the  historical
financial  statements as services are performed.  Prior to SFAS No. 123(R), only
certain pro forma  disclosures  of fair value were  required.  The provisions of
this statement are effective as of the beginning of the first interim  reporting
period that begins after June 15, 2005.  The Company  adoption of SFAS No.123(R)
is not expected to have a material impact on the Company's financial position or
results of operations.

                                       27

<PAGE>

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

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

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.

                                       28

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

     1. THE COMPANY HAS INCURRED OPERATING LOSSES.

     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 other   working  capital  financing.  Due to a  pattern  of
historical  losses,  there is no assurance  that further  financing  will not be
needed for operating purposes.

     2. INTERNET

     The internet environment is still 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.

                                       29

<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 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.

     Although  the  Company  has in the last few years  leased a fleet of trucks
operated by the Company to make deliveries,  the Company is still dependent, for
shipping of product  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.

                                       30

<PAGE>

     8. POSSIBLE LOSS OF NASDAQ SMALL CAP LISTING.

     Synergy's  qualification  for trading on the NASDAQ Small Cap system has in
the past been questioned, the focus being on the market quotes for the Company's
stock,  the current bid price having for a time 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  in the  past  that
stockholders'  equity has fallen below minimum NASDAQ continued listing standard
of $2,500,000.  NASDAQ has established, and the Commission has approved, certain
maintenance  requirements  which the  Company  must  adhere  to  remain  listed,
including  the  requirement  that a stock listed in such market have a bid price
greater  than or equal to $1.00 and the  listed  Company  maintain  stockholders
equity above $2,500,000. The bid price per share for the Common Stock of Synergy
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",  including  what the  Company  believes  to be
stringent   disclosure   rules  very  different  from  NASDAQ  trading  practice
procedures.  These  disclosure  requirements may have the effect of reducing the
level of trading  activity  in the  secondary  market  for a stock that  becomes
subject to the penny stock  rules.  If the Common  Stock  became  subject to the
penny  stock  rules,  many   broker-dealers   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  has  achieved  and is  confident  of  maintaining  a level  of
Stockholders'  equity above $2,500,000.  Historical  stability combined with the
Company's   increasing   business   share  in  the  market  and  its  continuing
establishment as a viable force in the industries  wherein it participates gives
the Company  confidence that its  susceptibility to market  deficiencies is in a
much  lessened  state then in years past and that it can continue to achieve and
maintain NASDAQ listing compliance, but of this there can be no assurance.

     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.

                                       31

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

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

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

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

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

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

                                       32

<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.

                                       33

<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 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.


                                       34

<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.

                                       35

<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.

                                       36

<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.

                                       37

<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.

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

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

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

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

                                       38

<PAGE>

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

     31. TAXES MAY BE IMPOSED ON INTERNET COMMERCE.

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

     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.

                                       39

<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 8.  FINANCIAL STATEMENTS

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

                          INDEX TO FINANCIAL STATEMENTS

                                                                          Page

Reports of Independent Registered Public Accounting Firms             F-2-F-3
Consolidated Balance Sheets as of December 31, 2004 and 2003          F-4-F-5
Consolidated Statements of Operations for the Years Ended
    December 31, 2004, 2003 and 2002                                      F-6
Consolidated Statements of Changes in Stockholders' Equity
    and Comprehensive Loss for the
    Years Ended December 31, 2004, 2003 and 2002                     F-7-F-10
Consolidated Statements of Cash Flows for the Years Ended
    December 31, 2004, 2003 and 2002                                F-11-F-12
Notes to Consolidated Financial Statements                          F-13-F-38


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

                                      NONE

                                       40

<PAGE>

                                    PART III

     The  information  required by items  10-13 are omitted  pursuant to general
instruction  G(3) to Form 10K including  executive  compensation and auditor fee
information . The Company has included this  information in its proxy  statement
expected to be mailed to shareholders and filed with the Commission on or before
April 30, 2005. The annual  meeting is scheduled to be in June 2005.  Such Proxy
Statement is expected to be filed with the  Commission  by April 30, 2005 and is
incorporated herein by reference. The Company has established and adopted a Code
of Ethics outlining and providing  guidelines for executive and employer conduct
regarding  the  disclosure,  promotion  and  handling  of Company  business  and
business relationships and a policy for comment and complaint on compliance with
applicable  conduct  codes  ("whistleblower  policy")  and the  Company has also
established a Nominating  Committee of certain of its Directors to assist in the
election and  succession  of members of the  Company's  Board of Directors and a
Compensation Committee to assist in establishing executive compensation.  Copies
of the Company's Code of Ethics,  whistleblower policy, Nominating Committee and
Compensation  Committee  Charters may be found  disclosed in the aforesaid Proxy
Statement to be confirmed at the relevant  shareholders  meeting and included by
reference thereto on the Company's Internet home page website.

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

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

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

                                       41

<PAGE>

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

ITEM 15. EXHIBITS, LIST AND REPORTS ON FORM 8-K

1. (a) Exhibits:

   See Index to Exhibits

2. Reports on Form 8-K

     On  November  4, 2004 the  Company  filed an 8K Report  disclosing  certain
unregistered  sales of equity securities made in a 4(2) exempt offering of units
consisting of preferred  stock and Common Stock  resulting in gross  proceeds to
the  Company of  $1,500,000  and  disclosure  of the press  release  made by the
Company  relating  thereto,  and on November  19,  2004 the Company  filed an 8K
Report  disclosing  further  sales  of  securities  from the  earlier  disclosed
placement  to the extent of at an  additional  $200,000  to make the total gross
proceeds  received to $1,700,000 and including  disclosure of the relevant press
release made. On November 15, 2004 the Company disclosed and filed as an exhibit
thereto  its press  release  commenting  on its  third  quarter  2004  financial
results. Such were the only 8K reports filed during the fourth quarter of 2004.

3. Financial Statement Schedules
             None


                                       42

<PAGE>

                                   SIGNATURES


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

                               Synergy Brands Inc.



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

Dated: March 30, 2005

     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 30, 2005

                               by /s/ Mitchell Gerstein
                               ----------------------------------
                                      Mitchell Gerstein
                                      Chief Financial Officer
Signed: March 30, 2005
                               by /s/ Joel Sebastian
                               -----------------------------------
                                      Joel Sebastian, Director

Signed: March 30, 2005

                               by /s/ Lloyd Miller
                               -----------------------------------
                                      Lloyd Miller, Director
Signed: March 30, 2005

                               by /s/ Dominic Marsicovetere
                               -----------------------------------
                                      Dominic Marsicovetere, Director
Signed: March 30, 2005

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


Signed: March 30, 2005

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

Signed: March 30, 2005

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

                                       43

<PAGE>


                                 Certification

I, Mair Faibish, certify that:

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

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

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

4.  The  registrant's  other  certifying  officer  and  I  are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-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 30, 2005

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

                                       44

<PAGE>


                                  Certification

I, Mitchell Gerstein, certify that:

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

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

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

4.  The  registrant's  other  certifying  officer  and  I  are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-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 30, 2005

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


                                       45

<PAGE>



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Synergy Brands, Inc.

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

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of Synergy Brands, Inc.
as of December 31, 2004 and the results of its operations and its cash flows for
the year then ended in conformity with accounting  principles generally accepted
in the United States of America.


HOLTZ RUBENSTEIN REMINICK LLP
Melville, New York
March 17, 2005

                                      F-2

<PAGE>

            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 2003, and the related
consolidated  statements  of  operations,  changes in  stockholders'  equity and
comprehensive  loss and cash flows for each of the two years in the period ended
December 31, 2003.  These  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

We conducted  our audits in  accordance  with  standards  of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements  are free of material  misstatement.  The Company is not  required to
have,  nor were we  engaged to perform  an audit of its  internal  control  over
financial reporting.  Our audits included consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a  test  basis,  evidence  supporting  the  amounts  and  disclosures  in the
financial  statements,  assessing the accounting principles used and significant
estimates  made by  management,  as well as  evaluating  the  overall  financial
statement  presentation.  We beleive 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, 2003, and the  consolidated  results of
their operations and their  consolidated cash flows for each of the two years in
the period ended  December 31, 2003, in conformity  with  accounting  principles
generally accepted in the United States of America.


/S/ GRANT THRONTON LLP
----------------------
    GRANT THORNTON LLP
    New York, New York
    March 5, 2004

                                      F-3

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                           CONSOLIDATED BALANCE SHEETS

                           December 31, 2004 and 2003

                                     ASSETS

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

CURRENT ASSETS                                                                       2004                2003
                                                                               ----------           ---------
    Cash and cash equivalents                                                  $ 945,806            $ 777,522
    Cash collateral security deposit                                                    -             500,000
    Marketable securities                                                               -              46,035
    Accounts receivable trade, less allowance for doubtful accounts of
    $ 127,481 and $127,481                                                      7,227,489           3,630,007
    Other receivables                                                           1,264,242             674,519
    Notes receivable                                                              314,285                   -
    Inventory                                                                   1,826,274           2,164,116
    Prepaid assets and other current assets                                       423,295             509,479
                                                                               ----------           ---------
              Total Current Assets                                             12,001,391           8,301,678

PROPERTY AND EQUIPMENT, NET                                                       366,510             379,224

OTHER ASSETS                                                                      632,466             186,057

NOTES RECEIVABLE                                                                1,889,815             437,133

INTANGIBLE ASSETS, net of accumulated amortization of
$2,003,048 and $1,780,736                                                       1,301,944           1,524,256

GOODWILL                                                                          514,297             164,297
                                                                               ----------           ---------
TOTAL ASSETS                                                                 $ 16,706,423        $ 10,992,645
                                                                               ==========           =========

</TABLE>

         The accompanying notes are an integral part of this statement.

                                      F-4

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                     CONSOLIDATED BALANCE SHEETS (Continued)

                           December 31, 2004 and 2003

                      LIABILITIES AND STOCKHOLDERS' EQUITY


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

CURRENT LIABILITIES                                                                                    2004            2003
                                                                                                -----------     -----------
     Lines of credit                                                                            $ 4,976,610     $ 4,013,680
    Notes payable - current                                                                         384,021               -
    Accounts payable                                                                              3,482,456       3,108,695
    Related party note payable                                                                       56,972         100,800
    Accrued expenses                                                                                 37,066          37,476
                                                                                                -----------     -----------
                    Total Current Liabilities                                                     8,937,125       7,260,651

NOTES PAYABLE                                                                                     1,196,241         788,162

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
    Class A preferred stock - $.001 par value; 100,000 shares authorized
        and outstanding; liquidation preference of $10.50 per share                                     100             100
    Class B preferred stock - $.001 par value; 900,000 shares authorized, none issued                     -               -
    Class B Series A Preferred stock-$.001 per value; 500,000 shares authorized;
       330,000 and 160,000 shares issued and outstanding; liquidation preference of
       $10.00 per share                                                                                 330             160
    Common stock - $.001 par value; 5,000,000 shares authorized;
        3,263,992 and 1,919,359 shares issued                                                         3,264           1,919
    Additional paid-in capital                                                                   43,134,165      37,748,004
    Deficit                                                                                     (36,349,706)    (34,373,327)
     Unearned Compensation                                                                         (201,756)       (426,252)
    Accumulated other comprehensive loss                                                             (8,340)         (1,772)
                                                                                                -----------     -----------

                                                                                                  6,578,057       2,948,832

    Less treasury stock, at cost, 1,000 shares                                                       (5,000)         (5,000)
                                                                                                -----------     -----------

    Total Stockholders' Equity                                                                    6,573,057       2,943,832
                                                                                                -----------     -----------
    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                 $ 16,706,423     $10,992,645
                                                                                                ===========     ===========

</TABLE>

         The accompanying notes are an integral part of this statement.

                                      F-5

<PAGE>

                                           Synergy Brands, Inc. and Subsidiaries

                                           CONSOLIDATED STATEMENTS OF OPERATIONS

                                                 Years ended December 31,

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


                                                                             2004                 2003                  2002
                                                                          ------------          -----------            -----------

Net sales                                                                 $ 56,705,044          $40,540,577            $31,540,675
                                                                          ------------          -----------            -----------
Cost of sales
    Cost of product                                                         51,907,840           36,837,796             29,241,384
    Shipping and handling costs                                                900,205              893,582                600,994
                                                                          ------------          -----------            -----------
                                                                            52,808,045           37,731,378             29,842,378
                                                                          ------------          -----------            -----------
Gross profit                                                                 3,896,999            2,809,199              1,698,297
Operating expenses
    Advertising and promotional                                                150,181               91,634                469,965
    General and administrative                                               3,605,433            2,984,663              3,196,270
    Depreciation and amortization                                              659,490              692,698                893,935
                                                                          ------------          -----------            -----------
                                                                             4,415,104            3,768,995              4,560,170
                                                                          ------------          -----------            -----------
Operating loss                                                                (518,105)            (959,796)            (2,861,873)
Other income (expense)
    Interest income                                                              4,610               13,913                 26,695
    Other income (expense)                                                     (46,983)             298,932                514,860
    Equity in earnings of investee                                             172,224               92,424                 67,717
    Interest and financing expenses                                         (1,553,521)            (690,038)              (211,279)
                                                                          ------------          -----------            -----------
                                                                            (1,423,670)            (284,769)               397,993
                                                                          ------------          -----------            -----------
Loss before income taxes                                                    (1,941,775)          (1,244,565)            (2,463,880)
Income tax expense                                                              34,604               32,658                 22,687
                                                                          ------------          -----------            -----------
Net loss                                                                    (1,976,379)          (1,277,223)            (2,486,567)

Dividend-Preferred Stock                                                      (156,375)             (78,000)                  -
                                                                          ------------          -----------            -----------
Net loss attributable to common stockholders                              $ (2,132,754)       $  (1,355,223)         $  (2,486,567)
                                                                          ============          ===========            ===========
Basic and diluted net loss per common share:                                    $(0.97)              $(0.82)                $(1.91)
                                                                          ============          ===========            ===========
Weighted-average shares used in the computation of loss per
    common share:
       Basic and diluted                                                     2,209,371            1,652,019              1,302,042
                                                                          ============          ===========            ===========


</TABLE>

        The accompanying notes are an integral part of these statements

                                      F-6


<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF CHANGES IN
                   STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS

                  Years ended December 31, 2004, 2003 and 2002

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


                                            Class A           Class B - Series A
                                      -----------------      --------------------
                                        preferred stock         Preferred stock         Common stock
                                      -----------------      --------------------    -------------------
                                      Shares      Amount      Shares      Amount     Shares       Amount
                                      ------     -------     -------     -------    -------      -------

Balance at January 1, 2002           100,000      $100                              1,237,621     $1,238

Common stock  and options issued
   in connection with compensation
   Plan                                                                                85,500         85
Intrinsic value of stock options
   issued in connection with
   compensation plan
Issuance of restricted stock                                                            1,250          1
Purchase of treasury stock
Sale of treasury stock
Retirement of treasury stock
Extinguishment of notes  receivable                                                    25,000         25
Extinguishment of advertising and
   in-kind services receivable from
   stockholder                                                                         18,750         19
Change in unrealized gain on
    marketable securities
Cumulative translation adjustments
Net loss
                                     --------     ------      -------       ----    ---------     ------
Comprehensive loss
Balance at December 31, 2002         100,000     $ 100          --          --      1,368,121     $1,368
                                     ========     ======      =======       ====    =========     ======
Common stock and options issued
   in connection with compensation
   plan                                                                                93,438         93
Common stock issued                                                                    30,000         30
Net proceeds from issuance of
      common stock in
Connection with private placement                             160,000        160      160,000        160
Issuance of common stock in
      satisfaction of note                                                             15,300         15
Issuance of restricted stock in
      Connection with notes payable                                                    42,500         43
Issuance of common stock for services                                                 185,000        185
Issuance of common stock in
connection with CAW acquisition                                                        25,000         25
Purchase of Treasury stock
Sale of treasury stock
Preferred stock dividend
Consulting expense
Change in unrealized gain on
      Marketable securities
Cumulative translation adjustments
Net loss
                                     --------     ------      -------       ----    ---------     ------
Comprehensive loss

Balance at December 31, 2003         100,000      $100        160,000       $160    1,919,359     $1,919
                                     ========     ======      =======       ====    =========     ======

</TABLE>


                                      F-7


<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF CHANGES IN
                  STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS

                  Years ended December 31, 2004, 2003 and 2002

                                    CONTINUED


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

                                                                  Accumulated
                                       Additional                     other                                Stockholders'
                                        paid-in                   comprehensive   Treasury    Unearned        notes
                                        capital       Deficit     income (loss)    stock    Compensation   receivable
                                      -----------  -------------  -------------  ----------  -----------    ----------

Balance at January 1, 2002            $34,795,297  $(30,609,537)    $ 1,685      $(251,135)               $(115,629)

Common stock  and options issued
   in connection with compensation
   Plan                                   301,360                                                            (2,500)
Intrinsic value of stock options
   issued in connection with
   compensation plan                       49,825
Issuance of restricted stock                4,199
Purchase of treasury stock                                                         (75,752)
Sale of treasury stock                    (24,451)                                 130,948
Retirement of treasury stock             (167,500)                                 167,500
Extinguishment of notes  receivable        99,975                                                          113,129
Extinguishment of advertising and
   in-kind services receivable from
   stockholder                            151,981
Change in unrealized gain on
    marketable securities                                         (1,583)
Cumulative translation adjustment                                   (176)
Net loss                                             (2,486,567)
                                      -----------  -------------  -------       ----------  --------     ----------
Comprehensive loss
Balance at December 31, 2002          $35,210,686  $(33,096,104)  $  (74)        $ (28,439)    --         $ (5,000)
                                      ===========  =============  =======       ===========  ========     =========
Common stock and options issued
      in connection with compensation
      plan                                212,133                                                             5000
Common stock issued                        47,170
Net proceeds from issuance of
      common stock in
Connection with private placement       1,509,680
Issuance of common stock in
      satisfaction of note payable         39,985
Issuance of restricted stock in
      Connection with notes payable        97,957
Issuance of common stock for services      493,315                                          (493,500)
Issuance of common stock in
connection with CAW acquistion              99,975
Purchase of Treasury stock                                                        (122,779)
Sale of treasury stock                     115,103                                 146,218
Preferred stock dividend                   (78,000)
Consulting expense                                                                            67,248
Change in unrealized gain on
      Marketable securities                                        4,003
Cumulative translation adjustments                                (5,701)
Net loss                                             (1,277,223)
                                      -----------  -------------  -------       ----------  --------     ----------
Comprehensive loss

Balance at December 31, 2003           $37,748,004  $(34,373,327) $(1,772)        $(5,000)  $(426,252)       --
                                      ============ =============  =======       ==========  ========     ==========


</TABLE>

                                      F-7

<PAGE>


                      Synergy Brands, Inc. and Subsidiaries

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

                  Years ended December 31, 2004, 2003 and 2002

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

                                             Class A           Class B - Series A
                                          ----------------     -------------------
                                           preferred stock       Preferred stock           Common stock
                                          ----------------     -------------------       ------------------
                                           Shares   Amount      Shares     Amount        Shares      Amount
                                          ------- --------     --------   -------        -------    -------



Amortization of unearned compensation
Common stock returned and retired                                                        (61,500)       (61)
Common stock issued                                                                      100,000        100
Net proceeds from issuance of
      common stock in
Connection with private placement                              170,000        170        255,000        255
placement
Issuance of common stock for note
      conversions                                              688,338        688
Exercise of stock options                                      110,000        110
Issuance of common stock                                        58,195         58
for services
Issuance of common stock in
   connection with CAW acquisitions                            175,000        175
Issuance of common stock along                                  19,600         20
       with debt
Option Expense
Preferred stock dividend
Consulting expense
Change in unrealized gain on
      Marketable securities
Cumulative translation adjustments
Net loss
                                       --------     -----      -------     ------    ----------       ------
Comprehensive loss

Balance at December 31, 2004           100,000      $100       330,000       $330     3,263,992       3,264
                                       ========     =====      ======       ======    ==========      =======

</TABLE>

                                      F-8

<PAGE>


                      Synergy Brands, Inc. and Subsidiaries

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

                  Years ended December 31, 2004, 2003 and 2002

                                   CONTINUED

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


                                                                        Accumulated
                                             Additional                     other                                Stockholders'
                                              paid-in                   comprehensive   Treasury    Unearned        notes
                                              capital       Deficit     income (loss)    stock    Compensation   receivable
                                            -----------  -------------  -------------  ----------  -----------    ----------

Amortization of unearned compensation                                                                 224,496
Common stock returned and retired                61
Common stock issued                         470,685
Net proceeds from issuance of
      common stock in
Connection with private placement         1,454,575
placement
Issuance of common stock for note
      conversions                          2,733,957
Exercise of stock options                    102,140
Issuance of common stock for services        190,563
Issuance of common stock in
   connection with CAW acquisitions          524,825
Issuance of common stock along                74,980
       with debt
Option Expense                                30,750
Preferred stock dividend                    (156,375)
Consulting expense                           (40,000)
Change in unrealized gain on
      Marketable securities                                                 (4,105)
Cumulative translation                                                      (2,463)
adjustments
Net loss                                                  (1,976,379)
                                            -----------  -------------  -------------  ----------  -----------    ----------
Comprehensive loss

Balance at December 31, 2004               $43,134,165    $(36,349,706)      $(8,340)   $(5,000)    $(201,756)        --
                                            ===========  =============  =============  ==========  ===========    ==========

</TABLE>

                                      F-8

<PAGE>



                      Synergy Brands, Inc. and Subsidiaries

     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)

                  Years ended December 31, 2004, 2003 and 2002


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

                                                              Stockholder's
                                                               advertising
                                                               and in-kind        Total
                                                                services      stockholder's      Comprehensive
                                                                receivable        equity         loss
                                                            ---------------   -------------      -------------
Balance at January 1, 2002                                  $   (794,990)     $ 3,027,029

Common stock  and options issued
   in connection with compensation
   Plan                                                                          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)
Sale of treasury stock                                                           106,497
Retirement of treasury stock                                                          -
Extinguishment of notes receivable                                              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)         (2,486,567)
                                                            ---------------   -------------      -------------
Comprehensive loss                                                                              $(2,488,326)
                                                                                                 ===========
Balance at December 31, 2002                                  $      -      $ 2,082,537
                                                            ==============  ============
Common stock and options issued
      in connection with compensation Plan                                      217,226
Common stock issued                                                              47,200
Net proceeds from issuance of common stock in
      Connection with private placement                                       1,510,000
Issuance of common stock in satisfaction of note payable                         40,000
Issuance of restricted stock in
      Connection with notes payable                                              98,000
Issuance of common stock for services
Issuance of common stock in connection with CAW
acquistion                                                                      100,000
Purchase of treasury stock                                                     (122,779)
Sale of treasury stock                                                          261,321
Preferred Stock Dividend                                                        (78,000)
Consulting expense                                                               67,248
Change in unrealized gain on
      Marketable securities                                                       4,003                4,003
Cumulative translation adjustments                                               (5,701)              (5,701)
Net loss                                                                     (1,277,223)          (1,277,223)
                                                            ---------------   -------------      -------------
Comprehensive loss                                                                               ($1,278,921)
                                                                                                 ============
Balance at December 31, 2003                                                 $2,943,832
                                                            ===============  ===============

</TABLE>

         The accompanying notes are an integral point of this statement

                                      F-9

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)

                  Years ended December 31, 2004, 2003 and 2002


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

                                                      Stockholder's
                                                       advertising
                                                       and in-kind        Total
                                                         services      stockholder's     Comprehensive
                                                        receivable        equity              loss
                                                      -------------    -------------     -------------

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

</TABLE>


         The accompanying notes are an integral point of this statement

                                      F-10

<PAGE>


                      Synergy Brands, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                            Years ended December 31,


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

                                                                     2004             2003                   2002
                                                                ------------      -------------       -------------
Cash flows from operating activities
    Net loss                                                    $(1,976,379)      $ (1,277,223)       $ (2,486,567)
    Adjustments to reconcile net loss to net cash
       used in operating activities
          Loss on sale of accounts receivable                        79,134                  -                   -
         Depreciation and amortization                              659,490            625,450             893,935
         (Recovery of)/Provision for doubtful accounts                    -            (35,090)            112,351
         Amortization of financing cost                              90,746             82,142                   -
         Loss (gain) on sale of marketable securities                15,793            (10,828)             71,237
         Loss on sale of preferred stock of investee                                         -              57,600
         Equity in earnings of investee                            (172,224)           (92,424)            (67,717)
         Loss on forgiveness of stockholder's note                        -                  -             213,129
         receivable
         Loss on forgiveness of advertising receivable                    -                  -             290,217
         from a stockholder
         Gain on dissolution of subsidiary                                -                  -            (215,250)
         Gain on settlement of liabilities due to vendors                 -           (282,750)           (592,689)
         Dividends on preferred stock of subsidiary                                          -               6,125
         Non-cash compensation                                       30,750             67,248              49,825
         Operating expenses paid with common stock and
         warrants                                                   154,620            100,725             303,145
         Changes in operating assets and liabilities
             Net (increase) decrease in
                Accounts receivable and other receivables        (6,466,339)        (2,095,518)         (1,440,824)
                Inventory                                           337,842         (1,089,208)            265,263
                Prepaid expenses, related party note
                receivable and other assets                         (66,011)          (122,354)             26,050
             Net increase (decrease) in
                Accounts payable, related party note
                payable,                                            329,523          1,231,455            (605,182)
                accrued expenses and other current
                liabilities

           Other liabilities                                              -                  -             282,750
                                                                ------------      -------------       -------------
             Net cash used in operating activites                (6,983,055)        (2,898,375)         (2,836,602)
                                                                ------------      -------------       -------------
Cash flows from investing activities
    Payment of security deposit                                     (35,848)                 -                   -
    Purchase of business, net of cash acquired                            -           (414,000)                  -
    Purchase of marketable securities                              (168,377)          (488,868)           (979,379)
    Proceeds from sale of marketable securities                     194,515            460,060           2,635,571
    Purchase of property and equipment                             (112,058)           (28,638)            (14,342)
    Payment of collateral security deposit                                -           (500,000)                  -
    Refund of collateral security deposit                           500,000                  -             658,542
    Proceeds from sale of preferred stock of investee                     -                  -             230,400
    Purchase of customer lists                                            -                  -            (250,000)
    Payments received on notes receivable                           433,033              2,267                   -
    Issuance of notes receivable, net loss                               -            (329,000)           (110,400)
                                                                ------------      -------------       -------------
       Net cash provided by (used in) investing activities          811,265         (1,298,179)          2,170,392
                                                                ------------      -------------       -------------

</TABLE>

                                      F-11

<PAGE>


                      Synergy Brands, Inc. and Subsidiaries

                CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

                            Years ended December 31,


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


                                                                           2004                 2003               2002
                                                                           ------------       ------------        -----------
Cash flows from financing activities
    Borrowings under line of credit                                         35,608,070        $19,432,524        $10,486,724
    Repayments under line of credit                                        (33,024,140)       (17,172,964)        (9,130,942)
    Increase in deferred financing cost                                              -            (18,750)                 -
    Proceeds from the issuance of notes payable                              1,990,000            850,000            722,778
    Repayments of notes payable                                               (100,000)           (20,000)          (662,778)
    Due from broker                                                                  -                  -         (1,216,733)
    Proceeds from issuance of common stock                                     462,732             47,200                  -
    Net proceeds from the issuance of common and preferred stock in
    a private placement                                                      1,460,000          1,510,000                  -
    Proceeds from the exercise of stock purchase options                       102,250            111,500                  -
    Proceeds from the sale of treasury stock                                         -            261,321            106,497
    Proceeds from stock subscription                                                 -              5,000                  -
    Purchase of treasury stock                                                       -           (122,779)           (75,752)
     Payment of dividends                                                     (156,375)           (78,000)             -
                                                                           ------------       ------------        -----------

                      Net cash provided by financing activities               6,342,537         4,805,052            229,794
                                                                           ------------       ------------        -----------
  Foreign currency translation                                                  (2,463)            (5,700)              (176)
                                                                           ------------       ------------        -----------
Net Increase (Decrease) In Cash                                                 168,284           602,798           (436,592)
                                                                           ------------       ------------        -----------
Cash and cash equivalents, beginning of year                                    777,522           174,724            611,316
                                                                           ------------       ------------        -----------
Cash and cash equivalents, end of year                                        $ 945,806      $    777,522       $    174,724
                                                                           ------------       ------------        -----------
Supplemental disclosures of cash flow information:
    Cash paid during the year for
       Interest                                                            $  1,317,151     $     590,126      $     164,000
                                                                           ============       ============        ===========
       Income taxes paid                                                   $    34,604      $      32,658             23,000
                                                                           ============       ============        ===========
Supplemental disclosures of non-cash, investing
    and financing activities:
      Common stock issued for acquisition                                   $   244,068     $      100,000     $           -
                                                                           ============       ============        ===========
      Unrealized gains on marketable securities                             $        -      $        4,105     $         102
                                                                           ============       ============        ===========

      Common stock issued for notes receivable                              $        -      $            -     $       2,500
                                                                           ============       ============        ===========

      Common stock issued in satisfaction of note payable                   $        -      $       40,000     $           -
                                                                           ============       ============        ===========

      Common stock issued in connection with consulting agreement and       $        -      $      493,500     $           -
                                                                           ============       ============        ===========
      services
      Common stock issued for note conversions                              $   2,734,646   $            -     $           -
                                                                           ============       ============        ===========

</TABLE>

         The accompanying notes are an integral part of these statements

                                      F-12

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2004, 2003 and 2002

NOTE A - DESCRIPTION OF THE BUSINESS

     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.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

     1. Principles of Consolidation

     The accompanying  consolidated financial statements include the accounts of
     Synergy,  its  wholly-owned   subsidiaries  and  majority-owned  subsidiary
     (collectively, the "Company"). 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.

                                      F-13

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                        December 31, 2004, 2003 and 2002

     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, 2004,  all  marketable  securities
     held by the Company have been sold.  At December 31, 2003 , 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. Use of Estimates

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

     5. Accounts Receivable Trade

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

                                      F-14

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                        December 31, 2004, 2003 and 2002


NOTE B (continued)

     Accounts  receivable  trade,  net consist of the  following  components  at
     December 31, 2004 and 2003

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

                                                              2004             2003
                                                          ------------      ----------
         Accounts receivable - business to business       $ 7,218,366       $3,635,741
         Accounts receivable - business to consumer           136,604          121,747
                                                          ------------      ----------
                Total                                       7,354,970        3,757,488

         Less allowance for doubtful accounts                (127,481)        (127,481)
                                                          ------------      ----------
                                                          $ 7,227,489       $3,630,007
                                                          ============      ==========

</TABLE>

     Changes in the Company's  allowance for doubtful  accounts during the years
     ended December 31, 2004 and 2003 are as follows:

                                                            2004          2003
                                                        -----------   ----------
        Beginning balance                                $ 127,481    $ 162,571
        Provision for (reduction in) doubtful accounts           -      (35,090)
                                                        -----------   ----------
        Ending balance                                   $ 127,481     $127,481
                                                        ===========   ==========


     6. Business and Credit Concentrations

     Financial   instruments   that   potentially   subject   the   Company   to
     concentrations  of  credit  risk  consist  principally  of  cash  and  cash
     equivalents,  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, 2004 and 2003 totaled $756,150 and $629,164.
     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.

     During the year ended December 31, 2004,  sales to two customers  accounted
     for 21% and 18% of total sales, respectively.  Four customers accounted for
     26%, 26%, 22% and 11%,  respectively of accounts receivable at December 31,
     2004.

     During the year ended  December  31,  2003,  sales to two  customers  each,
     accounted  for 11% of total  sales,  and in 2002,  sales  for one  customer
     accounted for 11% of total sales, respectively. Two customers accounted for
     30% and 21%,  respectively  of accounts  receivable  at December  31, 2003.
     These  concentrations  relate  to  the  Company's  PHS  Group  segment.  In
     addition,  one customer in the Proset segment accounted for 12% of accounts
     receivable at December 31, 2003 (See Note S.)

     During the years  ended  December  31,  2004,  2003 and 2002,  the  Company
     purchased  approximately 53 %, 71% and 77%,  respectively,  of its products
     from  one   supplier.   If  the  Company  were  unable  to  maintain   this
     relationship, it might have a material impact on future operations.

                                      F-15

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                        December 31, 2004, 2003 and 2002


NOTE B (continued)

     7. Inventory

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

     8. Property and Equipment

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

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

     9. Web Site Development Costs

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

     10. Vendor Allowances

     In  November  2002,  the  Emerging  Issues  Task Force  ("EITF")  reached a
     consensus on the  application of EITF No. 02-16  "Accounting by a Customer"
     (including a reseller)  for Certain  Consideration  Received from a Vendor.
     EITF No.02-16  addresses how a reseller of vendor  products  should account
     for cash consideration recorded from a vendor. The Company adopted EITF No.
     02-16 and recognizes vendor allowances, at the date goods are purchased and
     recorded  under fixed and  determined  arrangements.  The Company  receives
     allowances  and credits from suppliers for volume  incentives,  promotional
     allowances  and, to a lesser extent,  new product  introductions  which are
     typically based on contractual  arrangements  covering a period of one year
     or less.  Volume  incentives  and  promotional  allowances  earned based on
     quantities  purchased  and  new  product  allowances  are  recognized  as a
     reduction  to the  cost of  purchased  inventory  and  recognized  when the
     related  inventory is sold.  Promotional  allowances  that are based on the
     sell-through  of products  are  recognized  as a reduction of cost of sales
     when the products are sold for which the promotional  allowances are given.
     For the years  ended  December  31, 2004 and 2003,  the Company  recognized
     approximately   $913,000   and  $318,000  in  vendor   allowances   arising
     from arrangements  with a major  supplier  that met the  criteria for being
     fixed and determinable.  Vendor allowances from manufacturers,  included in
     other receivables in the accompanying consolidated balance sheet aggregated
     $1,246,697 and $674,519 at December 31, 2004 and 2003.

                                      F-16

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                        December 31, 2004, 2003 and 2002

NOTE B (continued)

     11. Intangible Assets and Goodwill

     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.

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

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

     Prior to the adoption of Statement of Financial  Accounting  Standards  No.
     142  ("SFAS  No.  142"),  "Goodwill  and  Other Intangible  Assets,"  these
     intangible  assets other than Goodwill were amortized over their  estimated
     useful life of five years.  As a result of the  adoption of SFAS No. 142 in
     2002,  intangible  assets with  indefinite  useful  lives 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. In 2004 and 2003, the amortization  expense recorded
     for the years was $222,312 and $192,354.

     At  December  31, 2004 and 2003,  intangible  assets are  comprised  of the
     following:

         Amortized intangible assets              2004               2003
                                              ------------       ------------
           Customer lists                     $ 3,214,592        $ 3,114,629
           Less accumulated amortization       (2,003,048)        (1,680,773)
                                              ------------       ------------
                                                1,211,544          1,433,856
         Unamortized intangible assets
           Trade names                             90,400             90,400
                                              ------------       ------------
           Total                              $ 1,301,944        $ 1,524,256
                                              ============       ============

     Amortization  expense for the Company over the next five years is estimated
     to be approximately $222,000 per year.

                                      F-17

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                        December 31, 2004, 2003 and 2002


NOTE B (continued)

     12. Long-lived Assets

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

     13. Revenue Recognition

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

     14. Advertising

     The  Company  expenses  advertising  and  promotional  costs  as  incurred.
     Advertising and promotional expenses were approximately $ 150,000,  $91,000
     and $470,000 for the years ended December 31, 2004, 2003 and 2002.

     15. Income Taxes

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

     16. 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.

     17. Basic and Diluted Loss Per Share

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

                                      F-18

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                        December 31, 2004, 2003 and 2002


NOTE B (continued)

     exercises of stock options and warrants of 681,650, 596,650 and 586,759 for
     the years ended December 31, 2004, 2003 and 2002,  respectively,  have been
     excluded from the  calculation of diluted loss per share since their effect
     would be antidilutive.

     18. Stock-Based Compensation Plans

     At December 31, 2004, the Company has two stock-based employee compensation
     plans,  which are described more fully in Note M. The Company  accounts for
     stock-based  compensation  to employees and  directors  using the intrinsic
     value method in accordance with Accounting Principles Board Opinion No. 25,
     "Accounting  for Stock Issued to  Employees,"  and related  Interpretations
     ("APB No. 25") and has adopted the  disclosure  provisions of SFAS No. 148.
     Under APB No. 25,  when the  exercise  price of the  Company's  employee or
     director stock options  equals the market price of the underlying  stock on
     the date of grant, no compensation expense is recognized.

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


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

                                                               Year ended December 31,
                                                                 2004            2003            2002
                                                           ------------        -----------    -----------

                                                           $(1,976,379)       $(1,277,223)   $(2,486,567)
             Net loss, as reported
             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                            $(1,976,379)       $(1,277,223)   $(3,037,992)
                                                           ------------        -----------    -----------
             Loss per share
                 Basic and diluted - as reported                $(0.97)            $(0.82)        $(1.91)
                                                           ------------        -----------    -----------
                 Basic and diluted - pro forma                  $(0.97)            $(0.82)        $(2.33)
                                                           ------------        -----------    -----------

</TABLE>


                                      F-19

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                        December 31, 2004, 2003 and 2002

NOTE B (continued)

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

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

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

                                                                    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, 2004 and
     2003.

     19. Segment Information

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

                                      F-20

<PAGE>


                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                        December 31, 2004, 2003 and 2002

NOTE B (CONTINUED)

     20. RECENT ACCOUNTING PRONOUNCEMENTS

     In  December  2004,  the FASB  issued  SFAS  No.  123(R),  "Accounting  for
     Stock-Based  Compensation" ("SFAS No. 123(R)"). SFAS No. 123(R) establishes
     standards for the accounting for  transactions in which an entity exchanges
     its  equity  instruments  for goods or  services.  This  statement  focuses
     primarily  on  accounting  for  transactions  in  which an  entity  obtains
     employee  services in  share-based  payment  transactions.  SFAS No. 123(R)
     requires that the fair value of such equity instruments be recognized as an
     expense in the historical  financial  statements as services are performed.
     Prior to SFAS No. 123(R),  only certain pro forma disclosures of fair value
     were  required.  The  provisions of this  statement are effective as of the
     beginning of the first interim  reporting period that begins after June 15,
     2005.  The Company  adoption of SFAS  No.123(R)  is not  expected to have a
     material  impact  on  the  Company's   financial  position  or  results  of
     operations.

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

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

                                      F-21

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                        December 31, 2004, 2003 and 2002

NOTE C - ACQUISTION

     On June 1, 2003,  the Company  acquired the common  stock of Ranley  Group,
     Inc. (d.b.a. Cigars Around the World ("CAW") of Chicago,  Illinois). CAW is
     a  leading  supplier  of  premium  hand  made  cigars  to some of the  most
     prestigious  hotels,  restaurants,  casinos  and golf  clubs in the  United
     States.  The  initial  purchase  price for the common  stock  acquired  was
     $425,000.  Additional  consideration of up to $450,000,  to be paid through
     the issuance of Class B, Series A Preferred stock, cash or common stock, is
     payable based upon the achievement of certain targeted operating results of
     CAW. In December 2003,  25,000 shares of common stock were issued valued at
     $100,000,  the quoted market price, and recorded as additional Goodwill for
     the purpose of satisfying the anticipated  consideration  due the seller by
     March 31, 2004,  based upon the operating  results of CAW through  December
     31, 2003. In February 2004, the Company issued an additional  25,000 shares
     in anticipation of satisfying the initial annual EBTDA requirements.  These
     shares were valued at $100,000,  the quoted market  price,  and recorded as
     additional Goodwill. In June 2004, the Company issued an additional 150,000
     shares,  of which 88,235 shares were used in anticipation of satisfying the
     CAW acquisition and 61,765 shares were issued for future shares. The shares
     were valued at $425,000,  and recorded as additional  Goodwill of $250,000,
     and prepaid compensation of $175,000.

     The  acquisition  of CAW has been  accounted for as a purchase  pursuant to
     SFAS No. 141, " Business  Combinations."  The  operations  of CAW have been
     included in the  Company's  statement of operations  since the  acquisition
     date. The following table  summarizes the assets and  liabilities  acquired
     from CAW based  upon the  Company's  initial  allocation  of the  aggregate
     purchase price of $425,000, including contingent consideration.

           Cash                                $   11,000
           Accounts Receivable                    374,000
           Other Assets                             9,000
           Customer List                          361,000
           Goodwill                                64,000
           Accounts Payable                      (331,000)
           Other Current Liabilities              (35,000)
           Other Long-Term Liabilities            (28,000)
                                               -----------
                                               $  425,000
                                               ===========

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

                                      F-22

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                        December 31, 2004, 2003 and 2002

NOTE C (continued)

     Summarized  below are the  unaudited pro forma results of operations of the
     Company  as if CAW  had  been  acquired  at  the  beginning  of  the  years
     presented:

                                                    Year Ended December 31,

                                                     2003                2002
                                                --------------      -----------
         Net sales                              $41,066,000         $32,935,000
         Net loss per common shareholder         (1,342,000)         (2,477,000)

         Net loss per common share:
         Basic                                       $(0.81)             $(1.90)
         Diluted                                     $(0.81)             $(1.90)

     The pro forma  financial  information  presented  above for the year  ended
     December  31, 2003 and 2002 are not  necessarily  indicative  of either the
     results of operations  that would have occurred had the  acquisition  taken
     place at the  beginning  of the periods  presented  or of future  operating
     results of the combined companies.

NOTE D - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

                                      F-23

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                        December 31, 2004, 2003 and 2002


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, 2003
     are as follows:


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

                                                                                      2003
                                                         -----------------------------------------------------
                                                                       Gross           Gross             Fair
                                                                    unrealized      unrealized          market
                                                        Cost           gains           losses            value
                                                       ---------    -----------     ----------         ---------

       Available-for-sale securities
            Equity securities                          $41,930        $4,105             -              $46,035

</TABLE>

     There were no securities available for sale at December 31, 2004.

     Proceeds from the sale of  available-for-sale  securities and the resulting
     net realized gains included in the  determination of net loss for the years
     ended December 31, 2004, 2003 and 2002 are as follows:

                                           2004            2003            2002
      Available-for-sale securities
        Proceeds                         $194,515       $460,060     $2,635,571
        Gross realized gains               19,973         27,713         66,414
        Gross realized losses             (35,766)       (16,885)      (137,651)

NOTE F - INVENTORY

     Inventory as of December 31, 2004 and 2003 consisted of the following:

                                                       2004              2003
                                                    -----------      ----------
       Grocery, health and beauty products          $1,375,165       $1,845,308
       Tobacco finished goods                          451,109          318,808

                                                    $1,826,274       $2,164,116
                                                    -----------      ----------

                                      F-24

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                        December 31, 2004, 2003 and 2002

NOTE G - PROPERTY AND EQUIPMENT

     Property and  equipment  as of December 31, 2004 and 2003  consisted of the
     following:


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

                                                           2004               2003
                                                        ----------         ---------
       Office equipment                                  $204,610          $ 204,610
       Furniture and fixtures                             231,265            231,266
       Leasehold improvements                             523,731            411,673
                                                        ----------         ---------
                                                          959,606            847,549

       Less accumulated depreciation and amortization    (593,096)          (468,325)
                                                        ----------         ---------
                                                        $ 366,510          $ 379,224
                                                        ----------         ---------

</TABLE>


     Depreciation  and  amortization  expense on property and  equipment for the
     years ended December 31, 2004,  2003 and 2002 was  approximately  $125,000,
     $123,000 and $118,000, respectively.

NOTE H - OTHER ASSETS

     Other assets consist of the following at December 31, 2004 and 2003:


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

                                                                                      2004             2003
                                                                                   ---------         ---------
       Investment (a)                                                               $336,828          $164,604
       CAW purchase agreement; net of accumulated amortization
       of $29,163                                                                    145,837                 -
       Website development costs, net of accumulated
          amortization of $929,479 and $924,104                                            -             5,375
       Deferred financing net of accumulated
          amortization of $32,625                                                    97,875                  -
       Other                                                                         51,926             16,078
                                                                                   ---------         ---------
                                                                                   $ 632,466         $ 186,057
                                                                                   =========         =========

</TABLE>


     (a) In December  2001,  the Company made an investment in Interline  Travel
     and Tour. Inc.  ("ITT") for  approximately  20 % of the outstanding  common
     stock.   At  December  31,  2004,  the  Companies   investment  in  ITT  is
     approximately  21.5% of the outstanding  common stock.  ITT provides cruise
     and resort  hotel  packages  through a  proprietary  reservation  system to
     airline  employees and their retirees.  The Company also purchased  288,000
     shares  of  nonvoting  redeemable  preferred  stock  of the  investee.  The
     aggregate  cost of the investment  was $290,880.  The Company  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 $172,224,  $92,424 and $67,717 during the years
     ended December 31, 2004, December 31, 2003 and

                                      F-25

<PAGE>


                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                        December 31, 2004, 2003 and 2002


NOTE H (continued)

     2002, respectively. At December 31, 2004, the Company's investment exceeded
     its shares of the  underlying  net assets of ITT by $65,000.  The excess is
     attributable to the goodwill of IIT.

     Summarized unaudited financial  information of this investee as of December
     31, 2004, 2003 and 2002 and for the years ended is as follows::


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

      Financial position:                                     2004                   2003             2002
                                                            ------------       ----------         ----------
      Current assets                                        $ 2,020,000        $1,511,000         $1,545,000
       Property and equipment                                   290,000           147,000            207,000
       Other assets                                             267,000           306,000            345,000
                                                            ------------       ----------         ----------
      Total assets                                          $ 2,577,000        $1,964,000         $2,097,000
                                                            ============       ==========         ==========
      Current liabilities                                   $ 1,322,000       $   972,000        $   737,000
      Long-term debt                                                  -            82,000            524,000
      Other long-term liabilities                                  4,000            9,000              3,000
                                                            ------------       ----------         ----------
      Total liabilities                                     $ 1,326,000        $1,063,000         $1,264,000
                                                            ============       ==========         ==========

      Results of operations:                                  2004                   2003              2002
                                                            ------------       ----------         ----------
      Revenues                                              $10,883,000       $ 9,602,000        $ 8,167,000
      Total expenses                                         (9,934,000)       (8,906,000)        (7,637,000)
      Other income                                              111,000            54,000             44,000
                                                            ------------       ----------         ----------
      Income before income taxes                              1,069,000           750,000            574,000
      Income tax expense                                       (359,000)         (268,000)          (210,000)
                                                            ------------       ----------         ----------
      Net income                                            $   701,000      $    482,000       $    364,000
                                                            ============       ==========         ==========


</TABLE>

                                      F-26

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                        December 31, 2004, 2003 and 2002

NOTE I - NOTES RECEIVABLE

     Through December 31, 2003, the Company provided  $429,600 in financing to a
     significant  customer who is a  distributor  of the  Company's  products in
     Canada and is expanding its  distribution  channel.  The  promissory  note,
     which is secured by accounts  receivable and  inventory,  bears interest at
     4%. The principle balance of $429,600 was paid March 31, 2004.

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


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

     In 2002,  the Company  entered  into a  promissory  note with a lender that
     provide for borrowings of $60,000 which,  bore interest at a rate of 9% per
     annum and was due on  December  31,  2004.  On March 31,  2003 the  Company
     entered into a modification agreement with the lender pursuant to which the
     Company  exchanged  the note for 15,300  shares of common  stock  valued at
     $40,000 and $20,000 in cash.

     In 2002, two of the Company's  subsidiaries entered into two revolving loan
     and security agreements with the same financial institution (the "Lender").
     The lines of credit,  as amended in September  2004,  under the loans allow
     for the  borrowing of up to  $8,500,000  based on the sum of 85% of the net
     face amount of eligible accounts receivable, as defined, plus the lesser of
     (1) $2,750,000 or (2) eligible inventory and eligible goods in transit,  as
     defined.  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.  As amended,  the
     agreements  extend  through May 31, 2005.  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, 2004, the interest rate on
     outstanding  borrowings was 17%. Outstanding  borrowings are collateralized
     by a  continuing  security  interest in all of the  subsidiaries'  accounts
     receivable, chattel paper, inventory,  equipment,  instruments,  investment
     property,  documents and general  intangibles.  The Company has  guaranteed
     these loans on an unsecured  basis. In November 2003, the Company secured a
     $2 million stand by letter of credit (LC) for the purpose of increasing its
     line of credit to $3.5 million with a major vendor. The LC was secured by a
     $500,000 cash deposit as well as certain  reserves  modified under the loan
     and  security  agreement  with the Lender.  The LC expired in May 2004,  at
     which time the cash deposit and reserves were  released.  525,000 shares of
     the  Company's  common  stock have also been pledged as  collateral  on the
     outstanding  borrowings.  In  2004,  the  lender  converted  $1,621,000  of
     outstanding  debt into 435,182 shares of common stock (see Note L).

                                      F-27

<PAGE>


                                    Synergy
                          Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                        December 31, 2004, 2003 and 2002

NOTE J (continued)

     On February 5, 2003, the Company received $500,000 pursuant to the issuance
     of two secured  promissory notes from certain  shareholders of ITT, a 21.5%
     investee.  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, 2006 as amended.  25,000  restricted  shares of the
     Company's  common  stock  were also  issued as part of the  financing.  The
     relative  estimated  fair  value of the  common  stock  that was  issued of
     $56,000 was recorded as debt  discount and will be amortized  over the life
     of these notes  payable.  In 2004, the Company  converted  $263,646 of this
     outstanding  debt  into  66,756  shares  of  common  stock  (see  note  L).
     Amortization  expense recorded in 2004 and 2003 was  approximately  $28,000
     and $26,000.  As security for the notes,  the Company pledged as collateral
     its investment in the common stock of ITT.

     On July 1, 2003, the Company received  $350,000 pursuant to the issuance of
     three secured  promissory  notes from certain  shareholders of ITT, a 21.5%
     investee.  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,  June 30, 2005. 17,500 restricted shares of the Company's common
     stock were also issued as part of the  financing.  The  relative  estimated
     fair value of the common  stock that was issued of $42,000 was  recorded as
     debt discount and will be amortized over the life of the notes payable.  In
     2004, the Company converted all of this outstanding debt into 86,400 shares
     of common  stock (see Note L).  Amortization  recorded in 2004 and 2003 was
     approximately $31,000 and $10,000.

     1. On March 1, 2004, the Company received $490,000 pursuant to the issuance
     of three secured promissory notes from certain shareholders of ITT, a 21.5%
     investee.  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 28, 2006.  19,600  restricted  shares of the Company's
     common  stock  were also  issued  as part of the  financing.  The  relative
     estimated  fair  value of the common  stock that was issued of $75,000  was
     recorded as debt discount and will be amortized  over the life of the notes
     payable.  As security for the notes,  the Company pledged as collateral its
     investment in the common stock of ITT (see Note H).  Amortization  recorded
     in 2004  was  approximately  $31,000.

     2. On April 2, 2004,  the Company  completed a financing with Laurus Master
     Funds  ("Laurus").  The  financing  consisted  of a  $1.5  million  secured
     convertible  debenture  that  converts  into  common  stock  under  certain
     conditions  at $5.00 per share and matures on April 2, 2007.  The debenture
     provides for monthly payments of $50,000, plus interest, commencing October
     1, 2004. In addition,  Laurus was issued warrants to purchase up to 100,000
     shares  of  common  stock at an  exercise  price of $5.00  per  share.  The
     Company's common stock quoted market price at the date of closing was $4.15
     per share.  The debenture has a three-year term with a coupon rate of prime
     (5.25%  at  December  31,  2004)  plus 3%.  The  Company  has  filed an S-3
     registration  statement,  which has been granted  effectiveness to register
     the common stock underlying the debenture and warrant. In 2004, the Company
     converted  $500,000 of this  outstanding debt into 100,000 shares of common
     stock. The Company repaid $100,000 of this debt in 2004.

     Aggregate maturities of notes payable at December 31, 2004 are as follows:

        Year Ending December 31,
         2005     $   384,021
         2006     $ 1,046,241
         2007     $   150,000
     Total         $1,580,262

     On January 25, 2005,  the Company  completed a financing with Laurus Master
     Funds ("Laurus"). The financing consisted of a $500,000 secured convertible
     debenture that converts into common stock under certain conditions at $3.50
     per share and matures on January 25, 2008.  The financing  provides  Laurus
     with  registration  rights for common shares it is issued under conversion.
     The debenture  provides for monthly  payments of $16,666.67  plus interest,
     commencing  August 1, 2005. In addition,  Laurus was issued 33,333 warrants
     exercisable at $ 3.50 per share.  The Company's  common stock quoted market
     price at the date of  closing  was $2.52 per  share.  The  debenture  has a
     three-year term with a coupon rate of prime plus 3%.

                                      F-28

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                        December 31, 2004, 2003 and 2002

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.

     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  2002
     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.

     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  Sinclair.  In addition,  the Company  issued 75,000 shares of
     stock and 31,250  warrants  exercisable at $5.00 to Sinclair 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 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 January 2003, the Company designated 100,000 shares of Class B Preferred
     stock,  par value  $.001 per share to be  designated  as Class B,  Series A
     Preferred  Stock and in June 2003,  the Company  increased  the  authorized
     Class B, Series A preferred stock to 500,000  shares.  The holders of Class
     B, Series A Preferred  Stock have no voting  rights with respect to general
     corporate  matters.  The holders of Class B,  Series A Preferred  Stock are
     entitled  to receive  dividends  at the  annual  rate of $.90 per share per
     annum.  The Company may, as its option,  at any time in whole, or from time
     to  time  in  part,  out  of  earned  funds,  capital  and  surplus  of the
     Corporation,  redeem the Class B, Series A Preferred  Stock on any date set
     by the Board of  Directors,  at $10.00 per share  plus,  in each  case,  an
     amount equal to all dividends of Class B, Series A Preferred  Stock accrued
     and unpaid thereon, pro rata to the date of redemption.  If, however, as to
     each  share of  Class  B,  Series A  Preferred  Stock  outstanding,  if not
     redeemed by the Company within 2 years of the issuance of such shares,  the
     Company  will be  obligated  to issue to the then  holder of record of such
     outstanding  Class  B,  Series  A  Preferred  Stock,  half a  share  of the
     Company's  unissued  restricted Common Stock per share of Class B, Series A
     Preferred Stock for each year that said share is not redeemed.  The Company
     issued 30,000 common shares to Class B Series A Preferred  shareholders  in
     January 2005.  No more that 19.9% of the  Company's  stock can be issued in
     connection  with stock  dividend  payments  against  the Class B,  Series A
     preferred stock.

                                      F-29

<PAGE>


                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                        December 31, 2004, 2003 and 2002

NOTE L (continued)

     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 Class
     B, Series A Preferred Stock and one share 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.

     In June 2003, the Board of Directors approved a second Private Placement in
     which 100,000 units were offered, with each unit consisting of one share of
     unregistered   Class  B,  Series  A  preferred   Stock  and  one  share  of
     unregistered  restricted  Common  Stock at a  purchase  price of $10.00 per
     unit. In June and July 2003, the Company sold 10,000 and 90,000,  units and
     received  aggregate  proceeds of $100,000  and  $900,000  respectively.  In
     connection  with the  January  and June  private  placements,  the  Company
     incurred $90,000 in legal fees which are netted against the proceeds.

     In July  2003,  the  Company  issued  150,000  shares  of  common  stock in
     connection  with an agreement  for  consulting  services for the three year
     period  ending June 30,  2006.  The Company  recorded  $403,500 as unearned
     compensation and recorded  compensation  expense of $67,248 for during 2003
     and $134,496 for 2004.

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

     In 2004,  certain  shareholders  of ITT  converted  $613,646  of debt  into
     153,156  shares of common stock.  In 2004,  Laurus  Master Funds  converted
     $500,000 of debt into 100,000  shares of common stock.  Also, in 2004,  the
     Company converted $1,621,000 outstanding debt of IIG into 435,182 shares of
     common stock (see Note J).

     During the years ended December 31, 2003 and 2002, the Company  repurchased
     47,866 and  21,329  shares of  treasury  stock for an  aggregate  amount of
     $122,779 and $75,752,  respectively.  The Company sold 54,366 shares of its
     treasury  stock  during the year ended  December 31,  2003,  for  aggregate
     proceeds of $261,321.

     For the years ended  December 31, 2004 and 2003,  the Company issued 58,195
     and  65,938  shares of common  stock as  compensation  for past and  future
     service and  recorded a charge to  operations  of $150,621  and $93,125 and
     unearned  compensation  of $90,000 in 2003. In 2003 the Company also issued
     options to purchase  75,000 shares of its common stock at a exercise  price
     of $4.00 per share,  with a fair value of $7,500, to a principal at a major
     customer in Canada and issued 30,000 shares of common stock to an unrelated
     third party for $47,200.

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

     The following is a summary of transactions  involving  warrants to purchase
     common stock for the years ended December 31, 2004, 2003 and 2002.

                                      F-30

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                        December 31, 2004, 2003 and 2002


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

                                                                                   Weighted-
                                                            Number                  average
                                                           of shares             exercise price
                                                          --------------        ----------------
         Outstanding at January 1, 2002                     281,250                  $ 12.27
             Granted                                         31,250                     5.00
             Cancelled/forfeited                            (85,000)                  (19.41)
                                                          --------------
         Outstanding at December 31, 2002                   227,500                     8.60
             Cancelled/forfeited                            (17,500)                  (35.00)

         Outstanding at December 31, 2003                   210,000                 $   6.40
                                                                                ----------------
             Granted                                        100,000                     5.00
                                                          --------------
         Outstanding at December 31, 2004                   310,000                  $  5.95
                                                          ==============        ----------------

</TABLE>


     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            2004            life (years)      price               2004            price
           -----------------        --------------    --------------  ----------         ---------------    --------
             $5.00                    273,750               3.45       $   5.00             173,750        $   5.00
           10.00 - $12.00              31,250                .97          10.40              31,250           10.40
           30.00 - 40.00                5,000                .33          30.00               5,000           30.00
                                    --------------    --------------  ----------         ---------------    --------
                                      310,000               3.15       $   5.95             310,000         $   5.95
                                    ==============    ==============  ==========         ===============    =========

</TABLE>

     Shares  issuable  under  outstanding  options,  warrants,  and  convertible
     securities at December 31, 2004 approximated 1,028,660.


                                      F-31

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                        December 31, 2004, 2003 and 2002

NOTE M - STOCK COMPENSATION PLANS

     In 1994, Synergy adopted the 1994 Services and Consulting Compensation Plan
     (the "Plan"). Under the Plan, as amended,  8,400,000 shares of common stock
     have been reserved for issuance.  The Plan  terminates  with respect to the
     granting  of common  stock and options in 2009 Since the  inception  of the
     Plan,  Synergy  has issued  1,181,033  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, 2004, 2003 and 2002, the Company issued
     42,195,  65,938 and 85,500  shares of its common  stock,  respectively,  to
     various  service  providers  and has  recorded  a  charge  to  earnings  of
     $150,621, $93,125 and $298,945. 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.  There were no options  issued  during the
     years ended December 31, 2004 and 2003.

     The following is a summary of such stock option  transactions for the years
     ended  December 31,  2004,  2003 and 2002 in  accordance  with the Plan and
     other restricted stock option agreements:


                                                                   Weighted-
                                               Number               average
                                              of shares          exercise price
                                             -------------       --------------
       Outstanding at January 1, 2002          140,809               $ 32.12
           Cancelled/forfeited                 (13,175)               (34.66)
           Granted                             356,625                  2.81
                                             -------------       --------------
       Outstanding at December 31, 2002        484,259                 10.46
           Granted                              85,000                  3.53
           Cancelled/forfeited                 (25,109)                (9.08)
           Exercised                           (62,500)                 1.84
                                             -------------       --------------
       Outstanding at December 31, 2003        481,650              $  10.42
           Exercised                          (110,000)                (3.68)
                                             -------------       --------------
       Outstanding at December 31, 2004         371,650             $  13.10
                                             =============       ==============

       Shares available for grant

         December 31, 2004                   7,218,967
                                             =============
         December 31, 2003                   7,261,162
                                             =============
         December 31, 2002                   7,457,291
                                             =============

                                      F-32

<PAGE>


                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                        December 31, 2004, 2003 and 2002

     NOTE M (continued)

     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            2004          life (years)       price              2004            price
           ------------------    -----------------  --------------   -----------      --------------    ----------

           $ 1.00 - $ 4.00           266,125              .12         $   3.85          266,125          $  3.85
           18.00 -  20.00             29,000              .35            18.34           29,000            18.34
           25.00 -  35.60             36,275              .31            27.36           36,275            27.36
           40.00 -  50.00              8,500              .01            42.94            8,500            42.94
           60.00 -  70.00             31,750              .38            61.57           31,750            61.57
                                =================  ==============   ===========      ==============    ==========
                                     371,650             .18           $ 13.10          371,650          $ 13.10
                                =================  ==============   ===========      ==============    ==========

</TABLE>



     The  Company  has also  reserved  100,000  shares for a stock  option  plan
     ("Option Plan") for nonemployee, independent directors, which entitles each
     nonemployee,  independent  director an option to purchase  10,000 shares of
     the Company's stock  immediately  upon election or re-election to the Board
     of  Directors.  Options  granted  under the Option Plan will be at the fair
     market value on the date of grant, immediately exercisable, and have a term
     of ten years.  The Company had no options  outstanding  and exercisable and
     84,000 shares available for grant at December 31, 2004 and 2003.

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,  2003  and  2002  aggregated
     approximately $55,000 and $134,000 respectively.

     At December 31, 2002,  there was an amount  receivable from the entity that
     is owned by the Company's Chairman and Chief Executive Officer  aggregating
     $44,750.  In the first  quarter of 2003,  the  receivable  was  repaid.  At
     December  31,  2004 and  2003,  $56,972  and  $100,800  is  payable  to the
     Company's Chairman and Chief Executive Officer for short-term advances made
     to the Company.


                                      F-33

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                        December 31, 2004, 2003 and 2002

NOTE O - OTHER INCOME (EXPENSE)

     Other income (expense) is comprised of the following:

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

                                                                                   2004          2003             2002
                                                                                -----------    ---------         --------
        Gain on settlements of liabilities due to vendors                       $       -       $282,750         $592,689
             (Note R-3)
         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)                   (15,793)        10,828          (71,237)
        Loss on sale of preferred stock of an investee (Note H)                         -              -          (57,600)
        Other                                                                      47,944          5,354          (51,113)
        Loss on sale of accounts receivable                                       (79,134)              -                -
                                                                                -----------    ---------         --------
                                                                                $ (46,983)      $298,932         $514,860
                                                                                ===========    =========         ========

</TABLE>

NOTE P - INCOME TAXES

     At December 31, 2004, the Company had a net operating loss carry forward of
     approximately  $32,042,000  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,  2004  were
     approximately as follows:

          Net operating loss carryforwards            10,894,000
          Fixed assets and intangibles                     1,000
          Allowance for doubtful accounts                 43,000
          Inventory                                       42,000
          Capital losses                                  56,000
          Other                                          (74,000)
          Valuation allowance                        (10,962,000)
                                                     ------------
                                                    $          -
                                                     ============

     Income taxes expense for the years ended  December 31, 2004,  2003 and 2002
     consisted of the following:

                                     2004           2003          2002
                                   --------       -------      --------
          State and local          $ 34,604       $32,658      $22,687
                                   ========       =======      ========

                                      F-34

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                        December 31, 2004, 2003 and 2002


NOTE P (continued)

     A  reconciliation  of  income  tax  expense  computed  at the U.S.  Federal
     statutory  rate of 34% and the  Company's  effective tax rate for the years
     ended December 31, 2004, 2003 and 2002 are as follows:


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

                                                                              2004             2003          2002
                                                                              ------         -------        ------
          Federal income tax expense at statutory rate                         (34)%         (34)%          (34)%

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

</TABLE>

NOTE Q - QUARTERLY FINANCIAL RESULTS (UNAUDITED)

     Quarterly  financial results for the years ended December 31, 2004 and 2003
     are as follows:


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

                                                                THREE MONTHS ENDED
                                                             3/31/2004        6/30/2004      9/30/2004    12/31/2004         TOTAL
    SALES                                                  $13,307,183      $12,860,329    $13,759,995   $16,777,537   $56,705,044
    GROSS PROFIT                                           $   817,524      $   698,205    $ 1,299,230   $ 1,082,040   $ 3,896,999
    INCOME(LOSS) BEFORE EXTRAORDINARY ITEMS                $  (457,974)     $  (700,008)   $  (170,230)  $  (804,542)  $ 2,132,754)

    NET INCOME(LOSS)  ATTRIBUTABLE TO COMMON STOCKHOLDER   $  (457,974)     $  (700,008)   $  (170,230)  $  (804,542)  $(2,132,754)
    BASIC AND DILUTED NET LOSS PER COMMON SHARE            $     (0.23)     $     (0.34)   $     (0.08)  $     (0.32)  $     (0.97)

                                                                     THREE MONTHS ENDED
                                                               3/31/03          6/30/03        9/30/03      12/31/03      TOTAL
    SALES                                                  $  9,079,644      $ 8,755,226    $10,278,027   $12,427,680  $ 40,540,577
    GROSS PROFIT                                           $    509,778      $   914,334    $   619,625   $   765,462  $  2,809,199
    INCOME(LOSS) BEFORE EXTRADORDINARY ITEMS               $   (132,818)     $   (97,551)   $ (627,923)   $  (496,931) $ (1,355,223)
    NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDER   $   (132,818)     $   (97,551)   $ (627,923)   $  (496,931) $ (1,355,223)
    BASIC AND DILUTED NET LOSS PER COMMON SHARE            $     (0.09)      $     (0.07)     $  (0.34)   $     (0.32) $      (0.82)

</TABLE>


NOTE R - 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
     $19,838,  $13,252 and $18,846 for the years ended  December 31, 2004,  2003
     and 2002, respectively.

                                      F-35

<PAGE>


                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                        December 31, 2004, 2003 and 2002

NOTE S - COMMITMENTS AND CONTINGENCIES

     1. Lease Commitments

     The  Company  leases  office and  warehouse  space under  operating  leases
     expiring at various  dates  through June 2011.  The Company is also leasing
     vehicles  under  operating  leases  expiring in 2004.  Future minimum lease
     payments under noncancelable  operating leases as of December 31, 2004 were
     as follows:

                         Year ending December 31,
                                2005                             $  384,609
                                2006                                358,444
                                2007                                346,148
                                2008                                341,158
                                2009                                342,964
                                                                -----------
                                                                 $1,773,323
                                                                ===========

     Rent expense under operating  leases for the years ended December 31, 2004,
     2003  and  2002  was   approximately   $190,000,   $112,000  and  $130,000,
     respectively.

     2. Litigation

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

     3. Other Liabilities

     Since 1999, the Company has disputed services performed by two vendors.  In
     December 31,  2002,  the Company and one 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
     service that it had disputed.  The Company recorded a gain of $592,689 as a
     result of the release by the vendor.

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

                                      F-36

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                        December 31, 2004, 2003 and 2002

NOTE T - 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, 2004
     2003 and 2002, as shown below:


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

                                                  Proset            PHS Group          B2C           Corporate            Total
   Year ended December 31, 2004
     Revenue                                     $3,923,823         $50,728,560      $2,052,661              -         $56,705,044
     Net loss attributable to common stockholder   (219,204)           (167,951)       (644,870)      (1,100,729)       (2,132,754)
     Depreciation and amortization                  210,920               6,501         145,301          296,768           659,490
     Interest income                                     -                4,344               -              266             4,610
     Other income (expense)                        (80,778)              71,586         (21,139)           (16,652)        (46,983)
     Equity in earnings of investee                      -                    -               -          172,224           172,224
     Interest and financing expenses               232,913            1,168,607          42,500          109,501         1,553,521
     Identifiable assets                         2,117,631            9,160,367       1,732,066        3,590,427        16,600,491
     Additions to long-lived assets                      -               85,980         175,000           29,078           290,058
     Investment in affiliate                             -                    -               -          336,829           336,829


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


   Year ended December 31, 2002
     Revenue                                     $2,537,216         $27,745,818     $ 1,257,641                -        $31,540,675
     Net loss attributable to common               (833,712)          (293,088)        (15,711)      (1,344,056)        (2,486,567)
     stockholder
     Depreciation and amortization                  468,842            272,667         127,764           24,662            893,935
     Interest income                                     -               3,024               -           23,671             26,695
     Other income (expense)                          (6,407)           (18,056)        579,482          (40,159)           514,860
     Equity in earnings of investee                      -                   -               -           67,717             67,717
     Interest and financing expenses                 60,336             94,582          38,013           18,348            211,279
     Identifiable assets                          2,193,471          2,477,292         711,531          489,375          5,871,669
     Additions to long-lived assets                      -               2,150          10,964          251,228            264,342
     Investment in affiliate                             -                   -               -           72,180             72,180

</TABLE>

                                      F-37

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                        December 31, 2004, 2003 and 2002

NOTE T (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, 2004, 2003 and 2002, is as follows:

                                    2004            2003               2002
                                  ------------  ------------        -----------
       Revenue
         United States            $30,774,482    $34,076,666        $30,555,151
         Canada                    25,930,562      6,463,911            985,524
                                  ------------  ------------        -----------
                                  $56,705,044    $40,540,577        $31,540,675
                                  ============  ============        ===========
        Accounts receivable
          United States           $ 1,144,373     $1,822,677        $ 1,256,041
          Canada                    6,210,597      1,934,811            776,628
                                  ------------  ------------        -----------
                                  $ 7,354,970     $3,757,488        $ 2,032,669
                                  ============  ============        ===========
         Identifiable assets
           United States          $16,706,423    $10,818,667        $ 5,824,230
           Canada                           -        173,978             47,439
                                  ------------  ------------        -----------
                                  $16,706,423    $10,992,645       $  5,871,669
                                  ============  ============        ===========

                                      F-38

<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-4

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

21               Listing of Company Subsidiaries                                   EX-21

32               Certification  Pursuant to 18 U.S.C.  Section  1350. As Adopted
                 Pursuant  to  Section  906 of the  Sarbanes-Oxley  Act of 2002,
                 signed by the Chief Executive Officer.                            EX-32

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

99               Listing of Company Intellectual Properties                        EX-99

</TABLE>

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

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

                                       44

<PAGE>

(3)      Description  of rights of Preferred  Stock are included in the Restated
         Certificate of Incorporation  filed November 10, 2003 and Clarification
         Amendment to the Certificate of Incorporation filed March , 2004 and in
         the  Certificate  of  Designation  filed  3/13/03 all  incorporated  by
         reference  herein  (See  footnote  (1)),  and  in  the  Certificate  of
         Designation  regarding  Preferred  Stock,  as amended,  and included as
         exhibit to the Form 10K/A of the  Company  filed  9/3/98 as well as the
         amendment to the  certificate of  incorporation  filed in July 2000 and
         included as an exhibit to the Form 10KSB/A of the Company  filed 8/9/01
         which  latter   documents  are   incorporated   by  reference   herein.
         Description of the Company's  Common Stock is incorporated by reference
         to the description contained in the Company's Registration Statement on
         Form 8-A (File No.  0-19409)  filed  with the  Commission  pursuant  to
         Section  12(b) of the  Exchange  Act on July 16,  1991,  including  any
         amendments   or  reports   filed  for  the  purpose  of  updating  such
         description.  A facsimile of outstanding warrants is included herein as
         an exhibit.  Information and particulars on long term debt  instruments
         outstanding  shall be supplied if and as requested by the Commission as
         allowed by applicable  regulation as none of such debt on an individual
         basis exceeds 10% of the Company's  current  assets.  Such  instruments
         include  $900,000  debt  currently  owed to Laurus  Master  Fund,  Ltd.
         arising from  Secured  Convertible  Term Note dated April 2, 2004,  and
         $490,000  in total  long term debt to three  non-affiliated  parties by
         Secured Promissory Notes dated March 1, 2004.

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

                                       45