                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                               REPORT ON FORM 10-K

       [x]    Annual Report pursuant to Section 13 or 15(d) of the Securities
              Exchange Act of 1934

       For the fiscal year ended December 31, 2005.

       [ ]    Transition Report pursuant to Section 13 or 15(d) of
              The Securities Exchange Act of 1934

       For the transition period from __________________ to __________________.

                                                     Commission File No. 0-13181

                          CAPITAL BEVERAGE CORPORATION
             (Exact name of registrant as specified in its charter)

                 Delaware                                   13-3878747
----------------------------------------     ---------------------------------
(State of or other jurisdiction              (IRS Employer Identification No.)
 of incorporation or organization)

120 Rio Vista Drive, Norwood, New Jersey                           07648
----------------------------------------                           -----
(Address of Principal Executive Officers)                       (Zip Code)

Registrant's telephone number, including area code: (201) 679-6752

Securities registered pursuant to Section 12(b) of the Act:  None.

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

                     Common Stock, par value $.001 per share
                                (Title of Class)

Indicate by check mark if the  registrant is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act. Yes [ ] No[x]

Indicate  by  check  mark if the  registrant  is not  required  to file  reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No[x]

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes[x] No[ ]

<PAGE>

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of the Regulation  S-K is not contained in this form, and no disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information  statements  incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [X] No[ ]

          Issuer's revenues for its most recent fiscal year were $-0-.

         The aggregate market value of the voting stock held by non- affiliates
of the Registrant, computed by reference to the closing price of such stock as
of April 11, 2006, was approximately $283,806.75.

         Number of shares outstanding of the issuer's Common Stock as of April
11, 2006 was 3,792,045.


                    DOCUMENTS INCORPORATED BY REFERENCE: None

<PAGE>

                          Capital Beverage Corporation
                          2005 Form 10-K Annual Report
                                TABLE OF CONTENTS


                                     PART I

 ITEM 1.      BUSINESS. .....................................................3
 ITEM 2.      PROPERTIES. ..................................................10
 ITEM 3.      LEGAL PROCEEDINGS. ...........................................10
 ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........11

                                     PART II

 ITEM 5.      MARKET FOR REGISTRANT'S COMMON................................11
 ITEM 6.      SELECTED FINANCIAL DATA. .....................................13
 ITEM 7.      MANAGEMENT'S DISCUSSION ......................................13
 ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES......................14
 ITEM 8.      FINANCIAL STATEMENTS. ........................................14
 ITEM 9.      CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING
              AND FINANCIAL DISCLOSURE .....................................14
 ITEM 9A.     CONTROLS AND PROCEDURES.......................................14

                                    PART III

 ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............15
 ITEM 11.     EXECUTIVE COMPENSATION........................................19
 ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND ..........22
 ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. ..............24
 ITEM 14.     PRINCIPAL ACCOUNTANT FEES AND SERVICES .......................25

                                     PART IV

 ITEM 15.     EXHIBITS AND FINANCIAL STATEMENT SCHEDULES....................26

SIGNATURES

CERTIFICATES

                                        2

<PAGE>

         SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

         Certain statements contained in this Annual Report on Form 10-K
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
All statements included in this Annual Report, other than statements of
historical facts, regarding our strategy, future operations, financial position,
estimated revenues, projected costs, prospects, plans and objectives are
forward-looking statements. When used in this Annual Report, the words
"believe," "anticipate," "intend," "estimate," "expect," "project" and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain these identifying words. We cannot
guarantee future results, levels of activity, performance or achievements, and
you should not place undue reliance on our forward-looking statements. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including the risks
described in Part I - Risk Factors, and elsewhere in this Annual Report. Our
forward-looking statements do not reflect the potential impact of any future
acquisitions, mergers, dispositions, joint ventures or strategic investments. In
addition, any forward-looking statements represent our expectation only as of
the day this Annual Report was first filed with the SEC and should not be relied
on as representing our expectations as of any subsequent date. While we may
elect to update forward-looking statements at some point in the future, we
specifically disclaim any obligation to do so, even if our expectations change.

                                     PART I

ITEM 1.  BUSINESS.

         General

         Capital Beverage Corporation ("Capital" and the "Company") was
incorporated under the laws of the State of Delaware on December 5, 1995. In
January 1996, the Company acquired from Consolidated Beverage Corporation, the
right to become the exclusive distributor ("Pabst Distribution Rights") for
certain beer and malt liquor products ("Pabst Products") manufactured by Pabst
Brewing Company ("Pabst"). The consideration paid by the Company for the Pabst
Distribution Rights was One Million Six Hundred Thousand Dollars ($1,600,000),
payable Eight Hundred Thousand Dollars ($800,000) in cash and the balance by
delivery of a series of 120 promissory notes, each in the amount of Ten Thousand
Dollars ($10,000) (collectively, the "Consolidated Notes"). The Consolidated
Notes bear interest at 9% per annum, which interest was included in the monthly
$10,000 payments.

         On April 30, 1999 Miller Brewing Company acquired certain brands of
alcoholic beverage from the Pabst Brewing Company resulting in a new
distribution agreement for certain brands held by Capital Beverage. The brands
of Olde English and Hamm's are the two brands which Capital Beverage now
contracts to purchase from the Miller Brewing Company on an exclusive basis.

                                        3

<PAGE>

         On December 31, 2001 Capital sold its Miller products at the request of
the Miller Brewing Company in compliance with their national consolidation plan.
Phoenix Beverage paid Capital Beverage Two Million Six Hundred Fifty Thousand
Dollars $2,650,000 for that acquisition.

         On July 18, 1998 and July 30, 1998 Capital Beverage signed two
distributor agreements with Pittsburgh Brewing Company ("Pittsburgh") to
distribute on an exclusive basis in the entire state of New York, the following
brands:

             Brigade, Brigade Light, Brigade Ice, Brigade N/A, Prime Time Lager,
             Prime Time Malt Liquor, Iron City, Iron City Light, Light Twist
             Acapulco Lime, Iron City Twist, Rio Cherry, Old German, Augustiner,
             Evil Eye Ale, Evil Eye Black Jack, Evil Eye Amber Lager, Evil Eye
             Honey Brown

On June 29, 2001, pursuant to the Purchase Agreement, the Company purchased all
of the assets of Prospect's business which related to Prospect's business of
distributing beverages, including among other things, beer distribution rights,
properties, rights, leases, interests, goods and customer lists of Prospect. The
purchase price of the assets consisted of the assumption by the Company of
certain liabilities of Prospect and the issuance of an aggregate of five hundred
thousand (500,000) shares of the common stock of the Company to the shareholders
of Prospect. Inclusive with the acquisition came the following national brands:
Colt 45, Old Milwaukee, Schaefer, Schlitz, Champale, Schmidts, Stroh, Piels,
McSorleys and also an extensive list of various imports.

         Recent Developments

         As of September 15, 2005, the Company, entered into an Asset Purchase
Agreement (the "Asset Purchase Agreement") with Oak Beverages, Inc., a New York
corporation ("Oak"), pursuant to which the Company agreed to sell, and Oak
agreed to purchase (the "Asset Sale"), the Company's exclusive distribution
rights for the Pabst brands, Pittsburgh brands and Ballantine brands (the
"Assets"). The Asset Purchase Agreement contained customary representations and
warranties, conditions to closing (including shareholder and brewer approval and
the distribution by the Company of an Information Statement on Schedule 14C (the
"Information Statement") to its stockholders), and termination and
indemnification provisions.

         Immediately following the execution of the Agreement, certain
stockholders (the "Approving Stockholders") of the Company holding an aggregate
of 1,900,000 shares of the Company's common stock, representing 50.1% of the
shares outstanding, signed a written consent of stockholders approving the Asset
Purchase Agreement and the exhibits and schedules thereto as well as the
transactions contemplated thereby. The Approving Stockholders were Carmine N.
Stella, the Company's President, Chief Executive Officer and Chairman of the
Board, Anthony Stella, the Company's then Vice President of Sales and Marketing
(and the brother of Carmine Stella), Michael Matrisciani, a director of the
Company, Daniel Matrisciani, the Company's then Vice President of Operations and
a director, Alex Matrisciani and Monty Matrisciani (each of whom are the
brothers of Michael and Daniel Matrisciani).

                                        4

<PAGE>

         The Company and Oak also entered into a Sub-Distribution Agreement
dated as of September 15, 2005 (the "Sub-Distribution Agreement"), pursuant to
which Oak became a Company sub-distributor of certain Pabst beers and malt
beverages (the "Products"). The Sub-Distribution Agreement became effective when
the Company filed an Information Statement on Schedule 14C with the Securities
and Exchange Commission. Under the terms of the Sub-Distribution Agreement, Oak
had the right to distribute the Products to customers located in Brooklyn,
Queens, Staten Island, Manhattan and the Bronx (the "Territory"), and in
exchange for such rights, Oak was required to pay Pabst directly for its Product
purchases and, during the first 45 days following the effective date of the
Agreement (the "45-Day Period"), Oak was required to pay to Capital the
following amounts for Products received by Oak: (x) $.50 for each case of
Products and (y) $2.00 for each barrel of Products. The purchase price paid by
Oak to Capital in connection with the closing of the transactions contemplated
by the Asset Purchase Agreement was reduced by an amount equal to the sum of:
(i) $.25 for each case of Products purchased by Oak and sold by Oak to customers
in the Territory, plus (ii) $.50 for each case of Products purchased by Oak but
not sold to such customers, plus (iii) $1.00 for each barrel of Products
purchased by Oak and sold by Oak to customers in the Territory, plus (iv) $2.00
for each barrel of Products purchased by Oak but not sold to such customers, all
determined during the 45-Day Period.

         Prior to the closing of the transaction, the Asset Purchase Agreement
and sale of Assets to Oak were approved unanimously by the Company's Board of
Directors and the terms of the transaction were submitted for stockholder
approval. As permitted by Delaware law and the Company's Certificate of
Incorporation, the Company received a written consent from the majority
Approving Stockholders of the Company approving the Asset Purchase Agreement and
the related Asset Sale. An Information Statement was furnished for the purposes
of informing stockholders, in the manner required under the Securities Exchange
Act of 1934, as amended, of the Asset Sale before it was consummated.

         As of December 16, 2005, the Company closed the sale of the Assets to
Oak, pursuant to the terms and conditions of the Asset Purchase Agreement. The
purchase price paid by Oak for the Assets was Nine Million Three Hundred
Thousand Dollars ($9,300,000.00), of which One Million Five Hundred Thousand
Dollars ($1,500,000.00), was deposited with an escrow agent, pursuant to the
terms of an escrow agreement, for at least 18 months for post closing
indemnification claims which may be asserted by Oak (the "Escrow"). A
substantial amount of the proceeds from the transaction were used by the Company
to repay outstanding indebtedness and for working capital purposes.

         As of April 11, 2006, approximately Seven Hundred Eight Thousand Sixty
Dollars ($708,060) has been released from Escrow and has been used to pay
outstanding liabilities of the Company.

                                        5

<PAGE>

         Strategy

         The Company will continue to use the proceeds from the sale of the
Assets for working capital purposes, including the payment of indebtedness,
trade payables and other outstanding obligations. Following the full payment of
its creditors, the Company may elect to acquire another entity, issue
dividend(s) to its stockholders or invest the net proceeds in the discretion of
the Board of Directors and management of the Company. Management currently
anticipates that additional transactions may take the form of a dissolution of
the corporation, the liquidation of its remaining assets, and the ultimate
distribution to stockholders of any assets remaining after satisfaction of our
liabilities, including personnel termination and related costs, sale transaction
expenses and final liquidation costs. In event of such dissolution, the residual
proceeds of the sale of the Assets would become part of a pool of assets
governed by the plan of dissolution. Alternatively, management may elect to
invest the net proceeds from the sale of the Assets in assets or operations
acquired by the Company. In such an event, no assets will be distributed to the
stockholders.

         Structure of the Company

         After application of the net proceeds in the manner contemplated, and
assuming ultimate release to us of the entire escrowed amount, and after
deduction of transaction costs in connection with the Asset Sale, the Company
will hold:

        o        equipment not part of the Asset Sale; and
        o        cash in the approximate range of $250,000 to $500,000.

         The Company does not have any ongoing operations subsequent to the
Asset Sale, except for the collection of accounts receivable and the payment of
its liabilities. As of the date hereof, the Company, as defined in Rule 12b-2
under the Exchange Act, is a "shell company," defined as a company with no or
nominal assets (other than cash) and no or nominal operations.

         We will continue to incur claims, liabilities and expenses, which will
reduce the realizable value of our remaining assets and the amount potentially
available for distribution to stockholders. Claims, liabilities and expenses
from operations (such as salaries, directors' and officers' insurance, payroll
and taxes, legal, accounting and consulting fees and miscellaneous office
expenses) will continue to be incurred subsequent to the Asset Sale. These
expenses will have to be satisfied from our remaining assets and, therefore,
will reduce the net realizable value of those assets.

         The Company intends to comply with the periodic reporting requirements
of the Exchange Act for so long as we are subject to those requirements. We have
an obligation to continue to comply with the applicable reporting requirements
of the Securities Exchange Act of 1934, as amended, even though compliance with
such reporting requirements is economically burdensome

                                        6

<PAGE>

Employees

         As of December 2, 2005, all employees were terminated, except for
Carmine Stella who will continue to serve as the Company's Chief Executive
Officer.

Risk Factors

         In addition to other information in this Annual Report on Form 10-K,
the following important factors should be carefully considered in evaluating the
Company and its business because such factors currently have a significant
impact on the Company's business, prospects, financial condition and results of
operations.

Risks related to our business

Our Business Is Difficult To Evaluate Because We Have No Ongoing Operations and
Minimal Assets. As the Company currently has no ongoing operations and only
minimal assets, there is a risk that we will be unable to continue as a going
concern and consummate a business combination. We have no significant assets or
financial resources. We will, in all likelihood, sustain operating expenses
without corresponding revenues, at least until the consummation of a business
combination. This may result in our incurring a net operating loss that will
increase continuously until we can consummate a business combination with a
profitable business opportunity. We cannot assure you that we can identify a
suitable business opportunity and consummate a business combination.

We Will Continue To Incur Claims, Liabilities And Expenses. We will continue to
incur claims, liabilities and expenses, which will reduce the realizable value
of our remaining assets and the amount potentially available for distribution to
stockholders. Claims, liabilities and expenses from operations (such as
salaries, directors' and officers' insurance, payroll and taxes, legal,
accounting and consulting fees and miscellaneous office expenses) will continue
to be incurred. These expenses will have to be satisfied from our remaining
assets and, therefore, will reduce the net realizable value of those assets.

Our Business Will Have No Revenues Unless And Until We Merge With Or Acquire An
Operating Business. As of the date hereof, the Company, as defined in Rule 12b-2
under the Exchange Act, is a "shell company," defined as a company with no or
nominal assets (other than cash) and no or nominal operations. We currently have
no revenues from operations. We may not realize any revenues unless and until we
successfully merge with or acquire an operating business.

Future Success Is Highly Dependent On The Ability Of Management To Locate And
Attract A Suitable Acquisition. The nature of our operations is highly
speculative and there is a consequent risk of loss of your investment. The
success of our plan of operation will depend to a great extent on the
operations, financial condition and management of the identified business
opportunity. While management intends to seek business combination(s) with
entities having established operating histories, we cannot assure you that we
will be successful in locating candidates meeting that criterion. In the event
we complete a business combination, the success of our operations may be
dependent upon management of the successor firm or venture partner firm, and
numerous other factors beyond our control.

                                        7

<PAGE>

The Company Has No Existing Agreement For A Business Combination Or Other
Transaction. We have no arrangement, agreement or understanding with respect to
engaging in a merger or joint venture with, or acquisition of, a private or
public entity. No assurances can be given that we will successfully identify and
evaluate suitable business opportunities or that we will conclude a business
combination. We cannot guarantee we will be able to negotiate a business
combination on favorable terms.

We Cannot Guarantee That The Final Distributions To the Company Will Be Made
From Escrow. On the closing date of the Asset Sale, the Company, Oak and Dealy
and Silberstein LLP, as escrow agent, entered into an Escrow Agreement, pursuant
to which at the closing, Oak deposited $1.5 million of the purchase price in an
escrow account with the escrow agent (the "Escrow"). This amount is being held
to satisfy potential purchase price adjustments and any claims for
indemnification that Oak may have for breaches of the Company's representations,
warranties, covenants or other obligations in the Asset Purchase Agreement. Upon
each of the 6 month, 12 month and 18 month anniversaries of the closing date,
one third of this amount (less any outstanding claims for indemnification) shall
be delivered by the escrow agent to Capital. The final distribution of these
funds shall be delivered by the escrow agent to Capital upon the later of the 18
month anniversary of the closing date, or the date upon which all pending claims
are resolved. We cannot guarantee that the final distributions to Capital from
the escrow agent will be made. As of April 11, 2006, approximately Seven Hundred
Eight Thousand Sixty Dollars ($708,060) have been released from Escrow and have
been used to pay outstanding liabilities of the Company.

Our Financial Statements Include A Going Concern Opinion From Our Independent
Auditors. The Company received a going concern opinion on its financial
statements for fiscal 2005. Our auditors have stated that due to our lack of
profitability and our negative working capital, there is "substantial doubt"
about our ability to continue as a going concern. The going concern opinion from
our auditors may limit our ability to access certain types of financing, or may
prevent us from obtaining financing on acceptable terms.

Loss Of Key Personnel Could Adversely Affect Our Business. Our future success
depends to a significant degree on the skills, experience and efforts of Carmine
Stella, our President and Chief Executive Officer. The loss of the services of
Mr. Stella could have a material adverse effect on our business, results of
operations and financial condition.

                                        8

<PAGE>

We May Not Be Able To Comply In A Timely Manner With All Of The Recently Enacted
Or Proposed Corporate Governance Provisions. Beginning with the enactment of the
Sarbanes-Oxley Act of 2002 in July 2002, a significant number of new corporate
governance requirements have been adopted or proposed. We believe that we
currently comply with all of the requirements that have become effective thus
far, and with many of the requirements that will become effective in the future.
Although we currently expect to comply with all current and future requirements,
we may not be successful in complying with these requirements at all times in
the future. In addition, certain of these requirements will require us to make
changes to our corporate governance practices. For example, one recent Nasdaq
rule approved by the Commission requires that a majority of our Board of
Directors be composed of independent directors by our 2005 Annual Meeting of
Stockholders. Currently, two (2) of the members of our Board of Directors are
considered to be independent. We may not be able to attract a sufficient number
of directors in the future to satisfy this requirement. Additionally, the
Commission recently passed a final rule that requires companies to disclose
whether a member of their Audit Committee satisfies certain criteria as a
"financial expert." We currently do not have an Audit Committee member that
satisfies this requirement and, we may not be able to satisfy this, or other,
corporate governance requirements at all times in the future, and our failure to
do so could cause the Commission or Nasdaq to take disciplinary actions against
us, including an action to delist our stock from the OTC Bulletin Board or any
other exchange or electronic trading system where our shares of common stock
trade.

Risks Related To Our Common Stock

Disappointing Quarterly Revenue Or Operating Results Could Cause The Price Of
Our Common Stock To Fall. Our quarterly revenue and operating results are
difficult to predict and may fluctuate significantly from quarter to quarter. If
our quarterly revenue or operating results fall below the expectations of
investors or securities analysts, the price of our Common Stock could fall
substantially.

Our Common Stock Is Particularly Subject To Volatility Because Of The Industry
That We Are In. The stock market in general has recently experienced extreme
price and volume fluctuations. In addition, the market prices of securities of
network marketing companies, have been extremely volatile, and have experienced
fluctuations that have often been unrelated or disproportionate to the operating
performance of such companies. These broad market fluctuations could adversely
affect the market price of our Common Stock.

Future Sales By Existing Security Holders Could Depress The Market Price Of Our
Common Stock. If our existing stockholders sell a large number of shares of our
Common Stock, the market price of the Common Stock could decline significantly.
Further, even the perception in the public market that our existing stockholders
might sell shares of Common Stock could depress the market price of the Common
Stock.

There Are Risks Associated With Our Stock Trading On The NASD OTC Bulletin Board
Rather Than A National Exchange. There are significant consequences associated
with our stock trading on the NASD OTC Bulletin Board rather than a national
exchange. The effects of not being able to list our securities on a national
exchange include:

- Limited release of the market prices of our securities;
- Limited news coverage of us;
- Limited interest by investors in our securities;
- Volatility of our stock price due to low trading volume;
- Increased difficulty in selling our securities in certain states due to "blue
  sky" restrictions; and
-  Limited ability to issue additional securities or to secure additional
   financing.

                                        9

<PAGE>

There is No Assurance That An Active Public Trading Market Will Develop. There
has been an extremely limited public trading market for the Company's Common
Stock. There can be no assurances that a public trading market for the Common
Stock will develop or that a public trading market, if developed, will be
sustained. If for any reason a public trading market does not develop,
purchasers of the shares of Common Stock may have difficulty in selling their
securities should they desire to do so.

"Penny Stock" Regulations May Impose Certain Restrictions On The Marketability
of Our Securities. The Securities and Exchange Commission (the "Commission") has
adopted regulations which generally define "penny stock" to be any equity
security that has a market price (as defined) less than $5.00 per share, subject
to certain exceptions. Our Common Stock is presently subject to these
regulations which impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally those with assets in excess of
$1,000,000 or annual income exceeding $200,000, or $300,000 together with their
spouse). For transactions covered by these rules, the broker-dealer must make a
special suitability determination for the purchase of such securities and have
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a "penny stock", unless
exempt, the rules require the delivery, prior to the transaction, of a risk
disclosure document mandated by the Commission relating to the "penny stock"
market. The broker-dealer must also disclose the commission payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the "penny stock" held in the account and information on the
limited market in "penny stocks". Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell our securities and may negatively
affect the ability of purchasers of our shares of Common Stock to sell such
securities.

ITEM 2.  PROPERTIES.

         Currently, the Company neither rents nor owns any properties.

ITEM 3.  LEGAL PROCEEDINGS.

On or about February 28, 2005, the Company was named as a defendant in an action
which commenced in the United States District Court for the Central  District of
California,  captioned,  Red Bull GmbH v. Vancol Industries,  Inc., et al., Case
No. LA  CV03-6731  DDP.  This  matter has been  settled  and the action has been
discontinued.  The  settlement  in this case did not entail  the  payment of any
monies by Capital to the plaintiffs.

                                       10

<PAGE>

         On or about October 24, 2005 Amelia Wallen, a former employee of the
Company filed a verified complaint with the New York City Commission on Human
Rights ("NYCCHR"), captioned, Amelia Wallen v. F.V. Distribution Co., LLC, Monty
Matrisciani, Tom Marigliano, Capital Beverage Corporation, Diversified
Distributors Network. The complaint alleges that the Company terminated Ms.
Wallen's employment and misrepresented the status of the Company based upon Ms.
Wallen's age, national origin and race. Although the Company has been named as a
respondent in this case, the Company believes that there is no basis for Ms.
Wallen's allegations. This matter is currently pending before the NYCCHR.


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

            Under Delaware law and our Certificate of Incorporation, the
affirmative vote of a majority of the votes entitled to be cast by holders of
all shares of the Company's common stock, par value $.001 per share ("Common
Stock"), outstanding as of the close of business on September 15, 2005, was
required to approve the Asset Purchase Agreement and sale of the Assets. Under
our Certificate of Incorporation, each share of Common Stock is entitled to one
vote per share. As of September 15, 2005, there were outstanding 3,792,045
shares of Common Stock, representing a total of 3,792,045 votes. As permitted by
the Delaware General Corporation Law, on September 15, 2005, the Company
received a written consent in lieu of a meeting of stockholders from holders of
1,900,000 shares of Common Stock representing 50.1% of the total issued and
outstanding shares of voting stock of the Company approving the Asset Purchase
Agreement and the Asset Sale.

         On November 10, 2005, an Information Statement was furnished to the
stockholders of the Company, in connection with the prior approval by our Board
of Directors of, and receipt of approval by written consent of the majority
Approving Stockholders of the Company for, the sale of our Assets to Oak. See
"Item 1.
Business--Recent Developments."

                                     PART II

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

         The Company's Common Stock commenced trading on The Nasdaq SmallCap
Market on the effectiveness of the Company's Initial Public Offering on July 17,
1997 under the symbol "CBEV". The Common Stock is regularly quoted and traded on
the OTC Bulletin Board. The Company's securities were delisted by The NASDAQ
Stock Market on June 19, 2001.

         The following table indicates the high and low closing prices for the
Company's, Common Stock for the period from January 1, 2003 to December 31, 2005
based upon information supplied by the OTC Bulletin Board. Prices represent
quotations between dealers without adjustments for retail markups, markdowns or
commissions, and may not represent actual transactions.

                                       11

<PAGE>

2003 Fiscal Year                          Quoted Price  ($)
----------------                          -----------------
                                           High        Low
                                           ----        ---
First Quarter                              .21         .08
Second Quarter                             .43         .25
Third Quarter                              .40         .23
Fourth Quarter                             .51         .19

2004 Fiscal Year                          Quoted Price  ($)
----------------                          -----------------
                                           High        Low
                                           ----        ---
First Quarter                              .41         .25
Second Quarter                             .35         .28
Third Quarter                              .30         .16
Fourth Quarter                             .25         .17

2005 Fiscal Year                          Quoted Price  ($)
----------------                          -----------------
                                           High        Low
                                           ----        ---
First Quarter                              .35         .15
Second Quarter                             .34         .17
Third Quarter                              .25         .13
Fourth Quarter                             .17         .09


         On April 11, 2006 the closing price of the Common Stock as reported on
The OTC Bulletin Board was $.15. On April 11, 2006 there were 181 holders of
record of Common Stock.

Recent Sales of Unregistered Securities

         We did not sell any unregistered securities during the fourth quarter
of the fiscal year covered in this report.

Dividends

         We have not paid any cash dividends on our Common Stock to date and do
not anticipate declaring or paying any cash dividends in the foreseeable future.
In addition, future-financing arrangements, if any, may preclude or otherwise
restrict the payment of dividends.

Repurchases by the Company

         During the fourth quarter of 2005, we did not repurchase any shares of
our Common Stock on our behalf or for any affiliated purchase.

                                       12

<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA.

         The following table contains our selected consolidated financial data
and is qualified in its entirety by the more detailed consolidated financial
statements and notes thereto included elsewhere in this report. Historical
results are not necessarily indicative of future results.

<TABLE>
<CAPTION>

                                                                                   December 31,
                                                            2005         2004          2003         2002          2001
                                                            ----         ----          ----         ----          ----
Consolidated Statement of Operations Data:
<S>                                                     <C>            <C>            <C>           <C>          <C>
Revenues                                                $         -    $         -    $         -   $         -  $         -
                                                        ----------------------------------------------------------------------

General and administrative expenses                     $   817,248    $   387,306    $   437,872   $   485,625  $    510,050
Non-cash compensation                                   $         -    $    91,724    $    98,276   $         -  $          -
                                                        ----------------------------------------------------------------------
Loss from continuing operations                         $  (817,248)   $  (479,030)   $  (536,148)  $  (485,625) $   (510,050)
Discontinued operations:
Interest expense                                        $  (702,848)   $  (738,812)   $  (543,136)  $  (473,275) $   (341,985)
Gain on sale of distribution rights                     $ 8,235,907    $         -    $         -   $         -  $          -
Cumulative effect of change in accounting principle     $         -    $         -    $         -   $  (860,000) $          -
Income taxes                                            $   (85,000)   $         -    $         -   $         -  $          -
(Loss) gain from discontinued operations                $(2,781,110)   $(3,059,071)   $ 1,103,455   $    49,146  $  1,424,511
                                                        ----------------------------------------------------------------------
Income (loss)                                           $ 3,849,701    $(4,276,913)   $    24,171   $(1,769,754) $    572,476

Diluted income (loss) from continuing operations
per share:                                              $     (0.22)   $     (0.13)   $     (0.14)  $     (0.15) $      (0.19)
Diluted income (loss) from discontinued operations
per share:                                              $      1.23    $     (1.00)   $      0.15   $     (0.40) $       0.41
Diluted income (loss) per share:                        $      1.02    $     (1.13)   $      0.01   $     (0.55) $       0.22
Diluted weighted-average number of shares outstanding:    3,792,045      3,792,045      3,792,045     3,229,545     2,628,409

Consolidated Balance Sheet Data (at end of period):
Cash and cash equivalents                               $   131,738    $    96,220    $   189,276   $   120,242  $  2,272,786
Restricted cash                                         $ 2,513,600    $         -    $         -   $         -  $          -
Working capital                                         $  (225,549)   $(3,247,703)   $(4,028,322)  $(2,418,137) $ (1,037,327)
Total assets                                            $ 2,765,535    $ 4,521,860    $ 8,153,142   $ 7,697,358  $ 10,228,453
Total debt                                              $         -    $ 4,630,999    $ 4,601,761   $ 4,472,282  $  5,181,933
Total stockholders' equity (deficit)                    $   340,435    $(3,509,266)   $   675,923   $   553,476  $  2,274,140

</TABLE>


ITEM 7.  MANAGEMENT'S DISCUSSION
                  AND ANALYSIS OR PLAN OF OPERATION.

         The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial operations and financial
conditions. This discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere herein.

         As of December 16, 2005, the Company closed the sale of the Assets to
Oak, pursuant to the terms and conditions of the Asset Purchase Agreement. The
purchase price paid by Oak for the Assets was Nine Million Three Hundred
Thousand Dollars ($9,300,000.00), of which One Million Five Hundred Thousand
Dollars ($1,500,000.00), was deposited with an escrow agent, pursuant to the
terms of an escrow agreement, for at least 18 months for post closing
indemnification claims which may be asserted by Oak (the "Escrow"). A
substantial amount of the proceeds from the transaction were used by the Company
to repay outstanding indebtedness and for working capital purposes.

         The Company will continue to use the proceeds from the sale of the
Assets for working capital purposes, including the payment of indebtedness,
trade payables and other outstanding obligations. Following the full payment of
its creditors, the Company may elect to acquire another entity, issue
dividend(s) to its stockholders or invest the net proceeds in the discretion of
the Board of Directors and management of the Company. Management currently
anticipates that additional transactions may take the form of a dissolution of
the corporation, the liquidation of its remaining assets, and the ultimate
distribution to stockholders of any assets remaining after satisfaction of our
liabilities, including personnel termination and related costs, sale transaction
expenses and final liquidation costs.

         After application of the net proceeds in the manner contemplated, and
assuming ultimate release to us of the entire escrowed amount, and after
deduction of transaction costs in connection with the Asset Sale, the Company
will hold:

                  1. equipment not part of the Asset Sale; and
                  2. cash in the approximate range of $250,000 to $500,000.

                                       13

<PAGE>

         We will continue to incur claims, liabilities and expenses, which will
reduce the realizable value of our remaining assets and the amount potentially
available for distribution to stockholders. Claims, liabilities and expenses
from operations (such as salaries, directors' and officers' insurance, payroll
and taxes, legal, accounting and consulting fees and miscellaneous office
expenses) will continue to be incurred subsequent to the Asset Sale. These
expenses will have to be satisfied from our remaining assets and, therefore,
will reduce the net realizable value of those assets.

         The Company intends to comply with the periodic reporting requirements
of the Exchange Act for so long as we are subject to those requirements. We have
an obligation to continue to comply with the applicable reporting requirements
of the Securities Exchange Act of 1934, as amended, even though compliance with
such reporting requirements is economically burdensome.

         As of December 2, 2005, all employees were terminated, except for
Carmine Stella who will continue to serve as the Company's Chief Executive
Officer.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         All of the Company's indebtedness that would have posed an interest
rate risk have been paid in full. As a result, the Company no longer has an
interest rate risk.

ITEM 8.  FINANCIAL STATEMENTS.

         See financial statements following Item 15 of this Annual Report on
Form 10-K.

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

         There were no changes in or disagreements with our accountants on
accounting or financial disclosure during the period covered by this report.

ITEM 9A. CONTROLS AND PROCEDURES.

         We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Securities Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
Treasurer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, as ours are designed to do, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.

                                       14

<PAGE>

         As required by SEC Rule 13a-15(b), we carried out an evaluation as of
December 31, 2005, under the supervision and with the participation of our
management, including our Chief Executive Officer and Treasurer, of the
effectiveness of the design and operation of our disclosure controls and
procedures, as of the end of the quarter covered by this report. Based upon that
evaluation, our Chief Executive Officer and Treasurer concluded that our
disclosure controls and procedures were effective in enabling us to record,
process, summarize and report information required to be included in our
periodic SEC filings within the required time period.

         There have been no changes in our internal control over financial
reporting that occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Directors and Executive Officers

         The names and ages of the directors, executive officers and significant
employees, and promoters of the Company are set forth below.

      Name                Age         Position Held
---------------------    -----        ------------------------------------------

Carmine N. Stella         54           President, Chief Executive Officer,
                                       Chairman of the Board of Directors

Anthony Stella(1)         54           Vice President of Sales and Marketing

Carol Russell             50           Secretary, Treasurer and Director

Joseph M. Luzzi*          58           Director

Michael Matrsciani        50           Director

Daniel Matrisciani(3)     58           Director and Vice President of Operations

Vito Cardinale*           45           Director
--------------------------------------------------------------------------------
(1) Anthony Stella resigned in his capacity as Vice President of Marketing of
the Company as of December 2, 2005. (2) Daniel Matrisciani resigned in his
capacity as Vice President of Operations of the Company as of December 2, 2005.
* Member of the Compensation Committee and/or Audit Committee.

                                       15

<PAGE>

          Carmine N. Stella - Mr. Stella has served as President, Chief
     Executive Officer and Chairman of the Board of Directors of the Company
     since its inception in December 1995. From 1991 to the present, Mr. Stella
     has been the sole officer, director and shareholder of VSI, a wholesale and
     retail seller of alcoholic and nonalcoholic beverages with $12,000,000 of
     sales during fiscal 1994 and $7,000,000 of sales during fiscal 1995. From
     1986 to 1990, Mr. Stella served as President and a director of Gotham
     Wholesale Beer Distributors, a beer and non-alcoholic beverage wholesaler
     with annual sales in excess of $20,000,000. Mr. Stella served as a
     President and Director of the Empire State Beer Distributors Association
     from 1984 to 1988. Mr. Stella received a B.B.A. in Accounting from Bernard
     M. Baruch College, New York, New York in 1973.

          Anthony  Stella.  Mr.  Stella  served  as Vice  President  - Sales and
     Marketing  and an  employee of the Company  from  inception  to December 2,
     2005.  Mr.  Stella has acted as executive  sales  manager for Vito Santoro,
     Inc.,  Gotham Wholesale Beer, Inc.,  Miller Home Service,  Inc. and College
     Point  Beer  Distributors  over the past 15 years .  Anthony  Stella is the
     brother of Carmine Stella.

          Carol Russell - Mrs. Russell has served as Secretary,  Treasurer and a
     Director of the Company since February 1996.  From 1991,  Mrs.  Russell has
     also served as Controller  and  Operations  Manager of VSI from 1991 to the
     present.  Mrs. Russell graduated from Central Commercial High School in New
     York City in 1973.

          Joseph M. Luzzi - Mr.  Luzzi has been a Director of the Company  since
     October 29, 1997. Mr. Luzzi has also served as President,  Chief  Executive
     Officer and  Chairman of the Board of  Directors  of Boro  Recycling,  Inc.
     since its inception in December 1980.  From 1973 to 1980, Mr. Luzzi was the
     New York City sales manager for the Sunshine Biscuit Company,  a subsidiary
     of American Brands, Inc. Mr. Luzzi attended New York City Community College
     from 1967 to 1969.

          Michael  Matrisciani  - Mr.  Matriscinai  has been a  Director  of the
     Company  since  June  2001.  Mr.  Matrisciani  has  been  in the  beverages
     distribution his entire career.  He managed a group of beverage centers for
     years before entering into the wholesale business.  Mr. Matrisciani started
     with  Prospect  Beverages,  Inc. as a sales manager and went on to become a
     principal and CFO. He has  certificates in finance and real estate from NYU
     in NYC. He is also a Dale Carnegie  graduate.  Mr.  Matrisciani  is a board
     member of the New York State Beer Wholesalers  association and board member
     of SCI, an international conservation and humanitarian organization.

          Daniel  Matrisciani - Mr.  Matrisciani  has been a Director since June
     2001. Mr.  Matrisciani  was Vice President of Operations  from June 2001 to
     December 2, 2005.  Mr.  Matrisciani  has been involved in the beer business
     for  almost 40 years.  He has  successfully  owned and  operated,  with his
     partners a chain of Thrifty  Beverage  Centers in the NYC market place. Mr.
     Matrisciani  was a principal  and  director of  wholesaler  relations  with
     Prospect  Beverages,  Inc. a company he founded  with his partners in 1981.
     Mr.  Matrisciani  is a decorated  veteran of the Vietnam  conflict,  having
     served as a crew chief on a UH-1B helicopter gunship (huey).

                                       16

<PAGE>

          Vito  Cardinale  - Mr.  Cardinale  has been a Director  of the Company
     since June 2001. Mr. Cardinale has held various  positions as President and
     CEO of  Cardinale  Enterprises  Inc.,  a real estate  holding and  business
     venture  corporation.  With holdings in various  companies from 1981 to the
     present.  Mr. Cardinale is currently CEO of School Time Products,  Inc., an
     educational publisher and wholesaler distributor to the New York City Board
     of Education. He is also President,  and CEO, of Unlimited Office Products,
     Inc.,  an office  equipment  company,  PC and  technology  company  selling
     throughout the New York City metropolitan  area. Mr. Cardinale holds a B.S.
     degree in Industrial and Mechanical Engineering from the City University of
     N.Y. Mr.  Cardinale  has held  positions as President,  Vice  President and
     Board Member for various organizations,  such as Gateway Rotary, Chamber of
     Commerce,  YMCA and Make A Wish Foundation  (Rainbow's  Hope). He is also a
     life member of Safari Club International, North American Hunting Club, Buck
     Masters,  the Sheep  Foundation,  Bass Masters and other  various  sporting
     organizations throughout the world.

         The Company has established a compensation committee and an audit
committee. The compensation committee reviews executive salaries, administers
any bonus, incentive compensation and stock option plans of the Company,
including the Company's 1996 Incentive Stock Option Plan, and approves the
salaries and other benefits of the executive officers of the Company. In
addition, the compensation committee consults with the Company's management
regarding pension and other benefit plans, and compensation policies and
practices of the Company. The compensation committee consists of Vito Cardinale
and Joseph Luzzi.

         The audit committee reviews, among other matters, the professional
services provided by the Company's independent auditors, the independence of
such auditors from management of the Company, the annual financial statements of
the Company and the Company's system of internal accounting controls. The audit
committee also reviews such other matters with respect to the accounting,
auditing and financial reporting practices and procedures of the Company as it
may find appropriate or as may be brought to its attention.

         The audit committee has reviewed and discussed the audited financial
statements included in the Company's Form 10-K for the fiscal year ended
December 31, 2005 with management. The audit committee has received the written
disclosures and the letter from the independent accountants reviewed by
Independence Standards Board Standard No. 1, as may be modified or supplemented,
and discussed with the auditors the auditors' independence.

         Based on the review and discussions noted above, the audit committee
recommended to the Board of Directors that the audited financial statements be
included in the Company 2005 Form 10-K.

                                       17

<PAGE>

         The audit committee consists of two members Vito Cardinale and Joseph
Luzzi, both of whom are "independent" for purposes of stock exchange listing
standards. The audit committee does not currently have an individual who
qualifies as an "audit committee financial expert" as defined by the rules of
the Securities and Exchange Commission.

Code of Ethics

         We have adopted a Code of Business Conduct and Ethics that applies to
our employees, officers (including our principal executive officer, principal
financial officer and controller) and directors. The Code of Business Conduct
and Ethics is not currently posted on our website but can be obtained free of
charge by sending a request to our Corporate Secretary at our address. Any
changes to or waivers under the Code of Business Conduct and Ethics as it
relates to our principal executive officer, principal financial officer,
controller or persons performing similar functions will be disclosed on our
website.

Compliance with Section 16(a) of The Securities Exchange Act of 1934

         Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent (10%) of a registered class of the Company's equity securities, to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.

         To the Company's knowledge, based solely on its review of the copies of
such reports furnished to the Company during the year ended December 31, 2005,
all Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were satisfied, except as provided
below:

         None

                                       18

<PAGE>

ITEM 11. EXECUTIVE COMPENSATION.

         The following table sets forth the compensation paid to the Named
Executive Officers for the fiscal years ending December 31, 2003, 2004 and 2005.

                                                     Summary Compensation Table
<TABLE>
<CAPTION>


                                Annual Compensation Awards                   Long-Term Compensation
---------------------------------------------------------------------------  ---------------------------------
   (a)                               (b)       (c)             (d)                (e)        (f)
Name and Principal Position          Year      Salary          Other Annual       Restricted  Stock Option
                                                               Compensation       Award       Grants
<S>                                  <C>     <C>                    <C>            <C>          <C>
Carmine N. Stella                    2005    $ 71,247.96            -0-            -0-          -0-
President, Chief Executive Officer,  2004    $208,796.88            -0-            -0-          -0-
Chairman of the Board                2003    $205,019.64            -0-            -0-          -0-

Anthony Stella                       2005    $ 44,662.68            -0-            -0-          -0-
Vice President of Sales              2004    $133,272.52            -0-            -0-          -0-
and Managing Director                2003    $128,258.12            -0-            -0-          -0-

Carol Russell                        2005    $ 64,192.37            -0-            -0-          -0-
Secretary Treasurer                  2004    $ 64,670.38            -0-            -0-          -0-
and Director                         2003    $ 65,784.96            -0-            -0-          -0-

Daniel Matrisciani                   2005    $ 44,668.80            -0-            -0-          -0-
Vice President of                    2004    $131,797.02            -0-            -0-          -0-
Operations and Director              2003    $133,075.80            -0-            -0-          -0-
</TABLE>


         There were no options granted or exercised during the last fiscal year
to the Company's Chief Executive Officer and the other executive officers named
in the above Summary Compensation Table.

         Each director of the Company is entitled to receive reasonable
out-of-pocket expenses incurred in attending meetings of the Board of Directors
of the Company. The members of the Board of Directors meet at least quarterly
during the Company's fiscal year, and at such other times duly called.

Employment Agreements

         The Company entered into an employment agreement with Mr. Stella on
October 1, 1996 which provides for a three-year term and includes annual
compensation of $300,000, plus certain fringe benefits including health and life
insurance. The contract was renewed for another three years and expired in
October, 2003. In June 2004, Mr. Stella's employment agreement was extended for
an additional two years in accordance with the terms of his expired contract.

         As of June 2001, the Company entered into an employment agreement with
Alex Matrisciani pursuant to which Mr. Matrisciani agreed to serve as the
Company's director of supplier relationships. The term of Mr. Matrisciani's
employment under the agreement is three years with options in favor of Mr.
Matrisciani to extend the term for an additional two years. In June 2004, Mr.
Matrisciani's employment agreement was extended for an additional two years. The
Company agreed to pay Mr. Matrisciani an annual base salary of $172,000. Mr.
Matrisciani's employment agreement contains other customary provisions including
provisions regarding confidentiality and solicitation.

         As of June 2001, the Company entered into an employment agreement with
Daniel Martisciani pursuant to which Mr. Matrisciani agreed to serve as the
Company's vice president of operations. The term of Mr. Matrisciani's employment
under the agreement is three years with options in favor of Mr. Matrisciani to
extend the terms of an additional two years. In June 2004, Mr. Matrisciani's
employment agreement was extended for an additional two years. The Company
agreed to pay Mr. Matrisciani an annual base salary of $192,000. In addition to
the base salary, Mr. Matrisciani is entitled to receive bonuses based upon the
Company's performance. Mr. Matrisciani's employment agreement contains other
customary provisions including provisions regarding confidentiality and
solicitation.

                                       19

<PAGE>

         As of June 2001, the Company entered into an employment agreement with
Michael Matrisciani pursuant to which Mr. Matrisciani agreed to serve as the
Company's director of administration. The term of Mr. Matrisciani's employment
under the agreement is three years in favor of Mr. Matrisciani to extend the
term for an additional two years. In June 2004, Mr. Matrisciani's employment
agreement was extended for an additional two years. The Company agreed to pay
Mr. Matrisciani an annual base salary of $192,000. In addition to the base
salary, Mr. Matrisciani is entitled to receive bonuses based upon the Company's
performance. Mr. Matrisciani's employment agreement contains other customary
provisions including provisions regarding confidentiality and solicitation.

         As of June 2001, the Company entered into an employment agreement with
Monty Martisciani pursuant to which Mr. Matrisciani agreed to serve as the
Company's director of sales and marketing. The term of Mr. Matrisciani's
employment under the agreement is three years with options in favor of Mr.
Matrisciani to extend the terms of an additional two years. In June 2004, Mr.
Matrisciani's employment agreement was extended for an additional two years. The
Company agreed to pay Mr. Matrisciani an annual base salary of $192,000. In
addition to the base salary, Mr. Matrisciani is entitled to receive bonuses
based upon the Company's performance. Mr. Matrisciani's employment agreement
contains other customary provisions including provisions regarding
confidentiality and solicitation.

         As of June 2001, the Company entered into an employment agreement with
Anthony Stella pursuant to which Mr. Stella agreed to serve as the Company's
vice president of sales and marketing. The term of Mr. Stella's employment under
the agreement is three years with options in favor of Mr. Stella to extend the
terms of an additional two years. In June 2004, Mr. Stella's employment
agreement was extended for an additional two years. The Company agreed to pay
Mr. Stella an annual base salary of $190,000. In addition to the base salary,
Mr. Stella is entitled to receive bonuses based upon the Company's performance.
Mr. Stella's employment agreement contains other customary provisions including
provisions regarding confidentiality and solicitation.

         All financial consideration in each of the aforementioned employment
agreements were reduced by thirty percent (30%) for an undetermined period of
time.

Payment of Accrued Unpaid Salaries and Severance

         Certain members of management have not received their salaries and
expenses since May 1, 2005. Accordingly, the following individuals are entitled
to be paid accrued and unpaid salaries from the proceeds from the Asset Sale
received by the Company in the amounts set forth adjacent to their names (such
amounts calculated as of December 31, 2005): Carmine Stella ($158,431.03);
Anthony Stella ($92,210.12); Michael Mastrisciani ($96,360.88); Daniel
Mastrisciani ($92,626.09); Monty Mastrisciani ($93,189.10); and Alex
Mastrisciani ($88,843.83). The Company has reimbursed such employees for
out-of-pocket expenses incurred by them in connection with the performance of
their duties which, as of December 31, 2005, of a total of approximately
$60,000.

                                       20

<PAGE>

         In addition, under the terms of employment agreements between the
Company and such members of management, such employees are, upon the termination
of their employment with the Company, entitled to severance payments equal to
four (4) weeks of a base salary for each year of service provided to the
Company. The proceeds from the Asset Sale were used to pay severance to
following employees each of whom were terminated as of the closing date of the
Asset Sale in the amounts set forth adjacent to their names: Anthony Stella
($102,000); Michael Mastrisciani ($47,000); Daniel Mastrisciani ($47,000); Monty
Mastrisciani ($47,000); and Alex Mastrisciani ($41,000). Carmine Stella was not
terminated as of the closing date, and therefore, he is not be entitled to any
severance payment. He will, however, continue to serve as the Company's Chief
Executive Officer, and will be paid $210,000 per annum.

Stock Option Plans and Agreements

         The Company's 1996 Incentive Stock Option Plan was approved by the
Board of Directors and holders of Common Stock of the Company on June 19, 1996
to provide for the grant of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986 to officers and employees of
the Company. A total of 350,000 shares of Common Stock has been authorized and
reserved for issuance under the 1996 Incentive Stock Option Plan, subject to
adjustment to reflect changes in the Company's capitalization in the case of a
stock split, stock dividend or similar event. 175,000 options have been granted
under the Company's 1996 Incentive Stock Option Plan. The 1996 Incentive Stock
Option Plan will be administered by the Compensation Committee, which has the
sole authority to interpret the 1996 Incentive Stock Option Plan, to determine
the persons to whom options will be granted, to determine the basis upon which
the options will be granted, and to determine the exercise price, duration and
other terms of options to be granted under the 1996 Incentive Stock Option Plan;
provided that, (i) the exercise price of each option granted under the 1996
Incentive Stock Option Plan may not be less than the fair market value of the
Common Stock on the day of the grant of the option, (ii) the exercise price must
be paid in cash and or stock upon exercise of the option, (iii) no option may be
exercisable for more than 10 years after the date of grant, and (iv) no option
is transferable other than by will or the laws of descent and distribution. No
option is exercisable after an optionee ceases to be employed by the Company or
a subsidiary of the Company, subject to the right of the Compensation Committee
to extend the exercise period for not more than 90 days following the date of
termination of an optionee's employment. If an optionee's employment is
terminated by reason of disability, the Compensation Committee has the authority
to extend the exercise period for not more than one year following the date of
termination of the optionee's employment. If an optionee dies holding options
that were not fully exercised, such options may be exercised in whole or in part
within one year of the optionee's death by the executors or administrators of
the optionee's estate or by the optionee's heirs. The vesting period, if any,
specified for each option will be accelerated upon the occurrence of a change of
control or threatened change of control of the Company.

                                       21

<PAGE>

         The Company's 2003 Stock Option Plan, which was subject to shareholder
approval, was approved by the Compensation Committee and ratified by the Board
of Directors on December 30, 2003 and February 20, 2004, respectively. A total
of 1,500,000 shares of Common Stock were authorized and reserved for issuance
under the 2003 Stock Option Plan, subject to adjustment to reflect changes in
the Company's capitalization in the case of a stock split, stock dividend or
similar event. In December 2003, the Company granted 1,500,000 non-qualified
options to employees and officers of the Company pursuant to the 2003 Stock
Option Plan exercisable for 10 years at $.23 per share. Subsequently, the
Compensation Committee and Board of Directors elected not to submit the 2003
Stock Option Plan to the shareholders for approval in order to avoid the expense
of seeking shareholder approval. Since the 2003 Stock Option Plan was not
approved by the shareholders of the Company within twelve months and in
accordance with the terms of the plan, it automatically terminated. In
accordance with the terms of the plan, any options issued and outstanding prior
to termination, remain outstanding and continue to have full force and effect.

ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

         The following table sets forth as of April 11, 2006, certain
information with respect to the beneficial ownership of Common Stock by each
person or entity known by the Company to be the beneficial owner of 5% or more
of such shares, each officer and director of the Company, and all officers and
directors of the Company as a group:

Name and Address of              Shares of Common          Percentage (%) of
Beneficial Owner(1)              Stock Owed(3)             Common Stock (3)
-------------------------        ------------------        --------------------

Carmine Stella                     712,500                     18.8%

Anthony Stella                     237,500                      6.3%

Carol Russell                            0                        0%

Joseph Luzzi                             0                        0%

Alex Matrisciani(2)                237,500                      6.3%

Michael Matrisciani(2)             237,500                      6.3%

Daniel Matrisiciani(2)             237,500                      6.3%

Vito Cardinale                           0                        0%

Monty Matrisciani(2)               237,500                      6.3%

Casimir Capital L.P
100 Broadway, 11th Floor
New York, NY 10005               1,000,000(4)                  20.9%

All officers and  directors
as a group (nine (9) persons)    1,900,000                       50%

                                       22

<PAGE>

(1)      The address of each Stockholder shown above except as otherwise
         indicated is c/o Capital Beverage Corporation, 700 Columbia Street,
         Erie Basin, Building # 302, Brooklyn, New York 11231.
(2)      Alex Matrisciani, Michael Matrisciani, Daniel Matrisciani and Monty
         Matrisciani are brothers. Daniel Matrisciani and Michael Mastrisciani
         are each a director of the Company.
(3)      Beneficial ownership as reported in the table above has been determined
         in accordance with Item 403 of Regulation S-K of the Securities Act of
         1933 and Rule 13(d)-3 of the Securities Exchange Act, and based upon
         3,792,045 shares of Common Stock outstanding.
(4)      Includes warrants to purchase an aggregate of 1,000,000 shares of
         Common Stock, exercisable at $1.00 per share.

         The following table presents information as of April 11, 2006 with
respect to compensation plans under which equity securities were authorized for
issuance by the Company.
<TABLE>
<CAPTION>

                                                 Equity Compensation Plan Information

                                                                                        Number of securities
                                                                                        remaining available for
                              Number of Securities to be   Weighted-average exercise    future issuance under
                              issued upon exercise of      price of outstanding         equity compensation plans
                              outstanding options,         options, warrants and        (excluding securities
 Plan Category                warrants and rights          rights                       reflected in column (a)
----------------------------- ---------------------------  --------------------------   -------------------------
<S>                              <C>                           <C>                             <C>
                                     (a)                         (b)                            (c)
Equity compensation plans
approved by security holders          0                           --                             --

Equity compensation plans not
approved by security holders      1,850,000                      $.62                             0

Total                             1,850,000                      $.62                             0

</TABLE>

                                       23

<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         On December 11, 2003, the Park Slope Group, LLC ("LLC"), a single
member limited liability company whose sole member is Addie Realty Properties,
Inc. ("Addie"), which in turn is wholly owned by certain officers of the Company
loaned the Company $2,500,000 maturing on December 11, 2005 and accruing
interest at 12% per annum.

         Addie and the officers of the Company entered into this transaction in
order to permit the Company to pay off its term loan with EGC, to pay down a
portion of its revolving credit promissory note and agreement with ECG, and to
restructure and amend its revolving credit agreement with EGC upon terms more
favorable than those presently existing and available to the Company from EGC.
Addie had transferred certain real property to the LLC. The LLC agreed to borrow
$2,500,000, secured by a mortgage to Seaway Capital Corp. ("Seaway") under
credit terms more favorable than those which could presently be obtained by
Capital. The LLC had lended the net proceeds of its loan from Seaway to Capital.
Addie and the officers also entered into an agreement with EGC to pay the net
proceeds of the Seaway loan to EGC for the benefit of Capital to pay off its
term loan with EGC, to pay down a portion of Capital's revolving credit
promissory note and agreement with EGC, and to restructure and amend Capital's
revolving credit agreement with EGC upon terms more favorable than those
presently existing and available to Capital from EGC.

         As of December 16, 2005, the closing date of the Asset Sale, the
above-referenced loans were paid in full.

Termination of Personal Guaranties and Release of Pledged Collateral

         In connection with a loan in the aggregate principal amount of $2.5
million provided to the Company by Seaway, each of Alex Mastrisciani, Daniel
Mastrisciani, Michael Mastrisciani and Monty Mastrisciani pledged real property
owned by them located in Brooklyn, New York as collateral for such loan. The
security interest held by Seaway in such collateral was released on the closing
date of the Asset Sale upon the repayment of the loan by the Company.

         In connection with a revolving line of credit provided by EGC to the
Company, the Company pledged all of its assets as collateral for such loan. In
addition, Carmine Stella, the Company's President, and Chief Executive Officer
personally guaranteed the Company's obligations to Entrepreneur Capital. The
guaranty provided by Mr. Stella terminated on the closing date of the Asset Sale
upon repayment of the line of credit by the Company.

         Although the Company has no present intention of entering into any
affiliated transactions, the Company believes that material affiliated
transactions between the Company and its directors, officers, principal
shareholders or any affiliates thereof should be in the future on terms no less
favorable than could be obtained from unaffiliated third parties.

         With respect to the foregoing transactions, the Company believes that
the terms of such transactions were as fair to the Company as could be obtained
from an unrelated third party. Future transactions with affiliates will be on
terms no less favorable than could be obtained from unaffiliated parties and
will be approved by a majority of the independent and/or disinterested members
of the board of directors.

                                       24

<PAGE>

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit and Other Professional Fees

         Consistent with the Audit Committee's responsibility for engaging our
independent auditors, subsequent to January 1, 2005, all audit and permitted
non-audit services require pre-approval by the Audit Committee. Subsequent to
January 1, 2005, all services performed by the auditors will be pre-approved.

         During the fiscal years ended December 31, 2005 and 2004 fees for
services provided by Sherb & Co., LLP were as follows (rounded to the nearest
$1,000):

Audit Fees

         The aggregate fees billed to the Company by Sherb & Co., LLP for the
audit of our annual financial statements for the years ended December 31, 2005
and for the review of our quarterly reports on Form 10-Q for the same year
totaled $34,000. The aggregate fees billed to the Company by Sherb & Co., LLP
for the audit of our annual financial statements for the year ended December 31,
2004 and for the review of our quarterly reports on Form 10-Q for the same year
totaled $45,000.

Audit Related Fees

         There were no fees paid to Sherb & Co., LLP for services rendered in
connection with employee benefit plan audits, SEC registration statements, due
diligence, assistance and consultation on financial accounting and reporting
standards during the years ended December 31, 2005 and 2004.

Financial Information Systems Design and Implementation Fees

         There were no fees paid to Sherb & Co., LLP for financial information
systems design or implementation during the years ended December 31, 2005 and
2004.

Tax Fees

         There were no fees paid to Sherb & Co., LLP for services rendered in
connection with tax audits and appeals, advise on mergers and acquisition and
technical assistance during the years ended December 31, 2005 and 2004.

All Other Fees

         There were no additional fees paid to Sherb & Co., LLP for professional
fees related to all other services during fiscal years ended December 31, 2005
and 2004.

                                       25

<PAGE>

                                     PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a)(1) Financial Statements.
                                      Index

         Independent Registered Auditors' Report                     F - 2

         Consolidated Financial Statement

                  Consolidated Balance Sheets                        F - 3
                  Consolidated Statements of Operations              F - 4
                  Consolidated Statements of Stockholders' Equity    F - 5
                  Statements of Cash flows                           F - 6
                  Notes to Financial Statements                      F - 7 - 19

(a)(2) Financial Statement Schedules.

(b)      Exhibits

1.1      Form of Underwriting Agreement.*

1.2      Form of Agreement Among Underwriters.*

1.3      Form of Selected Dealer Agreement.*

3.1      Certificate of Incorporation.*

3.2      Certificate of Designations, As Amended, Relating to Series A Preferred
         Stock.*

3.3      Form of Certificate of Designations Relating to Series B Preferred
         Stock.*

3.4      ByLaws.*

4.1      Specimen Common Stock Certificate.*

4.2      Specimen Series A Preferred Stock Certificate.*

4.3      Specimen Series B Preferred Stock Certificate.*

4.4      Specimen Class A Warrant Certificate.*

4.5      Form of Convertible Bridge Note.*

                                       26

<PAGE>

4.6      Form of Class A Warrants Issued to Certain Members of Management.*

4.7      Form of Class A Warrants Issued in 1996 Private Placement Financing.*

4.8      Form of Representative's Unit Purchase Option Agreement.*

4.9      Form of Warrant Agreement.*

10.1     Agreement with Consolidated Beverage Corp. relating to Pabst
         Distribution Rights *

10.2     Form of Series of Promissory Notes to Consolidated Beverage
         Corporation *

10.3     Bill of Sale from Consolidated Beverage Corp. to Registrant.*

10.4     Distributorship Agreement with Pabst Brewing Company *

10.5     Agency Agreement with Vito Santoro, Inc.*

10.6     Employment Agreement between Registrant and Carmine N. Stella.*
10.7     1996 Incentive Stock Option Plan.*

10.8     Agreement with Carmine N. Stella relating to Option to acquire Vito
         Santoro, Inc.*

10.9     Merger Agreement relating to Vito Santoro, Inc.*

10.10    Asset Purchase Agreement, dated as of May 4, 2001 between Registrant
         and Prospect Beverage Corporation (Incorporated by reference to
         Registrant's Current Report on Form 8-K filed on May 14, 2001.)

10.11    Voting Agreement, dated as of June 29, 2001, among Carmine Stella and
         Anthony Stella, Monty Matrisciani, Michael Matrisciani, Daniel
         Matrisciani and Alex Matrisciani, Registrant and Prospect Beverage
         Corporation (Incorporated by reference to Registrant's Current Report
         on Form 8-K/A filed on December 31, 2001.)

10.12    Employment Agreement, dated as of June 29, 2001, between Registrant and
         Alex Matrisciani. (Incorporated by reference to Registrant's Annual
         Report on Form 10-KSB for the annual period ending December 31, 2001.)

10.13    Employment Agreement, dated as of June 29, 2001 between Registrant and
         Daniel Matrisiciani. (Incorporated by reference to Registrant's Annual
         Report on Form 10-KSB for the annual period ending December 31, 2001.)

10.14    Employment Agreement, dated as of June 29, 2001, between Registrant and
         Michael Matrisiciani. (Incorporated by reference to Registrant's Annual
         Report on Form 10-KSB for the annual period ending December 31, 2001)

                                       27

<PAGE>

10.15    Employment Agreement, dated as of June 29, 2001, between Registrant and
         Monty Matrisiciani. (Incorporated by reference to Registrant's Annual
         Report on Form 10-KSB for the annual period ending December 31, 2001)

10.16    2003 Stock Option Plan (Incorporated by reference to Registrant's
         Annual Report on Form 10-KSB for the annual period ending December 31,
         2003)

10.17    Asset Purchase Agreement, dated as of September 15, 2005, between
         Registrant and Oak Beverages Inc. (Incorporated by reference to
         Registrant's Current Report on Form 8-K dated September 15, 2005)

10.18    Sub-Distribution Agreement dated as of September 15, 2005 between the
         Registrant and Oak Beverages Inc. (Incorporated by reference to
         Registrant's Current Report on Form 8-K dated September 15, 2005)

10.19    Escrow Agreement, dated as of December 16, 2005, between Registrant,
         Oak Beverages Inc. and escrow agent.

10.20    Amendment to Escrow Agreement, dated as of December 16, 2005, between
         Registrant, Oak Beverages Inc. and escrow agent.

31.1     Certification of Chief Executive Officer pursuant to Section 302 of the
         Sarbanes Oxley Act of 2002

31.2     Certification of Treasurer pursuant to Section 302 of the Sarbanes
         Oxley Act of 2002

32.1     Certification of Chief Executive  Officer and Treasurer  pursuant to
         Section 906 of the Sarbanes Oxley Act of 2002

* Incorporated by reference to Registrant's Registration Statement on Form SB-2,
and amendments thereto, Registration No. 333-9995 declared effective on July 17,
1997.

                                       28

<PAGE>

                                   SIGNATURES

         In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly executed on this 14th day of April, 2006.

                                                    CAPITAL BEVERAGE CORPORATION


                                      By: /s/ Carmine N. Stella
                                          --------------------------------------
                                          Carmine N. Stella
                                          President, Chief Executive Officer
                                          and Chairman of the Board of Directors

         In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant in the capacities and on the dates
indicated

Signature                             Title                           Date
---------                             -----                           ----

/s/ Carmine N. Stella           Chief Executive Officer,
-----------------------         Presidend and Chairman of
Carmine N. Stella               the Board of Directors            April 17, 2006

/s/ Carol Russell               Secretary, Treasurer
-----------------------         and Director                      April 17, 2006
Carol Russell

/s/ Joseph Luzzi                Director                          April 17, 2006
----------------------
Joseph Luzzi

/s/ Michael Mtrisciani          Director                          April 17, 2006
----------------------
Michael Matrisciani

/s/ Daniel Matrisciani          Director                          April 17, 2006
----------------------
Daniel Matrisciani

/s/ Vito Cardinale              Director                          April 17, 2006
----------------------
Vito Cardinale

<PAGE>

                   CAPITAL BEVERAGE CORPORATION AND SUBSIDIARY

                              FINANCIAL STATEMENTS

                                      INDEX
                                                              Page Number
REPORT OF INDEPENDENT REGISTERED PUBLIC
     ACCOUNTING FIRM                                             F - 2

CONSOLIDATED FINANCIAL STATEMENTS:

       Balance Sheet                                             F - 3

       Statements of Operations                                  F - 4

       Statements of Stockholders' Equity                        F - 5

       Statements of Cash Flows                                  F - 6

       Notes to Financial Statements                             F - 7 to F - 19


<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Capital Beverage Corporation and Subsidiary
Brooklyn, NY

We have audited the accompanying balance sheet of Capital Beverage Corporation
and Subsidiary as of December 31, 2005 and 2004 and the related statements of
operations, stockholders' deficit and cash flows for the years ended December
31, 2005, 2004 and 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capital Beverage Corporation
and Subsidiary as of December 31, 2005 and 2004 and the results of their
operations and their cash flows for the years ended December 31, 2005, 2004 and
2003, in conformity with accounting principles generally accepted in the United
States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred significant
losses as more fully described in Note 2. These issues raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.


                                                    /s/ Sherb & Co., LLP
                                                    ----------------------------
                                                    Certified Public Accountants

New York, New York
April 14, 2006

                                      F-2
<PAGE>
<TABLE>
<CAPTION>
                   CAPITAL BEVERAGE CORPORATION AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS

                                                                               December 31,
                                                                      -----------------------------------
                                                                            2005               2004
                                                                      ----------------   ----------------
CURRENT ASSETS:
<S>                                                                    <C>                <C>
     Cash                                                             $       131,738    $        96,220
     Restricted cash                                                        2,013,600                  -
     Other receivable - current portion                                        54,213                  -
                                                                      ----------------   ----------------
         TOTAL CURRENT ASSETS                                               2,199,551             96,220

RESTRICTED CASH                                                               500,000                  -

ASSETS FROM DISCONTINUED OPERATIONS                                                 -          4,413,869

OTHER ASSETS                                                                   65,984             11,771
                                                                      ----------------   ----------------

                                                                      $     2,765,535    $     4,521,860
                                                                      ================   ================

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
     Cash overdraft                                                   $           681    $       367,424
     Accounts payable                                                       1,531,794          2,846,455
     Accrued expenses and taxes                                               839,221            117,328
     Current portion of capital lease obligations                              53,404             12,716
                                                                      ----------------   ----------------
         TOTAL CURRENT LIABILITIES                                          2,425,100          3,343,923
                                                                      ----------------   ----------------

CAPITAL LEASE OBLIGATIONS                                                           -             56,204

LIABILITIES FROM DISCONTINUED OPERATIONS                                            -          4,630,999

STOCKHOLDERS' EQUITY (DEFICIT):
     Preferred stock, no shares issued and outstanding                              -                  -
     Common stock, $.001 par value; authorized 20,000,000 shares;
         issued and outstanding 3,792,045 shares                                3,793              3,793
     Additional paid-in capital                                             5,986,249          5,986,249
     Accumulated deficit                                                   (5,649,607)        (9,499,308)
                                                                      ----------------   ----------------
         TOTAL STOCKHOLDERS' EQUITY (DEFICIT)                                 340,435         (3,509,266)
                                                                      ----------------   ----------------
                                                                      $     2,765,535    $     4,521,860
                                                                      ================   ================


                 See notes to consolidated financial statements.
</TABLE>

                                       F-3

<PAGE>
<TABLE>
<CAPTION>

                                                CAPITAL BEVERAGE CORPORATION AND SUBSIDIARY

                                                   CONSOLIDATED STATEMENTS OF OPERATIONS


                                                                              Year Ended December 31,
                                                         ---------------------------------------------------------------
<S>                                                     <C>                    <C>                    <C>
                                                                2005                   2004                   2003
                                                         ------------------     ------------------     -----------------

REVENUES                                                $                -     $                -     $               -
                                                         ------------------     ------------------     -----------------
COSTS AND EXPENSES:
      General and administrative                                   817,248                387,306               437,872
      Non-cash compensation                                              -                 91,724                98,276
                                                         ------------------     ------------------     -----------------
                                                                   817,248                479,030               536,148
                                                         ------------------     ------------------     -----------------
LOSS FROM CONTINUING OPERATIONS                                   (817,248)              (479,030)             (536,148)

DISCONTINUED OPERATIONS:
      Interest expense                                            (702,848)              (738,812)             (543,136)
      Gain on sale of distribution rights                        8,235,907                      -                     -
      (Loss) gain from discontinued operations                  (2,866,110)            (3,059,071)            1,103,455
                                                         ------------------     ------------------     -----------------
NET INCOME (LOSS)                                       $        3,849,701     $       (4,276,913)    $          24,171
                                                         ==================     ==================     =================

NET INCOME (LOSS) PER SHARE - CONTINUING OPERATIONS
      Basic                                             $            (0.22)    $            (0.13)    $           (0.14)
                                                         ==================     ==================     =================
      Diluted                                           $            (0.22)    $            (0.13)    $           (0.14)
                                                         ==================     ==================     =================
NET INCOME (LOSS) PER SHARE - DISCONTINUED OPERATIONS
      Basic                                             $             1.23     $            (1.00)    $            0.15
                                                         ==================     ==================     =================
      Diluted                                           $             1.23     $            (1.00)    $            0.15
                                                         ==================     ==================     =================
NET INCOME (LOSS) PER SHARE
      Basic                                             $             1.02     $            (1.13)    $            0.01
                                                         ==================     ==================     =================
      Diluted                                           $             1.02     $            (1.13)    $            0.01
                                                         ==================     ==================     =================
WEIGHTED AVERAGE NUMBER OF SHARES:
      Basic                                                      3,792,045              3,792,045             3,792,045
                                                         ==================     ==================     =================
      Diluted                                                    3,792,045              3,792,045             3,802,045
                                                         ==================     ==================     =================


                                                 See notes to consolidated financial statements.
</TABLE>

                                                                          F-4
<PAGE>
<TABLE>
<CAPTION>

                                                  CAPITAL BEVERAGE CORPORATION AND SUBSIDIARY

                                             CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)



                            Preferred Stock         Common Stock       Additional                                       Total
                            ---------------    -------------------      Paid-In       Deferred       Accumulated     Stockholders'
                            Shares   Amount      Shares     Amount      Capital     Compensation       Deficit     Equity (Deficit)
                            ------   ------    ----------  --------   ------------  ------------   --------------  ----------------
<S>                         <C>      <C>       <C>         <C>        <C>           <C>            <C>            <C>
Balance December 31, 2002       -    $   -     3,792,045   $ 3,793    $ 5,796,249   $         -    $  (5,246,566) $        553,476

 Issuance of warrants for       -        -             -         -        190,000      (190,000)               -                 -
 services

 Amortization of deferred       -        -             -         -              -        98,276                -            98,276
 compensation

 Net income                     -        -             -         -              -             -           24,171            24,171
                            ------   ------    ----------  --------   ------------  ------------   --------------  ----------------
Balance December 31, 2003       -        -      3,792,045    3,793      5,986,249       (91,724)      (5,222,395)          675,923

 Amortization of deferred
 compensation                   -        -              -        -              -        91,724                -            91,724

 Net loss                       -        -              -        -              -             -       (4,276,913)       (4,276,913)
                            ------   ------    ----------  --------   ------------  ------------   --------------  ----------------
Balance December 31, 2004       -        -      3,792,045    3,793      5,986,249             -       (9,499,308)       (3,509,266)

 Net income                     -        -              -        -              -             -        3,849,701         3,849,701
                            ------   ------    ----------  --------   ------------  ------------   --------------  ----------------
Balance December 31, 2005       -    $   -      3,792,045  $  3,793   $ 5,986,249   $         -    $  (5,649,607)  $       340,435
                            ======   ======    ==========  ========   ============  ============   ==============  ================




                                                       See notes to consolidated financial statements.
</TABLE>
                                                                           F-5
<PAGE>
<TABLE>
<CAPTION>

                                                   CAPITAL BEVERAGE CORPORATION AND SUBSIDIARY

                                                               STATEMENTS OF CASH FLOWS


                                                                               Year Ended December 31,
                                                            -----------------------------------------------------------------
                                                                   2005                   2004                   2003
                                                            ------------------     -------------------    -------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
<S>                                                         <C>                    <C>                    <C>
 Net loss from continuing operations                        $        (817,248)     $         (479,030)    $         (536,148)
                                                            ------------------     -------------------    -------------------

 Adjustments to reconcile net loss from
  continuing operations to net cash provided
  by (used in) operating activities:
  Non-cash compensation                                                     -                  91,724                 98,276
 Changes in discontinued operations:
  Depreciation and amortization                                             -                 151,851                 66,991
  Impairment of distribution license                                        -               3,336,744                      -
  Interest expense                                                   (702,848)               (738,812)              (543,136)
  Gain on sale of distribution rights                               8,235,907                       -                      -
  (Loss) gain from discontinued operations                         (2,866,110)             (3,059,071)             1,103,455
 Changes in discontinued assets and liabilities:
  Assets from discontinued operations                               4,413,869                       -                      -
  Liabilities from discontinued operations                         (4,630,999)                      -                      -
  Accounts receivable                                                       -                (148,650)               (69,142)
  Inventories                                                               -                 269,650                 18,592
  Prepaid expenses                                                          -                  20,798               (161,780)
  Other assets                                                              -                 (76,835)              (163,344)
  Purchase of distribution license                                          -                       -                (44,000)
  Capital expenditures                                                      -                 (15,332)               (34,067)
  Revolving loans                                                           -                 125,171                (86,694)
  Payments of notes payable                                                 -                 (95,933)                     -
  Proceeds from loan payable                                                -                       -              2,500,000
  Payments of long-term debt                                                -                       -             (2,283,827)
 Changes in assets and liabilities:
  Other receivable                                                   (108,426)                      -                      -
  Accounts payable and accrued expenses                              (592,768)                179,151                269,834
                                                            ------------------     -------------------    -------------------
   Total adjustments                                                3,748,624                  40,456                671,158
                                                            ------------------     -------------------    -------------------

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                 2,931,376                (438,574)               135,010
                                                            ------------------     -------------------    -------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Cash overdraft                                                     (366,743)                367,424                      -
  Principal payments of capital lease obligations                     (15,515)                (21,906)               (15,976)
  Payment of accrued dividends on preferred stock                           -                       -                (50,000)
                                                            ------------------     -------------------    -------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                  (382,258)                345,518                (65,976)
                                                            ------------------     -------------------    -------------------

INCREASE (DECREASE) IN CASH                                         2,549,118                 (93,056)                69,034

CASH - BEGINNING OF YEAR                                               96,220                 189,276                120,242
                                                            ------------------     -------------------    -------------------

CASH - END OF YEAR                                          $       2,645,338      $           96,220    $           189,276
                                                            ==================     ===================   ====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
  Cash paid for interest                                    $         703,488      $          688,812    $           543,136
                                                            ==================     ===================   ====================


                                                   See notes to consolidated financial statements.
</TABLE>
                                                                          F-6
<PAGE>


                   CAPITAL BEVERAGE CORPORATION AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEARS ENDED DECEMBER 31, 2005, 2004 and 2003

1.       DESCRIPTION OF BUSINESS

         Capital Beverage Corporation (the "Company" or "Capital") was formed in
         December 1995 to operate as a wholesale distributor of beer and other
         beverages in New York City. In December 1998, CAP Communications, Ltd.
         ("Cap Com"), a wholly-owned subsidiary, was organized to market
         domestic and long distance prepaid telephone calling cards to
         distributors and to the general public.

         The Company entered into an Asset Purchase Agreement, dated May 4, 2001
         (the "Agreement"), to acquire certain assets and liabilities of
         Prospect Beverages Inc., a New York corporation ("Prospect"). Prospect
         is a Brooklyn based Pabst Distributor of Colt-45 Malt Liquor and other
         beverages.

         As of September 15, 2005, the Company, entered into an Asset Purchase
         Agreement (the "Asset Purchase Agreement") with Oak Beverages, Inc., a
         New York corporation ("Oak"), pursuant to which the Company agreed to
         sell, and Oak agreed to purchase (the "Asset Sale"), the Company's
         exclusive distribution rights for the Pabst brands, Pittsburgh brands
         and Ballantine brands (the "Assets"). The Asset Purchase Agreement
         contained customary representations and warranties, conditions to
         closing (including shareholder and brewer approval and the distribution
         by the Company of an Information Statement on Schedule 14C (the
         "Information Statement") to its stockholders), and termination and
         indemnification provisions. On December 16, 2005, the Company closed
         the sale of the Assets to Oak.

         The Company will continue to use the proceeds from the sale of the
         Assets for working capital purposes, including the payment of
         indebtedness, trade payables and other outstanding obligations.
         Following the full payment of its creditors, the Company may elect to
         acquire another entity, issue dividend(s) to its stockholders or invest
         the net proceeds in the discretion of the Board of Directors and
         management of the Company. Management currently anticipates that
         additional transactions may take the form of a dissolution of the
         corporation, the liquidation of its remaining assets, and the ultimate
         distribution to stockholders of any assets remaining after satisfaction
         of our liabilities, including personnel termination and related costs,
         sale transaction expenses and final liquidation costs. In event of such
         dissolution, the residual proceeds of the sale of the Assets would
         become part of a pool of assets governed by the plan of dissolution.
         Alternatively, management may elect to invest the net proceeds from the
         sale of the Assets in assets or operations acquired by the Company. In
         such an event, no assets will be distributed to the stockholders.

                                      F-7

<PAGE>

2.       GOING CONCERN

         The accompanying financial statements have been prepared on a
         going-concern basis, which presumes that the Company will be able to
         continue to meet its obligations and realize its assets in the normal
         course of business.

         As shown in the accompanying financial statements, the Company has a
         history of losses with an accumulated deficit of $5,649,607 at December
         31, 2005 and, as of that date, a working capital deficiency of
         $225,549. These conditions raise substantial doubt about the Company's
         ability to continue as a going concern. The Company's continuation as a
         going concern is dependent upon its ability to ultimately attain
         profitable operations, generate sufficient cash flow to meet its
         obligations, and obtain additional financing as may be required.

3.       SIGNIFICANT ACCOUNTING POLICIES

         Principles of Consolidation - The financial statements include the
         accounts of the Company and Cap Com, its wholly-owned subsidiary. All
         significant intercompany balances and transactions have been eliminated
         in consolidation.

         Cash and Cash Equivalents - Cash and cash equivalents include cash on
         hand and cash in banks in demand and time deposit accounts with
         maturities of 90 days or less.

         Income Taxes - The Company follows Statement of Financial Accounting
         Standards No. 109 - Accounting for Income Taxes, which requires
         recognition of deferred tax assets and liabilities for the expected
         future tax consequences of events that have been included in the
         financial statements or tax returns. Under this method, deferred tax
         assets and liabilities are based on the differences between the
         financial statement and tax bases of assets and liabilities using
         enacted tax rates in effect for the year in which the differences are
         expected to reverse.

         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 disclosure of contingent assets
         and liabilities at the date of the financial statements and the
         reported amounts of revenue and expenses during the reporting period.
         Actual results could differ from those estimates.

         Fair Value of Financial Instruments - The Company considers its
         financial instruments, which are carried at cost, to approximate fair
         value due to their near-term maturities.

         Income (loss) per Common Share - Net income (loss) per common share is
         based on the weighted average number of shares outstanding. Potential
         common shares includable in the computation of fully diluted per share
         results are not presented in the financial statements as their effect
         would be anti-dilutive. The outstanding options excluded in the
         computation amounted to 1,850,000 at December 31, 2005, 2004 and 2003.

                                      F-8

<PAGE>

         Stock based compensation - Financial Accounting Statement No. 123,
         Accounting for Stock Based Compensation, encourages, but does not
         require companies to record compensation cost for stock-based employee
         compensation plans at fair value. The Company has chosen to continue to
         account for stock-based compensation using the intrinsic method
         prescribed in Accounting Principles Board Opinion No. 25, Accounting
         for Stock Issued to Employees, and related interpretations.
         Accordingly, compensation cost for stock options is measured as the
         excess, if any, of the quoted market price of the Company's stock at
         the date of the grant over the amount an employee must pay to acquire
         the stock. The Company has adopted the "disclosure only" alternative
         described in SFAS 123 and SFAS 148, which require pro forma disclosures
         of net income and earnings per share as if the fair value method of
         accounting had been applied.

         New Accounting Pronouncements - In April 2003, the FASB issued SFAS No.
         149, "Amendment of Statement 133 on Derivative Instruments and Hedging
         Activities" ("SFAS 149"). This statement amends SFAS 133 to provide
         clarification on the financial accounting and reporting of derivative
         instruments and hedging activities and requires contracts with similar
         characteristics to be accounted for on a comparable basis. The adoption
         of SFAS 149 has not had a material effect on the Company's financial
         position or results of operations.

         In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
         Financial Instruments with Characteristics of both Liabilities and
         Equity" ("SFAS 150"). SFAS 150 establishes standards on the
         classification and measurement of financial instruments with
         characteristics of both liabilities and equity. SFAS 150 became
         effective for financial instruments entered into or modified after May
         31, 2003. The adoption of SFAS 150 has not had a material effect on the
         Company's financial position or results of operations.

         In December 2004, the FASB issued Statement 123r (revised 2004) which
         is a revision of FASB Statement No. 123, Accounting for Stock-Based
         Compensation. This Statement supersedes APB Opinion No. 25, Accounting
         for Stock Issued to Employees, and its related implementation guidance.
         This Statement establishes standards for the accounting for
         transactions in which an entity exchanges its equity instruments for
         goods or services. It also addresses transactions in which an entity
         incurs liabilities in exchange for goods or services that are based on
         the fair value of the entity's equity instruments or that may be
         settled by the issuance of those equity instruments. This Statement
         focuses primarily on accounting for transactions in which an entity
         obtains employee services in share-based payment transactions. This
         Statement requires a public entity to measure the cost of employee
         services received in exchange for an award of equity instruments based
         on the grant-date fair value of the award (with limited exceptions).
         That cost will be recognized over the period during which an employee
         is required to provide service in exchange for the award--the requisite
         service period (usually the vesting period). FASB 123r will have a
         significant impact on the consolidated financial statements of the
         Company through the expensing of stock option grants. However the
         Company does not anticipate granting any stock options in the
         foreseeable future.

                                      F-9

<PAGE>

         In May 2005, the FASB issued FASB Statement No. 154, which replaces APB
         Opinion No.20 and FASB No. 3. This Statement provides guidance on the
         reporting of accounting changes and error corrections. It established,
         unless impracticable retrospective application as the required method
         for reporting a change in accounting principle in the absence of
         explicit transition requirements to a newly adopted accounting
         principle. The Statement also provides guidance when the retrospective
         application for reporting of a change in accounting principle is
         impracticable. The reporting of a correction of an error by restating
         previously issued financial statements is also addressed by this
         Statement. This Statement is effective for financial statements for
         fiscal years beginning after December 15, 2005. Earlier application is
         permitted for accounting changes and corrections of errors made in
         fiscal years beginning after the date of this Statement is issued.
         Management believes this Statement will have no impact on the financial
         statements of the Company once adopted.

         In February 2006, the FASB issued FASB Statement No. 155, which is an
         amendment of FASB Statements No. 133 and 140. This Statement; a)
         permits fair value remeasurement for any hybrid financial instrument
         that contains an embedded derivative that otherwise would require
         bifurcation, b) clarifies which interest-only strip and principal-only
         strip are not subject to the requirements of Statement 133, c)
         establishes a requirement to evaluate interests in securitized
         financial assets to identify interests that are freestanding
         derivatives or that are hybrid financial instruments that contain an
         embedded derivative requiring bifurcation, d) clarifies that
         concentrations of credit risk in the form of subordination are not
         embedded derivatives, e) amends Statement 140 to eliminate the
         prohibition on a qualifying special-purpose entity from holding a
         derivative financial instrument that pertains to a beneficial interest
         other than another derivative financial instrument. This Statement is
         effective for financial statements for fiscal years beginning after
         September 15, 2006. Earlier adoption of this Statement is permitted as
         of the beginning of an entity's fiscal year, provided the entity has
         not yet issued any financial statements for that fiscal year.
         Management believes this Statement will have no impact on the financial
         statements of the Company once adopted.

         In March 2006, the FASB issued FASB Statement No. 156, which amends
         FASB Statement No. 140. This Statement establishes, among other things,
         the accounting for all separately recognized servicing assets and
         servicing liabilities. This Statement amends Statement 140 to require
         that all separately recognized servicing assets and servicing
         liabilities be initially measured at fair value, if practicable. This
         Statement permits, but does not require, the subsequent measurement of
         separately recognized servicing assets and servicing liabilities at
         fair value. An entity that uses derivative instruments to mitigate the
         risks inherent in servicing assets and servicing liabilities is
         required to account for those derivative instruments at fair value.
         Under this Statement, an entity can elect subsequent fair value
         measurement to account for its separately recognized servicing assets
         and servicing liabilities. By electing that option, an entity may
         simplify its accounting because this Statement permits income statement
         recognition of the potential offsetting changes in fair value of those
         servicing assets and servicing liabilities and derivative instruments
         in the same accounting period. This Statement is effective for
         financial statements for fiscal years beginning after September 15,
         2006. Earlier adoption of this Statement is permitted as of the
         beginning of an entity's fiscal year, provided the entity has not yet
         issued any financial statements for that fiscal year. Management
         believes this Statement will have no impact on the financial statements
         of the Company once adopted.

                                      F-10

<PAGE>

4.       SALE OF DISTRIBUTION RIGHTS

         As of September 15, 2005, the Company, entered into an Asset Purchase
         Agreement (the "Asset Purchase Agreement") with Oak Beverages, Inc., a
         New York corporation ("Oak"), pursuant to which the Company agreed to
         sell, and Oak agreed to purchase (the "Asset Sale"), the Company's
         exclusive distribution rights for the Pabst brands, Pittsburgh brands
         and Ballantine brands (the "Assets"). The Asset Purchase Agreement
         contained customary representations and warranties, conditions to
         closing (including shareholder and brewer approval and the distribution
         by the Company of an Information Statement on Schedule 14C (the
         "Information Statement") to its stockholders), and termination and
         indemnification provisions.

         Immediately following the execution of the Agreement, certain
         stockholders (the "Approving Stockholders") of the Company holding an
         aggregate of 1,900,000 shares of the Company's common stock,
         representing 50.1% of the shares outstanding, signed a written consent
         of stockholders approving the Asset Purchase Agreement and the exhibits
         and schedules thereto as well as the transactions contemplated thereby.
         The Approving Stockholders were Carmine N. Stella, the Company's
         President, Chief Executive Officer and Chairman of the Board, Anthony
         Stella, the Company's then Vice President of Sales and Marketing (and
         the brother of Carmine Stella), Michael Matrisciani, a director of the
         Company, Daniel Matrisciani, the Company's then Vice President of
         Operations and a director, Alex Matrisciani and Monty Matrisciani (each
         of whom are the brothers of Michael and Daniel Matrisciani).

         The Company and Oak also entered into a Sub-Distribution Agreement
         dated as of September 15, 2005 (the "Sub-Distribution Agreement"),
         pursuant to which Oak became a Company sub-distributor of certain Pabst
         beers and malt beverages (the "Products"). The Sub-Distribution
         Agreement became effective when the Company filed an Information
         Statement on Schedule 14C with the Securities and Exchange Commission.
         Under the terms of the Sub-Distribution Agreement, Oak had the right to
         distribute the Products to customers located in Brooklyn, Queens,
         Staten Island, Manhattan and the Bronx (the "Territory"), and in
         exchange for such rights, Oak was required to pay Pabst directly for
         its Product purchases and, during the first 45 days following the
         effective date of the Agreement (the "45-Day Period"), Oak was required
         to pay to Capital the following amounts for Products received by Oak:
         (x) $.50 for each case of Products and (y) $2.00 for each barrel of
         Products. The purchase price paid by Oak to Capital in connection with
         the closing of the transactions contemplated by the Asset Purchase
         Agreement was reduced by an amount equal to the sum of: (i) $.25 for
         each case of Products purchased by Oak and sold by Oak to customers in
         the Territory, plus (ii) $.50 for each case of Products purchased by
         Oak but not sold to such customers, plus (iii) $1.00 for each barrel of
         Products purchased by Oak and sold by Oak to customers in the
         Territory, plus (iv) $2.00 for each barrel of Products purchased by Oak
         but not sold to such customers, all determined during the 45-Day
         Period.

         Prior to the closing of the transaction, the Asset Purchase Agreement
         and sale of Assets to Oak were approved unanimously by the Company's
         Board of Directors and the terms of the transaction were submitted for
         stockholder approval. As permitted by Delaware law and the Company's
         Certificate of Incorporation, the Company received a written consent
         from the majority Approving Stockholders of the Company approving the
         Asset Purchase Agreement and the related Asset Sale. An Information
         Statement was furnished for the purposes of informing stockholders, in
         the manner required under the Securities Exchange Act of 1934, as
         amended, of the Asset Sale before it was consummated.

                                      F-11

<PAGE>

         As of December 16, 2005, the Company closed the sale of the Assets to
         Oak, pursuant to the terms and conditions of the Asset Purchase
         Agreement. The purchase price paid by Oak for the Assets was Nine
         Million Three Hundred Thousand Dollars ($9,300,000.00), of which One
         Million Five Hundred Thousand Dollars ($1,500,000.00), was deposited
         with an escrow agent, pursuant to the terms of an escrow agreement, for
         at least 18 months for post closing indemnification claims which may be
         asserted by Oak (the "Escrow"). A substantial amount of the proceeds
         from the transaction were used by the Company to repay outstanding
         indebtedness and for working capital purposes.

         Summary of closing of sale:

         Purchase price                              $              9,300,000
                                                     -------------------------
         Sub-Distribution credit                                    42,374.91
         Payments to primary creditors                           5,944,402.25
         Primary creditor escrow                                   321,964.93
         Secondary creditor escrow (1)                           1,012,960.29
         General escrow deposit (2)                              1,500,000.00
         Deposit to Capital                                        478,297.62
                                                     -------------------------
         Total                                       $              9,300,000
                                                     =========================

     (1)  As of April 11, 2006,  approximately  Seven  Hundred  Eight  Thousand
          Sixty Dollars  ($708,060)  has been  released  from  Escrow  and has
          been  used to pay outstanding  liabilities of the Company. The balance
          will be held in the escrow account in order to pay creditors for two
          years at which  point any  remaining funds will be kept by Capital.

     (2)  Will be released in three  traunches  of  $500,000,  on July 16, 2006,
          December 16, 2006 and June 16, 2007.

          Gain on the sale:

          Purchase price less sub-distribution credit       $        9,257,625
          Carrying value                                             1,021,718
                                                            --------------------
          Gain on sale                                      $        8,235,907
                                                            ====================

                                      F-12

<PAGE>

5.       DISCONTINUED OPERATIONS

         The Company's sale of its Distribution License has been accounted of
         under the requirements of paragraph 30 of Statements of Financial
         Accounting Standards ("SFAS") 144 "Accounting for the Impairment or
         Disposal of Long-Lived Assets", the assets and liabilities associated
         with the discontinued operations of the Company have been classified as
         Assets or Liabilities from discontinued operations on the accompanying
         2004 balance sheet, while the results of operations have been presented
         as discontinued operations for all periods presented.

         The carrying amounts of the major classes of assets and liabilities
         included as part of the assets and liabilities held for sale at
         December 31, 2004, are as follows:

         Accounts receivable                             $         698,792
         Inventories                                             2,097,338
         Other current assets                                      147,905
         Property and equipment                                    127,765
         Distribution license                                    1,065,718
         Other assets                                              276,351
                                                         ------------------
         Assets from discontinued operations             $       4,413,869
                                                         ==================


         Revolving loans                                 $       2,007,356
         Loan payable                                            2,500,000
         Long-term debt                                            123,643
                                                         ------------------
         Liabilities from discontinued operations        $       4,630,999
                                                         ==================

6.       OTHER RECEIVABLE

         On October 21, 2005 the Company signed a Stipulation of Settlement with
         Blue Ox Distributors, LLC (Blue Ox), where as Blue Ox has agreed to pay
         the Company as further consideration for the termination of the
         Exclusive United States Distribution Agreement in the amount of
         $100,000 plus interest of $8,425.93. Blue Ox will pay Capital $6,023.66
         per month beginning April 1, 2006 until the balance is paid in full.
         The Company classified $54,213 of this balance as current and the
         remaining as long-term.

                                      F-13

<PAGE>

7.       INCOME TAXES

         At December 31, 2005 the Company had a net operating loss carryover of
         $335,000 available as offsets against future taxable income, if any,
         which expire at various dates through 2025. The Company has a deferred
         tax asset of $219,000 arising from net operating loss deductions and an
         alternative minimum tax credit and has recorded a valuation allowance
         for the full amount of such deferred tax asset.

         The following is a reconciliation between the expected income tax
         expense (benefit), assuming a statutory Federal tax rate of 35%, and
         the actual income tax expense (benefit):
<TABLE>
<CAPTION>


                                                                                   Year Ended December 31,
                                                              ----------------------------------------------------------------
                                                                     2005                   2004                   2003
                                                              -------------------     ------------------    ------------------
<S>                                                           <C>                     <C>                   <C>
         Expected income tax (benefit)                        $        1,389,000      $      (1,497,000)    $          10,000
         State tax expense (benefit), net of Federal
         effect                                                          198,000               (214,000)                    -
         Impairment of distribution license                                    -              1,335,000                     -
         Deferred compensation                                                 -                 37,000                     -
         Utilization of net operating
         loss
         carryforward                                                 (1,656,000)                     -              (10,000)
         Other permanent differences                                     100,000                 36,000                     -
         Alternative minimum tax                                          85,000                      -                     -
         Other                                                           (31,000)                     -                     -
         Increase in valuation allowance                                       -                303,000                     -
                                                              -------------------     ------------------    ------------------
                                                              $           85,000      $               -                     -
                                                              ===================     ==================    ==================
</TABLE>

   The following is a schedule of the Company's net deferred tax assets as of:


                                                     December 31,
                                           -------------------------------
                                                2005              2004
                                           --------------   --------------

         Net operating loss carryforward   $     134,000    $   1,746,000
         Alternative minimum tax                  85,000                -
         Allowance for doubtful accounts               -           24,000
         Other                                         -           20,000
         Valuation allowance                    (219,000)      (1,790,000)
                                           --------------   --------------
         Net deferred tax asset            $           -    $           -
                                           ==============   ==============

                                      F-14

<PAGE>

8.       CONCENTRATION OF CREDIT RISK

         The Company maintains its cash balances at various financial
         institutions. These balances are insured by the Federal Deposit
         Insurance Corporation up to $100,000. The Company has not experienced
         any losses in such accounts and believes it is not exposed to any
         significant credit risk on cash on deposit.

9.       CONSULTING AGREEMENT

         On October 2, 2003, the Company entered into a consulting agreement
         with Casimir Capital L.P. ("Casimir") in which Casimir will act as
         exclusive strategic and financial advisor to the Company. The initial
         term shall be from October 2, 2003 to March 24, 2004. In the event that
         during the initial term the Company closes a restructuring the term
         shall automatically be extended for six months from the expiration date
         of the initial term. The Company issued Casimir 1,000,000
         non-redeemable and non-callable warrants on the date of the execution
         of this agreement. The warrants are exercisable at $1.00 per share for
         a period of ten years from the date of issuance. The warrants were
         valued at $190,000 using the Black-Scholes option valuation model and
         were recorded as deferred equity compensation to be amortized over the
         term of the agreement. Amortization for the year ended December 31,
         2004 and 2003 was $91,724 and $98,276, respectively.

10.      STOCK OPTIONS AND WARRANTS

         2003 Stock Option Plan

         The Company's 2003 Incentive Stock Option Plan (the "Plan") was
         approved by the Board of Directors and holders of Common Stock of the
         Company on December 30, 2003 to provide for the grant of incentive
         stock options to officers and employees of the Company. A total of
         1,500,000 shares of Common Stock has been authorized and reserved for
         issuance, subject to adjustment to reflect changes in the Company's
         capitalization in the case of a stock split, stock dividend or similar
         event. The Plan will be administered by the Compensation Committee,
         which has the sole authority to determine the persons to whom options
         will be granted, to determine the basis upon which the options will be
         granted, and to determine the exercise price, duration and other terms
         of options to be granted provided that, (i) the exercise price of each
         option granted under the Plan may not be less than the fair market
         value of the Common Stock on the day of the grant of the option, (ii)
         the exercise price must be paid in cash and or stock upon exercise of
         the option, (iii) no option may be exercisable for more than 10 years
         after the date of grant, and (iv) no option is transferable other than
         by will or laws of descent and distribution. In December 2003 the
         Company granted 1,500,000 options to employees and officers of the
         Company pursuant to the Plan exercisable for ten years at $0.23 per
         share. No options were granted during the year ended December 31, 2004.

                                      F-15

<PAGE>

         The Company has elected to follow APB No. 25; "Accounting for Stock
         Issued to Employees" ("APB 25"), and related interpretations in
         accounting for its employee stock options. Under APB 25, because the
         exercise price of the Company's employee stock options equals the
         market price of the underlying stock on the date of the grant, no
         compensation expense is recognized. Pro forma information regarding net
         income per share is required by SFAS No. 123, "Accounting for
         Stock-Based Compensation", and has been determined as if the Company
         had accounted for its employee stock options under the fair value
         method of that statement. The fair value of these options was estimated
         at the date of grant using Black-Scholes option pricing model with the
         following range of assumptions for the year ended December 31, 2003:

                                                                     2003
                                                                  ----------
                    Risk free interest rate                          5.0%
                    Expected dividend yield                            0%
                    Expected lives                                  10 years
                    Expected volatility                              368%

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

         Using the Black-Scholes option valuation model, the weighted average
         grant date fair value of options granted during the year ended December
         31, 2003 was $.23 per option share.

         For the purpose of pro forma disclosures, the estimated fair value of
         the options is amortized over the vesting period.

         The Company's pro forma information is as follows for the years ended
         December 31, 2003, December 31, 2005 and 2004 have been excluded since
         no options were issued during the year (in thousands, except per share
         amounts):

                                              December 31, 2003
                                         -------------------------------
                                                            Pro
                                          Reported         Forma
                                         ----------      --------
         Net income (loss)                $     24       $  (511)
         Income (loss) per Share:
         -Basic and Diluted                   0.01         (0.15)

                                      F-16

<PAGE>

       A summary of the Company's stock option activity and related information
for the years ended December 31, 2005, 2004 and 2003 is as follows (in
thousands, except per share amounts):


                                                                     Weighted
                                                                     Average
                                                     Shares       Exercise Price
                                                   ---------      --------------
 Outstanding at December 31, 2002                       350       $        2.00
      Granted                                         1,500                0.23
      Exercised                                           -                   -
      Cancelled                                           -                   -
                                                   ---------      --------------
 Outstanding at December 31, 2003                     1,850       $        0.62
      Granted                                             -                   -
      Exercised                                           -                   -
      Cancelled                                           -                   -
                                                   ---------      --------------
 Outstanding as December 31, 2004                     1,850       $        0.62

      Granted                                             -                   -
      Exercised                                           -                   -
      Cancelled                                           -                   -

 Outstanding as December 31, 2005                     1,850       $        0.62
                                                   =========      ==============

       A summary of options outstanding and exercisable at December 31, 2005 is
as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>


                                                Options Outstanding                           Options Exercisable
                                   ---------------------------------------------- ---------------------------------------
                                                 Weighted Weighted
                                                   Average Average
              Range of                             Remaining Life      Exercise          Range of
           Exercise Prices            Options        (in years)         Price          Exercise Prices        Options
  -----------------------------    ------------ ------------------  -------------  ---------------------  ---------------
     <S>                               <C>                <C>             <C>         <C>                      <C>
     December  31, 2005
              $0.23  -  $3.50          1,850                8             $0.62       $0.23 - $3.50            1,850
     December  31, 2004
               $0.23  -  $3.50         1,850                9             $0.62       $0.23 - $3.50            1,850
     December 31, 2003
               $0.23  -  $3.50         1,850               10             $0.62       $0.23 - $3.50            1,850
</TABLE>

                                      F-17

<PAGE>

         Warrants

         The units consisted of one share of Common Stock and Class A Redeemable
         Common Stock Purchase Warrants. Two Class A warrants entitle the holder
         to purchase one share of Common Stock at $6.25 per share. The warrants
         are exercisable commencing July 17, 1998 were to expire on July 16,
         2002 were extended one year to July 16, 2003 and then on more year to
         July 16, 2004. These warrants expired on July 16, 2004.

         In October 2003, the Company issued 1,000,000 warrants pursuant to a
         consulting agreement. The Company valued the warrants using the
         Black-Scholes options valuation model. (see Note 14)

         A summary of the Company's stock warrant activity and related
         information for the years ended December 31, 2004, 2003 and 2002 is as
         follows (in thousands, except per share amounts):


                                                               Weighted Average
                                              Warrants          Exercise Price
                                            ------------       ----------------
  Outstanding at December 31, 2002                1,659                 $6.25
    Granted                                       1,000                  1.00
    Exercised                                         -                     -
    Cancelled                                         -                     -
                                            ------------          ------------
 Outstanding at December 31, 2003                 2,659                  4.28
    Granted                                           -                     -
    Exercised                                         -                     -
    Cancelled                                     1,659                 $6.25
                                            ------------          ------------
Outstanding as December 31, 2004                  1,000                 $1.00
    Granted                                           -                     -
    Exercised                                         -                     -
    Expired                                           -                     -
                                            ------------          ------------
Outstanding as December 31, 2005                  1,000                 $1.00
                                            ============          ============

                                      F-18

<PAGE>

Note 11 - Selected Quarterly Financial Data - (UNAUDITED)
<TABLE>
<CAPTION>

Year Ended December 31, 2005:                 December 31         September 30         June 30           March 31

Continuing operations:
<S>                                           <C>                  <C>                <C>                <C>
     Net revenues                             $         -          $       -          $        -         $         -
     Gross profit                             $         -          $       -          $        -         $         -
     Loss from continuing                     $  (150,042)         $ (210,069)        $ (240,102)        $  (217,035)
     operations
Discontinued operations:
     Net revenues                             $ 1,045,645          $ 4,378,898        $ 4,979,838        $ 5,084,278
     Gross profit                             $   470,942          $   950,342        $ 1,157,067        $ 1,345,676
     Income (loss) from discontinued          $ 6,005,110          $  (518,452)       $  (486,634)       $  (333,075)
     operations
Net Income (loss)                             $ 5,855,068          $  (728,521)       $  (726,736)       $  (550,110)

Year Ended December 31, 2004:                 December 31         September 30         June 30           March 31

Continuing operations:
     Net revenues                             $         -         $         -         $         -         $        -
     Gross profit                             $         -         $         -         $         -         $        -
     Loss from continuing                     $  (129,338)        $  (110,177)        $  (124,548)        $ (114,967)
     operations
Discontinued operations:
     Net revenues                             $  6,337,999        $  7,043,376        $ 6,483,836         $ 7,749,854
     Gross profit                             $  1,368,575        $  1,959,491        $ 1,966,489         $ 1,904,174
     Income (loss) from discontinued          $ (3,986,084)       $    132,788        $    85,689         $   (30,276)
     operations
Net Income (loss)                             $ (4,115,422)       $     22,611        $   (38,859)        $  (145,243)

</TABLE>

                                                                    F-19
