FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

              |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
              OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
                  For the quarterly period ended JULY 31, 2006

              |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
            OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
           For the transition period from ___________ to ____________

                          Commission File No. 002-96666

                   Canal Capital Corporation and Subsidiaries
             (Exact name of registrant as specified in its charter)

           Delaware                                               51-0102492
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)

    490 Wheeler Road, Hauppauge, NY                                 11788
(Address of principal executive offices)                          (Zip Code)

Registrant's telephone number, including area code (631) 234-0140

717 Fifth Avenue, New York, NY
Former name, former address and former fiscal year, if changed since last
report.

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding  12 months or for such  shorter  period that the  registrant  was
required  to file  such  reports,  and  (2)  has  been  subject  to such  filing
requirements for the past 90 days. YES |X| NO |_|

Indicate the number of shares  outstanding  for each of the issuer's  classes of
common stock, as of the latest practical date:

     Title of each class                   Shares outstanding at AUGUST 31, 2006
Common stock, $0.01 par value                            4,326,929

(This document contains 46 pages)

<PAGE>

                   CANAL CAPITAL CORPORATION AND SUBSIDIARIES
                             FORM 10-Q JULY 31, 2006

                                      INDEX

The following documents are filed as part of this report:

Part I - Financial Information ............................................    3

Item I.  Condensed Financial Statements:

     Consolidated Balance Sheets - July 31, 2006
       and October 31, 2005 ...............................................    4

     Consolidated Statements of Operations and
       Comprehensive Income for the Nine and Three Month
       Periods ended July 31, 2006 and 2005................................    6

     Consolidated Statements of Changes in Stockholders'
       Equity for the One Year and Nine Month Periods
       ended October 31, 2005 and July 31, 2006 ...........................   10

     Consolidated Statements of Cash Flows for the
       Nine Month Periods ended July 31, 2006 and
       2005 ...............................................................   11

     Notes to Consolidated Financial Statements ...........................   13

Item II.  Management's Discussion and Analysis of
          Financial Condition .............................................   27

     Liquidity and Capital Resources ......................................   36

     Other Factors ........................................................   37

Item III.  Quantitative and Qualitative Disclosures
           About Market Risk ..............................................   37

Item IV.   Controls and Procedures ........................................   38

Part II - Other Information ...............................................   39

     Items 1 through 6 ....................................................   40

     Signatures and Certifications ........................................   41


                                       2
<PAGE>

                                     PART I

                              FINANCIAL INFORMATION


                                       3
<PAGE>

                    CANAL CAPITAL CORPORATION & SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                       JULY 31, 2006 AND OCTOBER 31, 2005

                                                        JULY 31,     OCTOBER 31,
                                                          2006          2005
                                                       (UNAUDITED)    (AUDITED)
                                                       -----------   -----------
ASSETS:

CURRENT ASSETS:

       CASH AND CASH EQUIVALENTS                       $    37,950   $    79,190

       NOTES AND ACCOUNTS RECEIVABLE, NET OF AN
         ALLOWANCE FOR DOUBTFUL ACCOUNTS OF $ZERO AT
         BOTH JULY 31, 2006 AND OCTOBER 31, 2005,          122,145       171,904

       ART INVENTORY, NET OF A VALUATION ALLOWANCE
         OF $713,000 AND $767,800 AT JULY 31, 2006
         AND OCTOBER 31, 2005                              333,000       352,400

       STOCKYARDS INVENTORY                                 12,070        11,655

       PREPAID EXPENSES                                     60,775        32,898
                                                       -----------   -----------

            TOTAL CURRENT ASSETS                           565,940       648,047
                                                       -----------   -----------

NON-CURRENT ASSETS:

       PROPERTY ON OPERATING LEASES, NET OF
            ACCUMULATED DEPRECIATION OF $376,599
            AND $359,948 AT JULY 31, 2006 AND
            OCTOBER 31, 2005, RESPECTIVELY               1,822,323     1,840,038
                                                       -----------   -----------

       PROPERTY USED IN STOCKYARD OPERATIONS, NET OF
            ACCUMULATED DEPRECIATION OF $185,105 AND
            $169,455 AT JULY 31, 2006 AND OCTOBER
            31, 2005, RESPECTIVELY                       1,110,010     1,121,258
                                                       -----------   -----------

       LONG-TERM MORTGAGE NOTE RECEIVABLE                1,750,000     1,750,000
                                                       -----------   -----------

OTHER ASSETS:

       PROPERTY HELD FOR DEVELOPMENT OR RESALE             149,260       299,635

       RESTRICTED CASH - TRANSIT INSURANCE                  53,144        41,328

       INVESTMENT IN JOINT VENTURE AND OTHER ASSETS        113,720       113,720
                                                       -----------   -----------

                                                           316,124       454,683
                                                       -----------   -----------

                                                       $ 5,564,397   $ 5,814,026
                                                       ===========   ===========

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.


                                       4
<PAGE>

                    CANAL CAPITAL CORPORATION & SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                       JULY 31, 2006 AND OCTOBER 31, 2005

<TABLE>
<CAPTION>
                                                         JULY 31,        OCTOBER 31,
                                                           2006             2005
                                                        (UNAUDITED)       (AUDITED)
                                                       ------------     ------------
<S>                                                    <C>              <C>
LIABILITIES & STOCKHOLDERS' EQUITY:

CURRENT LIABILITIES:

       ACCOUNTS PAYABLE AND ACCRUED EXPENSES           $    249,168     $    383,555
       PENSION PLAN PAYABLE                                  96,249          149,040
       PAYABLE TO EXECUTIVE OFFICERS                         63,492           70,259
       ACCRUED PROFESSIONAL FEES                             77,846          140,000
       INCOME TAXES PAYABLE                                  10,000           10,000
                                                       ------------     ------------
         TOTAL CURRENT LIABILITIES                          496,755          752,854
                                                       ------------     ------------

NON-CURRENT LIABILITIES:

       LONG-TERM PENSION LIABILITY                          333,442          429,691
       REAL ESTATE TAXES PAYABLE                            168,341          132,000
                                                       ------------     ------------
         TOTAL NON-CURRENT LIABILITIES                      501,783          561,691
                                                       ------------     ------------

LONG-TERM DEBT, RELATED PARTY                             2,687,000        2,687,000
                                                       ------------     ------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:

  PREFERRED STOCK, $0.01 PAR VALUE:
       10,000,000 SHARES AUTHORIZED; 8,014,137 AND
       7,050,836 SHARES ISSUED AND OUTSTANDING
       AT JULY 31, 2006 AND OCTOBER 31, 2005,
       RESPECTIVELY AND AGGREGATE LIQUIDATION
       PREFERENCE OF $10 PER SHARE FOR $ 80,141,370
       AND $70,508,360 AT JULY 31, 2006 AND
       OCTOBER 31, 2005, RESPECTIVELY                        80,141           70,508

  COMMON STOCK, $0.01 PAR VALUE:
       10,000,000 SHARES AUTHORIZED; 5,313,794
       SHARES ISSUED AND 4,326,929 SHARES OUT-
       STANDING AT JULY 31, 2006 AND OCTOBER 31,
       2005, RESPECTIVELY                                    53,138           53,138

  ADDITIONAL PAID-IN CAPITAL                             28,211,858       28,137,647

  ACCUMULATED DEFICIT                                   (13,603,046)     (13,396,580)

  986,865 SHARES OF COMMON STOCK
       HELD IN TREASURY, AT COST                        (11,003,545)     (11,003,545)

  COMPREHENSIVE INCOME:
    PENSION VALUATION RESERVE                            (1,859,687)      (2,048,687)
                                                       ------------     ------------
                                                          1,878,859        1,812,481
                                                       ------------     ------------

                                                       $  5,564,397     $  5,814,026
                                                       ============     ============
</TABLE>

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.


                                       5
<PAGE>

                    CANAL CAPITAL CORPORATION & SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
                FOR THE NINE MONTHS ENDED JULY 31, 2006 AND 2005

                                                         2006           2005
                                                      (UNAUDITED)    (UNAUDITED)
                                                      -----------    -----------

STOCKYARD OPERATIONS:

STOCKYARD REVENUES:
    YARD HANDLING AND AUCTION                         $ 2,331,784    $ 2,137,095
    FEED AND BEDDING INCOME                               111,435        120,315
    RENTAL & OTHER INCOME                                 139,370         91,389
                                                      -----------    -----------

                                                        2,582,589      2,348,799
                                                      -----------    -----------
STOCKYARD EXPENSES:
    LABOR AND RELATED COSTS                             1,029,272      1,071,891
    OTHER OPERATING AND MAINTENANCE                       610,620        508,264
    FEED AND BEDDING EXPENSE                               97,346         91,057
    DEPRECIATION AND AMORTIZATION                          15,650         15,710
    TAXES OTHER THAN INCOME TAXES                         127,266        123,205
    GENERAL AND ADMINISTRATIVE                            255,849        233,162
                                                      -----------    -----------

                                                        2,136,003      2,043,289
                                                      -----------    -----------
0
INCOME FROM STOCKYARD OPERATIONS                          446,586        305,510
                                                      -----------    -----------

REAL ESTATE OPERATIONS:

 REAL ESTATE REVENUES:
    SALE OF REAL ESTATE                                   375,000      2,810,000
    OUTSIDE REAL ESTATE RENT                              391,040        421,754
    EXCHANGE BUILDING RENTAL INCOME                        25,080         22,933
                                                      -----------    -----------

                                                          791,120      3,254,687
                                                      -----------    -----------
 REAL ESTATE EXPENSES:
    COST OF REAL ESTATE SOLD                              253,244      1,495,345
    LABOR, OPERATING AND MAINTENANCE                       65,833         60,705
    DEPRECIATION AND AMORTIZATION                          16,650         16,650
    TAXES OTHER THAN INCOME TAXES                          27,000         54,000
    GENERAL AND ADMINISTRATIVE                             23,800         19,250
                                                      -----------    -----------

                                                          386,527      1,645,950


INCOME FROM REAL ESTATE OPERATIONS                        404,593      1,608,737
                                                      -----------    -----------

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.


                                       6
<PAGE>

                    CANAL CAPITAL CORPORATION & SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
                FOR THE NINE MONTHS ENDED JULY 31, 2006 AND 2005
                                  Continued ...

                                                       2006            2005
                                                    (UNAUDITED)     (UNAUDITED)
                                                    -----------     -----------

GENERAL AND ADMINISTRATIVE EXPENSE                     (826,386)       (629,513)
                                                    -----------     -----------

INCOME FROM OPERATIONS                                   24,793       1,284,734
                                                    -----------     -----------

OTHER (EXPENSE) INCOME:

  INTEREST & OTHER INCOME                                54,000          54,000
  INTEREST EXPENSE                                     (202,790)       (212,008)
  ART SALES AND OPERATIONS                               (2,775)         13,686
                                                    -----------     -----------

                                                       (151,565)       (144,322)
                                                    -----------     ------------
(LOSS) INCOME BEFORE PROVISION FOR
  INCOME TAXES                                         (126,772)      1,140,412

PROVISION FOR INCOME TAXES                                    0               0
                                                    -----------     -----------

NET (LOSS) INCOME                                      (126,772)      1,140,412

OTHER COMPREHENSIVE INCOME:

  MINIMUM PENSION LIABILITY ADJUSTMENT                  189,000               0
                                                    -----------     -----------

COMPREHENSIVE INCOME                                $    62,228     $ 1,140,412
                                                    ===========     ===========

NET (LOSS) INCOME PER COMMON SHARE
  BASIC AND DILUTED                                 $     (0.05)    $      0.25
                                                    ===========     ===========

AVERAGE SHARES OUTSTANDING - BASIC
  AND DILUTED                                         4,326,929       4,326,929
                                                    ===========     ===========

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.


                                       7
<PAGE>

                    CANAL CAPITAL CORPORATION & SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
                FOR THE THREE MONTHS ENDED JULY 31, 2006 AND 2005

                                                        2006           2005
                                                     (UNAUDITED)    (UNAUDITED)
                                                     -----------    -----------

STOCKYARD OPERATIONS:

STOCKYARD REVENUES:
    YARD HANDLING AND AUCTION                        $   555,803    $   489,640
    FEED AND BEDDING INCOME                               30,453         29,789
    RENTAL & OTHER INCOME                                 67,841         30,138
                                                     -----------    -----------

                                                         654,097        549,567
                                                     ------------   -----------
STOCKYARD EXPENSES:
    LABOR AND RELATED COSTS                              322,141        327,974
    OTHER OPERATING AND MAINTENANCE                      191,060        153,019
    FEED AND BEDDING EXPENSE                              24,745         22,192
    DEPRECIATION AND AMORTIZATION                          5,216          5,237
    TAXES OTHER THAN INCOME TAXES                         40,233         38,314
    GENERAL AND ADMINISTRATIVE                            60,162         53,259
                                                     -----------    -----------

                                                         643,557        599,995
                                                     -----------    ------------


INCOME FROM STOCKYARD OPERATIONS                          10,540        (50,428)
                                                     -----------    -----------

REAL ESTATE OPERATIONS:

 REAL ESTATE REVENUES:
    SALE OF REAL ESTATE                                        0      1,060,000
    OUTSIDE REAL ESTATE RENT                             128,812        152,521
    EXCHANGE BUILDING RENTAL INCOME                        8,377          7,631
                                                     -----------    -----------

                                                         137,189      1,220,152
                                                     -----------    ------------
 REAL ESTATE EXPENSES:
    COST OF REAL ESTATE SOLD                                   0        595,090
    LABOR, OPERATING AND MAINTENANCE                      22,112         22,722
    DEPRECIATION AND AMORTIZATION                          5,550          5,550
    TAXES OTHER THAN INCOME TAXES                          9,000         18,000
    GENERAL AND ADMINISTRATIVE                             8,600          6,250
                                                     -----------    -----------

                                                          45,262        647,612
                                                     -----------    ------------


INCOME FROM REAL ESTATE OPERATIONS                        91,927        572,540
                                                     -----------    -----------

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.


                                       8
<PAGE>

                    CANAL CAPITAL CORPORATION & SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
                FOR THE THREE MONTHS ENDED JULY 31, 2006 AND 2005
                                  Continued ...

                                                       2006            2005
                                                    (UNAUDITED)     (UNAUDITED)
                                                    -----------     -----------

GENERAL AND ADMINISTRATIVE EXPENSE                     (270,131)       (220,275)
                                                    -----------     -----------

(LOSS) INCOME FROM OPERATIONS                          (167,664)        301,837
                                                    -----------     -----------

OTHER (EXPENSE) INCOME:

  INTEREST & OTHER INCOME                                18,000          18,000
  INTEREST EXPENSE                                      (67,175)        (70,696)
  ART SALES AND OPERATIONS                               (3,887)         (3,563)
                                                    -----------     -----------

                                                        (53,062)        (56,259)
                                                    -----------     ------------
(LOSS) INCOME BEFORE PROVISION FOR
  INCOME TAXES                                         (220,726)        245,578

PROVISION FOR INCOME TAXES                                    0               0
                                                    -----------     -----------

NET (LOSS) INCOME                                      (220,726)        245,578

OTHER COMPREHENSIVE INCOME:

  MINIMUM PENSION LIABILITY ADJUSTMENT                   63,000               0
                                                    -----------     -----------

COMPREHENSIVE (LOSS) INCOME                         $  (157,726)    $   245,578
                                                    ===========     ===========

NET (LOSS) INCOME PER COMMON SHARE
  BASIC AND DILUTED                                 $     (0.06)    $      0.05
                                                    ===========     ===========

AVERAGE SHARES OUTSTANDING - BASIC
  AND DILUTED                                         4,326,929       4,326,929
                                                    ===========     ===========

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.


                                       9
<PAGE>

                   CANAL CAPITAL CORPORATION AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                FOR THE YEAR ENDED OCTOBER 31, 2005 (AUDITED) AND
               FOR THE NINE MONTHS ENDED JULY 31, 2006 (UNAUDITED)

                                     COMMON STOCK            PREFERRED STOCK
                                  NUMBER                    NUMBER
                                    OF                        OF
                                  SHARES       AMOUNT       SHARES       AMOUNT


BALANCE, OCTOBER 31, 2004       5,313,794    $  53,138    6,198,367    $  61,984
 NET INCOME                             0            0            0            0
 PREFERRED STOCK DIVIDEND               0            0      852,469        8,524
 MINIMUM PEN. LIAB. ADJ                 0            0            0            0
                                -----------------------   ----------------------

BALANCE, OCTOBER 31, 2005       5,313,794    $  53,138    7,050,836    $  70,508
 NET INCOME                             0            0            0            0
 PREFERRED STOCK DIVIDEND               0            0      963,301        9,633
 MINIMUM PEN. LIAB. ADJ                 0            0            0            0
                                -----------------------    ---------------------

BALANCE, JULY  31, 2006         5,313,794    $  53,138    8,014,137    $  80,141
                                =======================   ======================

<TABLE>
<CAPTION>
                              ADDITIONAL                                       TREASURY
                               PAID-IN       ACCUMULATED    COMPREHENSIVE        STOCK,
                               CAPITAL         DEFICIT      (LOSS)INCOME        AT COST
<S>                          <C>            <C>              <C>             <C>
BALANCE, OCTOBER 31, 2004    $28,060,908    ($14,031,634)    ($2,250,089)    ($11,003,545)
 NET INCOME                            0         716,166               0                0
 PREFERRED STOCK DIVIDEND         76,739         (81,112)              0                0
 MINIMUM PEN. LIAB. ADJ                0               0         201,402                0
                             -----------    ------------     -----------     ------------

BALANCE, OCTOBER 31, 2005    $28,137,647    ($13,396,580)    ($2,048,687)    ($11,003,545)
 NET INCOME                            0        (126,772)              0                0
 PREFERRED STOCK DIVIDEND         74,211         (79,694)              0                0
 MINIMUM PEN. LIAB. ADJ                0               0         189,000                0
                             -----------    ------------     -----------     ------------
BALANCE, JULY 31, 2006       $28,211,858    ($13,603,046)    ($1,859,687)    ($11,003,545)
                             ===========    ============     ===========     ============
</TABLE>

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.


                                       10
<PAGE>

                    CANAL CAPITAL CORPORATION & SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE NINE MONTHS ENDED JULY 31, 2006 AND 2005

                                                              JULY 31,
                                                    ---------------------------
                                                        2006            2005
                                                        ----            ----

CASH FLOWS FROM OPERATING ACTIVITIES:
  NET (LOSS) INCOME                                 $  (126,772)    $ 1,140,412
                                                    -----------     -----------

  ADJUSTMENTS TO RECONCILE NET (LOSS)
   INCOME TO NET CASH (USED) BY
   OPERATING ACTIVITIES:

   DEPRECIATION AND AMORTIZATION                         32,301          36,860

   GAIN  ON SALES OF REAL ESTATE                       (121,756)     (1,314,655)

   GAIN ON ART SALES (NET OF RESERVE)                    (9,400)        (32,300)

   MINIMUM PENSION LIABILITY ADJUSTMENT                 189,000               0

   PREFERRED STOCK ISSUED IN LIEU OF
     OFFICER COMPENSATION                                 4,151           4,151

DECREASE (INCREASE) IN ASSETS:

   NOTES AND ACCOUNTS RECEIVABLE                         49,759         206,530

   STOCKYARDS INVENTORY                                    (415)         (5,057)

   PREPAID EXPENSES                                     (27,877)        (38,654)

   RESTRICTED CASH - TRANSIT INSURANCE                  (11,816)         (1,446)

   DEFERRED LEASING AND FINANCING COSTS                       0          12,075

   DEPOSITS AND OTHER - NET                                   0           7,849

INCREASE (DECREASE) IN LIABILITIES:

   ACCOUNTS PAYABLE AND ACCRUED EXPENSES               (134,387)       (324,839)

   PENSION PLAN PAYABLE                                (149,040)       (253,875)

   SALARIES PAYABLE - OFFICERS                           (6,767)       (194,884)

   ACCRUED PROFESSIONAL FEES                            (62,154)        (86,249)

   INCOME TAXES PAYABLE                                       0          (5,000)

   REAL ESTATE TAXES PAYABLE                             36,341        (151,878)
                                                    -----------     -----------

        TOTAL ADJUSTMENTS                              (212,060)     (2,141,372)
                                                    -----------     -----------

NET CASH USED BY OPERATING ACTIVITIES                  (338,832)     (1,000,960)
                                                    -----------     -----------

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.


                                       11
<PAGE>

                    CANAL CAPITAL CORPORATION & SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE NINE MONTHS ENDED JULY 31, 2006 AND 2005
                                  Continued ...

                                                              JULY 31,
                                                    ---------------------------
                                                        2006            2005
                                                        ----            ----

CASH FLOWS FROM INVESTING ACTIVITIES:

  PROCEEDS FROM SALES OF REAL ESTATE                    375,000       1,060,000
  PROCEEDS FROM SALES OF ART                             28,800          64,100
  COSTS RELATING TO SALES OF REAL ESTATE                (99,690)       (129,298)
  COSTS RELATING TO SALES OF ART - NET                        0               0
  CAPITAL EXPENDITURES                                   (6,518)              0
                                                    -----------     -----------

  NET CASH PROVIDED BY INVESTING
  ACTIVITIES                                            297,592         994,802
                                                    -----------     -----------

CASH FLOWS FROM INVESTING ACTIVITIES:

   REPAYMENT OF LONG-TERM DEBT OBLIGATIONS                    0         (80,000)
                                                    -----------     -----------

NET CASH PROVIDED BY INVESTING ACTIVITIES                     0         (80,000)
                                                    -----------     -----------

NET (DECREASE ) INCREASE IN CASH AND CASH
  EQUIVALENTS                                           (41,240)        (86,158)

CASH AND CASH EQUIVALENTS AT BEGN OF YEAR                79,190          86,158
                                                    -----------     -----------

CASH AND CASH EQUIVALENTS AT END OF YEAR            $    37,950     $         0
                                                    ===========     ===========

                                                              JULY 31,
                                                    ---------------------------
                                                        2006            2005
                                                        ----            ----
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
  INFORMATION:

CASH PAID DURING THE YEAR FOR:

  INTEREST                                          $   202,790     $   212,008
                                                    ===========     ===========

  INCOME TAXES                                      $         0     $     5,000
                                                    ===========     ===========

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
  AND FINANCING ACTIVITIES:

  MORTGAGE NOTE RECEIVED FOR SALE OF
    REAL ESTATE                                     $         0     $ 1,750,000
                                                    ===========     ===========

  PREFERRED STOCK DIVIDENDS                         $    79,694     $    60,263
                                                    ===========     ===========

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.


                                       12
<PAGE>

                   CANAL CAPITAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     FOR THE NINE MONTHS ENDED JULY 31, 2006

1.    DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

      Canal Capital Corporation ("Canal"), incorporated in the state of Delaware
in 1964, commenced business operations through a predecessor in 1936.

      General - While the Company is  currently  operating  as a going  concern,
certain  significant factors raise substantial doubt about the Company's ability
to continue as a going concern.  The Company has suffered  recurring losses from
operations and is obligated to continue making substantial annual  contributions
to its defined benefit pension plan. The financial statements do not include any
adjustments  that  might  result  from the  resolution  of these  uncertainties.
Additionally,   the  accompanying   financial  statements  do  not  include  any
adjustments  relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.

      Canal continues to closely monitor and reduce where possible its operating
expenses  and plans to continue  its program to develop or sell the  property it
holds  for  development  or  resale  as well as to  reduce  the level of its art
inventories to enhance current cash flows.  Management  believes that its income
from operations  combined with its cost cutting program and planned reduction of
its art  inventory  will enable it to finance its current  business  activities.
There can,  however,  be no assurance  that Canal will be able to effectuate its
planned art  inventory  reductions or that its income from  operations  combined
with its cost cutting  program in itself will be  sufficient  to fund  operating
cash requirements.

      Canal is engaged in two  distinct  businesses - stockyard  operations  and
real estate.

      Stockyard  Operations  -  Through  an  August  1,  1999  asset  repurchase
agreement,  Canal now  operates  two central  public  stockyards  located in St.
Joseph, Missouri and Sioux Falls, South Dakota.

      Public stockyards act much like a securities  exchange,  providing markets
for all  categories  of  livestock  and  fulfilling  the  economic  functions of
assembly,  grading, and price discovery.  The livestock handled by the Company's
stockyards include cattle, hogs, and sheep. Cattle and hogs may come through the
stockyard  facilities at two  different  stages,  either as feeder  livestock or
slaughter   livestock.   The  Company's  stockyards  provide  all  services  and
facilities required to operate an independent market for the


                                       13
<PAGE>

sale of livestock,  including  veterinary services  facilities,  auction arenas,
auctioneers, weigh masters and scales, feed and bedding, and security personnel.
In addition, the stockyards provide other services including pure bred and other
specialty sales for producer  organizations.  The Company promotes its stockyard
business   through  public   relations   efforts,   advertising,   and  personal
solicitation of producers.

      Actual  marketing  transactions  at a stockyard  are managed for livestock
producers by market  agencies and independent  commission  sales people to which
the livestock are consigned for sale.  These market  agencies (some of which are
owned  and  operated  by the  Company)  and  independent  sales  people  receive
commissions  from the seller upon  settlement of a transaction and the stockyard
receives a yardage fee on all livestock  using the facility which is paid within
twenty-four  hours of the sale.  Yardage  fees vary  depending  upon the type of
animal, the extent of services provided by the stockyard, and local competition.
Yardage revenues are not directly dependent upon market prices, but rather are a
function of the volume of livestock  handled.  In general,  stockyard  livestock
volume is dependent upon conditions  affecting livestock production and upon the
market  agencies and  independent  commission  sales people which operate at the
stockyards.  Stockyard  operations are seasonal,  with greater volume  generally
experienced  during the first and fourth  quarters of each fiscal  year,  during
which periods livestock is generally brought to market.

      Virtually all of the volume at Canal's  Sioux Falls  stockyards is handled
through market agencies and independent  commission sales people,  while the St.
Joseph  stockyards  has  solicitation  operations  of its own which  account for
approximately 50% of its livestock volume annually.

      Canal  intends  to  continue  its  soliciting  efforts  at its St.  Joseph
stockyards  in fiscal 2006.  Further,  Canal tries to balance its  dependence on
market  agencies  and  independent  commission  sales  people in  various  ways,
including:   developing  solicitation  operations  of  its  own;  direct  public
relations;  advertising and personal  solicitation of producers on behalf of the
stockyards;  providing  additional services at the stockyards to attract sellers
and  buyers;  and  providing  incentives  to  market  agencies  and  independent
commission sales people for increased business.

      Canal  maintains  an  inventory  of feed and  bedding  which is  comprised
primarily of hay,  corn and straw.  The value of this  inventory was $12,000 and
$12,000 at July 31, 2006 and October 31, 2005, respectively.

      Stockyard operations resulted in operating income of $447,000 and $306,000
for the  nine  month  periods  ended  July  31,  2006  and  2005,  respectively.
Additionally,  stockyard  operations  contributed  $2,583,000  and $2,349,000 to
Canal's  revenues  for the nine  month  periods  ended  July 31,  2006 and 2005,
respectively.


                                       14
<PAGE>

      Real Estate  Operations  - Canal's real estate  properties  are located in
Sioux City, Iowa, South St Paul, Minnesota, St Joseph, Missouri, Omaha, Nebraska
and Sioux Falls, South Dakota. The properties consist,  for the most part, of an
Exchange Building (commercial office space), land and structures leased to third
parties (rail car repair shops,  lumber yards and various other  commercial  and
retail  businesses) as well as vacant land available for  development or resale.
Its principal real estate operating  revenues are derived from lease income from
land and structures leased to various commercial and retail enterprises,  rental
income from its Exchange  Building,  and  proceeds  from the sale of real estate
properties.  In  addition to selling  what was excess  stockyard  property,  the
company  entertains any offers to purchase,  develop and restructure real estate
lots surrounding its existing  operating lease properties,  stockyard  operating
properties and properties held for development or resale in order to enhance the
value of the existing properties and surrounding real estate.

      Real estate  operations  resulted  in  operating  income of  $405,000  and
$1,609,000   for  the  nine  month   periods  ended  July  31,  2006  and  2005,
respectively.  Included in the 2006 real estate  operating  income is a $122,000
gain on the sales of six acres of  vacant  land  located  in South  Saint  Paul,
Minnesota and a one acre parcel of land located in Sioux City, Iowa. Included in
the 2005 real  estate  operating  income is a  $850,000  gain on the sale of the
company's South St. Paul,  Minnesota  Exchange Building with the associated five
acres of land and a $444,000 gain on the sale of 25 acres of land (formerly used
in  stockyard  operations)  in  Sioux  City,  Iowa.  Additionally,  real  estate
operations  contributed $791,000 and $3,255,000 to Canal's revenues for the nine
month periods ended July 31, 2006 and 2005, respectively.

      As of July 31, 2006, there are  approximately 20 acres of undeveloped land
owned by Canal adjacent to its stockyard properties. In addition to selling what
was excess stockyard  property,  the company  entertains any offers to purchase,
develop and  restructure  real estate lots  surrounding  its existing  operating
lease  properties,  stockyard  operating  properties  and  properties  held  for
development  or resale in order to enhance the value of the existing  properties
and surrounding real estate.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      A) Principles of Consolidation -- The  consolidated  financial  statements
include the  accounts of Canal  Capital  Corporation  ("Canal")  and its wholly-
owned  subsidiaries  ("the  Company").  All material  intercompany  balances and
transactions have been eliminated in consolidation.

      B)  Investments  in Joint  Ventures  --  Investments  in  which  ownership
interest  range from 20% to 50% or less owned joint  ventures are  accounted for
under the  equity  method.  These  joint  ventures  are not,  in the  aggregate,
material in relation to the financial position or results of operations of


                                       15
<PAGE>

Canal. The carrying amount of such investments was $111,000 at both July 31,2006
and October 31, 2005, and is included in other assets.  The operating results of
joint  ventures  accounted for on the equity  method,  for fiscal year 2005, and
2004 were not material to financial  statement  presentation  and were therefore
included in other income from real estate operations.

      C) Deferred Leasing and Financing Costs -- Costs incurred in obtaining new
leases and long-term  financing are deferred and amortized over the terms of the
related leases or debt agreements, as applicable.

      D) Properties  and Related  Depreciation  -- Properties are stated at cost
less  accumulated  depreciation.  Depreciation is provided on the  straight-line
method  over the  estimated  useful  lives of the  properties.  Such  lives  are
estimated  from  35 to 40  years  for  buildings  and  from  5 to 20  years  for
improvements and equipment.

      Property held for  Development or Resale -- Property held for  development
or  resale  consist  of  approximately  20  acres  located  in  the  midwest  of
undeveloped land not currently  utilized for corporate  purposes nor included in
any of the present operating leases. The Company constantly  evaluates proposals
received for the purchase,  leasing or  development  of this asset.  The land is
valued at cost which does not exceed the net realizable value.

      Long-Lived  Assets - The Company  reviews  the  impairment  of  long-lived
assets  whenever events or changes in  circumstances  indicate that the carrying
amount of an asset may not be  recoverable.  The  Company  considers  historical
performance  and  future  estimated  results  in  its  evaluation  of  potential
impairment and then compares the carrying  amount of the assets to the estimated
future cash flows expected to result from the use of the asset.  The measurement
of the loss,  if any,  will be  calculated  as the amount by which the  carrying
amount of the asset exceeds the fair value of the asset.

      E)  Expenditures  for maintenance and repairs are charged to operations as
incurred.  Significant renewals and betterments are capitalized. When properties
are sold or otherwise disposed of, the cost and related accumulated depreciation
are  removed  from the  accounts  and any gain or loss is  reflected  in current
income.

      F) Art  Inventory  Held for Sale - Inventory of art is valued at the lower
of  cost,  including  direct  acquisition  and  restoration   expenses,  or  net
realizable value on a specific  identification basis. The nature of art makes it
difficult to determine a replacement  value.  The most compelling  evidence of a
value in most cases is an  independent  appraisal.  In fiscal  2005  independent
appraisals  covered  approximately 46% of the art inventory value at October 31,
2005.  The net  realizable  value of Canals  remaining  art  inventory  has been
estimated by management  based in part on the Company's  history of art sales in
the current  and  previous  years and in part on the results of the  independent
appraisals done in previous years. However,


                                       16
<PAGE>

because of the nature of art inventory,  such  determination  is very subjective
and, therefore,  the estimated values could differ significantly from the amount
ultimately realized.

      G) Income Taxes -- Canal and its subsidiaries file a consolidated  Federal
income tax return.  The Company  accounts for income  taxes under the  liability
method.  Under this method,  deferred tax assets and  liabilities are determined
based on  differences  between  financial  reporting and tax bases of assets and
liabilities.

      H)  Stockyard  Inventory  -  Inventory  is  stated at the lower of cost or
market. Cost is determined using the first-in, first-out method.

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

      J) Revenue Recognition -- Lease and rental revenues are recognized ratably
over the period  covered.  All real estate leases are accounted for as operating
leases.  Revenues from real estate sales are recognized  generally when title to
the property passes.  Revenues from stockyard operations which consist primarily
of yardage  fees (a standard  per head  charge for each animal sold  through the
stockyards)  and sale of feed and bedding are recognized at the time the service
is rendered or the feed and bedding are delivered.

      Other  Income  (Expense)  Items -- Art  sales  are  recognized  using  the
specific identification method, when the piece is shipped to the purchaser.  Art
owned by Canal which is on  consignment,  joint  venture,  or being  examined in
contemplation  of sale is not removed from  inventory and not recorded as a sale
until notice of sale or acceptance  has been  received.  The sale of investments
available for sale, if any, are recognized, on a specific identification method,
on a trade date basis.

      K)  Statements  of Cash  Flows -- The  company  considers  all  short-term
investments with a maturity of three months or less to be cash equivalents. Cash
equivalents  primarily  include bank,  broker and time deposits with an original
maturity of less than three months. These investments are carried at cost, which
approximates  market value.  Canal made federal and state income tax payments of
$0 and $5,000 and interest  payments of $203,000 and $212,000 for the nine month
period periods ended July 31,2006 and 2005, respectively.


                                       17
<PAGE>

      L)  Reclassification  -- Certain prior year amounts have been reclassified
to conform to the current year presentation.

      M) Comprehensive  Income (Loss) -- The Company's only adjustments for each
classification of the comprehensive income was for minimum pension liability.

      N)  Earnings  (Loss)  Per  Share -- Basic  earnings  (loss)  per  share is
computed by dividing the net income  (loss)  applicable  to common shares by the
weighted  average  of common  shares  outstanding  during  the  period.  Diluted
earnings  (loss)  per share  adjusts  basic  earnings  (loss)  per share for the
effects of convertible securities,  stock options and other potentially dilutive
financial  instruments,  only in the  period in which such  effect is  dilutive.
There were no dilutive  securities in any of the periods presented  herein.  The
shares  issuable  upon the  exercise  of stock  options  are  excluded  from the
calculation   of  net  income   (loss)  per  share  as  their  effect  would  be
antidilutive.

      O)  Recent  Accounting  Pronouncements  -- In  June  2005,  the  Financial
Accounting  Standards  Board ("FASB") issued  Statement of Financial  Accounting
Standards No. 154, Accounting Changes and Error Corrections ("FAS 154"). FAS 154
replaces  Accounting  Principles  Board Opinion No. 20,  Accounting  Changes and
Statement of Financial  Accounting Standards No. 3, Reporting Accounting Changes
in Interim  Financial  Statements.  FAS 154 requires  that  voluntary  change in
accounting principle be applied  retrospectively with all prior period financial
statements presented on the new accounting principle. FAS 154 also requires that
a change in method of depreciating or amortizing a long-lived nonfinancial asset
be accounted for prospectively as a change in estimate, and correction of errors
in previously issued financial  statements  should be termed a restatement.  FAS
154 is effective for accounting  changes and correction of errors made in fiscal
years  beginning  December 15, 2005. The Company does not expect the adoption of
FAS  154 to have a  material  impact  on the  Company's  consolidated  financial
statements.

      Late in 2004, the Emerging  Issues Task Force reached a consensus on Issue
No.  04-8,  "The  Effect of  Contingently  Convertible  Instruments  on  Diluted
Earnings per Share" ("EITF 04-8").  The consensus  requires that all instruments
that have embedded  conversion features that are contingent on market conditions
indexed to an issuer's  share price  should be included in diluted  earnings per
share computations (if diluted) regardless of whether the market conditions have
been met. The consensus includes instruments that have more than one contingency
if one of the  contingencies  is  based  on  market  conditions  indexed  to the
issuer's  share price and that  instrument  can be  converted to shares based on
achieving a market  condition - that is, the  conversion  is not  dependent on a
substantive  non-market-based  contingency. The application of this consensus is
required  beginning with the December 31, 2004 reporting period. The adoption of
EITF  04-8  did  not  have  a  material  impact  on our  consolidated  financial
statements.


                                       18
<PAGE>

      In  December  2004,  the FASB issued  Statement  of  Financial  Accounting
Standards No. 123R,  "Share-Based  Payment" ("SFAS 123R"),  an amendment of FASB
Statement No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation".  SFAS
123R is focused  primarily on  accounting  for  share-based  compensation.  This
statement  requires  companies 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.  SFAS 123R  requires  measurement  of fair value of employee
stock options using an option  pricing model that takes into account the awarded
options' unique characteristics. SFAS 123R requires charging the recognized cost
to expense  over the period the  employee  provides  services to earn the award,
generally the vesting period for the award.

      SFAS  123R's  measurement  requirements  for  employee  stock  options are
similar to those of SFAS 123,  which is the basis for the pro forma stock- based
compensation   disclosure  contained  in  the  preceding  caption  "Stock  Based
Compensation" of this note. However, SFAS 123R requires:

            -     initial  and  ongoing  estimates  of the amount of shares that
                  will vest - SFAS 123 provided  entities the option of assuming
                  that all shares would vest and then  "truing-up"  compensation
                  cost and expense as shares were forfeited.

            -     adjusting the cost of a modified  award with  reference to the
                  difference  in the  fair  value of the  modified  award to the
                  initial award at the date of modification of the award.

      SFAS 123R also  provides  for the use of  alternative  models to determine
compensation cost related to stock option grants. The adoption of SFAS 123R will
not have a material impact on our consolidated financial statements.

3.    INTERIM FINANCIAL STATEMENTS

      The interim  consolidated  financial  statements included herein have been
prepared by Canal and in the  opinion of  Management,  contain  all  adjustments
necessary to present  fairly its financial  position as of July 31, 2006 and the
results of its  operations  and its cash flows for the nine month  period  ended
July  31,  2006.  All of the  above  referenced  adjustments  were  of a  normal
recurring nature. Certain information and footnote disclosures normally included
in  financial   statements   prepared  in  accordance  with  generally  accepted
accounting principles have been condensed or omitted. These financial statements
should be read in conjunction with the consolidated financial statements for the
three years ended  October 31, 2005 and the notes thereto which are contained in
Canal's  2005  Annual  Report on Form 10-K.  The results of  operations  for the
period presented is not necessarily indicative of the results to be expected for
the remainder of fiscal 2006.


                                       19
<PAGE>

4.    MORTGAGE NOTE RECEIVABLE

      On November 1, 2004 Canal sold its Exchange  Building  and the  associated
five acres of land located in South Saint Paul, Minnesota on a contract for deed
for $1,750,000,  generating  operating income of approximately  $850,000.  Canal
accepted a mortgage note for the full sales price,  which note carries  interest
at a rate of 4.12%  per  annum,  payable  in  equal  monthly  installments.  The
mortgage note is due and payable in full on October 31, 2007.

5.    BORROWINGS

      The Company's variable rate mortgage notes (originally issued in 1998) are
due May 15, 2009 and are held entirely by the Company's Chief Executive  Officer
and members of his family. These notes carry interest at the rate of ten percent
per annum.  These notes,  among other  things,  prohibit  Canal from becoming an
investment  company as defined by the  Investment  Company Act of 1940;  require
Canal to  maintain  minimum  net worth;  restricts  Canal's  ability to pay cash
dividends or repurchase stock and require principal  prepayments to be made only
out of the proceeds from the sale of certain  assets.  As of July 31, 2006,  the
balance due under  these notes was  $2,687,000,  all of which is  classified  as
long-term debt-related party.

      At July 31, 2006, substantially all of Canal's real properties,  the stock
of certain  subsidiaries,  the investments and a substantial  portion of its art
inventories are pledged as collateral for the following obligations:

                                                        July 31,     October 31,
($ 000's Omitted)                                         2006          2005
-----------------                                         ----          ----

Variable rate mortgage notes due
  May 15, 2009 - related party                          $  2,687      $  2,687
Less -- current maturities                                     0             0
                                                        --------      --------

Long-term debt                                          $  2,687      $  2,687
                                                        --------      --------

6.    LEASE COMMITMENTS

      In June 2004 Canal entered into a three year lease for approximately 1,000
square  feet of  office  space in  Hauppauge,  New York at a  monthly  rental of
approximately $1,400.

      Canal's future minimum payments  required under operating leases that have
initial or remaining  noncancellable  terms in excess of one year as of July 31,
2006 are  $17,000 and $9,000,  in fiscal 2006 and 2007,  respectively.  Net rent
expense under these and other  operating  leases was $13,000 and $12,000 for the
nine months ended July 31, 2006 and 2005, respectively.


                                       20
<PAGE>

7.    RESTRICTED CASH - TRANSIT INSURANCE

      Transit insurance covers livestock for the period that they are in transit
to and physically at the  stockyards and under the care of stockyard  personnel.
This self  insurance  program  is funded by a per head  charge on all  livestock
received at the stockyard.  The restricted cash - transit insurance  balances of
approximately  $53,000  and  $41,000  at July 31,  2006 and  October  31,  2005,
respectively,  represents  the  excess  of per head  fees  charged  over  actual
payments made for livestock that was injured or died while at the stockyards.

8.    INCOME TAXES

      At July 31, 2006,  the Company has net  operating  loss  carryforwards  of
approximately  $12,177,000  that expire  through 2018.  For financial  statement
purposes, a valuation allowance has been provided to offset the net deferred tax
assets due to the cumulative net operating  losses incurred during recent years.
Such allowance  decreased by approximately  $50,000 and $375,000 during the nine
month  periods  ended  July  31,  2006 and  2005,  respectively.  The  valuation
allowance will be reduced when and if, in the opinion of management, significant
positive  evidence  exists which  indicates that it is more likely than not that
the Company will be able to realize its deferred tax assets.

9.    ART INVENTORY HELD FOR SALE

      Canal is in the process of selling,  in an orderly  manner,  its remaining
art  inventory.  This  will be  accomplished  primarily  through  direct  sales,
consignment  arrangements with various  independent art dealers and through sale
at public art auctions. The Company's ability to dispose of its art inventory is
dependent  primarily on general economic  conditions and the  competitiveness of
the art market itself. Accordingly, there can be no assurance that Canal will be
successful in selling its art inventory.

      Canal has sold two pieces of contemporary  art in the first nine months of
fiscal  2006 as compared  to the six pieces of  contemporary  art sold in fiscal
2005.  Canal's art operations have generated an operating loss of  approximately
$3,000,as   compared  to   operating   income  of  $14,000  on  gross  sales  of
approximately $29,000 and $64,000 for the nine month periods ended July 31, 2006
and 2005, respectively.

      Antiquities  and  contemporary  art  represented  57%  ($189,l22)  and 43%
($143,878)  and 54% ($189,122) and 46% ($163,278) of total art inventory at July
31,  2006 and  October  31,  2005,  respectively.  All of the  contemporary  art
inventory held for resale is comprised of the work of Jules Olitski.

      The Company recorded a valuation  allowance against the current portion of
its inventory to reduce it to its estimated  net  realizable  value based on the
history of losses  sustained on inventory items sold in the current and previous
years. In fiscal 2006 Canal applied $54,800 of the valuation  allowance  against
sales, thereby,  decreasing the total valuation allowance to $713,000 as of July
31, 2006 as compared to $767,800 at October 31, 2005.


                                       21
<PAGE>

10.   PROPERTY ON OPERATING LEASES

      Property on operating  leases  consist of  approximately  39 acres of land
located in Omaha, Nebraska; S. St. Paul, Minnesota;  Sioux City, Iowa as well as
furniture  and  equipment  used in the  Hauppauge,  New  York  office.  Land and
structures  leased to third  parties  include  vacant land,  exchange  buildings
(commercial office space), meat packing facilities, railcar repair shops, lumber
yards and various other commercial and retail businesses.

      A schedule of the Company's  property on operating leases at July 31, 2006
is as follows (000's omitted):

<TABLE>
<CAPTION>
                                                Current Year
                                                ------------
                                                (Retirements
                                                ------------                     Carrying
                        Historical Cost           Additions                      --------
                        ---------------           ---------           Accum.      Value
                                 Bldgs. &                Bldgs. &     ------     --------
Description (1)         Land     Imprvmts.     Land      Imprvmts.    Depr.      07/31/06
------------------      ----     ---------     ----      ---------    ------     --------
<S>                   <C>        <C>         <C>         <C>         <C>         <C>
New York office
Various leasehold     $      0   $      0    $      0    $      2    $      0    $      2
improvements

11 acres of land
in Omaha, NE             1,200         14           0           0          (2)      1,212
Acquired in 1976

10 acres of land
in S. St. Paul, MN         125         98           0           0         (15)        208
Acquired in 1937

18 acres of land
in Sioux City, IA          403          0          (3)          0           0         400
Acquired in 1937      --------   --------    --------    --------    --------    --------

                      $  1,728   $    112    $     (3)   $      2    $    (17)   $  1,822
                      ========   ========    ========    ========    ========    ========
</TABLE>

      A schedule of the Company's reconciliation of property on operating leases
carried for the nine months  ended July 31, 2006 and the year ended  October 31,
2005 is as follows (000's omitted):

                                                       July 31,      October 31,
                                                         2006           2005
                                                         ----           ----

      Balance at beginning of year                      $ 1,840        $ 2,715
      Acquisitions and Improvements                           2              0
      Cost of property sold                                  (3)          (848)
      Depreciation                                          (17)           (27)
      Reclassifications                                       0              0
                                                        -------        -------
      Balance at end of the period                      $ 1,822        $ 1,840
                                                        -------        -------

(1)   Substantially  all of Canal's real property is pledged as  collateral  for
      its debt obligations.


                                       22
<PAGE>

11.   PROPERTY USED IN STOCKYARD OPERATIONS

      Property used in stockyard operations consist of approximately 60 acres of
land  located  in St.  Joseph,  Missouri  and Sioux  Falls,  South  Dakota.  The
Company's  stockyards provide all services and facilities required to operate an
independent  market  for the sale of  livestock.  Stockyard  facilities  include
exchange  buildings  (commercial  office space),  auction arenas,  scale houses,
veterinary facilities, barns, livestock pens and loading docks.

      A schedule of the Company's property used in stockyard  operations at July
31, 2006 is as follows (000's omitted):

<TABLE>
<CAPTION>
                                               Current Year
                                               ------------
                                               (Retirements)
                                               -------------                   Carrying
                        Historical Cost          Additions                     --------
                        ---------------          ---------          Accum.      Value
                                Bldgs. &              Bldgs. &      ------     --------
Description (1)         Land    Imprvmts.     Land    Imprvmts.     Depr.      07/31/06
---------------         ----    ---------     ----    ---------     ------     --------
<S>                   <C>        <C>        <C>        <C>         <C>         <C>
30 acres of land
in St. Joseph, MO     $   902    $    70    $     0    $     0     $    (9)    $   963
Acquired in 1942

30 acres of land
in Sioux Falls, SD        100         49          0          4          (6)        147
Acquired in 1937      -------    -------    -------    -------     -------     -------

                      $ 1,002    $   119    $     0    $     4     $   (15)    $ 1,110
                      =======    =======    =======    =======     =======     =======
</TABLE>

      A schedule of the Company's  reconciliation  of property used in stockyard
operations  carried  for the nine months  ended July  31,2006 and the year ended
October 31, 2005 is as follows (000's omitted):

                                                       July 31,      October 31,
                                                         2006           2005
                                                         ----           ----

      Balance at beginning of year                      $ 1,121        $ 1,142
      Acquisitions and Improvements                           4              0
         Cost of property sold                                0              0
      Depreciation                                          (15)           (21)
                                                        -------        -------
      Balance at end of the period                      $ 1,110        $ 1,121
                                                        -------        -------

(1)   Substantially  all of Canal's real property is pledged as  collateral  for
      its debt obligations.


                                       23
<PAGE>

12.   PROPERTY HELD FOR DEVELOPMENT OR RESALE

      Property held for development or resale consist of  approximately 20 acres
of land located in the midwest of  undeveloped  land not currently  utilized for
corporate  purposes and not included in any of the present operating leases. The
Company constantly  evaluates  proposals  received for the purchase,  leasing or
development of this asset.  The land is valued at cost which does not exceed the
net realizable value.

      A schedule of the  Company's  property held for  development  or resale at
July 31, 2006 is as follows (000's omitted):

<TABLE>
<CAPTION>
                                                Current Year
                                                ------------
                                                (Retirements)
                                                -------------                 Carrying
                          Historical Cost         Additions                   --------
                          ---------------         ---------         Accum.     Value
                                  Bldgs. &              Bldgs. &    ------    --------
Description (1)          Land     Imprvmts.    Land     Imprvmts.   Depr.     07/31/06
--------------------     ----     ---------    ----     ---------   ------    --------
<S>                     <C>        <C>        <C>        <C>        <C>        <C>
16 acres of land
in St. Joseph, MO       $   39        N/A     $    0        N/A        N/A     $   39
Acquired in 1942

0 acres of land
in S. St. Paul, MN         145        N/A     $ (145)       N/A        N/A          0
Acquired in 1937

4 acres of land
in Sioux City, IA          116        N/A     $   (6)       N/A        N/A        110
Acquired in 1937        ------     ------     ------     ------     ------     ------

                        $  300     $    0     $ (151)    $    0     $    0     $  149
                        ======     ======     ======     ======     ======     ======
</TABLE>

      A  schedule  of  the  Company's   reconciliation   of  property  held  for
development  or resale  carried for the nine months  ended July 31, 2006 and the
year ended October 31, 2005 is as follows (000's omitted):

                                                     July 31,    October 31,
                                                       2006         2005
                                                       ----         ----

      Balance at beginning of year                    $  300       $  817
      Acquisitions and Improvements                        0            0
         Cost of property sold                          (151)        (517)
      Reclassification of property                         0            0
                                                      ------       ------

      Balance at end of the period                    $  149       $  300
                                                      ------       ------

(1)   Substantially  all of Canal's real property is pledged as  collateral  for
      its debt obligations.


                                       24
<PAGE>

13.   IMPAIRMENT LOSS ON LONG-LIVED ASSETS

      The Company reviews the values of its long-lived  assets  annually.  There
was no impairment in the value of Canal's long-lived assets to be recorded as of
July 31, 2006 and October 31, 2005.

14.   MINIMUM FUTURE RENTALS ON OPERATING LEASES

      Minimum future rentals consist primarily of rental income from leased land
and  structures,  Exchange  Building rents  (commercial  office space) and other
rental  activities,  all of which are  accounted  for as operating  leases.  The
estimated  minimum  future rentals on operating  leases are $550,000,  $575,000,
$600,000,  $625,000 and $650,000 for fiscal  years 2006,  2007,  2008,  2009 and
2010, respectively.

15.   PENSION VALUATION RESERVE

      The Pension Valuation Reserve  represents the excess of additional minimum
pension  liability  required  under the  provisions  of  Statement  of Financial
Accounting  Standards  ("SFAS") No. 87 over the unrecognized prior service costs
of former  stockyard  employees.  Such  excess  arose due to the  decline in the
market  value of  pension  assets  available  for  pension  benefits  of  former
employees,  which benefits were frozen at the time the stockyard operations were
sold in 1989.  The  additional  minimum  pension  liability  will be expensed as
actuarial  computations of annual pension cost (made in accordance with SFAS No.
87) recognize the deficiency that exists.

      The components of net periodic benefit cost are as follows:

                                           Nine Months Ended
                                         7/31/06       7/31/05
                                         ---------------------

Service cost                               4,100         4,000
   Interest cost                          75,500        74,600
Expected return on plan assets           (80,800)      (64,700)
Amortization of prior service cost             0             0
Recognized net actuarial loss            191,800       177,300
                                         -------       -------

Net periodic service cost                190,600       191,200
                                         =======       =======

The fiscal 2006 amounts have been estimated, actual amounts will be based on the
discount rate and assets available at year end.

In the second quarter of fiscal 2006 the Company made  contributions of $149,000
into the  pension  plan.  The  Company  does not  expect to make any  additional
contributions into its pension plan during fiscal 2006.


                                       25
<PAGE>

16.   RELATED PARTY TRANSACTIONS

      Interest  Expense  Related Party - At July 31, 2006,  all of Canal's Long-
Term Debt is held by the company's  Chief  Executive  Officer and members of his
family. These notes pay interest at a rate of 10% per annum and come due May 15,
2009.  Canal has  incurred  interest  expense  on these  notes of  $203,000  and
$212,000  and for  the  nine  month  periods  ended  July  31,  2006  and  2005,
respectively.  At various times during  fiscal 2006 and 2005 certain  holders of
these notes agreed to defer interest payments due totaling approximately $14,000
and $28,000 as of July 31, 2006 and October 31, 2005.  The fiscal 2005  deferred
interest  liability plus accrued interest at a rate of 10% per annum, was repaid
as funds  became  available in the second  quarter of fiscal 2006.  The deferred
interest  liability  was included in payable to executive  officers at both July
31, 2006 and October 31, 2006. As of July 31, 2006,  the balance due under these
notes was $2,687,000 all of which is classified as long-term debt related party.

17.   LITIGATION

      Canal and its  subsidiaries  are from time to time  involved in litigation
incidental to their normal business activities, none of which, in the opinion of
management,  will have a material adverse effect on the  consolidated  financial
condition and  operations  of the Company.  Canal was not a party to any ongoing
litigation at July 31, 2006.

      The following situation did arise in fiscal 2005:

Environmental  Protection  Agency - Special  Notice  Letter  for  Investigation,
Portland, Oregon Property

      In 1989, the Company sold its 48 acre Portland, Oregon stockyard to Oregon
Waste  Systems,  Inc. On September  29, 2003,  the United  States  Environmental
Agency  (EPA)  placed  a 4.2  acre  portion  of that  property  on the  National
Priorities   List   pursuant  to  the   Comprehensive   Environmental   Response
Compensation and Liability Act (CERCLA), commonly known as the Superfund Act. In
a letter from the EPA dated June 27, 2005 the Company,  along with approximately
13 other  parties,  including  the current  owner and operator of the site,  was
notified  that it might be  liable  to  perform  or pay for the  remediation  of
environmental  contamination  found on and around the site. Since the receipt of
the  letter,  the Company  has been in  periodic  communications  with the other
parties who received a similar letter with respect to what action,  collectively
or individually,  should be taken in response to the EPA assertion of liability.
The  Company  believes  that the  remediation  of  contamination  of the site is
properly the  responsibility of other parties that have occupied and used it for
waste  recycling  purposes since 1961,  although under CERCLA the EPA is able to
assert  joint and  several  liability  against  all  parties  who ever  owned or
operated the site or generated or transported  wastes to it. This  investigation
is in its preliminary  stages and the Company  intends to vigorously  defend any
liability for remediation.  At July 31, 2006, the liability for remediation,  if
any,  is not  estimatable  and  therefore  no accrual  has been  recorded in the
financial statements.


                                       26
<PAGE>

ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
         RESULTS OF OPERATIONS AND FINANCIAL CONDITION
         FOR THE NINE MONTHS ENDED JULY 31, 2006

      You should read the following  discussion  together with the more detailed
business  information and  consolidated  financial  statements and related notes
that appear elsewhere in this report and in the documents that we incorporate by
reference into this report.  This report may contain certain "forward-  looking"
information within the meaning of the Private  Securities  Litigation Reform Act
of 1995. This information  involves risks and uncertainties.  Our actual results
may  differ  materially  from  the  results  discussed  in  the  forward-looking
statements.  Factors  that might cause such a  difference  include,  but are not
limited to, those discussed in "Risk factors".

                                Company Overview

      The  Registrant,  Canal Capital  Corporation  ("Canal" or the  "Company"),
incorporated  in the state of Delaware in 1964,  commenced  business  operations
through a predecessor in 1936.

      Canal is engaged in two distinct  businesses  -- stockyard and real estate
operations.

      Stockyard  Operations  - As a result of an August 1, 1999  asset  purchase
agreement,  Canal now  operates  two central  public  stockyards  located in St.
Joseph,  Missouri and Sioux Falls, South Dakota (collectively the "Stockyards").
Public stockyards act much like a securities exchange, providing markets for all
categories  of livestock  and  fulfilling  the  economic  functions of assembly,
grading,  and price discovery.  The Company's  principal  stockyard revenues are
derived  from a per head  charge  ("yardage  charge")  imposed on all  livestock
consigned  for sale at the  stockyards  and the sale of feed  and  bedding.  See
"Stockyard Operations".

      Real Estate  Operations  - Canal's real estate  properties  are located in
Sioux City, Iowa, South St Paul, Minnesota, St Joseph, Missouri, Omaha, Nebraska
and Sioux Falls, South Dakota. The properties consist,  for the most part, of an
Exchange Building (commercial office space), land and structures leased to third
parties  (meat  packing  facilities,  rail car repair  shops,  lumber  yards and
various other commercial and retail businesses) as well as vacant land available
for  development  or resale.  Its principal real estate  operating  revenues are
derived from lease income from land and structures leased to various  commercial
and retail enterprises,  rental income from its Exchange Buildings, and proceeds
from the sale of real estate properties.  In addition to selling what was excess
stockyard property,  the company entertains any offers to purchase,  develop and
restructure   real  estate  lots   surrounding  its  existing   operating  lease
properties,  stockyard operating  properties and properties held for development
or  resale  in  order  to  enhance  the  value of the  existing  properties  and
surrounding real estate. See "Real Estate Operations".


                                       27
<PAGE>

      Stockyard Operations

      General - Through an August 1, 1999 asset repurchase agreement,  Canal now
operates two central public stockyards located in St. Joseph, Missouri and Sioux
Falls, South Dakota.

      Public stockyards act much like a securities  exchange,  providing markets
for all  categories  of  livestock  and  fulfilling  the  economic  functions of
assembly,  grading, and price discovery.  The livestock handled by the Company's
stockyards include cattle, hogs, and sheep. Cattle and hogs may come through the
stockyard  facilities at two  different  stages,  either as feeder  livestock or
slaughter   livestock.   The  Company's  stockyards  provide  all  services  and
facilities  required to operate an independent market for the sale of livestock,
including veterinary facilities,  auction arenas, auctioneers, weigh masters and
scales, feed and bedding,  and security personnel.  In addition,  the stockyards
provide  other  services  including  pure  bred and  other  specialty  sales for
producer  organizations.  The Company  promotes its stockyard  business  through
public relations efforts, advertising, and personal solicitation of producers.

      Actual  marketing  transactions  at a stockyard  are managed for livestock
producers by market  agencies and independent  commission  sales people to which
the livestock are consigned for sale.  These market  agencies (some of which are
owned  and  operated  by the  Company)  and  independent  sales  people  receive
commissions  from the seller upon  settlement of a transaction and the stockyard
receives a yardage fee on all livestock  using the facility which is paid within
twenty-four  hours of the sale.  Yardage  fees vary  depending  upon the type of
animal, the extent of services provided by the stockyard, and local competition.
Yardage revenues are not directly dependent upon market prices, but rather are a
function of the volume of livestock  handled.  In general,  stockyard  livestock
volume is dependent upon conditions  affecting livestock production and upon the
market  agencies and  independent  commission  sales people which operate at the
stockyards.  Stockyard  operations are seasonal,  with greater volume  generally
experienced  during the first and fourth  quarters of each fiscal  year,  during
which periods livestock is generally brought to market.

      Virtually all of the volume at Canal's  Sioux Falls  stockyards is handled
through market agencies and independent  commission sales people,  while the St.
Joseph  stockyards  has  solicitation  operations  of its own which  account for
approximately 50% of its livestock volume annually.

      Canal  intends  to  continue  its  soliciting  efforts  at its St.  Joseph
stockyards  in fiscal 2006.  Further,  Canal tries to balance its  dependence on
market  agencies  and  independent  commission  sales  people in  various  ways,
including:   developing  solicitation  operations  of  its  own;  direct  public
relations;  advertising and personal  solicitation of producers on behalf of the
stockyards;  providing  additional services at the stockyards to attract sellers
and  buyers;  and  providing  incentives  to  market  agencies  and  independent
commission sales people for increased business.

      Stockyard  operations  resulted in operating income of approximately  $0.4
million while  contributing  approximately  $2.6 million to Canal's revenues for
the first nine months of fiscal 2006.


                                       28
<PAGE>

      Risk -  Stockyard  activities  face a variety  of risks and  uncertainties
related to the  safeguarding  of the  national  food supply which are beyond our
control.  Public  confidence in the  government's  efforts to safeguard the food
supply is essential for the success of our stockyard operations.  An outbreak of
a disease such as bovine spongiform encephalopathy (BSE) better known as Mad Cow
Disease  could  have a  devastating  impact  on  stockyard  operations.  For the
company's part we strictly  follow all USDA  regulations to ensure to the extent
we can the  safety of the food  supply.  Furthermore,  stockyard  activities  in
general may involve  various  degrees of risk,  such as  competition  from other
regional  stockyards and sale barns,  general market  conditions and to a lesser
extent interest rates.

      Competition - Canal competes in the area of public  stockyards  with other
regional  public  stockyards  and sale  barns,  some of which are  substantially
larger and have greater  financial  resources than Canal.  To a certain  extent,
Canal's  stockyard  revenues are dependent on the ability of the market agencies
and independent  commission sales people at each of Canal's stockyard  locations
to compete within the region.

      Real Estate Operations

      General - Canal is involved in the management,  development or sale of its
real estate properties  located in five Midwest states.  Real estate operations,
resulted in operating income of $0.4 million, while contributing $0.8 million to
Canal's revenues for fiscal 2006. In the first nine months of fiscal 2006, Canal
sold a total of six acres of land located in South Saint Paul,  Minnesota  (five
acres) and Sioux City,  Iowa (one acre) for $0.4  million  generating  operating
income of $0.1 million.

      As of July 31, 2006, there are  approximately 20 acres of undeveloped land
owned by Canal located in five Midwest states.  Canal is continuing the program,
which  it  started  several  years  ago,  to  develop  or  sell  this  property.
Additionally,  Canal will continue to aggressively pursue additional tenants for
its Exchange Buildings and undeveloped properties in fiscal 2006.

      Risk - Real estate  activities in general may involve  various  degrees of
risk,  such as the  ability to collect  receivables,  competition  for  tenants,
general  market  conditions  and interest  rates.  Furthermore,  there can be no
assurance that Canal will be successful in the development, lease or sale of its
real estate properties.

      Competition - Canal competes in the area of real estate  development  with
other  regional  developers,  some of which are  substantially  larger  and have
significantly  greater  financial  resources  than Canal.  To a certain  extent,
Canal's  real estate  revenues  are  dependent  on the ability of the  stockyard
operations and the various meat packers located  adjacent to Canal's  properties
to successfully compete in their respective businesses.


                                       29
<PAGE>

                          CRITICAL ACCOUNTING POLICIES

      Our  consolidated  financial  statements  have been prepared in accordance
with  accounting  principles  generally  accepted  in the United  States.  These
generally  accepted  accounting  principles require 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 net sales  and  expenses  during  the
reporting period. We continually evaluate our estimates, including those related
to revenue  recognition,  bad debts, income taxes, fixed assets,  restructuring,
contingencies and litigation. We base our estimates on historical experience and
on various other  assumptions that are believed to be reasonable under the facts
and  circumstances.  Actual  results  may  differ  from  these  estimates  under
different assumptions or conditions.

      Management  believes the following critical accounting policies impact our
most difficult,  subjective and complex judgments used in the preparation of our
consolidated  financial  statements,  often  as a  result  of the  need  to make
estimates  about the  effect of matters  that are  inherently  uncertain.  For a
further discussion of these and other accounting policies,  please see Note 2 of
the  Notes to  Consolidated  Financial  Statements  included  elsewhere  in this
Quarterly Report.

      Revenue  Recognition -- Lease and rental  revenues are recognized  ratably
over the period  covered.  All real estate leases are accounted for as operating
leases.  Revenues from real estate sales are recognized  generally when title to
the property passes.  Revenues from stockyard operations which consist primarily
of yardage  fees (a standard  per head  charge for each animal sold  through the
stockyards)  and sale of feed and bedding are recognized at the time the service
is rendered or the feed and bedding are delivered.

      Art  Inventory  Held for Sale -- The nature of art makes it  difficult  to
determine a replacement  value. The most compelling  evidence of a value in most
cases is an independent appraisal.  Canal has had varying percentages of its art
inventory appraised by independent appraisers in previous years. For fiscal 2006
the net realizable value of Canals remaining art inventory has been estimated by
management  based in part on the  Company's  history of art sales in the current
and previous years and in part on the results of the independent appraisals done
in previous years.

      Properties and Related  Depreciation -- Properties are stated at cost less
accumulated  depreciation.  Depreciation is provided on the straight-line method
over the estimated useful lives of the properties. Such lives are estimated from
35 to 40  years  for  buildings  and  from 5 to 20 years  for  improvements  and
equipment.

      Property held for  Development or Resale -- Property held for  development
or  resale  consist  of  approximately  20  acres  located  in  the  Midwest  of
undeveloped land not currently  utilized for corporate  purposes nor included in
any of the present operating leases. The Company constantly  evaluates proposals
received for the purchase,  leasing or  development  of this asset.  The land is
valued at cost which does not exceed the net realizable value.


                                       30
<PAGE>

      Long-Lived  Assets -- The Company  reviews the  impairment  of  long-lived
assets  whenever events or changes in  circumstances  indicate that the carrying
amount of an asset may not be  recoverable.  The  Company  considers  historical
performance  and  future  estimated  results  in  its  evaluation  of  potential
impairment and then compares the carrying  amount of the assets to the estimated
future cash flows expected to result from the use of the asset.  The measurement
of the loss,  if any,  will be  calculated  as the amount by which the  carrying
amount of the asset exceeds the fair value of the asset.

Results of Operations

      The  following  tables  set  forth  certain  items  in  our  statement  of
operations for the periods indicated:

                                                      Nine Months Ended July 31,
                                                      --------------------------
                                                          2006          2005
                                                          ----          ----
                                                            (In Thousands)
Revenues:

Stockyard Revenue                                       $  2,583      $  2,349
Real Estate Revenue                                          791         3,255
                                                        --------      --------
    Total Revenue                                          3,374         5,604
                                                        --------      --------

Costs and Expenses:

Stockyard Expenses                                         2,136         2,043
Real Estate Expenses                                         387         1,646
General and Administrative Expenses                          826           630
                                                        --------      --------
     Total Costs and Expenses                              3,349         4,319
                                                        --------      --------

Income from Operations                                        25         1,285

Other Income                                                  54            67

Other Expenses                                              (206)         (212)
                                                        --------      --------
Net (Loss)Income                                        $   (127)     $  1,140
                                                        ========      ========

      While the  Company is  currently  operating  as a going  concern,  certain
significant  factors  raise  substantial  doubt about the  Company's  ability to
continue as a going  concern.  The Company has  suffered  recurring  losses from
operations and is obligated to continue making substantial annual  contributions
to its defined benefit pension plan. The financial statements do not include any
adjustments  that  might  result  from the  resolution  of these  uncertainties.
Additionally,   the  accompanying   financial  statements  do  not  include  any
adjustments  relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.


                                       31
<PAGE>

      Canal  recognized a net loss of  approximately  $127,000 in the first nine
months of fiscal  2006 as  compared  to net  income of  $1,140,000  for the same
period in fiscal 2005.  After  recognition of preferred stock dividend  payments
(paid in additional shares of preferred stock for each of fiscal 2006, and 2005)
of $80,000 and $60,000 in 2006 and 2005, respectively.  The results attributable
to common  stockholders  were a net loss of  $206,000  in 2006 and net income of
$1,080,000 in 2005. The significant  increase in Canal's 2005 net income was due
primarily to an $1,315,000  gain on the sale of the Company's  South Saint Paul,
Minnesota Exchange Building and the associated five acres of land (this property
was sold on a contract  for deed  payable in October  2007)and  25 acres of land
(formerly used in stockyard operations) located in Sioux City, Iowa.

      Canal's revenues from continuing  operations  consist of revenues from its
stockyard and real estate  operations.  Revenues in 2006 decreased by $2,229,000
to  $3,374,000 as compared  with 2005  revenues of  $5,603,000.  The fiscal 2006
decrease in revenues is due  primarily  to the  $2,435,000  decrease in sales of
real estate as discussed above.

COMPARISON OF FISCAL PERIODS ENDED JULY 31, 2006 AND 2005

Stockyard Revenues

      Stockyard  revenues for the nine months ended July 31, 2006 of  $2,583,000
accounted  for 76.6% of the  fiscal  2006  revenues  as  compared  to  stockyard
revenues of  $2,349,000  or 41.9% for the same period in fiscal  2005.  The 2006
increase  in the  stockyard  revenues  as a percent  of total  revenues,  is due
primarily to the significant decrease in sales of real estate for the first nine
months of fiscal 2006.  Stockyard  revenues are  comprised of yard  handling and
auction  (90.3% and 91.0%),  feed and bedding  income (4.3% and 5.1%) and rental
and other income (5.4% and 3.9%) for the nine month  periods ended July 31, 2006
and 2005,  respectively.  The fiscal 2006  increase  in rental and other  income
represents sharp increases in both  administrative fees earned on self insurance
programs  and  interest  earned.  There  were no  other  significant  percentage
variations in the year to year comparisons.

      Stockyard  revenues  for the three  months ended July 31, 2006 of $654,000
accounted  for 82.7% of the  fiscal  2006  revenues  as  compared  to  stockyard
revenues  of  $550,000  or 31.1% for the same  period in fiscal  2005.  The 2006
increase  in the  stockyard  revenues  as a percent  of total  revenues,  is due
primarily to the  increase in sales of real estate for the third fiscal  quarter
of 2005.  Stockyard  revenues are comprised of yard handling and auction  (85.0%
and 89.1%),  feed and bedding income (4.7% and 5.4%) and rental and other income
(10.3%  and 5.5%) for the three  month  periods  ended  July 31,  2006 and 2005,
respectively.  The fiscal 2006  increase in rental and other  income  represents
sharp increases in both  administrative  fees earned on self insurance  programs
and interest earned.  There were no other significant  percentage  variations in
the year to year comparisons.


                                       32
<PAGE>

Stockyard Expenses

      Stockyard  expenses for the nine months ended July 31, 2006 of  $2,136,000
increased by $93,000 (4.5%) from  stockyard  expenses of $2,043,000 for the same
period in fiscal 2005.  Stockyard  expenses  are  comprised of labor and related
costs (48.2% and 52.5%), other operating and maintenance (28.6% and 24.9%), feed
and bedding expense (4.6% and 4.5%),  depreciation  and  amortization  (0.7% and
0.8%),   taxes  other  than  income  taxes  (6.0%  and  6.0%)  and  general  and
administrative  expense  (11.9% and 11.3%) for the nine month periods ended July
31, 2006 and 2005,  respectively.  The 2006  increase in stockyard  expenses was
consistent  with the increase in stockyard  revenues.  There were no significant
percentage variations in the year to year comparisons.

      Stockyard  expenses  for the three  months ended July 31, 2006 of $644,000
increased  by $44,000  (7.3%) from  stockyard  expenses of $600,000 for the same
period in fiscal 2005.  Stockyard  expenses  are  comprised of labor and related
costs (50.1% and 54.7%), other operating and maintenance (29.7% and 25.5%), feed
and bedding expense (3.9% and 3.7%),  depreciation  and  amortization  (0.8% and
0.9%),   taxes  other  than  income  taxes  (6.2%  and  6.4%)  and  general  and
administrative  expense  (9.3% and 8.8%) for the three month  periods ended July
31, 2006 and 2005,  respectively.  The 2006  increase in stockyard  expenses was
consistent  with the increase in stockyard  revenues.  There were no significant
percentage variations in the year to year comparisons.

Real Estate Revenues

      Real estate  revenues  for the nine months ended July 31, 2006 of $791,000
accounted  for 23.4% of the fiscal  2006  revenues  as  compared  to real estate
revenues of $3,255,000  or 58.1% for the same period in fiscal 2005.  The fiscal
2006 decrease in real estate  revenues as a percentage of total  revenues is due
primarily to the significant decrease in sales of real estate for the first nine
months of fiscal 2006. Real estate revenues are comprised of sale of real estate
(47.4% and 86.3%), rentals and other lease income from the rental of vacant land
and  certain  structures  (49.4% and 13.0%) and rental  income  from  commercial
office space in its Exchange Buildings (3.2% and 0.7%) for the nine months ended
July 31, 2006 and 2005,  respectively.  The  increase in rentals and other lease
income from the rental of vacant land and certain  structures as a percentage of
total revenues is due primarily to the sharp decrease in sales of real estate.

      Real estate  revenues for the three months ended July 31, 2006 of $137,000
accounted  for 17.3% of the fiscal  2006  revenues  as  compared  to real estate
revenues of $1,220,000  or 68.9% for the same period in fiscal 2005.  The fiscal
2006 decrease in real estate  revenues as a percentage of total  revenues is due
primarily  to the sharp  increase in sales of real  estate for the third  fiscal
quarter of 2005. Real estate revenues are comprised of sale of real estate (0.0%
and 86.9%), rentals and other lease income from the


                                       33
<PAGE>

rental of vacant land and certain structures (93.9% and 12.5%) and rental income
from commercial  office space in its Exchange  Buildings (6.1% and 0.6%) for the
three months ended July 31, 2006 and 2005, respectively. The increase in rentals
and other lease income from the rental of vacant land and certain  structures as
a percentage of total revenues is due primarily to the decrease in sales of real
estate.

Real Estate Expenses

      Real estate  expenses  for the nine months ended July 31, 2006 of $387,000
decreased by $1,259,000  (76.5%) from real estate expenses of $1,646,000 for the
same period in fiscal 2005. The sharp decrease in real estate expenses is due to
the 2006  decrease in real estate sales.  Real estate  expenses are comprised of
the cost of real estate sold (65.5% and 90.8%), labor, operating and maintenance
(17.0% and 3.7%),  depreciation  and amortization  (4.3% and 1.0%),  taxes other
than income taxes (7.0% and 3.3%) and general and administrative  expenses (6.2%
and 1.2%) for the nine months  ended July 31, 2006 and 2005,  respectively.  The
percentage  variations in the year to year  comparisons are due primarily to the
significant decrease in the cost of real estate sold in fiscal 2006.

      Real estate  expenses  for the three months ended July 31, 2006 of $45,000
decreased by $603,000 (93.0%) from real estate expenses of $648,000 for the same
period in fiscal 2005. The sharp decrease in real estate  expenses is due to the
2006  decrease in real estate sales.  Real estate  expenses are comprised of the
cost of real estate  sold (0.0% and 91.9%),  labor,  operating  and  maintenance
(48.9% and 3.5%),  depreciation and amortization  (12.3% and 0.9%),  taxes other
than  income  taxes  (19.9% and 2.8%) and general  and  administrative  expenses
(19.0%  and  0.9%)  for  the  three   months  ended  July  31,  2006  and  2005,
respectively.  The percentage variations in the year to year comparisons are due
primarily to the significant  decrease in the cost of real estate sold in fiscal
2006.

General and Administrative

      General and  administrative  expenses  for the nine months  ended July 31,
2006 of $826,000 increased by $196,000 (31.3%) from expenses of $630,000 for the
same period in fiscal 2005. The major  components of general and  administrative
expenses are officers  salaries  (42.7% and 55.4%),  pension  expense (22.9% and
1.4%),  insurance  expense (6.2% and 9.8%),  office  salaries  (8.6% and 11.4%),
travel expense (3.2% and 5.3%), rent (1.6% and 2.0%) and professional fees (4.8%
and 1.3%) for the nine month periods ended July 31, 2006 and 2005, respectively.
The percentage  variations in the year to year  comparisons are due to the sharp
increase  in pension  expense  for the first nine months of fiscal 2006 which is
the result of an under accrual in fiscal 2005.


                                       34
<PAGE>

      General and  administrative  expenses  for the three months ended July 31,
2006 of $270,000  increased by $50,000 (22.6%) from expenses of $220,000 for the
same period in fiscal 2005. The major  components of general and  administrative
expenses are officers  salaries  (44.6% and 52.8%),  pension  expense (23.3% and
1.4%),  insurance  expense (6.3% and 9.3%),  office  salaries  (8.3% and 11.0%),
travel expense (3.3% and 5.0%), rent (1.6% and 1.9%) and professional fees (4.9%
and  1.2%)  for  the  three  month   periods  ended  July  31,  2006  and  2005,
respectively.  The percentage variations in the year to year comparisons are due
to the sharp  increase in pension  expense for the second quarter of fiscal 2006
which is the result of an under accrual in fiscal 2005.

Interest and Other Income

      Interest  and other  income for the nine  months  ended  July 31,  2006 of
$54,000 was  unchanged  for the same period in fiscal  2005.  Interest and other
income  is  comprised  primarily  of  interest  income  on the  $1,750,000  note
receivable  associated  with the fiscal 2005 first quarter sale of the company's
South  St.  Paul,  Minnesota  Exchange  Building.  This  property  was sold on a
contract for deed payable in October 2007.

Interest Expense

      Interest  expense  for the nine  months  ended July 31,  2006 of  $203,000
decreased  $9,000 (4.3%) from  $212,000 for the same period in fiscal 2005.  The
principal  balances  outstanding  at July 31,  2006  and  October  31,  2005 was
$2,687,000.  The interest rate (10%) on Canal's variable rate mortgage notes has
remained  unchanged  for the past 12 months.  Variations in the period to period
interest  expense reflects a combination of an $80,000 decrease in the principal
balance outstanding coupled with Canal's repayment (including additional accrued
interest on the unpaid  balance due) of a portion of the interest  deferred from
time to  time  by  certain  noteholders  to  help  ease  the  cash  flow  strain
experienced by Canal.

(Expense) Income from Art Sales

      Other  expense  from art sales for the nine months  ended July 31, 2006 of
$3,000 reflects a decrease of $17,000 from income of $14,000 for the same period
in fiscal  2005.  Art revenues  are  comprised of the proceeds  from the sale of
antiquities and  contemporary  art. Canal  recognized gross sales of $29,000 and
$64,000 for the nine month periods  ended July 31, 2006 and 2005,  respectively.
Art expenses are  comprised of the cost of inventory  sold and selling,  general
and  administrative  expenses.  Canal incurred cost of inventory sold of $19,000
and $37,000  (net of a valuation  allowance  of $55,000 and  $24,000) as well as
selling, general and administrative expenses of $12,000 and $13,000 for the nine
month  periods ended July 31, 2006 and 2005,  respectively.  It is the Company's
policy to use the  adjusted  carrying  value for  sales,  thereby  reducing  the
valuation reserve proportionately as the inventory is sold.


                                       35
<PAGE>

Liquidity and Capital Resources

      While the  Company is  currently  operating  as a going  concern,  certain
significant  factors  raise  substantial  doubt about the  Company's  ability to
continue as a going  concern.  The Company has  suffered  recurring  losses from
operations and is obligated to continue making substantial annual  contributions
to its defined benefit pension plan. The financial statements do not include any
adjustments  that  might  result  from the  resolution  of these  uncertainties.
Additionally,   the  accompanying   financial  statements  do  not  include  any
adjustments  relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.

      The Company's  variable rate mortgage notes (originally issued in 1998 and
amended  several times since then) are due May 15, 2009 and are held entirely by
the Company's  Chief  Executive  Officer and members of his family.  These notes
carry  interest at the rate of ten percent per annum.  These notes,  among other
things,  prohibit  Canal from becoming an  investment  company as defined by the
Investment  Company Act of 1940;  require  Canal to maintain  minimum net worth;
restricts  Canal's ability to pay cash dividends or repurchase stock and require
principal  prepayments  to be made  only  out of the  proceeds  from the sale of
certain  assets.  As of July 31,  2006,  the  balance  due under these notes was
$2,687,000, all of which is classified as long-term debt-related party.

      Cash and cash equivalents of $38,000 at July 31, 2006 decreased $41,000 or
52.1% from $79,000 at October 31, 2005.  Net cash used by  operations  in fiscal
2006 was $339,000.  Substantially all of the 2006 net proceeds from the sales of
real  estate of  $375,000  was used in  operations.  During  fiscal  2006  Canal
decreased the balance of its liabilities by a total of $316,000.

      At July 31, 2006 the Company's  current assets exceed current  liabilities
by $0.1 million which was an increase of $0.2 million as compared to October 31,
2005 when the Company's  current  liabilities  exceeded  current  assets by $0.1
million.  The only required  principal  repayments under Canal's debt agreements
for  fiscal  2006  will be from the  proceeds  (if  any) of the sale of  certain
assets.

      As discussed above,  Canal's cash flow position has been under significant
strain for the past several years. Canal continues to closely monitor and reduce
where  possible  its  operating  expenses  and plans to continue  its program to
develop or sell the  property it holds for  development  or resale as well as to
reduce  the  level  of its  art  inventories  to  enhance  current  cash  flows.
Management  believes  that its income  from  operations  combined  with its cost
cutting  program and planned  reduction of its art  inventory  will enable it to
finance its current business  activities.  There can,  however,  be no assurance
that Canal will be able to effectuate  its planned art  inventory  reductions or
that its income from operations combined with its cost cutting program in itself
will be sufficient to fund operating cash requirements.


                                       36
<PAGE>

Other Factors

      Some of the  statements  in this Form 10-Q,  as well as  statements by the
Company in  periodic  press  releases,  oral  statements  made by the  Company's
officials to analysts and stockholders in the course of presentations  about the
Company  and   conference   calls   following   earning   releases,   constitute
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation Reform Act of 1995. Such  forward-looking  statements  involved known
and unknown  risks,  uncertainties  and other  factors that may cause the actual
results,  performance or achievements of the Company to be materially  different
from any future results, performance or achievements expressed or implied by the
forward-looking statements.

ITEM III. Quantitative and Qualitative Disclosures About Market Risk

      The  Securities  and  Exchange  Commission's  rule  related to market risk
disclosure  requires  that we describe and quantify  our  potential  losses from
market risk sensitive  instruments  attributable  to reasonably  possible market
changes.  Market risk sensitive  instruments  include all financial or commodity
instruments and other financial  instruments (such as investments and debt) that
are sensitive to future  changes in interest  rates,  currency  exchange  rates,
commodity  prices or other  market  factors.  We are not exposed to market risks
from changes in foreign currency, exchange rates or commodity prices. As of July
31,  2006,  we do not  hold  derivative  financial  instruments  nor do we  hold
securities for trading or speculative  purposes.  Under our current policies, we
do not use  interest  rate  derivative  instruments  to manage our  exposure  to
interest rate changes.

      At July 31, 2006, the following  long-term  debt-related  party  financial
      instruments  are  sensitive  to  changes  in  interest  rates by  expected
      maturity dates:

               As of         Fixed rate        Average          Fair
              July 31,         ($ US)       Interest Rate       Value
              --------       ----------     -------------       -----
               2006           $     0            N/A
               2007                 0            N/A
               2008                 0            N/A
               2009             2,687            10%
               2010                 0            N/A
               Thereafter           0            N/A
                              -------
               Total          $ 2,687                          N/A (A)
                              -------                          -------

      (A)   Long-term debt related party:  it is not practicable to estimate the
            fair value of the related party debt.


                                       37
<PAGE>

ITEM IV. Controls and Procedures

      Our  management,  which  includes  our Chief  Executive  Officer and Chief
Financial  Officer,  has  conducted an evaluation  of the  effectiveness  of our
disclosure  controls and procedures (as defined in Rule 13(a)-14(c)  promulgated
under the Securities Exchange Act of 1934) as of April 30, 2006 ("the Evaluation
Date")  within 45 days prior to the filing date of this report.  Based upon that
evaluation our Chief  Executive  Officer and Chief Financial  Officer  concluded
that our disclosure  controls and procedures are effective for timely gathering,
analyzing  and  disclosing  the  information  we are required to disclose in our
reports filed under the Securities Exchange Act of 1934, as amended.  There have
been no significant  changes made in our internal controls or other factors that
could  significantly  effect our internal controls  subsequent to the Evaluation
Date.


                                       38
<PAGE>

                                     PART II

                                OTHER INFORMATION


                                       39
<PAGE>

Item 1: Legal Proceedings:

      Also see Item 3 of Canal's October 31, 2005 Form 10-K.

      Canal and its  subsidiaries  are from time to time  involved in litigation
incidental to their normal business activities, none of which, in the opinion of
management,  will have a material adverse effect on the  consolidated  financial
condition and  operations  of the Company.  Canal was not a party to any ongoing
litigation at July 31, 2006. The following situation did arise in fiscal 2005:

Environmental  Protection  Agency - Special  Notice  Letter  for  Investigation,
Portland, Oregon Property

      In 1989, the Company sold its 48 acre Portland, Oregon stockyard to Oregon
Waste  Systems,  Inc. On September  29, 2003,  the United  States  Environmental
Agency  (EPA)  placed  a 4.2  acre  portion  of that  property  on the  National
Priorities   List   pursuant  to  the   Comprehensive   Environmental   Response
Compensation and Liability Act (CERCLA), commonly known as the Superfund Act. In
a letter from the EPA dated June 27, 2005 the Company,  along with approximately
13 other  parties,  including  the current  owner and operator of the site,  was
notified  that it might be  liable  to  perform  or pay for the  remediation  of
environmental  contamination  found on and around the site. Since the receipt of
the  letter,  the Company  has been in  periodic  communications  with the other
parties who received a similar letter with respect to what action,  collectively
or individually,  should be taken in response to the EPA assertion of liability.
The  Company  believes  that the  remediation  of  contamination  of the site is
properly the  responsibility of other parties that have occupied and used it for
waste  recycling  purposes since 1961,  although under CERCLA the EPA is able to
assert  joint and  several  liability  against  all  parties  who ever  owned or
operated the site or generated or transported  wastes to it. This  investigation
is in its preliminary  stages and the Company  intends to vigorously  defend any
liability for remediation.  At July 31, 2006, the liability for remediation,  if
any,  is not  estimatable  and  therefore  no accrual  has been  recorded in the
financial statements.

Item 2 and 3:

      Not applicable.

Item 4: Submission of Matters to a Vote of Security Holders:

      None.

Item 5: Other Information:

      None.

Item 6: Exhibits and Reports on Form 8-K:

      (A) Not applicable.
      (B) None


                                       40
<PAGE>

                                   SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto duly  authorized,  on the 13th day of
September, 2006.

                                     CANAL CAPITAL CORPORATION


                                     By: /S/ Michael E. Schultz
                                         ----------------------------
                                         Michael E. Schultz
                                         President and Chief
                                         Executive Officer
                                         (Principal Executive Officer)

      Pursuant to the requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated.

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


/S/ Michael E. Schultz           President and Chief
----------------------     Executive Officer and Director
Michael E. Schultz          (Principal Executive Officer)     September 13, 2006


                               Vice President-Finance
/S/ Reginald Schauder          Secretary and Treasurer
----------------------        (Principal Financial and
Reginald Schauder                Accounting Officer)          September 13, 2006


/S/ Asher B. Edelman            Chairman of the Board
----------------------              and Director              September 13, 2006
Asher B. Edelman


                                       41