SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB


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

                  For the fiscal year ended December 31, 2003.
                         Commission file number 0-19409

                               SYNERGY BRANDS INC.

             (Exact name of registrant as specified in its charter)

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

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

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

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

                      Title of Each Class Name of Exchange

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


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

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

     Synergy  Brands  Inc.  revenues  for  its  most  recent  fiscal  year  were
$40,540,577

     On March 30,  2004,  the  aggregate  market  value of the  voting  stock of
Synergy Brands Inc.,  held by  non-affiliates  of the  Registrant  (based on the
closing  price as reported on the NASDAQ for March 30,  2004) was  approximately
$4,000,000.  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, 2004 was 2,051,154.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Proxy  Statement for  Registrant's  2003 Annual  Meeting of
Stockholders  currently  scheduled  to be held  June  2004 are  incorporated  by
reference in Part III (for other  documents  incorporated  by reference refer to
Exhibit Index at page 38 and 39)

                                     PART I

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

<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS

     A. OVERVIEW

     Synergy  Brands  Inc.  (SYBR or the  Company)  is a  holding  company  that
operates  in  wholesale  distribution  of  consumer  goods  as  well  as  retail
distribution  of premium cigars and salon products  through three  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  distributes  and sells these  products  through  wholly  owned
subsidiaries in two distinct manners.

     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 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,  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,
distributors, chain drug stores and supermarkets 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  sells premium cigars through the Internet  directly to
         the consumer.

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

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

     THE  COMPANY'S  CORPORATE  OFFICES  ARE LOCATED AT 1175 WALT  WHITMAN  ROAD
MELVILLE NEW YORK 11747, AND ITS TELEPHONE NUMBER IS (631) 424-5500. THE COMPANY
MAINTAINS  A  CORPORATE  WEBSITE  AT  WWW.SYNERGYBRANDS.COM.  The  Company  is a
reporting Company as defined in Regulation 12B of the Securities Exchange Act of
1934 and files  electronically  with the SEC the Company's  quarterly  10QSB and
year end 10-KSB reports and interim Form 8K reports. The general public may read
and copy any  materials  the  Company  has filed  with the SEC at the SEC Public
Reference  Room at 450 Fifth Street NW,  Washington  DC. The general  public may
obtain  information on the operation of the Public Reference Room by calling the
SEC at  1-800-SEC-0330.  The SEC also  maintains an Internet  site that contains
reports,  proxy and  information  statements,  and other  information  regarding
issuers that file  electronically  with the SEC which website can be accessed at
www.sec.gov.  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  continues to be the  distribution  of  nationally  branded  consumer
products  in the  grocery  and HBA  sectors.  Distribution  of such  products is
directed to major retailers and  wholesalers  from major U.S.  consumer  product
manufacturers.   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.  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  to
wholesalers,   distributors,   chain  drug  stores  and   supermarkets   in  the
Northeastern part of the United Stated.  Proset uses optimized  inventory levels
for just in time  technology  and  continuous  replenishment  programs to stock,
track and market defined planograms within the store's salon aisles.  Planograms
can range from 4 feet to 16 feet depending on the demographics of the store.

     C. BUSINESS TO CONSUMER OPERATIONS. (B2C)

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

     The  Company's  B2C  operations  include  three  businesses.  This  segment
includes  Cigars Around the World,  CigarGold/NetCigar  and  BeautyBuys.  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 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.  CigarGold (CG) is the company's  cigar online
unit. CG sells premium cigars online to retail  customers  throughout the United
States and elsewhere  where internet  access exists.  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.

                                      -3-

<PAGE>

     (i).NETCIGAR.COM and CIGARGOLD.COM

     In 1999, the Company launched through its GRC subsidiary  NetCigar.com Inc.
("NetCigar") a web site  (www.netcigar.com)  for sale of premium cigar products.
The Company acquired another domain name in CigarGold.com  and the operations of
NetCigar are now precessed under that name.  Through  CigarGold.com  the Company
offers  information  on and sales of a  variety  of  cigars  and  cigar  related
products and content,  including cigar news and events, editorials, and an array
of cigars  and cigar  products  of both  proprietary  labels  and other  popular
brands.  The Company also markets  humidors,  and sells golf oriented  gifts and
apparatus.  The Company  has a long term lease in Miami,  Florida for storage of
its entire  inventory in a custom designed  humidor  warehouse.  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.

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

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

                                       4

<PAGE>

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

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

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

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

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

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

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

     Many of the Company's 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 desplays and
maintains its own internet  sales based  website.  The purchase price being paid
for such subsidiary is based on the EBTDA (Earnings  Before Taxes,  Depreciation
and  Amortization)of  CAW going forward over a three-year  period.  The purchase
price  paid for CAW is not  anticipated  to  constitute  more than  (10%) of the
Company's gross assets and is payable  substantially in equity representing less
than 10% of the Company's voting stock.

                                      -5-

<PAGE>

     (ii). BEAUTYBUYS

     The Company has established  through its subsidiary  BeautyBuys.Com Inc. an
e-commerce  website  (www.BeautyBuys.com)  to offer  direct to the  consumer via
internet  sales on a  non-exclusive  basis a  popular  selection  of  nationally
branded salon hair care items also sold in the Company's B2B businesses  through
Proset. Advertising on radio/television and on-line channels is an integral part
of the overall  traffic-building  plan for BeautyBuys.com.  The Company over the
past year has  decreased and in many respects  eliminated  the product  category
selection available (demphasizing skin care products,  fragrances and cosmetics)
and is  currently,  through  Proset,  concentrating  solely  on salon  hair care
products, most of which are also available for sale to the Company's BtoB sector
through  ProSet,  which has helped  streamline  the  Company's  business in this
consumer  area,  and this  segment of the  Company's.  business has thereby been
de-emphasized  and  currently  accounts  for only a small part of the  Company's
present operations.

     (iii). WEBSITE TECHNOLOGY FOR INTERNET SALES.

     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.

                                       6

<PAGE>

     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.

     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, 2003
and 2002, the Company  purchased  approximately  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.  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, 2003,  sales to two  customers  each of
whom  accounted  for 11% of the  Company's  total sales and in 2002 sales to one
customer  accounted for 11% of total sales.  These major customers relate to the
grocery logistics business within its B2B sector.

     F. INFORMATION SYSTEMS

     The various web sites established for sale of the Company's products are of
multi-tier  construction to allow for ease of administration and record keeping.
Behind the screen  not  visible to the  consumer  when  visiting  the  Company's
various  product  category  websites are internet based marketing and accounting
information  programs  to allow  the  Company  to review  interest  shown in its
websites and account for sales made  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.  Internet  sites
presently available regarding Company business and product sales are:

                                 BeautyBuys.com
                                  NetCigar.com
                                SynergyBrands.Com
                                  DealbyNet.com
                            Perx.com (managed by ITT)
                                    SYBR.com
                                  CIGARGOLD.com
                                  Goldcigar.com
                            CigarsAroundtheWorld.com

                                       7

<PAGE>

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

     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  75% of B2C  product
inventory  is in  warehouse  stock and 25% 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 utlized 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 drug
license  through the Drug  Enforcement  Agency  (DEA) The  Company has  domestic
rights  to  the  "Suarez  Gran  Reserva",  "Breton  Legend",  "Breton  Vintage",
"Anduleros",  "Don Otilio","Alminante" "Nativo" and various other trade names in
marketing  of premium  handmade  cigars.  GR also owns and utilizes in its cigar
distribution  business the  following  trade names:  CigarGold,  Netcigar,  Gold
Cigar,  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  30 full time persons all of whom work
in executive,  administrative sales, marketing, data processing,  and accounting
or clerical activities and certain work as Company employees that integrate with
the various  warehouses  where  Company  products  are stored and as drivers and
delivery  personnel in the Company leased trucks.

     The Company leases and staffs its  warehouses in New York (PHS Group),  New
Jersey,  (Proset),  and Florida,  and sales offices in  Pennsylvania,  Illinois,
Maine  and  Toronto  (Netcigar,   CigarGold,   and  BeautyBuys)  from  where  it
facilitates  storage,  sorting,  packing and  shipping  of products  sold on its
websites.  Otherwise  warehousing  is  contracted  on an as  needed  arrangement
staffed through the warehousing entity contracted with 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  proposed federal  legislation  under the  McIntyre-Davis  Bill 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 bill
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.
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  illnesse 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 forementioned  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  offices in New York,  Pennsylvania,  New
Jersey, Toronto, Maine, Illinois and Florida.

     Warehousing  facilities  utilized by the Company are located in New Jersey,
New York and Florida.  The Grocery  inventory is warehoused  in New York,  Salon
products are  warehoused in New Jersey,  and cigars are  wharehoused in Florida.
The  facilities  operate  under  contractual  warehousing  agreements  except in
Florida which facility is leased.

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 2003 no matters were submitted for shareholder
approval.

                                     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       Adj. Close*
-------------             -------         -------      ------      -----------
March 31, 2002              1.25            1.00       1.00         4.00
June 30, 2002               0.94            0.76       0.80         3.20
September 30, 2002          0.95            0.75       0.81         3.24
December 31, 2002           0.75            0.63       0.63         2.52
March 31, 2003              3.05            2.47       2.47         2.47
June 30, 2003               3.44            2.45       2.69         2.69
September 30, 2003          4.49            2.99       3.61         3.61
December 31, 2003           4.20            3.40       3.90         3.90

*Adjusted for reverse split 4 to 1 on 2/20/2003.

On March 30, 2004, the Company had approximately 3000 shareholders of record.

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


                                       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 2003.  These
issuances  were made either under  exemption  from  registration  allowed  under
Section 4 (2) or Regulation D of the Securities Act of 1933 as amended.

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

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

     Synergy  Brands  Inc.  (SYBR or the  Company)  is a  holding  company  that
operates  in  wholesale  distribution  of  consumer  goods  as  well  as  retail
distribution  of premium cigars and salon products  through three  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 distributes and sells these products through
wholly owned subsidiaries in two distinct manners.

     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. PHS is the
largest  subsidiary  of the  Company  and  represents  about 86% 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,  distributors,  chain drug
stores and supermarkets 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  sells premium cigars through the Internet  directly to the
     consumer.

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

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

                                      -12-

<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

                                    Operating               Operating and
Year ended 12/31/2003               Segments                Corporate Segments
<TABLE>
<CAPTION>
<S>                                   <C>         <C>        <C>                 <C>

Revenue                             40,540,577    28.53%     40,540,577           28.53%
Gross Profit                         2,809,199    65.41%      2,809,199           64.41%
SG&A                                 2,655,864    13.71%      3,076,297          -16.09%
Net loss                              (817,685)   28.43%      1,355,223           48.64%
Net loss per common share                (0.49)   43.59%          (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   640.28%         91,600          106.51%
                                    ==========                =========
EBITDA net income per share                .28   533.70%             .06         105.13%

</TABLE>

Year ended 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               (.06)                   (1.08)

     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.

                                      -13-

<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  $1,277,223  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 $459,565, which include legal, accounting and regulatory expenses.

     Earnings before  interest taxes,  depreciation  and  amortization  (EBITDA)
improved  from a loss of  $1,408,048  to a profit of $91,600  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.

                                      -14-

<PAGE>

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

     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.

                                      -15-

<PAGE>

PROSET SEGMENT INFORMATION OF OPERATING BUSINESSES

                                         SALON
                                         PRODUCTS            CHANGE

Year ended December 31, 2003
Revenue                                  3,671,106          44.69%
Gross Profit                               334,305           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)

     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.

                                      -16-

<PAGE>

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.

                                      -17-

<PAGE>

                         LIQUIDITY AND CAPITAL RESOURCES

     The Company's  predominant need for working capital financing is to finance
its Receivables and Inventory  levels.  In order to finance its requirements the
Company  relies on secured asset based lending,  trade  financing as well as its
cash flow.  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 10 to 30 days. One vendor to the
Company  represents  over 70% of the  Company's  purchases.  Loss of this vendor
would have a material adverse effect on the Company's operations.

year ended                         2003              2002

Working Capital                1,131,027            51,542     2094.38%
Assets                        11,082,645         5,871,669       88.75%
Liabilities                    8,048,813         3,789,132      112.42%
Equity                         3,033,832         2,082,537       45.68%
Line of Credit Facility        4,013,680         1,754,119      128.82%
Receivable Turnover (days)            33                21       53.18%
Inventory Turnover (days)             19                12       56.64%
Tangible Assets                9,388,717         4,200,560      125.89%

     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 $7 million for accounts receivable,  purchase orders, and inventory. The term
of the  agreement  is for one year and  allows  for  automatic  renewals.  As of
December 31, 2003 the Company's  borrowing  under its agreement  were $4 million
and increase of 128% as compared to 2002. In November of 2003, the 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 expires in May 2004,  at which time the cash deposit
and reserves  will be  released.  In the event that PHS requires an extension of
this facility,  the modification to the loan and security  agreement will remain
in effect.  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. The 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 2003 as compared to
2002. 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.

                                      -18-

<PAGE>

     As the Company's  operations  have grown the Company has been able to raise
additional capital predominately through its shareholders.  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. The Company has
used  these  financings  to reduce  its  borrowings  with IIG as well as provide
working capital.  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, 2003 totaled  approximately  $1.3 million a
increase of 1.25 million from 2002. 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.  As of
December 31, 2003, the company had available  under its borrowing base $500,000.
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 19 days, its receivables average 33 days of collections and
its account payables average 30 days.

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

     The following table presents the Company's  expected cash  requirements for
Contractual obligations outstanding as of December 31, 2003.


                                           Payments Due By Period

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

Line-Of-Credit             $4,013,680                                 $4,013,680

Notes Payable                           $850,000                        $850,000

Operating Leases              $10,856   $382,565   $153,378             $546,799

Total Contractual
  Cash Obligations         $4,024,536 $1,232,565   $153,378           $5,410,479

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.

                                      -19-

<PAGE>

ACCOUNTS RECEIVABLE/ALLOWANCE FOR DOUBTFUL ACCOUNTS.

     The Company's  accounts  receivable are due from businesses  engaged in the
distribution  of grocery,  health and beauty  products as well as from consumers
who purchase  health and beauty  products and premium  handmade  cigars from the
Company's  Web sites.  Credit is extended  based on  evaluation  of a customers'
financial  condition  and,  generally,  collateral  is  not  required.  Accounts
receivable  are due within 30 days and are stated at amounts due from  customers
net of an allowance for doubtful accounts.  Accounts outstanding longer than the
contractual  payment  terms  are  considered  past  due.  Estimates  are used in
determining  the  allowance  for  doubtful   accounts  based  on  the  Company's
historical  collections   experience,   current  trends,  credit  policy  and  a
percentage of its accounts  receivable by aging category.  In determining  these
percentages,  the Company looks at historical write-offs of its receivables. The
Company also looks at the credit quality of its customer base as well as changes
in its credit  policies.  The  Company  continuously  monitors  collections  and
payments from its  customers.  The Company writes off accounts  receivable  when
they  become   uncollectible,   and  payments   subsequently  received  on  such
receivables are credited to the allowance for doubtful accounts.

VALUATION OF DEFERRED TAX ASSETS.

     Deferred tax assets and liabilities represent temporary differences between
the basis of assets and  liabilities  for financial  reporting  purposes and tax
purposes.  Deferred tax assets are primarily  comprised of reserves,  which have
been deducted for financial statement  purposes,  but have not been deducted for
income tax purposes as well as net operating  loss carry  forwards.  The Company
annually reviews the deferred tax asset accounts to determine if is appears more
likely than not that the deferred tax assets will be fully realized. At December
31, 2003, the Company has established a full valuation allowance.

VALUATION OF LONG-LIVED ASSETS.

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

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

     In January 2003, the FASB issued FASB  Interpretation No. 46 ("FIN No. 46")
"Consolidation of Variable Interest  Entitles." In general,  a variable interest
entity is a corporation,  partnership,  trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity  investors  that do not  provide  sufficient  financial
resources for the entity to support its activities.  A variable  interest entity
often holds financial  assets,  including loans for receivables,  real estate or
other property.  A variable interest entity may be essentially passive or it may
engage  in  activities  on behalf  of  another  company.  Until  now,  a company
generally has included another entity in its consolidated  financial  statements
only if it controlled the entity through  voting  interests.  FIN No. 46 changes
that by requiring a variable  interest entity to be consolidated by a company if
that  company is subject  to a  majority  of the risk of loss from the  variable
interest  entity's  activities or entitled to receive a majority of the entity's
residual  returns  or  both.  FIN  No.  46's  consolidation  requirements  apply
immediately to variable  interest entities created or acquired after January 31,
2003. The consolidation requirements apply to older entities in the first fiscal
year or  interim  period  beginning  after  December  15,  2003.  Certain of the
disclosure  requirements apply in all financial  statements issued after January
31, 2003,  regardless of when the variable interest entity was established.  The
Company has adopted FIN No. 46 effective January 31, 2003. In December 2003, the
FASB issued FASB  Interpretation  No. 46R,  "consolidation  of Variable Interest
Entities an interpretation of ARB 51 (revised December 2003)" ("FIN 46R"), which
includes  significant  amendments to the  previously  issued FIN 46. Among other
provisions,  FIN 46R includes  revised  transition  dates based on the nature as
well as the creation date of the variable  interest  entity.  The Company is now
required to adopt the  provisions  of FIN 46R no later than the end of the first
reporting  period  that  ends  after  March  15,  2004.  The  adoption  of these
pronouncements  has not and is not  expected  to have a  material  impact on the
Company's  consolidated  financial  condition or results of operations  taken as
whole.

                                      -20-

<PAGE>

     In April 2003, the FASB issued SFAS No. 149 ("SFAS No. 149"), "Amendment of
Statement 133 on Derivative  Instruments and Hedging  Activities,"  which amends
and clarifies  financial  accounting and reporting for  derivative  instruments,
including  certain  derivative  instruments  embedded in other contracts and for
hedging  activities  under SFAS No. 133. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003 except for the provisions that were
cleared by the FASB in prior  pronouncements.  The  adoption of SFAS No. 149 has
not had a material  impact on the  Company's  financial  position and results of
operations.

     In May 2003, the FASB issued SFAS No. 150 ("SFAS No. 150"), "Accounting for
Certain  Financial  Instruments  with  Characteristics  of both  Liabilities and
Equity." This statement  establishes  standards for how an issuer classifies and
measures in its statement of financial  position certain  financial  instruments
with  characteristics  of both  liabilities  and equity.  In accordance with the
standard,  financial  instruments  that  embody  obligations  for the issuer are
required to be classified as liabilities.  This Statement shall be effective for
financial  instruments entered into or modified after May 31, 2003 and otherwise
shall be effective at the beginning of the first interim period  beginning after
June 15,  2003.  The  Company  adoption  of SFAS No.  150 has not had a material
impact on its financial  position and results of  operations.  In November 2002,
the Emerging  Issues Task Force ("EITF")  reached a consensus on the application
of EITF No. 2-16  "Accounting  by a Customer  (including a reseller) for Certain
Consideration Received from a Vendor. EITF No. 02-16 addresses how a reseller of
a vendors products should account for cash consideration received from a vendor.
The  adoption of EITF No. 02-16 has not had a material  effect on the  Company's
financial position and results of operations.

     In December 2003, the  Securities  and Exchange  Commission  ("SEC") issued
Staff Accountant Bulletin No. 104, "Revenue  recognition" ("SAB No.104"),  which
codifies,  revises  and  rescinds  certain  sections  on SAB No.  101,  "Revenue
Recognition" in order to make this interpretive guidance consistent with current
authoritative  accounting and auditing  guidance and SEC rules and  regulations.
The changes noted in SAB No. 104 did not have a material effect on the Company's
financial position or results 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.

     However,  inflationary  pressures frequently increase interest rates. Since
the Company is  dependent  on  financing,  any  increase in interest  rates will
increase the Company's  credit  costs,  thereby  reducing its profits.  However,
since the company  currently pays above market rates for  financing,  management
believes  that  inflationary  pressures  on pricing may be  beneficial  to sales
growth and operating margins.

                                       21

<PAGE>

FORWARD LOOKING INFORMATION AND CAUTIONARY STATEMENTS

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

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

         The Company's ability to attract and retain customers;

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

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

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

         Potential government regulation; and

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

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

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

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

     1. THE COMPANY HAS INCURRED OPERATING LOSSES.

     The  Company  has a long  history of  operating  losses.  To date,  a large
portion of the Company's  expenses have been financed  through  capital  raising
activities.  Although the Company has narrowed its losses, it still continues to
report  operating  deficits  as  opposed  to  profits.  A large  portion  of the
Company's historical losses are a direct result of fees and expenses paid for in
stock  and/or  barter.  and  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.

                                       22

<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 year 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.

                                       23

<PAGE>

     8. POSSIBLE LOSS OF NASDAQ SMALL CAP LISTING.

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

                                       24

<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.  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).

                                       25

<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.

                                       26

<PAGE>

     17. POTENTIAL FUTURE SALES OF COMPANY STOCK.

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

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

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

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

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

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

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

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


                                       27

<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.

                                       28

<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.

                                       29

<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.

                                       30

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

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

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

     The worldwide  availability of Internet web sites often results in sales of
goods to buyers outside the  jurisdiction  in which the Company or its customers
are  located,  and  foreign  jurisdictions  may claim  that the  Company  or its
customers are required to comply with their laws. As an Internet Company,  it is
unclear which  jurisdictions  may find that the Company is  conducting  business
therein.  Its failure to qualify to do business in a jurisdiction  that requires
it to do so could  subject the Company to fines or penalties and could result in
its inability to enforce contracts in that jurisdiction.

                                       31

<PAGE>

     The Company is not aware of any recent related legislation specifically
mentioned herein but there can be no assurance that future government regulation
will not be enacted further restricting use of the internet that might adversely
affect the Company's business.

     31. NEW TAXES MAY BE IMPOSED ON INTERNET COMMERCE.

     In the U.S.,  the Company does not collect  sales or other similar taxes on
goods sold through the Company's internet websites. The Internet Tax Freedom Act
of 1998, (extended through November 2003),  prohibits the imposition of taxes on
electronic commerce by United States federal and state taxing  authorities.  The
Company is not aware of any further  extensions  regarding but understands  that
more  permanent   application  is  currently  being  discussed  in  the  federal
legislature.  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  mail 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.

                                       32

<PAGE>

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

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

         - failure to meet its development plans;

         - the demand for its common stock;

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

         -   technological   innovations   by   competitors   or  in   competing
         technologies; and

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

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

ITEM 7.  FINANCIAL STATEMENTS

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

                                                              Page
                                                              ----

Report of Independent
Certified Public Accountants:                                     F-2

Consolidated Balance Sheet as of December 31, 2003          F-3 - F-4

Consolidated Statements of Operations for the
Years Ended December 31, 2003 and 2002                            F-5

Consolidated Statement of
Changes in Stockholders' Equity for the
Years Ended December 31, 2003 and 2002                      F-6 - F-7

Consolidated Statements of
Cash Flows for the Years Ended December 31, 2003 and 2002   F-8 - F-9

Notes to Consolidated Financial Statements                  F-10-F-36


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

                                      NONE

                                       33

<PAGE>

                                    PART III

     The  information  required  by items 9-12 are  omitted  pursuant to general
instruction  G(3) to Form 10K. The Company has included this  information in its
proxy  statement to be mailed and filed with the  Commission  on or before April
30,  2004.  The annual  meeting  is  scheduled  to be in June  2004.  Such Proxy
Statement  expected  to be filed with the  Commission  by April 30,  2004 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 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.  Copies of the Company's Code of
Ethics and Nominating  Committee Charter are included as exhibits to this Report
and in the future are expected to be disclosed in the  Company's  Internet  home
page website.


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

1. (a) Exhibits:

   See Index to Exhibits

2. Reports on Form 8-K

     A Form 8-K report was filed November 18, 2003 regarding the announcement by
the  Company of its 3rd  quarter  2003  financial  results on which the  Company
published a press release made an exhibit to such Form 8-K. Such was the only 8K
report filed during the fourth quarter of 2003.

3. Financial Statement Schedules
             None

ITEM 14.  CONTROLS AND PROCEDURES

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

     The Company is evaluating  and is hopeful at  completing  the adoption of a
revised Audit Committee Charter providing  expanded  authority of such committee
and the independent nature and identify of its director participants as required
by the recent enactment of the Sarbanes-Oxley  Act. 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.

     Fees paid to the Company's  independent auditors in the last two years were
as follows:

                               2003            2002

audit fees                    130,000          85,000
audit related fees                 -                -
tax fees                       32,500          25,000
other fees                     25,000           5,500

                                       34

<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, 2004

     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, 2004

                               by /s/ Mitchell Gerstein
                               ----------------------------------
                                      Mitchell Gerstein, Director
                                      Chief Financial Officer
Signed: March 30, 2004

                                       35

<PAGE>

                                 Certifications

I, Mair Faibish, certify that:

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

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

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

4.  The  registrant's  other  certifying  officer  and  I  are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

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

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

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

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

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

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

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

Date: March 30, 2004

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

                                       36

<PAGE>

I, Mitchell Gerstein, certify that:

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

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

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

4.  The  registrant's  other  certifying  officer  and  I  are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

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

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

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

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

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

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

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

Date: March 30, 2004

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

                                       37

<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
    Synergy Brands, Inc.

We have audited the accompanying  consolidated  balance sheet of Synergy Brands,
Inc. and  Subsidiaries  (the "Company") as of December 31, 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 auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the consolidated  financial position of Synergy Brands,
Inc. and Subsidiaries as of December 31, 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 THORNTON LLP
New York, New York
March 5, 2004

                                      F-2

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                           CONSOLIDATED BALANCE SHEET

                                December 31, 2003

                                     ASSETS

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

CURRENT ASSETS
    Cash and cash equivalents                                                            $ 777,522
    Cash collateral security deposit                                                       500,000
    Marketable securities                                                                   46,035
    Accounts receivable trade, less allowance for doubtful accounts of $127,481          3,630,007
    Other receivables                                                                      674,519
    Inventory                                                                            2,164,116
    Prepaid assets and other current assets                                                509,479
                                                                                         ---------
              Total current assets                                                       8,301,678

PROPERTY AND EQUIPMENT, NET                                                                379,224

OTHER ASSETS                                                                               186,057

NOTES RECEIVABLE                                                                           437,133

Intangible assets, net of accumulated amortization of $1,780,736                         1,524,256

GOODWILL                                                                                   164,297
                                                                                         ---------
                                                                                      $ 10,992,645
                                                                                        ==========

</TABLE>

         The accompanying notes are an integral part of this statement.

                                      F-3

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                           CONSOLIDATED BALANCE SHEET

                                December 31, 2003

                      LIABILITIES AND STOCKHOLDERS' EQUITY

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

CURRENT LIABILITIES
    Lines of credit                                                                                 $ 4,013,680
    Accounts payable                                                                                  3,108,695
    Related party note payable                                                                          100,800
    Accrued expenses                                                                                     37,476
                                                                                                    -----------
                    Total current liabilities                                                         7,260,651

NOTES PAYABLE                                                                                           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
    Class B preferred stock - $.001 par value; 9,900,000 shares authorized, none issued                       -
    Class B Series A Preferred stock-$.001 per value; 500,000 shares authorized;
        160,000 shares issued and outstanding; liquidation preference of $10.00 per share                   160
    Common stock - $.001 par value; 49,900,000 shares authorized;
        1,919,359 shares issued and outstanding                                                           1,919
    Additional paid-in capital                                                                       37,748,004
    Deficit                                                                                         (34,373,327)
    Unearned Compensation                                                                              (426,252)
    Accumulated other comprehensive loss                                                                 (1,772)
                                                                                                    -----------
                                                                                                      2,948,832

    Less treasury stock, at cost, 1,000 shares                                                           (5,000)
                                                                                                    -----------
                                                                                                      2,943,832
                                                                                                    -----------
                                                                                                    $10,992,645
                                                                                                    ===========

</TABLE>

         The accompanying notes are an integral part of this statement.

                                      F-4

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                             Year ended December 31,

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

                                                                               2003                   2002

Net sales                                                                 $40,540,577             $31,540,675
                                                                          -----------             -----------
Cost of sales
    Cost of product                                                        36,837,796              29,241,384
    Shipping and handling costs                                               893,582                 600,994
                                                                          -----------             -----------
                                                                           37,731,378              29,842,378
                                                                          -----------             -----------
              Gross profit                                                  2,809,199               1,698,297

Operating expenses
    Advertising and promotional                                                91,634                 469,965
    General and administrative                                              2,984,663               3,196,270
    Depreciation and amortization                                             692,698                 893,935
                                                                          -----------             -----------
                                                                            3,768,995               4,560,170
                                                                          -----------             -----------
              Operating loss                                                 (959,796)             (2,861,873)

Other income (expense)
    Interest income                                                            13,913                  26,695
    Other income (expenses)                                                   298,932                 514,860
    Equity in earnings of investee                                             92,424                  67,717
    Interest and financing expenses                                          (690,038)               (211,279)
                                                                          -----------             -----------
                                                                             (284,769)                397,993
                                                                          -----------             -----------
              Loss before income taxes                                     (1,244,565)             (2,463,880)

Income tax expense                                                             32,658                  22,687
                                                                          -----------             -----------
              NET LOSS                                                     (1,277,223)             (2,486,567)

Dividend-Preferred Stock                                                      (78,000)                   -
                                                                          -----------             -----------
Net loss attributable to common stockholders                            $  (1,355,223)          $  (2,486,567)
                                                                          ===========             ===========

Basic and diluted net loss per common share:                                   $(0.82)                 $(1.91)
                                                                          ===========             ===========
Weighted-average shares used in the computation of loss per
    common share:
       Basic and diluted                                                    1,652,019               1,302,042
                                                                          ===========             ===========

</TABLE>

The accompanying notes are an integral part of these statements

                                      F-5

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS

                     Years ended December 31, 2003 and 2002


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

                                               Class A        Class B - Series A                            Additional
                                          preferred stock      Preferred stock         Common stock         paid-in
                                        Shares      Amount    Shares      Amount     Shares       Amount     capital       Deficit

Balance at January 1, 2002              100,000      $100                           1,237,621     $1,238  $34,795,297  $(30,609,537)

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

Comprehensive loss
Balance at December 31, 2002            100,000     $ 100      --          --        1,368,121     $1,368  $35,210,686 $(33,096,104)
                                        =======     =====    ======      =======     =========      =====-   =======   ===========
Common stock and options issued
      in connection with compensation
      plan                                                                             93,438         93      212,133
Common stock issued                                                                    30,000         30       47,170
Net proceeds from issuance of
      common stock in
 connection with private placement                            160,000        160      160,000        160    1,509,680
Issuance of common stock in
      satisfaction of note payable                                                     15,300         15       39,985
Issuance of restricted stock in
      Connection with notes payable                                                    42,500         43       97,957
Issuance of common stock for services                                                 185,000        185      493,315
Issuance of common stock in
  connection with CAW acquisition                                                      25,000         25       99,975
Purchase of treasury stock
Sale of treasury stock                                                                                        115,103
Preferred stock dividend                                                                                      (78,000)
Consulting expense
Change in unrealized gain on
      marketable securities
Cumulative translation adjustments
Net loss                                                                                                                (1,277,223)
                                        -------     -----    ------      -------     ---------      ------     -------   -----------

Comprehensive loss
Balance at December 31, 2003            100,000      $100    160,000       $160      1,919,359     $1,919  $37,748,004 $(34,373,327)
                                        =======     =====    ======      =======     =========      =====-   =======   ===========

</TABLE>

                                      F-6

<PAGE>

      CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (continued)

                     Years ended December 31, 2003 and 2002


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

                                                                                                Stockholder's
                                         Accumulated                                             advertising
                                           other                                  Stockholders' and in-kind     Total        Compreh
                                         comprehensive   treasury   unearned       notes'        services      stockholder's   sive
                                          income (loss)   stock     Compensation   receivable    Receivable     equity        Loss


Balance at January 1, 2002                 $1,685       $(251,135)                $ (115,629)  $(794,990)    $3,027,029

Common stock  and options issued
   in connection with compensation
   Plan                                                                               (2,500)                 298,945
Intrinsic value of stock options
   issued in connection with
   compensation plan                                                                                           49,825
Issuance of restricted stock                                                                                    4,200
Purchase of treasury stock                                (75,752)                                           (75,752)
Sale of treasury stock                                    130,948                                             106,497
Retirement of treasury stock                              167,500                                                   -
Extinguishment of notes receivable                                                   113,129                  213,129
Extinguishment of advertising and
   in-kind services receivable from
   stockholder                                                                                   794,990      946,990
Change in unrealized gain on
    marketable securities                  (1,583)                                                             (1,583)   $ (1,583)
Cumulative translation adjustments           (176)                                                               (176)       (176)
Net loss                                                                                                    (2,486,567)  (2,486,567)
                                          --------      ---------   --------      ---------    ---------   ------------   ----------
Comprehensive loss                                                                                                      $(2,488,326)
                                                                                                                       ============
Balance at December 31, 2002         $   (74)            $(28,439)       =          $(5,000)         -        $ 2,082,537
                                         ========       =========   ========      =========    =========      ============ =========

Common stock and options issued
  in connection with compensation plan                                               5,000                       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                                  (493,500)
Issuance of common stock in
  connection with CAW  acquistion                                                                                100,000
Purchase of treasury stock                               (122,779)                                              (122,779)
Sale of treasury stock                                    146,218                                                261,321
Preferred Stock Dividend                                                                                        (78,000)
Consulting expense                                                       67,248                                   67,248
Change in unrealized gain on
      marketable securities                  4,003                                                                 4,003       4,003
Cumulative translation adjustments          (5,701)                                                               (5,701)    (5,701)
Net loss                                                                                                      (1,277,223)(1,277,223)
                                          --------       ---------   --------      ---------    --------- --------------    --------
Comprehensive loss                                                                                                        $1,278,921
                                                                                                                          ==========

Balance at December 31, 2003              $(1,772)     $(5,000)     $426,252)    --                          $2,943,832
                                          --------      ---------   --------      ---------    ---------      ------------  --------

</TABLE>

         The accompanying notes are an integral point of this statement

                                      F-7

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                             Year ended December 31,

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

                                                                                           2003                   2002


Cash flows from operating activities
    Net loss                                                                               $ (1,277,223)       $ (2,486,567)
    Adjustments to reconcile net loss to net cash
       used in operating activities
         Depreciation and amortization                                                          625,450             893,935
         (Recovery of)/Provision for doubtful accounts                                          (35,090)            112,351
         Amortization of financing costs                                                         82,142                   -
         Loss (gain) on sale of marketable securities                                           (10,828)             71,237
         Loss on sale of preferred stock of investee                                                  -              57,600
         Equity in earnings of investee                                                         (92,424)            (67,717)
         Loss on forgiveness of stockholder's note receivable                                         -             213,129
         Loss on forgiveness of advertising receivable from a stockholder                             -             290,217
         Gain on dissolution of subsidiary                                                            -            (215,250)
         Gain on settlement of liabilities due to vendors                                      (282,750)           (592,689)
         Dividends on preferred stock of subsidiary                                                   -               6,125
         Non-Cash Compensation                                                                   67,248              49,825
         Operating expenses paid with common stock and warrants                                 100,725             303,145
         Changes in operating assets and liabilities
             Net (increase) decrease in
                Accounts receivable and other receivables                                    (2,095,518)         (1,440,824)
                Inventory                                                                    (1,089,208)            265,263
                Prepaid expenses, related party note receivable and other assets               (122,354)             26,050
             Net increase (decrease) in
                Accounts payable, related party note payable, accrued
                    expenses and other current liabilities                                    1,231,455            (605,182)
                Other liabilities                                                                     -             282,750
                                                                                             ----------         -----------
                      Net cash used in operating activities                                  (2,898,375)         (2,836,602)

Cash flows from investing activities
    Purchase of business, net of cash acquired                                                 (414,000)                  -
    Purchase of marketable securities                                                          (488,868)           (979,379)
    Proceeds from sale of marketable securities                                                 460,060           2,635,571
    Purchase of property and equipment                                                          (28,638)            (14,342)
    Payment of collateral security deposit                                                     (500,000)                  -
    Refund of collateral security deposit                                                             -             658,542
    Proceeds from sale of preferred stock of investee                                                 -             230,400
    Purchase of customer lists                                                                        -            (250,000)
    Payments received on notes receivable                                                         2,267                   -
    Issuance of notes receivable                                                               (329,000)           (110,400)
                                                                                             ----------         -----------
                      Net cash provided by (used in) investing activities                    (1,298,179)          2,170,392
                                                                                             ----------         -----------

</TABLE>

                                      F-8

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

                             Year ended December 31,

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

                                                                                              2003                2002

Cash flows from financing activities
    Borrowings under line of credit                                                         $19,432,524         $10,486,724
    Repayments under line of credit                                                         (17,172,964)         (9,130,942)
    Increase in deferred financing cost                                                         (18.750)                  -
    Proceeds from the issuance of notes payable                                                 850,000             722,778
    Repayments of notes payable                                                                 (20,000)           (662,778)
    Due from broker                                                                                   -          (1,216,733)
    Proceeds from issuance of common stock                                                       47,200                   -
    Net Proceeds from the issuance of common and preferred stock
        in a private placement                                                                1,510,000                   -
    Proceeds from the exercise of stock purchase options                                         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                                                                        (78,000)              -
                                                                                              ---------           ----------
                      Net cash provided by financing activities                               4,805,052             229,794
                                                                                              ---------           ----------
  Foreign currency translation                                                                   (5,700)               (176)
                                                                                              ---------           ----------
                      NET  INCREASE (DECREASE) IN CASH                                          602,798            (436,592)

Cash and cash equivalents, beginning of year                                                    174,724             611,316
                                                                                              ---------           ----------
Cash and cash equivalents, end of year                                                         $777,522            $174,724
                                                                                              ---------           ----------

Supplemental disclosures of cash flow information:
    Cash paid during the year for
       Interest                                                                                $590,126            $164,000
                                                                                              ---------           ----------
       Income taxes paid                                                                       $ 32,658            $ 23,000
                                                                                              ---------           ----------

Supplemental disclosures of noncash operating, investing
    and financing activities:
      Common stock issued for acquistion                                                       $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 services                 $493,500            $     -
                                                                                              ---------           ----------


</TABLE>

        The accompanying notes are an integral part of these statements.


                                      F-9
<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2003 and 2002


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

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

At December 31, 2003, the Company had cash and cash equivalents, cash collateral
security deposit and marketable securities of approximately $1,324,000,  working
capital of approximately  $1,041,000 and an accumulated deficit of approximately
$34,373,000.  The Company incurred a loss of approximately $1,277,000 during the
year ended December 31, 2003.

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

On March 1, 2004,  the Company  received  $490,000  pursuant to the  issuance of
three  promissory notes bearing interest at 12% per annum which are due February
28, 2006. The Company is not required to repay the 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.

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

                                      F-10

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2003 and 2002

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

2. Cash and Cash Equivalents

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

3. Marketable Securities

The Company determines the appropriate  classification of securities at the time
of purchase and reassesses the  appropriateness  of the  classification  at each
reporting date. At December 31, 2003 and 2002, all marketable securities held by
the Company have been  classified as  available-for-sale  and, as a result,  are
stated  at  fair  value.  Unrealized  gains  and  losses  on  available-for-sale
securities  are  recorded  as a  separate  component  of  stockholders'  equity.
Realized gains and losses on the sale of securities, as determined on a specific
identification basis, are included in the consolidated statements of operations.

4. Accounts Receivable 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 30 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

                                      F-11

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2003 and 2002

NOTE B (continued)

considered  past  due.  Estimates  are used in  determining  the  allowance  for
doubtful  accounts  based on the Company's  historical  collections  experience,
current  trends,  credit policy and a percentage  of its accounts  receivable by
aging  category.  In  determining  these  percentages,   the  Company  looks  at
historical  write-offs of its receivables.  The Company also looks at the credit
quality of its  customer  base as well as changes  in its credit  policies.  The
Company continuously  monitors collections and payments from its customers.  The
Company  writes off  accounts  receivable  when they become  uncollectible,  and
payments subsequently received on such receivables are credited to the allowance
for doubtful accounts.

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

              Accounts receivable - business to business   $3,635,741
              Accounts receivable - business to consumer      121,747
                       Total                                3,757,488

              Less allowance for doubtful accounts          (127,481)

                                                           $3,630,007

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

              Beginning balance                                $  162,571
              Provision for (reduction in) doubtful accounts     (35,090)

              Ending balance                                     $127,481

5. Business and Credit Concentrations

Financial  instruments that potentially subject the Company to concentrations of
credit  risk  consist  principally  of cash  and  cash  equivalents,  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,
2003 totaled  approximately  $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.

                                      F-12

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2003 and 2002

NOTE B (continued)

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,  2003 and 2002,  the  Company  purchased
approximately 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.

6. Inventory

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

7. Property and Equipment

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

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

8. 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.

                                      F-13

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2003 and 2002

NOTE B (continued)

9. Vendor Allowances

The Company recognizes vendor allowances,  which are classified as reductions in
cost of sales, at the date goods are purchased and recorded, and under fixed and
determined   arrangements.   During  the fourth  quarter  of  2003, the  Company
recognized approximately $318,000 in vendor allowances arising from arrangements
with a major  supplier that  met the critieria for being fixed and determinable.
The  Company  expects  to record  such  vendor  allowances principally  based on
purchases, which were previously  not under fixed  arrangements, on a current as
purchases  are  recorded and  the  arrangements  are  in  effect  that meet  the
aforementioned criteria. Vendor allowances from manufacturers, included in other
receivables in the accompanying  consolidated  balance sheet aggregated $674,519
at December 31, 2003.

10. Intangible Assets

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

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 a
six (6) year estimated useful life from the date of acquisition. (see Note C)

Prior to the adoption of Statement of  Financial  Accounting  Standards  No. 142
("SFAS No.  142"),  "Goodwill and  Other Intangible  Assets,"  these  intangible
assets were  amortized  over their  estimated  useful  life of five years.  As a
result of the adoption of SFAS No. 142, intangible assets with indefinite useful
lives will no longer be amortized but instead will be reviewed for impairment at
least  annually and more often when  impairment  indicators  are  present.  As a
result,  the Company's  trade names will no longer be  amortized.  The Company's
customer  lists  have  finite  lives.  Management  considered  various  factors,
including  appraisals,  in determining  that a revision to the estimated  useful
life of the Company's customer lists should be made. Based upon the analysis, it
was determined that the estimated useful life should be extended  prospectively,
by a term of six  years  from  the  original  useful  life of five  years.  This
modification decreased amortization expense by approximately $129,000 during the
year ended December 31, 2002. As a result, the remaining carrying amount will be
amortized   prospectively   over  the  remaining   useful  life.  In  2003,  the
amortization expense recorded for the year was $192,354.

                                      F-14

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2003 and 2002

NOTE B (continued)

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

                       Amortized intangible assets
                           Customer lists                   $ 3,114,629
                           Less accumulated amortization     (1,680,773)
                                                              1,433,856
                       Unamortized intangible assets
                           Trade names                           90,400

                           Total                            $ 1,524,256

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

11. 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.

12. Revenue Recognition

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

13. Advertising

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

                                      F-15

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2003 and 2002

NOTE B (continued)

14. 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.

15. 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.

16. Basic and Diluted Loss Per Share

Basic and diluted loss per share is  calculated  by dividing the net loss by the
weighted-average  number  of  common  shares  outstanding  during  each  period.
Incremental  shares from  assumed  exercises  of stock  options and  warrants of
596,650  and  586,759  for  the  years  ended   December   31,  2003  and  2002,
respectively,  have been excluded from the calculation of diluted loss per share
since their effect would be antidilutive.

17. Stock-Based Compensation Plans

At December  31, 2003,  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.

                                      F-16

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2003 and 2002

NOTE B (continued)

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.

                                                         Year ended December 31,
                                                          2003            2002

             Net loss, as reported                     $(1,277,223) $(2,486,567)
             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                        $(1,277,223) $(3,037,992)

             Loss per share
                 Basic and diluted - as reported           $ (0.82)     $ (1.91)
                 Basic and diluted - pro forma              $(0.82)      $(2.33)

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.

                                      F-17

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2003 and 2002

NOTE B (continued)

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, 2003.

18. Segment Information

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

19. Recent Pronouncements

In January  2003,  the FASB  issued  FASB  Interpretation  No. 46 ("FIN No. 46")
"Consolidation of Variable Interest  Entities." In general,  a variable interest
entity is a corporation,  partnership,  trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity  investors  that do not  provide  sufficient  financial
resources for the entity to support its activities.  A variable  interest entity
often holds financial  assets,  including loans for receivables,  real estate or
other property.  A variable interest entity may be essentially passive or it may
engage  in  activities  on behalf  of  another  company.  Until  now,  a company
generally has included another entity in its consolidated  financial  statements
only if it controlled the entity through  voting  interests.  FIN No. 46 changes
that by requiring a variable  interest entity to be consolidated by a company if
that  company is subject  to a  majority  of the risk of loss from the  variable
interest  entity's  activities or entitled to receive a majority of the entity's
residual  returns  or  both.  FIN  No.  46's  consolidation  requirements  apply
immediately to variable  interest entities created or acquired after January 31,
2003. The consolidation requirements apply to older entities in the first fiscal
year or  interim  period  beginning  after  December  15,  2003.  Certain of the
disclosure  requirements apply in all financial  statements issued after January
31, 2003,  regardless of when the variable  interest entity was established.  In
December 2003, the FASB issued FASB  Interpretation  No. 46R,  "consolidation of
Variable Interest Entities  an interpretation of ARB 51 (revised

                                      F-18

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2003 and 2002

NOTE B (continued)

December  2003)" ("FIN  46R"),  which  includes  significant  amendments  to the
previously  issued FIN 46.  Among other  provisions,  FIN 46R  includes  revised
transition  dates  based  on the  nature  as  well as the  creation  date of the
variable interest entity. The Company is now required to adopt the provisions of
FIN 46R no later  than the end of the first  reporting  period  that ends  after
March 15, 2004. The adoption of these pronouncements has not and is not expected
to have a material impact on the Company's  consolidated  financial condition or
results of operations taken as whole.

In April  2003,  the FASB issued SFAS No. 149 ("SFAS No.  149"),  "Amendment  of
Statement 133 on Derivative  Instruments and Hedging  Activities,"  which amends
and clarifies  financial  accounting and reporting for  derivative  instruments,
including  certain  derivative  instruments  embedded in other contracts and for
hedging  activities  under SFAS No. 133. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003 except for the provisions that were
cleared by the FASB in prior  pronouncements.  The  adoption of SFAS No. 149 has
not had a material  impact on the  Company's  financial  position and results of
operations.

In May 2003,  the FASB issued  SFAS No. 150 ("SFAS No.  150"),  "Accounting  for
Certain  Financial  Instruments  with  Characteristics  of both  Liabilities and
Equity." This statement  establishes  standards for how an issuer classifies and
measures in its statement of financial  position certain  financial  instruments
with  characteristics  of both  liabilities  and equity.  In accordance with the
standard,  financial  instruments  that  embody  obligations  for the issuer are
required to be classified as liabilities.  This Statement shall be effective for
financial  instruments entered into or modified after May 31, 2003 and otherwise
shall be effective at the beginning of the first interim period  beginning after
June 15,  2003.  The  Company  adoption  of SFAS No.  150 has not had a material
impact on its financial position and results of operations.

In December 2003, the  Securities and Exchange  Commission  ("SEC") issued Staff
Accountant  Bulletin  No.  104,  "Revenue  recognition"  ("SAB  No.104"),  which
codifies,  revises  and  rescinds  certain  sections  on SAB No.  101,  "Revenue
Recognition" in order to make this interpretive guidance consistent with current
authoritative  accounting and auditing  guidance and SEC rules and  regulations.
The changes noted in SAB No. 104 did not have a material effect on the Company's
financial position or results of operations.

                                      F-19

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2003 and 2002

NOTE C - ACQUISITION

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  cigar to some of some of the most  prestigious
hotels,  restaurants,  casinos and golf clubs in the United States. The 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 on various dates through May 2006, based
upon the achievement of certain targeted  operating results of CAW predominately
based upon  multiplying  Earnings  before  depreciation  amortization  and taxes
(EBTDA) by six times. In December 2003,  25,000 shares of common stock have been
issued  valued at $100,000  for the purpose of the  satisfying  the  anticipated
consideration due the seller by March 31, 2004, based upon the operating results
of CAW through  December 31, 2003.  In the event that CAW  experiences  an EBTDA
loss for the last quarter of initial  measurement  period of 2004 an  adjustment
will be made to future consideration issued.

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 allocation of the $425,000 purchase price.

                  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

Customer lists are being  amortized  over a six year estimated  useful life from
the date of  acquisition.  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  will be 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.  Summarized  below  are the  unaudited  pro forma
results of  operations  of operations of the Company as if CAW had been acquired
at the beginning of the years presented:

                                      F-20

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2003 and 2002

NOTE C (continued)

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-21

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 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>           <C>             <C>               <C>

                                                                       Gross           Gross              Fair
                                                                    unrealized      unrealized          market
                                                        Cost           gains           losses            value

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

</TABLE>

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, 2003 and 2002 are as follows:

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

NOTE F - INVENTORY

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

       Grocery, health and beauty products    $1,845,308
       Tobacco finished goods                    318,808

                                              $2,164,116

NOTE G - PROPERTY AND EQUIPMENT

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

       Office equipment                                    $ 204,610
       Furniture and fixtures                                231,266
       Leasehold improvements                                411,673

                                                             847,549

       Less accumulated depreciation and amortization      (468,325)

                                                           $ 379,224

                                      F-22

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2003 and 2002

NOTE G (continued)

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

NOTE H - OTHER ASSETS

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

       Investment (a)                                           $164,604
       Website development costs, net of accumulated               5,375
          amortization of $924,104
       Other                                                      16,078

                                                                $186,057

(a) In December  2001,  the Company made an investment  in Interline  Travel and
Tour. Inc. ("ITT") for approximately  20% of the outstanding  common stock of an
investee 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 $92,424 and $67,717  during the years ended December 31,
2003 and December 31, 2002, respectively.

                                      F-23

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2003 and 2002

NOTE H (continued)


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

                Financial position:                  2003             2002

                Current assets                   $1,511,000         $1,545,000
                 Property and equipment             147,000            207,000
                 Other assets                       306,000            345,000

                Total assets                     $1,964,000         $2,097,000

                Current liabilities             $   972,000        $   737,000
                Long-term debt                       82,000            524,000
                Other long-term liabilities           9,000              3,000

                Total liabilities                $1,063,000         $1,264,000


                Results of operations:               2003              2002

                Revenues                        $ 9,602,000        $ 8,167,000
                Operating expenses               (8,906,000)        (7,637,000)
                Other income                         54,000             44,000

                Income before income taxes          750,000            574,000
                Income tax expense                 (268,000)          (210,000)

                Net income                     $    482,000       $    364,000

                                      F-24

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 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  principal
balance  is  due on  December  31,  2005.  Sales  to  this  customer  aggregated
$4,649,000 in 2003 and $986,000 in 2002.  Accounts receivable from this customer
aggregates $801,000 at December 31, 2003.


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 July  2003,  under  the  loans  allow for the
borrowing of up to $7,000,000  based on the sum of 85% of the net face amount of
eligible accounts receivable,  as defined,  plus the lesser of (1) $2,750,000 or
(2) eligible inventory and eligible goods in transit,  as defined.  The terms of
the  agreements  are for one year and  provide  for  automatic  renewals  unless
written  consent by either the Company or the Lender is provided  within 60 days
of the renewal date.  Interest accrues on outstanding  borrowings at the greater
of (i) 8% per  annum in  excess of the  prime  rate or (ii) 17% per  annum.  The
minimum  interest to be paid for any year under the line of credit is  $320,000.
At December  31, 2003,  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.
525,000  shares  of the  Company's  common  stock  have  also  been  pledged  as
collateral on the outstanding borrowings. 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
IIG.  The LC expires in May 2004,  at which time the cash  deposit and  reserves
will be  released.  In the event that the Company  requires an extension of this
facility,  the  modification  to the loan and security  agreement will remain in
effect.

                                      F-25

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 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 20% 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, 2005. 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 the notes payable.  Amortization  expense  recorded in 2003 was
approximately  $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 20%  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.  Amortization  recorded  in  2003  was
approximately  $10,000.  As  security  for the  notes,  the  Company  pledged as
collateral its investment in the common stock of ITT.

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.

                                      F-26

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2003 and 2002

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.

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.  No more that 19.9% of the  Company's  stock can be
issued in connection with stock dividend  payments against the Class B, Series A
preferred stock.

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

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

On  September  30, 2002,  the Company  exchanged  in full its  outstanding  note
payable and accrued interest of $656,773  through a revision  agreement with SBG
for the termination of $794,990 of its outstanding  unused  advertising  credits
with 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.

                                      F-27

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2003 and 2002

NOTE L (continued)

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 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  shares 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 during 2003.

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.

                                      F-28


<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2003 and 2002

NOTE L (continued)

For the year ending  December  31, 2003,  the Company  issued  65,938  shares of
common stock as compensation for services under existing agreements and recorded
a charge to  operations  of $93,125 and unearned  compensation  of $90,000.  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, 2003, the Company received  proceeds of $111,500
from the exercise of stock  options to purchase  62,500  shares of the Company's
common stock.

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

                                                                       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


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


<TABLE>
            <S>                      <C>                  <C>             <C>              <C>
                                                 Warrants outstanding                        Warrants exercisable
                                                         Weighted-
                                       Number             average       Weighted-            Number         Weighted-
                                    outstanding at       remaining       average         exercisable at      average
              Ranges of             December 31,        contractual     exercise          December 31,      exercise
             exercise prices            2003            life (years)      price               2003            price

           $5.00                      173,750               2.84        $  5.00             173,750         $  5.00
           $10.00 - $12.00             31,250               1.97          10.40              31,250           10.40
           30.00 - 40.00                 5000               1.33          30.00                5000           30.00

                                      210,000               2.67        $  6.40             210,000          $  6.40

</TABLE>

                                      F-29

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2003 and 2002

NOTE M - STOCK OPTION PLANS

In 1994, Synergy adopted the 1994 Services and Consulting Compensation Plan (the
"Plan"). Under the Plan, as amended,  8,400,000 shares of common stock have been
reserved  for  issuance.  The Plan  terminates  with  respect to the granting of
common stock and options in 2004.  Since the inception of the Plan,  Synergy has
issued  1,138,838  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, 2003
and 2002,  the  Company  issued  65,938 and 85,500  shares of its common  stock,
respectively, to various service providers and has recorded a charge to earnings
of $93,125 and $298,945,  respectively,  pursuant to the provisions of the Plan.
Under  the  Plan,   Synergy  has  granted  options  to  selected  employees  and
professional  service  providers.  The maximum term of options granted under the
Plan is ten years. During the year ended December 31, 2002, the Company recorded
a charge to  operations of $49,825,  which  represented  the intrinsic  value of
stock options  granted to employees and directors in January 2002.  There was no
charge to operation for the year ended December 31, 2003.

The following is a summary of such stock option transactions for the years ended
December  31,  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

       Available for grant
           December 31, 2003             7,261,162

           December 31, 2002             7,457,291

                                      F-30

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2003 and 2002

NOTE M (continued)

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


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

                                                 Options outstanding                       Options exercisable
                                                      Weighted-
                                      Number           average        Weighted-           Number         Weighted-
                                   outstanding at     remaining        average        exercisable at      average
             Ranges of             December 31,      contractual      exercise         December 31,      exercise
            exercise prices            2003          life (years)       price              2003            price

           $ 1.00 - $ 4.00           376,125              .99          $  3.68          376,125          $  3.68
            18.00  - 20.00            29,000              .65            18.34           29,000            18.34
           25.00 -  35.60             36,275              .69            27.36           36,275            27.36
           40.00 -  50.00              8,500              .99            42.94            8,500            42.94
           60.00 -  70.00             31,750              .62            61.57           31,750            61.57

                                     481,650              .92           $10.86          481,650           $10.86

</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, 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 account receivable 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,  2003  $100,800  is payable to the  Company's  Chairman  and Chief
Executive Officer for short-term advances made to the Company.

                                      F-31

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2003 and 2002

NOTE O - OTHER INCOME (EXPENSE)

     Other income (expense) is comprised of the following:

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

                                                                         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)           10,828          (71,237)
        Loss on sale of preferred stock of an investee (Note H)                -          (57,600)
        Other                                                              5,354          (51,113)

                                                                        $298,932         $514,860

</TABLE>

NOTE P - INCOME TAXES

At December  31, 2003,  the Company had a net  operating  loss carry  forward of
approximately $30,423,000,  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, 2003 were approximately as follows:

          Net operating loss carryforwards         $ 10,344,000
          Fixed assets and intangibles                  273,000
          Allowance for doubtful accounts                43,000
          Inventory                                      62,000
          Capital losses                                 51,000
          Other                                         (52,000)
          Valuation allowance                       (10,721,000)

                                                    $         -

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

                                              2003          2002

          State and local                   $32,658      $22,687

                                      F-32

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 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, 2003 and 2002 are as follows:

                                                            2003         2002

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

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

                                                            .9 %          .9 %

NOTE Q - RETIREMENT PLAN

On January 1, 2002, the Company  established  the Synergy  Brands,  Inc.  401(k)
Profit Sharing Plan  (the "Plan")  covering  employees 21 years of age and older
who have  completed  six  months of  continuous  service.  The Plan is a defined
contribution  plan which  provides  for  voluntary  employee  contributions  and
discretionary employer contributions.  Employees become fully vested in employer
contributions  after three  years.  The  Company's  discretionary  matching  and
profit-sharing  contributions to the Plan were $13,252 and $18,846 for the years
ended December 31, 2003 and 2002, respectively.

                                      F-33

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2003 and 2002

NOTE R - COMMITMENTS AND CONTINGENCIES

1. Lease Commitments

The Company leases office and warehouse space under operating leases expiring at
various  dates  through June 2008.  The Company is also leasing  vehicles  under
operating  leases  expiring  in  2004.   Future  minimum  lease  payments  under
noncancelable operating leases as of December 31, 2003 were as follows:

      Year ending December 31,
             2004                                                $173,042
             2005                                                 123,691
             2006                                                  96,688
             2007                                                 101,364
             2008                                                  52,014
                                                                 $546,799

Rent expense under  operating  leases for the years ended  December 31, 2003 and
2002 was approximately $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-34

<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2003 and 2002

NOTE S - SEGMENT AND GEOGRAPHICAL INFORMATION

The  Company  offers a broad  range of  Internet  access  services  and  related
products to businesses  and consumers  throughout  the United States and Canada.
Management  evaluates the various  segments of the Company based on the types of
products  being  distributed  which were,  as of December 31, 2003 and 2002,  as
shown below:


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

                                            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                               (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                               (833,712)           (293,088)        (15,711)     (1,344,056)        (2,486,567)
     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-35


<PAGE>

                      Synergy Brands, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

                           December 31, 2003 and 2002

NOTE S (continued)

All of the Company's  identifiable  assets and results of operations are located
in the United States and Canada.  Geographic data, as of and for the years ended
December 31, 2003 and 2002, is as follows:

                                               2003               2002

                 Revenue
                      United States           $34,076,666        $30,555,151
                      Canada                    6,463,911            985,524

                                              $40,540,577        $31,540,675

                 Accounts receivable
                      United States            $1,822,677       $  1,256,041
                      Canada                    1,934,811            776,628

                                               $3,757,488       $  2,032,669

                 Identifiable assets
                      United States           $10,818,667       $  5,824,230
                      Canada                      173,978             47,439

                                              $10,992,645       $  5,871,669


                                      F-36


<PAGE>

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

3.2              By-Laws (2)                                                          --

4                Preferred Stock, Common Stock, and Options and
                 Warrants defining  rights of security  holders (3)               EX-3.1

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

14               Code of Ethics                                                    EX-14

21               Listing of Company Subsidiaries                                   EX-21

31.1             Certification  Pursuant to 18 U.S.C.  Section  1350. As Adopted
                 Pursuant  to  Section  906 of the  Sarbanes-Oxley  Act of 2002,
                 signed by the Chief Executive Officer.                            EX-31.1

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-31.2

99.1             Listing of Company Intellectual Properties                        EX-99.1

99.2             Nominating Committee Charter                                      EX-99.2
</TABLE>

(1)      Only 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  included  in the  Exhibits.  The
         amendments  to  Certificate  of  Incorporation  filed 7/29/96 and filed
         6/24/98 and Certificate of Designation  regarding Preferred Stock filed
         6/24/98,  are  incorporated  by reference to the exhibits  filed to the
         Form  10K/A  of  the  Company  filed  9/3/98.   The  amendment  to  the
         Certificate  of  Incorporation  filed  July  2000  is  incorporated  by
         reference  to the  exhibits  filed to the form  10KSB/A of the  Company
         filed 8/9/01.  The amendment to the Certificate of Incorporation  filed
         April 1, 2001 is incorporated by reference to the exhibits filed to the
         Form 10-KSB of the  Company  filed March  2002.  The  amendment  to the
         Certificate   of   Incorpoartion   filed  February  11,  2003  and  the
         Certificate  of  Designation  regarding  Prefered 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

                                      -38-

<PAGE>

(3)      Description  of rights of Preferred  Stock are included in the Restated
         Certificate  of  Incorporation  filed  November 10, 2003  clarificaiton
         amendment  to the  Certificate  of  Incorporation  filed  March  , 2004
         included  herewith as exhibits and in the  Certificate  of  Designation
         filed  3/13/03  incorporated  by  reference  to the 10KSB filed for the
         Company  for  the  year  ended  12/31/03,  and  in the  Certificate  of
         Designation  regarding  Preferred  Stock,  as amende,  and  included as
         exhibit to the Form 10K/A of the  Company  filed  9/3/98 as well as the
         amendment to the  certificate of  incorporation  filed in July 2000 and
         included as an exhibit to the Form 10KSB/A of the Company  filed 8/9/01
         which  latter   documents  are   incorporated   by  reference   herein.
         Description of the Company's  Common Stock is incorporated by reference
         to the description contained in the Company's Registration Statement on
         Form 8-A (File No.  0-19409)  filed  with the  Commission  pursuant  to
         Section  12(b) of the  Exchange  Act on July 16,  1991,  including  any
         amendments   or  reports   filed  for  the  purpose  of  updating  such
         description.  A  facsimile  of  outstanding  warrants  is  included  by
         reference to the inclusion thereof as an exhibit to the Company's 10KSB
         report filed March 2002 which  documents are  incorporated by reference
         herein.  Also  incorporated  by  reference  to the 10KSB  filed for the
         Company  for the year  ended  12/31/04  is the Option  Agreement  dated
         September  30, 2002 entered by the Company with  Sinclair  Broadcasting
         Group  Inc.  as part  consideration  for  modification  of all  earlier
         agreements between said parties, including extinguishment of Debt which
         Option  Agreement along with all equity holdings in the Company held by
         Sinclair Broadcasting was subsequently purchased by and assigned to the
         largest  shareholder  of the  Company to which  assignment  the Company
         consented.

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

                                   39