UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

~~UNITED~~QUARTERLY ~~STATES~~REPORT PURSUANT TO ~~SECURITIES~~SECTION ~~AND~~13 ~~EXCHANGE~~OR ~~COMMISSION~~15(d) OF ~~Washington,~~THE ~~D.C.~~SECURITIES ~~20549~~EXCHANGE ACT OF 1934

~~Quarterly Report~~For ~~Pursuant~~the toquarterly ~~Section 13 or 15(d) of~~period ~~the~~ended: October 31, ~~Securities and Exchange Act of 1934~~2004

~~For the quarterly period ended: 04/30/03~~ Commission ~~file~~File ~~number~~Number: 1-14091

SHERWOOD BRANDS, INC.
(Exact name of Registrant as specified in its charter)
North Carolina		56-1349259
(State or other jurisdictions of incorporation or organization)		(I.R.S. Employer Identification No.)
1803 Research Blvd. Suite 201, Rockville MD 20850
(Address of principal executive offices)
Registrant’s telephone number, including area code: 301-309-6161

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 requirement for the past 90 days. Yes ý No o

The number of shares outstanding of issuer’s Class A Common Stock, $.01 par value per share, as of June 10, 2003 was 3,003,476. The number of shares outstanding of issuer’s Class B Common Stock, $.01 par value per share, as June 10, 2003 was 1,000,000. The Class B Common Stock is not publicly traded.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

SHERWOOD BRANDS, INC.

(Exact name of Registrant as specified in its charter)

North Carolina	56-1349259
(State or other jurisdictions of incorporation or organization)	(I.R.S. Employer Identification No.)

1803 Research Boulevard, Suite 201
Rockville, MD 20850

(Address of principal executive offices)

Registrant’s telephone number, including area code: (301) 309-6161

Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

The number of shares outstanding of the registrant’s Class A Common Stock, $.01 par value per share, as of December 13, 2004 was 3,036,561. The number of shares outstanding of the registrant’s Class B Common Stock, $.01 par value per share, as December 13, 2004 was 1,000,000. The Class B Common Stock is not publicly traded.

Transitional Small Business Disclosure Format (check one):

Yes o No ý

SHERWOOD BRANDS, INC.

INDEX

PART I FINANCIAL INFORMATION
PART I			FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
	Item 1.		FINANCIAL STATEMENTS
	Consolidated Balance Sheets – April 30, 2003 (unaudited) and July 31, 2002
		Consolidated Balance Sheets - October 31, 2004 (unaudited) and July 31, 2004
	Consolidated Statements of Operations – Three months and nine months ended April 30, 2003 and 2002 (unaudited)
		Consolidated Statements of Operations - Three months ended October 31, 2004 and 2003 (unaudited)
	Consolidated Statements of Cash Flows – Nine months ended April 30, 2003 and 2002 (unaudited)
		Consolidated Statements of Cash Flows - Three months ended October 31, 2004 and 2003 (unaudited)
	Notes to Consolidated Financial Statements
		Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
		Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 3. Quantitative and Qualitative Disclosures about Market Risk
		Item 4.	Controls and Procedures
Item 4. Control and Procedures
		PART II OTHER INFORMATION
PART II OTHER INFORMATION
		Item 1.	Legal Proceedings
Item 1. Legal Proceedings
		Item 6.	Exhibits and Reports on Form 8-K
Item 4. Submission of Matters to a Vote of Security Holders
		SIGNATURES
Item 6. Exhibits and Reports on form 8-K
SIGNATURES

SHERWOOD BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
UNAUDITED

	October 31, 2004			July 31, 2004

Assets
Current assets
Cash and cash equivalents	$	13,801		$	10,808
Accounts receivable, less allowance of $134,000 and $103,000	10,087,185			1,038,123
Inventory	12,949,310			9,591,268
Income taxes receivable	—			54,681
Other current assets	631,272			581,411
Deferred taxes on income	864,000			864,000
Total current assets	24,545,568			12,140,291
Net property and equipment	5,866,430			6,103,880
Goodwill	2,001,330			2,001,330
Other assets	180,502			160,952
TOTAL ASSETS	$	32,593,830		$	20,406,453
Liabilities and Stockholders’ Equity
Current liabilities
Line of credit	$	12,471,850		$	5,610,903
Short-term Debt	467,800			—
Current portion of long-term debt	376,850			465,239
Current portion of subordinated debt	3,352,140			3,397,140
Current portion of capital lease obligation	16,688			16,688
Accounts Payable	5,637,116			3,241,708
Accrued expenses	3,452,446			1,761,894
Total current liabilities	25,774,890			14,493,572
Deferred taxes on income	864,000			864,000
Long-term debt	583,055			617,774
Obligations under capital lease	403,125			407,204
TOTAL LIABILITIES	27,625,070			16,382,550
Stockholders’ equity
Preferred stock, $.01 par value, 5,000,000 shares authorized; no shares issued or outstanding	—			—
Common stock, Class A, $.01 par value, 30,000,000 shares authorized, 3,036,561 and 3,036,561 shares issued and outstanding	30,366			30,366
Common stock, Class B, $.01 par value, 5,000,000 shares authorized, 1,000,000 shares issued and outstanding	10,000			10,000
Additional paid-in-capital	9,893,349			9,893,349
Retained earnings (deficit)	(4,964,955		)	(5,909,812		)

TOTAL STOCKHOLDERS’ EQUITY	4,968,760			4,023,903
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	32,593,830		$	20,406,453

See accompanying notes to consolidated financial statements.

SHERWOOD BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED

	Three Months Ended October 31,
	2004			2003

Net sales	$	11,692,537		$	17,420,813
Cost of sales	8,352,639			12,384,142
Gross profit	3,339,898			5,036,671
Selling, general and administrative expenses	1,166,121			2,231,517
Salaries and related expenses	921,024			1,062,982
Total operating expenses	2,087,145			3,294,499
Income from operations	1,252,753			1,742,172
Other income (expense)
Interest income	3			19
Interest expense	(297,763		)	(236,766		)
Other (expense)income	(10,136		)	4,537
Total other (expense)income	(307,896		)	(232,210		)
Income before provision for taxes on income	944,857			1,509,962
Provision for taxes on income	—			—
Net income	$	944,857		$	1,509,962
Net income per share-basic	$	0.23		$	0.38
-diluted	0.23			0.37
Weighted average shares outstanding-basic	4,036,561			3,996,199
-diluted	4,146,017			4,136,235

See accompanying notes to consolidated financial statements.

SHERWOOD BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED

CONSOLIDATED BALANCE SHEETS

	Three months ended October 31,
	2004			2003

Cash flows used in operating activities
Net income	$	944,857		$	1,509,962
Adjustments to reconcile net income to net cash used in operating activities
Depreciation expense	237,450			248,444

Provision for doubtful accounts	30,396			75,682
(Increase) decrease in assets
Accounts receivable	(9,079,458		)	(13,421,200		)
Income taxes receivable	54,681			(49		)
Inventory	(3,358,042		)	(3,012,118		)
Other current assets	(49,861		)	88,878
Other assets	(19,550		)	(5,000		)
Increase (decrease) in liabilities
Accounts payable	2,395,408			2,877,533
Accrued expenses	1,690,552			1,631,901

Net cash used in operating activities	(7,153,567		)	(10,005,966		)
Cash flows from investing activities
Proceeds from sales of assets	—			142,750
Capital expenditures	—			(111,992		)
Net cash provided by investing activities	—			30,759
Cash flows from financing activities
Net borrowings on line of credit	6,860,947			9,995,531
Borrowing on short-term debt	467,800			—
Payments on subordinated debt	(45,000		)	—
Payments on long term debt	(127,187		)	(126,266		)
Net cash provided by financing activities	7,156,560			9,869,265
Net increase in cash and cash equivalents	2,993			(105,943		)
Cash and cash equivalents, at beginning of period	10,808			227,352
Cash and cash equivalents, at end of period	$	13,801		$	121,409

~~Unaudited~~See accompanying notes to consolidated financial statements.

	April 30, 2003	July 31, 2002
	(unaudited)	(audited)
Assets
Current assets
Cash and cash equivalents	56,389	709,247
Accounts receivable, less allowance of $273,000 and $126,000	4,628,016	2,547,452
Inventory	10,966,258	15,956,145
Income taxes receivable	1,357,240	1,555,078
Other current assets	564,060	450,375
Deferred taxes on income	512,000	512,000
Total current assets	18,083,963	21,730,297
Net property and equipment	7,324,968	7,350,488
Goodwill	2,001,330	2,001,330
Other assets	339,509	308,839
TOTAL ASSETS	27,749,770	31,390,954
Liabilities and Stockholders’ Equity
Current liabilities
Line of credit	7,207,580	8,203,971
Current portion of long-term debt	481,111	90,000
Current portion of capital lease obligation	15,718	15,718
Accounts payable	5,118,608	5,833,301
Accrued expenses	1,429,328	1,368,928
Income taxes payable	—	—
Total current liabilities	14,252,345	15,511,918
Deferred taxes on income	331,000	331,000
Long-term debt	1,412,090	1,722,000
Obligations under capital lease	427,676	438,696
TOTAL LIABILITIES	16,423,111	18,003,614
Stockholders’ equity
Preferred stock, $.01 par value, 5,000,000 shares authorized; no shares issued or outstanding	—	—
Common stock, Class A, $.01 par value, 30,000,000 shares authorized, 3,003,476 shares issued and outstanding	30,035	29,869
Common stock, Class B, $.01 par value, 5,000,000 shares authorized, 1,000,000 shares issued and outstanding	10,000	10,000
Additional paid-in-capital	9,843,774	9,816,856
Retained earnings	1,442,850	3,561,754
Accumulated other comprehensive income (loss)	—	(31,139	)
TOTAL STOCKHOLDERS’ EQUITY	11,326,659	13,387,340
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	27,749,770	31,390,954

See accompanying summary of accounting policies and notes to consolidated financial statements

SHERWOOD BRANDS, INC. AND SUBSIDIARIES ~~CONSOLIDATED~~NOTES ~~STATEMENTS~~TO OFCONSOLIDATED ~~OPERATIONS~~FINANCIAL STATEMENTS ~~Unaudited~~(UNAUDITED)

		THREE MONTHS ENDED APRIL 30,						NINE MONTHS ENDED APRIL 30,
		Unaudited						Unaudited
		2003			2002			2003			2002
Net sales		$	9,482,412		$	11,312,184		$	47,335,225		$	48,290,502
Cost of sales		7,919,775			9,063,422			35,218,817			34,402,511
Write-down of inventory		2,192,005			—			2,192,005			—
Gross profit (loss		(629,368		)	2,248,762			9,924,403			13,887,991
Selling, general and administrative expenses		1,632,931			1,588,005			6,945,440			6,592,152
Pre-production costs		405,838			393,918			1,790,214			393,918
Salaries and related expenses		1,249,423			1,102,277			3,707,832			3,777,329
Total operating expenses		3,288,192			3,084,200			12,443,486			10,763,399
(Loss) income from operations		(3,917,560		)	(835,438		)	(2,519,083		)	3,124,592
Other income (expense)
Interest income		116			460			2,608			4,340
Interest expense		(126,893		)	(114,194		)	(463,965		)	(402,855		)
Other income		379,673			33,595			317,498			19,469
Total other income (expense)		252,896			(80,139		)	(143,859		)	(379,046		)
(Loss) income before provision (benefit) for taxes on income		(3,664,664		)	(915,577		)	(2,662,942		)	2,745,546
(Benefit) provision for taxes on income		(914,637		)	(222,072		)	$	(544,000	)	1,099,341
Net (loss) income		$	(2,750,026	)	$	(693,505	)	$	(2,118,941	)	$	1,646,205
Net (loss) income per share	-basic	$	(0.69	)	$	(0.19	)	$	(0.53	)	$	0.44
	-diluted	(0.69		)	(0.19		)	(0.53		)	0.37
Weighted average shares outstanding
	-basic	4,001,454			3,716,250			3,993,756			3,707,143
	-diluted	4,001,454			3,716,250			3,993,756			4,390,870

See accompanying summary of accounting policies and notes to consolidated financial statements.

SHERWOOD BRANDS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

	Nine months ended April 30,
	Unaudited
	2003			2002
Cash flows from operating activities
Net (loss) income	$	(2,118,941	)	$	1,646,205
Adjustments to reconcile net income to net Cash used in operating activities
Depreciation expense	719,377			306,566
Provision for inventory obsolescence	146,390			865
Provision for doubtful accounts	157,275			245,742
(Increase) decrease in assets
Accounts receivable	(2,237,837		)	(2,123,160		)
Inventory	4,843,496			4,274,996
Other current assets	628,153			(142,511		)
Other assets	(30,671		)	(907,484		)
Increase (decrease) in liabilities
Accounts payable	(714,693		)	(1,350,139		)
Accrued expenses	91,576			284,036
Income taxes payable	—			(384,144		)
Net cash provided by operating activities	940,124			1,850,972
Cash flows from investing activities
Capital expenditures	(693,857		)	(1,317,836		)
Net cash used in investing activities	(693,857		)	(1,317,836		)
Cash flows from financing activities
Net pay-downs on line of credit	(996,390		)	(330,649		)
Exercise of Stock options	27,084			—
Borrowings on Debt	350,000			—
Payments on Debt	(279,819		)	42,910
Net cash used by financing activities	(899,125		)	(287,739		)
Net increase (decrease) in cash and cash equivalents	(652,858		)	245,397
Cash and cash equivalents, at beginning of period	709,247			385,195
Cash and cash equivalents, at end of period	$	56,389		$	630,592

See accompanying summary of accounting policies and notes to consolidated financial statements

1. BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Sherwood Brands, Inc., and its direct and indirect wholly-owned subsidiaries, Sherwood Brands, LLC, a Maryland limited liability company, Sherwood Brands of RI Inc., a Rhode Island corporation, Sherwood Brands Overseas, Inc., a Bahamas entity (“Overseas”), and Asher Candy, Inc., a Wyoming corporation (collectively referred to herein as, “we”, “our”, “us” or, the “Company”). All material inter-company transactions and balances have been eliminated in consolidation. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the consolidated financial statements, and the notes thereto, included in the Company’s amended Annual Report and Form 10-K/A filed on December 20, 2002.

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the consolidated financial statements, and the notes thereto, included in the Company’s July 31, 2004 Annual Report and Form 10-K filed on October 29, 2004.

2. ORGANIZATION AND DESCRIPTION OF BUSINESS

Sherwood Brands, Inc. was incorporated in December 1982 in the ~~State~~state of North Carolina. Sherwood Brands, Inc. is engaged in the manufacture, marketing and distribution of a diverse line of brand name candies, cookies, chocolates and gifts. The Company manufactures ~~jelly beans,~~ lollipops, biscuits and ~~soft and~~ ~~hard candies and~~ assembles seasonal gift items including gift baskets for Christmas, Valentines Day and Easter. The Company’s principal branded products ~~are~~include COWS(TM) butter toffee candies, DEMITASSE(R) biscuits, RUGER(R) wafers, SMILE POPS(R) lollipops, STRIP-O-POPS(R) lollipops, ~~and~~ ELANA(R) ~~Belgian~~ chocolates., ~~The Company also markets~~ SOUR FRUIT BURST(TM) fruit-filled hard candies, ~~as well as holiday specialty products, such as~~ and PIRATE’S GOLD COINS(R) milk chocolates ~~for Christmas and TOKENS OF LOVE(TM) milk chocolates for Valentine’s Day~~. The Company’s marketing strategy, including its packaging of products, is designed to maximize freshness, taste and visual appeal, and emphasizes highly distinctive, premium quality products that are sold at prices that compare favorably to those of competitive products. The Company ~~believes~~operates ~~that~~in ~~all~~the of confectionery industry and aligns its operations ~~are~~into three ~~part~~business ofsegments ~~the~~for ~~confectionery~~management ~~industry~~to measure financial performance by product type. The Company’s business segments are (i) Manufactured Candy and itCookies, ~~currently~~(ii) ~~reports~~Purchased Candy and asCookies aand ~~single~~(iii) ~~industry~~Purchased ~~segment~~Gift Items.

Sherwood Brands, Inc. ~~has~~is the ~~following~~owner ~~subsidiaries:~~of Sherwood Brands, LLC, a Maryland limited liability company. Sherwood Brands, LLC markets and distributes its own line of confectionery products in the United States.

• Sherwood Overseas, Inc. (a wholly-owned subsidiary of Sherwood Brands, LLC) was incorporated in July 1993 in the Bahamas to market and distribute the Sherwood lines of confectionery products internationally.

• Sherwood Brands of RI, Inc. was incorporated in September, 1998 in the state of Rhode Island. Sherwood Brands of RI, Inc. d/b/a E. Rosen Company manufactures hard candies and jelly beans and assembles and markets gift items and baskets to chains such as Wal-Mart, Kmart and CVS.4

• Sherwood ~~Acquisition~~ ~~Corporation~~Brands ~~was incorporated in April 2002 in the State~~ of ~~Wyoming.~~ ~~On May 1~~RI, ~~2002,~~Inc. ~~Sherwood~~is ~~Acquisition~~a ~~merged~~wholly ~~with and into Asher~~owned ~~Candy~~subsidiary ~~Acquisition~~of ~~Corporation,~~Sherwood ~~a Wyoming corporation~~Brands, ~~that manufactured candy canes and other hard candies under the “Asher” name~~Inc. ~~The~~that ~~surviving corporation of the merger~~ was ~~Asher~~incorporated ~~Candy~~in ~~Acquisition Corporation~~September, ~~which~~1998 ~~changed its name~~in tothe ~~Asher~~state ~~Candy,~~of ~~Inc~~Rhode Island., ~~and is now a wholly-owned subsidiary of~~ Sherwood Brands~~. The~~ ~~Company issued an aggregate~~ of ~~270~~RI,~~559~~ ~~shares~~Inc. ofd/b/a ~~its~~E. ~~Class~~Rosen ~~A common stock~~Company, ~~then~~that ~~valued~~prior atto $1fiscal 2005,~~675,000,~~ toformerly ~~the~~manufactured ~~shareholders~~hard ofcandies ~~Asher~~and ~~Candy~~jelly ~~Acquisition~~beans ~~Corporation~~and incontinues ~~consideration for the transaction, subject~~ to ~~claims~~assemble ~~for indemnification~~ and ~~adjustments~~market ~~based~~gift onitems aand ~~final~~baskets ~~audit.~~to ~~The~~chains ~~Company~~such ~~also issued~~as ~~warrants exercisable for 38~~Wal-Mart,~~652~~ ~~shares~~Kmart ofand ~~its Class A common stock, valued at $108,000~~CVS. ~~The Company is currently engaged in litigation with the former shareholders of Asher Candy Acquisition Corporation.~~

Sherwood Acquisition Corporation, a wholly-owned subsidiary of the Company, was incorporated in April, 2002 in the state of Wyoming. On May 1, 2002, Sherwood Acquisition merged with and into Asher Candy Acquisition Corporation, a Wyoming corporation. Asher Candy Acquisition Corporation is a manufacturer of candy canes and other hard candies under the “Asher” name. The surviving corporation of the merger is Asher Candy Acquisition Corporation, which has changed its name to Asher Candy, Inc.

3. INTERIM FINANCIAL INFORMATION

The financial information as of ~~April~~October 3031, ~~2003~~ 2004 and for the three ~~and nine~~ months ended ~~April~~ October 3031, ~~2003~~2004 and ~~2002~~2003 is ~~unaudited~~un-audited. In the opinion of management, such information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for such periods. Results for interim periods are ~~except~~not necessarily indicative of results to be expected for ~~the~~an entire year.

The July 31, 2004 consolidated balance sheet amounts have been derived from the previously audited Consolidated Balance Sheet of Sherwood Brands, Inc.

4. INVENTORY

Inventory consists of raw materials, packaging materials, components used in assembly, work- in- process and finished goods and is stated at the lower of cost or market. Cost is determined by the FIFO (first-in, first-out) method. Inventory consists of the following:

	October 31 2004			July 31 2004
	(unaudited)
Raw materials and ingredients	$	372,459		$	384,216
Components used in assembly	1,341,523			1,043,036
Packaging materials	2,802,970			2,798,591
Work-in-process	84,065			130,634
Finished product	10,413,719			7,262,339

	15,014,736			11,710,690
Less reserve for inventory obsolescence	(2,065,426		)	(2,119,422		)

	$	12,949,310		$	9,591,268

5. USE OF ESTIMATES

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

6. INCOME TAXES

Income taxes are calculated using the liability method specified by Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes (SFAS 109).” Under SFAS 109, deferred taxes are determined using the liability method, which requires the recognition of deferred tax assets and liabilities based on differences between the financial statement and the income tax basis using presently enacted tax rates.

The income tax rate utilized on an interim basis is based on the Company’s estimate of the effective income tax rate for the fiscal year ending July 31, 2004. The Company has a net operating loss carry forward which management believes will offset all taxable income generated in fiscal year 2004. Therefore, the Company estimated its effective tax rate at 0%.

7. STOCK BASED COMPENSATION

The Company adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-An Amendment of SFAS No. 123” (“SFAS 148”), but continues to measure compensation cost for the stock options using the intrinsic value method prescribed by APB Opinion No. 25. Compensation expense, if any, is measured as the excess of the market price of the stock over the exercise price on the measurement date. No compensation expense is recognized for the Company’s option grants that have an exercise price equal to the market price on the date of the grant. As allowable under SFAS 148, the Black-Sholes method to measure the compensation cost of stock options granted. The Company did not grant any stock options to employees in the quarters ended October 31, 2004 or 2003.

There were no adjustments made in calculating the fair value to account for vesting provisions, for non-transferability or risk of forfeiture. Because our 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.

~~$2,192,005~~If ~~writedown~~we ofhad elected to recognize compensation cost based ~~obsolete~~on ~~inventory~~the ~~recognized~~value inat the ~~quarter~~grant ~~ended~~dates ~~April 30,~~with ~~2003.~~the ~~Results~~method prescribed by SFAS 148, net ~~for~~income ~~interim~~and ~~periods~~earnings ~~are~~per ~~not~~share ~~necessarily~~would ~~indicative~~have ofbeen ~~results~~changed to bethe ~~expected~~pro forma amounts ~~for~~indicated in the ~~fiscal~~following ~~year.~~table:

4. ACQUISITION

	For the three months ended October 31,
	2004		2003
Net Income
As Reported	$	944,857	$	1,509,962

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	—		26,000

Pro Forma net income	$	944,857	$	1,483,962
Basic Income per Common Share:
As Reported	$	0.23	$	0.38
Pro Forma	0.23		0.37
Diluted income per Common Share:
As Reported	$	0.23	$	0.37
Pro Forma	0.23		0.36

On May 1, 2002, the Company acquired all of the outstanding common stock of Asher Candy Acquisition Corporation, a Wyoming corporation with operations located in New Hyde Park, New York, that manufactured candy canes and other hard candies under the “Asher” name. The purchase price paid to the shareholders of Asher Candy Acquisition Corporation in consideration for the transaction was approximately $1,786,000, consisting of an aggregate of 270,559 shares of the Company’s Class A common stock, then valued at $6.20 per share, or $1,675,000, subject to claims for indemnification, and warrants exercisable for 38,652 shares of Sherwood Brands Class A common stock, which warrants were valued at $108,000. The Company valued the common shares at the closing market price on April 30, 2002 and valued the warrants using the Black-Scholes options pricing method. Under the terms of the merger agreement, for a period of 30 days commencing on April 25, 2003, the Asher shareholders had the right to sell to the Company one-half of the shares issued to them at a price of $4.50 per share. During the quarter ended April 30, 2003, the Asher shareholders notified the Company of their exercise of the put right. However, because the Company has commenced litigation against the Asher shareholders alleging fraud, calling into question the validity of the put right and seeking damages, the Company determined not to give effect to the put right unless and until the matter is judicially resolved. The Company seeks declaratory and injunctive relief and award of damages against the prior shareholders for violations of the Merger Agreement and for common law fraud and violations of applicable securities laws. Certain of the Shareholders have filed a counterclaim seeking $7.0 million in damages. The Company believes that it has defenses to the counterclaim.

The following proforma information sets forth the consolidated results of operations for the three and nine months ended April 30, 2002, as though the acquisition had been completed on August 1, 2001. The pro forma information for the three months ended April 30, 2002 is the same as the Company’s reported results, since Asher’s entire business relates to manufacturing of Christmas seasonal items.

	Three Months Ended April 30, 2002			Nine Months Ended April 30, 2002
Net sales	$	11,312,184		$	58,005,438
Income (loss) before provision for	(1,491,287		)	3,797,051
income taxes
Net (loss) income	(1,269,755		)	2,318,664
Earnings per share—basic	$	(0.34	)	$	0.58
Earnings per share—diluted	$	(0.34	)	$	0.55

5. INVENTORY

Inventory consists of raw materials, packaging materials; components used in assembly, work-in-process and finished goods and are stated at the lower of cost or market. Cost is determined by the FIFO (first-in, first-out) method.

Inventory consists of the following:

	APRIL 30 2003			JULY 31 2002
	(UNAUDITED)			(AUDITED)
Raw materials and ingredients	$	582,286		$	868,319
Components used in assembly	1,160,692			1,200,576
Packaging materials	2,200,744			2,850,910
Work-in-process	599,398			667,697
Finished product	6,744,528			11,069,470
	11,287,648			16,656,972
Less reserve for inventory allowance	(321,390		)	(700,827		)
	$	10,966,258		$	15,956,145

During the quarter ended April 30, 2003, the Company wrote down $1.2 million of packaging materials and inventory resulting from product lines that will no longer be manufactured at the Company’s Chase City facility and $1.0 million of hard candy product lines that will no longer be produced at the Chase City, Virginia facility. These product lines will be manufactured by the Company’s overseas third party suppliers.

6. USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

7. INCOME TAXES

The Company reversed the provision for income taxes of $370,637 recorded in the first quarter since it will generate a net loss for fiscal year 2003. In addition, the Company recognized an $544,000 income tax benefit for the carryback of the net operating loss to recover income taxes previously paid.

8. EARNINGS PER SHARE

Earnings per share ~~are~~is based on the weighted average number of shares of common stock and dilutive common stock equivalents outstanding. ~~Basic~~during the period. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of ~~securities~~ securities that could share in the earnings of an entity. Antidilutive options are excluded from the earnings per share calculations when the option price exceeds the average market price of the common shares for the period. The following table presents a reconciliation between the weighted average shares outstanding for basic and diluted earnings per share for the three ~~and nine~~ months ended ~~April 30~~October 31, ~~2003~~2004 and ~~April 30~~October 31, ~~2002~~ 2003:

For the three months ended April 30, 2003	Loss			Shares	Per Share Amount
For the three months ended October 31, 2004	Income			Shares	Per Share Amount
Basic Earnings per Share
Basic earnings per share
Income (loss) available to common shareholders	$	(2,750,026	)	4,001,454	$	(0.69	)
Income available to common shareholders	$	944,857		4,036,561	$	0.23
Effect of dilutive stock options				—109,456
Dilutive earnings per share	$	(2944,~~750,026~~857	)	4,~~001~~146,~~454~~017	$	(0.6923	)

For the three months ended April 30, 2002	Loss			Shares	Per Share Amount
Basic Earnings per Share
Income (loss) available to common shareholders	$	(693,505	)	3,716,250	$	(0.19	)
Effect of dilutive stock options				—
Dilutive earnings per share	$	(693,505	)	3,716,250	$	(0.19	)

For the three months ended April 30, 2002	Loss			Shares	Per Share Amount
For the three months ended October 31, 2003	Income			Shares	Per Share Amount
Basic Earnings per Share
Basic earnings per share
Income (loss) available to common shareholders	$	(2,118,941	)	3,993,756	$	(0.53	)
Income available to common shareholders	$	1,509,962		3,996,199	$	0.38
Effect of dilutive stock options				—140,036
Dilutive earnings per share	$	(21,~~118~~509,~~941~~962	)	34,~~993~~136,~~756~~235	$	(0.5337	)

For the three months ended April 30, 2002	Loss		Shares	Per Share Amount
Basic Earnings per Share
Income available to common shareholders	$	1,646,205	3,707,143	$	0.44
Effect of dilutive stock options			536,179
Dilutive earnings per share	$	1,646,205	4,243,322	$	0.39

9. CONTINGENCY

The Company is, from time to time, involved in litigation incidental to the conduct of its business. The Company is currently involved in several actions. In particular, the Company’s ~~landlord~~is atcurrently ~~its Rhode~~involved ~~Island~~as ~~facility~~Plaintiff ~~has~~in ~~named~~a ~~the~~suit ~~Company~~brought before asthe aCircuit ~~defendant~~Court infor anMontgomery ~~action~~County, ~~seeking security~~Maryland, ~~for~~presenting claims ~~relating~~in connection towith the ~~lease~~merger agreement. ~~The~~under ~~Company~~which ~~deposited~~Sherwood Brands acquired ~~$180,000~~securities ~~with~~of ~~the~~Asher ~~registry~~Candy ofAcquisition ~~the~~Corporation ~~court~~and ~~relating~~agreed to ~~claims~~sell ~~for~~securities in ~~payment~~Sherwood Brands to prior shareholders of ~~real~~Asher Candy. The complaint alleges that the Company was ~~estate~~fraudulently ~~taxes,~~induced ~~water~~to ~~and~~enter ~~sewer,~~into ~~rent~~the merger agreement on the basis of, among other ~~occupied~~things, ~~space~~material misrepresentations and ~~repair~~omissions by the shareholders of ~~expenses~~Asher Candy. Sherwood InBrands ~~September~~is ~~2002,~~seeking declaratory ~~the~~and ~~landlord~~injunctive ~~claimed~~relief ~~other~~and ~~breaches~~award of damages against the ~~lease~~former ~~agreement,~~shareholders ~~alleging~~of anAsher ~~obligation~~Candy offor ~~$932,000~~violations ~~under~~of the ~~lease~~merger agreement and ~~demanded~~for ~~$750,000~~common tolaw ~~settle~~fraud ~~the~~and ~~disputes~~violations of applicable securities laws. Pending ~~The~~resolution of the litigation, the Company has ~~claims~~refused ~~against~~to honor the ~~landlord~~demand ~~it is~~of ~~pursuing~~the ~~and~~former ~~continues~~shareholders for the Company to ~~occupy~~repurchase ~~space~~half atof the ~~leased~~shares ~~premises.~~issued ~~The~~to ~~Company has~~them ~~accrued~~at ~~amounts~~a toprice ~~cover~~of ~~current~~$4.50 ~~charges~~per share. ~~Management~~Certain ~~does~~of ~~not~~the ~~believe~~shareholders ~~that~~have filed a counterclaim seeking $7.0 ~~the~~million ~~outcome~~in ofdamages. The ~~these~~Company ~~actions,~~believes that ~~individually~~it orhas indefenses to the ~~aggregate,~~counterclaim. ~~will~~There ~~have~~can ~~a material~~be ~~adverse~~no ~~effect~~assurance onthat the Company ~~financial~~will ~~condition~~not ofbe a party to other litigation in the ~~Company~~future.

The Company is currently involved as Plaintiff in a suit brought before the Circuit Court for Montgomery County, Maryland, presenting claims in connection with the merger agreement under which Sherwood Brands acquired securities of Asher Candy Acquisition Corporation and agreed to sell securities in Sherwood Brands to prior shareholders of Asher Candy. The complaint alleges that the Company was fraudulently induced to enter into the merger agreement on the basis of, among other things, material misrepresentations and omissions by the shareholders of Asher Candy. Sherwood Brands seeks declaratory and injunctive relief and award of damages against the former shareholders of Asher Candy for violations of the merger agreement and for common law fraud and violations of applicable securities laws. Pending resolution of the litigation, the Company has refused to honor the demand of the former shareholders for the Company to repurchase half of the shares issued to them at a price of $4.50 per share. Certain of the shareholders have filed a counterclaim seeking $7.0 million in damages. The Company believes that it has defenses to the counterclaim.

10. LICENSING AGREEMENTS

During the quarter ended ~~April 30~~October 31, ~~2003~~2004, the Company entered into a two ~~year~~licensing ~~license agreement~~agreements to incorporate products into gift sets. ~~and~~The aroyalty ~~license~~rates ~~agreement~~for ~~to manufacture~~such ~~candy~~licenses ~~canes~~are ~~using~~from a3% ~~licensed~~to ~~brand name. Under this agreement, the Company pays a royalty of 12~~5% of net sales ~~. The products will be incorporated into the Company’s gift set items during the Christmas~~ and ~~Easter holiday seasons but the agreement is effective~~ asexpire ~~of January 2003. The Company paid $35,000 as an advance fee for the license, which is to be offset against any royalties due. The Company incurred $890~~ in ~~royalties~~ ~~during~~range ~~the~~of ~~quarter~~three ~~ended April 30, 2003 and $244,654 during the nine months ended April 30, 2003 under this and other license agreements~~years. ~~The Company is currently pursuing other licenses with similar terms and conditions.~~

The products are to be incorporated into the Company’s gift set items during the Christmas and Easter holiday season. The Company paid $3,000 in advance fees for the licenses. These advance fees will be offset against any amounts due on royalties. There is a $5,000 minimum guaranteed license fee under these agreements. The Company incurred $172,982 and $212,047 in royalties for the quarters ended October 31, 2004 and 2003, respectively. The Company is currently pursuing other licenses with similar terms and conditions.

11. CREDIT FACILITY

During the quarter ended ~~April 30~~October 31, ~~2003~~2004, the Company was in ~~violation~~compliance ~~of certain~~with ~~business~~the ~~and~~ financial covenants under its credit facility relating to the fixed charge coverage ratio ~~and tangible net worth~~. As ofManagement ~~the~~believes ~~filing date of this quarterly~~that ~~report,~~ the Company ~~was~~will ~~still~~maintain incompliance ~~violation of those financial covenants. The Company is seeking to amend the credit agreement. The Company has been in discussions~~ with the ~~bank~~restrictive ~~regarding the amendment of the credit agreement and the modification of some of the financial~~ covenants tofor ~~help ensure~~ the ~~Company’s compliance with those covenants on a~~ ~~going~~remainder ~~forward~~of ~~basis~~2005. ~~The Company believes that the bank will agree to the changes.~~

12. CONCENTRATION OF CREDIT RISK AND EXPORT SALES

The Company has a variety of customers, including mass merchandisers, drug stores and grocery stores throughout the United States and abroad. For the quarter ended October 31, 2004 three customers accounted for approximately 21%, 10% and 7% of the Company’s net sales. For the quarter ended October 31, 2003 the same three customers accounted for approximately 16%, 8% and 4% of the Company’s total net sales. The Company had sales to customers in Canada, which represent 0.64% and 0.23% of net sales for the quarters ended October 31, 2004 and 2003, respectively.

During the quarter ended April 30, 2003, the Company entered into a third amendment and modification to its Loan and Security Agreement allowing for a short term permitted out of formula advance of $300,000 through May 31, 200313. ~~The~~ OPERATING ~~short term loan was fully paid during the fourth quarter ending July 31, 2003.~~SEGMENTS

~~The~~We ~~Company~~operate isin ~~currently seeking to obtain third party financing for short-term unsecured or subordinated debt to fund~~ the ~~Company’s~~confectionery ~~immediate~~industry ~~cash~~and ~~needs~~align ~~during the fourth~~our ~~quarter~~operations ~~ending~~into ~~July~~three ~~31,~~business ~~2003~~segments ~~and~~for ~~part~~management ofreporting ~~first quarter ending October 31, 2003~~purposes. ~~The~~These ~~Company~~segments isare ~~close~~based toon ~~over~~product ~~advance~~type. ~~financing~~This ~~from~~alignment aallows ~~source~~management ~~other than the~~to ~~bank~~measure ~~for~~financial ~~its~~performance ~~out~~by ofproduct ~~formula advances~~type. ~~The~~ ~~new~~Our ~~financing~~business ~~will~~segments ~~provide~~are ~~net cash to the Company in an amount~~(i) ~~equal~~Manufactured toCandy ~~$2,000,000~~ and ~~an additional $1~~Cookies,~~000,000~~ ~~provided~~(ii) ~~from~~Purchased ~~the~~Candy ~~bank. All~~and ~~the~~Cookies ~~proceeds~~and ~~of the new financing shall~~(iii) bePurchased ~~used~~Gift byItems. ~~the~~We ~~Company~~report ~~for~~these ~~working~~as ~~capital~~reportable ~~and~~segments orin toaccordance ~~pay a portion of the~~with ~~outstanding~~SFAS ~~revolving~~131, ~~loans. The~~“Disclosures ~~new financing~~about ~~shall~~Segments ~~be secured by assets~~ of ~~the~~an ~~Company~~Enterprise and ~~the~~Related ~~party extending the~~Information.” ~~new~~The ~~financing~~accounting ~~will~~policies ~~enter~~of ~~into a letter agreement regarding~~ the ~~subordination~~operating ~~of the~~segments ~~new~~are ~~financing only to~~ the ~~bank,~~same ~~but~~as ~~shall~~those ~~be prior to all other debts of~~described in the ~~Company’s~~summary ~~right~~ of ~~the~~significant ~~shareholders.~~accounting ~~The new financing will be in form and content as shall be satisfactory to the bank~~policies.

~~The~~Our ~~additional~~Chief ~~$3,000,000~~Operating ~~will provide~~Decision ~~cash~~Maker, ~~needs~~who ~~during~~is ~~the~~our Chairman ~~fourth~~and ~~quarter~~Chief ~~ending~~Executive ~~July 31~~Officer, ~~2003~~evaluates ~~and~~performance ~~part~~based ofupon a ~~the~~measure ~~first~~of ~~quarter~~segment ~~ending~~operating ~~October~~profit ~~31,~~or ~~2003~~loss ~~and~~that isincludes ~~expected~~an toallocation beof ~~fully paid off~~common ~~by December 31~~expenses, ~~2003~~but orexcludes ~~earlier~~some atunallocated ~~which~~expenses. ~~time~~Unallocated ~~the~~expenses represent ~~Company~~corporate ~~will~~expenditures ~~have~~that ~~excess availability~~are ~~against~~not ~~its~~specifically ~~line~~allocated ofto ~~credit~~the segments.

Our reportable segments are strategic business units that offer different products. We have minimal assets outside of the United States. There is no concentration of net sales in any one area within the United States. Net sales outside of the United States are minimal.

				Three Months ended October 31, 2004
	Manufactured Candy			Purchased Candy		Gift Items		Other		Consolidated Total
Total revenue	$	2,279,846		$	9,016,923	$	395,768	$	—	$	11,692,537
Gross margin	(832,179		)	4,068,770		103,029		—		3,339,620
Interest expense	142,926			108,438		46,399		—		297,763
Segment assets	8,895,676			12,943,867		9,790,651		963,636		32,593,830
Depreciation and amortization	136,411			57,075		32,649		11,315		237,450

			Three Months ended October 31, 2003
	Manufactured Candy		Purchased Candy		Gift Items		Other		Consolidated Total
Total revenue	$	5,605,903	$	8,302,312	$	3,515,126	$	—	$	17,420,813
Gross margin	90,326		3,801,575		1,147,298		—		5,036,671
Interest expense	113,643		86,225		36,893		—		236,766
Segment assets	10,731,663		17,662,819		12,640,937		1,355,713		42,391,132
Depreciation and amortization	172,919		—		33,884		41,868		248,444

~~ITEM~~Item 2. ~~MANAGEMENT~~ Management’Ss ~~DISCUSSION~~Discussion ~~AND~~and ~~ANALYSIS~~Analysis ~~OF FINANCIAL~~of ~~CONDITION~~Financial ~~AND~~Condition ~~RESULTS~~and OFResults ~~OPERATIONS~~of Operations

Important Information ~~Regarding~~ Regarding Forward-Looking Statements

This ~~Quarterly Report~~quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Those statements include statements regarding the intent, belief or current expectations of the ~~Company~~ company and its management. Such ~~These~~forward-looking statements are subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those contemplated in such forward-looking statements, including in particular the risks and uncertainties described under “Risk Factors” in our ~~amended Annual Report, on~~ Form 10-K~~/A,~~ filed with the ~~Commission~~commission on ~~December 20~~October 29, ~~2002~~2004. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update or revise the information contained in this ~~Quarterly~~quarterly ~~Report~~report on Form 10-Q, whether as a result of new information, future events or circumstances or otherwise.

The preparation of financial statements in conformity with accounting principles generally accepted ~~accounting~~ ~~principles~~in the United States of America requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities at the date of the financial statements. Significant estimates in our financial statements include the accounts receivable and inventory reserves. We continually evaluate ~~these~~ these reserves based upon historical experience. Although actual results could ~~differ~~ differ from those disclosed, management feels that the estimates used to establish the reserves are conservative in nature. Furthermore, management ~~believes~~ contends that it would be unlikely that the reserve level would be materially different from any other independently prudently established reserve.

OnIf ~~May~~any ~~1, 2002, we acquired all~~ of the ~~outstanding~~following ~~common~~risks ~~stock of Asher Candy Acquisition Corporation~~occurs, aour ~~Wyoming corporation with operations located in New Hyde Park~~business, ~~New~~financial ~~York, that manufactured candy canes and other hard candies under~~condition the “Asher” name. The purchase price paid to the shareholders of Asher Candy Acquisition Corporation in consideration for the transaction was approximately $1,786,000, consisting of an aggregate of 270,559 shares of our Class A common stock valued at $6.20 per share, or $1,675,000, subject to claims for indemnification, and warrants exercisable for 38,652 shares of our Class A common stock, which warrants were valued at $108,000. We valued the common shares at the closing market price on April 30, 2002 and valued the warrants using the Black-Scholes options pricing method. Under the terms of the merger agreement, for a period of 30 days commencing on April 25, 2003, the Asher Candy shareholders had the right to sell to us one-half of the shares issued to them at a price of $4.50 per share. During the quarter ended April 30, 2003, the Asher Candy shareholders notified us of their exercise of the put right. However we are currently involved as Plaintiff in a suit brought before the Circuit Court for Montgomery County, Maryland, presenting claims in connection with the merger agreement under which we acquired securities of Asher Candy Acquisition Corporation and agreed to sell securities in Sherwood Brands to the former shareholders of Asher Candy in reasonable reliance on shareholders material misrepresentations and omissions. We are seeking declaratory and injunctive relief and award of damages against the former shareholders of Asher Candy for violations of the merger agreement and for common law fraud and violations of applicable securities laws. Pending resolution of the litigation, we have refused to honor the demand of the former shareholders for us to repurchase half of the shares issued to them at a price of $4.50 per share. Some of the former Asher Candy shareholders have filed a counterclaim seeking $7.0 million in damages. We believe that we have defenses to the counterclaim. During the quarter ended April 30, 2003, we included the operating results of ~~Asher~~operations ~~Candy~~could inbe ~~our~~adversely ~~consolidated results~~affected. ~~Asher Candy generated $0.00 net sales during the quarter ended April 30, 2003 and $9.8 million of net sales for the nine months ended April 30, 2003.~~

~~During~~The ~~the~~loss of a significant customer could have an ~~twenty~~adverse ~~two~~effect ~~months~~on ~~ended~~our ~~April~~business. ~~30,~~We ~~2003,~~are wedependent ~~entered~~on ~~into~~a ~~fourteen~~limited ~~licensing~~number of ~~agreements~~customers tofor ~~incorporate~~a significant portion of our ~~products~~revenues. ~~into~~Big ~~gift~~Lots, ~~sets~~Dollar General and toRite ~~manufacture candies~~Aid accounted for approximately 21%, 10% and ~~wafers~~7%, ~~under~~respectively, ~~license~~of sales ~~from~~for the ~~trademark~~three ~~holders~~months ended October 31, 2004. ~~The~~Big ~~royalty~~Lots, ~~rates~~Dollar ~~for~~General ~~these~~and ~~licenses~~Rite ~~range~~Aid ~~from~~accounted 2for approximately 17%, to8% 12and 4%, respectively, of ~~net~~ sales ~~and are~~ for ~~terms~~the ofquarter ~~two to~~ended ~~three~~October 31, ~~years~~2003. ~~The~~Sam’s ~~products~~Club toand beWal-Mart accounted ~~incorporated~~for ~~into~~approximately ~~our~~0% ~~gift~~and ~~set~~4% ~~items~~of ~~are primarily~~our sales for ~~the~~quarter ~~Christmas~~ended October 31, 2004 and ~~Easter~~12% ~~selling~~and ~~seasons~~8% of our sales for quarter ended October 31, 2003, respectively. We ~~also~~do ~~entered~~not ~~into~~maintain anagreements with our customers and sell ~~agreement~~products pursuant to ~~produce~~purchase ~~everyday~~orders ~~candies~~placed ~~and~~from ~~wafers~~time ~~under~~to ~~license~~time ~~from~~in the ordinary ~~trademark~~course ~~holder~~of business. WeThe ~~paid~~loss ~~$230,000~~of ina ~~advance~~significant ~~fees~~customer ~~for~~could ~~the~~have ~~rights~~an ~~under the~~adverse ~~licensing~~effect ~~agreements~~on ~~which~~our ~~may be offset~~business.

11We face significant competition in the marketing and sales of our products. Our products compete for consumer recognition and shelf space with candies, cakes, cookies, chocolates and other food products which have achieved international, national, regional and local brand recognition and consumer loyalty. These products are marketed by companies (which may

against any royalties due. During the quarter and nine months ended April 30, 2003, we incurred $890 and $244,654, respectively, of royalty expense. We are currently pursuing other licenses with similar terms and conditions. We expect to generate sales from the license agreements in the fiscal year ending July 31, 2003, but hope that the greatest impact will occur beginning in the fiscal year ending July 31, 2004.11

Oninclude ~~May 31, 2002, we closed~~ our ~~Rhode~~suppliers) ~~Island~~with ~~manufacturing~~significantly ~~facility, which occupied five~~greater ~~stories in an old building. All the production equipment~~financial, ~~together with the electrical~~manufacturing, ~~piping~~marketing, ~~steam and air-conditioning~~distribution, ~~were~~personnel ~~disassembled~~ and other ~~transferred~~resources tothan ~~our~~we ~~expanded Chase City, Virginia facility~~have. ~~The~~Some ~~Chase City facility occupies 65,000 square feet, including 25,000 square feet~~ of ~~newly constructed~~these ~~space. We also maintain a 73~~competitors,~~000~~ ~~square~~such ~~foot~~as ~~facility~~Hershey atFood ~~Keysville~~Corporation, ~~Virginia~~Masterfoods USA (~~about~~M&M ~~20 miles from Chase City~~Mars), ~~Virginia)~~Inc., WeNestle, ~~expected to operate these facilities as a single manufacturing and distribution facility under one plant management for all products produced at the Chase City facility~~S.A., ~~Because of the Chase City manufacturing facility inefficiencies~~ and ~~production~~Kraft ~~levels running at 45% on a daily basis~~ Foods, dominate the ~~transition~~markets ~~period resulted in decreased sales~~ for ~~seasonal~~candy ~~merchandise for the three months~~ and ~~nine~~cookie ~~months ended April 30~~products, ~~2003. The impact of this transition resulted in approximately $1.8 million of pre-production costs, or 4% of net sales~~ and ~~resulted~~have insubstantial ~~a write down of~~promotional ~~impaired~~budgets ~~film~~which ~~and~~enable ~~packaging~~them ~~inventory~~to ofimplement ~~approximately~~extensive ~~$2.2~~advertising ~~million or 4~~campaigns.6% ~~of net~~The ~~sales.~~food ~~The~~industry ~~inventory~~is ~~write-down~~characterized ~~was~~by afrequent ~~direct~~introductions ~~result~~ of ~~our~~new ~~decision in the~~products, ~~third~~accompanied ~~quarter~~by tosubstantial ~~shift~~promotional ~~certain production to our overseas third party manufacturing suppliers~~campaigns. WeIf ~~have~~we ~~reduced~~are ~~our~~unable ~~work force from 280 employees~~ to 68 ~~at the Chase City facility, and are currently in the process of moving hard~~continue ~~candy~~to ~~production~~compete tosuccessfully our ~~third~~business ~~party~~could ~~manufacturing~~be ~~suppliers~~adversely ~~overseas~~affected. ~~We anticipate that additional expenses may arise due to movement from Chase City to our overseas suppliers.~~

Our ~~Christmas~~success ~~and~~is ~~Easter~~highly ~~gift~~dependent on consumer ~~sets~~preferences and ~~gift~~industry ~~baskets~~factors. The markets for candy and cookie products are affected ~~distributed~~by ~~from~~changes ~~our~~in ~~Rhode~~consumer ~~Island~~tastes and ~~Massachusetts~~preferences and nutritional and ~~facilities~~health-related concerns. We ~~source~~could ~~product~~be ~~primarily~~subject to increased competition from companies ~~the~~whose ~~Pacific~~products ~~Rim.~~or Wemarketing ~~are~~strategies address these concerns. In ~~continually~~addition, ~~looking~~the tomarkets ~~further~~for ~~reduce~~our ~~costs~~products ~~through~~may ~~more~~be ~~efficient sourcing. We~~subject ~~are~~to ~~currently~~national, ~~shifting~~regional ~~assembly~~ and local ~~manufacturing~~economic toconditions ~~China~~which affect discretionary spending, demographic trends and ~~South~~product ~~America~~life ascycles, awhereby ~~way~~product tosales ~~reduce~~increase ~~overall~~from their ~~assembly~~introductory ~~and~~stage ~~manufacturing~~through ~~costs~~their maturity and ~~improve~~then ~~gross~~reach ~~margins~~a stage of decline over time.

We ~~did~~have limited historical profitability and may not be ~~exercise~~profitable in the ~~options~~future. We have historically, until recently, achieved onlimited ~~our~~profitability. ~~office~~Our operating expenses have increased and ~~assembly~~can ~~facility~~be expected to continue to increase in ~~Rhode~~connection ~~Island~~with ~~and~~any ~~plan~~expansion activities undertaken by us, including those relating to ~~vacate~~advertising ~~the~~and product ~~location~~manufacturing. Accordingly, our profitability will depend on ~~March~~our ~~31,~~ability ~~2004. After~~to improve ~~March~~our operating margins and increase revenues from operations. ~~31,~~Unanticipated ~~2004~~expenses, ~~our~~unfavorable ~~New~~currency ~~Bedford~~exchange rates, ~~Massachusetts~~increased ~~facility~~price competition ~~together~~and ~~with~~adverse achanges ~~planned~~in ~~West Coast~~economic ~~facility~~conditions ~~will~~could behave ~~utilized~~a tomaterial adverse ~~improve~~effect on our ~~shipping~~operating ~~costs~~results. ~~and~~If ~~assembly~~we ofare unable to achieve significantly increased levels of revenues, our ~~products~~future operations may not continue to be profitable.

~~Factors~~We ~~Affecting~~depend ~~Performance~~on our trademarks. We hold United States trademark registrations for the “ELANA,” “RUGER”, “TONGUE TATTOO”, “STRIP-O-POP”, “SMILE POPS” and “demitasse” names, and have filed applications to register certain other names, including “COWS,” and use other names for which we have not applied for registration. We believe that our rights to these names are a significant part of our business and that our ability to create demand for our products is dependent to a large extent on our ability to exploit these trademarks. Our failure to protect our trademarks and other intellectual property rights could negatively impact the value of our brand names. We are not aware of any other infringement claims or other challenges to our rights to use these marks. We have requested some of our marks to be registered in countries other than the ~~Quarter~~U.S. ~~Ended~~and ~~April~~may 30apply for additional registration as appropriate, ~~2003~~based on our needs to register our marks for worldwide distribution.

OnWe ~~September 30,~~are ~~2002,~~dependent 29on ~~west~~third ~~coast~~party ~~sea~~manufacturers ~~ports were shut down~~ and ~~remained closed as~~ ~~contract negotiations between dockworkers and shipping companies broke off negotiations for new contracts~~suppliers. ~~The~~We ~~shutdown~~are ~~occurred~~dependent ~~during~~on ~~our peak inventory shipping period for orders for~~ the ~~holiday~~ability ~~season. In mid-October 2002, the President~~ of ~~the~~our ~~United~~manufacturers ~~States~~to ~~signed~~adhere ~~an order under the Taft-Hartley Act~~ to ~~reopen~~our ~~the~~product, ~~sea~~price ~~ports~~ and ~~put~~quality aspecifications ~~moratorium~~and onscheduling ~~the strike for 60 days~~requirements. ~~The~~Our ~~shutdown~~operations ~~affected~~require ~~our~~us ~~first~~to ~~quarter~~have ~~shipments~~production toorders ~~customers.~~in Aplace ~~large~~in ~~amount~~advance of ~~our~~ ~~inventory containers, which were~~ shipment to ~~be received by~~ our ~~customers,~~warehouses ~~remained either~~(product atdeliveries ~~sea~~typically ~~ports~~take or60 ~~on shipping vessels~~days). InAny ~~addition,~~delay ~~empty containers,~~by ~~which~~manufacturers wein ~~needed~~supplying tofinished ~~move~~products ~~other inventory, were not brought back~~ to ~~ports~~us inwould ~~the Pacific~~adversely ~~Rim.~~affect ~~In mid-October 2002,~~ our ~~inventory began to be released for~~ ~~shipment~~ability to ~~our~~deliver ~~facility~~products inon ~~New~~a ~~Bedford,~~timely ~~Massachusetts. A slowdown by the longshoremen involved in shipping inventory was still prevalent. Our first quarter revenues were impacted by the shut down~~ and ~~resulted~~competitive ~~in a delay of approximately $6~~basis.0 ~~million~~In inaddition, ~~sales.~~ raw ~~Approximately~~materials ~~$3.5~~necessary ~~million~~for ~~was shipped out during~~ the ~~second quarter and approximately $2.5 million of the remaining inventory will be shipped during the first and second quarter of fiscal year 2004.~~

~~Results of Operations~~12

~~Three~~manufacture ~~Months~~of ~~Ended~~our ~~April~~products 30at our facilities, ~~2003~~including flour, sugar, shortening, butter and ~~2002~~flavorings, are purchased from third-party suppliers. We do not maintain agreements with any such suppliers and we are, therefore, subject to risks of periodic price fluctuations, shortages and delays. If there is a material interruption in the availability or significant price increases for raw materials would have a material adverse effect on our operating margins.

~~Net~~We ~~sales~~face ~~for~~various risks relating to foreign manufacturing. During the three months ended ~~April 30~~October 31, 2004 and 2003, approximately 77% and ~~2002~~45%, ~~were~~as a percent of net sales, or $9,~~482~~016,~~412~~924 and $118,302,312,~~184~~ respectively, ~~respectively~~of our products were manufactured in foreign countries. We have ~~Net~~been ~~sales~~and ~~decreased~~will ~~16.2%~~continue ~~due~~to be subject to ~~decreased~~risks ~~sales~~associated with the manufacture of ~~manufactured~~products ~~hard~~in ~~candy~~foreign ofcountries, primarily in Argentina, Austria, Belgium, ~~approximately~~Brazil, $1China and Holland.3 ~~million~~These risks include material shipping delays, fluctuations in foreign currency exchange rates, customs duties, tariffs and import ~~decreased~~quotas ~~sales~~and ofinternational ~~manufactured~~political, ~~soft~~regulatory ~~candy~~and ofeconomic $0developments.5 ~~million~~We ~~for~~assume the ~~Valentine’s~~risk ~~Day~~of ~~and~~loss, ~~Easter~~damage ~~seasons~~or destruction of products when shipped by a manufacturer. ~~The~~Because ~~decrease~~we ~~was~~pay for some of our products ~~primarily~~manufactured outside the ~~result~~United States in foreign currencies, any weakening of the ~~production~~United ~~through~~States ~~put~~dollar ~~and~~in ~~quality~~relation ~~inefficiencies~~to ~~at our~~relevant ~~Chase~~foreign ~~City~~currencies, ~~Virginia~~could result ~~manufacturing~~in ~~facility,~~significantly ~~which~~increased ~~prevented~~costs to us. In addition, some products manufactured overseas are subject to import duties. Deliveries of products from ~~filling~~our ~~orders~~foreign manufacturers could also be delayed or restricted by the future imposition of quotas. ~~Sam’s~~If ~~Club~~quotas were imposed, ~~Wal-Mart~~it ~~and~~is ~~Kmart~~possible ~~accounted~~that ~~for~~we ~~approximately~~would ~~23%,~~not ~~21%~~be ~~and~~able 9%to ofobtain ~~sales~~quality ~~during~~products ~~the~~at ~~three~~favorable ~~months~~prices ~~ended~~from ~~April~~domestic ~~30,~~or ~~2003,~~other suppliers ~~respectively,~~whose quotas have not been exceeded by the supply of products to ~~and~~their existing customers.

12Our operating results are subject to fluctuations as a result of new product introductions, the timing of significant operating expenses and customer orders, delays in shipping orders, pricing and seasonality. We are subject to government regulation. We are subject to extensive regulation by the United States Food and Drug Administration, the United States Department of Agriculture and by other state and local authorities in jurisdictions in which our products are manufactured or sold. Among other things, such regulation governs the importation, manufacturing, packaging, storage, distribution and labeling of our products, as well as sanitary conditions and public health and safety. Applicable statutes and regulations governing our products include “standards of identity” for the content of specific types of products, nutritional labeling and serving size requirements and general “Good Manufacturing Practices” with respect to manufacturing processes. Our facilities and products are subject to periodic inspection by federal, state and local authorities. Our failure to comply with applicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions.

~~Wal-Mart,~~We ~~Kmart~~may ~~and~~incur ~~Sam’s~~product ~~Club~~liability ~~accounted~~claims ~~for~~that ~~approximately~~are ~~32%,~~not fully ~~18%~~insured. As a manufacturer and 9% marketer of ~~the~~food ~~sales~~products, ~~for~~we ~~the~~are ~~prior~~subject to ~~year’s~~product ~~comparable~~liability ~~period,~~claims ~~respectively~~from consumers. ~~The~~ ~~reduction~~We inmaintain ~~sales~~product toliability insurance ~~Sam’s~~with ~~Club~~limits of $2,000,000 in the aggregate and $1,000,000 per ~~Wal-mart~~occurrence ~~was~~(with aexcess ~~result~~coverage of ~~sales~~$10,000,000). inThese ~~the~~insurance ~~prior~~amounts ~~years~~may not ofbe ~~specialty~~sufficient ~~gift~~to ~~items~~cover ~~as part~~potential ofclaims ~~their~~and ~~Easter~~adequate ~~seasonal~~levels ~~items,~~ of coverage may ~~including~~not ~~shadow~~be ~~boxes,~~available ~~steamer~~in ~~trunks~~the ~~and~~future ~~leather~~at ~~clocks,~~a ~~which~~reasonable ~~were~~cost. In the event of a ~~one~~partially ~~time~~or ~~order~~completely inuninsured ~~fiscal~~successful ~~year~~claim ~~2002~~against us, our financial condition and reputation would be materially adversely affected.

Gross profit (loss) for the three months ended April 30, 2003 and 2002 were ($629,368) and $2,248,762, respectively. During the three months ended April 30, 2003, gross margins decreased to (6.6%) as percent of net sales from 19.9% during the prior year’s comparable period. The decrease in earnings was largely attributable to the production through put and quality inefficiencies at our manufacturing facility in Chase City, Virginia. The facility’s operations were running at a 45% production level during the three months ended April 30, 2003. The decrease in the production levels created unfavorable labor costs and material variances in packaging and raw materials which resulted in $0.6 million loss, which was expensed in the current period. This reduced our gross margins for the three months ended April 30, 2003 by 6.3%. The inefficiency and decreased production levels at the facility represented approximately 7.4% of the gross margin decrease as a percent of net sales during the quarter ended April 30, 2003. Write down of inventory of $2,192,005, or 23.1% for the three months ended April 30, 2003, resulted from impaired film and packaging materials at our Chase City, Virginia facility for product lines that will be no longer manufactured at the plant. These lines will be purchased from overseas suppliers which we currently purchase from. We may incur additional expenses in the fourth quarter as we reduce and reorganize the plant’s operations.13

~~During~~We are dependent on key personnel and the ~~three~~loss ~~months~~of these ~~ended~~key ~~April~~personnel ~~30,~~could ~~2003~~have ~~and~~a ~~2002,~~material ~~selling,~~adverse ~~general~~effect on our success. Our ~~and~~success ~~administrative~~is ~~expenses~~dependent ~~increased~~on tothe $1personal efforts of Uziel Frydman,~~632,931~~ ~~from~~our $1Chairman,~~588,005,~~ ~~respectively,~~President and ~~increased~~Chief toExecutive ~~17.2%~~Officer, ~~from~~Amir ~~14.0%~~Frydman, asour aVice ~~percent~~President of Marketing ~~sales~~and Christopher Willi, ~~respectively~~ our Chief Financial Officer. The ~~increase~~loss asor interruption aof ~~percent~~the services of ~~sales~~such ~~was~~individuals ~~largely~~could ~~due~~have to a ~~$90,000~~material adverse ~~increase~~effect on our business. We maintain “key-man” insurance in ~~broker~~the ~~commissions~~amount ~~and~~of $471,000,000 on inthe ~~shipping~~life ~~violations~~of ~~resulting from~~Mr. ~~not~~Uziel ~~meeting~~Frydman. ~~shipping~~Our ~~dates~~success ~~for~~also depends upon our ~~customers~~ability to hire and retain additional qualified management, marketing and ~~was~~other ~~partially~~personnel. Employment ~~offset~~and byretention of qualified personnel is important due to the acompetitive ~~$92,000~~nature ~~reduction~~of inthe ~~legal~~food ~~expense~~industry. Our failure to hire and retain qualified personnel could adversely affect our success.

~~Pre-production~~Our ~~costs~~President ~~increased~~and toChief ~~$405,838~~Executive ~~during~~Officer ~~the~~controls ~~three months~~our ~~ended~~company. ~~April~~Mr. 30Uziel Frydman, ~~2003~~President ~~from~~and ~~$393~~Chief Executive Officer,~~918~~ ~~during~~owns 400,000 shares of Class A Common Stock (with a right to acquire an additional 202,984 upon the ~~three~~exercise ~~months~~of ~~ended~~options) ~~April~~and 301,000,000 shares of Class B Common Stock, ~~2003~~representing, orin 3%the asaggregate, aapproximately ~~result~~38% of ~~increased~~the ~~training~~outstanding ~~costs~~Common Stock of our company and ~~inefficiencies~~74% atof the voting control of our ~~Chase~~ ~~City~~company, ~~Virginia~~assuming that ~~facility~~all of Mr. ~~We anticipate~~ ~~incurring~~Frydman’s ~~additional~~options ~~costs~~are ~~associated~~exercised. ~~with~~Accordingly, Mr. Frydman will be able to direct the ~~Chase~~election ~~City~~of all of our company’s directors, ~~Virginia~~increase the ~~facility~~authorized incapital, ~~the~~dissolve, ~~fourth~~merge ~~quarter~~or assell wethe ~~reduce~~assets of our company, and generally ~~reorganize~~direct the ~~plant’s~~affairs of our company. In addition, the level of control ~~operations~~exercised by Mr. Frydman may discourage investors from purchasing our Common Stock.

~~During~~We ~~the~~may ~~three~~issue ~~months~~“blank ~~ended~~check” ~~April~~preferred 30stock that would prevent a change of control. Our Articles of Incorporation, ~~2003~~as ~~and~~amended, authorize ~~2002~~our board of directors to issue up to 5,000,000 ~~salaries~~shares ~~and~~of “blank ~~related~~check” ~~expenses~~preferred ~~increased~~stock without stockholder approval, in one or more series and to $1fix the dividend rights,~~249~~ terms,~~423~~ ~~from~~conversion $1rights,~~102~~ voting rights,~~277~~ redemption rights and terms, ~~respectively~~liquidation preferences, and any other rights, preferences, ~~increased~~privileges, toand ~~13.2%~~restrictions ~~from~~applicable ~~9.7%~~to aseach anew ~~percent~~series of ~~sales,~~preferred ~~respectively~~stock. ~~This increase~~ ~~was~~The ~~mainly~~issuance ~~attributable~~of ~~to an~~shares ~~increase~~ of ~~$8,000~~preferred stock in ~~contract~~the ~~labor~~future ~~associated~~could, ~~with~~among other things, adversely affect the ~~design~~voting ~~and~~power ~~artwork~~of ~~for~~the ~~our~~holders ~~2004 Christmas~~of ~~seasonal~~common ~~items~~stock and, under acertain ~~$12~~circumstances,~~000~~ ~~increase~~could ~~resulting~~make ~~from~~it ~~the~~difficult ~~hiring~~for ~~of additional~~a ~~staff~~third inparty ~~our~~to ~~sales~~gain control ~~and~~of ~~marketing~~our ~~department~~company, anprevent ~~additional~~or ~~$50~~substantially delay a change in control,~~000~~ ofdiscourage ~~workmen’s~~bids ~~comp~~for ~~insurance~~the ~~premiums~~Common ~~charged~~Stock toat ~~corporate~~a ~~overhead~~premium, ~~and~~or anotherwise adversely ~~additional~~affect ~~$77,000~~the market price of ~~health~~the ~~insurance~~Common ~~costs~~Stock.

~~Operating~~We ~~expenses~~have ~~increased~~never topaid ~~$3,288,192~~any ~~for~~cash ~~the~~dividends ~~three~~on ~~months~~our ~~ended~~common ~~April~~stock ~~30,~~and ~~2003~~do ~~from~~not ~~$3,084,200~~anticipate ~~for~~paying ~~the~~cash ~~three~~dividends ~~months~~in ~~ended~~the ~~April 30, 2002, an~~foreseeable ~~increase of 6~~future.~~6% as a percent of sales.~~ The ~~increase~~payment ~~as a percentage~~ of ~~sales was~~cash ~~largely~~dividends ~~due to increased pre-production costs of $406,000 associated with~~is ~~the~~prohibited ~~Chase~~by ~~City, Virginia facility compared to $394,000 in~~ the ~~prior~~terms ~~period, $47,000~~of ~~in shipping violations resulting from~~ our ~~inability~~financing to meet shipping dates for our customers and additional brokers commissions of $90,000, which was partially offset by a $92,000 reduction in legal expenses, an increase in contract labor of $8,000 and additional overall labor cost of $139,000agreements.

~~Loss~~For ~~from~~the ~~operations~~year ~~for~~ended ~~the~~July ~~three~~31, ~~months~~2004 and first quarter ended ~~April~~October 3031, ~~2003 was ($3~~2004,~~917,560),~~ aswe ~~compared~~had toa ~~($835,438)~~total ~~for~~of ~~the~~eighteen ~~prior~~licensing ~~year’s~~agreements, ~~comparable period.~~two ~~The~~signed ~~increase~~during ~~was~~first ~~primarily~~quarter ~~the~~ended ~~result~~October of31, ~~the~~2004, ~~production~~three ~~inefficiencies~~signed atduring ~~our~~the ~~Chase~~fiscal ~~City,~~year ~~Virginia~~ended ~~facility~~July 31, a2004 ~~$600,000~~and ~~increase~~fifteen insigned as of our ~~raw~~fiscal ~~materials~~year ~~and~~ended ~~packaging~~July ~~costs~~31, ~~and~~2003. anHowever, ~~increase~~two ofwere ~~$406,000~~not inrenewed ~~pre-production~~upon ~~costs~~expiration. The Welicenses are to incorporate products into ~~incurred~~gift ~~approximately~~sets $2and to manufacture candies and wafers.2 ~~million~~The ~~relating~~royalty torates afor ~~write~~such licenses ~~down~~range from 2% to 12% of ~~film~~net sales and ~~packaging~~ ~~materials~~expire ~~that~~in ~~had~~2 ~~become~~to ~~impaired~~3 ~~due~~years. The products to ~~the~~be ~~transfer~~incorporated ofinto ~~product~~our gift set items are primarily for the first ~~production~~quarter toand ~~our~~Easter ~~third~~selling ~~party~~season. ~~overseas~~We ~~suppliers~~entered into a licensing agreement to produce everyday candies and wafers. We paid a ~~reduction~~total of ~~product~~$939,000 in advance ~~lines~~fees ~~manufactured~~for atthe ~~our~~rights ~~Chase~~under ~~City,~~the ~~Virginia~~licensing ~~facility~~agreement since inception. These advance fees were offset against any amounts due on royalties. There were no other minimum license fees

Interest income decreased to $116 during the three months ended April 30, 2003 from $460 during the three months ended April 30, 2002. Interest expense increased to $126,893 during the three months ended April 30, 2003 from $114,194 during the three14

13under this agreement. We incurred $172,982 and $212,047 in royalties for the quarter ended October 31, 2004 and 2003, respectively. We are currently pursuing other licenses with similar terms and conditions. We expect the greatest impact from the agreements will occur in the year ending July 31, 2005.

~~months~~Christmas ~~ended~~and ~~April~~Easter ~~30,~~gift ~~2002. Although~~sets ~~we had lower interest rates on our working capital line~~ and ~~term~~ ~~facilities,~~gift ~~the~~baskets ~~increase is due to term debt assumed in connection with~~are ~~the~~assembled ~~merger~~and ~~with~~distributed ~~Asher~~from ~~Candy,~~our ~~which~~Massachusetts ~~was $1~~facility.3 ~~million~~We onpurchase ~~May 1, 2002. Other~~product ~~income~~primarily ~~(expense) increased to $379,673 during the three months ended April 30, 2003~~ from ~~$35,595 during~~ the ~~three~~Pacific ~~months~~Rim. ~~ended~~We ~~April~~are ~~30,2002~~continually ~~due~~looking to afurther ~~$580,000~~reduce ~~settlement~~costs ~~on a trade infringement claim partially offset~~ by ~~$149,000~~more ofefficient ~~legal costs associated with the settlement, and $87,000 realized losses on foreign exchange transaction~~sourcing.

WeDuring the ~~reversed~~first quarter of fiscal 2005, Sherwood Brands closed the ~~provision~~New ~~for~~Hyde ~~income~~Park, ~~taxes~~New York location as of October 29, 2004. Sherwood incurred approximately $~~370~~25,~~637~~000 ~~recorded~~expenses in closure and ~~first~~severance ~~quarter~~costs. The ~~since~~company’s wecurrent assets ~~will~~previously ~~generate~~located aat ~~net~~the ~~loss~~New ~~for~~Hyde ~~fiscal~~Park ~~year~~facility ~~2003. In~~have ~~addition,~~been wemoved ~~recognized~~to anour Chase ~~$544~~City,~~000 income~~ ~~tax~~Virginia ~~benefit~~facility ~~for~~and ~~the~~some ~~carryback~~will ofbe ~~the~~moved ~~net~~to ~~operating~~our ~~loss~~overseas ~~to recover~~suppliers ~~income~~during ~~taxes~~the ~~previously~~second ~~paid~~quarter ending January 31, 2005.

AsIn athe ~~result~~fall of ~~the foregoing~~2003, weSherwood ~~incurred~~Brands began moving its hard candy manufacturing to overseas suppliers. Sherwood Brands finalized a ~~net~~production ~~loss~~and manufacturing agreement with the largest manufacturer in Argentina and South America. This Argentine manufacturer is one of ~~($2~~Sherwood Brands’ key suppliers,~~750~~ specializing in manufacture of hard candies,~~026)~~ chocolates, cookies and butter toffees. The Argentine company does not ~~for~~have the ~~three~~equipment ~~months~~or ~~ended~~the ~~April~~facilities ~~30,~~to ~~2003,~~completely ~~compared~~take toover ~~net~~the ~~loss~~production of all ~~($693,505)~~our product lines. The Chase City ~~for~~facility ~~the~~continues ~~prior~~to ~~year’s~~produce ~~comparable~~certain ~~period~~products, orwhich ~~(29.0%)~~the ~~compared~~Argentine tocompany cannot (6yet produce.~~1)%~~ The Chase City facility also is being utilized as a warehouse for Christmas seasonal items ~~percent~~that ofneed ~~sales~~to be shipped to our southeast region customers.

~~Nine~~In ~~months~~Spring ~~ended~~2004, ~~April~~Sherwood 30entered into a production agreement with a second Argentine company to manufacture lollipops. Sherwood benefits from the expertise and technology of the second Argentine company in lollipop production. The second Argentine company is using a combination of Sherwood equipment and their own equipment allowing Sherwood to increase margins, ~~2003~~capacity and ~~2002~~marketability of Sherwood products.

~~Net~~We did ~~sales~~not ~~for~~extend the ~~nine~~term ~~months~~of ~~ended~~the ~~April~~lease ~~30,~~for ~~2003~~our ~~and~~Rhode ~~2002~~Island ~~were $47,335,225~~facility and ~~$48,290,502 respectively. Net sales decreased 1.98%, primarily~~we ~~due~~vacated ~~to decreased sales of manufactured hard and soft candy for~~ the ~~Valentine and~~location ~~Easter~~on ~~seasons~~March ~~of $2.0 million~~31, ~~which was offset by increased sales of $1~~2004.0 ~~million~~Instead ofwe ~~our~~are ~~gift~~using ~~baskets.~~our ~~Sam’s~~New ~~Club~~Bedford, ~~Big~~Massachusetts ~~Lots~~facility and ~~Wal-Mart accounted for~~various ~~approximately~~West ~~16%,~~Coast ~~10.3%~~facilities ~~and~~to ~~10%~~assemble ~~of sales, respectively during the nine months ended April 30, 2003,~~ and ~~Sam’s~~ship ~~Club,~~our ~~Wal-Mart and Big Lots accounted for the period approximately 36%, 15% and 9% of sales, respectively, for the prior year’s comparable period~~products. The ~~reduction~~proximity ~~in sales to Sam’s Club and Wal-mart was a result~~ of ~~sales~~these offacilities ~~specialty~~to ~~gift items as part of their Easter seasonal~~our ~~items, including~~customers ~~shadow~~reduces ~~boxes,~~our ~~steamer trunks~~freight ~~and leather clocks, which were a one time order in fiscal year 2002~~costs.

~~For the nine months ended April 30, 2003 and 2002, gross margins~~Environmental ~~decreased~~Factors toAffecting ~~$9,924,403 from $13,887,991, respectively, and decreased to 20.9% and 28.8% as percent of sales, respectively. The decrease in margins was attributable to~~ the ~~low~~Performance ~~efficiency levels at our Chase City, Virginia facility. The facility ran at a 38% production level during the nine months ended April 30, 2003. The decrease~~ in the ~~production~~Quarter ~~levels~~Ended ~~created~~October ~~unfavorable labor cots and material variances in packaging and raw materials of approximately $2.2 million~~31, ~~or a 4~~2004.6% effect to the gross margins for the nine month period ended April 30, 2003. We have expensed these unfavorable variance as incurred. We incurred $515,000 of additional freight and duty costs associated with the west coast dockworkers strike. The inefficiency and decreased production levels at the facility and the additional freight and duty costs incurred due to the dockworkers strike amounted to approximately 5.7% of the decrease as a percent of sales during the nine months ended April 30, 2003. Write down of inventory of $2,192,005, or 4.6%% for the nine months ended April 30, 2003, resulted from a write down of film and packaging materials that became impaired due to the transfer of product production to our third party overseas suppliers and reduction of product lines manufactured at our Chase City, Virginia facility.

WeDuring ~~may~~the ~~incur~~quarter ~~additional~~ended ~~expenses~~October in31, 2004, West Coast ports experienced a backup of cargo ships, railroads and truck lines, delaying shipments of Asian made goods. Offshoring, outsourcing and importing are on the rise. ~~fourth~~The ~~quarter~~Commerce asdepartment werecently ~~continue~~stated that trade deficit (the amount of foreign goods imported into the United States vs. the amount of United States goods shipped abroad), swelled to ~~reorganize~~$54 billion in August, just shy of the ~~plant~~$55 billion record deficit in June. Much of the world’s ~~operations~~production is rapidly moving to China, which is producing toys, clothes and shoes faster than the rest of the world can import them. Los Angeles and Long Beach receive the majority of the Chinese imports. Volumes flowing through Los Angeles port

During the nine months ended April 30, 2003 and 2002, selling, general and administrative expenses increased to $6,945,440 from $6,592,152, respectively, and increased to 14.7% from 13.7% as a percent of sales, respectively. The increase as a percent of sales was largely due to $174,000 in travel expenses, of which approximately $85,000 was for trips to China, $47,00 of shipping violation fees resulting from our inability to meeting shipping dates for our customers , $23,000 in building rental costs, $77,000 in accounting and auditing fees, $32,000 in shipping and carrier cost associated with samples, and $149,000 of warehouse transfer costs, which was partially offset by a decrease of $159,000 of brokers commissions.15

~~Pre-productions~~alone ~~costs~~have ~~increased~~climbed to10% $1this year,~~790~~ on top of a 20% increase in 2003. August,~~214~~ ~~during~~September ~~the~~and October ~~nine~~have always been busy months for the ports of Long Beach and Los ~~ended~~Angeles ~~April~~because 30of holiday shipments, ~~2003~~but ~~compared~~the rise of imports by mega-retailers such as Wal-Mart and Target further increased traffic. There are not enough dockworkers to ~~$393~~unload shipments. Machinery used to unload ships is scarce and old. After container ships finally tie up at the dock,~~918~~ ~~from~~it ~~prior~~takes ~~year’s~~more ~~comparable~~than ~~period~~10 days to get them unloaded, or ~~increase~~rather than the usual three to 3four days.8% With ~~from~~oil ~~0.8%~~prices asclimbing and ~~percent~~the price of ~~sales~~diesel fuel on the rise, ~~respectively~~a new source of backlog is being created; a lack of truckers willing to haul containers. Many truckers are responding by turning away jobs or by leaving the business, as stated in a recent ~~result~~article in USA Today. The rail systems that transport most of the goods out of the Los Angeles and Long Beach ports have also experienced backlogs, labor shortages and lack of equipment. The contentious relationship between the ~~training~~port ~~required~~operators ~~for~~and the dominant union, the International Longshore and ~~decreased~~Warehouse ~~production~~Union, ~~levels~~has ~~experienced~~resulted atin ~~our~~a shortage of ~~Chase~~workers ~~City~~and technology needed to keep up with the boom in imports. Tensions hit a breakpoint two years ago, ~~Virginia~~when contract ~~facility~~talks shut down the ports. Since then, port operators have been slow to hire workers. Recently an additional 5,000 workers were being hired and the union is training new workers as fast as it can.

14Our revenues for the three months ended October 31, 2004 were impacted by the delays and resulted in a delay of approximately $5.0 million in sales. The remaining goods scheduled for shipment in the first quarter will be shipped during the second quarter of fiscal year 2004.

During the nine months ended April 30, 2003, salaries and related expenses decreased to $3,707,832 from $3,777,329 during the nine months ended April 30, 2002, or 7.8% from 7.8%, respectively, as a percent of sales. This decrease was mainly attributable to a $70,000 decrease in personnel and corporate overhead.16

~~As a result, operating expenses for the nine months ended April 30,~~Results ~~2003 increased to $12,443,486 from $10,763,399 for the nine months ended April 30, 2002 and increased to 26.3% from 22.3%, respectively, as a percent~~ of ~~sales.~~ The increase as a percentage of sales was largely due to increased pre-production costs of $1,396,296 at the Chase City, Virginia facility. The increase was partially offset by a $159,000 decrease in brokers commissions, $215,000 in warehouse transfer costs and $174,000 of additional travel costs, of which $85,000 resulted from trips to China. We incurred $47,000 of shipping violation fees resulting from not meeting shipping dates for our customers , $24,000 associated with D&O insurance premiums, $23,000 in building rental costs, $77,000 in accounting and auditing fees, $32,000 of shipping and carrier costs associated with samples and a decrease of $149,000 in legal expenses attributable to the settlement of a trade infringement claim.Operations

~~Loss from operations for the nine months ended April 30, 2003 was~~Three ~~$2,519,083,~~Months asEnded ~~compared~~October ~~to income of $3~~31,~~124,592~~ ~~for~~2004 ~~the prior year’s comparable period. Most of the loss resulted from the write down of film~~ and ~~packaging materials that had become impaired due to production transferring to our third party overseas suppliers and reduction of product lines manufactured at our Chase City, Virginia facility.~~2003

~~For~~Net the nine months ended April 30, 2003, interest income decreased to $2,608 from $4,340 for the nine months ended April 30, 2002. For the nine months ended April 30, 2003, interest expenses increased to $463,965 from $402,855 for the nine months ended April 30, 2002 due to an increase in our term debt financing of $1.3 million associated with the merger with Asher Candy.Sales

~~For~~Net sales for the ~~nine~~three months ended ~~April~~October 3031, 2004 and 2003 were $11,692,537 ~~other~~and ~~income~~$17,420,813, ~~increased~~respectively, toa decrease of 32.9%, or $~~317~~5,~~498~~728,276. The decline in net sales was due to lower sales of manufactured candy of approximately $3.3 million. This was due to a decision by management to curtail manufacturing operations and purchase goods directly from foreign suppliers. This decrease is offset by an increase in sales of purchased candy of $~~19,469~~0.8 ~~for~~million ~~the~~and ~~nine~~a ~~months~~decrease ~~ended~~of ~~April~~$3.0 ~~30,~~million ~~2002~~on sales of gift sets largely due to ~~$133,000~~similar orders being shipped in the first ~~realized~~quarter ~~losses~~in onthe ~~foreign~~prior ~~exchange~~year ~~transactions~~that are being shipped in the second quarter of the fiscal year ending July 31, ~~legal~~2005. ~~settlement~~Big onLots, ~~trade~~Dollar General, Rite Aid and Dollar ~~infringement~~Tree Stores accounted for approximately 21%, 10%, 7% and 7%, respectively, of ~~$580~~sales for the three months ended October 31,~~000~~ ~~offset~~2004. byBig ~~$149~~Lots,~~000~~ inDollar ~~legal~~General, ~~expenses~~Rite ~~associated~~Aid and ~~with~~Dollar Tree Stores accounted for approximately 17%, 8%, 4% and 13%, respectively, of sales for the ~~settlement~~prior year’s comparable period.

~~We reversed the provision for income taxes of $370,637 recorded in~~Net ~~first~~sales ~~quarter since we will generate a net loss~~ for ~~fiscal~~each ~~year 2003. In addition, we recognized an $544,000 income tax benefit for the carryback~~ of ~~the~~our ~~net~~business ~~operating~~segments ~~loss~~were toas ~~recover income taxes previously paid.~~follows:

AsNet asales ~~result~~ of ~~the~~Manufactured ~~foregoing,~~Candy weand ~~incurred~~Cookies adecreased from ~~net~~$5.6 ~~loss~~million ~~of ($2,118,941)~~ for the ~~nine~~three months ended ~~April~~October 3031, 2003, ~~compared~~ to ~~net income of~~ $~~1,646,205~~2.3 million for the ~~prior~~three ~~year’s~~months ~~comparable~~ended ~~period~~October 31, or2004. The a decrease of ~~(4.5%) from~~ $3.4%3 ~~as percent~~million ~~of sales. The decrease~~ was primarily due to ~~approximately~~a decline of $2.~~8 million~~7 inmillion ~~production~~of ~~through~~sales ~~put~~of ~~and~~manufactured ~~quality~~candy ~~inefficiency costs~~canes, ~~write-down~~ of ~~impaired~~ ~~inventory~~which ~~of approximately~~ $2.23 million atof production ~~our~~was ~~manufacturing~~shifted ~~facility in~~to ~~Chase~~our ~~City,~~overseas ~~Virginia,~~suppliers ~~$515,000~~as ofPurchased ~~increased~~Candy ~~freight~~ and Cookies. ~~duty~~The ~~costs associated~~remaining ~~with~~decline ~~the~~was ~~dockworkers~~primarily ~~strike~~related ~~and~~to $~~174,000~~0.3 ofmillion ~~additional~~decline ~~travel costs.~~in ~~The~~production ~~increase~~of ~~was~~everyday ~~partially~~lollipops, ~~offset by a~~ $~~159,000~~0.2 ~~decrease~~million decline in ~~brokers~~Kastins Christmas ~~commissions,~~candy and $~~215,000~~0.1 ~~warehouse~~million ~~transfer~~decline ~~costs,~~in ~~$47,000~~Cows ofsales. These ~~shipping~~declines ~~violation fees~~are ~~resulting~~primarily ~~from~~due ~~not~~to ~~meeting~~the ~~shipping~~impact ~~dates~~of ~~for~~shifting our ~~customers , $24,000 in~~complete ~~premiums~~manufacturing ~~for~~operations ~~D&O~~to ~~insurance,~~our ~~$23,000~~overseas suppliers in ~~building~~Argentina ~~rental~~and ~~costs~~China, ~~$77,000 in~~which ~~accounting~~eliminates ~~and~~the ~~auditing~~variable ~~fees,~~costs ~~$32,000~~associated ofwith ~~shipping~~manufacturing ~~and~~in ~~carrier~~the ~~costs associated~~United ~~with~~States. ~~samples,~~We ~~and~~are acurrently ~~reduction~~purchasing ofthese ~~$430,000~~items ~~attributable~~from toour aoverseas ~~trade infringement settlement~~suppliers.

~~LIQUIDITY~~Net ~~AND~~sales ~~CAPITAL~~of ~~RESOURCES~~Purchased Candy and Cookies increased from $8.3 million for the three months ended October 31, 2003 to $9.0 million for the three months ended October 31, 2004. The increase of $0.7 million was primarily due to increases in the sale of purchased candy canes of $2.3 million. This was offset by a $1.0 million decline of purchased gift items, which were shifted into the second quarter of the fiscal year ending July 31, 2005 due to the port delays on the west coast, a decrease of Halloween purchased candy of $0.8 million and an increase of $0.2 million of gold coins for Christmas holiday.

~~Our~~Net ~~primary~~sales ~~cash~~of ~~requirements~~Purchased ~~have~~Gift ~~been~~Items decreased from $3.5 million for the three months ended October 31, 2003 to ~~fund~~$0.4 million for the period ~~purchase~~ended October 31, ~~manufacture~~2004. The $3.1 ~~and~~million ~~commercialization~~decrease was primarily a result of ~~our~~a ~~products~~$3.1 Wemillion ~~finance~~decrease ~~our~~of ~~operations~~sales ~~and~~of ~~manufacturing~~Christmas ~~with~~assembled ~~cash~~goods ~~flow~~due ~~from~~to ~~operations~~shipment ~~and~~delays ~~bank~~of ~~financing~~goods ~~along~~not ~~with~~received from the ~~favorable~~west ~~payment~~coast ~~terms~~ports ~~from~~due ~~some~~to ofdelayed ~~our~~transportation ~~vendors.~~and ~~Our~~unloading ~~working~~of ~~capital~~vessels at ~~April~~the ~~30,~~ports. ~~2003~~See ~~and~~environmental ~~July~~factors ~~31,~~effecting ~~2002~~performance ~~was~~above ~~$3,831,619~~for ~~and $6,218,379, respectively~~further details.

Net cash provided in operating activities for the nine months ended April 30, 2003 and 2002, was $940,124 and $1,850,972, respectively. The decrease in cash provided by operating activities was due primarily to increases in the net loss, other current assets and accounts receivable, which were partially offset by a decrease in accrued expenses, as well as decreases in inventory and accounts payable.17

~~Net~~Gross ~~cash used in investing activities for the nine months ended April 30, 2003 and 2002 decreased to $693,857 from $1,317,836, respectively, primarily due to the~~Margins

15Gross margins decreased to $3.3 million for the three months ended October 31, 2004 from $5.0 million for the three months ended October 31, 2003, and decreased to 28.6% from 28.9% as percent of sales, respectively. The decrease was largely attributable to absorption of manufacturing facility costs at our New Hyde Park, New York facility, which was closed for operation in the United States on October 29, 2004.

~~reduction~~Gross margins infor ~~purchase~~each of ~~production equipment lines and capital improvements for~~ our ~~facility~~business insegments ~~Chase~~were ~~City,~~as ~~Virginia.~~follows:

~~Net~~Gross ~~cash~~margins ~~used~~on byour ~~financing~~Manufactured ~~activities~~Candy ~~for~~and ~~the nine months ended April~~Cookies ~~30,~~decreased ~~2003~~from ~~and 2002 was~~ $~~899,125 and $287,739, respectively~~0.1 ~~This~~million ~~increase was primarily due~~ to ($~~996,391 pay-down on our credit facility, $279,819 pay-down on term debt offset by proceeds of $350,000 on additional term debt~~0.8) ~~The borrowings~~million for the ~~nine~~three months ended October ~~April 30~~31, 2003, ~~was~~and ~~approximately $7~~2004,~~207,580~~ ~~as compared to $3,511,648 for the prior years comparable period~~respectively. ~~The~~ ~~increase~~The isdecrease was mainly aattributable ~~result of our reliance on borrowings under our line of credit~~ to ~~finance~~increased ~~working~~labor ~~capital~~costs ~~needs for seasonal purchases. The impact of higher borrowings was offset~~and ~~somewhat~~overhead byabsorption ~~lower~~expenses ~~interest~~at ~~rates.~~our Wemanufacturing ~~have~~plant ~~$17,792,420~~in ofNew ~~our~~Hyde ~~$25~~Park,~~000,000~~ ~~line~~New ~~of credit available to meet additional seasonal needs to purchase and manufacture inventory subject to availability of accounts receivable and inventory~~York.

~~During~~Gross ~~the~~margins ~~quarter~~for ~~ended~~our ~~April~~Purchased ~~30,~~Candy ~~2003, we were in violation of some of the business~~ and ~~financial covenants~~Cookies ~~under~~increased ~~our~~from ~~credit~~$3.8 ~~facility~~million ~~relating~~ to ~~the~~$4.1 ~~fixed~~million ~~charge~~for ~~coverage~~the ~~ratio~~three ~~and tangible~~months ~~net~~ended ~~worth. As of the filing~~October ~~date~~31, of2003 ~~this~~and ~~quarterly report~~2004, werespectively. ~~are~~The ~~still~~increase ~~violation~~was ofprimarily ~~those~~due ~~covenants.~~to Wepurchased ~~are~~pre-packed ~~seeking~~assembled togift ~~amend~~items ~~the~~that ~~credit~~were ~~agreement~~not toassembled ~~modify~~in ~~the~~our ~~covenants~~New ~~and to help~~Bedford, ~~ensure~~Massachusetts ~~our~~facility ~~compliance~~and ~~going~~better ~~forward. The~~pricing ~~bank~~of ispurchased ~~currently~~candy ~~working~~from ~~with~~our usthird party ~~to amend~~overseas ~~the credit agreement~~suppliers.

~~During~~Gross margins on our Purchased Gift Items decreased from $1.1 million to $0.1 million for the ~~quarter~~three months ended ~~April~~October 3031, 2003 and 2004, werespectively. The ~~entered~~decrease ~~into~~was due aprimarily ~~third amendment~~to ~~and~~the ~~modification~~decrease toof ~~our~~the ~~loan~~number ~~and~~of ~~security~~products ~~agreement~~being ~~allowing~~assembled ~~for~~at aour ~~short~~New ~~term~~Bedford, ~~permitted~~MA ~~out~~facility ofas ~~formula~~a ~~advance~~result of ~~$300,000~~the ~~through~~delays ~~May~~in ~~31,~~our shipments being ~~2003. The~~transferred ~~permitted~~from ~~out~~the ofwest ~~formula advance~~coast ~~facility~~ports, ~~was~~due ~~paid~~to inshipment ~~full~~delays ~~during~~at the ~~fourth~~west ~~quarter~~coast ports ~~ending~~due ~~July~~to ~~31,~~delayed transportation and unloading of vessels at the ports. See environmental factors effecting ~~2003~~performance above for further details.

WeOperating are currently seeking to obtain third party financing for short-term unsecured or subordinated debt for our immediate cash needs during the fourth quarter ending July 31, 2003 and part of first quarter ending October 31, 2003. We are in the process of finalizing the over advance financing from a source other than our bank for out of formula advances. The new financing will provide us with net cash in an amount equal to $2,000,000 and an additional $1,000,000 provided from our bank . We will use all the proceeds of the new financing for working capital and or to pay a portion of the outstanding revolving loans. The new financing shall be secured by our assets and the party extending the new financing will enter into a letter agreement regarding the subordination of the new financing only to the bank, but shall be prior to all other debts of the right of our shareholders. The new financing will be in form and content as shall be satisfactory to the bank.Expenses

~~The~~Operating expenses ~~additional~~for ~~$3,000,000~~the ~~will~~three ~~provide~~months ~~cash~~ended ~~needs~~October ~~during~~31, ~~the~~2004 ~~fourth quarter~~decreased ~~ending~~to ~~July~~$2.1 ~~31,~~million from ~~2003~~$3.3 ~~and~~million ~~part~~for of the ~~first~~three ~~quarter~~months ~~ending~~ended October 31, 2003 and ~~will~~decreased beto 17.9% ~~fully~~from ~~paid~~18.9%, ~~off by December 31~~respectively, ~~2003~~as ora ~~earlier. At~~percent ~~which time we will have excess availability against our line~~ of ~~credit~~ sales.

~~Principal~~During ~~payments~~the ~~for~~three ~~our~~months ~~long-term~~ended ~~debt~~October ~~for~~31, ~~the~~2004 ~~twelve~~and 2003, ~~months~~selling, ~~ending~~general and administrative expenses decreased to $1.2 million ~~April~~from 30$2.2 million, ~~2004~~respectively, ~~are~~and ~~$456~~decreased to 10.0% from 12.8% as a percent of sales,~~061~~ respectively. WeThe ~~believe~~decrease ~~that~~was ~~cash~~largely ~~provided~~due byto ~~operations~~decreases ~~will~~in the befollowing: ~~sufficient~~$36,000 in travel expenses in the prior year relating to ~~finance~~trips to China, $340,000 of shipping and carrier costs, due to direct shipments to our customers, ~~operations~~$4,000 in building rental costs, $237,000 in broker commissions due to better negotiated fees, $205,000 in advertising and ~~fund~~promotional ~~debt~~costs, $20,000 ~~service~~in ~~requirements~~bank ~~for~~fees and $158,000 in public warehouse storage costs attributable to the ~~next~~consolidation ~~twelve~~of ~~months~~public facilities into our own facilities.

~~Schedule~~Salaries and related expenses decreased to $921,024 for the three months ended October 31, 2004, from $1,062,982 for the three months ended October 31, 2003, or 7.9% from 6.1%, respectively, as a percent of ~~Contractual~~sales. This ~~Obligations~~decrease resulted from a decline of $142,000 in our

	Payments Due by Period
ContractualObligation	Total		Less Than1 year		1-3 years		After 4 years
Long-Term Debt	$	1,893,201	$	212,312	$	1,185,403	$	495,486
Capital Lease Obligation	443,395		15,718		46,395		381,282
Licensing Agreements	694,000		—		694,000		—
Operating Leases	965,687		295,677		435,166		234,844
Total Contractual Obligation	$	3,996,283	$	523,707	$	2,360,964	$	1,111,612

16overhead due to our reorganization effort started in the fourth quarter of the fiscal year ended July 31, 2004 and continued through the first quarter ending October 31, 2004.

~~Schedule~~Income From ~~of Commercial Commitments~~Operations

	Amount of Commitment expiration per period
Commercial Commitments	Total		Less Than 1 year	1-3 years		After 4 years
Line of Credit (*)	$	25,000,000	—	$	25,000,000	—
Total Contractual Obligation	$	25,000,000	—	$	25,000,000	—

Income from operations for the three months ended October 31, 2004 was $1.3 million as compared to income of $1.7 million for the prior year’s comparable period, or 10.7% and 10.0% as a percent of net sales, respectfully. Most of the decrease resulted from the decrease in product sales and other expense explained in results from operating expenses.

~~(*) The~~Interest ~~line of credit is available for advances~~Income ~~to finance working capital~~ and the issuance of letter of credits. Advances under the line of credit are based on a borrowing formula equal to 85% of eligible domestic accounts receivable plus 60% of eligible finished goods and 30% of eligible components inventory. The line of credit varies from quarter to quarter based on working capital needs and pay-downs.Expense

~~INFLATION~~For the three months ended October 31, 2004, interest income decreased to $3 from $19 for the three months ended October 31, 2003 as cash reserves declined. For the three months ended October 31, 2004, interest expenses increased to $297,763 from $236,766 for the three months ended October 31, 2003, due to an increase in subordinated debt financing for a total of $3.3 million and increased interest rates from Libor plus 2.35% which was at 4.4% to Prime plus 3.0% currently at 7.75% associated with our new bank agreement extension.

~~We do not~~Other ~~believe that inflation has had a significant impact on our results of operations for the periods presented.~~Income/Expense

~~Item~~For ~~3. Quantitative~~the ~~and~~three ~~Qualitative~~months ~~Disclosures~~ended October 31, 2004, other ~~About~~income/expenses ~~Market~~increased ~~Risk~~to expense of $10,137 from income of $4,537 for the three months ended October 31, 2003 due to $10,000 of realized losses on foreign exchange transactions.

AsIncome aTax result of our variable rate line of credit, we are exposed to the risk of rising interest rates. Our $25,000,000 line of credit had an interest rate ranging from 4.06% to 3.69% for the three months ended April 30, 2003 and 4.7% to 3.69% for the nine months ended April 30, 2003. Our long-term debt is at variable market tax-exempt rates, which exposes us to fluctuations in the market. However, since the rate is based on the tax-exempt rate, it is below the market rate.Benefit

WeThe ~~previously utilized~~income ~~derivative~~tax ~~instruments,~~rate ~~from~~utilized ~~time~~on toan ~~time,~~interim ~~foreign~~basis ~~currency forward~~is ~~contracts~~based ~~and~~on ~~currency~~the ~~exchange~~Company’s ~~rate~~estimate ~~contracts~~of tothe ~~hedge~~effective ~~our~~income ~~market~~tax ~~price~~rate ~~risk exposures. Foreign currency contracts were executed~~ for ~~periods~~the ~~consistent with~~fiscal ~~related~~year ~~underlying~~ending ~~exposures~~July ~~and~~31, ~~do not constitute positions independent of those exposures~~2005. WeThe doCompany ~~not~~has ~~hold or issue derivative instruments for trading purposes and are not~~ a ~~party~~net tooperating ~~any~~loss ~~instruments~~carry ~~with leverage or prepayment features.~~forward ~~In entering into these contracts, we have assumed risk~~ which ~~might~~management ~~arise~~believes ~~from possible~~will ~~inability~~offset ofall ~~counter-parties~~taxable toincome ~~meet~~generated ~~the~~in ~~terms of their contracts. For~~fiscal ~~the~~year ~~quarter ended April 30~~2005. Therefore, ~~2003, we incurred losses of $58,000 on foreign exchange transactions. For~~ the ~~nine months ended April 30, 2003 we incurred~~Company ~~losses~~estimated ofits ~~$178,000~~effective ontax ~~foreign~~rate ~~exchange transactions~~at 0%.

~~Periodically we~~Critical ~~enter into foreign exchange forward contracts to hedge transactions~~Accounting ~~primarily~~Policies related to firm commitments to purchase our contract manufactured products from foreign manufactures under terms that provide for payment of goods in foreign currency approximately 60 to 90 days from invoice date. Purchases of COWS butter toffee candies and other candies from manufacturers located in Argentina are paid in U.S. Dollars. Purchases of RUGER wafers, ELANA Belgian chocolate products and Zed Gum Specialty Gum products are purchased from manufacturers located in Austria, Belgium and Ireland respectively, and are paid for in Euros.Estimates

WeManagement ~~follow~~has ~~the guidance~~determined inthat ~~SFAS~~the ~~133~~Company’s ~~and~~most critical ~~account~~accounting ~~for~~policies ~~these~~are ~~contracts~~those asrelated ~~cash~~to ~~flow~~revenue ~~hedges. As~~recognition, ~~of April~~inventory 30obsolescence, ~~2003~~long-lived assets, welitigation ~~had~~and noincome ~~foreign exchange contracts~~taxes. WeThe ~~recognized~~Company continues to monitor its ~~realized~~accounting ~~losses~~policies ofto ~~approximately~~ensure ~~$31,000~~proper ~~related~~application. There have been no changes to these ~~derivative~~policies ~~instruments~~as discussed in the Company’s Annual Report on Form 10-K for the fiscal ~~2003~~year ended July 31, 2004.

~~Significant Accounting Policies~~ Liquidity and ~~Estimates~~Capital Resources

Our ~~preparation~~ ofprimary ~~financial~~cash ~~statements~~requirements inhave ~~conformity~~been ~~with~~to ~~accounting~~fund ~~principals~~the ~~generally~~purchase, ~~accepted~~manufacture ~~within~~and ~~the~~commercialization ~~United~~of ~~States~~our ~~requires~~products. ~~management~~We tofinance ~~make~~our ~~estimates~~operation and ~~assumptions~~manufacturing inwith ~~certain~~cash ~~circumstances~~flow ~~that~~from ~~effect~~operations ~~amounts reported in the accompanying financial statements~~ and ~~related~~bank ~~notes~~financing. ~~In preparing these~~ ~~financial~~Our ~~statements,~~working ~~management~~capital ~~has~~at ~~made~~October ~~its~~31, ~~best~~2004 ~~estimates~~ and ~~judgments~~July ~~of certain~~31, ~~amounts~~2004 ~~included~~was ~~in the financial statements~~($1,229,321) ~~giving due consideration~~and to($2,353,281), ~~materiality~~respectively. ~~We do not believe there is a great likelihood that materially different amounts would be~~

1719

~~reported~~The ~~related~~Company toduring the ~~accounting~~ ~~policies~~fiscal ~~described~~year ~~below;~~ending ~~however~~July 31, 2004 ~~application~~had a need to borrow $1.4 million of ~~these~~additional ~~accounting~~subordinated debt to meet ~~policies~~its ~~involves~~working capital needs and the ~~exercise~~bank provided additional out of ~~judgment~~formula advances ~~and~~against ~~the~~is ~~use~~collateral base of ~~assumptions~~$1,000,000 asto support the up coming seasonal activity in the Company. Management feels that it should be able to ~~future~~sustain ~~uncertainties~~positive ~~and~~working capital going forward into the fiscal year ending July 31, as2005. aIn ~~result~~addition, ~~actual~~the ~~results~~Company ~~could~~supplemented ~~differ~~borrowing during the quarter ended October 31, 2004 with an uncollateralized loan of $467,800 due on December 31, 2004 from ~~these~~an unrelated individual third-party at an interest rate ~~estimates~~equal to that of our subordinated debt.

~~We provide an~~Financial allowance for uncollectible accounts receivable based on experience. We consider the following factors in developing an estimate of our allowance for non-payment and the overall economic environment. Although it is reasonably possible that management’s estimate of uncollectible accounts could change in the near future, management is not aware of any events that would result in a change to its estimates which would be material to our financial position or results from operations. For the nine months ended April 30, 2003, we had an allowance for doubtful accounts of approximately $273,000.Condition

We provide an allowance for slow moving inventory based on experience and aging of products. We consider the following factors in developing an estimate of our allowance for non-moving of inventory and the overall economic environment. Although it is reasonably possible that management’s estimate of slow moving inventory could change in the near future, management is not aware of any events that would result in change to its estimates which would be material to our financial position or results from operations. For the nine months ended April 30, 2003, we had an allowance for slow moving inventory of approximately $321,000. During the quarter ended April 30, 2003, we wrote-down impaired packaging and film inventory of approximately $2.2 million, this was in part due to the impaired inventory of which the product lines will be shifted to overseas manufacturers.Assets

~~Goodwill~~Total ~~represents~~assets ~~the~~increased ~~excess~~to of$32,593,830 ~~consideration~~at ~~over~~October ~~the~~31, ~~net~~2004 ~~assets acquired resulting~~ from ~~acquisitions~~$20,406,453 ofat ~~companies~~fiscal year ~~accounted~~ended ~~for~~July by31, ~~the purchase method~~2004. This Weis ~~utilize~~an ~~the~~increase ~~annual~~of ~~evaluation~~$12,187,377. asThe ~~required~~increase bywas ~~SFAS~~mainly ~~142.~~attributable Atto ~~each~~$9,049,062 ~~balance~~in accounts ~~sheet~~receivable ~~date~~and $3, ~~management~~358,042 ~~evaluates~~in ~~the~~inventory, ~~recoverability~~due ofto the ~~goodwill~~increased ~~and~~level ~~reviews goodwill~~of ~~and~~sales ~~other long-lived assets~~ for ~~impairment. We will complete our impairment evaluations with~~ the ~~aid~~Christmas ~~of an independent valuation group, in the fourth quarter~~season.

~~Seasonality~~As of October 31, 2004, current assets increased to $24,545,568 from $12,140,291 as of fiscal year ended July 31, 2004, an increase of $12,405,277 or 102.2%. The increase was primarily due to and ~~Cylicality;~~increase ~~Fluctuation~~of $9,049,062 in ~~Quarterly~~accounts ~~Operating~~receivable ~~Results~~and $3,358,042 in inventory, related to the levels of Christmas season orders to ship.

~~We have~~As ~~experienced~~of ~~and~~October ~~expect~~31, to2004, ~~continue~~plant, toproperty ~~experience variability in revenues~~ and ~~net~~ ~~income~~equipment ~~from~~decreased ~~quarter~~ to ~~quarter~~$5,866,430 from $6,103,880 as ~~a result~~ of ~~seasonality~~fiscal ~~that~~year ~~may accompany~~ended ~~private~~July or31, ~~public~~2004, ~~sector~~a ~~budget~~decrease ~~cycles. Sales~~ of $237,450 ~~our~~or ~~products~~3.9%. This ~~have historically~~decrease ~~been~~was ~~higher~~associated inwith the ~~first and second quarters as a result of~~ ~~patterns~~depreciation of ~~spending~~the byassets ~~our~~of ~~customers~~$237,450.

We also believe that the confectionery industry is influenced by general economic conditions and particularly by the level of change in the economy. Increased levels of consumer spending change can have a favorable impact on our revenues. We also believe that the confectionery industry tends to experience periods of decline and recession during economic downturns. The confectionery industry could sustain periods of decline in revenues in the future, and any decline may have a material adverse effect on us.Liabilities

WeAs ~~could~~of inOctober 31, 2004 total liabilities increased to $27,625,070 from $16,382,550 as of the ~~future~~fiscal ~~experience~~year ended ~~quarterly~~July ~~fluctuations~~31, in2004, ~~operating~~an ~~results~~increase ~~due~~of $11,242,520 toor ~~the~~68.6%. The ~~factors~~increase ~~described~~primarily ~~above~~reflects ~~and~~additional ~~other~~borrowing ~~factors~~of $6,860,947 ~~including~~on its working capital facility, additional borrowings of $467,800 of short-term ~~nature~~debt, of$2,395,408 ~~certain~~of ~~customer~~accounts ~~commitments;~~payables ~~patterns~~and $1,690,552 of accrued ~~capital~~expenses ~~spending~~and offset by ~~customers;~~the ~~loss~~payments on its long term and subordinated debt of a$172,187. ~~major~~The ~~customer;~~increases ~~seasonality~~are ~~that~~primarily ~~may~~due ~~accompany~~to ~~private~~the orCompany’s ~~public budget~~Christmas ~~cycles;~~seasonal ~~pricing~~orders ~~changes~~being inshipped ~~response~~ to ~~various~~our ~~competitive~~customers ~~factors;~~in ~~market factors~~the ~~affecting~~first ~~availability~~and second quarter of ~~qualified~~our ~~personnel~~fiscal ~~and~~year ~~general~~ending ~~economic conditions~~in July 31, 2005.

~~Item 4. Controls and Procedures~~Capital Structure

~~Based~~The onCompany ~~their~~has ~~evaluation,~~two asclasses of astock ~~date~~outstanding, ~~within~~Class 90A ~~days~~Common ofStock and Class B Common Stock (collectively the ~~filing~~“Common ~~date~~Stock”), ofthat ~~this~~are ~~form~~substantially ~~10-Q~~identical, except ~~our~~that ~~Chief~~the ~~Executive~~Class ~~Officer~~A Common Stock is entitled to one vote per share and ~~Chief~~the ~~Financial~~Class ~~Officer~~B Common ~~have~~Stock ~~concluded~~is ~~that~~entitled ~~our~~to seven votes per share on all matters, including the ~~disclosure~~election cof directors. Uziel Frydman, Chairman, President and ~~procedures~~Chief ~~(as~~Executive Officer ~~defined~~of inthe ~~Rules~~Company, ~~13a-14(c)~~beneficially owns 400,000 shares of Class A Common Stock and ~~15d-14(c)~~all of the 1,000,000 share of Class B Common Stock outstanding and controls the Company.

under the Securities Exchange Act of 1934, as amended) are effective. There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.20

18Cash Flows:

~~PART~~Net ~~II OTHER~~cash ~~INFORMATION~~used in Operating Activities:

~~Item~~Net 1cash used in operating activities for the three months ended October 31, 2004 and 2003, was $7,153,567 and $10,005,966, respectively. ~~Legal~~ ~~Proceedings~~The decrease in cash used by operating activities was due primarily to increases in accounts receivable, inventory, accounts payable and accrued expenses primarily related to inventory purchases and sales for the Christmas selling season.

~~We are from time to time involved in litigation incidental to the~~Net ~~conduct~~Cash ofUsed ~~our business. We are currently involved~~ in ~~several~~Investing actions. In particular, the landlord at our Rhode Island facility has named us as a defendant in an action seeking security for claims relating to the lease agreement. We deposited $180,000 with the registry of the court relating to claims for payment of real estate taxes, water and sewer, rent of other occupied space and repair expenses. In September 2002, the landlord claimed other breaches of the lease agreement alleging an obligation of $932,000 under the lease and demanded $750,000 to settle the disputes. We have claims against the landlord we are pursuing and continue to occupy space at the leased premises. We have accrued amounts to cover current charges. Management does not believe that the outcome of these actions, individually or in the aggregate, will have a material adverse effect on our financial condition .Activities:

OnNet ~~April~~cash ~~24,~~provided ~~2003,~~by weinvesting ~~filed~~activities ~~a claim in the Circuit Court~~ for ~~Montgomery~~the ~~County,~~three ~~Maryland,~~months ~~against~~ended ~~Robert~~October ~~Davidoff~~31, ~~Howard~~2004 ~~Davidoff,~~and ~~James Spampinato~~2003, ~~Leonard~~ ~~Levie,~~decreased ~~Elanor~~to ~~Levie,~~$0 ~~StepCapp~~from ~~LLC and CAMCO~~$30, ~~Inc.~~759, ~~the former~~ ~~shareholders~~respectively, ofprimarily ~~Asher~~due ~~Candy~~to ~~Acquisition~~no ~~Corporation.~~sales ~~The suit presents claims in connection with the corporate merger agreement under which we acquired all outstanding securities~~ of ~~Asher~~assets ~~Candy~~or ~~Acquisition~~investment ~~Corporation~~in ~~and~~equipment ~~agreed to~~at ~~sell~~our ~~securities~~facilities inrelated ~~Sherwood Brands~~ to ~~the~~moving ~~former~~our ~~shareholders~~production of Asher Candy in reasonable reliance on the shareholders’ material misrepresentations and omissions. We are seeking declaratory and injunctive relief and an award of damages against the former shareholders of Asher Candy for violations of the Merger Agreement, for common law fraud and for statutory securities claims. Some of the former shareholders of Asher Candy filed a counterclaim seeking $7.0 million in damages. We believe that we have defenses to ~~the~~overseas ~~counterclaim~~suppliers.

~~Item~~Net ~~4. Submission~~Cash ofUsed ~~Matters~~by toFinancing ~~a Vote of Security Holders~~Activities:

~~None~~Net cash provided by financing activities for the three months ended October 31, 2004 and 2003, was $7,156,560 and $9,869,265, respectively. This decrease from the prior year was primarily due to decreased reliance on borrowings under our line of credit to finance working capital needs for seasonal materials, which was partially offset by borrowings of short-term debt of $467,800. The gross borrowings for the period ended October 31, 2004 were approximately $12,471,850 as compared to $16,255,795 for the prior years comparable period. We have $2,528,150 of our $15,000,000 line of credit available to meet additional seasonal needs to purchase and manufacture inventory subject to availability of accounts receivable and inventory.

~~Item~~Principal 6payments for our long-term and subordinated debt for the three months ended October 31, 2004, was $172,187. ~~Exhibits~~ We believe that cash provided by operations during the 2005 fiscal year will be sufficient to finance our operations and ~~Reports~~fund ondebt ~~Form~~service ~~8-K~~requirements for the next twelve months.

~~(a) Exhibits~~Schedule of Contractual Obligations

10.1 Third Amendment and Modification to Loan and Security Agreement dated April 7, 2003, between the Registrant and Wachovia Bank, National Association

			Payments Due by Period
Contractual Obligations	Total		Less Than 1 year		1-3 years		After 4 years
Long-Term Debt	$	959,905	$	376,850	$	319,664	$	263,391
Subordinated Debt	3,352,140		3,352,140		—		—
Capital Lease Obligation	419,813		16,688		56,497		346,628
Licensing Agreements	907,080		619,580		272,500		15,000
Operating Leases	835,126		164,016		345,781		325,329
Total Contractual Obligations	$	6,474,064	$	4,529,274	$	994,442	$	950,348

~~(b) Reports on Form 8-K~~21

~~None.~~Schedule of Commercial Commitments

			Amount of Commitment expiration per period
Commercial Commitments	Total		Less Than 1 year	1-3 years		After 4 years
Line of Credit (*)	$	15,000,000	—	$	15,000,000	—
Total Commercial Commitments	$	15,000,000	—	$	15,000,000	—

~~SIGNATURES~~(*) The line of credit is available for advances to finance working capital and the issuance of letter of credits. Advances under the line of credit are based on a borrowing formula equal to 85% of eligible domestic accounts receivable plus 60% of eligible finished goods and 30% of eligible components inventory. The line of credit facility varies from quarter to quarter based on working capital needs and the level of repayments.

~~Pursuant~~Item ~~to the requirements of the Securities Exchange Act of 1934,~~3. Quantitative ~~the~~and ~~Registrant~~Qualitative ~~has~~Disclosures ~~duly~~About ~~caused~~Market ~~this report to be signed on its behalf by the undersigned thereunto duly authorized.~~Risk

	SHERWOOD BRANDS, INC.
Date: June 13, 2003
	/s/ Uziel Frydman
	Uziel Frydman, President and Chief Executive Officer
Date: June 13, 2003
	/s/ Christopher J. Willi
	Christopher J. Willi, Chief Financial Officer and Secretary

As a result of its variable rate line of credit, we are exposed to the risk of rising interest rates. Our $15,000,000 line of credit had an interest rate ranging from 4.5% to 7.75% for the three months ended October 31, 2004. Our long-term debt is at variable market tax exempt rates, which exposes us to fluctuations in the market. However, since the rate is based on the tax exempt rate, it is below the market rate.

20Significant Accounting Policies and Estimates

~~CERTIFICATION PURSUANT TO~~ Accounts ~~SECTION~~Receivable ~~302~~and OFAllowance ~~THE~~for ~~SARBANES-OXLEY~~Doubtful ~~ACT OF 2002~~Accounts.

IAccounts receivable are customer obligations due under normal trade terms. We sell our products to those involved in the retail industry. Accounts receivable are reviewed to determine if any receivables will potentially be uncollectible. The Company records an allowance for doubtful accounts based on specifically identified amounts that they believe to be uncollectible along with a general reserve. If the actual collections experience changes, revisions ~~Uziel~~to the allowance may be required. ~~Frydman~~Any unanticipated changes in the customer’s credit worthiness or other matters affecting the collectability of amounts due from such customers, ~~certify~~could have ~~that:~~a material affect on the results of operations in the period in which such changes or events occur. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available, the Company believes the allowance for doubtful accounts of $134,000 as of October 31, 2004 is adequate. However, actual write-offs might exceed the recorded allowance.

~~1. I have reviewed this quarterly report on Form 10-Q of Sherwood Brands, Inc. (the “Registrant”);~~Inventory

~~2. Based~~Inventory onconsists myof ~~knowledge~~raw materials, ~~this~~packaging ~~quarterly~~materials, ~~report~~components ~~does~~used ~~not~~in ~~contain any untrue statement of~~assembly, awork-in-process ~~material~~and ~~fact~~finished orgoods ~~omit~~and tois ~~state~~stated aat ~~material fact necessary to make~~ the ~~statements~~ ~~made,~~lower ~~in light~~ of ~~the~~cost ~~circumstances under which such statements were~~or ~~made,~~market. ~~not~~Cost ~~misleading~~is ~~with~~determined ~~respect~~by to the ~~period covered by this quarterly report;~~

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;22

~~4. The~~FIFO ~~Registrant’s~~(first-in, ~~other~~first-out) ~~certifying~~method. ~~officer~~We ~~and~~provide Ian ~~are~~allowance ~~responsible~~ for ~~establishing~~slow moving inventory based on experience and ~~maintaining~~aging ~~disclosure~~of ~~controls~~products. We consider the following factors; age of product and ~~procedures~~sale ~~(as~~through ~~defined~~of the product in ~~Exchange~~developing ~~Act~~an estimate of our ~~Rules~~allowance ~~13a~~for non-14moving of inventory and ~~15d-14)~~the ~~for~~overall economic environment. Although it is reasonably possible that management’s estimate of slow moving inventory could change in the ~~Registrant~~near ~~and~~future, management is not aware of any events that would result in changes to its estimates which would be material to our financial position or results from operations. For the quarter ended October 31, 2004, we ~~have:~~had an allowance for slow moving inventory of $2,065,426.

~~(a) designed such disclosure controls and procedures to~~Asset 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 amended quarterly report is being prepared;Impairment

~~(b) evaluated~~The Company periodically evaluates the ~~effectiveness~~carrying value of long-lived assets when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the ~~Registrant’s~~anticipated undiscounted cash ~~disclosure~~flow ~~controls~~from such asset is separately identifiable and ~~procedures~~is asless ofthan the carrying value. In that event, a ~~date~~loss ~~within~~is 90recognized ~~days~~based ~~prior~~on tothe amount by which the ~~filing~~carrying ~~date~~value exceeds the fair market value of ~~this~~the ~~quarterly~~long-lived ~~report~~asset. (Fair market value is determined primarily using the ~~“Evaluation~~anticipated ~~Date”);~~cash ~~and~~flows discounted at a rate commensurate with the risk involved.

~~(c) presented~~Goodwill inrepresents ~~this~~the ~~quarterly~~excess ~~report~~of ~~our~~consideration ~~conclusions about~~over the ~~effectiveness~~net assets acquired resulting from acquisitions of companies accounted for by the ~~disclosure~~purchase ~~controls~~method. ~~and~~We ~~procedures~~utilize ~~based~~the onannual ~~our~~ evaluation as required by SFAS 142. At each Balance Sheet date, management evaluates the recoverability of the goodwill ~~Evaluation~~and ~~Date;~~reviews goodwill and other long-lived assets for impairment. As of October 31, 2004 there was no impairment loss.

~~5. The~~Revenue 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 (or persons performing the equivalent function):Recognition

~~(a) all~~Sales are ~~significant~~recognized ~~deficiencies~~upon inshipment ~~the~~of ~~design~~products. orSales ~~operation~~discounts and any other price ofadjustments ~~internal~~are ~~controls~~accounted ~~which~~for ~~could~~as ~~adversely~~a ~~affect~~reduction in revenue at the ~~Registrant’s~~later ~~ability~~of to(1) the ~~record,~~date ~~process,~~at ~~summarize~~which ~~and~~the ~~report~~related ~~financial~~revenue ~~data~~is ~~and~~recognized ~~have~~by ~~identified for~~ the ~~Registrant’s~~Company ~~auditors~~or ~~any~~(2) ~~material~~the ~~weaknesses~~date at inwhich ~~internal~~the ~~controls;~~sales ~~and~~incentive is offered.

~~(b) any fraud, whether or not material, that involves~~Income ~~management or other employees who have a significant role in the Registrant’s internal controls; and~~Taxes

6Income taxes are calculated using the liability method specified by Statement of Financial Accounting Standards No. ~~The~~ 109, “Accounting for Income Taxes (SFAS ~~Registrant’s~~109).” ~~other~~Under ~~certifying~~SFAS ~~officer~~109, ~~and~~deferred Itaxes ~~have~~are ~~indicated~~determined inusing ~~this~~the ~~quarterly~~liability method ~~report~~which ~~whether~~requires orthe ~~not~~recognition ~~there~~of ~~were~~deferred ~~significant~~tax ~~changes~~assets inand ~~internal~~liability ~~controls~~based oron differences inbetween the financial statement and the income tax basis using ~~other~~presently ~~factors~~enacted ~~that~~tax ~~could~~rates. ~~significantly~~The ~~affect~~income ~~internal~~tax ~~controls~~rate ~~subsequent~~utilized toon an interim basis is based on the ~~date~~Company’s estimate of ~~our~~the ~~most~~effective ~~recent~~income ~~evaluation~~tax rate for the fiscal year ending July 31, ~~including~~2004. ~~any~~The ~~corrective~~Company ~~actions~~has ~~with~~a ~~regard~~net operating loss tocarry ~~significant~~forward ~~deficiencies~~which ~~and~~management ~~material~~believes ~~weaknesses~~will offset all taxable income generated in fiscal year 2005. Therefore, the Company estimated its effective tax rate at 0%.

Date: June 13, 2003
	/s/ Uziel Frydman
	Uziel Frydman
	Chairman, President and Chief Executive Officer

Use of Estimates

1The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and

~~CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002~~23

I,assumptions that ~~Christopher~~affect the reported amounts of assets and liabilities and disclosures of Jcontingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. ~~Willi,~~Actual results ~~certify~~could ~~that:~~differ from those estimates.

~~1. I~~Derivative ~~have~~Financial ~~reviewed this quarterly report on Form 10-Q of Sherwood Brands, Inc. (the “Registrant”);~~Instruments

2The Company formerly utilized derivative financial instruments to reduce foreign currency risks. ~~Based~~ The Company did not hold or issue derivative financial oninstruments myfor ~~knowledge~~trading purposes. In June 1998, ~~this~~the ~~quarterly~~Financial ~~report~~Accounting Standards ~~does~~Board ~~not~~(“FASB”) ~~contain~~issued ~~any~~SFAS ~~untrue~~No. ~~statement~~133, of“Accounting for Derivative aInstruments ~~material~~and ~~fact~~Hedging orActivities,” ~~omit~~which towas ~~state~~amended in June 2000 by SFAS No. 138. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that a company ~~material~~recognize ~~fact~~all ~~necessary~~derivatives toas ~~make~~either assets or liabilities in the ~~statements~~statement ~~made,~~of financial condition and measure those instruments at fair value. Changes in ~~light~~the fair value of those instruments will be reported in earnings or other comprehensive income depending on the ~~circumstances~~use ~~under~~of ~~which~~the ~~such~~derivative ~~statements~~and ~~were~~whether ~~made,~~it ~~not~~qualifies ~~misleading~~for hedge accounting. The accounting for gains and losses associated with ~~respect~~changes toin the ~~period~~fair ~~covered~~value byor ~~this~~the ~~quarterly~~derivative, and the effect on ~~report;~~the consolidated financial statements will depend on its hedge designation and whether the hedge is highly effective in achieving offsetting changes in the fair value of cash flows of the asset or liability hedged. The Company adopted SFAS 133, as amended in the fourth quarter of fiscal 2001.

~~3. Based~~Seasonality ~~on my knowledge, the financial statements,~~ and ~~other~~Cylicality; ~~financial~~Fluctuation ~~information included~~ in ~~this~~Quarterly ~~quarterly~~Operating ~~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 quarterly report;~~Results

~~4. The~~We have experienced and expect to continue to ~~Registrant’s~~experience ~~other~~variability ~~certifying~~in ~~officer~~revenues and Inet ~~are~~income ~~responsible~~from ~~for~~quarter ~~establishing~~to quarter as a ~~and~~result ~~maintaining~~of ~~disclosure~~seasonality ~~controls~~that ~~and~~may ~~procedures~~accompany ~~(as~~private ~~defined~~or inpublic ~~Exchange~~sector ~~Act~~budget ~~Rules~~cycles. ~~13a-14~~Sales ~~and~~of ~~15d-14)~~our ~~for~~products have historically been higher in the ~~Registrant~~first and second wequarters ~~have:~~as a result of patterns of capital spending by our customers.

~~(a) designed~~We ~~such~~also ~~disclosure~~believe ~~controls~~that ~~and~~the ~~procedures~~confectionery toindustry is ~~ensure~~influenced ~~that~~by ~~material~~general ~~information~~economic ~~relating~~conditions toand particularly by the ~~Registrant,~~level ~~including~~of change. ~~its~~Increased levels of change can have a favorable impact on our revenues. ~~consolidated~~We ~~subsidiaries,~~also isbelieve ~~made~~that ~~known~~the toconfectionary usindustry bytends ~~others~~to ~~within~~experience ~~those~~periods ~~entities,~~of ~~particularly~~decline and recession during ~~the~~economic ~~period~~downturns. The confectionary industry could sustain periods of decline in ~~which~~revenues ~~this~~in ~~quarterly~~the ~~report~~future, isand ~~being~~any decline may ~~prepared;~~materially adversely effect us.

~~(b) evaluated~~We could in the ~~effectiveness~~future ofexperience quarterly fluctuations in operating results due to the ~~Registrant’s disclosure~~factors ~~controls~~described above and ~~procedures~~other factors, asincluding short-term nature of acertain ~~date~~client ~~within~~commitments; 90patterns ~~days~~of capital ~~prior~~spending toby ~~the filing~~customers; ~~date~~loss of ~~this~~a ~~quarterly~~major ~~report~~client; ~~(the~~seasonality ~~“Evaluation~~that ~~Date”)~~may accompany private or public budget cycles; pricing changes in response to various competitive factors; market factors affecting availability of qualified personnel and general economic conditions.

~~(c) presented~~Item ~~in this quarterly report our conclusions about~~4. Controls ~~the effectiveness of the disclosure controls~~ and ~~procedures based on our evaluation as of the Evaluation Date;~~Procedures

~~5. The Registrant’s~~As ~~other~~of ~~certifying~~the ~~officer~~end ~~and~~of Ithe ~~have~~period ~~disclosed~~covered by this report, our ~~based~~Chief onExecutive Officer and our ~~most recent~~Chief ~~evaluation,~~Financial toOfficer (collectively, the ~~Registrant’s~~“certifying officers”) ~~auditors~~have ~~and~~evaluated the ~~audit~~effectiveness ~~committee~~ of ~~Registrant’s~~ ~~board~~our ofdisclosure ~~directors~~controls and procedures (oras ~~persons~~such ~~performing~~term ~~the~~is ~~equivalent function~~defined in Rule 13a-15(e): and 15d-15(e)

(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; and24

(bunder the Exchange Act) ~~any~~. These ~~fraud,~~disclosure ~~whether~~controls orand ~~not~~procedures ~~material,~~are designed to ensure that ~~involves~~the information required to be disclosed by us in our ~~management~~periodic orreports ~~other~~filed ~~employees~~with ~~who~~the ~~have~~Commission ais ~~significant~~recorded, ~~role~~processed, insummarized and reported within the ~~Registrant~~time periods specified by the Commission’s ~~internal~~ ~~controls;~~rules and forms, and that the information is communicated to the certifying officers on a timely basis.

6. The ~~Registrant’s~~ ~~other~~ certifying ~~officer~~officers ~~and~~concluded, Ibased ~~have~~on ~~indicated in this quarterly~~their ~~report~~evaluation, ~~whether~~that orour ~~not~~disclosure ~~there~~controls ~~were~~and ~~significant~~procedures ~~changes~~are ineffective, ~~internal controls or in~~taking ~~other~~into ~~factors~~consideration ~~that~~the ~~could~~size ~~significantly~~and ~~affect~~nature ~~internal controls subsequent to the date~~ of our ~~most~~business ~~recent evaluation, including any corrective actions with regard to significant deficiencies~~ and ~~material weaknesses~~operations.

Date: June 13, 2003
	/s/ Christopher J. Willi
	Christopher J. Willi
	Chief Financial Officer

No change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

2PART II OTHER INFORMATION

~~Exhibit~~Item 1. Legal ~~Index~~Proceedings

Exhibit No.		Description
99.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

We are from time to time involved in litigation incidental to the conduct of our business. We are currently involved as Plaintiff in a suit brought before the Circuit Court for Montgomery County, Maryland, presenting claims in connection with the merger agreement under which Sherwood Brands acquired securities of Asher Candy Acquisition Corporation and agreed to sell securities in Sherwood Brands to prior shareholders of Asher Candy. The complaint alleges that we were fraudulently induced to enter into the merger agreement on the basis of, among other things, material misrepresentations and omissions by the shareholders of Asher Candy. We are seeking declaratory and injunctive relief and award of damages against the former shareholders of Asher Candy for violations of the merger agreement and for common law fraud and violations of applicable securities laws. Pending resolution of the litigation, we have refused to honor the demand of the former shareholders for us to repurchase half of the shares issued to them at a price of $4.50 per share. Some of the shareholders have filed a counterclaim seeking $7.0 million in damages. We believe that we have defenses to the counterclaim. There can be no assurance that we will not be a party to other litigation in the future.

3Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

31.1 Certification of the Chief Executive Officer Purusant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Acto of 2002.

32.1 Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act 2002.

32.2 Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

Current Report on Form 8-K filed on 10-29-04, with attached earnings release for the fiscal year ended July 31, 2004.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this amended report to be signed on its behalf by the undersigned thereunto duly authorized.

	SHERWOOD BRANDS, INC.

Date: December 12, 2004	/s/ Uziel Frydman
	Chairman, President and Chief Executive Officer

Date: December 12, 2004	/s/ Christopher J. Willi
	Chief Financial Officer and Secretary

Exhibit Index

Exhibit No.		Description

31.1		Certification of the Chief Executive Officer Purusant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Acto of 2002.

32.1		Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act 2002.

32.2		Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Filing Compare · SHERWOOD BRANDS INC